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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required] for the fiscal year ended
December 31, 1996 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required] for the transition period from
____________ to ___________
Commission File Number: 0-28284
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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
Wayne, Pennsylvania 19087
(Address of principal executive offices) (Zip Code)
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 February 28, 1997 was approximately $16.8 million (based on
the last reported sale price on the Nasdaq National Market on that date).
For purposes of making this calculation only, the registrant has defined
affiliates to include all directors and executive officers, all holders of
more than ten percent of the Company's Class A Common Stock and all holders
of more than five percent of the Company's Class A Common Stock who also have
a representative on the Company's board of directors.
The number of shares of the registrant's Class A Common Stock outstanding as
of February 28, 1997 was 9,391,627.
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 1997 Annual Meeting of Shareholders to be held on May 29, 1997
are incorporated by reference in Part III of this Annual Report on Form 10-K.
INFONAUTICS, INC.
FORM 10-K ANNUAL REPORT
For Fiscal Year Ended December 31, 1996
TABLE OF CONTENTS
Page
PART I
Item 1. Business.............................................................1
Item 2. Properties..........................................................18
Item 3. Legal Proceedings...................................................18
Item 4. Submission of Matters to a Vote of Security Holders.................18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.............................................................21
Item 6. Selected Financial Data.............................................22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................23
Item 8. Financial Statements and Supplementary Data.........................27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................27
PART III
Item 10. Directors and Executive Officers of the Registrant..................27
Item 11. Executive Compensation..............................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management......27
Item 13. Certain Relationships and Related Transactions......................27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 28
Unless the context indicates otherwise, the terms "Infonautics" and
"Company" refer to Infonautics, Inc. and its subsidiaries. "Infonautics,"
"Electric Library," "Homework Helper," "Electronic Printing Press," "EPP,"
"EPP-Direct," "EPP-License" and "EPP-Select," are service marks or trademarks
of the Company or its subsidiaries. All other brand names, service marks or
trademarks appearing in this Annual Report on Form 10-K are the property of
their respective owners.
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PART I
Item 1. BUSINESS
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements by the Company with regard to its
expectations as to financial results and other aspects of its business that
involve risks and uncertainties and may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These include statements regarding changes in the number of publications
available on the Company's services, anticipated increases in data
preparation costs, changes in the number of subscribers to the Company's
services, pricing uncertainty, proprietary technology, hardware and software
suppliers, growth, development and expansion plans, sales and marketing
plans, accrued and mandatory contributions to the royalty pool for content
providers, the establishment of multiple royalty pools, industry development
and regulation, competition, Electronic Printing Press direct sales,
operating results and the sufficiency of the Company's liquidity and capital.
Such statements are based on management's current expectations and are
subject to a number of uncertainties and risks that could cause actual
results to differ materially from those described in the forward-looking
statements. Factors that may cause such a difference include, but are not
limited to, those described under "Factors Affecting the Company's Business,
Operating Results and Financial Condition" on page 12 of this Annual Report
on Form 10-K.
Business Overview
Infonautics develops online reference services for the consumer and
institutional markets and electronic publishing tools and services for
publishers and other content creators. The Company's online reference
services, Electric Library-TM- and Homework Helper-TM-, are available to
students and their families through the Internet and consumer online
services, and are marketed to schools, libraries and other educational
institutions. They allow users to search horizontally across the Company's
entire content collection or customize searches to meet specific user
requirements. The services provide the user with a list of full-text
documents and images, ranked by relevancy, from the content collection. The
Company's content collection contains full-text documents and images from
thousands of diverse publications and data sources, such as TIME, Fortune,
Money, Los Angeles Times, USA Today, The Economist, Colliers Encyclopedia and
The Complete Works of Shakespeare.
The Company's New Media Services division was created to market Electronic
Printing Press ("EPP") the online multi-media delivery system that combines
the Company' core technology, operating environment and optional services,
including business and management functions, to launch digital archives and
publications on the Internet and intranets. EPP, based on an open-systems
architecture, provides publishers and other content creators with a scaleable
alternative to building their own online information system and is designed to
allow them to do so quickly and affordably. The Company sells EPP as a
service to publishers and other content creators and also offers EPP to
publishers and other content creators through a licensing arrangement. EPP
customers include publishers and other content creators such as: Newsday,
Business Week, Cox Interactive (which publishes the Atlanta Journal and
Constitution) and Public Agenda.
Services and Products
Since its founding in late 1992, Infonautics has developed a complete
information system architecture, which it regards as its core technology and
the foundation for future growth. This system architecture forms the basis
for the Company's online reference services and its electronic publishing
tools and services. The online reference services, Electric Library and
Homework Helper, which are sold in the consumer and educational institution
markets, are based on the Company's core technology and access the Company's
content collection. EPP is a service provided to, or a license arrangement
with, publishers and other content creators.
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Online Reference Services
The Company's online reference services, Homework Helper and Electric
Library, are designed to be broad reference libraries providing access to a
diverse collection of content and are based on the Company's content-rich
collection of full-text documents and images from thousands of periodicals,
books and other reference sources originating with hundreds of publishers.
The services offer user-friendly graphical interfaces and a powerful natural
language search capability that allows users to search the entire content
collection by asking questions and provides results in the form of a list of
documents, with links to the most relevant full-text articles, pictures and
other documents. The services' ability to customize searches, combined with
the underlying technology and diversity of content, is designed to enable
users to satisfy their general and special interest information requirements.
The Company's pricing models are designed to be simple and affordable, both
for individuals and institutions.
Users can pose a question to launch a comprehensive search of the
Company's content collection. Query results are returned quickly, ranked in
order of relevancy, with bibliographic source reference data, file size and
grade reading level. The Company's graphical user interfaces offer a
familiar, easy-to-use, point-and-click functionality with customized buttons
and artwork designed to appeal to children as well as adults. Clicking on a
reference title allows users to download the document or image of interest
automatically. Also, the services have features specifically designed for
students. For example, users of the Company's services can "cut and paste"
text into other applications such as word processing, with the bibliographic
and copyright information automatically accompanying the material transferred
to the new document.
Electric Library. Electric Library was introduced in the first quarter of
1996 and is accessible directly over the Internet (at
http://www.elibrary.com) and through a variety of marketing partners
(including Netscape Communication Corporation's ("Netscape") NetSearch page,
America Online, CompuServe and The Microsoft Network). Users are able to
access the service through any standard World Wide Web (the "Web") browser
such as Netscape Navigator or Microsoft Corporation's Internet Explorer, as
well as those supplied by the major consumer online services such as America
Online. In addition, access is available through the Company's own Windows
and Macintosh client software, which provide enhanced user interfaces and
improved functionality.
The Company markets Electric Library to consumers through paid
advertisements as well as through bounty and royalty incentive arrangements.
The Company currently purchases online advertising space from a number of
leading Internet sites, including Infoseek, Netscape, America Online and
Yahoo! Inc. Electric Library is featured as one of 14 "Distinguished
Providers" of search and navigation services accessible from the "Net Search"
button on the Netscape browser, generating significant Web site visits and
product trial. The Company has established bundling and distribution deals
with a variety of partners, including US Robotics Access Corp., The 1997 IBM
World Book Encyclopedia, Graphix Zone, Inc., Random House Inc., Knowledge
Adventure, Inc. and others. The Company also has entered into alliances with
popular Web sites to construct "co-branded" Web sites on which Electric
Library is incorporated as a standard reference tool. Examples of this
approach are the Financial Electric Library on Intuit's Quicken Financial
Network and Cool Questions on Yahoo's Yahooligans site.
Individual subscriptions, typically priced at $9.95 per month after one
month free, offer virtually unlimited consumer usage. Annual subscriptions
are available for $59.95. For institutions, the annual fee is approximately
$1,500 per concurrent user. The Company may offer discounts in certain
circumstances, including high-volume purchases and site licenses. Electric
Library generated 40% of total revenues in 1996. There can be no assurance
that the Company will retain current customers or that it will not reduce the
selling price of its online reference services. See "--Important Factors
Affecting the Company's Business, Operating Results and Financial
Condition--Retention; Pricing Uncertainty."
Electric Library has received the following awards: 1996 Best Web Site;
PC Magazine-Top 100 Web Sites; 1996 Dvorak Telecommunications Excellence
Award, Outstanding Online Research Tool; USA Today-Hot Site Award; iWorld
Site of the Day; PointCom-Point's Top 5% Web Sites; and the Information
Industry Association ("IIA")--IIA/Online Access HotShots Award for Best
Educational Product/Services for 1996.
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Homework Helper. The Company launched Homework Helper in February 1995,
through a reseller agreement with Prodigy Services Company ("Prodigy").
Homework Helper is currently only available on Prodigy Classic, Prodigy's
original online service, and is not available on Prodigy Internet, a
value-added Internet service launched by Prodigy in 1996. Over the past
year, Prodigy has shifted its marketing efforts from Prodigy Classic to
Prodigy Internet, and as a result, the Company anticipates reductions in the
Homework Helper user base. Under the Company's agreement with Prodigy,
Prodigy makes Homework Helper available over its Prodigy Classic service as a
custom choice service at a subscription fee of $9.95 per month in addition to
the basic Prodigy subscription charge. This fee includes up to 50 hours of
free connect time, with a fee of $2.95 per hour thereafter. As an inducement
to encourage subscriptions, users of Prodigy's online service can also access
Homework Helper without a subscription at a rate of $6.00 per hour. In
addition, Prodigy handles all billing and administrative functions and
engages in certain marketing and promotional activities. The agreement with
Prodigy is subject to termination upon six months' notice. Homework Helper
generated 41% of total revenues in 1996. There can be no assurance that the
Company will retain current customers or that it will not reduce the selling
price of its online reference services. See "--Important Factors Affecting
the Company's Business, Operating Results and Financial Condition--Retention;
Pricing Uncertainty."
Homework Helper has received several awards since its introduction in
March 1995, including: Home PC--1995 Editors' Choice; Popular Science--1995
"Best of What's New Award"; and the IIA--IIA/Online Access HotShots Award for
Best Educational Product/Services for 1995.
Electronic Printing Press
The Company packages and licenses the core technology underlying Electric
Library and Homework Helper as EPP. Based upon open systems technology, EPP
is an online multimedia delivery system designed to offer a standardized
solution for accessing distributed text, images, graphics and, ultimately,
multimedia information. This technology has been production tested for
search capacity and response times as part of the commercialization of
Homework Helper and Electric Library. EPP provides hosting services, the
operation of archival services at the Company's facilities using the
Company's operating environment on behalf of a customer, and integration
services, the development of site design, user interface and data
preparation. EPP also provides optional services, including business and
management functions. Target customers for EPP are publishers and other
content creators who wish to publish and manage information online, either
externally for customers or internally for corporate purposes.
The business and management functions of EPP provide publishers and other
content creators with an opportunity to effectively market their archival
information and to manage that marketing effort with control processes and
feedback, including a record of each user's access to documents. The royalty
management function records the downloading of published documents and tracks
frequency of user access by document over time. The Company believes these
records, with their links to subscriber demographics, constitute one of the
most sophisticated analytical tools available in the information marketplace.
This feedback can be used to guide future editorial decisions. The subscriber
management function also provides information gathering and calculation of
charges for input to a broad variety of accounting systems. These billing
functions are designed to support a variety of pricing options as well as
flexible and effective alternatives for processing invoices by credit card or
direct invoicing. Flexibility in pricing allows the customization of various
business models targeted at a diverse customer base.
EPP is packaged in three ways:
* EPP-Direct-TM- is for publishers or other content creators who wish to
have their own online information service based on EPP technology, but
wish to outsource the entire operation to the Company's New Media
Services division.
* EPP-Select-TM- is for publishers or other content creators who desire
to build their own online information service based on EPP technology
but wish to outsource a portion of the operation to the Company's New
Media Services division.
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* EPP-License-TM- allows publishers or other content creators to
build an online information service based on EPP technology
themselves--from concept to completion to ongoing support.
Currently, the Company has four EPP-Direct customers, Business Week, Cox
Interactive, Newsday, and Public Agenda, and one EPP-License customer,
Ausinet, Pty. Ltd., a wholly-owned subsidiary of John Fairfax Holdings, Ltd.
of Sydney, Australia. EPP-Direct agreements will normally have a term of 24
months, with an initial fee based on customization required and a monthly
service fee based on the size of the database and the number of concurrent
users. EPP-License is expected to be priced at at least $150,000 based on
volume usage and installation size, plus an ongoing annual fee based upon
usage. EPP-Select, which is comprised of two or more EPP components, is
priced according to customer requirements. EPP generated 19% of total
revenues in 1996.
Customers
Infonautics' customers include individuals, primarily students and their
families (consumer market), schools, libraries and other educational
organizations (institutional market) and publishers and other content
creators. In addition, the Company has agreements with a limited number of
resellers to increase distribution of its services. As of December 31, 1996,
the Company had 26,000 consumer customers for its Electric Library and
Homework Helper online reference services. This total included 10,500
Electric Library subscribers and 6,100 monthly and 9,400 hourly Homework
Helper subscribers. At the end of 1996, the Company had signed contracts
with 180 institutions for Electric Library.
During 1996, revenues from subscriptions and hourly usage fees pursuant
to a reseller agreement with Prodigy were $589,000, or 41% of total revenues.
In addition, Ausinet, Pty. Ltd. contracted for EPP-License to provide a
business-to-business information service. Revenues from this agreement were
$234,500, or 16% of total revenues in 1996.
Content Provider Relationships
Infonautics believes that its content collection, which underlies
Electric Library and Homework Helper, is a major strategic asset. The Company
places a high priority on continuing to increase the depth and variety of its
information sources, including increased graphical material, as well as
introducing sound and full-motion video capabilities in the future. The
Company also believes that it will be necessary in the future to license
additional content from sources such as major daily newspapers, financial
publications and weekly or monthly magazines. It is expected that the content
available on the Company's services will change from time to time.
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To compile its content collection, the Company has entered into supply
agreements with various publishers and other content providers, including
companies that aggregate the content of other providers. These relationships
provide access to full-text documents and images from thousands of diverse
publications and data sources, including newspapers, newswires, magazines,
journals, books, photos, maps and great works of literature and art,
originating with hundreds of publishers. The following table shows a partial
list of selected full-text publications which the Company has rights to
include in its content collection.
- -------------------------------------------------------------------------------------------------------------
Magazines/Journals
- -------------------------------------------------------------------------------------------------------------
American Demographics Harper's Bazaar People
Business Week Information Week Popular Mechanic
Cosmopolitan InfoWorld Ranger Rick
The Economist International Wildlife Redbook
Entertainment Weekly Management Review Sports Illustrated
Esquire Money Sports Illustrated for Kids
Foreign Policy National Wildlife TIME
Fortune New Republic TIME for Kids
Good Housekeeping PC World U.S. News & World Report
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Newspapers/Newswires/Transcripts
- -------------------------------------------------------------------------------------------------------------
Atlanta Journal and Constitution Los Angeles Times Reuters
Baseball Weekly Newsbytes News Network Reuters Business Reports
Cambridge Telecom Report Newsday USA Today
Jerusalem Post Nightly Business Report Washington Times
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Encyclopedia/Reference Works
- -------------------------------------------------------------------------------------------------------------
Archive Photos Index Stock Photography, Inc. The World's Best Poetry Inc. on CD-ROM
Colliers Encyclopedia King James Bible Webster's New World Dictionary
Countries of the World Magill's Survey of Cinema World Almanac and Book of Facts
Earth Explorer Monarch Notes Young Students Learning Library
- -------------------------------------------------------------------------------------------------------------
The content collection is updated daily, often by satellite or other
direct links. The frequency of updates varies with the particular periodical
or reference source.
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Content providers are compensated from a royalty pool based on a
percentage of the Company's revenues. Payments to content providers out of
the royalty pool are based on the number of full-record retrievals from each
source by subscribers and are divided pro rata based on the total publishers'
credits for the calendar quarter. Certain of the Company's content provider
agreements contain limits on the use of the content, including limits in
certain distribution channels or in certain geographic locations, and may be
terminated by the content provider under certain circumstances, including the
failure of the Company to make certain minimum payments. These agreements
are typically non-exclusive and vary in length of term, with terms ranging
from one to five years. With certain exceptions, the agreements automatically
renew at the end of their terms unless prior written notification is given.
In an effort to reduce the limitations on the use of content, the Company has
established an arrangement whereby content providers are given the option to
participate in a supplemental guaranteed royalty pool. See"--Important
Factors Affecting the Company's Business, Operating Results and Financial
Condition--Dependence on Content Providers; Significant Payments Required to
be Made to Content Providers; Risk of Third Party Claims."
The Company is reducing its reliance on content aggregators and
concurrently is contracting directly with the publishers represented by such
aggregators, as well as other publishers. As a result, from time to time,
there may be changes in the number of publications available on the services.
In addition, the combination of contracting directly with publishers and the
Company's overall effort to increase the content available under its Electric
Library and Homework Helper services will result in an increase in data
preparation costs. The Company believes that the possible reduction of
content or the increase in data preparation costs will not have a material
adverse effect on the Company. However, there can be no assurance that these
changes will not have a material adverse effect on the Company.
Technology and Product Development
Technology
Infonautics' core technology encompasses technologies proprietary to the
Company in combination with those licensed from third parties, including
components of the Company's basic search software. The core technology is a
scalable, open and flexible online distributed information search and
retrieval system currently supporting hundreds of concurrent users and
designed eventually to support thousands. This system is easy to use and
enables users to access and search the Company's extensive database and
receive rapid responses to their queries. In addition to providing the
foundation for the Company's Homework Helper and Electric Library services,
this technology is also available for licensing to publishers and other
content creators under EPP-License and as a service for publishers or other
content creators who wish to have their own online information service based
on EPP technology, but wish to outsource the entire operation, or a part of
the operation, under EPP-Direct or EPP-Select, respectively.
The Company's core technology is characterized by the following important
features:
Search Accuracy. The Company's core technology is designed to optimize
search precision (finding the right answers) rather than recall (finding all
possible answers). A proprietary algorithm evaluates the syntactical
structure of the query and analyzes parts of speech to determine the context
and meaning of the question as a basis for relevancy scoring. The documents
are returned to the user ranked in order of relevancy.
Ease of Use and Flexible Architecture. The Company's core technology
delivers flexibility for the product developer and for the end user. For the
product developer, the core technology's three-tiered client-server
architecture separates each of the tiers by an Application Programming
Interface, or API. An API consists of a well-defined, well-tested set of
programming routines that are used to provide services that link different
types of software. This interface allows the client developer to define
multiple user products accessing the same server base and content. Products
targeted to a broad or specific marketplace can be quickly defined and
implemented with minimal testing, thereby improving time to market. From a
user's perspective, access by user interfaces such as Macintosh, Microsoft
Windows or Internet browsers offers the same set of options and functional
capability. The APIs support a broad spectrum of ease-of-use features such as
the "Go to Best Part" button that transports users to the most relevant parts
of the downloaded article. In addition, they support advanced searches,
document categorization and a server-based dictionary and thesaurus.
Natural Language Capability. The natural language search technology
allows the user to perform searches using plain English questions rather than
structured query syntax. An algorithm expands each query via a semantic
network to include words that are related to the words in the initial query,
either as synonyms or other forms of the root words. For example, a search
for "intelligent animals" would also include a search for "clever creatures."
Scalability. The core technology's three-tier client-server architecture
is designed to be scalable. Scalability is the ability of a computer system
to maintain both user performance and relative cost per transaction while the
database and the subscriber base grow. This modular structure, in which the
three tiers are separated by flexible APIs, allows the system to be expanded
in order to maintain rapid response times as the Company's content collection
and user base grow. This modularity also allows the addition or replacement
of server-based applications, such as search and retrieval or database
engines, without changing the entire system.
Content Diversity. The Company's content management capability
facilitates the integration and delivery of a broad variety of content types
and sources. This capability includes software filters that transform
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publishers' content into unified and standard formats for loading into the
database. As a result, the Company can accept multiple data sources,
including print or digital media, in multiple formats, such as SGML, ASCII or
major graphic formats, and can accommodate real-time digital data feeds.
Business Management Functions. The Company's core technology includes
features for essential business management functions related to the Company's
online services or those customers who might license
Electronic Printing Press. These functions include billing, royalty
management, subscriber management and bounty tracking. For example, the
royalty management function permits tracking and accounting for royalties by
each indexed document retrieved. The Company believes these functions
provide a sophisticated and valuable foundation for managing relationships
with subscribers, content providers and marketing partners.
Technology Licensed From Third Parties. The Company has a systems supply
agreement with Tandem Computers Incorporated ("Tandem"), under which Tandem
is the exclusive supplier, with a right of first refusal, of the Company's
required production computer hardware systems and of certain software. The
Company also has a software licensing agreement with Excalibur Technologies
Corporation ("Excalibur") (parent of and successor to Conquest Software
Corp.), under which components of the basic search software used by the
Company are licensed on a non-exclusive basis. The agreements call for
payments to Tandem and Excalibur of certain percentages of the Company's
subscription revenues. See Note 10 of the Notes to Consolidated Financial
Statements.
Product Development
Future product development is expected to focus on further improvements
in the intelligence and natural language capabilities of the search and
retrieval function through techniques such as "clustering" or
"auto-subjecting." The Company also expects to focus on the development of
intelligent search agents appropriate for the distributed environment that
the Company anticipates will develop for the Internet. In addition, the
Company anticipates adding audio and video content to its services at such
time as the required communications technology becomes widely available.
Further, the Company expects to develop data visualization technologies to
facilitate effective searches in multimedia data environments.
Markets
The Company addresses three broad markets: (i) consumers, primarily
students and their families; (ii) institutions, including schools, libraries
and other educational organizations; and (iii) publishers and other content
creators. While most of the Company's revenues to date have been derived
from the consumer market, the Company also targets certain institutional
customers, including schools, libraries and other educational organizations,
and expects that institutional sales will help it penetrate the consumer home
market. In addition, EPP provides publishers and other content creators with
the tools to distribute their content electronically.
Consumer
The Company believes that the market potential for consumer online
reference information in the United States and worldwide is substantial. A
primary marketing goal of the Company is to create a strong brand identity as
a leading online reference service for individuals and families, libraries,
schools and other educational organizations. The Company's content
collection and online reference services are designed to be easy to use by
both adults and children and are targeted to fulfill a broad range of
reference and research requirements. The Company believes that the growth of
the Internet and online services market will continue to expand the potential
market for its services among consumers.
Institutional
The Company currently targets three segments within the institutional
market: kindergarten through grade twelve schools ("K-12 schools"), colleges
and universities, and public libraries. The Company believes the
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institutional market for its products is large and growing, as an increasing
number of K-12 schools, colleges and universities and public libraries have
made investments in technology and connectivity that make it possible for
them to access the Company's services. The institutional market business is
seasonal, particularly in the K-12 market. Most schools operate with a June
fiscal year end, making purchasing decisions in the spring for the next
school year, with funds released at the start of the school year.
In addition to the increased expenditures by schools with respect to the
"information highway," telecommunications companies have also pledged to
assist schools in getting on the "information highway" by offering free or
reduced cost hookups and connect time. The Company views the institutional
market as a way to encourage and reinforce usage in the home by familiarizing
users with its services in the classroom and library.
Publishers and Other Content Creators
As publishers and other content creators enter the online information
markets, the Company believes there is a growing need for cost-effective
archiving and search and retrieval tools. The Company believes that this
service provides a means to strengthen relationships with current content
providers as well as identify opportunities for new content provider
relationships. The Company has entered into five agreements for Electronic
Printing Press, continues to hire an in-house sales staff and may enter into
reseller agreements. See "Services and Products--Electronic Printing Press"
and "Sales and Marketing--Resellers." In addition, the Company believes that
the growth of consumer online services, such as CompuServe and America
Online, and of the Internet in general will encourage publishers and other
content creators to license products such as EPP in order to provide online
access to their content for consumers.
Sales and Marketing
The Company's primary marketing goals are to: (i) create a strong brand
identity as a leading online reference service for individuals and families,
libraries, schools and other educational organizations; and (ii) firmly
establish its core technology as an affordable option for distributed
information search and retrieval systems. The Company uses a variety of
programs to stimulate demand for its services and products, including direct
sales, online marketing, resellers, software bundling and integration and
other arrangements. The Company believes that forming strategic marketing
alliances with partners in the institutional, Internet, online publishing and
software areas will be important for rapid market penetration. The Company
generally structures its alliances with bounty and royalty incentives, which
reward partners for both attracting new subscribers and cultivating loyal and
frequent users of its services.
Direct Sales
The Company currently uses an internal direct-sales force (which now
totals more than 20 full-time sales representatives) to sell institutional site
licenses for Electric Library and to market its Electronic Printing Press to
publishers and other content creators. The institutional sales force focuses
its efforts on making telephone sales calls, as well as exhibiting the
Company's services at key educational product trade shows. In addition, the
institutional sales force responds to school and library inquiries generated
by users of the Company's consumer reference services. The Company's
Electronic Printing Press sales force is focusing on leveraging relationships
with existing and potential content providers.
Online Marketing
The Company's online marketing initiatives are focused on creating
awareness and generating traffic for its online reference services. The
Company currently promotes and advertises its services on several Internet
sites, through paid advertisements as well as through bounty and royalty
incentive arrangements. The Company currently purchases online advertising
space from a number of leading Internet sites. Electric Library is featured
as a "Distinguished Provider" of search and navigation services on Netscape's
NetSearch page, generating significant Web site visits and product trials.
The Company believes that the Internet has proven itself to be an excellent
environment for fostering communities of interest, many of which have
specialized information requirements, and that the Internet provides an ideal
one-to-one marketing environment to identify and service these communities.
In addition, the Company believes that the Internet provides an effective
communications mechanism (through newsgroups, mailing lists, etc.) to conduct
outreach efforts for new users and plans to establish a bounty program for
user referrals. The Company has entered into alliances with popular Web sites
to construct "co-branded" Web sites on which Electric Library is incorporated
-8-
as a standard reference tool. Examples of this approach are Financial
Electric Library on Intuit's Quicken Financial Network and Cool Questions on
Yahoo's Yahooligans site. See "--Important Factors Affecting the Company's
Business, Operating Results and Financial Condition--Limited Marketing
Experience; Exclusive Distribution Rights."
Resellers
As part of its sales and marketing plan, the Company uses resellers for
its online reference services. For the consumer market, the Company launched
Homework Helper through Prodigy's online service in March 1995. For the
institutional market, in 1996, Infonautics entered into an arrangement with a
marketer of software and information services to public libraries. The
marketer is selling Electric Library to public libraries through its direct
sales force in selected regions of the U.S. The Company has also entered into
an agreement with a leading supplier of library automation systems, to market
Electric Library in the school library market. The Company plans to enter
into additional reseller agreements for both the consumer and institutional
markets. In addition, the Company may enter into reseller agreements for EPP.
Software Bundling and Integration
The Company pursues opportunities to bundle and integrate client software
for its services with complementary products and services. The Company
currently has bundling agreements with a variety of companies and is
currently exploring additional bundling and integration arrangements. See
"--Services and Products--Electric Library."
Other Arrangements
The Company uses print media advertising in selected online and personal
computer publications. Moreover, the Company believes that certain
endorsements can accelerate mass market acceptance. The American Federation
of Teachers, one of the largest accredited teaching federations in the United
States, has endorsed Electric Library. With the endorsement, the Company
offers discounts on Electric Library to member teachers for personal use.
Additionally, in the fourth quarter of 1996, the Company launched
Researchpaper.com, an online Web site intended to help students with their
term papers and promote usage of Electric Library.
Customer Service and Support
The Company believes customer service and support are critical to its
objectives. Through submission of online feedback forms, customers can
provide the Company with valuable feedback each time they use Homework Helper
and Electric Library. To date, the Company has collected more than 150,000
submissions, many of which contain not only questions, but also comments
regarding ideas for improving the services. The Company believes that the
customer feedback received to date reflects a high level of customer
satisfaction.
The Company has a customer support department, which currently consists
of eleven people who act as online postmasters, technical support
coordinators and bulletin board leaders. The online postmasters respond to
e-mail correspondence generated via online services and the Internet, and
relay customer feedback to other departments of the Company regarding
customer requirements and priorities for new features and information
sources. The technical support coordinators provide centralized telephonic
support for all institutional clients and users, including K-12 schools and
public libraries, while bulletin board leaders respond to all customer
"postings" generated from the bulletin board areas within the various online
services. The bulletin board leaders also respond to technical, product and
search-related items.
-9-
Competition
The information services industry is intensely competitive. With respect
to its online services, the Company competes directly or indirectly with other
information services and sources, including: (i) consumer online reference
services such as Cognito ("Cognito") (a product developed by Information
Access Company which is also marketed by Microsoft as the Encarta Online
Library); (ii) educational database providers and content aggregators (such as
EBSCO, Information Access Company, UMI and Newsbank); (iii) professional
business-related services (such as Lexis-Nexis and Desktop Data); (iv) CD-ROM
encyclopedias and other reference sources (such as Microsoft Encarta and
Comptons Multimedia Encyclopedia); (v) publishers offering online or Internet
access to their own content; (vi) Internet search service companies; and (vii)
individually-maintained Web sites on the Internet. With respect to EPP, the
Company competes with other providers of enabling technology for publishers
and other content creators. Companies compete in two aspects of this market:
search technology and optional services. With respect to search technology,
Verity and Fulcrum are leaders in a mature market with many participants. EPP
optional services include hosting services, integration services and business
management functions. The optional services market is new, and various
competitors continue to emerge.
The Company markets its online reference services through consumer online
services. In the future, however, the Company's partners may become
competitors of the Company. In general, these online services are primarily
designed for communication, casual browsing and entertainment. For those
seeking specific information, the major online services typically offer their
own mix of information resources, including independent sites of newswires,
general reference works and periodicals. However, the Company believes that
these services do not currently offer users the same search capabilities or
the depth, breadth and quality of content as the Company's services.
Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and larger existing customer bases than
the Company. In addition, these competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements,
to devote greater resources to the development, promotion and sale of their
products or services than the Company and to establish relationships with
content providers that have not entered into agreements with the Company. No
assurance can be given that a competitor or competitors will not develop
products and services which are comparable or superior to the Company's
services and products; nor can any assurance be given that a competitor or
competitors will not seek to obtain agreements with the Company's content
providers or to market their services and products to the same customers to
whom the Company intends to market its services and products. Moreover,
because the success of the Company's strategy is dependent in part upon the
success of the Company's relationship with its strategic partners, including
the Company's suppliers, content providers, resellers and distributors, any
failure of the products of the Company's strategic partners to achieve or
maintain market acceptance could have a material adverse effect on the
Company's competitive position and results of operations.
Intellectual Property
Although Infonautics believes that its success will depend principally on
continuing innovation, technical expertise, quality of product support and
customer relations, the Company's ability to compete successfully depends, in
part, on its ability to protect the proprietary technology contained in its
services and products. Electric Library and Homework Helper client software
are licensed under agreements prohibiting the unauthorized use, copying and
transfer of the licensed program. In addition, the Company relies on a
combination of trade secret, copyright and trademark laws, non-disclosure
agreements and contractual provisions to protect its proprietary rights in
its software and technology. The Company has applied for federal service mark
and trademark registration for certain of the marks it uses, including
"Infonautics," "Electric Library" and "Electronic Printing Press," and the
Company has applied to register certain of its marks in eight countries and
the European community. In addition, the Company licenses software technology
from third parties. Moreover, the Company has developed a number of
proprietary technologies and currently has 15 patents pending on several
technologies, including a "split server" architecture which yields high
efficiencies in database systems, a plain English search capability and an
API standard to access information in a client-server mode. In addition, the
Company has two allowed U.S. patent and eight pending international patent
applications. See "--Important Factors Affecting the Company's Business,
Operating Results and Financial Condition--Dependence on Proprietary
Technology."
-10-
Due to the changing nature of technology used in information retrieval,
the Company believes that any patent will prove to be of substantially less
significance in its business than the timely application of the technology.
The Company also believes that factors such as the technological and creative
skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position.
Government Regulation and Legal Uncertainties
The Company is subject, both directly and indirectly, to various U.S. and
foreign laws and governmental regulations relating to its business. The
Company believes it is currently in compliance with such laws and that they
do not have a material impact on its operations. Moreover, there are
currently few laws or regulations that expressly address commerce on
commercial online services or the Internet. However, due to the increasing
popularity and use of commercial online services and the Internet, it is
possible that a number of such laws and regulations may be adopted with
respect to commercial online services and the Internet, which may cover
issues such as user privacy, pricing, taxation and characteristics and
quality of products and services. The Telecommunications Act of 1996,
including the Communications Decency Act of 1996, which was signed into law
on February 8, 1996 and the judicial interpretation of which is uncertain,
imposes criminal penalties for transmission of or allowing access to certain
obscene communications over the Internet and other computer services and
contains additional provisions intended to protect minors. The application of
this law, and any similar laws or regulations in the future, may decrease the
growth of commercial online services and the Internet, which could in turn
decrease the demand for the Company's services and products and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, operating results and financial condition. Moreover, the
applicability to commercial online services and the Internet of existing U.S.
and foreign laws governing issues such as intellectual property ownership,
defamation, personal privacy and export restrictions is uncertain and could
expose the Company to substantial liability, for which the Company might not
be indemnified by content providers. See "--Important Factors Affecting the
Company's Business, Operating Results and Financial Condition--Government
Regulation and Legal Uncertainties."
Employees
As of February 28, 1997, the Company had 132 full-time employees and 13
part-time and hourly employees. None of the Company's employees are currently
covered by collective bargaining agreements. Management considers employee
relations to be good.
The Company also has relationships with various consultants, including
Howard L. Morgan and Israel J. Melman, who are directors of the Company.
-11-
Factors Affecting the Company's Business, Operating Results
and Financial Condition
History of Losses; Anticipation of Future Losses. Since inception, the
Company has incurred significant losses and substantial negative cash flow.
As of December 31, 1996, the Company had cumulative net losses of
approximately $25.5 million, with net losses of approximately $3.7 million,
$7.5 million and $13.8 million, respectively, for each of the years ended
December 31, 1994, December 31, 1995 and December 31, 1996. The Company
currently anticipates that it will not achieve profitability in the years
ending December 31, 1997 and December 31, 1998, and there can be no assurance
that the Company will ever achieve profitable operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto.
Developing Market. The Company's services, Electric Library and Homework
Helper, are in markets that have only recently begun to develop, are rapidly
evolving and are characterized by an increasing number of market entrants
that have introduced or developed services and products addressing
information search and retrieval requirements over private and public
networks, online services and the Internet. Because the markets for the
Company's services and products are new and evolving and because the Company
has limited operating experience, it is difficult to assess or predict with
any assurance the growth rate, if any, and the size of these markets. The
market for Electronic Printing Press technology is similarly new and rapidly
evolving. See "--Services and Products" and "--Markets." There can be no
assurance that the markets for the Company's services and products will
develop. If these markets fail to develop or develop more slowly than
expected, the Company's business, operating results and financial condition
will be materially adversely affected.
Limited Operating History; Limited Services and Products to Date;
Unproven Acceptance of the Company's Services and Products. The Company
commenced operations in November 1992 and introduced its first commercial
service, Homework Helper, on the online service of Prodigy in early 1995.
Homework Helper has generated total net revenues of approximately $448,000 in
1995 and $589,000 in 1996, 100% and 41% of revenues, respectively, in 1995
and 1996. The Company introduced its second service, Electric Library, on the
Internet in the first quarter of 1996. Revenues from Electric Library totaled
$580,000, or 40% of revenues, for the year ended December 31, 1996. The
Company generated revenues of $272,000, or 19% of revenues, for the year
ended December 31, 1996 from licensing its core technology and providing
integration services for hosting archive sites. To achieve revenue growth,
of which there can be no assurance, the Company must, among other things,
achieve market acceptance of its services and products, continue to upgrade
and add technologies and commercialize products and services incorporating
such upgraded or additional technologies. See "--Services and Products."
Retention; Pricing Uncertainty. The Company's marketing strategy for
Electric Library and Homework Helper depends in part upon retaining customers
after the first free month has ended. See "--Services and Products." Even if
customers do not cancel after the initial free period, there can be no
assurance that the Company will retain them as paying customers, and industry
experience suggests that each month a significant number of subscribers to
the Company's services will terminate their subscriptions. In addition, the
Company may reduce the selling price of its online reference services due to,
among other things, increased competition in the market place or high churn
rates. See "--Services and Products," "--Sales and Marketing" and
"--Competition."
Competition. The information services industry is intensely competitive.
With respect to its online services, the Company competes directly or
indirectly with other information services and sources, including: (i)
consumer online reference services such as Cognito; (ii) educational database
providers and content aggregators (such as EBSCO, Information Access Company,
UMI and Newsbank); (iii) professional business-related services (such as
Lexis-Nexis and Desktop Data); (iv) CD-ROM encyclopedias and other reference
sources (such as Microsoft Encarta and Comptons Multimedia Encyclopedia); (v)
publishers offering online or Internet access to their own content; (vi)
Internet search service companies; and (vii) individually-maintained Web
sites on the Internet.
With respect to Electronic Printing Press, the Company competes with
other providers of enabling technology for publishers and other content
-12-
creators. Companies compete in two aspects of this market: search technology
and optional services. With respect to search technology, Verity and Fulcrum
are leaders in a mature market with many participants. The optional services
market is new, but various competitors continue to emerge.
The Company markets its online reference services through consumer online
services. These services typically offer their own mix of information
resources, often with search mechanisms that address independent sites of
newswires, general reference works and periodicals. In the future, these
services may compete with the Company's services by offering search
mechanisms which give access to larger and more diverse content collections,
including more full-text documents and historical archived information.
Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and larger existing customer bases than
the Company. In addition, these competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements,
to devote greater resources to the development, promotion and sale of their
products or services than the Company and to establish relationships with
content providers that have not entered into agreements with the Company. No
assurance can be given that a competitor or competitors will not develop
services and products which are comparable or superior to the Company's
services and products; nor can any assurance be given that a competitor or
competitors will not seek to obtain agreements with the Company's content
providers or to market their services and products to the same customers to
whom the Company intends to market its services and products. Moreover,
because the success of the Company's strategy is dependent in part upon the
success of the Company's relationships with its strategic partners, including
the Company's suppliers, content providers, resellers and distributors, any
failure of the products of the Company's strategic partners to achieve or
maintain market acceptance or compete successfully in their markets could
have a material adverse effect on the Company's competitive position and
results of operations.
Potential Fluctuations in Quarterly Results. The Company expects to
experience significant fluctuations in future quarterly operating results
that may be caused by many factors, including demand for the Company's
services and products, introduction or enhancement of services and products
by the Company and its competitors, market acceptance of new services and
products, including EPP technology, the mix of distribution channels through
which services and products are sold, the mix of services and products sold,
seasonality of the online services and institutional markets and general
economic conditions. As a result, the Company believes that period-to-period
comparisons of its results of operations are not and will not necessarily be
meaningful and should not be relied upon as an indication of future
performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on Content Providers; Significant Payments Required to be Made
to Content Providers; Risk of Third Party Claims. The Company's relationships
with its content providers are fundamental to its goal of becoming a leading
online reference service. To date, various content providers, including
publishers, have entered into supply agreements with the Company to provide
information for use in the Company's reference services. Certain of these
agreements contain limits on the use of the content, including limits in
certain distribution channels or in certain geographic locations, and may be
terminated by either party upon: (i) breach of any material obligation, if
such breach remains uncured within a specified number of days after written
notice; or (ii) a bankruptcy, insolvency or similar filing, if such filing is
not withdrawn within a specified number of days. Certain of the agreements
may also be terminated by the content providers under certain circumstances,
including the failure of the Company to make certain minimum payments. In
addition, the agreements are typically non-exclusive and vary in length of
term, ranging from one to five years.
The Company believes it may be necessary in the future to license
additional content from content providers such as major daily newspapers,
financial publications and weekly or monthly magazines. The Company believes
it can differentiate itself as the provider of the most useful online
reference services for a broad audience with its current database of diverse
source material; however, users of online services and the Internet will in
addition to diversity also seek access to content from well known sources
that are familiar to users, such as major daily newspapers, financial
publications and weekly or monthly magazines. While the Company intends to
continue adding new content, including additional graphical material and
eventually audio and video content, there can be no assurance the Company
will be able to enter into agreements with additional content providers.
Failure to do so may have a material adverse effect on the Company's
business, operating results and financial condition.
-13-
The Company's future success also depends, in part, on its ability to
maintain its existing relationships with its content providers, of which
there can be no assurance. The Company is reducing its reliance on content
aggregators and concurrently is contracting directly with the publishers
represented by such aggregators, as well as other publishers. As a result,
from time to time, there may be changes in the number of publications
available on the services. In addition, the combination of contracting
directly with publishers and the Company's overall effort to increase the
content available under its Electric Library and Homework Helper services
will result in an increase in data preparation costs. The Company believes
that the possible reduction of content or the increase in data preparation
costs will not have a material adverse effect on the Company. However, there
can be no assurance that there will be no material adverse effect on the
Company. See "--Content Provider Relationships."
In addition, while fees payable to the Company's content providers
constitute a significant portion of the Company's cost of revenues, content
providers have received only minimal payments from the Company to date. There
can be no assurance that the content providers will be satisfied with the
revenue received through arrangements with the Company or that content
providers will enter into prospective agreements with the Company. If the
Company is required to increase the fees payable to its content providers,
such increased payments will have an adverse effect on the Company's results
of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "--Services and Products," "--Content
Provider Relationships" and "--Government Regulation and Legal Uncertainties."
Dependence on the Internet. Although the Company provides access to its
services across multiple delivery channels, including commercial online
services, the success of the Company's services and products depends on,
among other things, the continued expansion of the Internet and its network
infrastructure. The Internet may not prove to be a viable commercial
marketplace because of, among other things, inadequate development of the
necessary infrastructure such as a reliable network backbone, delayed
development of complementary products and technologies such as high speed
modems and security procedures for financial transactions or delays in the
development or adoption of new standards and protocols such as the
next-generation Internet Protocol, all of which would inhibit the Internet's
ability to handle increased levels of activity. There can be no assurance
that the infrastructure, complementary products or protocols necessary to
make the Internet a viable commercial marketplace will be developed. If they
are not developed or if the Internet does not become a viable commercial
marketplace for any other reason, the Company's business, operating results
and financial condition will be materially adversely affected. Moreover,
critical issues concerning the commercial use of, distribution on, and
government regulation of online services and the Internet (including
security, cost, ease of use and access, property ownership and other legal
liability issues) remain unresolved and may impact both the growth of online
services and the Internet and the Company's financial results. See
"--Government Regulation and Legal Uncertainties."
Limited Marketing Experience; Exclusive Distribution Rights. The Company
uses a variety of strategies to market and sell its services and products,
including direct sales, online marketing, reseller arrangements and software
bundling and integration. The Company also uses paid advertising and product
endorsements to promote its services and products. To the extent the Company
distributes its services and products online through arrangements with other
consumer technology companies, the Company will be dependent in part upon the
efforts of such parties for distribution of its services and products. See
"--Sales and Marketing."
In April 1996, the Company entered into a one-year "Distinguished
Provider" Agreement with Netscape pursuant to which the Company was
designated one of 14 "Distinguished Providers" of search and navigation
services accessible from the "Net Search" button on the Netscape browser.
For the year ended December 31, 1996, a significant portion of visits to the
Company's Web sites was derived through the Netscape browser. The Company
cannot anticipate the impact on visits to its Web sites of any changes
Netscape may make to its service or browser or the effect on consumer
subscriptions that may be generated from such visits. There can be no
assurance that this agreement will be renewed, and the termination of the
-14-
Company's relationship with Netscape could significantly reduce new customer
acquisition rates for Electric Library.
In addition, pursuant to the Company's agreement with Telebase Systems,
Inc. ("Telebase"), Telebase has the exclusive rights, subject to certain
limitations, to distribute the Company's services through certain
remarketers. Further, if the Company contracts directly with any such
remarketer, Telebase will be entitled to a five percent commission on all
subscription revenue generated from such remarketer for a period of five
years.
Rapid Technological Change. The information services, software and
communications industries are characterized by rapid technological change,
changes in customer requirements, frequent new product and service
introductions and enhancements and emerging industry standards. The
introduction of products and services embodying new technologies and the
emergence of new industry standards and practices can render existing
products and services obsolete and unmarketable or require significant
unanticipated investments in research and development. The Company's future
success will depend, in part, upon its ability to keep abreast of, and to
obtain rights to, the latest technologies in order to enhance Electric
Library and Homework Helper, sell and license its EPP technology, introduce
new services and products and keep pace with technological developments,
changing customer requirements and frequent new product introductions. See
"--Technology and Product Development" and "--Intellectual Property."
Dependence on Proprietary Technology. The Company's success is heavily
dependent upon a combination of proprietary software technology and software
licensed from third parties. The Company has pending U.S. and international
patent applications, and has two allowed U.S. patent applications. In
addition, the Company relies on a combination of trade secret, copyright and
trademark laws, non-disclosure agreements and contractual provisions to
protect its proprietary rights in its software and technology. However, there
can be no assurance that the steps taken by the Company or its licensors will
prevent misappropriation of this technology. Moreover, third parties could
independently develop competing technologies that are substantially
equivalent or superior to the Company's technologies. Although the Company
believes that its services and products and the proprietary rights developed
or licensed by it do not infringe patents and proprietary rights of other
parties, there can be no assurance that infringement claims, regardless of
merit, will not be asserted against the Company or its licensors in the
future. Moreover, effective intellectual property and proprietary rights
protection of this proprietary technology may be unavailable or limited in
certain foreign countries. In addition, the Company has applied for federal
service mark and trademark registration for certain of the marks it uses,
including "Infonautics," "Electric Library" and "Electronic Printing Press,"
and the Company has applied to register certain of its marks in eight
countries and the European community. There can be no assurance that the
Company will receive such service mark or trademark protection or that such
protection will be adequate to protect the Company's marks. See
"--Intellectual Property."
-15-
The Company currently has 15 U.S. patent applications pending on several
technologies, including a "split server" architecture which yields high
efficiencies in database systems, a plain English search capability and an
API standard to access information in a client-server mode. In addition, it
has two allowed U.S. patent applications and eight pending international
patent applications. See "Business--Technology and Product Development."
There can be no assurance that any patent applications now pending or filed
in the future will result in patents being issued or, if patents are issued,
that the claims allowed will be sufficiently broad to protect what the
Company believes to be its proprietary rights. In addition, there can be no
assurance that pending applications or any patents licensed to the Company or
issued or licensed to the Company in the future will afford any competitive
advantages to the Company or will not be challenged by third parties or
circumvented or designed around by others. The cost of litigation to uphold
the validity and prevent infringement of patents and to enforce licensing
rights can be substantial. Furthermore, there can be no assurance that others
will not independently develop similar technologies or duplicate the
technology owned by or licensed to the Company or design around the patented
aspects of such technology. There can be no assurance that the services and
products the Company markets or will seek to market do not or will not
infringe patents or other rights owned by others, licenses for which may not
be available to the Company.
Dependence on Limited Sources of Supply. Components of the basic search
software used by the Company are licensed on a non-exclusive basis from
Excalibur Technologies Corporation ("Excalibur") (parent of and successor to
Conquest Software Corp.). No assurance can be given that Excalibur will
continue to support or maintain the software adequately or that the
arrangement will not be terminated. The Company's agreement with Excalibur is
for a term of 15 years, ending July 5, 2008, with automatic renewal periods
of five years thereafter unless one year's written notice of termination is
given. The agreement may be terminated earlier, after a notice period, by
either party upon breach of any material obligation. However, the Company
believes that if Excalibur were unable adequately to support or maintain the
software, additional or replacement suppliers could provide the Company with
comparable software within a reasonable time frame and at comparable prices.
Nevertheless, there can be no assurance that the Company could find
alternative suppliers or that any such suppliers could provide comparable
software on a timely basis or on similar terms.
In addition, the Company obtains certain computer systems on which
Electric Library and Homework Helper operate primarily from Tandem. No
assurance can be given that Tandem will continue to support or maintain the
systems adequately or that their arrangements will not be terminated. The
Company's agreement with Tandem is for an initial term of five years, ending
February 3, 1999, with an initial automatic renewal period of three years and
thereafter additional optional renewal periods of three years each. The
agreement may be terminated earlier by either party upon: (i) any default, if
such default remains uncured for 30 days after written notice; (ii) certain
defaults related to confidentiality; and (iii) in certain limited
circumstances if the Tandem products do not meet certain performance
standards. The agreement may also be terminated earlier by Tandem upon
certain defaults relating to proprietary rights and licensing provisions and
requires renegotiation upon the occurrence of certain events, which in
general may cause the Company to require additional Tandem products. Although
management believes the Company could purchase similar hardware from other
sources, there can be no assurance that the Company would be able to do so in
a timely manner. In addition, Excalibur and Tandem both receive a percentage
of revenues from subscriptions in return for providing the Company with
software and hardware for its computer systems, and there can be no assurance
that the Company would be able to enter into similar agreements on comparable
terms with alternate suppliers. In the event that the Company is unable to
establish comparable relationships with alternate software or hardware
suppliers, the inability of the Company's current suppliers to meet the
Company's needs could have a material adverse effect on the Company. See
"--Technology and Product Development."
Risk of System, Service or Product Failure or Inadequacy. From time to
time the Company has suffered failure of its system which has resulted in
interruptions in the delivery of its services to its customers. In addition,
the growth of the Company's customer base may strain or exceed the capacity
of its computer and telecommunications systems and lead to degradations in
performance or system failure. Any damage, failure or delay that causes
interruptions in the Company's operations could have a material adverse
effect on the Company's business, results of operations and financial
condition. The Company's operations are also dependent on its ability to
maintain its computer and telecommunications equipment in effective working
order and to protect its systems against damage from fire, natural disaster,
power loss, telecommunications failure or similar events. All of the
Company's computer and telecommunications equipment, including its processing
operations, is located at its headquarters facilities in Wayne, Pennsylvania.
While the Company maintains property insurance, such insurance may not be
adequate to compensate the Company for all losses that may occur or to
provide for costs associated with business interruption.
There can be no assurance that, despite testing and quality assurance
efforts by the Company and by current and potential customers, errors will
not be found in the service, product or product upgrades, resulting in loss
of or delay in market acceptance and sales, diversion of development
resources, injury to the Company's reputation or increased service and
support costs, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition.
-16-
Dependence on Personnel; Management of Growth. The Company's performance
is substantially dependent on the performance of its executive officers and
key employees, some of whom do not have employment agreements with the
Company. The loss of any such personnel could have an adverse effect on the
operations of the Company. The Company is dependent upon its ability to
attract, retain and motivate skilled technical, managerial and sales
personnel. Competition for qualified personnel is intense, and there can be
no assurance that the Company will be able to attract, assimilate or retain
additional highly qualified employees. Furthermore, the expenses associated
with hiring and retaining employees may be incurred prior to the generation
of any associated revenues.
The Company's future growth will require it to manage its operations
effectively while responding to constant changes in both technology and the
markets in which the Company intends to compete. The introduction of
Electric Library and the continued development of Electronic Printing Press
have already placed and will continue to place significant demands on the
Company's management, employees and technical and other resources. If the
Company's management is unable to manage growth effectively, the quality of
the Company's services and products, its ability to attract and retain key
personnel and its business, financial condition and results of operations
will be materially adversely affected.
Government Regulation and Legal Uncertainties. The Company is subject,
both directly and indirectly, to various U.S. and foreign laws and
governmental regulations relating to its business. The Company believes it is
currently in compliance with such laws and that they do not have a material
impact on its operations. Moreover, there are currently few laws or
regulations that expressly address commerce on commercial online services or
the Internet. However, due to the increasing popularity and use of commercial
online services and the Internet, it is possible that a number of such laws
and regulations may be adopted with respect to commercial online services and
the Internet, which may cover issues such as user privacy, pricing, taxation
and characteristics and quality of products and services. The
Telecommunications Act of 1996, including the Communications Decency Act of
1996, which was signed into law on February 8, 1996 and the judicial
interpretation of which is uncertain, imposes criminal penalties for
transmission of or allowing access to certain obscene communications over the
Internet and other computer services and contains additional provisions
intended to protect minors. The application of this law, and any similar laws
or regulations in the future, may decrease the growth of commercial online
services and the Internet. Such a decrease could in turn decrease the demand
for the Company's services and products and increase the Company's cost of
doing business or otherwise have an adverse effect on the Company's business,
operating results and financial condition.
Moreover, the applicability to commercial online services and the
Internet of existing U.S. and foreign laws governing issues such as
intellectual property ownership, defamation, personal privacy and export
restrictions is uncertain and could expose the Company to substantial
liability for which the Company might not be indemnified by content
providers. For example, there is a potential that claims will be made
against the Company for copyright or trademark infringement, defamation or
negligence or other theories based on the nature and content of such
materials, including claims based on the Company's providing access to
obscene or indecent information. Although the Company carries general
liability insurance, the Company's insurance may not cover potential claims
of this type, or may not be adequate to indemnify the Company for all
liability that may be imposed. Any imposition of liability that is not
covered by indemnification or insurance, or is in excess of insurance
coverage, could have a material adverse effect on the Company.
Need for Additional Funds. Based on current levels of operations and
commitments, the Company anticipates that its existing capital resources
will enable it to maintain its operations for at least twelve months.
However, the Company may require additional funds to sustain and expand its
product development and sales and marketing activities, particularly if a
well-financed competitor emerges or if there is a shift in the type of online
or Internet information services that are developed and ultimately receive
customer acceptance. Adequate funds for these and other purposes on terms
acceptable to the Company, whether through additional equity financing, debt
financing or other sources, may not be available when needed or may result in
significant dilution to existing shareholders. The inability to obtain
sufficient funds from operations or external sources would have a material
adverse effect on the Company's business and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Agreements with Certain Founders. In connection with the founding of the
Company and the execution of employment agreements as of January 1, 1993
between the Company and Marvin Weinberger and Joshua Kopelman, the Company
entered into agreements with each of them pursuant to which they will
receive, commencing in 1998 and terminating in 2091, payments equal to 3% and
0.15%, respectively, of the Company's after-tax adjusted net income. In
addition, under the terms of his agreement, Mr. Weinberger has the right at
all times to disapprove any proposed change in corporate structure, such as a
merger, consolidation or sale of all or substantially all of the assets of
the Company, which may adversely affect his rights under the agreement,
unless the holders of 80% of the shares entitled to vote on the matter
(excluding Mr. Weinberger's shares) approve the transaction.
-17-
ITEM 2. PROPERTIES
The Company leases approximately 21,000 square feet of office space in
Wayne, Pennsylvania. This lease expires July 31, 2000 and has a three-year
renewal option. The Company subleased 3,600 square feet in the same office
park, under an agreement which began in July 1996 and expired on February 28,
1997. The Company is currently negotiating the details of amending the
existing lease to add this 3,600 square foot space. The Company has recently
entered into a lease for approximately 2,400 square feet in New York, New
York to be used as a content and publisher relations office. The Company is
seeking to expand its existing facilities to support its growth. The Company
believes that additional space will be available on acceptable terms. In
addition, the Company has an agreement and certain noncancelable operating
leases with a computer manufacturer for certain of its equipment.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 1996.
-18-
EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 of Form 10-K with respect to executive
officers of the Company is set forth below. Executive officers of the Company
are elected by the Board of Directors on an annual basis and serve until
their successors have been duly elected and qualified. There are no family
relationships among any of the executive officers or directors of the Company.
The following table sets forth certain information concerning the
executive officers of the Company:
Name Age Position
--------- ----- ----------
Marvin I. Weinberger............ 41 Chief Executive Officer, Chairman
of the board of directors and
co-founder
David Van Riper ("Van") Morris.. 42 President and Chief Operating
Officer
Joshua M. Kopelman.............. 25 Executive Vice President, Secretary
and co-founder
Ronald A. Berg.................. 40 Vice President-Finance and
Administration and Chief Financial
Officer
James T. Beattie................ 48 Vice President and General Manager-
New Media Services
William R. Burger............... 39 Vice President-Content and
Publisher Relations
Gerard J. Lewis, Jr............. 36 Vice President, General Counsel and
Assistant Secretary
Marvin I. Weinberger, a co-founder of the Company, has served as the
Company's Chief Executive Officer and Chairman of the board of directors
since its inception in November 1992. From 1985 until he co-founded the
Company in 1992, he was Executive Vice President and co-founder of Telebase,
a developer of customized information and entertainment services that is now
part of N2K Inc., where his duties included marketing and sales functions.
Mr. Weinberger was Project Leader for Homework Helper while at Telebase.
Van Morris joined the Company as President and Chief Operating Officer in
September 1995. From 1992 until he joined the Company, Mr. Morris held
various vice president and general management positions at Legent Corporation
("Legent"), a systems management software company. From September 1987 to
July 1992, Mr. Morris was employed by Goal Systems International, a system
management software company that was purchased in 1992 by Legent, where he
initially served as Director of Marketing and was promoted to Vice President
of Marketing.
Joshua M. Kopelman, a co-founder of the Company, is Executive Vice
President and Secretary of the Company. In addition, Mr. Kopelman is
responsible for the Company's sales and marketing functions. From 1991 until
he co-founded the Company, Mr. Kopelman was employed by Telebase as the
Development Projects Coordinator for Homework Helper.
Ronald A. Berg joined the Company as Vice President--Finance and
Administration and Chief Financial Officer in January 1994. For the preceding
four years, Mr. Berg served as Chief Financial Officer of Ziff Technologies,
the technical services division of Ziff Communications Company, a computer
publishing and services company. Mr. Berg is a certified public accountant
and was employed by Coopers & Lybrand L.L.P. from 1977 to 1985, the last two
years as an Audit Manager.
James T. Beattie has been Vice President and General Manager-New Media
Services since June 1996. From May 1994 until June 1996, he served as Vice
President--Engineering. For the preceding nine years, Mr. Beattie served as
-19-
Manager and Director of Systems Development of Prodigy Services Company,
where he was responsible for all aspects of technical product and application
development for editorial, merchandising and advertising lines of business,
as well as specified systems development and operations.
William R. Burger joined the Company as Vice President - Content and
Publisher Relations in January 1997. From July 1995 to January 1997, Mr.
Burger was director of new media development and educational initiatives at
AT&T's Messaging, Wireless and Multimedia group, where he was responsible for
introducing voice-messaging services into primary and secondary schools as
part of the AT&T Learning Network. From 1981 to May 1995, Mr. Burger was
employed by Newsweek Magazine where he held a number of positions, including
senior editor, senior writer and foreign correspondent.
Gerard J. Lewis, Jr. was named Vice President & General Counsel of the
Company in February 1997. From May 1996 to February 1997, Mr. Lewis served
the Company as Corporate Counsel & Director of Business Development. Prior
to joining the Company in May 1996, Mr. Lewis was in private law practice
with Reed Smith Shaw & McClay where he practiced in the intellectual property
and technology law areas since 1992. Mr. Lewis also spent several years
working in Silicon Valley as a member of various product development teams at
Software Publishing Corporation during the late 1980s.
-20-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock of the Company has traded on the NASDAQ Stock
Market under the symbol INFO since the Company's initial public offering on
April 30, 1996. Prior to that time, there was no public market for the
Company's Class A Common Stock. The following table sets forth the high and
low last reported sale prices for the Company's Class A Common Stock for the
period indicated as reported by the NASDAQ Stock Market.
Year Fiscal Quarter Ended High Low
- ----- ----------------------------------------------- -------- --------
1996 June 30, 1996 (commencing April 30, 1996)...... $14.00 $8.00
September 30, 1996............................. 8.25 4.25
December 31, 1996.............................. 5.50 3.50
1997 March 31, 1997 (through February 28, 1997)..... 4.625 2.375
As of February 28, 1997, the Company had approximately 219 shareholders of
record.
The Company has not declared or paid dividends on its Common Stock and
does not intend to do so in the foreseeable future.
-21-
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below under the caption Consolidated
Statements of Operations Data with respect to each of the three years in the
period ended December 31, 1996 and under the caption Consolidated Balance
Sheet Data at December 31, 1996 and 1995, are derived from the consolidated
financial statements of the Company and its subsidiaries, which financial
statements have been audited by Coopers & Lybrand L.L.P., independent
accountants. The following selected consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report on Form
10-K.
Year Ended December 31,
-----------------------------------------------------
1993 1994 1995 1996
----------- ----------- ----------- -----------
(In thousands, except share and per share data)
Consolidated Statements of Operations Data:
Revenues............................... $ -- $ -- $ 448 $ 1,441
Costs and expenses:
Cost of Revenues ................... -- -- 282 822
Customer support expenses .......... -- -- 146 324
Development expenses ............... 90 2,009 3,554 5,210
Sales and marketing expenses ....... -- -- 1,979 6,142
General and administrative expenses. 435 1,581 1,982 3,927
----------- ----------- ----------- -----------
Total costs and expenses ...... 525 3,590 7,943 16,425
----------- ----------- ----------- -----------
Loss from operations .................. (525) (3,590) (7,495) (14,984)
Interest income (expense), net ........ (30) (109) 14 1,198
----------- ----------- ----------- -----------
Net loss ...................... $ (555) $ (3,699) $ (7,481) $ (13,786)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per common equivalent
share (1) ................. $ (0.16) $ (0.72) $ (1.23) $ (1.65)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common
and equivalent shares
outstanding ..................... 3,427,719 5,168,577 6,062,289 8,347,904
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
December 31,
-----------------------------------------------------
1993 1994 1995 1996
----------- ----------- ----------- -----------
(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments ..................... $ 1,233 $ 718 $ 962 $ 27,379
Working capital (deficit) ............ 859 (224) (1,514) 25,841
Total assets ......................... 1,312 1,254 2,532 30,227
Long-term obligations, net of current
portion ......................... 842 204 138 --
Shareholder's equity (deficit) ....... 91 51 (549) 27,688
-22-
(1) Net loss per share is calculated using the weighted average number
of common and common equivalent shares outstanding during the
respective periods. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin Topic 4-D, all common stock and common stock
equivalents issued by the Company during the twelve-month period prior
to the Company's initial public offering have been included in the
calculation as if they were outstanding, using the treasury stock
method, for all periods presented, at the offering price of $14.00 per
share. Subsequent to the initial public offering, net loss per common
equivalent share is computed in accordance with Accounting Principles
Board No. 15, "Earnings Per Share." As a result, outstanding common
stock equivalents have not been included in computation of common
equivalent shares for the period subsequent to the initial public
offering, as the effect would be anti-dilutive.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Item 7 contains, in addition to historical information,
forward-looking statements by the Company with regard to its expectations as
to financial results and other aspects of its business that involve risks and
uncertainties and may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
include statements regarding changes in the number of publications available
on the Company's services, anticipated increases in data preparation costs,
pricing uncertainty, use of system resources and marketing effects, growth
and expansion plans, sales and marketing plans, accrued and mandatory
contributions to the royalty pool for content providers, the establishment of
multiple royalty pools, future EPP-Direct sales, operating results and the
sufficiency of the Company's liquidity and capital. Such statements are
based on management's current expectations and are subject to a number of
uncertainties and risks that could cause actual results to differ materially
from those described in the forward-looking statements. Factors that may
cause such a difference include, but are not limited to, those described
under "Factors Affecting the Company's Business, Operating Results and
Financial Condition" in Item 1 of this Annual Report on Form 10-K.
Overview
Infonautics develops and markets online reference services for the
consumer and institutional markets and information technology products for
publishers and other content creators. The Company's consumer customers
include students and families, its institutional customers include libraries,
schools and other educational institutions, and its New Media Services
customers include publishers and other content creators.
Infonautics launched its initial product in the consumer market,
Homework Helper, late in March 1995. Homework Helper was available only to
Prodigy subscribers. Revenues generated through sales of Homework Helper
were the Company's only source of revenue in 1995. Electric Library,
accessible to anyone with Internet access, was introduced to the consumer
market in the first quarter of 1996. In May 1996, Electric Library was made
available to the institutional market. In April 1996, the Company's New
Media Services division began to market the core technology underlying
Homework Helper and Electric Library as the Electronic Printing Press, which
is an online multimedia delivery system designed to offer a standardized
solution for accessing distributed text, images, graphics and ultimately,
multimedia information. During the last quarter of 1996, the New Media
Services division began offering the hosting of archive sites on the
Internet, related integration services and business management functions for
publishers and other content creators. As a result of its expanding service
and product base, as well as an increase in Electric Library subscriber
count, revenues more than tripled in 1996 over 1995. At the same time, the
Company continued to develop its infrastructure in order to support the new
services and products and, as a result, total costs and expenses more than
doubled in 1996 over 1995.
Revenues from Homework Helper and Electric Library subscriptions, both
consumer and institutional, are recognized in the month the subscription
service is provided and from hourly usage fees when the service is provided.
Potential individual subscribers are currently offered the first month free,
after which the Company typically charges a fee of $9.95 per month for
virtually unlimited consumer usage. Annual subscriptions are available for
$59.95. For institutions, the annual fee is approximately $1,500 per
concurrent user. The Company may offer discounts in certain circumstances,
including high-volume purchases and site licenses. New Media Services
revenue from licensing the Company's core technology, packaged as
EPP-License, is recognized upon delivery, provided that no significant
obligations of the Company remain and collection of the resulting receivable
is probable. Revenue from contracts for hosting services (providing and
maintaining archives) for EPP-Direct and EPP-Select are recognized ratably
over the term of the contract. Revenue from integration services for
EPP-Direct and EPP-Select are recognized upon customer acceptance.
The Company is committed to pay up to 48% of online service revenues as
royalties and license fees to providers of content, hardware and software.
See Note 10 of the Notes to Consolidated Financial Statements. Content
-23-
providers are compensated from a royalty pool which is funded in accordance
with applicable contract provisions. Development of certain co-branded Web
site partnerships requires the establishment of multiple royalty pools. These
pools will consist only of those content providers participating in specific
sites. Payments to content providers made from a royalty pool are based on
the number of full record retrievals from each source by users and are
divided pro rata based on the total publishers' credits for the calendar
quarter. Certain of the Company's content provider agreements contain limits
on the use of the content, including limits in certain distribution channels
or in certain geographic locations, and may be terminated by the content
provider under certain circumstances, including the failure of the Company to
make certain minimum payments. In an effort to reduce the limitations on the
use of content, the Company has established an arrangement whereby certain
content providers are given the option to participate in a supplemental
guaranteed royalty pool. In addition, the Company will be required until the
year 2008 to pay royalties of up to 12.5% of its income for sub-licensing
software to EPP customers.
In February 1997, the Company changed the structure of consumer
enrollment plans. Prior to that time, visitors to the Electric Library site
were generally offered a two-week free trial. Upon expiration of the trial
period, those who had requested trials were asked to enroll as subscribers.
Now, visitors to the Electric Library site are asked to enroll as
subscribers, at which time they will receive the first thirty (30) days of
usage free. One result of this change is to reduce the number of non-paying
(trial) users of Electric Library. The Company anticipates that this change
will result in more efficient use of system resources and selling efforts.
Results of Operations
Revenues. Revenues for the year ended December 31, 1996 totaled $1.4
million versus $448,000 in 1995. There were no revenues in 1994, as the
Company's services and products were not yet launched. Consumer
subscriptions accounted for $1,025,000 or 71% of revenue in 1996, compared to
$448,000 or 100% in 1995. Homework Helper monthly subscribers decreased from
approximately 10,000 at December 31, 1995 to 6,100 at December 31,
1996. Electric Library, launched in the first quarter of 1996 had 10,500
subscribers at December 31, 1996.
Institutional subscription revenue for 1996 was $144,000. Revenue from
institutional long-term subscriptions is deferred and recognized ratably over
the term of the agreement, commencing with the month the service begins.
New Media Services revenue was $272,000 for the year ended December 31,
1996, the majority of which related to EPP-License. During the last quarter
of 1996, EPP-Direct was launched and is expected to provide most of New Media
Services future revenue. At year end, the Company had signed three
EPP-Direct contracts, two of which were in operation.
Deferred revenue at year end consists of $275,000 related to
institutional subscriptions, and $500,000 relating to a marketing agreement,
which is expected to be recognized in the second quarter of 1997.
Cost of revenues. Cost of revenues consists primarily of royalties 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 $822,000 for the year ended December 31, 1996, or 57%
of total revenues. Cost of revenues for the year ended December 31, 1995
was $282,000, or 63% of total revenues. There was no cost of revenues in
1994, as there were no revenues. Cost of revenues, as a percentage of total
revenue, decreased due to the greater margins on New Media Services
(EPP-License) revenues, which accounted for nearly 19% of total revenues in
1996. To attract new content providers and retain existing ones, the Company
began offering content providers the option to participate in a minimum
royalty pool, payable at June 1997, the end of the contract period. During
1996, the Company accrued $25,000 to supplement the royalty pool for those
providers participating in the minimum pool.
The Company is reducing its reliance on content aggregators and
concurrently is contracting directly with the publishers represented by such
aggregators, as well as other publishers. As a result, from time to time,
there may be changes in the number of publications available on the services.
In addition, the combination of contracting directly with publishers and the
-24-
Company's overall effort to increase the content available under its Electric
Library and Homework Helper services will result in an increase in data
preparation costs, which to date have not been material. Data preparation
costs are deferred and expensed over the minimum useful life of the content.
The Company believes that the possible reduction of content or the increase
in data preparation costs will not have a material adverse effect on the
Company. However, there can be no assurance that there will be no material
adverse effect on the Company.
Customer Support. Customer support expenses consist primarily of costs
associated with the staffing of professionals responsible for assisting users
with technical and product issues and monitoring customer feedback. Customer
support expenses were $324,000 for the year ended December 31, 1996, as
compared to $146,000 for the year ended December 31, 1995. There were no
customer support expenses in 1994, as the Company's services and product were
not yet available. The increase in 1996 resulted primarily from higher
staffing levels and the continuing need for the Company to provide additional
support to its growing customer base. The Company anticipates continuing to
make increasing customer support expenditures as the Company provides service
to an increased number of subscribers.
Development. Development expenses consist primarily of costs associated
with the design, programming, testing, documentation and support of the
Company's new and existing software, services and databases. Development
expenses were $5,210,000 for 1996, as compared to $3,554,000 and $2,009,000,
respectively, for the years ended December 31, 1995 and 1994. This increase
was largely due to the Company's enlargement of the development staff in
order to support increased development activities, most importantly,
completion of the Company's Internet service, Electric Library in the first
quarter of 1996, as well as improvements and upgrades to the existing
service. The Company anticipates continuing to make significant development
expenditures as it develops new and enhanced services.
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 $6,142,000 for the year ended December 31, 1996, as compared to
$1,979,000 for the year ended December 31, 1995. There were no sales and
marketing expenses in 1994, as the Company had not yet launched Homework
Helper. The increase in 1996 was a result of the continued efforts to
increase sales and expand distribution channels. Promotional marketing
programs increased in 1996, mainly to support the introduction of Electric
Library and EPP-Direct, and the number of sales and marketing personnel grew.
The Company anticipates further increasing the size of its sales and
marketing staff. However, as revenues derived from institutional
subscription renewals increase, while the productivity of the sales force
increases, sales and marketing expenses are expected to increase in absolute
dollar amounts, but decline as a percentage of total revenues.
General and Administrative. General and administrative expenses consist
primarily of expenses for administration, office operations, finance and
general management activities, including legal, accounting and other
professional fees.
General and administrative expenses were $3,927,000 for the year ended
December 31, 1996, as compared to $1,982,000 and $1,581,000, respectively,
for the years ended December 31, 1995 and 1994. The increases in general and
administrative expense were due to the expansion of internal staffing,
increased costs relating to the licensing of additional content and the
maintenance of existing content, increases in professional service fees to
support the Company's expanded operations and costs associated with being a
publicly traded company. The Company anticipates that general and
administrative expenses may increase in absolute dollar amounts but decline
as a percentage of total revenues.
-25-
Interest Income (expense), net. Interest income, net, was approximately
$1,198,000 for the year ended December 31, 1996, resulting primarily from the
investment of net proceeds received upon the closing of the Company's initial
public offering and private placement in May and February, respectively.
Interest income, net was $15,000 in 1995, from interest earned on proceeds
from the sale of the Company's stock in that year. Interest expense of
$110,000 was recognized in 1994 due to the Company's debt at that time.
Income taxes. The Company has not recorded an income tax benefit because
it has incurred net operating losses since inception. As of December 31,
1996, the Company had approximately $23.9 million in Federal and state net
operating loss carryforwards. The Federal net operating losses will expire
beginning in 2008 if not utilized. The state net operating losses will expire
beginning in 1997 if not utilized. A portion or all of net operating loss
carryforwards which can be utilized in any year may be limited by changes in
ownership of the Company, pursuant to Section 382 of the Internal Revenue
Code and similar statutes.
Liquidity and Capital Resources
Prior to its initial public offering, the Company financed its
operations primarily from proceeds of the private sale of equity securities
and, to a lesser extent, operating leases.
At December 31, 1996, the Company had cash, cash equivalents, and
short-term investments of approximately $27.4 million. The Company regularly
invests excess funds in short-term money market funds, corporate bonds, and
commercial paper.
The Company used cash in operations of approximately $14.0, $5.8 and
$2.5 million for 1996, 1995 and 1994, respectively. The increases in 1996
and 1995 were due primarily to the increased net loss. The 1996 increase
included a $1.0 million decrease in accrued consulting fees.
Net cash used in investing activities in 1996 was $12.7 million, $11.3
million for the purchase of short-term investments and $1.4 million for
capital expenditures. During 1995 and 1994, the Company used $690,000 and
$356,000, respectively, in investing activities, primary for capital
expenditures required to support the expansion and growth of the business.
Net cash provided by financing activities was $41.7 million, $6.7
million and $2.4 million for 1996, 1995 and 1994, respectively. On April 29,
1996, the Company completed an initial public offering of its Class A Common
Stock in which 2,250,000 shares of Class A Common Stock were issued at a
price of $14.00 per share, with net proceeds of approximately $28.7 million.
On February 26, 1996, the Company completed a private placement in which it
issued 1,201,086 shares of Class C Common Stock (which converted into shares
of Class A Common Stock upon the closing of the initial public offering),
with net proceeds of approximately $12.9 million
The Company believes that cash flow from operations together with
existing cash balances will be sufficient to meet its working capital
requirements for at least the next twelve months.
Impact of Accounting Standard Issued in 1996
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. This Statement is effective for financial statements
issued for periods ending after December 15, 1997, earlier application is not
permitted. This Statement requires restatement of all prior-period EPS data
presented. The Company is currently evaluating the impact, if any, adoption
of SFAS No. 128 will have on its financial statements.
-26-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries
and supplementary data required by this item are attached to this Annual
Report on Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning directors is
incorporated herein by reference to the Company's Proxy Statement to be filed
within 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K. The information concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 required by this item will be
set forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement, to be filed within 120 days
after the end of the fiscal year covered by this Annual Report on Form 10-K.
The information required by this item concerning executive officers is
set forth in Item 4 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the Company's Proxy Statement to be filed within 120 days after
the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the Company's Proxy Statement to be filed within 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Company's Proxy Statement to be filed within 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K.
-27-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
List of documents filed as part of this report:
(a) 1. Financial Statements. Consolidated Financial Statements listed
in the accompanying Index to Consolidated Financial Statements and Financial
Statement Schedule appearing on page F-1 are filed as part of this Annual
Report on Form 10-K.
2. Financial Statement Schedules. The Financial Statement
Schedule listed in the accompanying Index to Consolidated Financial
Statements and Financial Statement Schedule appearing on page F-1 is filed as
part of this Annual Report on Form 10-K.
3. Exhibits. See (c) below.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1996.
(c) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-K. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the previous filing
is indicated in parentheses.
Exhibit No. Description
3.1 Form of Articles of Incorporation (1)(Exhibit 3.1)
3.2 Bylaws (1)(Exhibit 3.2)
10.1** Amended and restated 1994 Omnibus Stock Option Plan
(1)(Exhibit 10.1)
10.2** 1996 Equity Compensation Plan (1)(Exhibit 10.2)
10.3** Form of Nonqualified Stock Option Agreement (1)(Exhibit 10.3)
10.4** Employment Agreement dated as of January 1, 1993 between
Infonautics, Inc. and Marvin Weinberger (1)(Exhibit 10.4)
10.5** Employment Agreement dated as of January 1, 1993 between
Infonautics, Inc. and Joshua Kopelman (1)(Exhibit 10.5)
10.6(a)** Employment Agreement dated September 5, 1996 between
Infonautics, Inc. and Van Morris (1)(Exhibit 10.6)
10.6(b)* ** Amendment No. 1 to Employment Agreement dated as of November
4, 1996 between Infonautics, Inc. and Van Morris
10.7(a)** Employment Agreement dated January 21, 1994 between
Infonautics, Inc. and Ronald Berg (1)(Exhibit 10.7)
-28-
10.7(b)* ** Amendment No. 1 to Employment Agreement dated as of November
4, 1996 between Infonautics, Inc. and Ronald Berg
10.8(a)** Employment Agreement dated as of April 14, 1994 between
Infonautics, Inc. and James Beattie (1)(Exhibit 10.8)
10.8(b)* ** Amendment No. 1 to Employment Agreement dated as of November
4, 1996 between Infonautics, Inc. and James Beattie
10.9* ** Employment Agreement dated as of January 2, 1997 between
Infonautics, Inc. and William Burger
10.10** Form of Indemnification Agreement (1)(Exhibit 10.9)
10.11** Royalty Agreement dated as of January 1, 1993 between
Infonautics, Inc. and Marvin Weinberger (1)(Exhibit 10.10)
10.12** Royalty Agreement dated as of January 1, 1993 between
Infonautics, Inc. and Joshua Kopelman (1)(Exhibit 10.11)
10.13(a)** Consulting agreement effective July 1, 1994 between
Infonautics, Inc. and Israel Melman (1)(Exhibit 10.13)
10.13(b)* ** Amendment No. 1 to Consulting Agreement dated as of January
13, 1997 between Infonautics, Inc. and Israel Melman
10.14** Consulting agreement effective as of March 1, 1993, as
amended February 1, 1994 and February 1, 1996 between
Infonautics, Inc. and Howard Morgan (1)(Exhibit 10.14)
10.15 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 (1)(Exhibit
10.15)
10.16 Agreement dated March 24, 1993 between Infonautics, Inc.
and Lawrence Husick (1)(Exhibit 10.16)
10.17 Amended and Restated Registration Rights Agreement dated as
of February 7, 1996 by and among Infonautics, Inc. and Zero
Stage Capital II-Central Pennsylvania, L.P., Keystone
Venture IV, L.P., 21st Century Communications Partners,
L.P., 21st Century Foreign Partners, L.P. and 21st Century
Communications T-E Partners, L.P. and other individuals
and entities listed on Exhibit A thereto (1)(Exhibit 10.17)
10.18 Amended and Restated Piggyback Registration Rights Agreement
dated as of February 7, 1996 by and among Infonautics, Inc.
and 21st Century Communications Partners, L.P., 21st Century
Communication Foreign Partners, L.P. and 21st Century
Communications T-E Partners, L.P., VIMAC & Co. Nominee
Trust and Meridian Venture Partners and the other
individuals and entities listed on Exhibit A thereto
(1)(Exhibit 10.18)
10.19 Registration Rights Agreement dated as of February 8, 1996
by and among Infonautics, Inc. and the persons whose
signatures appear on the counterpart signature pages
thereto (1)(Exhibit 10.19)
-29-
10.20*** Non-Standard Agreement for Computer Products effective
February 3, 1994 between Infonautics, Inc. and Tandem
Computers Incorporated (1)(Exhibit 10.20)
10.21*** Software License Agreement dated June 27, 1994 between
Infonautics, Inc. and Conquest Software Corp. (succeeded
by Excalibur Technologies Corporation) (1)(Exhibit 10.21)
10.22*** Agreement dated December 15, 1994, as amended effective
September 11, 1995, and as supplemented April 22, 1996,
between Infonautics, Inc. and Prodigy Services Company
(1)(Exhibit 10.22)
10.23*** Software Publishing Agreement dated November 3, 1995 between
Infonautics, Inc. and Quarterdeck Corporation. (1)
(Exhibit 10.23)
10.25 Agreement of Lease dated June 14, 1994, as amended January
27, 1995, June 30, 1995, November 13, 1995, April 18,
1996* and May 22, 1996* between Infonautics, Inc. and West
Valley Business Trust. (1)(Exhibit 10.24)
11* Computation of Earnings Per Share.
21* Subsidiaries.
23* Consent of Coopers & Lybrand L.L.P.
24 Powers of Attorney (included as part of the signature page
hereof).
27* 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 Ronald A. Berg,
Vice President--Finance and Administration and Chief Financial Officer,
Infonautics, Inc., 900 West Valley Road, Suite 1000, Wayne, Pennsylvania
19087.
30
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, 1995 and 1996 ........ F-3
Consolidated Statements of Operations for the years ended December
31, 1994, 1995 and 1996 ........................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1994, 1995 and 1996 ...................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 .................................. F-6
Notes to Consolidated Financial Statements .......................... F-7-F-17
Schedule II: Valuation and Qualifying Accounts, for the years
ended December 31, 1994, 1995 and 1996 ............................ F-18
Financial Statement Schedules other than those 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:
We have audited the consolidated financial statements and the financial
statement schedule of Infonautics, Inc. and subsidiaries listed in the index
on page F-1 of the Form 10-K. The financial statements 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Infonautics, Inc. and subsidiaries as of December 31, 1995 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
February 14, 1997
F-2
INFONAUTICS, INC.
Consolidated Balance Sheets
December 31, 1995 and 1996
1995 1996
---- ----
Assets
Current assets:
Cash and cash equivalents ................................. $ 962,010 $ 16,064,159
Short-term investments .................................... -- 11,314,956
Receivables:
Trade, less allowance for doubtful accounts
of $31,590 in 1996 ...................................... 125,345 373,509
Other ................................................... 250,000 62,406
Prepaid expenses and other assets ......................... 92,210 565,858
------------ ------------
Total current assets ................................. 1,429,565 28,380,888
Property and equipment, net ................................. 816,261 1,701,306
Prepaid and other assets .................................... 156,635 145,265
Deferred financing costs .................................... 130,000 --
------------ ------------
Total assets ......................................... $ 2,532,461 $ 30,227,459
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable .......................................... $ 756,169 $ 1,199,621
Accrued expenses .......................................... 337,966 253,132
Accrued consulting fees ................................... 1,072,579 66,349
Accrued royalties ......................................... 133,627 224,439
Deferred revenue .......................................... 500,000 796,129
Due to officer ............................................ 48,500 --
Note payable-- funding agreement .......................... 94,245 --
------------ ------------
Total current liabilities ............................ 2,943,086 2,539,670
Note payable-- funding agreement ............................ 138,192 --
------------ ------------
Total liabilities .................................... 3,081,278 2,539,670
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, no par value ............................. -- --
Class A common stock, no par value; 25,000,000
shares authorized; one vote per share; 9,389,357
and 5,935,748 shares issued and outstanding at
December 31, 1996 and 1995 .............................. -- --
Class B common stock, no par value; 100,000 shares
authorized, issued and outstanding; 50 votes per
share ................................................... -- --
Additional paid-in capital ................................ 11,313,997 53,354,345
Deferred compensation ..................................... -- (375,000)
Accumulated deficit ....................................... (11,505,336) (25,291,556)
------------ ------------
(191,339) 27,687,789
Less notes and stock subscription receivables ............... (357,478) --
------------ ------------
Total shareholders' equity (deficit) ................. (548,817) 27,687,789
------------ ------------
Total liabilities and shareholders' equity (deficit) . $ 2,532,461 $ 30,227,459
============ ============
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, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
Revenues ....................................... -- $ 447,936 $ 1,441,651
----------- ----------- ------------
Costs and expenses:
Cost of revenues .......................... -- 282,022 822,745
Customer support expenses ................. -- 146,416 323,898
Development expenses ...................... $ 2,009,233 3,554,185 5,209,975
Sales and marketing expenses .............. -- 1,978,913 6,141,962
General and administrative expenses ....... 1,580,571 1,981,722 3,926,853
----------- ----------- ------------
Total costs and expenses ............. 3,589,804 7,943,258 16,425,433
----------- ----------- ------------
Loss from operations ........................... (3,589,804) (7,495,322) (14,983,782)
Interest income (expense), net ................. (109,520) 14,465 1,197,562
----------- ----------- ------------
Net loss ............................. $(3,699,324) $(7,480,857) $(13,786,220)
=========== =========== ============
Net loss per common equivalent share ........... $ (0.72) $ (1.23) $ (1.65)
=========== =========== ============
Weighted average number of common and equivalent
shares outstanding .......................... 5,168,577 6,062,289 8,347,904
=========== =========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
INFONAUTICS, INC.
Consolidated Statements Of Shareholders' Equity (Deficit)
Common Stock
------------ Notes and
Class A Class B Additional Stock
------- ------- Paid-in Accumulated Subscription
Shares Par Value Shares Par Value Capital Deficit Receivables
------ --------- ------ --------- ------- ------- -----------
Balance at December 31,
1993 ...................... 2,084,458 -- 100,000 -- $ 448,243 $ (325,155) $(32,500)
Stock issued in exchange for
notes ..................... 28,504 -- -- -- 60,000 -- (60,000)
Notes collected ............. -- -- -- -- -- -- 65,000
Sale of stock for cash ...... 1,005,650 -- -- -- 2,275,000 -- --
Shares issued pursuant to
conversion of subordinated
notes ..................... 604,518 -- -- -- 1,024,056 -- --
Shares issued in connection
with:
Services performed ........ 131,768 -- -- -- 277,373 -- --
Equipment purchased ....... 8,568 -- -- -- 18,036 -- --
Net loss for the year ....... -- -- -- -- -- (3,699,324) --
--------- ------- ------- ------- ------------ ------------ ----------
Balance at December 31,
1994 ...................... 3,863,466 -- 100,000 -- 4,102,708 (4,024,479) (27,500)
Stock issued in exchange for
notes ..................... 82,666 -- -- -- 304,000 -- (304,000)
Notes collected ............. -- -- -- -- -- -- 70,000
Sale of stock and warrant for
cash ...................... 1,877,138 -- -- -- 6,645,671 -- --
Exercise of warrant ......... 44,444 -- -- -- 16,667 -- --
Shares issued in connection
with employee stock
purchase plan ............. 25,594 -- -- -- 95,978 -- (95,978)
Shares issued in connection
with services performed ... 42,440 -- -- -- 148,973 -- --
Net loss for the year ....... -- -- -- -- -- (7,480,857) --
--------- ------- ------- ------- ------------ ------------ ----------
Balance at December 31,
1995 ...................... 5,935,748 -- 100,000 -- 11,313,997 (11,505,336) (357,478)
Sale of stock ............... 3,451,086 -- -- -- 41,526,095 -- --
Deferred compensation ....... -- -- -- -- 500,000 -- --
Amortization of deferred
compensation ............ -- -- -- -- -- -- --
Notes collected ............. -- -- -- -- -- -- 357,478
Other ....................... 2,523 -- -- -- 14,253 -- --
Net loss for the year ....... -- -- -- -- -- (13,786,220) --
--------- ------- ------- ------- ------------ ------------ ----------
Balance at December 31,
1996 .................... 9,389,357 -- 100,000 -- $ 53,354,345 $(25,291,556) --
========= ======= ======= ======= ============ ============ ==========
Total
Shareholders'
Deferred Equity
Compensation (Deficit)
------------ ---------
Balance at December 31,
1993 ...................... -- $ 90,588
Stock issued in exchange for
notes ..................... -- --
Notes collected ............. -- 65,000
Sale of stock for cash ...... -- 2,275,000
Shares issued pursuant to
conversion of subordinated
notes ..................... -- 1,024,056
Shares issued in connection
with:
Services performed ........ -- 277,373
Equipment purchased ....... -- 18,036
Net loss for the year ....... -- (3,699,324)
--------- ------------
Balance at December 31,
1994 ...................... -- 50,729
Stock issued in exchange for
notes ..................... -- --
Notes collected ............. -- 70,000
Sale of stock and warrant for
cash ...................... -- 6,645,671
Exercise of warrant ......... -- 16,667
Shares issued in connection
with employee stock
purchase plan ............. -- --
Shares issued in connection
with services performed ... -- 148,973
Net loss for the year ....... -- (7,480,857)
--------- ------------
Balance at December 31,
1995 ...................... -- (548,817)
Sale of stock ............... -- 41,526,095
Deferred compensation ....... $(500,000) --
Amortization of deferred
compensation ............ 125,000 125,000
Notes collected ............. -- 357,478
Other ....................... -- 14,253
Net loss for the year ....... -- (13,786,220)
--------- ------------
Balance at December 31,
1996 .................... $(375,000) $ 27,687,789
========= ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
INFONAUTICS, INC.
Consolidated Statements Of Cash Flows
Year ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
Cash flows from operating activities:
Net loss ................................................... $ (3,699,324) $ (7,480,857) $(13,786,220)
Adjustments to reconcile net loss to cash provided
by (used in) operating
activities:
Depreciation and amortization ............................ 175,093 246,854 487,780
Common stock issued for services ......................... 277,373 148,973 --
Provision for losses on accounts receivable .............. -- -- 31,590
Amortization of deferred compensation .................... -- -- 125,000
Changes in operating assets and liabilities:
Receivables:
Trade ................................................ -- (125,345) (279,754)
Other ................................................ -- (250,000) 187,594
Prepaid and other assets ............................... (146,135) (86,636) (462,278)
Accounts payable ....................................... 102,631 591,828 443,452
Accrued expenses ....................................... 146,473 78,433 (84,834)
Accrued consulting fees ................................ 582,617 489,962 (1,006,230)
Accrued royalties ...................................... -- 133,627 90,812
Deferred revenue ....................................... 20,000 480,000 296,129
------------ ------------ ------------
Net cash used in operating activities .............. (2,541,272) (5,773,161) (13,956,959)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ........................ (368,260) (690,016) (1,372,825)
Proceeds from insurance claim .............................. 12,575 -- --
Purchases of short-term investments ........................ -- -- (11,546,956)
Proceeds from maturity of short-term investments ........... -- -- 232,000
------------ ------------ ------------
Net cash used in investing activities .............. (355,685) (690,016) (12,687,781)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrant ..... 2,340,000 6,715,671 42,027,826
Proceeds from exercise of common stock warrant ............. -- 16,667 --
Payments under note payable-- funding agreement ............ -- (8,015) (232,437)
Proceeds from long-term borrowings and note payable ........ 42,500 31,000 --
Repayment of loans to officer .............................. -- (48,500) (48,500)
------------ ------------ ------------
Net cash provided by financing activities .......... 2,382,500 6,706,823 41,746,889
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (514,457) 243,646 15,102,149
Cash and cash equivalents, beginning of period ............... 1,232,821 718,364 962,010
------------ ------------ ------------
Cash and cash equivalents, end of period ..................... $ 718,364 $ 962,010 $ 16,064,159
============ ============ ============
Supplemental disclosure of cash flow information and noncash
investing and financing activities:
Cash paid for interest expense ............................. $ 47,065 $ 8,410 $ 58,916
Noncash items:
Issuance of stock for note and subscription receivable ... $ 60,000 $ 304,000 --
Equipment purchased in exchange for stock ................ $ 18,036 -- --
Debt converted to stock .................................. $ 1,250,000 -- --
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
INFONAUTICS, INC.
Notes to Consolidated Financial Statements
1. The Company:
Infonautics, Inc. (the "Company" or "Infonautics") develops online
reference services for the consumer and institutional markets and electronic
publishing tools and services for publishers and other content creators. The
Company's online reference services, Electric Library and Homework Helper, are
available to students and their families through the Internet and consumer
online services, and are marketed to schools, libraries and other educational
institutions. Additionally, the Company markets to publishers and other
content creators Electronic Printing Press ("EPP"), its online multi-media
delivery system, that combines the Company's core technology and operating
environment to launch digital archives and publications on the Internet and
intranets.
Effective January 1, 1996, Infonautics Corporation effected a corporate
reorganization which resulted in the formation of a new Pennsylvania
corporation, and the incorporation of two subsidiaries in Delaware. On February
29, 1996, the board of directors authorized an amendment to the Company's
Articles of Incorporation, which became effective on April 28, 1996, changing
the name of the Company from Infonautics Corporation to Infonautics, Inc. On May
3, 1996, the Company completed an initial public offering (IPO) of its Class
A Common Stock in which 2,250,000 shares of Class A Common Stock were issued
(see Note 7 ).
2. Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of Infonautics,
Inc. and its wholly owned subsidiaries (collectively, the Company). All
intercompany balances and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets, and
liabilities and disclosure of contingencies. Actual results could differ from
those estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with original
maturities of three months or less as cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
Short-term Investments:
All the Company's short-term investments are classified as
available-for-sale as defined by Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Such investments are stated at market value, and unrealized
gains and losses on such securities are reflected in shareholder's equity
(deficit). The Company uses the specific identification method to determine
the cost of securities sold.
Depreciation and Amortization:
Depreciation is provided over the estimated useful lives of the related
assets (three to seven years) 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.
F-7
INFONAUTICS, INC.
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 costs related to future
periods are classified in prepaid expenses in the consolidated balance sheet.
Advertising expense was $0, $617,664 and $2,374,997, respectively, for the
years ended December 31, 1994, 1995 and 1996.
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 is amortized over the
vesting period. See Note 7.
Revenue Recognition:
Revenues from consumer subscriptions and customer billing services are
recognized in the month the service is provided. Those subscriptions sold
through remarketers are recognized net of the related fees. Revenues from
licensing contracts are recognized when delivery and services related to the
license agreement are complete. Revenue from integration services are recognized
upon customer acceptance. Revenues from long-term subscription agreements are
deferred and recognized over the term of respective agreement, as service is
provided. Costs incurred with the procurement of subscriptions and the delivery
of the service are expensed as incurred.
Payments received in advance of providing services or for a long-term
license are deferred until the period such services are provided.
Cost of Revenues:
Cost of revenues include royalties payable to content, hardware, software
and telecommunications providers, as well as certain content preparation and
network costs.
Income Taxes:
The Company has incurred losses since inception; therefore, there was no
provision for taxes in the Company's statements of operations. Provision for
income taxes are 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.
F-8
INFONAUTICS, INC.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies, continued:
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.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash investments and trade
accounts receivable. The Company maintains cash and cash equivalents and
short-term investments with various financial institutions. Company policy is
designed to limit exposure with any one institution. As part of its cash
management process, the Company performs periodic evaluations of the relative
credit standing of these financial institutions.
Trade receivables consist of receivables from remarketers and a diversified
base of consumers and institutions. The Company performs ongoing credit
evaluations of its remarketers . Concentrations of credit risk with respect
to the remaining trade receivables are limited due to the diversified
customer base. The Company generally requires no collateral from its
customers. In 1996, one customer and two remarketers aggregated approximately
62% of revenues and approximately 59% of trade accounts receivable. In 1995,
all revenues and receivables were from one remarketer.
Vulnerability Due to Certain Concentrations:
The Company markets Homework Helper through Prodigy Services Company's
original online service, Prodigy Classic. Electric Library is marketed
through the Internet to consumers and through direct sales and remarketer
arrangements to institutional markets.
The components of the basic search software used by the Company are
licensed from a single supplier. In addition, the Company obtains its production
hardware primarily from a single manufacturer.
The Company is dependent upon various content providers, including
publishers, to provide content for use in the Company's reference services.
Net Loss Per Common Equivalent Share:
Net loss per common equivalent share is computed using the weighted average
number of shares of Class A and Class B Common Stock outstanding during the
period. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
Topic 4-D, all common stock and common stock equivalents issued by the Company
during the twelve-month period prior to the Company's IPO have been included in
the calculation as if they were outstanding, using the treasury stock method,
for all periods presented, at the offering price of $14.00 per share. Subsequent
to the IPO, net loss per common equivalent share is computed in accordance with
Accounting Principles Board No. 15, "Earnings Per Share." As a result,
outstanding common stock equivalents have not been included in computation of
common equivalent shares for the period subsequent to the IPO, as the effect
would be anti-dilutive.
F-9
INFONAUTICS, INC.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies, continued:
Impact of Accounting Standard Issued in 1996:
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." This
Statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or
potential common stock. This Statement is effective for financial statements
issued for periods ending after December 15, 1997, earlier application is not
permitted. This Statement requires restatement of all prior-period EPS data
presented. The Company is currently evaluating the impact, if any, adoption
of SFAS No. 128 will have on its financial statements.
3. Short-term Investments:
The estimated fair value of the short-term investments, which approximate
cost, are as follows:
December 31,
1996
----
Available for sale
Commercial paper ............... $ 4,369,176
Corporate bonds ................ 6,945,780
------------
Total available for sale $ 11,314,956
============
At December 31, 1995 the Company did not hold any short-term or long-term
investments.
4. Property and Equipment:
Property and equipment consists of the following at December 31, 1995
and 1996:
1995 1996
---- ----
Computer equipment................. $ 590,700 $1,286,966
Office equipment................... 179,575 356,636
Furniture and fixtures............. 211,876 505,524
Leasehold improvements............. 119,771 212,862
Purchased software................. 65,280 171,771
--------- ----------
1,167,202 2,533,759
Less accumulated depreciation
and amortization................. (350,941) (832,453)
--------- ----------
$ 816,261 $1,701,306
========= ==========
Depreciation expense was approximately $88,000 in 1994, $247,000 in 1995 and
$529,000 in 1996.
F-10
INFONAUTICS, INC.
Notes to Consolidated Financial Statements (continued)
5. Note Payable -- Funding Agreement:
The Ben Franklin Technology Center of Southeastern Pennsylvania ("BFTC")
funded an aggregate of $186,500 to the Company through December 31, 1995. The
Company accreted interest using the effective interest method over the
anticipated repayment period. This note was paid in full in March 1996.
6. Income Taxes:
The significant components of deferred tax assets at December 31, 1995 and
1996 are as follows:
1995 1996
---- ----
Federal tax loss carryforward........... $ 3,066,000 $ 8,071,000
State tax loss carryforward............. 122,000 147,000
Accrual to cash basis difference........ 937,000 352,000
Research and experimentation credit..... 167,000 335,000
----------- -----------
4,292,000 8,905,000
Less: valuation allowance............... (4,292,000) (8,905,000)
----------- -----------
-- --
=========== ===========
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, 1996, the Company had a net operating loss carryforward of
approximately $23,886,000 for federal tax purposes, with $225,000 expiring in
2008, $2,819,000 expiring in 2009, and $6,089,000 expiring in 2010, and
$14,753,000 expiring in 2011, if not utilized. The net operating loss
carryforward for state tax purposes is $2,225,000, of which $1,225,000
expires in 1997 and $1,000,000 expires in 1999. 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 $335,000 with $96,000 expiring in 2009, $72,000 expiring in
2010, and $167,000 expiring in 2011. 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.
7. Shareholders' Equity (Deficit):
Common Stock:
An officer and 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.
The Company issued 26,598 and 31,440 shares, respectively, of Class A
Common Stock in consideration for $55,973 and $111,848, respectively, of
administrative and consulting services in 1994 and 1995. The Company also issued
105,170 and 11,000 shares, respectively, of Class A Common Stock in connection
with a consulting contract and charged such issuances to development expenses in
1994 and 1995, respectively. Certain equipment with an approximated fair value
of $18,036 was exchanged for 8,568 shares in 1994.
During 1993, the Company issued 6% convertible subordinated notes in an
aggregate amount of $1,250,000. Concurrent with the issuance of the notes,
168,076 shares of Class A Common Stock were issued to the purchasers. The fair
market value of the shares issued of $353,800 was recognized as a discount on
the debt and amortized as interest expense. The notes were converted during 1994
into an aggregate of 604,518 shares of Class A Common Stock, in accordance with
their conversion terms.
F-11
INFONAUTICS, INC.
Notes to Consolidated Financial Statements (continued)
7. Shareholders' Equity (Deficit), continued:
Common Stock, continued:
In August 1995, the Company sold 400,000 shares of Class A Common Stock and
a warrant to purchase 44,444 additional shares of Class A Common Stock. In
December 1995, the warrant was exercised. The total amount received, including
exercise of the warrants, was $1,516,667.
In September 1995, the Company sold 400,000 shares of Class A Common Stock
at $3.75 per share.
In October 1995, the Company entered into an agreement with a company of
which an officer/shareholder is the president, for the sale of 66,666 shares of
Class A Common Stock at $3.75 per share. The Company received a note for
$250,000, with interest at 6% per annum. The receivable is included in the notes
and stock subscriptions receivable balance at December 31, 1995 and was paid in
full in February 1996.
In November 1995, the board of directors authorized an amendment to the
Company's Articles of Incorporation that increased the authorized shares of
Class A Common Stock from 5,000,000 to 10,000,000 shares.
In November 1995, the board of directors authorized 2,000,000 shares of
Class C Common Stock; no shares were issued or outstanding at December 31, 1995.
On February 2, 1996, the board of directors approved a 500,000 increase in the
maximum number of shares of Class A Common Stock that may be issued under the
1994 Plan, as described below, pursuant to stock option grants.
On February 29, 1996, the board of directors authorized an amendment
increasing the number of authorized shares of Class A Common Stock to
25,000,000. The board of directors also approved a 2-for-1 stock split in the
form of a stock dividend. All common stock share data have been retroactively
adjusted to reflect this change. Additionally, the board of directors approved
the 1996 Equity Compensation Plan, which provides for the issuance of a maximum
of 500,000 shares of Class A Common Stock pursuant to grants of stock options,
stock appreciation rights or restricted stock.
In February, 1996, the Company completed a private placement in which it
issued 1,201,086 shares of Class C Common Stock, which converted to Class A
Common Stock at the IPO, with proceeds to the Company of approximately $12.9
million, which is net of approximately $0.8 million of offering expenses. In
April, 1996, the Company issued 2,250,000 shares of Class A Common Stock at a
price of $14.00 per share in the initial public offering. Proceeds to the
Company were $28.7 million, net of approximately $2.8 million of offering
expenses.
Preferred Stock:
The Company is authorized to issue 1,250,000 shares of preferred stock with
no par value per share, none of which is outstanding.
F-12
INFONAUTICS, INC.
Notes to Consolidated Financial Statements (continued)
7. Shareholders' Equity (Deficit), continued:
Stock Options:
In February, 1996, the Company adopted the 1996 Equity Compensation Plan
("1996 Plan"). Concurrently, the 1994 Omnibus Stock Plan ("1994 Plan") was
amended and restated. Both plans provide for the granting of stock options to
officers, directors, employees and consultants. Grants under both plans may
consist of options intended to qualify as incentive stock options ("ISOs"), or
nonqualified stock options that are not intended to so qualify ("NQSOs"). In
addition, under the 1996 Plan, grants may also consist of grants of restricted
stock, stock appreciation rights ("SARs"), or performance units. The option
price of any ISO will not be less than the fair market value on the date the
option is granted (110% of fair value in certain instances). The option price of
a NQSO may be greater than, equal to, or less than the fair market value on the
date the option is granted. The 1994 Plan authorizes up to 1,100,000 shares and
the 1996 Plan up to 500,000 shares of Class A Common Stock. Prior to adoption of
this plan, 175,750 options were granted to certain employees and consultants
pursuant to individual agreements with the grantees.
The Plans are administered by a committee of the board of directors. The
Committee determines the term of each option, provided, however, that the
exercise period may not exceed ten years from the date of grant, and for ISOs in
certain instances may not exceed five years. The options granted under both
plans in general vest ratably over a four-year period from the date of grant,
except for options granted to any directors which vest when granted.
The Company's board of directors believes that all stock options were
granted with an exercise price equal to the fair value of the Company's Class A
Common Stock on the date of the grant, based on the facts, circumstances and
limitations existing at the time of their determinations. However, compensation
expense of approximately $500,000 is being recognized, over the four-year
vesting period for certain options which were granted in late 1995, to acquire
80,600 shares of Class A Common Stock. Compensation expense of $125,000 was
recognized in 1996.
If compensation cost had been determined based on the fair value of the
options at the grant dates for those options for which no compensation cost
has been recognized, consistent with the method of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), the Company's net loss and loss per share would have been:
1995 1996
Net loss As reported $(7,480,857) $(13,786,220)
Proforma $(7,492,000) $(14,954,000)
Loss per share As reported $ (1.23) $ (1.65)
Proforma $ (1.23) $ (1.79)
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 1995 and 1996, respectively: expected volatility
of 75% percent; risk-free interest rates of 6.28 percent and 6.71 percent,
respectively, for 1995 and 1996; and expected lives of 5 years.
F-13
INFONAUTICS, INC.
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:
1994 1995 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at 20,000 $2.105 353,450 $2.66 739,850 $ 3.08
beginning of year
Granted...................... 339,000 $ 2.39 437,450 $3.58 721,030 $11.05
Exercised.................... -- -- -- -- (1,413) 2.22
Expired/Canceled............. (5,550) $ 2.29 (51,050) $2.43 (127,737) $ 8.25
------- ------- --------
Outstanding at
year end.................. 353,450 $ 2.66 739,850 $3.08 1,331,730 $ 5.19
======= ======= =========
Weighted-average
fair value of options
granted during the year... $3.98 $7.42
The following information applies to options outstanding at December 31,
1996:
Number outstanding 1,331,730
Range of exercise prices $2.105 - $14.00
Weighted-average exercise price $5.19
Weighted-average remaining contractual life 7.80 years
Employee Stock Purchase Plan:
In 1995, the Company approved and adopted an Employee Stock Purchase
Plan (the "ESPP") to provide employees of the Company with an opportunity to
purchase Common Stock through direct purchases and payroll deductions not to
exceed one year from the enrollment date. At December 31, 1995, employees
subscribed for 25,594 shares at $3.75 a share. The stock subscription
receivable balance of $95,978 at December 31, 1995 is included in the notes
and stock subscription receivables balance in shareholders' equity (deficit).
In February 1996, the ESPP was terminated.
F-14
INFONAUTICS, INC.
Notes to Financial Statements (continued)
8. 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, 1996.
9. Related Party Transactions:
The Company entered into, and subsequently amended, consulting
agreements with two of its directors and shareholders during 1994 through
1996. The individuals entered into stock subscription agreements to purchase
28,504 and 16,000 shares of Class A Common Stock in 1994 and 1995 in an
aggregate amount of $60,000 and $54,000. Included in the notes and stock
subscription receivables balance in shareholders' equity (deficit) at
December 31, 1995 was $11,500 due under these agreements which were paid in
full during 1996. Consulting expense of $74,000, $124,000 and $100,200, were
recognized under these agreements, in each of the years ended December 31,
1994, 1995 and 1996, respectively.
10. Commitments and Contingencies:
Royalty/License Agreements:
The Company has entered into certain agreements to license the use of
hardware, software and content which provide for a royalty pool and license
payments aggregating up to 48% of subscription revenue from Homework Helper
and Electric Library. Additionally, certain content providers are under a
contract which provides for a minimum royalty pool of $750,000. Those
participating content providers will receive an additional royalty amount
equal to their percentage of usage for all content providers multiplied by
any shortfall to the minimum on an annual basis.
The agreement to license certain software provides for payment of up to
12.5% of revenues for sublicensing the software to EPP customers.
F-15
INFONAUTICS, INC.
Notes to Financial Statements (continued)
10. Commitments and Contingencies, continued:
Other Agreements:
In 1994, the Company entered into an exclusive agreement, with a right
of first refusal, with a computer company whereby certain computer hardware
systems will be supplied by the equipment manufacturer through February 1999.
In return for providing all computer systems required to operate and support
Homework Helper and Electric Library, the supplier receives a certain
percentage of the Company's revenue from subscriptions. The arrangement
contains a buy-out provision based upon the list price of equipment being
used and the number of months since the commencement of the agreement.
In 1992, certain shareholders entered into an agreement with the
corporation that had been developing Homework Helper. This agreement provided
for the assignment to the Company of all rights in and to Homework Helper in
exchange for quarterly payments equal to 3% of the Company's revenue for a
term of up to eight years, expiring in October 2000, with a maximum
cumulative amount of $1,200,000. At the end of the eight-year term, the
difference between the aggregate amount paid and $1,200,000 may (unless paid
by the Company at such time) be converted to equity at a discount of 20% of
the then market rate.
In 1994, the Company entered into a consulting agreement with a systems
development and integration firm to perform design, development and systems
integration services required to complete the system for the Company's
initial commercial launch. These professional services were provided in
return for cash and 105,170 shares of Class A Common Stock. Research and
development expense in the amount of approximately $221,400 ($2.105 per
share) was charged in the statement of operations during 1994. Under an
amendment to this agreement, an additional 11,000 shares were issued in 1995,
and approximately $37,125 ($3.375 per share) was charged to development
expenses. At December 31,1995, accrued consulting fees included $757,219
related to this agreement.
Separate agreements with these two key officers provide for payment equal
to 3.15% of the Company's net income, as defined in the agreements, commencing
in 1998, and continuing until 2091.
Marketing Agreement:
The Company entered into an agreement with a software company granting a
one year exclusive right and license to include access to the Company's
Electric Library service in the retailer's Internet products. The retailer
agreed to pay $500,000 for this exclusive license; $250,000 was received at
signing and $250,000 was received in January 1996. The Company has deferred
recognition of any revenue under this agreement until certain terms of the
agreement are met. A director of the Company is also a director of the
licensee.
Service Agreement:
The Company has a commitment to purchase data conversion services in
1997 for $300,000.
F-16
INFONAUTICS, INC.
Notes to Financial Statements (continued)
10. Commitments and Contingencies, continued:
Operating Leases:
The Company has noncancelable operating leases for office facilities and
certain equipment. Certain leases include scheduled base rent increases over
the term of the respective lease, which are being amortized over the term of
the lease on a straight-line basis.
The future minimum rental commitments under noncancelable operating
leases as of December 31, 1996 are as follows:
Operating
Fiscal Year Leases
----------- ---------
1997................... $ 859,700
1998................... 784,600
1999................... 479,500
2000................... 236,000
2001................... 52,800
Thereafter............. 22,000
----------
$2,434,600
==========
Total rent expense for operating leases for the years ended December 31,
1994, 1995 and 1996 amounted to $72,708, $346,183 and $745,249, respectively.
F-17
INFONAUTICS, INC.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Description Balance at beginning Charged to costs Charged to other Deductions- Balance at end
of period and expenses accounts-describe describe of period
Valuation
allowances for
deferred tax
asset
1996 $4,292,000 $4,613,000 -- -- $8,905,000
1995 $1,687,850 $2,604,150 -- -- $4,292,000
1994 $ 75,000 $1,612,850 -- -- $1,687,850
Allowance for
doubtful
accounts
1996 $ -- $ 48,799 -- $17,209 $ 31,590
1995 $ -- -- -- -- $ --
1994 $ -- -- -- -- $ --
F-18
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 27, 1997 By: /s/ Marvin I. Weinberger
------------------------------------
Marvin I. Weinberger
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement 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 Ronald A. Berg 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/Marvin I. Weinberger Chief Executive Officer,
- -------------------------- Director (Principal Executive
Marvin I. Weinberger Officer) March 27, 1997
/s/Ronald A. Berg Vice President - Finance and
- -------------------------- Administration and Chief
Ronald A. Berg Financial Officer (Principal
Financial and Accounting
Officer) March 27, 1997
/s/Israel J. Melman Director March 27, 1997
- --------------------------
Israel J. Melman
/s/Howard L. Morgan Director March 27, 1997
- --------------------------
Howard L. Morgan
/s/Lloyd N. Morrisett Director March 27, 1997
- --------------------------
Lloyd N. Morrisett
/s/Barry Rubenstein Director March 27, 1997
- --------------------------
Barry Rubenstein
/s/Lester D. Wunderman Director March 27, 1997
- --------------------------
Lester D. Wunderman
/s/Michael Zisman Director March 27, 1997
- --------------------------
Michael Zisman
EXHIBIT INDEX
10.6(b)** Amendment No. 1 to Employment Agreement dated as of November
4, 1996 between Infonautics, Inc. and Van Morris
10.7(b)** Amendment No. 1 to Employment Agreement dated as of November
4, 1996 between Infonautics, Inc. and Ronald Berg
10.8(b)** Amendment No. 1 to Employment Agreement dated as of November
4, 1996 between Infonautics, Inc. and James Beattie
10.9** Employment Agreement dated as of January 2, 1997 between
Infonautics, Inc. and William Burger (Exhibit 10.9)
10.13(b)** Amendment No. 1 to Consulting Agreement dated as of January
13, 1997 between Infonautics, Inc. and Israel Melman
10.25* Agreement of Lease dated June 14, 1994, as amended January
27, 1995, June 30, 1995, November 13, 1995, April 18, 1996*
and May 22, 1996* between Infonautics, Inc. and West Valley
Business Trust. (1)(Exhibit 10.24)
11* Computation of Earnings Per Share.
21* Subsidiaries
23* Consent of Coopers & Lybrand L.L.P.
24 Powers of Attorney (included as part of the signature page
hereof).
27* Financial Data Schedule.
- --------------------------
* Filed herewith.
** Compensation plans and arrangements for executive officers and others.