Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
___________
COMMISSION FILE NUMBER: 0-28284
INFONAUTICS, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2707366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 WEST VALLEY ROAD, SUITE 1000 19087
WAYNE, PENNSYLVANIA (Zip Code)
(address of principal executive offices)
Registrant's telephone number, including area code: 610-971-8840
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 17, 2000 was approximately $140 million (based on the
last reported sale price on The Nasdaq Stock Market on that date). For purposes
of making this calculation only, the registrant has defined affiliates to
include all directors and executive officers, all holders of more than ten
percent of the Company's Class A Common Stock and all holders of more than five
percent of the Company's Class A Common Stock who also have a representative on
the Company's board of directors.
Page 1
The number of shares of the registrant's Class A Common Stock outstanding
as of March 17, 2000 was 12,061,033.
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement (the "Proxy Statement") for the
registrant's 2000 Annual Meeting of Shareholders to be held on May 25, 2000 are
incorporated by reference in Part III of this Annual Report on Form 10-K.
Page 2
INFONAUTICS, INC.
ANNUAL REPORT ON FORM 10-K
For Fiscal Year Ended December 31, 1999
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business...................................................................................... 4
Item 2. Properties.................................................................................... 28
Item 3. Legal Proceedings............................................................................. 28
Item 4. Submission of Matters to a Vote of Security Holders........................................... 28
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..................... 28
Item 6. Selected Financial Data....................................................................... 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 32
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.................................... 41
Item 8. Financial Statements and Supplementary Data................................................... 41
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.......... 41
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 41
Item 11. Executive Compensation........................................................................ 41
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 42
Item 13. Certain Relationships and Related Transactions................................................ 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 42
Page 3
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains, in addition to historical information,
forward-looking statements by the Company with regard to its plans, objectives,
expectations, and intentions that involve risks and uncertainties. These
statements are not guarantees of future performance and you should not rely on
them. These statements are based on management's current expectations and they
are subject to a number of uncertainties and risks that could cause our actual
results to differ materially from those described in the forward-looking
statements. The sections of this Annual Report entitled "Business," "Risk
Factors," and "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations," as well as other sections, contain a discussion of some
of the factors that could contribute to these differences. We do not assume any
obligation to revise or update any forward-looking statements. You should also
carefully review the risk factors set forth in other reports or documents we
file from time to time with the Securities and Exchange Commission.
Overview
Infonautics, Inc. (including its subsidiaries, "Infonautics," the "Company,"
"we," or "our") is a pioneering provider of personalized information agents and
Web sites. We deliver information over the Internet and other communications
mediums such as wireless. Our sites provide our users with relevant information
they cannot conveniently locate in any one place elsewhere on the Internet. Our
content notification sites are personal portals that provide users with
comprehensive information on a specific topic or area of interest. Our search
and reference sites deliver deep, archival research content in response to
users' questions. As the amount of information on the Internet continues to
grow, users value our delivery of relevant information. As a result, we expect
increasing usage of our sites and increasing return traffic to them. In turn, we
believe this will provide more opportunities to increase our subscriber,
advertising, and other e-commerce related revenues.
Our content notification sites - Company Sleuth, Sports Sleuth, Job Sleuth,
Entertainment Sleuth, and Shopping Sleuth - are intelligent personalized
information agents that deliver the information users want, when and where they
want it. These sites are now integrated into the Sleuth Center portal making it
even easier for our customers to go to one place on the Internet to get all the
information they want. Our content notification sites generate revenue in a
variety of ways, including through advertising and affiliate marketing.
Our search and reference sites - Electric Library, eLibrary Tracker,
Encyclopedia.com, and Newsdirectory.com - provide relevant information in
response to users' questions and preferences from sites that are highly
differentiated from traditional search engines and directories. Our search and
reference sites generate revenue primarily through Electric Library subscription
fees, and also through advertising, affiliate marketing, and co-branding.
The Company was incorporated in Pennsylvania in November 1992.
Page 4
Recent developments
On December 15, 1999, we closed a transaction with Bell & Howell Company
("Bell & Howell") and its wholly owned subsidiary, Bell and Howell
Information and Learning Company ("BHIL"), following approval of the
transaction by our shareholders on November 30, 1999.
In the transaction, we contributed our Electric Library K-12 and public
library business and assets and liabilities into what is now bigchalk.com,
Inc. ("bigchalk.com"), an Internet education company. Also in the
transaction, BHIL contributed its ProQuest K-12 and public library business
and certain assets and liabilities into bigchalk.com. As part of the
transaction, we also sold our e-commerce online archive business to BHIL and
granted an option to bigchalk.com to purchase our Electric Library end-user
business.
As a result of the transaction and taking into account our subsequent $3.5
million investment in, and the private placement by, bigchalk.com, we
ultimately received a total of $18.5 million in cash and currently own
approximately 20% of bigchalk.com's stock. The balance of bigchalk.com's
stock is owned by BHIL, a select group of institutional investors, and board
members of bigchalk.com. We are represented on the Board of Directors of
bigchalk.com. The Company, bigchalk.com, Bell & Howell, and BHIL have entered
into a series of service and license agreements, as well as non-competition
agreements. See Business -- Intellectual Property and Licenses.
The closing of the transaction provides us with capital to further develop and
market our Sleuth Center sites, expand our marketing of our Search and Reference
sites to individual end users, and explore new business models. The transaction
also positions us as an experienced Internet company with substantially lower
fixed costs delivering vast amounts of personalized information to users through
both "wired" Internet applications and wireless devices and applications. As a
result of the transaction, we no longer sell to the K-12, public library, and
post-secondary education markets. We are also no longer engaged in the
e-commerce online archive business.
Our Sites
We currently provides content notification sites as well as search and reference
sites.
Content Notification Sites
Our content notification sites are personal portals providing our users with
comprehensive information on a specific topic or area of interest delivered over
"wired" mediums, such as the Internet, and "wireless" mediums, such as pagers
and personal digital assistants. Regardless of the topic or area of interest of
each of our sites, they are designed to make the best information find the user
to give that person an information edge. These sites use intelligent
personalized information agents to comb the Internet on a daily basis looking
for relevant information based on a large number of key words and phrases that
we have developed. We expect to expand the number of these words and phrases so
that our sites can continue to uncover and deliver the information our users
want in an increasing number of areas of interest. Our current content
notification sites, all of which are free to registered users, include:
- Company Sleuth, our first content notification site, was launched in
October 1998 and has been the model for our subsequent content
notification sites. The site
Page 5
uncovers hard-to-find current events-type information about U.S.
public companies available to anyone with access to the Internet. It
searches various public and subscription-based sites and databases on
a daily basis for new information in a variety of categories,
including: patents, trademarks, Internet domain name registrations,
federal litigation, stock prices, insider trading activity, SEC
filings and news reports. The site then aggregates this information
and matches it to the personal profiles created by its registered
user. Company Sleuth offers users the ability to receive daily e-mails
informing them of any new items of interest relating to the companies
they have entered into their profile.
- Sports Sleuth is a one stop source of personalized sports news and
information. It was launched in July 1999. Created for the fan and
fanatic alike, the site searches hundreds of national and local Web
sites to provide users with comprehensive daily e-mail reports on
their favorite teams. Users can create personal profiles of teams from
the major professional sports and major college football and
basketball as well as for NASCAR racing. The site provides a
wide-range of information, including hometown news, columns, scores,
statistics, standings, team histories, trivia, injury reports,
transactions and the latest postings from fan message boards from
across the Web. In addition to Sports Sleuth, our Fantasy Sports
Sleuth site, launched in September 1999, is a source for free,
personalized news and information for fantasy sports players. The site
searches hundreds of national and regional sports and fantasy sports
Web sites to provide users with comprehensive daily e-mail reports on
their favorite players and teams.
- Job Sleuth was launched in May 1999 and searches the Internet's top
job sites and databases for job postings based on the user profiles of
the site's registered users. The site delivers a daily e-mail to its
users containing any job opportunities it has found from the top job
sites on the Internet. Users can create as many as five different
profiles based on more than 100 different job categories, geographic
region, and keyword. The site addresses the needs of both the active
job seeker as well as the passive job looker who simply wants to keep
on top of job opportunities in the market.
- Entertainment Sleuth was launched in January 2000 and provides users
with daily news on today's Hollywood and music stars and is designed
to help entertainment fans find the latest information on their
favorite celebrities. The site investigates over 1,000 entertainment
Web sites every day and notifies registered users about newly
discovered celebrity content in a daily e-mail. The site provides a
wide-range of information including multimedia, photos, gossip,
interviews and news on over 5,000 current stars. Registered users of
Entertainment Sleuth can build a "star portfolio" and track up to 10
celebrities at any given time.
- Shopping Sleuth provides product information and price comparisons to
consumers seeking to make educated buying decisions. It was launched
in November 1999. It investigates hundreds of product information
sites for specific product details requested by the user, and then
delivers its findings to registered users through e-mail. The site
provides a wide-range of information including best prices, ratings
and reviews, product details, news group reviews and premium
information. Users can also comparison shop for price, as well as
purchase products through from many name brand stores through
agreements with various vendors. Shopping Sleuth
Page 6
updates product information daily to ensure that users receive the
most current and accurate information.
- The Sleuth Center portal integrates our content notification sites in
one place on the Internet and provides users with a customizable
homepage that delivers the latest information on their interests.
Sleuth Center was launched in February 2000 and is an example of how
we seek to unite our users' life interests in one convenient place for
delivery to them through both "wired" Internet applications and
wireless devices and applications.
See Business - Risk Factors -- If We Are Unable To Retain Access To Free Or Low
Cost Web-Based Content, Then Our Ability To Provide Our Content Notification
Sites In A Cost Efficient Manner Will Be Impaired.
Search and Reference Sites
Our search and reference sites employ a series of Web search capabilities that
provide relevant information in response to users' questions and preferences
from sites that are highly differentiated from traditional search engines. Our
current search and reference sites include:
- Electric Library provides individual users on the Web with a digital
library made up of well known published sources. It was launched in
the first quarter of 1996 and it currently has approximately 95,000
registered paying users making it one of the largest paid subscription
sites on the Internet. The site offers a user-friendly graphical
interface and a powerful natural language search capability that
allows users to search an entire content collection simply by asking a
question. Results are provided in the form of a list of documents,
from which the user can select from the most relevant content. The
site is designed to enable users to satisfy their general and special
interest information requirements in a manner highly differentiated
from other search engines and directories. The site also provides
users with the ability to see related Internet content from thousands
of Web sites. Users are able to access Electric Library through any
standard Web browser. We market the site to end-users through paid
advertisements, bounty and royalty incentive arrangements, and a
variety of other methods including affiliates. Individual
subscriptions, which include a one month free trial, are typically
priced at $9.95 per month and offer unlimited consumer usage of the
site. Annual subscriptions are currently available for $59.95. As a
result of the closing of our transaction with Bell & Howell Company,
we are contractually obligated not to market or sell Electric Library
subscriptions to the K-12, public library, and post-secondary
education markets, as those markets are now served by bigchalk.com,
Inc. or Bell & Howell Information and Learning Company. See Business -
Intellectual Property and Licenses; -- Risk Factors -- If We Are
Unable To Retain Our Electric Library Customers After Their
Subscription Period Has Ended; -- bigchalk.com, Inc. Or A Third Party
Could Purchase The Electric Library End User Business From Us; -- We
Depend On bigchalk.com, Inc. For Electric Library Technology And
Related Technical Systems.
- Encyclopedia.com is a basic, easy-to-use research tool for anyone on
the Internet. The site was launched in January 1998. The site contains
the complete text of The Concise Columbia Encyclopedia - Third Edition
and more than 17,000 articles from the encyclopedia have been
assembled to provide free, quick, and useful information
Page 7
on almost any topic. Through extensive cross-references, users have
the option of expanding their research through direct links to other
articles within Encyclopedia.com and other related Web sites and
books, as well as to the in-depth archives of Electric Library.
Encyclopedia.com provides us with a cost-effective marketing vehicle
for Electric Library as well as for generating traffic across our
sites. See - Business - Risk Factors -- Our Business Model Is Evolving
And Depends In Part On Web Advertising, E-Commerce Programs, And
Subscriptions, All Of Which Are Susceptible To Change.
- eLibrary Tracker, launched in October 1999, uses our content
notification and Sleuth Center technology to deliver a free article
clipping service, currently from the Electric Library site. The free
site clips links to articles found on Electric Library based on users'
preferences and currently delivers personalized e-mails on a periodic
basis to more than 400,000 registered eLibrary Tracker users.
- Newsdirectory.com, acquired by us in February 2000, is a media portal
that provides an easy to use, comprehensive set of links to domestic
and foreign news sources linking users with information ranging in
scope from purely local to international. Not only does the free site
generate page views as a resource itself, it also provides us with
access to comprehensive news sources for all of our content
notification and search and reference sites. Newsdirectory.com also
serves as a cost-effective customer acquisition site for our sites.
The Infonautics Network
The Infonautics Network of Web sites is comprised of our content notification
and search and reference sites. The Infonautics Network defines our presence on
the Internet, which services that analyze and report on Web site traffic, users,
and page views can use to evaluate and report on our performance using a variety
of measures. See Business - Risk Factors -- Our Ability Accurately To Track And
Measure Advertising, Impressions, Page Views, And Registered Users Is Important
To The Success Of Our Business.
Our Growth Strategy
The key elements in our strategy include enhancing and increasing the number of
our sites, increasing marketing efforts to grow our base of registered users and
subscribers, and generating revenue from our user base and the traffic across
our sites.
We are developing the Sleuth Center personal portal into a site that integrates
the specific interests of individual users into a single page. We are also
developing and promoting new content notification sites, which we believe will
expand our user base and promote repeated use of the sites by our users. We are
also expanding and improving the features and technology of our existing sites.
For example, in February 2000 we launched an enhanced Company Sleuth site which
included a new user interface as well as support for wireless delivery,
initially over the Palm Pilot platform.
We are also increasing our marketing efforts to grow our registered user base.
In this regard, our primary goals in marketing and distribution are to increase
and establish brand recognition as a leading information source, generate
registered users for our content notification and search and reference sites,
and generate repeat traffic from users.
Page 8
In order to build brand awareness and generate registered users for our sites,
we plan to launch targeted promotional campaigns. In February 2000, we launched
a Web, TV, print, and radio promotional campaign for our Sports Sleuth site
targeting three U.S. metropolitan markets in conjunction with college
basketball's annual March tournament. In addition to generating brand awareness
and registered users, this campaign will provide valuable information to us
about the effectiveness and cost of similar campaigns, as well as the cost of
larger scale, possibly national, campaigns.
The Company also intends to "monetize" the user base and traffic across its
sites. Our content notification sites are free to registered users. Our business
models for these sites currently include site advertising including banner and
sponsor ads, direct e-mail containing paid advertising, and various e-commerce
models such as promotional offers which include referral fees, revenue sharing
arrangements with key partners, co-branding of sites, and participation in
affiliate networks. We have and will continue to enter into barter arrangements
for the trading of advertising between Web sites and e-mails. As our registered
user base and traffic grows, we expect that results from the revenue sharing
model will increase in direct proportion to the growth in registered users with
revenue being generated from targeted e-commerce product or service offers based
on user demographics. See Business - Risk Factors -- Our Business Model Is
Evolving And Depends In Part On Web Advertising, E-Commerce Programs, And
Subscriptions, All Of Which Are Susceptible To Change.
Markets, Customers and Distribution
To date, the majority of our revenues have been derived from the sale of
Electric Library subscriptions to educational and end-user markets. As a result
of the closing of the transaction with Bell & Howell and BHIL, we will no longer
have revenue from K-12, public library, and post-secondary educational
contracts. Additionally, as part of the same transaction we sold our e-commerce
online archive business, so no further revenue will be recognized from those
customers.
In the near term, our major source of revenue will be from Electric Library
subscription sales to individuals in the end-user market. The Electric Library
site is a fee-based subscription service; the other search and reference sites
are free to their users. Individual subscriptions, which include a one month
free trial, are typically priced at $9.95 per month and offer unlimited usage of
the site. Annual subscriptions are currently available for $59.95. To a lesser
extent, we will generate revenues from other e-commerce revenue sources.
The sale of advertisements on the Infonautics Network is derived principally
from short-term advertising contracts. Advertisements include banner and sponsor
ads on our sites as well as ads placed in our e-mails which are sent to
subscribers and registered users of our sites. Other sources of revenue for the
Company are derived from various e-commerce sources. These e-commerce sources
include promotional offers which include referral fees, revenue sharing
arrangements with key partners, co-branding of sites, and participation in
affiliate networks. For example, we earn revenue when subscribers register with
a partner's site through a direct link from the Infonautics Network. We also
earn revenue from the creation of customized Sleuth Center sites for partners
who sell or provide the custom site to their customers.
Our markets and customers are users of "wired" Internet applications and
wireless devices who want high-quality, relevant content delivered to them
wherever they are in response to their
Page 9
specific interests and questions. We believe that these customers represent a
significant and growing market for our sites. As of March 2000, we had the
following metrics for our sites:
- - The Sleuth Center portal, including the Company Sleuth, Sports Sleuth, Job
Sleuth, Fantasy Sports Sleuth, Entertainment Sleuth and Shopping Sleuth
sites, had more than 600,000 individual site registrations, representing
approximately 550,000 unique registered users;
- - The Electric Library site had approximately 100,000 individual paying
subscribers;
- - We delivered an estimated 50 million personalized e-mails to the registered
users of all of our sites during the fourth quarter of 1999; and
- - We delivered periodic personalized e-mails to more than 400,000 registered
users of the eLibrary Tracker site.
We obtain new users through affiliates, co-brand partners, consumer marketing
and other referrals. Our promotions are highly personalized around events or
areas of personal interest. An emerging business model on the Internet,
affiliate marketing, is a referral system that enables individuals and other
companies and organizations to market and promote a third party's products and
services in return for a referral fee or commission. We participate in the
affiliate network and currently have over 9,500 affiliate web sites promoting
various sites from our content notification and search and reference sites. A
relatively small percentage of all our current affiliates account for a high
percentage of our registered users. Still, we believe that having a large
affiliate network is beneficial and permits us to experiment with and tailor our
affiliates to achieve our goals on a cost-effective basis. We believe that the
popularity of affiliate marketing programs will continue to increase and that
they represent a cost-effective means for promoting our sites.
We use our Encyclopedia.com, eLibrary Tracker, and Newsdirectory.com sites as
highly cost effective customer acquisition vehicles for Electric Library.
Additionally, we have a strategic marketing agreement to promote the end user
Electric Library site. In March 1998, we entered into an Interactive Marketing
Agreement with America Online, Inc. ("AOL") to feature Electric Library
prominently on two AOL channels, the Research and Learn channel and the
Workplace channel. Under the agreement with AOL, we agreed to pay $4 million to
AOL in quarterly $500,000 placement fees as well as certain other calculated
revenue sharing fees. As of March 2000, we have paid the full amount of
placement fees to AOL and do not owe AOL any further placement fees. The AOL
agreement expires May 11, 2000 unless AOL exercises a renewal right to continue
the agreement on partial contract terms. The partial contract terms would not
obligate us to make large quarterly placement fee payments. These terms would
only require us to make revenue sharing payments based on a percentage of end
user revenues attributable to sales of Electric Library made available through
AOL. In the event the AOL agreement expires, we expect to continue servicing our
Electric Library customers generated under the AOL agreement with our Electric
Library site available over the Internet. AOL's Research and Learn also
currently links to our Encyclopedia.com site. See Business - Risk Factors -- Our
Business Model Is Evolving And Depends In Part On Web Advertising, E-Commerce
Programs, And Subscriptions, All Of Which Are Susceptible To Change.
Page 10
As a result of our transaction with Bell & Howell Company, we are subject to a
non-competition agreement restricting us from distributing products or services
into the K-12, public library, or post-secondary education segments. However,
the agreement established exceptions from the non-competition provision for our
activities with respect to end users. We are also subject to a non-competition
agreement restricting us from distributing online publishing services. We do not
believe that the restrictions in the non-competition agreements will prevent us
from developing and retaining markets and customers for our products. See
Business - Intellectual Property and Licenses.
Competition
The market for wired Internet and wireless applications such as our content
notification and search and reference sites is intensely competitive and the
barriers to entry are low. The number of sites on the Internet competing for
users' attention and spending continues to increase rapidly and we expect that
competition will continue to intensify. Furthermore, recent merger and
acquisition activity in our industry appears to continue unabated and additional
consolidation of companies, especially of smaller companies by larger ones, will
only fuel already intense competition by many companies who are larger and more
well-financed that we are.
We compete, directly and indirectly, with numerous types of companies, products,
and services for, among other things, users, advertisers, advertising inventory
and spending, and content suppliers. General categories of current and potential
competitors to our sites include:
- - Specialty-oriented Web sites and services such as Lifeminders, Quicken.com,
About.com, Yodlee, The Street.com, or Strategy.com which are targeted to
users with specific interests and needs;
- - Search, search engine, and directory Web sites such as Yahoo! which provide
extensive, highly-topical content to users in a variety of personalized and
increasingly customizable formats and through several delivery means,
including wireless;
- - Media-based or oriented Web sites from traditional print, radio, and
television companies such as CNN.com or CBSMarketwatch.com which draw on
their vast supply of archival and current content across an increasingly
wide range of topics; and
- - Consumer-oriented online services such as America Online, Inc. or Microsoft
Network which provide their own or licensed content, Web sites, products,
and services.
Competition for our content notification sites is and will be particularly
intense from specialty-oriented Web sites and search and related Web sites.
Competition for our search and reference sites is and will be particularly
intense from search and related Web sites such as Northern Light,
Britannica.com, and Ask Jeeves.
We believe that we are well-positioned with respect to our competitors,
particularly on our content notification sites, because of our relatively early
entry into the field, the brand recognition of our Sleuth Center and Electric
Library sites, the personalization features of our content notification sites,
and the high-quality content provided through our sites. Nevertheless, we remain
subject to the intense competition in our industry from a variety of sources,
including possibly bigchalk.com, Inc. in limited circumstances. See Business -
Risk Factors -- The Competition We Face From Other Providers Of Electronic
Information Is Intense.
Page 11
Sources of Content for our Sites
The quality of the content provided by our sites is vital to our customers'
satisfaction and their continued use of them. As a result, we seek to deliver
the highest quality content. We currently use two primary sources of content:
published content licensed from bigchalk.com, Inc. and Web-based content that we
link to directly. While we continue to seek high-value content to enhance the
breadth and depth of the information available on our sites, we believe that the
content licensing agreements and Web-based content sources we have in place
today provide us with sufficient high quality content effectively to market our
sites.
bigchalk.com, Inc. Licensed Content
As part of our transaction with Bell & Howell Company, bigchalk.com, Inc. and
the Company have entered into a content license agreement. Under this agreement,
bigchalk.com licenses content to us for use in the Electric Library site for end
users, and if we request, in our content notification sites and for any new
Company sites. To date, we only license content from bigchalk.com for use in
connection with Electric Library for end users.
The content we license from bigchalk.com consists primarily of published content
such as magazines, newspapers, and other periodicals. This content is comprised
of titles licensed from BHIL to bigchalk.com as well as titles from our former
content license agreements with publishers that were transferred to bigchalk.com
in the Bell & Howell transaction. The number of titles currently available to be
licensed to us under this agreement is approximately 1,500. Much of the
bigchalk.com licensed content is updated daily, often by satellite or other
direct links. The frequency of updates varies with the particular periodical or
reference source.
The bigchalk.com content license has a five year term and grants us a
non-exclusive, worldwide, royalty bearing license to use the full text licensed
content subject to its terms. The royalty payable by us to bigchalk.com for the
licensed content is based on an initially fixed percentage of net revenues
derived from sales made to our customers of sites that include the licensed
titles. On an annual basis following the initial twelve months of the content
license, the percentage of net revenues associated with the royalty is subject
to a proportionate adjustment based on a formula.
Under the bigchalk.com content license agreement, bigchalk.com is the preferred
provider to the Company of the type of content licensed under the agreement,
namely, published titles such as newspapers, magazines, and periodicals.
bigchalk.com has a right of first refusal under the license agreement if we
intend to obtain similar type of content from a third party. In order for
bigchalk.com to assert its right of first refusal, it must license the third
party content to us on the same terms as proposed by the third party. Otherwise,
we can license the content directly from the third party and bigchalk.com will
have declined its right of first refusal in that particular case. See Business -
Risk Factors -- We Depend On bigchalk.com, Inc. For Our Published Content And If
We Are Unable To License Additional Content On A Cost-Effective Basis, We May Be
Unable To Retain Our Current Customers And Attract New Customers.
Web-Based Content
In addition to the content we license directly from bigchalk.com or third party
content providers, the Company also accesses certain Web-based content in our
content notification sites. We
Page 12
access Web-based content primarily by searching selected third party Web sites
for relevant content and then providing links to that content from our sites. In
most cases, clicking on the link to that content takes a user of our site
directly to the third party Web site where the content is located. Typically, we
pay no fee or a nominal fee for these links. See Business - Risk Factors -- If
We Are Unable To Retain Access To Free Or Low Cost Web-Based Content, Then Our
Ability To Provide Our Content Notification Sites In A Cost Efficient Manner
Will Be Impaired.
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 seasonality 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. These seasonal effects could cause fluctuations in our financial
results as well as our performance statistics reported and measured by services
such as Media Metrix, Inc.
Technology, Infrastructure and Operations
The Company regards its technology, infrastructure, and operations as highly
important to its success. We continue to leverage our traditional strengths in
the areas of content management and natural language searching learned during
our development of the Electric Library site and system. For example, our
engineering staff includes natural language search experts whose task it is to
improve the quality of results delivered by our content notification and search
and reference sites. Given the potentially large numbers of visitors to and
users of our sites, we have also increased our expertise in the area of
horizontal scalability across our sites. Scalability is the ability of a
computer system to maintain high user performance and low cost per transaction
as the system's size, volume and transactions grow, as well as take full
advantage of the growth. We have made significant improvements in the speed and
reliability of our sites using a combination of internally developed solutions
and industry standard techniques such as "trusted" caching, Linux enhancements,
and intelligent page updating.
Our internally developed technology in the area of Web site tracking, search,
and retrieval is intended to further enhance the quality and user experience of
our content notification sites. For example, we have patent-pending technology
used to track changes in Web sites across the Internet. We also make extensive
use of XML (extensible markup language) technology to enhance our Web site
tracking and retrieval capabilities. We have also developed sophisticated
"spidering" and meta-searching capabilities permitting us to provide
significantly enhanced results as compared to most commercially available
spidering technologies available for use on the Internet. Most of our internal
technology is developed by our employees. In certain cases, however, we employ
independent contractors as developers to take advantage of their special
expertise as well as to increase our time to market. Currently, we contract with
individual independent contractors as well as with independent contractor
companies, including one in India, for this work, all of which is provided
according to written agreements establishing the
Page 13
Company's rights to the work. See Business - Risk Factors -- Rapid Technology
Change May Render Our Sites Noncompetitive Or Obsolete.
In addition to our own technology, we selectively use third party technology
applications in our sites and systems and we have developed a number of our own
proprietary technologies to enhance the value of these applications to us. For
Electric Library, we license and use software, technology, and systems from
bigchalk.com, Inc.
Most of our infrastructure and operations (computer systems and personnel
supporting them) are currently being provided by bigchalk.com, Inc. under the
agreements entered into in connection with the closing of our transaction with
Bell & Howell Company. However, we provide our own infrastructure and operations
for portions of our content notification sites. We are in the planning stages of
becoming independent from bigchalk.com for our infrastructure and operations. We
expect that we will co-locate some of our infrastructure and operations between
our own facilities and those of third parties. See Business - Risk Factors -- We
Depend On bigchalk.com, Inc. For Electric Library Technology And Related
Technical System; -- We Could Experience System Failures And Capacity
Constraints; -- Our Systems Face Security Risks And Our Customers Have Concerns
About Their Privacy.
Intellectual Property and Licenses
We view our intellectual property assets, domain names, and related contractual
agreements and licenses as highly important to our success. The Company relies
on a combination of the intellectual property laws of patents, trademarks,
copyrights and trade secrets to establish and protect its proprietary rights in
its sites. We currently own seven United States patents and have one pending
United States patent application. We may consider filing international patent
applications, as well as additional United States patent applications, in the
future under the appropriate circumstances. We have secured federal trademark
registrations in the United States for the trademark Infonautics and several
trademark applications are either pending or published for, among others, the
trademarks Company Sleuth, Sports Sleuth, Job Sleuth, Shopping Sleuth,
Entertainment Sleuth, and Sleuth Center. We have secured trademark registrations
in certain foreign countries and the European Community for the trademark
Infonautics and have filed applications to register the trademark Infonautics in
other countries. We will continue to evaluate the registration of additional
trademarks, as appropriate, in the United States and foreign countries. In
addition to trademark protection, we have registered and maintain numerous
domain names for our current sites as well as for potential future ones. To date
we have not registered any of our copyrights in the United States or elsewhere.
We also rely on applicable federal law and state law for the protection of our
trade secrets within the United States. See Business - Risk Factors -- If We
Fail To Protect Our Proprietary Rights Or If We Infringe On The Proprietary
Rights Of Others, We Could Lose Our Intellectual Property Rights Or Be Liable
For Significant Damages.
In addition to intellectual property laws, the Company relies on confidentiality
and non-disclosure agreements and other contractual agreements and provisions to
establish and protect our proprietary rights. We enter into confidentiality and
non-disclosure agreements with employees, consultants, independent contractors,
and prospective and actual business partners where appropriate. We also enter
into license agreements and other agreements with, among others, our marketing
and content providers, our end-user customers, and our vendors of technology and
services.
Page 14
As a result of the closing of our transaction with Bell & Howell Company on
December 15, 1999, we are now a party to several technology service and license
agreements with bigchalk.com, Inc. and BHIL. These agreements, all dated
December 15, 1999, include:
- Technical Services Agreement between the Company and bigchalk.com,
Inc. under which bigchalk.com provides technical and data center
support and services to us for Electric Library for individual end
users. The term of this agreement is 3 years and may be renewed by the
mutual written agreement of the parties.
- Content License Agreement between the Company and bigchalk.com, Inc.
under which bigchalk.com licenses content to us for use in Electric
Library and any other Company-provided site for end users. The scope
of use under the license is limited to the end user business. However,
we may use the licensed content in Electric Library, any Sleuth Center
sites, and any new sites of ours. The term of this agreement is 5
years.
- Software and Technology License Agreement between the Company and
bigchalk.com, Inc. under which bigchalk.com licenses to us (i) the six
United States patents and one patent United States application
transferred by us to bigchalk.com in the Bell & Howell transaction,
(ii) any third party or Company-developed technology and software
pertaining to the Electric Library business transferred by us to
bigchalk.com, and (iii) Electric Library trademarks and domain names.
The scope of use under the license is limited to the end user
business. However, we may use the licensed patents, technology and
software, and trademarks and domain names in Electric Library, any
Sleuth Center sites, and any new sites of ours. The license is royalty
free and perpetual, but bigchalk.com has a right to terminate the
license on a change of control of the Company.
- Online Publishing License Agreements between the Company, Bell &
Howell Information and Learning Company, and bigchalk.com, Inc. under
which BHIL licenses to us and bigchalk.com the online publishing
software and technology transferred by us to BHIL. The scope of use
under the licenses permits all uses except for those by us or
bigchalk.com in the online publishing market. The license is royalty
free and perpetual.
- Info Sleuth Software and Technology Licenses between the Company and
Bell & Howell Information and Learning Company and bigchalk.com, Inc.
under which we license our Sleuth Center and related sites' technology
and software to BHIL and bigchalk.com. The scope of use under the
license is limited to the K-12 and public library segment for
bigchalk.com and to the online publishing and post-secondary education
segments for BHIL. The license is royalty free and perpetual, but we
have a right to terminate the license on a change of control of Bell &
Howell Information and Learning or bigchalk.com, respectively.
In addition to the terms and conditions in each of the agreements specified
above, each of the Company, bigchalk.com, Inc., and BHIL are party to certain
non-competition agreements entered into in connection with the closing of the
transaction with Bell & Howell Company. The non-
Page 15
competition agreements each have three year terms that expire December 15, 2002.
With respect to us, our non-competition agreement with bigchalk.com restricts us
from distributing products or services into the K-12, public library, or
post-secondary education segments. The agreement also established exceptions
from the non-competition for our activities with respect to end users. Our
non-competition agreement with bigchalk.com and BHIL regarding online publishing
restricts us and bigchalk.com from distributing online publishing services. See
Business - Risk Factors -- We Depend On bigchalk.com, Inc. For Our Published
Content; -- We Depend On bigchalk.com, Inc. For Electric Library Technology And
Related Technical Systems.
Employees
As of March 15, 2000, the Company had 74 full-time employees and 11 part-time
and hourly employees. From time to time, we also employ independent consultants
and contractors to support our research and development, marketing and support
efforts. None of our employees are bound by an employment agreement that
prevents the person from terminating his or her relationship at any time for any
reason. Further, none of our employees are represented by a labor union, and we
consider our employee relations to be good. Competition for qualified personnel
in our industry is intense, particularly for software development and other
technical personnel. We believe that our future success will depend in part on
our continued ability to attract, hire, and retain qualified personnel. See
Business - Risk Factors -- Our Success Depends On Our Key Personnel, Who We May
Be Unable To Retain, And Our Ability To Recruit Enough Qualified Personnel To
Meet Our Hiring Needs.
Executive Officers of the Registrant
Executive officers of the Company are elected by the Board of Directors on an
annual basis and serve until their successors have been duly qualified and
elected. There are no family relationships among any of the executive officers
or directors of the Company. The following table sets forth certain information
concerning our executive officers*:
- ------------------------------------------------------------------------------------------
Name Age Position
- ------------------------------------------------------------------------------------------
David Van Riper ("Van") Morris 45 President & Chief Executive Officer
- ------------------------------------------------------------------------------------------
Federica F. O'Brien 42 Vice President & Chief Financial Officer,
Treasurer
- ------------------------------------------------------------------------------------------
Gerard J. Lewis, Jr. 39 Vice President & General Counsel, Secretary
- ------------------------------------------------------------------------------------------
Cedarampattu ("Ram") Mohan 31 Vice President & Chief Technical Officer
- ------------------------------------------------------------------------------------------
Van Morris has been President and Chief Executive Officer of the Company since
March 31, 1998. Mr. Morris originally joined us as President and Chief Operating
Officer in September 1995. From 1992 until he joined the Company, Mr. Morris
held various vice president and general management positions at Legent
Corporation, a systems management software company, Goal Systems, a systems
management company, UCCEL, and IBM. Mr. Morris is a director of bigchalk.com,
Inc. and Half.com, Inc.
- --------
* In July 1999, Joshua Kopelman, a former executive officer and Executive Vice
President of the Company, left his employment with us in order to start a new
company, Half.com, Inc.
Page 16
Federica F. O'Brien joined the Company as Director of Finance in June 1996. Ms.
O'Brien was appointed Acting Chief Financial Officer and Treasurer in June 1998
and was named Vice President & Chief Financial Officer in September 1999. Prior
to joining us, Ms. O'Brien was a Business Assurance Manager with Coopers &
Lybrand L.L.P. and she is a certified public accountant.
Gerard J. Lewis, Jr. was named Vice President & General Counsel and Assistant
Secretary of the Company in February 1997. From May 1996 to February 1997, Mr.
Lewis served us as Corporate Counsel & Director of Business Development. Prior
to joining us in May 1996, Mr. Lewis was in private law practice with Reed Smith
Shaw & McClay LLP in Philadelphia, Pennsylvania, where he practiced in the
intellectual property and technology law and related corporate areas since 1992.
Mr. Lewis was appointed Secretary of the Company in September 1999.
Ram Mohan was named Vice President and Chief Technical Officer in January 1999.
From May 1997 to December 1998, Mr. Mohan served us as Director of Software
Product Development. Mr. Mohan was hired by us in 1995 as a senior Engineer.
Prior to joining us, Mr. Mohan worked with First Data Corporation, Unisys
Corporation and KPMG Peat Marwick in a variety of engineering, technical and
leadership positions.
Risk factors
You should consider carefully the following factors in addition to the other
information contained or incorporated by reference in this Annual Report in
evaluating our business and prospects.
WE HAVE LOST MONEY IN THE PAST AND WE EXPECT TO LOSE MONEY IN THE FUTURE.
If our revenues do not increase substantially, we may never become profitable.
We have not generated enough revenues to exceed the substantial amounts we have
spent to create, launch and enhance our sites and to grow our business. We
expect to continue to expend substantial amounts on marketing our sites to grow
our registered user base. We expect these expenditures to continue our losses in
the near future.
We need our registered user base to grow substantially in order to execute our
business plan. If our marketing efforts are unsuccessful, our business,
financial condition and results of operations would be materially adversely
affected. In order to build our brand awareness, we must succeed in our growth
strategy and marketing efforts, provide high-quality sites and increase user
traffic on the Infonautics Network. These efforts have required, and will
continue to require, significant expenses.
A portion of our revenues may be derived from barter agreements. Approximately
2% of our revenues in 1999 were derived from agreements where we traded
advertisements on the Infonautics Network in exchange for advertisements on
other web sites without receiving any cash payments.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY RESULT IN A FAILURE TO MEET
ANALYSTS' AND INVESTORS' EXPECTATIONS, CAUSING OUR SHARE PRICE TO DECLINE OR
FLUCTUATE WIDELY.
Page 17
Our share price may decline or fluctuate widely as a result of fluctuations in
our quarterly operating results and any corresponding failure to meet analysts'
and investors' expectations. We may experience significant fluctuations in
future quarterly operating results that may be caused by:
- introduction or enhancement of sites by us and our competitors;
- market acceptance of new sites, such as Sleuth Center;
- the mix of distribution channels through which our sites are
distributed;
- seasonality of the markets and customers we market to; and
- general economic conditions.
As a result, we believe that comparing our quarterly results will not
necessarily be informative and is not an indication of future performance.
WE HAVE A LIMITED OPERATING HISTORY WITH OUR BUSINESS FOLLOWING THE BELL &
HOWELL TRANSACTION WHICH OFFERS LITTLE INFORMATION TO EVALUATE US AND OUR LONG
TERM PROSPECTS.
Although our company and original business were established in 1992, we have
only recently closed our transaction with Bell & Howell Company in December
1999. As a result, we have little operating history as a company with our
current business. If we do not successfully address the risks and difficulties
that companies like ours with little operating history with their current
businesses encounter, then our business may not grow and our revenues may
decline. Our success depends upon our ability to address those risks
successfully, which include, among other things:
- whether we can continue to expand marketing and distribution for
our sites to support an increasing customer base;
- whether we can retain and attract talented employees to support
and market our existing sites and develop and market new sites,
and experienced management to execute our strategy, and;
- whether we can respond quickly and effectively to competitive and
technological changes.
AS WE OPERATE IN A NEW AND DEVELOPING MARKET OF PROVIDING ELECTRONIC
INFORMATION, THE MARKET FOR OUR SITES MAY NOT GROW FAST ENOUGH AND OUR
PROFITABILITY WILL BE IMPAIRED.
We depend on revenues derived from our sites such as Sleuth Center and Electric
Library and we may not receive these revenues if we do not continue to develop a
market for these sites. Specifically, we currently derive subscription-based
revenues from our fee based Electric Library site. Our Electric Library
customers are primarily individual end users and we may not receive revenues
from Electric Library if we do not continue to develop a market for it. Our
content notification sites such as those found in the Sleuth Center portal, and
non-Electric Library search and reference sites, are free to the user. These
sites are intended to be primarily advertising and e-commerce supported. Our
ability to earn significant revenues from our content notification and
non-Electric Library search and reference sites will depend in part on their
acceptance by a substantial number of users in order to attract advertising
revenues and their inclusion in e-commerce programs. Furthermore, if we develop
these markets slower than expected, our
Page 18
financial growth and profitability will be impaired.
RAPID TECHNOLOGY CHANGE MAY RENDER OUR SITES NONCOMPETITIVE OR OBSOLETE.
If we are not able successfully to respond to the rapid technological change of
the Internet, we may not be able to compete effectively. The Internet may not
continue to expand as quickly as needed to remain a viable commercial
marketplace, or may suffer periodic setbacks in this regard, because of factors
that may inhibit its ability to handle increased levels of activity, such as:
- inadequate development of the necessary reliable infrastructure (i.e.,
a reliable network backbone);
- delayed development of complementary products and technologies (i.e.,
high speed modems and security procedures for customer transaction
information); and
- delays in the development or adoption of new standards and protocols
(i.e., the next-generation Internet protocol).
The introduction of new technologies and the emergence of new industry standards
and practices can render our existing sites obsolete and unmarketable.
Additionally, it could require us to make significant unanticipated investments
in research and development. We are dependent, in part, on our ability to keep
pace with:
- the latest technologies and technological development;
- changing customer requirements; and
- frequent new product introductions.
OUR BUSINESS MODEL IS EVOLVING AND DEPENDS IN PART ON WEB ADVERTISING,
E-COMMERCE PROGRAMS, AND SUBSCRIPTIONS, ALL OF WHICH ARE SUSCEPTIBLE TO CHANGE.
We expect to derive an increasing amount of our revenues from, among others,
advertising and e-commerce sources for our content notification and search and
reference sites, in addition to the subscription based revenue we currently
derive from Electric Library. Few standards have been widely accepted to measure
the effectiveness of Web advertising and e-commerce programs. In the absence of
such standards, it may be difficult to attract advertisers for our sites and
reliably report the results of Web advertising and e-commerce programs.
Potential advertisers and e-commerce partners may also be reluctant to
participate in Web advertising and e-commerce programs in the absence of these
standards. Our business could be harmed if the market for Web advertising and
e-commerce programs fails to develop or develops more slowly than expected.
Currently, there are many different pricing models used to sell advertising on
the Internet and for e-commerce programs. Unless and until any industry
standards emerge, it will be difficult for us to predict the terms of and
results from advertising and e-commerce programs.
We derive our subscription-based revenue from Electric Library. We depend in
part on third party Web sites and services with which we have agreements, such
as America Online, Inc., to generate new subscribers to Electric Library. These
agreements with third party Web sites and services may not generate the
anticipated number of new customers we seek for Electric Library, even though
these agreements may require us to make payments. Typically, these agreements
Page 19
provide the Electric Library site with promotion and placement on the third
parties' web sites. These agreements usually require us to pay the third parties
a fixed fee plus a variable fee based on the number of qualified users who
enroll for our service. One or more of these agreements may not generate enough
revenue to cover the associated costs, and a significant shortfall could affect
our ability to make the required payments under these agreements. Additionally,
one or more of these agreements may not be renewed. If they are not renewed,
this could reduce our acquisition rate for new subscribers. In particular, our
Interactive Marketing Agreement with America Online, Inc. expires May 11, 2000
unless America Online exercises a renewal right to continue the agreement on
partial contract terms. See Business - Markets, Customers and Distribution. If
the America Online agreement is not renewed, this could reduce our acquisition
rate for new subscribers. Similarly, if AOL's link to Encyclopedia.com is
removed, this could also reduce our acquisition rate for new subscribers.
OUR ABILITY ACCURATELY TO TRACK AND MEASURE ADVERTISING, IMPRESSIONS, PAGE
VIEWS, AND REGISTERED USERS IS IMPORTANT TO THE SUCCESS OF OUR BUSINESS.
We must accurately track and measure a variety of metrics that are important to
the success of our business. These metrics include, for example, the size of
advertising inventories, the number of advertising impressions, the number of
page views, and the number of registered users of our sites. We depend in part
on third parties to provide some of these metrics. If they are unable to provide
these metrics in the future, we would be required to perform them ourselves or
obtain them from another provider. This could cause us to incur additional costs
or cause interruptions in our business during the time we are replacing these
services. We provide some of these metrics ourselves. In order to continue to
deliver accurate metrics ourselves, we must continue to monitor and update our
tracking systems. This could cause us to incur additional costs or cause
interruptions in our business during the time we are updating our tracking
systems. Our failure accurately to track and provide advertising, page view, and
registered user metrics could cause us to not obtain new advertisers or
affiliates, for example, or lose existing ones. Any corrections we make to
advertising, page view, and registered user metrics we have previously used
could cause us to fail to obtain new advertisers or affiliates, lose existing
ones, or renegotiate terms of contracts with existing ones.
THE COMPETITION WE FACE FROM OTHER PROVIDERS OF ELECTRONIC INFORMATION IS
INTENSE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY OR SUCCESSFULLY ATTRACT
AND RETAIN CUSTOMERS.
Competition in our business of providing electronic information is intense. We
may not be successful in attracting and retaining customers which would cause
revenues to decline. There are many entities, Yahoo!, America Online, Inc.,
About.com, Britannica.com, Northern Light, for example, both public and private,
some with greater resources and name recognition than us, that are or may become
competitors of ours. Many of these companies have substantially greater
experience and larger existing customer bases than we do. Accordingly, our
competitors may succeed in:
- responding more quickly to new or emerging technologies;
- responding more rapidly to changes in customer requirements;
- devoting greater resources to the development, promotion and sale of
their products or services than us; and
- establishing relationships with affiliates, advertisers, content
providers, and
Page 20
others who have not entered into agreements with us.
Competitors may succeed in developing services and products which are superior
to ours and also may prove more successful in marketing their products or
services to the same customers we intend to market our products or services to.
IF WE ARE UNABLE TO RETAIN OUR ELECTRIC LIBRARY CUSTOMERS AFTER THEIR
SUBSCRIPTION PERIOD HAS ENDED OR MAINTAIN THE PRICE OF ELECTRIC LIBRARY, OUR
REVENUES MAY DECLINE.
If our retention and renewal rates or pricing decreases significantly, our
revenues from Electric Library may decline. Our Electric Library marketing
strategy and objectives depend in part on our ability to retain and renew
customers after their subscription period has ended. In the end-user market,
industry experience indicates that a significant number of subscribers to
Electric Library will likely end their subscriptions over time, but tend to be
replaced by new subscribers. Also, we may reduce the selling price of Electric
Library due to factors such as increased competition or loss of customers.
BIGCHALK.COM, INC. OR A THIRD PARTY COULD PURCHASE THE ELECTRIC LIBRARY END USER
BUSINESS FROM US, WHICH WOULD GENERATE CASH FOR THE COMPANY AND CAUSE OUR
REVENUES TO DECLINE.
Our agreements with Bell & Howell Company give bigchalk.com, Inc. a right of
first refusal and exclusive call option to purchase the Electric Library site
and end user business from us. This right and option expire December 15, 2001.
We can sell the Electric Library site and end user business to a third party on
terms negotiated with the third party if bigchalk.com declines to purchase that
site and business by matching the terms. If the Electric Library site and end
user business have not already been purchased, bigchalk.com has the right to
acquire that site and business for a purchase price equal to the preceding 12
months net revenue for the site and business multiplied by two. If a third party
or bigchalk.com purchase the Electric Library site and business, we would
receive cash and our revenues would likely decline.
WE NEED TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB SITES
AND SERVICES IN ORDER TO GROW OUR BUSINESS.
In order to promote and grow our sites, we depend in part on establishing and
maintaining distribution relationships with high-traffic Web sites. There is
intense competition for placements on these sites. We may not be able to enter
into placement agreements on commercially reasonable terms or at all. Even if we
enter into distribution relationships with these Web sites, they may not attract
significant numbers of users. Therefore, our sites may not receive additional
users from these relationships. Moreover, we may have to pay significant fees to
establish these relationships. Our business would be harmed if we do not
establish and maintain additional strategic relationships on commercially
reasonable terms. It would also be harmed if any of our strategic relationships
do not result in increased use of our sites.
WE DEPEND ON BIGCHALK.COM, INC. FOR OUR PUBLISHED CONTENT AND IF WE ARE UNABLE
TO LICENSE ADDITIONAL CONTENT ON A COST-EFFECTIVE BASIS, WE MAY BE UNABLE TO
RETAIN OUR CURRENT CUSTOMERS AND ATTRACT NEW CUSTOMERS.
Page 21
We license published content for Electric Library, and our other sites if we
request, from bigchalk.com, Inc. Our content license from bigchalk.com makes
them the preferred provider to us of content of this type and gives them a right
of first refusal to provide this type of content to us. If we were to lose the
content license with bigchalk.com, our ability to deliver Electric Library, and
possibly other sites, would be harmed. The loss of the bigchalk.com content
license could require us to change Electric Library and any other site using the
content licensed from bigchalk.com. These changes may cause interruptions in our
business and could cause us to incur substantial costs to replace any lost
content.
Our future success also partially depends on our ability to license additional
content on a cost-effective basis from sources other than bigchalk.com. If we
are unable to license content at a reasonable cost, our ability to deliver our
sites could be impaired which could cause us to lose current customers or fail
to attract new customers.
IF WE ARE UNABLE TO RETAIN ACCESS TO FREE OR LOW COST WEB-BASED CONTENT, THEN
OUR ABILITY TO PROVIDE OUR CONTENT NOTIFICATION SITES IN A COST EFFICIENT MANNER
WILL BE IMPAIRED.
If we are not able to continue to access and provide Web-based content as we
have been, our ability to provide low cost or free services like our content
notification sites will be impaired. For example, if we have to pay fees or
develop technology in order to access and provide Web-based content, our costs
will rise. If we are not able to access and provide Web-based content on
favorable terms, our ability to deliver the Sleuth Center portal and its sites
for free will be impaired. We access and provide links to Web-based content in
our content notification sites. We access this content mainly by searching
selected Web sites and then providing links to relevant content from the
individual sites, such as Company Sleuth or Sports Sleuth. Usually, we pay no
fee, or a small fee, for accessing Web-based content in this manner. Our ability
to continue to use Web-based content in this manner without cost, or for small
fees, is fundamental to our goal of providing free, or low cost, content
notification sites.
IF WE FAIL TO PROTECT OUR PROPRIETARY RIGHTS OR IF WE INFRINGE ON THE
PROPRIETARY RIGHTS OF OTHERS, WE COULD LOSE OUR INTELLECTUAL PROPERTY RIGHTS OR
BE LIABLE FOR SIGNIFICANT DAMAGES.
Our efforts to establish and protect our proprietary rights may be inadequate to
prevent misappropriation or infringement of our intellectual property. And, our
success depends in large part on proprietary software technology and software
developed by us and licensed from third parties. While we have alternatives to
third party technology and software, there is a risk that our licensors or third
parties could take actions that would have a material adverse effect on the
value of our intellectual rights or our ability to continue to provide our
sites.
We may incur substantial costs in asserting any patent rights, in defending
suits against us related to patents, and in taking licenses to patents asserted
against the company. We are aware that many patents have recently been issued in
the United States, and that more are likely to be issued, relating to various
elements of electronic commerce including online shopping, advertising, and
affiliate marketing. We could be subject to demands or suits from the holders of
these patents. In addition to patents, we may also incur substantial costs in
asserting our other intellectual property rights against third parties, in
defending suits against us related to our other intellectual property rights,
and in taking licenses to other intellectual property asserted against us.
Page 22
In order to establish and protect our proprietary rights in our sites, we rely
on patents, trademarks, copyrights and trade secrets. We also routinely enter
into confidentiality and non-disclosure agreements with our employees,
consultants, advisors and partners. However, these parties may not honor these
agreements. Further, we may not successfully protect our rights to unpatented
trade secrets, know-how and confidential information. Others may also
independently develop substantially equivalent or even superior proprietary
information and techniques, or otherwise gain access to our trade secrets,
know-how and confidential information. While we believe that our services and
the proprietary rights developed by us or licensed to us do not infringe on the
rights or others, we cannot be sure that others will not bring an infringement
claim against us or those licensing information to us. Any patents we now hold,
or any patents that may issue from patent applications we file, may not be broad
enough to protect what we believe are our proprietary rights. Also, any current
or future patents may not give us any competitive advantages.
We have licensed in the past, and may license in the future, some of our
trademarks and other proprietary rights to third parties. While we attempt to
ensure that the quality of its trademarks and technology is maintained by our
licensees, our licensees may take actions that could materially and adversely
affect the value of our proprietary rights or the reputation of our sites.
The laws of some foreign countries do not protect proprietary rights to as great
an extent as do the laws of the United States. Because the nature of online
services and the Internet is global, we cannot control the ultimate destination
of our services. As policing the unauthorized use of our technology and
proprietary rights is often difficult and expensive anywhere in the world, we
cannot be sure our proprietary rights will be honored everywhere.
WE DEPEND ON BIGCHALK.COM, INC. FOR ELECTRIC LIBRARY TECHNOLOGY AND RELATED
TECHNICAL SYSTEMS.
We depend on bigchalk.com, Inc. to license the Electric Library site and related
software, technology, and systems to us. The license is royalty free and
perpetual, but bigchalk.com has a right to terminate the license on a change of
control of the Company. The loss of this license could hurt our business and
cause our revenues to decline. We also depend on bigchalk.com to provide
technical and data center support and services to us for Electric Library for
individual end users. The term of this agreement is 3 years and may be renewed
by the mutual written agreement of the parties. The loss of this agreement could
hurt our business and force us to provide technical and data center support and
services ourselves, or hire a third party to provide those services.
This could cause our business to suffer interruptions and us to incur
substantial costs.
WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS WHICH WOULD CAUSE
INTERRUPTIONS IN THE SITES WE PROVIDE TO OUR CUSTOMERS AND ULTIMATELY CAUSE US
TO LOSE CUSTOMERS.
Any delay or failure to the systems we use to deliver our sites to our customers
would interfere with their ability to access and use our sites. We have
occasionally suffered failures of the computer hardware and software and
telecommunications systems that we use to deliver our sites to customers. These
failures have caused interruptions in the functioning of our sites for our
customers. Also, the growth of our customer base as well as the number of sites
we provide, or both, may strain the systems we use to deliver our services to
customers to the point where the
Page 23
system may perform poorly or fail. We are also dependent on our ability and that
of our service providers, including bigchalk.com, Inc., to maintain our systems
in effective working order and to protect them against damage from:
- fire;
- natural disaster;
- power loss;
- telecommunications failure; or
- similar events.
All of the systems we currently use to deliver our services to our customers
(except for external telecommunications systems) are located in Wayne,
Pennsylvania. Although we maintain property insurance, claims could exceed the
coverage obtained.
We, along with our customers and our service providers, test and perform quality
assurance efforts in connection with our sites. We may, however, find errors in
our sites or our upgrades to them that could result in:
- loss of or delay in market acceptance and sales;
- diversion of development resources;
- injury to our reputation; or
- increased service and support costs.
OUR SYSTEMS FACE SECURITY RISKS AND OUR CUSTOMERS HAVE CONCERNS ABOUT THEIR
PRIVACY.
We have taken security precautions with respect to our systems and sites. Still,
they may be vulnerable to unauthorized access and use by hackers or other
persons or organizations, computer viruses, and other disruptive problems. The
consequences to us of any security breaches or problems could include, for
example, misappropriation of our customers' information, misappropriation of our
sites, misappropriation of our intellectual property and other rights, as well
as disruption and interruption in the use of our systems and sites. Unauthorized
access to and theft of customer information as well as denial of service attacks
of various Internet and online services have occurred in the past, and will
likely occur again in the future. In order to maintain our security precautions
or to correct problems caused by security breaches we may need to spend
significant capital or other resources. We intend to continue to put
industry-standard security measures in place for our systems and sites.
Nevertheless, those measures may be circumvented and in order continually to
monitor and maintain these measures we may cause disruption to and interruption
in our customer's use of our systems and sites. These disruptions and
interruptions could harm our business.
In general, users of the Internet and online services are very concerned about
the security and privacy of their communications and transaction data
transmitted over those services. These concerns may inhibit the growth of the
Internet and other online services generally, and our sites in particular. We
intend to continue to put industry-standard measures in place in order securely
to transmit and store our customers' private and confidential information and
transaction data including, for example, their credit card numbers. These
measures could be circumvented, however, and the consequence of a security
breach in this regard could hurt our reputation, expose us to a risk of damages
and litigation, and possible liability. These kinds of breaches could harm our
business.
Page 24
OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL, WHO WE MAY BE UNABLE TO RETAIN, AND
OUR ABILITY TO RECRUIT ENOUGH QUALIFIED PERSONNEL TO MEET OUR HIRING NEEDS.
The loss of the services of existing personnel, as well as the failure to
recruit additional key technical, managerial, and sales personnel in a timely
manner, would be detrimental to our business. Furthermore, we may incur
substantial expenses in connection with hiring and retaining employees. We are
highly dependent on the performance of our executive officers and key employees.
Some of our officers and all of our other employees have not entered into
employment agreements with us. There is intense competition for qualified
personnel. Therefore, we may not be able to attract and retain the qualified
personnel necessary for the development of our business and to manage growth
effectively.
WE MAY BE SUBJECT TO GOVERNMENT REGULATION AND LEGAL LIABILITIES WHICH MAY BE
COSTLY AND MAY INTERFERE WITH OUR ABILITY TO CONDUCT BUSINESS.
GOVERNMENT REGULATION IN THE U.S.
We are not currently subject to direct regulation by any United States or state
government agency other than the laws and regulations applicable to businesses
generally. Also, there are few laws or regulations directly applicable to access
to or commerce on the Internet. We believe these laws and regulations do not
seriously affect our operations and that we are materially in compliance with
them. Because of the increasing popularity and use of the Internet, federal and
state governments may adopt laws or regulations in the future with respect to
commercial online services and the Internet, with respect to:
- user privacy;
- copyrights and other intellectual property rights and infringement;
- domain names;
- pricing;
- content regulation;
- defamation;
- taxation; and
- the characteristics and quality of products and services.
Laws and regulations directly applicable to online commerce or Internet
communications are becoming more prevalent. Laws and regulations such as those
listed above could expose the Company to substantial liability, if enacted. For
example, provisions of the Communications Decency Act of 1996 may apply to us.
Although portions of that Act were struck down as unconstitutional by the U.S.
Supreme Court, other portions of it remain in effect. Other recently enacted
United States laws, such as the federal Digital Millennium Copyright Act and
various federal laws aimed at protecting children, their privacy, and the
content made available to them could expose us to substantial liability, too.
Furthermore, various proposals at the federal, state and local level could, if
enacted, impose additional taxes on the sale of goods and services through the
Internet. These laws, regulations, and proposals could also slow the growth in
use of the Internet, decrease the acceptance of the Internet as a communications
and commercial medium, require us to incur significant compliance expenses, and
adversely affect our opportunity to derive financial benefit from our
activities. Also, our content providers, other
Page 25
licensors and contractual partners, or insurance may not indemnify or
cover us in all cases for violations of any of these laws or regulations.
GOVERNMENT REGULATION OUTSIDE THE U.S.
Although transmission of our sites primarily originates in Pennsylvania and the
United States, the Internet is global in nature. Therefore, governments of
foreign countries might try to regulate our transmissions or prosecute us for
violations of their laws covering a variety of topics, many of which are the
same as those described above for United States laws and regulations. For
example, Germany has taken actions to restrict the free flow of material deemed
to be objectionable on the Internet. The European Union has adopted privacy,
copyright, and database directives that may impose additional burdens and costs
on us. We may incur substantial costs in responding to charges of violations of
local laws by foreign governments. The effect of this could be to slow the
growth in use of the Internet, decrease the acceptance of the Internet as a
communications and commercial medium, require us to incur significant compliance
expenses, and adversely affect our opportunity to derive financial benefit from
our activities.
IF WE FAIL TO MEET THE LISTING REQUIREMENTS OF THE NASDAQ SMALLCAP MARKET, WE
MAY UNABLE TO SUSTAIN A TRADING MARKET FOR OUR STOCK WHICH WOULD AFFECT THE
LIQUIDITY OF YOUR SHARES.
If we do not continue to meet the Nasdaq Stock Market's SmallCap listing
requirements, our stock could be traded on the over-the-counter market, which
would cause our shareholders to have less liquidity. In addition, we would be
less visible in the public markets. Since January 5, 1999, our stock has been
traded on the Nasdaq SmallCap Market. We must maintain, among other
requirements, one of three financial requirements to stay listed on the Nasdaq
SmallCap Market. We currently meet the market capitalization requirement. From
January 1, 1999 through December 31, 1999, our stock price has varied from a
high close of $9.25 per share to a low close of $3.75 per share. Although we
have met the Nasdaq SmallCap Market's listing requirements during 1999, given
the volatility in our stock price as well as the stock market in general, it is
possible that we may no longer meet these listing requirements and may be unable
to maintain our listing on the Nasdaq SmallCap Market.
OUR STOCK PRICE MAY VARY SIGNIFICANTLY WHICH MAY MAKE IT DIFFICULT TO RESELL
YOUR SHARES WHEN YOU WANT TO AT PRICES YOU FIND ATTRACTIVE.
If our stock price continues to vary significantly, the price of our common
stock may decrease in the future regardless of our operating performance.
Additionally, you may be unable to resell your shares of common stock following
periods of volatility because of the market's adverse reaction to this
volatility. There may be several factors contributing to this behavior,
including:
- actual or anticipated variations in quarterly operating results;
- announcements of new technologies or new services by us or our
competitors;
- changes in financial estimates and recommendations by securities
analysts;
- the operating and stock price performance of other companies that
investors may view as comparable to us;
- news relating to our industry as a whole; and
- news relating to trends in our markets.
Page 26
The stock market in general, and the market for Internet-related companies,
including ours, in particular, have experienced extreme volatility. This
volatility often has been unrelated to the operating performance of these
companies. These broad market and industry fluctuations may cause the price of
our stock to drop, regardless of our performance.
YOUR HOLDINGS MAY BE DILUTED IN THE FUTURE BY THE CONVERSION OF OUR OUTSTANDING
DEBENTURE AND EXERCISE OF OUR OUTSTANDING WARRANTS.
Your holdings may be diluted in the future by conversion of our debenture or
the exercise of outstanding warrants. As of December 31, 1999, $3,000,000
principal amount of a debenture was outstanding. The debenture is convertible
into shares of common stock at a conversion price equal to $4.13. This
conversion price does not fluctuate with the market price of the common stock
but is subject to adjustment from time to time in the event that, among other
things, we issue shares of common stock, options, warrants or other
convertible securities at less than market price. If fully converted on
December 31, 1999, the debenture and accrued interest would have been
convertible into 771,338 shares of common stock, but this number of shares
could prove to be substantially greater in the event that the conversion
price is adjusted as described above. In addition, as of December 31, 1999
the following warrants were outstanding:
- a warrant to purchase 522,449 shares of common stock issued to the
purchaser of the debenture at an exercise price of $5.97; this
conversion price does not fluctuate with the market price of the
common stock but is subject to adjustment from time to time pursuant
to anti-dilution provisions similar to those described above; and
- two warrants to purchase 100,000 shares each of common stock at
exercise prices of $5.15 and $6.25 respectively.
Purchasers of common stock could therefore possibly experience substantial
dilution of their investment upon conversion of the debenture and exercise of
warrants. Furthermore, the debenture matures on August 11, 2000 if not
previously converted into 802,663 shares at that date. Upon the maturity, we
would be required to pay $3.315 million, representing the $3 million principal
plus interest at 7%.
IF WE ARE UNABLE SUCCESSFULLY TO INTEGRATE FUTURE ACQUISITIONS OR MEGERS INTO
OUR OPERATIONS, THERE COULD BE AN ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF
OPERATIONS.
We may acquire or merge into complementary businesses, products and technologies
in the future. Some of the risks attendant to these acquisitions and mergers
are:
- - difficulties and expenses of integrating the operations and personnel of
acquired or merged companies into our operations while preserving the
goodwill of the acquired or merged entity;
- - the additional financial resources that may be needed to fund the
operations of acquired or merged companies, and the potentially dilutive
effect on your shares from these additional financial resources;
- - the potential disruption of our business;
- - our management's ability to maximize our financial and strategic position
by incorporating acquired or merged technology or businesses; and
Page 27
- - the difficulty of maintaining uniform standards, controls, procedures and
policies.
POTENTIAL INADEQUACY OF INSURANCE
Although we maintain general liability insurance, claims could exceed the
coverage obtained or might not be covered by our insurance. In addition, while
we typically obtain representations from our technology and content providers
(as well as other contractual partners) as to the ownership of licensed
technology and informational content and obtain indemnification to cover any
breach of these representations, we still may not receive accurate
representations or adequate compensation for any breach of such representations.
We may have to pay a substantial amount of money for claims which are not
covered by indemnification.
ITEM 2. PROPERTIES
Our headquarters are currently located in approximately 10,000 square feet of
office space in Wayne, Pennsylvania that we sublease from bigchalk.com, Inc. The
Company is obligated to reimburse bigchalk.com for rent and certain other office
expenses based on the Company's proportionate use of the space through June
2000. Our sublease expires in June 2000. We are in the process of entering into
a lease for new office space in the same area as our current offices. We also
lease approximately 2,400 square feet in New York, New York which we use
primarily as a business development office.
ITEM 3. LEGAL PROCEEDINGS
The Company was not a party to any material legal proceedings as of December 31,
1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of shareholders on November 29, 1999. This
Special Meeting was subsequently adjourned to November 30, 1999 in order to
obtain the necessary quorum of shareholders. Our shareholders voted on and
approved two matters at the Special Meeting.
In the first matter, we sought shareholder approval for our transaction with
Bell & Howell Company. The number of votes cast for this matter was 5,266,538
and against this matter was 20,197. The number of abstentions for this matter
was 41,010. In the second matter, we sought shareholder approval for an
amendment to our Amended and Restated 1996 Equity Compensation Plan increasing
the authorized shares under the plan to 2,500,000. The number of votes cast for
this matter was 6,106,081 and against this matter was 409,106. The number of
abstentions for this matter was 57,265. There were no broker non-votes for
either matter.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Class A Common Stock has traded on The Nasdaq Stock Market under the symbol
INFO since our initial public offering on April 30, 1996. Effective January 5,
1999, trading in our shares moved from the Nasdaq National Market to the Nasdaq
SmallCap Market. We have retained our symbol INFO on the SmallCap market. Prior
to that time, there was no public market for our Class A Common Stock. The
following table sets forth the high and low last
Page 28
reported sale prices for our Class A Common Stock for the period indicated as
reported by The Nasdaq Stock Market.
- ----------- -------------------------- --------- ---------
YEAR FISCAL QUARTER ENDED HIGH LOW
- ----------- -------------------------- --------- ---------
1998 March 31, 1998 5.625 1.875
- ----------- -------------------------- --------- ---------
June 30, 1998 7.938 2.625
- ----------- -------------------------- --------- ---------
September 30, 1998 4.438 1.938
- ----------- -------------------------- --------- ---------
December 31, 1998 7.094 1.250
- ----------- -------------------------- --------- ---------
1999 March 31, 1999 5.938 3.750
- ----------- -------------------------- --------- ---------
June 30, 1999 8.313 4.313
- ----------- -------------------------- --------- ---------
September 30, 1999 7.313 5.250
- ----------- -------------------------- --------- ---------
December 31, 1999 9.250 4.375
- ----------- -------------------------- --------- ---------
As of March 17, 2000, the Company had 162 shareholders of record and
approximately 7,400 beneficial owners.
We have not declared or paid dividends on our Common Stock and we do not intend
to do so in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below under the caption Consolidated Statements
of Operations Data with respect to each of the five years in the period ended
December 31, 1999 and under the caption Consolidated Balance Sheet Data are
derived from our the consolidated financial statements, which have been
audited by PricewaterhouseCoopers LLP, independent accountants. The following
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and accompanying Notes
included elsewhere in this Annual Report on Form 10-K.
Page 29
YEAR ENDED DECEMBER 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: (in thousands, except share and per share data)
Revenue.................................... $ 448 $ 1,441 $ 6,832 $14,925 $ 23,234
------ ------- ------- ------- --------
Costs and expenses:
Cost of revenues....................... 282 822 2,641 4,384 7,164
Customer support expenses.............. 146 324 578 1,093 1,147
Technical operations and
development expenses................ 3,554 5,210 6,272 7,606 8,375
Sales and marketing expenses........... 1,979 6,142 10,674 14,835 11,773
General and administrative
expenses............................ 1,982 3,927 5,029 4,609 3,068
------------ ------------ ------------ ------------- -------------
Total costs and expenses....... 7,943 16,425 25,194 32,527 31,527
------------ ------------ ------------ ------------- -------------
Loss from operations........................ (7,495) (14,984) (18,362) (17,602) (8,293)
Equity in net losses of
unconsolidated affiliate.................. -- -- -- -- (413)
Gain on sale of net assets.................. -- -- -- -- 34,919
Interest income (expense), net.............. 14 1,198 1,003 154 (1,516)
------------ ------------ ------------ ------------- -------------
Net loss.................................... $(7,481) $(13,786) $(17,359) $(17,448) $ 24,697
------------ ------------ ------------ ------------- -------------
Redemption of preferred stock in
excess of carrying amount .................. -- -- -- -- (75)
------------ ------------ ------------ ------------- -------------
Net loss applicable to common
shareholders................................ $(7,481) $(13,786) $(17,359) $(17,448) $ 24,622
======== ========= ========= ========= ========
Net income (loss) per common equivalent
share - basic (1)........................... $ (1.51) $ (1.61) $ (1.83) $ (1.77) $ 2.10
======== ======== ======== ======== =======
Weighted average number of common and
equivalent shares
outstanding - basic....... 4,940,400 8,549,800 9,491,600 9,830,900 11,729,900
========= ========= ========= ========= ==========
Net income (loss) per common equivalent
share - diluted (1)......................... $ (1.51) $ (1.61) $ (1.83) $ (1.77) $ 1.88
======== ======== ======== ======== =======
Weighted average number of common and equivalent shares outstanding -
diluted.....
4,940,400 8,549,800 9,491,600 9,830,900 13,126,300
========= ========= ========= ========= ==========
Page 30
DECEMBER 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments...... $ 962 $ 27,379 $ 12,997 $ 3,268 $ 3,739
Working capital (deficit)................... (1,514) 25,841 7,163 (5,561) 11,511
Total assets................................ 2,532 30,227 18,794 10,192 30,061
Long-term obligations, net of current
portion.................................. 138 -- 404 577 --
Shareholders' equity (deficit).............. (549) 27,688 10,460 (3,298) 22,916
(1) The Company calculates income and loss per share in accordance
with Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," which requires public companies to present
basic earnings per share (EPS) and, if applicable, diluted
earnings per share, instead of primary and fully diluted EPS.
Basic EPS is a per share measure of an entity's performance
computed by dividing income (loss) available to common
stockholders (the numerator) by the weighted-average number of
common shares outstanding during the period (the denominator).
Diluted earnings per share measures the entity's performance
taking into consideration common shares outstanding (as computed
under basic EPS) and dilutive potential common shares, such as
stock options, warrants, and convertible debt. Entities with a
net loss do not include common stock equivalents in the
computation of diluted EPS, as the effect would be
anti-dilutive.
Page 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATION
Item 7 contains, in addition to historical information, forward-looking
statements by the Company with regard to its plans, objectives, expectations,
and intentions that involve risks and uncertainties. These statements are not
guarantees of future performance and you should not rely on them. These
statements are based on management's current expectations and they are subject
to a number of uncertainties and risks that could cause our actual results to
differ materially from those described in the forward-looking statements. The
sections of this Annual Report entitled "Business" and "Risk Factors," as well
as other sections, contain a discussion of some of the factors that could
contribute to these differences. We do not assume any obligation to revise or
update any forward-looking statements. You should also carefully review the risk
factors set forth in other reports or documents we file from time to time with
the Securities and Exchange Commission.
OVERVIEW AND RECENT DEVELOPMENTS
Infonautics, Inc. (including its subsidiaries, "Infonautics," the "Company,"
"we," or "our") is a pioneering provider of personalized information agents and
Web sites. We deliver information over the Internet and other communications
mediums such as wireless. We began generating Web-based revenues in the first
quarter of 1996 with the introduction of the Electric Library site to the
end-user market, followed by a version designed for the educational market where
it was sold to schools, libraries and other educational institutions. In October
of 1998, we entered the market for free, advertising supported Internet-based
content services with the launch of Company Sleuth. We also have supplied
e-commerce-based online publishing services to publishers and other content
creators to offer their content for sale over the Web directly to customers.
On December 15, 1999, we closed a transaction with Bell & Howell Company ("Bell
& Howell") and its wholly owned subsidiary, Bell and Howell Information and
Learning Company ("BHIL"), following approval of the transaction by our
shareholders on November 30, 1999. In the transaction, we contributed our
Electric Library K-12 and public library business and assets and liabilities
into what is now bigchalk.com, Inc. ("bigchalk.com"), an Internet education
company. Also in the transaction, BHIL contributed its ProQuest K-12 and public
library business and certain assets and liabilities into bigchalk.com. As part
of the transaction, we also sold our e-commerce online archive business to BHIL
and granted an option to bigchalk.com to purchase the our Electric Library
end-user business.
As a result of the transaction and taking into account our additional $3.5
million investment in, and the private placement by, bigchalk.com, we
ultimately received a total of $18.5 million in cash and currently own
approximately 20% of bigchalk.com's stock. The balance of bigchalk.com's
stock is owned by BHIL, a select group of institutional investors, and board
members of bigchalk.com.
Following this transaction, we continue to develop and market our content
notification sites integrated in the Sleuth Center portal, including Company
Sleuth, Sports Sleuth, Job Sleuth, Entertainment Sleuth, and Shopping Sleuth. We
also retain rights to market Electric Library to end-users (subject to an option
granted to bigchalk.com to purchase the end-user business). Together these
sites, along with some others, are referred to as the Infonautics Network.
Additionally, we may develop and acquire other new Internet information sites
and expand existing sites. See Business - Our Sites; -- Our Growth Strategy; --
Markets, Customers and
Page 32
Distribution; -- Risk Factors -- We Have A Limited Operating History With Our
Business Following The Bell & Howell Transaction; -- As We Operate In A New And
Developing Market Of Providing Electronic Information, The Market For Our Sites
May Not Grow Fast Enough; -- Our Business Model Is Evolving And Depends In Part
On Web Advertising, E-Commerce Programs, And Subscriptions, All Of Which Are
Susceptible To Change; -- We Need To Establish And Maintain Strategic
Relationships With Other Web Sites And Services In Order To Grow Our Business.
During 1999, we generated most of our revenue from Electric Library, with
approximately 53% generated from the educational market and 35% from the
end-user market. Approximately 4% was from advertising and other e-commerce
revenues generated from the Infonautics Network and 3% was generated from the
e-commerce online archive business. The remaining revenues were from services
and products which the Company was no longer actively pursuing, including
revenues from extranet and intranet knowledge management services, domestic
marketing partners, and international markets. During 1999, sales growth was
achieved in both the educational and end-user markets for Electric Library, with
increases in the number of schools and libraries served and the number of
individual subscribers.
One result of our decision to no longer pursue business in certain markets,
combined with other cost cutting efforts, was to reduce operating costs.
Revenue, cost and expense comparison to the prior years will be somewhat
impacted by this and in 2000 each quarter's revenue and expense comparison to
the respective quarter in 1999 will be impacted by the transaction with Bell and
Howell.
Revenues from online monthly end-user subscriptions are recognized in the month
the subscription service is provided, and for annual end-user subscriptions,
revenues are recognized ratably over the term of the subscription. Potential
individual subscribers are given the first month free as a trial period, after
which we typically charge a fee of $9.95 per month for monthly subscriptions and
$59.95 per year for annual subscriptions, both for virtually unlimited usage.
Advertising revenue on the Infonautics Network sites is derived principally from
short-term advertising contracts in which we typically guarantee a minimum
number of impressions to advertisers over a specified period of time for a fixed
fee. Revenues from advertising sales are recognized ratably over the term of the
contract during the period in which the advertising is displayed.
Other sources of income for us include, or are expected in 2000 to include,
e-commerce and e-mail advertising revenues. E-commerce revenues consist of
referral fees from partners and revenues from co-branding our sites. Revenues
are earned when subscribers register with a partner's site, through a direct
link from the Infonautics network. The revenues from e-commerce are recognized
in the same period that the subscribers register with the partner site. There is
typically no minimum guarantee, and Infonautics has no further obligations after
the users' registrations. Partner revenues are also derived from the creation of
customized or co-branded sites through Infonautics partners. The partners sell
or provide the custom site to their customers. The revenues recognized include
any initial fees which are deferred and recognized ratably over the contract and
monthly minimum guaranteed revenues from the partners which are contractually
agreed for terms of less than one year.
E-mail revenues are derived from advertisements placed in e-mails which are sent
to subscribers of the Infonautics Network. We typically guarantee a minimum
number of e-mail impressions to
Page 33
advertisers over a specified period of time for a fixed fee. Revenues from
e-mail sales are recognized ratably in the period in which the e-mails are sent,
provided that no significant obligations remain. See Business - Our Growth
Strategy; -- Markets, Customers and Distribution; -- Risk Factors -- Our
Business Model Is Evolving And Depends In Part On Web Advertising, E-Commerce
Programs, And Subscriptions; -- Our Ability Accurately To Track And Measure
Advertising, Impressions, Page Views, And Registered Users Is Important To The
Success Of Our Business.
Less than 2% of our revenues in 1999 were from barter advertisements or e-mails
(agreements in which we trade advertisements on the Infonautics Network sites in
exchange for advertisements on third-party web sites). Barter advertising
revenues and expenses are recorded at the fair market value of services provided
or received, whichever is more determinable in the circumstances. Revenue from
barter advertising transactions is recognized as income when advertisements are
delivered. Barter expense is recognized when our advertisements are run on
third-party web sites, which is typically around the time when barter revenue is
recognized. Barter expense is included in sales and marketing. Barter revenues
are expected to be a greater percentage of our overall revenues in 2000.
We currently use two primary sources of content: published content licensed
from bigchalk.com, Inc. and Web-based content that we link to directly. As
part of our transaction with Bell & Howell Company, bigchalk.com, Inc. and
the Company have entered into a content license agreement. Under this
agreement, bigchalk.com licenses content to us for use in the Electric
Library site for end users, and, if we request, in our content notification
sites and for any new Company sites. To date, we only license content from
bigchalk.com for use in connection with the Electric Library site for end
users. The bigchalk.com content license has a five year term and grants us a
non-exclusive, worldwide, royalty bearing license to use the full text
licensed content subject to its terms. The royalty payable by us to
bigchalk.com for the licensed content is based on an initially fixed
percentage of net revenues derived from sales made to our customers of sites
that include the licensed titles, which approximates our historical royalty
percentage. Annually following the initial 12 months of the content license,
the percentage of net revenues associated with the royalty is subject to a
proportionate adjustment based on a formula.
In addition to the content we license directly from bigchalk.com or third party
content providers, we also access certain Web-based content in our content
notification sites. We accesses Web-based content primarily by searching
selected third party Web sites for relevant content and then providing links to
that content from our sites. In most cases, clicking on the link to that content
takes a user of our site directly to the third party Web site where the content
is located. Typically, we pay no fee or a nominal fee for these links to content
on third party Web sites. See - Business -- Sources of Content for our Sites; --
Risk Factors -- We Depend On bigchalk.com, Inc. For Our Published Content; -- If
We Are Unable To Retain Access To Free Or Low Cost Web-Based Content, Then Our
Ability To Provide Our Content Notification Sites In A Cost Efficient Manner
Will Be Impaired.
RESULTS OF OPERATIONS
We expect that all revenue and certain operating expenses in 2000 will be
less than in 1999 as a result of the sale of the contracts, assets,
liabilities to bigchalk.com and the related reduction in staffing levels.
REVENUES. Revenue was $23.2 million in 1999, $14.9 million in 1998 and $6.8
million in 1997,
Page 34
representing an increase of 56% in 1999 and 118% in 1998. An amount of $500,000
was included in revenues for 1997, which was received in 1995 as consideration
for limited exclusivity contained in a marketing agreement. During 1997 this
amount was recognized as the period of exclusivity ended, and we had no further
obligation under the marketing agreement. This amount is excluded for period to
period comparisons, and comparison of expenses as a percentage of revenues.
End-user subscription revenue, a continuing market for us, accounted for $8.2
million or 35% of revenue in 1999, $4.7 million or 31% of revenue in 1998 and
$3.8 million or 55% of revenue in 1997. Electric Library had approximately
95,000 subscribers at December 31, 1999, as compared to 60,000 subscribers at
December 31, 1998 and 47,000 subscribers at December 31, 1997.
Advertising and other e-commerce revenues, a continuing market for us, were $1.0
million, or 4% of revenues in 1999. Barter revenue accounted for $371,000 of
these 1999 revenues. There were no advertising and other e-commerce revenues in
1998 or 1997. These revenues consist of advertising revenues from ads that are
displayed on the Infonautics Network sites. E-commerce revenues include referral
revenues from partners who pay us for referring customer links to them, 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
Infonautics users with advertising promotions. These revenues are expected to
increase in 2000.
Educational revenue accounted for $12.2 million or 53% of revenue in 1999, $7.0
million or 47% of revenue in 1998 and $2.1 million or 31% of revenue in 1997. We
had over 4,700 educational contracts at the closing of the Bell & Howell
transaction, compared with 3,200 educational contracts at December 31, 1998 and
1,400 educational contracts at December 31, 1997. The 4,700 contracts covered
approximately 20,000 institutions. We will not have any revenue from sales to
the educational market in 2000 as a result of the Bell & Howell transaction.
E-commerce online publishing (formerly referred to as content management and
custom archive services) revenue was $715,000 or 3% of revenue in 1999, compared
to $857,000 or 5% of revenue in 1998 and $580,000, or 9% in 1997. Online
publishing revenue was generated primarily from archive services. We had 14
archive customers at the date of the BHIL transaction, compared to 9 archive
customers at December 31, 1998 and 5 in 1997. We will not have any revenue from
online publishing sales in 2000 as a result of the Bell & Howell transaction.
Extranet and intranet knowledge management services (IntelliBank) revenue was
$167,000, or 1% of revenue in 1999, compared to $1.7 million, or 12% of revenue
in 1998 and $357,000, or 5% of revenue in 1997. IntelliBank revenue was
generated primarily from archive services. We had no archive customers at
December 31, 1999, compared to 5 archive customers at December 31, 1998 and
1997. Sales comparisons in 1999 to the prior years are impacted by the Company
curtailing its direct sales efforts to the IntelliBank market in January 1999.
We also eliminated the related marketing and development costs. There will be no
revenues from these services in 2000.
Other revenue was $948,000, or 4% of revenue in 1999, compared to $700,000, or
5% of revenue in 1998. The comparable revenue amounts in 1997 were less than
$100,000. Other revenue consists of sales of Electric Library through
international partners which was sold to bigchalk.com as part of the Bell &
Howell transaction, reseller, and other miscellaneous sales.
Page 35
During 1997 and 1998, we signed agreements with companies to sell Electric
Library to end users in Canada, Australia and Korea. The services in Canada and
Australia began in 1998; the services in Korea began on a limited basis in 1999.
These minimum revenues were earned ratably over the term of each agreement.
As of December 31, 1999, deferred revenue amounted to $858,000, compared to $8.3
million at December 31, 1998. The decrease is attributable to the Bell & Howell
transaction, in which we transferred deferred revenue of $10.6 million. The
deferred revenue balance at December 31, 1999 of $858,000 consists of revenue to
be recognized from annual end-user subscriptions.
COST OF REVENUES. The principal elements of our cost of revenues are royalty and
license fees paid to providers of content, hardware and software, as well as
communication costs associated with the delivery of the online services. Cost of
revenues was $7.2 million, $4.4 million and $2.6 million, and gross margins were
69%, 71% and 61% in 1999, 1998 and 1997, respectively. The absolute dollar
increase in cost of revenues for each period primarily reflects costs incurred
to provide services to an increased number of users.
The reduction in gross margin in 1999 reflects a higher percentage of
revenues from Electric Library offset somewhat by reduced rate royalty
agreements. The improvement in gross margin in 1998 was primarily due to a
change in the revenue mix, with 78% of revenues derived from Electric Library
in 1998, compared to 87% in 1997. The improvement in the gross margin in 1998
was also from the effect of the prior year's restructuring of certain
agreements with hardware, software and content providers, as well as the
Company spreading its fixed costs over more contracts. We will incur certain
fees to bigchalk.com under the content license agreement which is expected to
approximate the 1999 royalty percentage for the end user business. See
Business - Sources of Content for Our Sites; -- Risk Factors -- We Depend On
bigchalk.com, Inc. For Our Published Content.
CUSTOMER SUPPORT. Customer support expenses consist of costs associated with the
staffing of professionals responsible for assisting users with technical and
product issues and monitoring customer feedback, and centralized support for all
billing-related inquiries. Customer support expenses were $1,147,000 in 1999,
$1,093,000 in 1998 and $578,000 in 1997, representing an increase of 5% in 1999
and 89% in 1998. As a percentage of revenue, customer support expenses were 5%
in 1999, 7% in 1998 and 9% in 1997. The absolute dollar increases resulted
primarily from higher staffing levels and the continuing need for us to provide
additional support to our growing customer base. As a percentage of revenues,
customer support costs declined in 1999 as the staffing levels were able to
support a greater number of users. Due to the Bell & Howell transaction in
December 1999, we reduced our customer service staffing levels from 20 to 0. We
may incur certain fees to bigchalk.com for customer service under the technical
services agreement and we are in the process of staffing certain customer
service functions for our sites. See Business -- Intellectual Property and
Licenses.
TECHNICAL OPERATIONS AND DEVELOPMENT. Technical operations and development
expenses consist primarily of costs associated with maintaining our sites, data
center operations, hardware
Page 36
expense, data conversion costs, as well as the design, programming, testing,
documentation and support of our new and existing software, sites and databases.
To date, all our costs for technical operations and development have been
expensed as incurred. Technical operations and development expenses were $8.4
million in 1999, $7.6 million in 1998 and $6.3 million in 1997, representing an
increase of 10% in 1999 and 21% in 1998. As a percentage of revenue, technical
operations and development expenses were 36% in 1999, 51% in 1998 and 93% in
1997. The absolute dollar increases each year were largely due to our
enlargement of the technical operations and development staff in order to
support increased activities as well as improvements and upgrades in Electric
Library, and introduction of new content notification sites.
Due to the Bell & Howell transaction in December 1999, we reduced our
technical operation and development staffing levels from 79 to 35. We expect
these costs in 2000 to be less than the cost prior to the Bell and Howell
transaction. However, we expect that the level of technical operations and
development expenses may increase quarter over quarter as we develop new and
enhanced services and upgrades to the current services which may include the
use of outside consultants. Additionally, we will incur certain fees to
bigchalk.com under the technical services agreements and is expected to incur
these costs internally over time.
SALES AND MARKETING. Sales and marketing costs consist primarily of costs
related to compensation, attendance at conferences and trade shows, advertising,
promotion and other marketing programs. Sales and marketing expenses were $11.8
million in 1999, $14.8 million in 1998 and $10.7 million in 1997, representing a
decrease of 21% in 1999, and an increase of 39% in 1998. The principal reasons
for the decrease in absolute dollars was our decision to decrease marketing
efforts for certain products and services. As a percentage of sales, sales and
marketing costs were 51%, 99% and 156% of revenues for the years ended December
31, 1999, 1998 and 1997, respectively. The decrease of costs as a percentage of
sales is a result of our cost reduction efforts, lower costs associated with
renewals, and the effect of earlier period start up costs. Additionally, we
opened and closed a sales office in California during 1998. We may incur
significant sales and marketing costs in 2000 to market our content notification
sites integrated in the Sleuth Center portal.
The number of sales and marketing personnel decreased from 72 to 28 as a
result of the Bell & Howell transaction. We will no longer incur the trade
show, conference and other costs of marketing to the educational market. The
marketing of the end-user business has been and will continue to be limited.
We use affiliate and other marketing programs to acquire registered users. We
may accelerate these programs which could increase the cost of acquisition.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of expenses for content, administration, office operations, finance
and general management activities, including legal, accounting and other
professional fees. General and administrative expenses were $3.1 million in
1999, $4.6 million in 1998 and $5.0 million in 1997, representing decreases of
33% in 1999 and 8% in 1998. The comparative decrease in 1999 was a result of
$500,000 of severance costs incurred in 1998 associated with the resignation of
the former chairman of the board who resigned in February 1998, as well as
reductions in overall expenses, offset by professional fees and other costs
related to the Bell & Howell transaction and related severance incurred. The
decrease in 1998 was the result of costs associated with the staffing and costs
incurred with the Electric Schoolhouse project in 1997, which were in excess of
the severance costs recognized in 1998 when the project was transferred to the
former chairman of the board. We expect that general and administrative expenses
will decrease in comparison to prior periods as a result of the Bell & Howell
transaction, unless we consider or enter into any strategic
Page 37
alliances or transactions or hire additional management.
INCOME (LOSS) IN EQUITY INVESTMENT. The loss in equity investment consists of
the Company's 30.89% equity pickup in the results of operations of bigchalk.com
since December 15, 1999. The loss of equity in the investment was $413,000
during 1999. There were no such costs during 1998 or 1997. As of December 31,
1999, we held a 30.89% interest in the common stock of bigchalk.com. This
interest has subsequently been diluted as a result of additional equity capital
infusions into bigchalk.com. We expect that bigchalk.com will continue to
generate net losses in 2000 as it develops its business and marketshare.
GAIN ON SALE OF NET ASSETS. The gain on sale of net assets consists of the cash
and note receivable received, plus the net liabilities transferred upon
consummation of the transaction with BHIL and Bell & Howell. The gain amounted
to $34.9 million. There are no current or future Federal or state income tax
liabilities resulting from the transaction due utilization of available net
operating loss carryforwards.
INTEREST INCOME (EXPENSE), NET. Interest expense, net was $1.5 million in 1999,
compared to net interest income of approximately $154,000 in 1998 and $1.0
million in 1997, a decrease of 85% in 1998, resulting from the decrease in cash
and investments. In 1999, approximately $369,000 of interest expense was
incurred for the discount on the issuance of convertible debt below market.
Approximately $657,000 of interest expense was incurred in the current year for
the amortization of the warrant valuation and 7% interest on the convertible
debt. We will continue to incur interest expense for the interest on the
convertible debt and the amortization of the warrant valuation. The remaining
interest was incurred on capital leases and interest relating to the accounts
receivable financing, as well as interest expense related to a liability owed to
the Commonwealth of Pennsylvania as a result of the $13.5 million note
receivable from Bell & Howell at December 31, 1999. We expect that we will
recognize net interest income in 2000.
INCOME TAXES. We have not recorded an income tax benefit because we have
incurred net operating losses since inception. As of December 31, 1999, we
had approximately $18.3 million in Federal net operating loss carry forwards.
The Federal net operating losses will expire beginning in 2008 through 2019
if not utilized. The state net operating losses of $6.0 million will expire
beginning in 2005 if not utilized. See Note 5 of Notes to Consolidated
Financial Statements. A portion or all of net operating loss carryforwards
which can be utilized in any year may be limited by changes in ownership of
the Company, pursuant to Section 382 of the Internal Revenue Code and similar
statutes.
PRO FORMA RESULTS OF OPERATIONS
The pro forma results of operations reflected here are based on available
information and certain information and certain assumptions that the Company's
management believes are reasonable. As a result of the transaction with
bigchalk.com, the following pro forma information has been prepared for
comparative purposes to the ongoing operations of the Company, in millions:
Q1 Q2 Q3 Q4 TOTAL
1999 1999 1999 1999
REVENUES 2.0 2.4 2.4 2.7 9.5
COST OF GOODS SOLD 0.7 0.8 0.8 0.9 3.2
EXPENSES 2.3 2.6 2.3 2.7 9.9
LOSS FROM OPERATIONS (1.0) (1.0) (0.7) (.9) (3.6)
Page 38
This information includes the results of operations of the end-user version
of Electric Library and our content notification sites in Sleuth Center,
which are the ongoing businesses of the Company. This information also
assumes the transaction with bigchalk.com occurred at the beginning of
1999. Excluded from the above are the revenues and costs that relate to the
Electric Library site and technology which are used in the educational
market and the international market. Also excluded are revenues and costs
that relate to the e-commerce online publishing markets and customers,
which was sold to BHIL, and revenues earned by our extranet and intranet
knowledge management services during 1999.
The cost of goods sold and expenses include pro forma royalties for
content licensing and technical services which would have been owed to
bigchalk.com had the transaction occurred on January 1, 1999.
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 issuance of preferred stock and, to a lesser
extent, operating leases. In February 1999, we also raised funds through
issuance of convertible debt. During the second and third quarters of 1999,
we used the accounts receivable purchase agreement which we entered into in
May 1999 to fund cash needs. This line was paid in full upon closing of the
Bell & Howell transaction. In December 1999, we sold our net assets related
to the sales of Electric Library for the educational market and the
e-commerce and online publishing business and generated $18.5 million,
prior to fees of approximately $1.9 million, and after our additional
investment in bigchalk.com. In 2000, we believe we will be able to fund our
operations through existing cash and cash generated through operations.
The Company had cash and cash equivalents balances of approximately $3.7
million at December 31, 1999 and $3.3 million at December 31, 1998. We
collected $5 million of the proceeds from the Bell & Howell transaction in
1999 and the remaining $13.5 million in 2000.
We had working capital of approximately $11.5 million at December 31, 1999,
compared to a working capital deficiency of nearly $5.6 million at December
31, 1998. The improvement is due to the Bell & Howell transaction. We
monitor our cash and investment balances regularly and invest excess funds
in short-term investments.
We had negative cash flows from operations of approximately $6.6 million,
$11.7 million and $12.7 million for 1999, 1998 and 1997, respectively. The
decreases in 1999 were due to the increased cash collections from
customers in advance of providing our sites and services.
Net cash provided by investing activities was $4.3 million in 1999 and $9.8
million in 1998. This compares to cash used in investing activities of $1.7
million in 1997. The decrease in cash provided in 1999 is a result of $10.7
million in net proceeds received during 1998 from investments maturing
during 1998 which were not reinvested. No such investments matured during
1999, causing the cash provided to decrease. Offsetting this
Page 39
decrease was the receipt of $5.0 million from the Bell & Howell
transaction. $454,000 was used for capital expenditures in 1999. In 1998,
$852,000 was used for capital expenditures. In 1997, net cash was provided
by the net redemption of $620,000 of investments and used for $2.3 of
capital expenditures.
Our principal commitments at December 31, 1999 consisted of obligations
under the bigchalk.com service and license agreements and the remaining
payment of $500,000 due under a marketing agreement. Other previous
commitments such as content provider and lease agreements were assigned to
bigchalk.com. Additionally, the Company was committed to pay approximately
$1 million in March and April 2000 for a Sports Sleuth marketing campaign.
Capital expenditures have been, and future expenditures are anticipated to
be, primarily for facilities and equipment to support the expansion of our
operations and systems. We expect that our capital expenditures will
increase as the number of registered users increase. As of December 31,
1999, we did not have any material commitments for capital expenditures,
although we anticipate that our planned purchases of capital equipment, a
move to new offices and the related expenses will require additional
expenditures of up to $1,000,000 for 2000, a portion of which we may try to
finance through equipment leases, or a working capital line of credit.
However, there can be no guarantee will obtain this financing. We also
expect to enter into a lease agreement for office space.
Net cash provided by financing activities was $2.8 million in 1999, $2.8
million in 1998 and $653,000 in 1997. We raised $3.0 million on February
11, 1999 from the issuance of convertible debt. We also entered a
receivables financing agreement during 1999 from which $2.9 million was
borrowed and paid off during the year. On July 22, 1998, we raised $3.0
million in a private placement of 3,000 shares of Preferred Stock. See
Notes 6 and 7 to the Consolidated Financial Statements. We used a
sale-leaseback arrangement to finance the purchase of certain equipment
in 1997.
We currently anticipate that the cash balances and cash from operations,
will be sufficient to meet our anticipated needs for at least the next
twelve months. We may need to raise additional funds in the future in order
to fund more aggressive marketing or growth, to develop new or enhanced
services, to respond to competitive pressures or to make acquisitions. Any
required additional financing may not be available on terms favorable to
us, or at all. 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
Page 40
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 seasonality
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.
ELECTRIC SCHOOLHOUSE
In February 1998, we entered into an agreement with Marvin I. Weinberger,
the former Chairman of the Board, Chief Executive Officer and founder of
the Company, under 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. Under the February 1998
agreement, Electric Schoolhouse, LLC is obligated to repay us for certain
expenses and costs. We are continuing to pursue collection of these
amounts, repayment of which was originally due on September 30, 1998 and
remains outstanding. However, we have expensed as bad debt the balance due
from Electric Schoolhouse, LLC, approximately $172,000, which is owed to
us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data required by this
item are attached to this Annual Report on Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning directors is incorporated by
reference to our Proxy Statement to be filed within 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K. The information
concerning compliance with Section 16(a) of the Securities Exchange Act of 1934
required by this item will be set forth under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in our Proxy Statement to be filed
within 120 days after the end of the fiscal year covered by this Annual Report
on Form 10-K.
The information required by this item concerning executive officers is set forth
in Part I, Item 1 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Page 41
The information required by this item is incorporated by reference to our Proxy
Statement to be filed within 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to our Proxy
Statement to be filed within 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to our Proxy
Statement to be filed within 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
List of documents filed as part of this Annual Report on Form 10-K:
(a)
1. (i) FINANCIAL STATEMENTS. Infonautics, Inc. Consolidated
Financial Statements listed in the accompanying Index to
Consolidated Financial Statements and Financial Statement
Schedule appearing on page F-1 are filed as part of this
Annual Report on Form 10-K.
(ii) FINANCIAL STATEMENTS. bigchalk.com, Inc. Financial
Statements listed in the accompanying Table of Contents
appearing on page F-27 are filed as part of this Annual Report
on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES. The Financial Statement
Schedule listed in the accompanying Index to Infonautics, Inc.
Consolidated Financial Statements and Financial Statement
Schedule appearing on page F-25 is filed as part of this
Annual Report on Form 10-K.
3. EXHIBITS. See (c) below.
(b) Reports on Form 8-K
We filed a report on Form 8-K/A on October 4, 1999 attaching the
Master Transaction Agreement by and among Infonautics, Inc., Infonautics
Corporation, Bell & Howell Company and Bell & Howell Information and Learning
Company dated July 8, 1999 (the "MTA") and the First Amendment to the MTA dated
September 28, 1999. The Company filed no other reports on Form 8-K during the
quarter ended December 31, 1999.
(c) EXHIBITS. The following is a list of exhibits filed as part of this Annual
Report on Form 10-K. Where indicated, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated in parentheses.
EXHIBIT NO. DESCRIPTION
Page 42
3.1 Form of Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1
(File No. 333-2428) ("Form S-1 Registration Statement"))
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Report on Form 10-Q for the quarterly period ended
March 31, 1997)
10.1** Amended and Restated 1994 Omnibus Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the Form S-1
Registration Statement)
10.2** 1996 Equity Compensation Plan as amended and restated as of
August 18, 1999 (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (File No.
333-30342))
10.3** Form of Nonqualified Stock Option Agreement (incorporated by
reference to Exhibit 10.3 to the Form S-1 Registration
Statement)
10.5** Employment Agreement dated as of January 1, 1993 between
Infonautics, Inc. and Joshua Kopelman (incorporated by
reference to Exhibit 10.5 to the Form S-1 Registration
Statement)
10.6(a)** Employment Agreement dated September 5, 1996 between
Infonautics, Inc. and Van Morris (incorporated by reference to
Exhibit 10.6 to the Form S-1 Registration Statement)
10.6(b)** Amendment No. 1 to Employment Agreement dated as of November 4,
1996 between Infonautics, Inc. and Van Morris (incorporated by
reference to Exhibit 10.6(b) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 ("1996
Form 10-K"))
10.9** Employment Agreement dated as of January 2, 1997 between
Infonautics, Inc. and William Burger (incorporated by reference
to Exhibit 10.9 to the 1996 Form 10-K)
10.10** Employment Agreement dated as of November 24, 1997 between
Infonautics, Inc. and Gerard J. Lewis, Jr.
10.11** Form of Indemnification Agreement (incorporated by reference to
Exhibit 10.9 to the Form S-1 Registration Statement)
10.13** Royalty Agreement dated as of January 1, 1993 between
Infonautics, Inc. and Joshua Kopelman (incorporated by
reference to Exhibit 10.11 to the Form S-1 Registration
Statement)
10.15** Consulting agreement effective as of March 1, 1993, as amended
February 1, 1994 and February 1, 1996 between Infonautics, Inc.
and Howard Morgan (incorporated by reference to Exhibit 10.14
to the Form S-1 Registration Statement)
Page 43
10.16 Agreement of Termination and Assignment dated October 30, 1992
between Telebase Systems, Inc. and Marvin Weinberger and
Lawrence Husick and Bill of Sale dated April 19, 1993 between
Infonautics, Inc. and Marvin Weinberger (incorporated by
reference to Exhibit 10.15 to the Form S-1 Registration
Statement)
10.17 Agreement dated March 24, 1993 between Infonautics, Inc. and
Lawrence Husick (incorporated by reference to Exhibit 10.16 to
the Form S-1 Registration Statement)
10.18 Agreement of Lease dated June 14, 1994, as amended January 27,
1995, June 30, 1995 and November 13, 1995 (each incorporated by
reference to Exhibit 10.24 to the Form S-1 Registration
Statement), April 18, 1996 and May 22, 1996 (each incorporated
by reference to Exhibit 10.25 to the 1996 Form 10-K), April 14,
1997 (incorporated by reference to Exhibit 10.1 to the
Company's Report on Form 10-Q for the quarterly period ended
June 30, 1997), September 19, 1997 (incorporated by reference
to Exhibit 10.1 to the Company's Report on Form 10-Q for the
quarterly period ended September 30, 1997) and November 17,
1997 between Infonautics, Inc. and West Valley Business Trust
10.19*** Interactive Marketing Agreement dated as of March 10, 1998
between Infonautics Corporation and America Online, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the
Page 44
quarterly period ended March 31, 1998)
10.20 Electric Schoolhouse Agreement dated as of February 12, 1998
between Infonautics, Inc. and Marvin I. Weinberger
(incorporated by reference to Exhibit 10.2 to the Company's
Report on Form 10-Q for the quarterly period ended March 31, 1998)
10.21 Amendment Number 1 to Interactive Marketing Agreement between
America Online, Inc. and Infonautics Corporation dated March 2,
1999. (incorporated by reference to Exhibit 10.1 to the
Company's Report on Form 10-Q for the quarterly period ended
March 31, 1999)
10.22*** Master Transaction Agreement by and among Infonautics, Inc.,
Infonautics Corporation, Bell & Howell Company and Bell &
Howell Information and Learning Company dated July 8, 1999
(incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 8-K/A (File No. 000-28284))
10.23 First Amendment to the Master Transaction Agreement by and
among Infonautics, Inc., Infonautics Corporation, Bell & Howell
Company and Bell & Howell Information and Learning Company
dated September 28, 1999 (incorporated by reference to Exhibit
10.2 to the Company's Report on Form 8-K/A (File No.
000-28284))
10.24* Second Amendment to the Master Transaction Agreement by and
among Infonautics, Inc., Infonautics Corporation, Bell & Howell
Company and Bell & Howell Information and Learning Company
dated December 15, 1999.
10.25* Purchase and Sale Agreement by and among Bell & Howell
Information and Learning Company, Infonautics, Inc., and
BHW/INFO/EDCO.COM, LLC dated December 30, 1999.
10.26 Amendment to Employment Agreement between Joshua Kopelman and
Infonautics, Inc. dated June 17, 1999 (incorporated by
reference to Exhibit 10.1 to the Company's Report on Form 10-Q
for the quarterly period ended June 30, 1999)
10.27 Amendment to Agreement of Termination and Assignment dated
October 30, 1992 between Telebase Systems, Inc. and Marvin
Weinberger and Lawrence Husick and Bill of Sale dated April 19,
1993 between Infonautics, Inc. and Marvin Weinberger, between
Infonautics, Inc. and CDnow, Inc. dated June 22, 1999
(incorporated by reference to Exhibit 10.2 to the Company's
Report on Form 10-Q for the quarterly period ended June 30,
1999)
Page 45
10.28 Agreement of Termination between Israel Melman and Infonautics,
Inc. dated February 26, 1999 (incorporated by reference to
Exhibit 10.3 to the Company's Report on Form 10-Q for the
quarterly period ended March 31, 1999)
10.29 Securities Purchase Agreement, dated as of February 11, 1999,
between Infonautics, Inc. and RGC International Investors, LDC
(incorporated by reference as exhibit 99.1 to the Company's
Report on Form 8-K filed February 24, 1999) (incorporated by
reference to Exhibit 10.4 to the Company's Report on Form 10-Q
for the quarterly period ended March 31, 1999)
10.30 Registration Rights Agreement, dated as of February 11, 1999,
between Infonautics, Inc. and RGC International Investors, LDC
(incorporated by reference as exhibit 99.2 to the Company's
Report on Form 8-K filed February 24, 1999) (incorporated by
reference to Exhibit 10.5 to the Company's Report on Form 10-Q
for the quarterly period ended March 31, 1999)
10.31 Letter dated November 2, 1998 from RGC International Investors,
LDC waiving certain rights under the securities purchase and
related agreements discussed in Note 6 of the Notes To
Consolidated Financial Statements in the Company's Report on
Form 10-Q for the quarterly period ended September 30, 1998 and
in Item 2, Changes in Securities, in the same Report on Form
10-Q (incorporated by reference to Exhibit 99.1 to the
Company's Report on Form 10-Q for the quarterly period ended
September 30, 1998)
10.32 Statement with Respect to Shares for Series A Convertible
Preferred Stock of Infonautics, Inc. with RGC International
Investors, LDC (incorporated by reference to Exhibit 99.1 to
the Company's Report on Form 8-K dated July 22, 1998)
10.33 Securities Purchase Agreement, dated as of July 22, 1998
between Infonautics, Inc. and RGC International Investors, LDC
(incorporated by reference to Exhibit 99.2 to the Company's
Report on Form 8-K dated July 22, 1998)
10.34 Registration Rights Agreement dated as of July 22, 1998 between
Infonautics, Inc. and RGC International Investors, LDC
(incorporated by reference to Exhibit 99.3 to the Company's
Report on Form 8-K dated July 22, 1998)
21* Subsidiaries of the Registrant
23* Consents of PricewaterhouseCoopers LLP and KPMG LLP
24 Powers of Attorney (included as part of the signature page
hereof)
Page 46
27.1* Financial Data Schedule
---------------
* Filed herewith.
** Compensation plans and arrangements for executive officers and others.
*** Portions of these exhibits were omitted and filed separately with the
Secretary of the Securities and Exchange Commission pursuant to a
request for confidential treatment.
COPIES OF THE EXHIBITS ARE AVAILABLE TO SHAREHOLDERS (UPON PAYMENT OF A FEE TO
COVER THE COMPANY'S EXPENSES IN FURNISHING EXHIBITS) FROM GERARD J. LEWIS, JR.,
VICE PRESIDENT & GENERAL COUNSEL, SECRETARY, INFONAUTICS, INC., 900 WEST VALLEY
ROAD, SUITE 1000, WAYNE, PENNSYLVANIA 19087.
Page 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
INFONAUTICS, INC.
Date: March 30, 2000 By: /s/ David Van Riper Morris
__________________________
David Van Riper Morris
President and Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dates indicated.
Each person whose signature appears below in so signing also makes,
constitutes and appoints David Van Riper Morris his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to execute and cause to be filed with the Securities and
Exchange Commission any and all amendments to this report and in each case
to file the same, with all exhibits thereto and other documents in
connection therewith and hereby ratifies and confirms all that said
attorney-in-fact or his substitute or substitutes may do or cause to be
done by virtue hereof.
NAME CAPACITY DATE
/s/ DAVID VAN RIPER MORRIS Principal Executive Officer March 30, 2000
__________________________
David Van Riper Morris
/s/ FEDERICA F. O'BRIEN Principal Financial and March 30, 2000
__________________________
Federica F. O'Brien Accounting Officer
/s/ ISRAEL J. MELMAN Director March 30, 2000
__________________________
Israel J. Melman
/s/HOWARD L. MORGAN Director March 30, 2000
__________________________
Howard L. Morgan
/s/LLOYD N. MORRISETT Director March 30, 2000
__________________________
Lloyd N. Morrisett
/s/LESTER WUNDERMAN Director March 30, 2000
__________________________
Lester Wunderman
Page 48
/s/BRIAN SEGAL Director March 30, 2000
__________________________
Brian Segal
Page 49
INFONAUTICS, INC.
REPORT ON AUDITS OF
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997, 1998 AND 1999
INFONAUTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGES
-----
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1997, 1998 and 1999 F-6
Notes to Consolidated Financial Statements F-7 - F-24
Schedule II - Valuation and Qualifying Accounts, for the years
ended December 31, 1997, 1998 and 1999 F-25
Financial statement schedules other than that listed above have been omitted
because such schedules are not required or applicable.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Infonautics, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Infonautics, Inc. and its subsidiaries at December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
February 18, 2000
F-2
INFONAUTICS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
ASSETS 1998 1999
---- ----
Current assets:
Cash and cash equivalents $ 3,267,811 $ 3,739,024
Receivables:
Trade, less allowance for doubtful accounts of $65,740 in 1998
and $99,800 in 1999 2,934,597 637,316
Due from affiliate -- 13,500,000
Other 305,121 513,231
Prepaid royalties 397,849 --
Prepaid expenses and other assets 446,492 267,230
------------ ------------
Total current assets 7,351,870 18,656,801
Property and equipment, net 2,572,617 492,438
Investments in affiliates -- 10,885,773
Other assets 267,885 26,415
------------ ------------
Total assets $ 10,192,372 $ 30,061,427
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of obligations under capital lease $ 356,898 --
Accounts payable 1,929,598 $ 916,292
Accrued expenses 1,484,934 2,438,515
Accrued royalties 1,334,669 75,606
Deferred revenue 7,807,016 858,159
Convertible debt -- 2,857,322
------------ ------------
Total current liabilities 12,913,115 7,145,894
Noncurrent portion of obligations under capital lease 47,209 --
Noncurrent portion of deferred revenue 530,256 --
------------ ------------
Total liabilities 13,490,580 7,145,894
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Series A Convertible Preferred Stock, no par value, 5,000 shares
authorized, 283 shares issued and outstanding at
December 31, 1998 258,483 --
Class A common stock, no par value; 25,000,000 shares authorized;
one vote per share; 11,522,692 and 11,757,076 shares issued and
Outstanding at December 31, 1998 and 1999, respectively -- --
Class B common stock, no par value; 100,000 shares authorized,
issued and outstanding -- --
Additional paid-in capital 56,666,439 58,316,564
Deferred compensation (125,000) --
Accumulated deficit (60,098,130) (35,401,031)
------------ ------------
Total shareholders' equity (deficit) (3,298,208) 22,915,533
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 10,192,372 $ 30,061,427
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
---- ---- ----
Revenues $ 6,831,731 $ 14,924,567 $ 23,234,243
------------ ------------ ------------
Cost and expenses:
Cost of revenues 2,641,198 4,384,362 7,164,121
Customer support expenses 578,212 1,093,212 1,146,967
Technical operations and development expenses 6,271,514 7,605,669 8,375,173
Sales and marketing expenses 10,674,468 14,834,567 11,773,119
General and administrative expenses 5,029,100 4,608,715 3,067,934
------------ ------------ ------------
Total costs and expenses 25,194,492 32,526,525 31,527,314
------------ ------------ ------------
Loss from operations (18,362,761) (17,601,958) (8,293,071)
Interest and other income 1,044,204 293,919 76,304
Interest expense (40,481) (139,497) (1,592,099)
Equity in net losses of unconsolidated affiliate -- -- (412,999)
Gain on sale of net assets -- -- 34,918,964
------------ ------------ ------------
Net income (loss) (17,359,038) (17,447,536) 24,697,099
Redemption of preferred stock in excess of
carrying amount -- -- (74,875)
------------ ------------ ------------
Net income (loss) attributable to $(17,359,038) $(17,447,536) $ 24,622,224
common shareholders ============ ============ ============
Income (loss) per common share - basic $ (1.83) $ (1.77) $ 2.10
============ ============ ============
Weighted average shares outstanding - basic 9,491,600 9,830,900 11,729,900
============ ============ ============
Income (loss) per common share - diluted $ (1.83) $ (1.77) $ 1.88
============ ============ ============
Weighted average shares outstanding - diluted 9,491,600 9,830,900 13,126,300
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(17,359,038) $(17,447,536) $ 24,697,099
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Gain on sale of net assets -- -- (34,918,964)
Depreciation and amortization 1,096,353 1,499,837 1,428,669
Amortization of discount on convertible debt -- -- 840,269
Accretion on convertible debt -- -- 185,625
Provision for losses on accounts receivable 86,181 33,174 335,432
Amortization of deferred compensation 125,000 125,000 125,000
Equity in investee losses -- -- 412,999
Stock issued for services -- -- 5,625
Severance and related costs -- 398,525 --
Changes in operating assets and liabilities:
Receivables:
Trade (385,024) (542,656) (3,961,783)
Other (35,356) (125,724) (328,226)
Prepaid and other assets (168,733) (232,370) (108,380)
Accounts payable (19,384) 454,098 (291,787)
Accrued expenses 1,322,940 (157,487) (123,676)
Accrued royalties 450,284 659,946 107,093
Deferred revenue 2,173,905 3,614,374 4,981,121
------------ ------------ ------------
Net cash used in operating activities (12,712,872) (11,720,819) (6,613,884)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (2,321,326) (852,445) (454,487)
Receipts from sale of net assets -- -- 5,000,000
Minority investment -- -- (280,000)
Purchases of short-term investments (22,086,548) (7,789,936) --
Purchases of long-term investments (600,000) -- --
Proceeds from maturity of short-term and long-term
investments 23,306,000 18,485,440 --
------------ ------------ ------------
Net cash provided by (used in)
investing activities (1,701,874) 9,843,059 4,265,513
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and
warrant 5,876 -- --
Proceeds from borrowings under accounts
receivable purchase agreement -- -- 2,913,358
Repayments of borrowings under accounts
receivable purchase agreement -- -- (2,913,358)
Proceeds from exercise of stock options -- 216,037 550,804
Repurchase of preferred stock -- -- (333,358)
Proceeds from issuance of long-term debt -- -- 3,000,000
Net proceeds from issuance of preferred stock and
warrants, net -- 2,950,139 --
Proceeds from sale - leaseback of equipment 766,504 -- --
Payments on capital lease obligations (64,860) (297,538) (397,862)
Loans to officer and employees (55,000) (25,000) --
------------ ------------ ------------
Net cash provided by financing activities 652,520 2,843,638 2,819,584
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (13,762,226) 965,878 471,213
Cash and cash equivalents, beginning of period 16,064,159 2,301,933 3,267,811
------------ ------------ ------------
Cash and cash equivalents, end of period $ 2,301,933 $ 3,267,811 $ 3,739,024
============ ============ ============
Supplemental disclosure of cash flow information:
See Note 12
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
INFONAUTICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
CLASS A CLASS B PREFERRED STOCK
----------------- ----------------- ----------------------
Shares Par Value Shares Par Value Shares Amount
----------- --------- --------- --------- ------ ------------
Balance at December 31, 1996 9,389,357 -- 100,000 -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Other 2,270 -- -- -- -- --
Net loss for the year -- -- -- -- -- --
------------ ---- ------------ ---- ------- ------------
Balance at December 31, 1997 9,391,627 -- 100,000 -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Exercise of employee stock options 103,287 -- -- -- -- --
Issuance of stock to former CEO 125,000 -- -- -- -- --
Sale of preferred stock -- -- -- -- 3,000 $ 2,950,139
Warrants issued in connection with preferred stock -- -- -- -- -- (261,000)
Accretion of preferred stock -- -- -- -- -- 48,493
Conversion of preferred stock 1,902,778 -- -- -- (2,717) (2,479,149)
Net loss for the year -- -- -- -- -- --
------------ ---- ------------ ---- ------- ------------
Balance at December 31, 1998 11,522,692 -- 100,000 -- 283 258,483
Amortization of deferred compensation -- -- --
Exercise of employee stock options 232,884 -- -- -- -- --
Accretion of preferred stock -- -- -- -- 74,875
Repurchase of preferred stock -- -- (283) (333,358)
Discount on issuance of convertible debt -- -- -- -- --
Beneficial conversion of convertible debt -- -- -- -- --
Stock issued for services 1,500 -- -- -- -- --
Net income for the year -- -- -- --
------------ ---- ------------ ---- ------- ------------
Balance at December 31, 1999 11,757,076 -- 100,000 -- -- --
------------ ---- ------------ ---- ------- ------------
------------ ---- ------------ ---- ------- ------------
Additional Total
Paid-in Accumulated Deferred Stockholders'
Capital Deficit Compensation Equity (Deficit)
------------ ------------ ------------ ---------------
Balance at December 31, 1996 $ 53,354,345 $(25,291,556) $ (375,000) $ 27,687,789
Amortization of deferred compensation -- -- 125,000 125,000
Other 5,876 -- -- 5,876
Net loss for the year -- (17,359,038) -- (17,359,038)
------------ ------------ ------------ ------------
Balance at December 31, 1997 53,360,221 (42,650,594) (250,000) 10,459,627
Amortization of deferred compensation -- -- 125,000 125,000
Exercise of employee stock options 216,037 -- -- 216,037
Issuance of stock to former CEO 398,525 -- -- 398,525
Sale of preferred stock -- -- -- 2,950,139
Warrants issued in connection with preferred stock 261,000 -- -- --
Accretion of preferred stock (48,493) -- -- --
Conversion of preferred stock 2,479,149 -- -- --
Net loss for the year -- (17,447,536) -- (17,447,536)
------------ ------------ ------------ ------------
Balance at December 31, 1998 56,666,439 (60,098,130) (125,000) (3,298,208)
Amortization of deferred compensation -- -- 125,000 125,000
Exercise of employee stock options 550,804 -- -- 550,804
Accretion of preferred stock (74,875) -- -- --
Repurchase of preferred stock -- -- (333,358)
Discount on issuance of convertible debt 799,346 -- -- 799,346
Beneficial conversion of convertible debt 369,225 -- -- 369,225
Stock issued for services 5,625 -- -- 5,625
Net income for the year -- 24,697,099 -- 24,697,099
------------ ------------ ------------ ------------
Balance at December 31, 1999 $ 58,316,564 $(35,401,031) -- $ 22,915,533
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INFONAUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND RECENT TRANSACTION:
Infonautics, Inc. and its subsidiaries (the "Company" or "Infonautics")
is a provider of personalized information agents and Internet sites.
The Infonautics Network of web properties includes free, advertising
supported Sleuth Center sites featuring the Company Sleuth, Sport
Sleuth, Job Sleuth, Entertainment Sleuth and Shopping Sleuth services.
The Infonautics Network also includes search and reference media sites
consisting of the subscriber based Electric Library, the free
Encyclopedia.com services, the Library Tracker site, and the
Newsdirectory.com site. The company operates in a single segment
throughout North America.
GAIN ON SALE OF NET ASSETS:
On December 15, 1999, Infonautics completed a transaction with Bell
& Howell Company and its wholly owned subsidiary, Bell & Howell
Information & Learning Company ("BHIL"), to create a new company
("bigchalk.com, Inc.", formerly referred to as "EDCO"), which
combined the complementary K-12 reference businesses of the Company
and BHIL. Infonautics contributed its school and Electric Library
contracts, assets, liabilities and related commitments to Electric
Library, in exchange for $16.5 million in cash and a 30.89 percent
interest in bigchalk.com, Inc. ("bigchalk"). BHIL received the
remaining percentage interest in bigchalk. Bell & Howell Company
also purchased Infonautics' e-commerce online archive business for
$2 million. In connection with these transactions, Infonautics
received $5 million in cash and a note receivable for $13.5 million
at closing. The note receivable was paid in January 2000. The
Company recognized a gain on sale of these net assets of $34,918,964.
Infonautics will continue to develop and market its Sleuth Center
services. Infonautics also retains rights to market Electric Library to
end-users (subject to an option granted to BHIL to purchase the
end-user business (see Note 11).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of
Infonautics, Inc. and its wholly owned subsidiaries (collectively, the
Company). Investments in nonconsolidated companies which are at least
20% owned are carried at cost plus equity in undistributed earnings or
losses since acquisition. All intercompany balances and transactions
have been eliminated.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
revenues, expenses, assets, and liabilities and disclosure of
contingencies. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with original
maturities of three months or less as cash equivalents. Cash
equivalents are stated at cost, which approximates market value. At
December 31, 1999, the Company has restricted cash of approximately
$150,000. This amount consists of restricted U.S. Treasury notes held
as collateral by a financial institution against letters of credit for
leasing arrangements (see Note 11).
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the related assets. The Company
defines useful lives as three years for computer equipment, office
equipment, leasehold improvements and purchased software and seven
years for furniture and fixtures. Depreciation on these assets is
computed on a straight-line basis. Leasehold improvements are
capitalized and amortized on the straight-line basis over the shorter
of their useful life or the term of the lease. Capital leases are
amortized over the shorter of the life of the asset or the term of the
respective lease, which range from two years to two and one-half years.
Maintenance and repairs are expensed as incurred. When the property or
equipment is retired or otherwise disposed of, related costs and
accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in operations.
The Company reviews assets for impairment whenever events or changes in
circumstances indicate the carrying value of the asset may not be
recoverable. A determination of impairment (if any) is made based on
estimates of undiscounted future cash flows. For the years ended
December 31, 1998 and 1999 there have been no asset impairments.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PRODUCT DEVELOPMENT COSTS:
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based on
the Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the
Company between completion of the working model and the point at which
the product is ready for general release have been insignificant, and
all product development costs have been expensed.
ADVERTISING COSTS:
Advertising costs, included in sales and marketing expenses, are
expensed over the period the advertising takes place. Advertising
expense was $2,450,904, $1,172,637, and $959,002, respectively, for the
years ended December 31, 1997, 1998 and 1999.
SUBSCRIBER ACQUISITION COSTS:
New subscriber acquisitions costs, primarily in sales and marketing
expenses, are expensed as incurred. These costs relate directly to new
customer solicitations and include the Company's direct costs of
acquiring new customers, including the cost of providing trial
subscriptions free of charge. Costs associated with renewal of current
customers are also expensed as incurred.
STOCK BASED COMPENSATION:
Stock based compensation is recognized using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at
the date of grant over the amount an employee must pay to acquire the
stock and amortized over the vesting period. (See Note 7).
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION:
To date, the majority of Infonautics revenues have been derived from
the sales of Electric Library subscriptions to educational and end-user
markets. As a result of the sale of the educational contracts to
bigchalk.com, in connection with the Bell & Howell transaction, after
1999 the Company will no longer have revenue from educational
contracts, which had resulted in significant deferred revenue.
Revenue from educational institutions was recognized ratably over the
term of the contract. Revenue from online monthly end-user
subscriptions is recognized in the month the subscription service is
provided. For annual end-user subscriptions, revenue is recognized
ratably over the term of the subscription. Revenue from subscription
agreements is deferred and recognized over the term of the respective
agreement as the service is provided. Revenue from licensing contracts
is recognized when delivery and services related to the license
agreement are complete. Revenue from contracts for online publishing
hosting services is recognized ratably over the term of the contract.
Revenue from the implementation or integration services associated with
online publishing agreements is recognized upon customer acceptance.
Revenue from advertisements on the Infonautics network sites is derived
principally from short-term advertising contracts in which Infonautics
typically guarantees a minimum number of impressions to advertisers
over a specified period of time for a fixed fee. Revenue from
advertising sales is recognized ratably in the period in which the
advertisement is displayed, provided no significant obligations remain
at the conclusion of the contract and the collection of the resulting
receivable is probable.
A portion of Infonautics' revenue is from barter advertisements
(agreements whereby Infonautics exchanges advertisements on the
Infonautics Network sites for advertisements on third-party web sites).
Barter advertising revenues and expenses are recorded at the fair
market value of services provided or received, whichever is more
determinable in the circumstances. Revenue from barter advertising
transactions is recognized as income when advertisements are delivered.
Barter expense is recognized when Infonautics advertisements are run on
third-party web sites, which is typically consistent with when barter
revenue is recognized. Barter expense is included in sales and
marketing.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
COST OF REVENUE:
Cost of revenues include royalties payable to content, hardware,
software, and telecommunications providers, as well as certain network
costs. Costs incurred with the procurement of subscriptions and the
delivery of the service is expensed as incurred.
INCOME TAXES:
Provision for income taxes is determined based on the asset and
liability method. The asset and liability method provides that deferred
tax balances are recorded based on the difference between the tax bases
of assets and liabilities and their carrying amounts for financial
reporting purposes.
Deferred tax liabilities or assets at the end of each period are
determined using the tax rate enacted under the current tax law. The
measurement of net deferred tax assets is reduced by the amount of any
tax benefits that, based on available evidence, are not expected to be
realized, and a corresponding valuation allowance is established.
BUSINESS AND CREDIT CONCENTRATIONS:
Financial instruments which subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities. The carrying
amounts of these instruments approximate fair value.
The Company maintains cash and cash equivalents with domestic financial
institutions. The Company performs periodic evaluations of the relative
credit standing of these institutions. Cash and cash equivalent
balances generally exceed Federal Deposit Insurance Corporation
insurance limits.
Infonautics' customers are concentrated in the United States. The
Company performs ongoing credit evaluations, generally does not require
collateral and establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of each customer, historical
trends and other information.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
BASIC AND DILUTED EPS:
The Company calculates EPS in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," which
requires public companies to present basic earnings per share (EPS)
and, if applicable, diluted earnings per share, instead of primary and
fully diluted EPS. Basic EPS is a per share measure of an entity's
performance computed by dividing income (loss) available to common
stockholders (the numerator) by the weighted-average number of common
shares outstanding during the period (the denominator). Diluted
earnings per share measures the entity's performance taking into
consideration common shares outstanding (as computed under basic EPS)
and dilutive potential common shares, such as stock options, warrants,
and convertible debt. Entities with a net loss do not include common
stock equivalents in the computation of diluted EPS, as the effect
would be anti-dilutive.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, 1998
and 1999:
1998 1999
---- ----
Property and equipment:
Computer equipment $ 2,160,453 $ 652,778
Office equipment 1,302,867 584,547
Furniture and fixtures 896,523 301,384
Leasehold improvements 459,625 161,490
Purchased software 233,799 16,024
Capital leases:
Equipment 766,504 --
----------- -----------
5,819,771 1,716,223
Less accumulated depreciation and amortization:
Property and equipment (2,794,026) (1,223,785)
Capital leases (453,128) --
----------- -----------
Property and equipment, net $ 2,572,617 $ 492,438
=========== ===========
Depreciation expense was approximately $1,005,700 in 1997, $1,137,300
in 1998 and $1,072,000 in 1999. Amortization expense was approximately
$91,000 in 1997 and $362,500 in 1998, and $356,700 in 1999.
4. INVESTMENTS IN AFFILIATES:
In December 1999, the Company acquired a 30.89% interest in the
outstanding common stock of bigchalk. The carrying value of this
investment was $10,605,773 at December 31, 1999.
The Company accounts for its investment in bigchalk on the equity method.
Summarized financial information of bigchalk follows (dollars in thousands):
Condensed Statement of
Operations: 1999
- -----------------------------------------------------------------------------------------------------------
Net sales $14,701
Gross profit 8,240
Loss from continuing operations (5,469)
Net loss (5,469)
Condensed Statement of
Financial Condition: 1999
- -----------------------------------------------------------------------------------------------------------
Current assets $8,558
Non-current assets 52,871
- -----------------------------------------------------------------------------------------------------------
$61,429
- -----------------------------------------------------------------------------------------------------------
Current liabilities $40,271
Non-current liabilities 1,973
Members' interest 19,185
$61,429
- -----------------------------------------------------------------------------------------------------------
The Company also has an interest of less than 4% in Half.com, Inc.
which is carried at cost, or $280,000 at December 31, 1999 (See
Note 10).
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INCOME TAXES:
The significant components of deferred tax assets at December 31, 1998
and 1999 are as follows:
1998 1999
---- ----
Federal tax loss carryforward $ 16,878,000 $ 18,312,000
State tax loss carryforward 264,000 395,000
Accrual to cash basis difference 3,657,000 --
Research and experimentation credit 1,120,000 1,503,000
Sale of assets -- (10,058,000)
Change from cash basis to accrual
basis for tax purposes -- (1,047,000)
Other accruals -- (108,000)
------------ ----------
21,919,000 8,997,000
Less: valuation allowance (21,919,000) (8,997,000)
------------ ----------
-- --
============ ==========
A valuation allowance was established against the Company's net
deferred tax asset due to the Company's lack of earnings history and,
accordingly, the uncertainty as to the realizability of the asset.
At December 31, 1999, the Company had a net operating loss carryforward
of approximately $18,311,702 for federal tax purposes, which expires
between 2008 and 2019, if not utilized. The net operating loss
carryforward for state tax purposes is $6,000,000, which expires
between 2005 and 2009. These carryforwards may be applied as a
reduction to future taxable income of the Company, if any. The Company
also has research and experimentation credit carryforwards of
approximately $1,503,000, which expire between 2009 and 2019. The
Company's ability to utilize its net operating loss carryforwards and
credit carryforwards may be subject to annual limitations as a result
of prior or future changes in ownership.
6. 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 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. At issuance, the fair market value
of the warrants was $800,000, which the Company recorded 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 12.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. CONVERTIBLE DEBENTURES, CONTINUED:
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 the beneficial conversion feature, a discount of
approximately $369,000 on the convertible debt was recorded upon
issuance and was amortized into interest expense between the date the
debentures were issued and the date they became convertible.
7. SHAREHOLDERS' EQUITY (DEFICIT):
A former director of the Company is the holder of all 100,000
outstanding shares of Class B Common Stock. The shares of Class B
Common Stock may be converted at any time by the holder of such shares
into shares of Class A Common Stock on a one-for-one basis. Each Share
of Class B Common Stock has 50 votes per share.
PREFERRED STOCK:
The Company has authorized 1,250,000 shares of no par value preferred
stock of which 5,000 shares have been designated as Series A
Convertible Preferred Stock.
On July 22, 1998, the Company issued 3,000 shares of Series A
Convertible Preferred Stock for $1,000 per share and warrants to
purchase 200,000 shares of Common Stock, resulting in net proceeds of
$2,950,139, net of expenses of $49,861. The warrants issued in
connection with the Series A Convertible Preferred Stock were valued at
$261,000.
In November 1998, the holder of the Series A Convertible Preferred
Stock exercised its conversion rights for 2,717 shares of the preferred
stock outstanding, and received 1,902,778 shares of Class A Common
Stock. This conversion increased additional paid in capital by
$2,479,149. On February 11, 1999, the Company repurchased the remaining
283 shares of Series A Convertible Preferred Stock 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.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. SHAREHOLDERS' EQUITY (DEFICIT), CONTINUED:
STOCK OPTIONS:
In February 1996, the Company adopted the 1996 Amended and Restated
Equity Compensation Plan ("1996 Plan"). Concurrently, the 1994 Omnibus
Stock Plan ("1994 Plan") was amended and restated. Both plans provide
for the granting of stock options to officers, directors, employees and
consultants. Grants under both plans may consist of options intended to
qualify as incentive stock options ("ISOs"), or nonqualified stock
options that are not intended to so qualify ("NQSOs"). In addition,
under the 1996 Plan, grants may also consist of grants of restricted
stock, stock appreciation rights ("SARs"), or performance units. The
option price of any ISO will not be less than the fair market value on
the date the option is granted (110% of fair value in certain
instances). The option price of a NQSO may be greater than, equal to,
or less than the fair market value on the date the option is granted.
The 1994 Plan authorizes up to 1,100,000 shares of Class A Common
Stock. In 1997, 1998 and 1999, the board of directors approved
increases in the number of authorized shares of Class A Common Stock
for issuance under the 1996 Plan from 500,000 to 1,000,000 shares, from
1,000,000 to 1,500,000 shares and from 1,500,000 to 2,500,000 shares
respectively.
Compensation expense of approximately $500,000 has been recognized over
the four-year vesting period for certain options which were granted in
1995, to acquire 80,600 shares of Class A Common Stock. Compensation
expense of $125,000 was recognized in 1997, 1998 and 1999.
A committee of the board of directors administers the Plans. The
Committee determines the term and exercisability of each option,
provided, however, that the term may not exceed ten years from the date
of grant. Formula NQSO grants made to non-employee directors have a
fixed term of five years and are fully and immediately exercisable as
of the date of grant. Historically, the ISO options granted under both
plans have generally vested ratably over a four-year period from the
date of grant. ISO options granted beginning in 1999 have had four
year, two year and, in some cases, one year vesting periods. Currently,
ISO grants have two year vesting periods. The NQSO options granted to
directors vest when granted.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. SHAREHOLDERS' EQUITY (DEFICIT), CONTINUED:
STOCK OPTIONS, CONTINUED:
If compensation cost had been determined based on the fair value of the
options at the grant dates for those options for which no compensation
cost has been recognized, consistent with the method of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), the Company's net income (loss) and income
(loss) per share would have been:
1997 1998 1999
---- ---- ----
Net income (loss)
applicable to common As reported $ (17,359,000) $ (17,448,000) $ 24,622,000
shareholders Pro forma (18,564,000) (18,649,000) 21,600,000
Income (loss) per As reported (1.83) (1.77) 1.88
diluted share Pro forma (1.96) (1.89) 1.64
Such pro forma disclosures may not be representative of future
compensation expense because options vest over several years and
additional grants are made each year. As a result of the December 1999
transaction with bigchalk, which qualifies under the plans as a change
of control, options issued prior to announcement of the transaction on
July 8, 1999 became fully vested upon closing of the transaction, the
impact of which is reflected above.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1997, 1998 and 1999,
respectively: expected volatility of 75% percent; risk-free interest
rates of 6.48 percent, 5.23 percent, and 6.31 percent; and expected
lives of 5 years.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. SHAREHOLDERS' EQUITY (DEFICIT), CONTINUED:
STOCK OPTIONS, CONTINUED:
A summary of the Company's stock options plans are presented below:
1997 1998 1999
---------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------- ------------- ------------- ------------- ------------- -------------
Outstanding at
beginning of
year 1,331,730 $ 7.20 1,730,330 $ 5.77 1,666,013 $ 4.34
Granted 536,600 2.00 485,600 2.76 769,800 6.22
Exercised (5,150) 2.62 (103,287) 2.36 (254,136) 2.53
Expired/canceled (132,850) 3.59 (446,630) 4.59 (277,402) 7.06
-------------- ------------- -------------
Outstanding at
end of year 1,730,330 5.77 1,666,013 4.34 1,904,275 4.96
============== ============= =============
Weighted-average
fair value of
options
granted
during year $ 1.31 $ 1.77 $ 4.09
The following table summarizes information about the stock options
outstanding as of December 31, 1999:
Stock Options Outstanding Stock Options Exercisable
--------------------------------------------------- ---------------------------------
Number Weighted- Number
Outstanding Average Weighted- Exercisable Weighted-
at Remaining Average at Average
Range of December Contractual Exercise December Exercise
Exercise Prices 31, 1999 Life Price 31, 1999 Price
- ---------------------- ----------------- ----------------- --------------- ---------------- ---------------
$1.375 - $2.625 471,113 3.19 $ 1.88 471,113 $ 1.88
$3.00 - $4.938 540,462 2.60 3.77 506,962 3.72
$4.969 - $7.660 751,500 3.46 6.34 56,000 6.42
$11.50 - $14.00 141,200 2.15 12.39 141,200 12.39
----------------- ----------------- --------------- ---------------- ---------------
1,904,275 2.85 $ 4.96 1,175,275 $ 4.15
================= ================= =============== ================ ===============
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. EARNINGS PER SHARE:
Following is a reconciliation of net income and weighted average common
shares outstanding for purposes of calculating basic and diluted net
income (loss) per share, in thousands:
BASIC NET INCOME (LOSS) PER SHARE 1997 1998 1999
--------------------------------- ---- ---- ----
Net income (loss) applicable to common
shareholders $ (17,359) $ (17,448) $ 24,622
================== ================== ================
Weighted average common shares outstanding 9,491,600 9,830,900 11,729,900
================== ================== ================
Basic net income (loss) per share $ (1.83) $ (1.77) $ 2.10
================== ================== ================
DILUTED NET INCOME (LOSS) PER SHARE
Income (loss) for purposes of computing diluted
net income (loss) per share $ (17,359) $ (17,448) $ 24,622
================== ================== ================
Weighted average common shares outstanding 9,491,600 9,830,900 11,729,900
================== ================== ================
Dilutive stock options and warrants - - 625,100
================== ================== ================
Assumed conversion of 7%
convertible debentures - - 771,300
================== ================== ================
Weighted average common shares outstanding
for purposes of computing diluted net income
per share 9,491,600 9,830,900 13,126,300
================== ================== ================
Diluted net income (loss) per share $ (1.83) $ (1.77) $ 1.88
================== ================== ================
The weighted average diluted common shares outstanding for 1999
excludes the dilutive effect of approximately 471,000 options and
622,449 warrants, since such options have an exercise price in excess
of the average market value of the Company's Common Stock during the
year.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. EMPLOYEE BENEFIT PLAN:
In 1995, the Company established a defined contribution 401(k)
retirement plan covering substantially all its employees. Under this
plan, eligible employees may contribute a portion of their salary until
retirement and the Company, at its discretion, may match a portion of
the employee's contribution up to 15% of an employee's annual
compensation; however, no contributions were made by the Company
through December 31, 1999.
10. RELATED PARTY TRANSACTIONS:
AGREEMENTS WITH AFFILIATES AND RELATED PARTIES:
As part of the Company's transaction with Bell & Howell Company,
bigchalk and the Company have entered into a content license agreement.
Under this agreement, bigchalk licenses content to the Company for use
in the Electric Library site for end users, and, if the Company
requests, for its content notification sites and for any new Company
sites. To date, the Company only licenses content from bigchalk for use
in connection with the Electric Library site for end users. The
bigchalk content license has a five-year term and grants the Company a
non-exclusive, worldwide, royalty bearing license to use the full text
licensed content subject to its terms. The royalty payable by the
Company to bigchalk for the licensed content is based on an initially
fixed percentage of net revenues derived from sales made to our
customers on sites that include the licensed titles, which approximates
our historical royalty percentage. Annually, following the initial 12
months of the content license, the royalty as a percentage of net
revenues is subject to a proportionate adjustment based on a formula.
The Company receives certain technical services from bigchalk and pays
a fee of end user revenues as part of the technical services agreement
with BHIL and bigchalk. This agreement is subject to annual review and
adjustment.
The Company entered into, and subsequently amended, consulting
agreements with two of its directors and shareholders during 1994
through 1999. Consulting expense of, $72,000, $64,000 and $36,000 was
recognized under these agreements, in each of the years ended December
31, 1997, 1998 and 1999, respectively. One of these agreements was
terminated in early 1999.
In 1997, the Company loaned $25,000 and $30,000 to two officers bearing
interest rates of 5.78% and 6.23%, due in March 1999 and August 1999,
respectively. As part of a December 1998 termination agreement with a
former vice president of the Company, the $30,000 balance due by the
officer was netted against the severance payment due such officer, and
accrued interest of $2,959 on the loan was forgiven. The severance, net
of the loan, was subsequently paid to the former vice president of the
Company on January 5, 1999. The remaining outstanding loan of $25,000
included in other receivables at December 31, 1998, was expensed as bad
debt in 1999. The Company loaned
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. RELATED PARTY TRANSACTIONS, CONTINUED:
AGREEMENTS WITH AFFILIATES AND RELATED PARTIES, CONTINUED:
another officer $40,000 in 1999, bearing an interest rate of 5.49%. As
part of a severance agreement with this officer in 2000, the loan and
interest accrued upon it, were netted against a severance payment made
to him in January 2000.
In February 1998, the Company entered into an agreement with the former
Chairman of the Board, Chief Executive Officer and founder of the
Company, pursuant to which he resigned as Chairman and Chief Executive
Officer of the Company to become the Chief Executive Officer of a newly
formed company that is pursuing the Electric Schoolhouse project.
Pursuant to the terms of the agreement, the Company transferred to the
new entity all of the Company's rights in certain trademarks, trademark
applications, domain names and tangible Electric Schoolhouse materials,
along with certain other rights to non-Electric Schoolhouse materials
and concepts and, in return, the Company has received an equity
interest in the new company. The cost basis of this investment is zero
at December 31, 1999. In addition, pursuant to the terms of the
agreement, his employment and royalty agreements with the Company
terminated upon the issuance by the Company to him of 125,000 shares of
Class A Common Stock, one option was canceled and he was granted a new
option at the same exercise price with an extended termination, and
another option was amended to accelerate the vesting of such option.
The Company recognized severance and related expenses of approximately
$500,000 in 1998.
The Company also had entered into a remarketing agreement with the new
entity for a version of the Electric Library service, containing a
portion of the Company's content collection. This remarketing agreement
expired in June 1999.
The Company has agreed to net the amounts due to and due from this
newly formed company. An amount of $339,000 was due from the former
Chairman's company, arising from the agreement discussed above and
$193,000 was owed to the newly formed company as a result of severance
costs agreed to upon resignation of the former Chairman and Chief
Executive Officer. During 1999, the net amount was expensed as bad
debt.
Effective July 6, 1999, the Company's 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, in the amount of $280,000. The Company
elected to make the equity investment in the new company.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. COMMITMENTS AND CONTINGENCIES:
RIGHT TO PURCHASE END USER BUSINESS:
As part of the agreement with Bell & Howell, the Company granted
bigchalk a right of first refusal and an exclusive call option to
purchase the Company's Electric Library end-user business. The purchase
price would be equal to two times the net revenues of the end user
business for the previous 12 months.
LETTERS OF CREDIT:
The Company had outstanding an irrevocable letter of credit in the
amount of $110,000 at December 31, 1999. This letter of credit, which
expires on March 31, 2000, collateralizes the Company's obligations to
a third party under a leasing arrangement. The fair value of the letter
of credit approximates contract values based on the nature of the
estimated costs to settle the obligation.
ROYALTY/LICENSE AGREEMENTS:
Through 1999, the majority of content providers were compensated from a
standard royalty pool that is based on a percentage of the Company's
revenues attributable to its Electric Library and related services,
aggregating up to 29% of the applicable revenue. Certain content
providers are compensated on a flat-fee basis. Certain agreements with
content providers provide for minimum fees or guaranteed payments. See
Note 10 under Agreements with Affiliates for ongoing royalty and
license commitments resulting from the transaction with Bell & Howell.
OTHER AGREEMENTS:
In 1992, certain shareholders entered into an agreement with the
corporation that had been developing Homework Helper. This agreement
provided for the assignment to the Company of all rights in and to
Homework Helper in exchange for quarterly payments equal to 3% of the
Company's revenue for a term of up to eight years, expiring in October
2000, with a maximum cumulative amount of $1,200,000. On February 15,
2000, the Company paid the remaining balance, satisfying the agreement
in full.
Separate agreements with two key officers provide for payments equal to
3.15% of the Company's net income, as defined in the agreements,
commencing in 1998, and continuing until 2091. In 1998, an agreement
with one of the officers was terminated. The remaining agreement, which
provided for payment equal to 0.15% of the Company's net income, was
terminated in 1999.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. COMMITMENTS AND CONTINGENCIES, CONTINUED:
MARKETING AGREEMENT:
The Company entered into a marketing agreement in March 1998, in which
the Company agreed to pay $4.0 million in placement fees, plus $40,000
in interest charges over a two-year period. The Company paid $1,200,000
and $2,340,000 in 1998 and 1999, respectively. Included in prepaid
expenses as of December 31, 1999 is $179,000 resulting from this
agreement. The fees are being amortized on a straight-line basis since
the launch of the service in May 1998, over the term of the two-year
agreement, with $1,333,000 and $2,028,000 expensed during 1998 and
1999, respectively. The Company made the final contractual payment of
$500,000 in March 2000.
LEASES:
The Company transferred lease obligations for the majority of its
facilities and other equipment to bigchalk. The Company is obligated to
reimburse bigchalk for rent and certain other office expenses based on
the Company's proportionate use of certain facilities through June
2000. The Company is still subject to remaining agreements classified
as operating leases expiring through 2003. Future minimum payments as
of December 31, 1999, by year and in the aggregate, under these non
cancelable operating leases for each fiscal year ended December 31 are
as follows:
Operating
Leases
-----------
2000 $ 59,638
2001 59,249
2002 24,421
2003 & Thereafter -
-----------
Total minimum lease payments $ 143,308
===========
Total rent expenses for all operating leases amounted to $1,549,000 in
1997, $2,802,000 in 1998 and $1,769,000 in 1999, respectively.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The assets and liabilities transferred in the bigchalk and e-commerce
on-line archive business transactions were:
Accounts receivable $ 4,113,643
Property and equipment, net 1,432,209
Prepaid and other assets 1,047,077
Obligations under capital leases (332,457)
Accounts payable and accrued expenses (1,524,181)
Accrued royalties (1,366,156)
Deferred revenues (10,650,245)
-----------------
Total (7,280,110)
The gain on sale of assets of $34,918,964 consists of the cash and note
receivable of $18,500,000, the net liabilities transferred of
$7,280,110 plus the investment in bigchalk of $11,018,772, net of
related expenses of $1,879,918, of which $1,646,010 were included
in accrued expenses at December 31, 1999.
Additional paid in capital of $398,525 was recorded during 1998 for the
issuance of 125,000 shares of Class A Common Stock and the acceleration
of vesting of 50,000 options to purchase Common Stock, respectively,
pursuant to the agreement with the Company's former Chairman and CEO
described in Note 10.
Additional paid in capital of $261,000 was recorded during 1998 related
to the valuation of warrants issued in connection with a private
placement of Series A Convertible Preferred Stock with a stated value
of $1,000 per share (see Note 7). The Company recorded accretion of
$48,000 on the Series A Convertible Preferred Stock.
Approximately $369,000 was recognized during the year ended December
31, 1999 as a discount for the issuance of convertible debt below
market pursuant to the agreement described in Note 6.
Interest expense of approximately $186,000 was accrued on the
convertible debt in the year ended December 31, 1999. Cash paid for
interest expense was $27,378, $120,865, and $241,746 for 1997, 1998 and
1999 respectively.
Approximately $800,000 was recorded as an additional discount on debt,
related to the valuation of warrants issued in connection with the
convertible debt. In the year ended December 31, 1999, $471,000 of this
discount was amortized and recorded as interest expense. In connection
with the repurchase of 283 shares of Series A Convertible Preferred
Stock described in Note 7, the Company charged additional paid in
capital for approximately $75,000, which represents the excess of the
redemption price over the accreted carrying value of the Series A
Preferred Stock.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION, CONTINUED:
The Company acquired $766,504 and $326,000 of equipment under capital
leases during 1997 and 1999 respectively.
Gross barter income and expenses of $371,000 are included in revenue
and marketing expenses respectively for the year ended December 31,
1999.
F-24
INFONAUTICS, INC.
SCHEDULE II : VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- -------------------------------------------- ------------- ----------------------------- -------------- --------------
Charged to
Balance at Charged to other
beginning costs and accounts - Deductions - Balance at
Description of period expenses describe describe end of period
- -------------------------------------------- ------------- ------------- ------------- -------------- ---------------
Valuation allowances for deferred tax asset
1999 $21,919,000 $ -- -- $12,922,000 $ 8,997,000
1998 15,221,000 6,698,000 -- - 21,919,000
1997 8,905,000 6,316,000 -- - 15,221,000
Allowance for doubtful accounts
1999 $ 65,740 $ 53,860 -- $ 19,800 $ 99,800
1998 32,566 33,174 -- - 65,740
1997 31,590 86,181 -- 85,205 32,566
D - The reduction reflects utilization of deferred tax assets to
offset the gain recorded on the sale of net assets.
F-25
BIGCHALK.COM, INC.
Financial Statements
(With Independent Auditors' Report Thereon)
December 31, 1999 and 1998
F-26
BIGCHALK.COM, INC.
TABLE OF CONTENTS
PAGE
Independent Auditors' Report F-27
Balance Sheets as of December 31, 1999 and 1998 F-29
Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 F-30
Statements of Members' Interests (Deficit) for the Years Ended
December 31, 1999, 1998 and 1997 F-31
Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 F-32
Notes to the Financial Statements F-33
F-27
[LOGO]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
bigchalk.com, inc:
We have audited the accompanying balance sheets of bigchalk.com, inc. as of
December 31, 1999 and 1998, and the related statements of operations,
members' interests (deficit) and cash flows for each of the years in the
three-year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of bigchalk.com, inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
March 10, 2000
F-28
BIGCHALK.COM, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
1999 1998
------------- -------------
ASSETS
Current assets:
Cash $ 134 $ -
Accounts receivable 6,846 2,019
Prepaid expenses and other current assets 1,578 661
------------- -------------
Total current assets 8,558 2,680
Property and equipment, net 1,553 305
Goodwill and other intangible assets, net 50,318 -
Other 1,000 -
------------- -------------
Total assets $ 61,429 $ 2,985
============= =============
LIABILITIES AND MEMBERS' INTERESTS (DEFICIT)
Current liabilities:
Accounts payable (including $1,761 due to members in 1999) $ 4,513 $ 1,690
Accrued expenses 944 122
Current portion of capital lease obligations 190 -
Deferred revenue 16,654 7,321
Due to members (including $15,000 due to Infonautics for contribution) 17,970 -
------------- -------------
Total current liabilities 40,271 9,133
Long term deferred revenue 1,830 -
Capital lease obligations, less current portion 143 -
------------- -------------
Total liabilities 42,244 9,133
Commitments and contingencies
Members' interests (deficit):
Members' interests (deficit) 34,135 (6,148)
Due from member for members' interests (15,000) -
Common stock subscribed 50 -
------------- -------------
Total members' interests (deficit) 19,185 (6,148)
------------- -------------
Total liabilities and members' interests (deficit) $ 61,429 $ 2,985
============= =============
See accompanying notes to the financial statements
F-29
BIGCHALK.COM, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1999 1998 1997
-------------- -------------- ---------------
Sales $ 14,701 $ 9,365 $ 6,722
Cost of sales 6,461 3,662 2,146
-------------- -------------- ---------------
Gross profit 8,240 5,703 4,576
Sales and marketing 7,866 5,452 3,694
Product development 1,761 - -
Information and technology 774 875 1,856
General and administrative 2,621 963 542
Depreciation and amortization 657 145 75
-------------- -------------- ---------------
Total operating expenses 13,679 7,435 6,167
-------------- -------------- ---------------
Operating loss (5,439) (1,732) (1,591)
Interest expense, net (30) - -
-------------- -------------- ---------------
Net loss $ (5,469) $ (1,732) $ (1,591)
============== ============== ===============
See accompanying notes to the financial statements
F-30
BIGCHALK.COM, INC.
STATEMENTS OF MEMBERS' INTERESTS (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
Balance at January 1, 1997 $ (2,880)
Net loss (1,591)
Contributions from BHIL, net 1,297
--------------
Balance at December 31, 1997 (3,174)
Net loss (1,732)
Distributions to BHIL, net (1,242)
--------------
Balance at December 31, 1998 (6,148)
Net loss (5,469)
Contributions from BHIL, net 2,252
Issuance of members' interests 43,500
Due from member for members' interests (15,000)
Common stock subscribed 50
--------------
Balance at December 31, 1999 $ 19,185
==============
See accompanying notes to the financial statements
F-31
BIGCHALK.COM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1999 1998 1997
-------------- --------------- ---------------
Cash flows from operating activities:
Net loss $ (5,469) $ (1,732) $ (1,591)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 657 145 75
Changes in operating assets and liabilities, net of
effect of acquisition:
Accounts receivable 14 (31) (925)
Prepaid expenses and other current assets (768) (409) 7
Accounts payable 736 700 133
Accrued expenses 53 111 (35)
Due to members 2,970 - -
Deferred revenue 629 2,676 1,238
-------------- --------------- ---------------
Net cash provided by (used in) operating activities (1,178) 1,460 (1,098)
Cash flows from investing activities:
Deposit for acquisition (1,000) - -
Acquisition of business (5,000) - -
Capital expenditures, net of minor disposals 10 (218) (199)
-------------- --------------- ---------------
Net cash used in investing activities (5,990) (218) (199)
Cash flows from financing activities:
Contributions from (distributions to) BHIL, net 2,252 (1,242) 1,297
Proceeds from issuance of members' interests 5,000 - -
Proceeds from common stock subscribed 50 - -
-------------- --------------- ---------------
Net cash provided by (used in) financing activities 7,302 (1,242) 1,297
-------------- --------------- ---------------
Net increase in cash 134 - -
Cash at beginning of year - - -
-------------- --------------- ---------------
Cash at end of year $ 134 $ - $ -
============== =============== ===============
See accompanying notes to the financial statements
F-32
BIGCHALK.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1) DESCRIPTION AND FORMATION OF BUSINESS
bigchalk.com, inc. (the "Company") is a leading online learning destination
in the kindergarten through twelfth grade ("K-12") domestic educational
market, which includes teachers, administrators, students and parents of
students of public and private schools (the "K-12 Market") and
publicly-owned and government-funded libraries (the "Public Library
Market"). The Company provides a portfolio of products and services,
including: research and reference services consisting of an extensive
collection of published material; standards correlation services for
educational resources; standards-based curriculum solutions; an integrated
platform for building Web-based communities; and professional development
services for teachers.
On September 30, 1999, Bell & Howell Information and Learning Company
("BHIL") and Infonautics, Inc. ("Infonautics") (collectively, the
"Members") entered into an Amended and Restated Limited Liability Company
Agreement (the "LLC Agreement") that provided for the formation and
capitalization of BHW/INFO/EDCO.COM, LLC ("LLC") under the Delaware Limited
Liability Company Act. On December 15, 1999, BHIL contributed the assets
and liabilities that relate exclusively to or arise from sales to the K-12
Market, $5,000 in cash, and an obligation to pay $15,000 in cash on January
3, 2000 in exchange for an equity investment in LLC. On that same date,
Infonautics contributed the assets and liabilities that relate exclusively
to or arise from sales to the K-12 Market and Public Library Market in
exchange for an equity investment in LLC, $5,000 in cash, and the right to
receive $15,000 in cash on January 3, 2000. Subsequent to the
contributions, the equity interests owned by BHIL and Infonautics were
approximately 73% and 27%, respectively. On January 10, 2000, pursuant to
the Certificate of Conversion, the LLC Agreement was terminated and LLC was
converted to bigchalk.com, inc., a Delaware corporation.
For financial reporting purposes, the above transactions have been
accounted for as if the Company is a successor to the contributed BHIL
business. The Infonautics contribution has been accounted for as a purchase
business combination, and accordingly, the assets acquired and liabilities
assumed from Infonautics have been reflected in these financial statements
at fair value as of the contribution date.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) BASIS OF PRESENTATION
The financial statements have been prepared as if the Company operated
as a stand-alone entity prior to December 15, 1999. Accordingly, for
all periods presented, certain expenses reflected in the financial
statements include allocations from BHIL. These allocations take into
consideration related business volume, personnel, or other appropriate
bases, and generally include administrative expenses related to general
management, information management, and other services provided to the
Company by BHIL. The allocations of expenses are based on BHIL's
assessment of actual expenses incurred by the Company and are
reasonable in the opinion of BHIL's management.
F-33
BIGCHALK.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The financial information included herein may not necessarily reflect
the financial position, results of operations, or cash flows of the
Company in the future, or what the financial position, results of
operations, or cash flows of the Company would have been if it had been
a separate, stand-alone corporation during the periods presented.
b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Subsequent actual
results may differ from those estimates.
c) REVENUE/COMMISSION EXPENSE RECOGNITION
The Company principally derives its revenue from subscriptions.
Subscription sales are deferred as a liability and recognized ratably
as revenue in the periods the subscriptions are fulfilled, normally
over twelve months. Prepaid expense includes commissions paid to sales
representatives, which are recorded as an asset and recognized as
expense over the periods the subscriptions are fulfilled.
d) CONTRIBUTIONS FROM (DISTRIBUTIONS TO) BHIL
Prior to December 15, 1999, BHIL provided funding for working capital.
The Company participated in Bell & Howell Company's cash management
system, and accordingly, all cash generated from and cash required to
support the Company's operations was deposited and received through
BHIL's cash accounts. The amounts represented by the caption
"Contributions from (distributions to) BHIL, net" in the Company's
statements of cash flows and members' interests (deficit) represent the
net effect of all cash transactions between the Company and BHIL. No
interest expense has been charged on such activity. The average
balances of member's deficit was $7,079 for the period from January 1,
1999 to December 15, 1999 and $4,661 and $3,027 for the years ended
December 31, 1998 and 1997, respectively.
As of December 31, 1999, the Company was obligated to BHIL for accounts
payable totaling $1,761 to be paid on behalf of the Company to third
party vendors.
e) INCOME TAXES
The financial statements of the Company have been prepared assuming the
Company was a limited liability company prior to December 15, 1999. On
December 15, 1999, the Company was formed as a limited liability
company in the state of Delaware. As such, the net loss of the Company
for the period from December 16, 1999 to December 31, 1999 was
reportable in the members' tax returns. Accordingly, these financial
statements contain no provision or benefit and no assets or liabilities
for federal or state income taxes for any of the periods presented.
F-34
BIGCHALK.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
f) FINANCIAL INSTRUMENTS
The Company believes that the carrying amounts of its financial
instruments, consisting of amounts due to and from members and capital
lease obligations, approximate the fair values of such items based on
their short maturities.
g) PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated on a
straight-line basis over their estimated useful lives as follows:
Equipment 3 years
Furniture and fixtures 7 years
Leasehold improvements 3 years
Equipment held under capital leases is stated at the present value of
minimum lease payments at the inception of the lease and amortized
using the straight-line method over the lease term (generally 2 to 3
years).
h) INTANGIBLE ASSETS
Goodwill resulting from the Infonautics transaction is amortized on a
straight-line basis over five years. Other intangible assets are
amortized over their estimated useful lives, which range from two to
five years, on a straight-line basis. When events and circumstances so
indicate, the Company assesses the potential impairment of its
intangible assets based on future undiscounted cash flows from
operations.
3) INFONAUTICS TRANSACTION
As described in note 1, Infonautics contributed the assets and liabilities
that relate exclusively to or arise from sales to the K-12 Market and the
Public Library Market to the Company, in exchange for $5,000 in cash, the
right to receive $15,000 in cash, and an interest valued at $23,500.
F-35
BIGCHALK.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The acquisition was accounted for in these financial statements using the
purchase method of accounting. The following allocation of the purchase
price to the assets acquired and liabilities assumed has been made using
estimated fair values that include values based on independent appraisals
and management estimates:
Purchase price $ (43,500)
Long-term assets acquired 1,599
Long-term liabilities assumed (1,867)
Working capital (7,033)
Other intangible assets 20,799
Goodwill 30,002
These estimates will be adjusted to reflect actual amounts. Any subsequent
adjustments are expected to occur prior to December 31, 2000 and are not
expected to have a material impact on the Company's financial position.
The following unaudited pro forma information assumes that the Infonautics
transaction occurred on January 1, 1998. It does not purport to be
indicative of the results that would have occurred if the transaction had
been consummated on the date indicated or which may be attained in the
future.
Years ended December 31,
1999 1998
--------- ---------
Sales $ 27,532 $ 16,637
Net loss (19,614) (23,799)
4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1999 1998
------------ ------------
Equipment $ 986 $ 313
Equipment under capital lease 283 -
Furniture and fixtures 550 233
Leasehold improvements 66 -
------------ ------------
1,885 546
Less accumulated depreciation and amortization (332) (241)
------------ ------------
$ 1,553 $ 305
============ ============
F-36
BIGCHALK.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
5) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following at December
31, 1999:
Estimated
Amount useful life
--------------- ---------------
Customer list $ 14,882 4 years
Capitalized software 2,655 3 years
Workforce 2,016 5 years
License agreements 1,023 2 years
Non-compete agreements 223 3 years
Goodwill 30,002 5 years
---------------
50,801
Less accumulated amortization (483)
---------------
$ 50,318
===============
6) LEASE OBLIGATIONS
The Company leases its facility and certain equipment under non-cancelable
operating leases expiring at varying dates through November 2001. Rent
expense was approximately $504 for the year ended December 31, 1999.
The Company also leases certain equipment under agreements accounted for as
capital leases.
Minimum lease payments as of December 31, 1999 are as follows:
Capital Operating
leases leases
----------------- ----------------
2000 $ 252 $ 654
2001 132 310
2002 25 72
2003 - 7
----------------- ----------------
Total future minimum lease payments 409 $ 1,043
================
Less amounts representing interest (76)
-----------------
Present value of future minimum lease payments 333
Less amounts due within one year (190)
=================
Amounts due after one year $ 143
=================
Minimum lease payments under operating leases are net of income from
subleases of $163, $53, $24, and $2 for the years ended December 31, 2000,
2001, 2002, and 2003, respectively.
7) COMMITMENTS AND CONTINGENCIES
The Company is subject to pending and threatened legal actions that arise
in the normal course of business. In the opinion of management, no such
actions are known to have a material adverse impact on the financial
position of the Company.
F-37
BIGCHALK.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
8) PRIOR PERIOD ADJUSTMENT
The Company has restated its financial statements for the year ended
December 31, 1998 to reflect the correction of errors that resulted from
the inclusion of cancelled billings as a result of a change in the
Company's billing system. The following restatement is necessary to
properly state the Company's results of operations for the year ended
December 31, 1998:
Net loss, as previously reported $ (1,402)
Prior period adjustment (330)
---------
Net loss, as restated $ (1,732)
==========
9) SUBSEQUENT EVENTS
On January 10, 2000, the Company converted from a limited liability company
under the Delaware Limited Liability Company Act to a Delaware corporation
(note 1). The Certificate of Incorporation provides for the authorization
of 25,900,002 shares of common stock and 7,600,002 shares of Series A
Preferred Stock.
On January 10, 2000, the Company completed the sale of 7,600,002 shares of
Series A Preferred Stock for proceeds of $53,200. The Company reserved
7,600,002 shares of its common stock to provide for the conversion of such
preferred shares. In addition, the Company issued 300,000 shares of its
common stock in exchange for $1,800 in cash. As of December 31, 1999, the
Company had received $50 from one of the new investors. Such amount has
been reflected as a common stock subscription in the accompanying financial
statements as of December 31, 1999.
On January 10, 2000, the Company approved a stock option plan covering
employees, directors, and unaffiliated consultants. The Company reserved
3,000,000 shares of common stock for issuance under this plan.
On January 27, 2000, the Company, MediaSeek Technologies, Inc.
("MediaSeek"), and the principal vendors of MediaSeek entered into a Share
Purchase Agreement whereby the Company acquired all of the issued and
outstanding shares of MediaSeek pursuant to a purchase business
combination. The Company provided aggregate consideration of $7,982, of
which $1,000 was deposited in a trust prior to December 31, 1999, $800 was
held in escrow in consideration of the covenants, and the balance was paid
upon closing.
On February 25, 2000, the Company and HomeworkCentral.com, Inc.
("HomeworkCentral") entered into an Agreement and Plan of Reorganization
whereby the Company will acquire all of the issued and outstanding shares
of HomeworkCentral pursuant to a purchase business combination. The
shareholders of HomeworkCentral may receive either cash or shares of the
Company's common stock, at their option. Aggregate cash tendered will be
approximately $2,000 and aggregate common stock issued will not exceed
1,700,000 shares.
F-38