SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-17508
TELESCAN, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 72-1121748
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5959 CORPORATE DRIVE, SUITE 2000
HOUSTON, TEXAS 77036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(281) 588-9700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
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 and 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. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 26, 1999, based upon the average bid and asked price of the
common stock on Nasdaq Small-Cap Market for such date, was approximately
$112,100,000. The number of outstanding shares of the Registrant's common stock
on March 26, 1999 was 12,476,406.
TELESCAN, INC.
FORM 10-K REPORT INDEX
PART I..................................................................3
ITEM 1. BUSINESS......................................................3
ITEM 2. PROPERTIES...................................................14
ITEM 3. LEGAL PROCEEDINGS............................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........15
PART II................................................................16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................16
ITEM 6. SELECTED FINANCIAL DATA......................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................23
PART III...............................................................24
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........24
ITEM 11. EXECUTIVE COMPENSATION.......................................27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............31
PART IV................................................................33
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K......33
2
ITEM 1. BUSINESS
GENERAL
Telescan, Inc. ("Telescan" or the "Company") provides state-of-the-art Internet
services, innovative solutions for online technology and sophisticated data
retrieval tools. The Company develops, markets, and operates major Internet
sites and online networks serving the financial and non-financial industries.
The Company's services and products, which are based upon its proprietary online
operating system and user software, allow customers to electronically access and
analyze information through their personal computer systems.
The Company's primary business line is a system of Internet and online financial
services and products provided directly to users and under private label
versions from third parties. Such services allow investors to:
o Obtain financial news and information;
o Perform personalized searches with the Company's optimal
search technology using current and historical information;
o Manage personal portfolios and strategize investment planning;
and
o Perform fundamental and technical analyses.
The Company's Internet and online financial services and products contain
proprietary software technologies, developed or acquired by the Company, which
increase the speed, power and user friendliness of information retrieval while
lowering costs to users. The Company's primary financial Internet site, Wall
Street City(R) (http://www.wallstreetcity.com), employs the Company's
proprietary designs as well as data provided by others on a fee and/or revenue
sharing basis.
The core of the Company's technology is its unique modular and parallel host
configuration, designed and developed by the Company's founder, Dr. Richard K.
Carlin. This configuration permits simultaneous reception of multiple input from
a large array of information sources while permitting simultaneous output to
users with different information processing requests. The system supports the
addition of a wide variety of specialty designed modular tools created by both
the Company and outside vendors. In addition, the Company has interfaced the
host configuration to a wide variety of communication sources, including the
Internet, several major package switch carriers and a wireless interface. The
hardware configuration and the operating system that make it powerful and
responsive are the proprietary design of the Company, for which the Company was
awarded patents in 1997 and 1998.
The Company's primary market has historically been the sophisticated individual
investor and active trader. With the growth of the Internet, the Company has
broadened its appeal to a wider range of users. The Company has responded to the
increased demand by expanding the editorial content, offering free, unlimited
real-time quotes, increasing the level of educational aid provided and
redesigning the Wall Street City website to facilitate user friendliness.
The Company's non-financial business segment includes developing and maintaining
several third party Internet and online services in the publishing,
entertainment, sports and biotechnical/pharmaceutical industries. Pertinent
disclosures and related information for the financial and non-financial segments
of the Company are disclosed in Footnote No. 11 "Segment Reporting" in the
financial statements.
The Company or its predecessors have operated the business of the Company since
1983. The Company, which is a Delaware corporation, was incorporated in 1988
under the name Max Ret, Inc. for the purpose of acquiring or participating in a
business opportunity. In 1989 the Company issued 75% of its outstanding common
stock toacquire all of the outstanding common stock of D.B. Technology, Inc.
("DB") d.b.a. Telescan, Inc. After the acquisition of DB by the Company, DB was
merged into the Company and the Company changed its name from Max Ret, Inc. to
Telescan, Inc.
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INDUSTRY
Online services allow personal computer users to access outside sources of
information and interact with other users via telephone line connections
channeled through a central host computer or computers. Online services
typically include information databases and specialized search and retrieval
software maintained by the service provider on the host computer. Interface
software, which is used on the customer's computer, permits users to access
information through the online system. The service provider usually rents or
purchases databases on a non-exclusive basis from third parties and then further
develops such databases for use within the provider's online system. Customers
typically subscribe to an online system for an initial base charge for which
they are granted a license for the interface software needed to access the
online service. Following their subscription, customers are typically charged a
flat rate dependent upon the usage of hours logged onto the system. Usage in
excess of plan hours are billed on a per hour basis. There are often additional
charges for specific services used within the databases.
Fees for Internet access are similar to online service charges, though lower due
to reduced communication costs. Customers select from several rate plans that
offer varying levels of information and technical features.
The industry's dynamic growth in recent years has resulted from a number of key
factors, which are expected to contribute to continued growth in future years.
Some of these key factors include (1) the increasing market awareness of
Internet and online services; (2) growth in the availability, quality and
marketing of Internet and online products and services; (3) growth in the home
and personal computer markets including mobile "laptop" computing; (4) increased
use of modems for telecommunications; and (5) the development of alternative
access devices such as dedicated communications terminals and pagers. The
Company believes that as the market continues to expand, important competitive
factors will include system performance, product differentiation, quality and
quantity of content, user friendliness, price, customer support and effective
marketing techniques.
BUSINESS STRATEGY
The Company's mission is to be a worldwide leader in the development of
sophisticated interactive Internet sites and online information systems for
individuals and businesses, through the delivery of superior, cost effective
data retrieval technology, customer user interface programs and communications
services. To achieve this mission, the Company's business strategy is to (1)
build revenue by providing private label financial database access; (2) increase
usage of its Wall Street City website to build advertising revenue; (3) continue
to invest resources to develop new services and enhancements; (4) increase and
maintain Telescan's Internet and online customer base; and (5) increase the
Company's visibility to the public. There can be no assurance that this strategy
will be effective.
In recent years the Company has marketed its proprietary software technology to
third parties for private label and co-branded versions. Normally the third
party incurs an initial license fee for the base technology. The Company earns
development fees through further enhancements and designs to the primary site.
Marketing of the private label version is typically the responsibility of the
third party and net revenues are allocated between the parties.
Advertising revenue is directly linked to the number of viewers or, as more
commonly referred to, as page impressions. In an effort to attract new and
recurring viewers to its website, the Company has sought to increase or
introduce brand awareness through public relations efforts and increasing web
links.
4
With the growth of the Internet, a substantial number of new competitors have
entered the Internet and online service market. To remain competitive, the
Company has expended over $2 million in each of the past two years on software
development. Enhancements have included the introduction of free, unlimited
real-time quotes and real-time breakout alerts.
Current customers are a valuable Company asset and are an integral component in
the Company's business strategy. Maintaining the current customer base is
accomplished by providing comprehensive and high quality data, offering customer
training and conducting reactivation campaigns to encourage inactive customers
to return. New customers are attracted by advertising in major trade journals
and allowing free trial periods for potential new customers.
The Company continues to seek avenues to introduce the business community and
public to its products and services through name recognition. The Company has
been cited in national and local publications. In January 1999, the Company
announced an acquisition of its common stock by General Electric's National
Broadcasting ("NBC") unit. The Company will license its proprietary technology
for CNBC.com. This presents major growth potential for the Company in the
process of integrating personal computers with the Internet and television.
SERVICES AND PRODUCTS
The Company has participated in the growing market for Internet and online
services by creating and marketing products that build and expand upon the
Company's base technology of proprietary operating systems and user software for
database applications. The Company's primary product line is the Telescan system
of financial databases and software programs accessed over the Internet and
online. In 1996, the Company substantially expanded its private labeling
arrangements under agreements with such major corporations as American Express,
Charles Schwab, Fidelity Investments and Standard & Poor's. In 1997, the Company
continued this expansion by signing agreements with Time Inc. New Media,
Strategic Advisors, Inc. (a subsidiary of Fidelity Investments) and Citibank,
N.A. In 1998, Telescan added Altair Corporation (a subsidiary of Imperial Bank),
Web Street Securities and Texas Galleria Corporation. Telescan receives per user
fees, fees for providing "premium" services and/or reports, development and
licensing fees from such third parties, and revenue sharing for new customers
and advertising. Certain agreements guarantee minimum monthly, quarterly or
annual payments.
In February 1996, the Company launched Wall Street City, a new enhanced
financial website, which it has continuously broadened and upgraded. Page
impressions on Wall Street City have grown from 2 million in the first quarter
of 1997 to over 11 million in the last quarter of 1998. The Company has devoted
significant development resources to this part of its business.
Wall Street City also serves as an advertising medium with rates tied to
thousands of impressions. With the increasing popularity of the website,
advertising revenues grew four-fold from 1997 to 1998.
FINANCIAL SERVICES AND PRODUCTS
WALL STREET CITY. Wall Street City is a financial supersite on the Internet that
provides investors with a comprehensive database, state-of-the-art financial
analysis and research tools. The site is an effective combination of Telescan's
most dynamic, innovative analysis tools built into one supersite located at
http://www.wallstreetcity.com. In November 1997, the Company introduced a new,
revamped Wall Street City, providing investors with an easier-to-navigate format
and new features. During 1998, the Company increased its market commentary and
added free, unlimited real-time quotes and real-time breakout alerts for active
traders.
5
The site features:
o ActiveX Stock Graph with Technical Analysis - Internet Explorer users with
Windows '95 or NT operating system can download a powerful ActiveX control
to allow technical analysis on stock graphs.
o Calculators - Under an agreement with Financenter, Inc., users can access
their powerful and programmable calculators. Investors can use the
calculators to answer questions on stock, mutual funds and bond returns.
Consumers can use the calculators to compute answers on home purchases and
refinancing, credit cards and household budgeting.
o Customizable Technical Analysis Charts - Allows users to select multiple
indicators they want to see on a single chart for individual stocks or
groups of stocks. Users can also create technical analysis profiles for a
variety of stocks and save up to 10 separate profiles, which will appear
each time the stocks are called up on their personal computers.
o E-Commerce - Introduced in 1999, E-commerce allows customers to purchase
books, videos and other educational material to enhance investment
decisions.
o Multiple Portfolios - Each user can configure up to seven portfolios with a
maximum of 150 symbols per portfolio.
o Personal Investment Planner - Allows investors to assess risks in their
stock and mutual fund portfolios and provides alternatives to better meet
their financial goals.
o Portfolio Scanning - Portfolios can be scanned for end-of-day technical and
positive breakouts, stock cycle strengths, and comparative rankings.
o Real-Time Market Commentary and Quantitative Analysis - Provides intraday
articles on the markets, stocks and mutual funds, as well as strategies.
The commentary provides insight into the markets and investing strategies
based on comprehensive and up-to-the-minute data-based analysis of stocks,
mutual funds and market trends. Columns are written by Wall Street City's
research staff and include Stock of the Hour, Stocks in Focus and Strategic
Maneuver.
o Real-Time Quotes - Allows users to obtain free, unlimited real-time quotes.
o Search Capabilities - An investor can categorize up to 40 criteria from a
selection of 300 to identify the top stocks that "fit" the criteria. The
search capabilities were enhanced in 1998 with Java-based technology
allowing investors to more easily customize searches for stocks, mutual
funds and options.
o What's Working Now - A major step forward in automated backtesting and
optimization, wherein the system runs in excess of 35 million searches
weekly to identify the "best" and "worst" combinations of characteristics
and generates a list of stocks or funds having the most similar
characteristics.
Wall Street City is one of the leading Internet services for investors,
featuring Telescan's proprietary ProSearch technology on the web. Wall Street
City provides the broad range of services described above, as well as quotes,
news and company reports from industry-leading information sources. The site
also provides investors with access to educational tools, discussion groups,
investment newsletters, an E-commerce site and brokers.
TIP@WALLSTREET(TM) . Combines the advanced functionality of the Telescan
Investor'S Platform (R) ("TIP") and the Wall Street City website. The software
embeds a web browser to take advantage of the depth of market information
available through Wall Street City. TIP allows users to further screen and
analyze the information online or offline, with greater speed and ease of use.
6
TELESCAN INVESTOR'S PLATFORM 2.0(R). Telescan Investor's Platform is the
MicrosofT Windows version of the Company's financial research, screening and
analysis software, Telescan Analyzer 3.0. Some of its features are improved
charting capabilities, unique portfolio-based control for greater flexibility
and faster data retrieval, additional database information such as end-of-day
quotes for most major international exchanges, full-text analyst's reports, a
Market Snapshot for major indexes, improved communications options including
TCP/IP access and interactive roundtables, a Top Picks screening feature and
expanded automation tools. Features such as multi-tasking and graphic toolbars
that are inherent in the Windows operating environment make TIP more
user-friendly and lead to its improved data presentation options.
TELESCAN ANALYZER 3.0. This is the most recent DOS-based version of the Telescan
Analyzer product with the capability of accessing other Telescan products, such
as ProSearch and Telescan Mutual Fund Search. This product features a graphical
user interface similar to the Microsoft Windows and Apple Macintosh operating
environments. The software allows the user to access the Telescan database of
over 20,000 stocks, over 7,000 mutual funds, over 80,000 options, 1,000 market
indexes and more than 1,200 futures and commodities contracts. Telescan Analyzer
3.0 helps the investor evaluate stock portfolios and mutual fund holdings. Over
80 fundamental and technical indicators such as price, volume, insider trading,
key company facts, volume indexes, trend lines, news releases, Moving Average
Convergence/Divergence ("MACD") and relative strength are available for
analyzing securities. Users can retrieve historical price and volume charts of
up to 23 years of data. Additional features include multiple graphs per screen,
higher graphics resolution, 28,800 baud modem support, mouse interface and pull
down menus and enhanced system integration and visual presentation.
PROSEARCH 5.0. ProSearch is a powerful search program that allows the user to
develop custom screening routines to select securities that best meet the
individual's specific investment goals. The program was designed for serious
investors as a tool for identifying stocks to meet investment objectives as
defined by a wide variety of fundamental and technical indicators. ProSearch
allows the user to select up to 40 parameters from a list of about 300 criteria
for building a search strategy. Additionally, investors can utilize composite,
weighted indicators (i.e., short/long term value and technical ranks),
fundamental, momentum, and volume ranks for simplified searches that meet one's
specific investment strategies. ProSearch users can test and retest strategies
by searching their historical performance back to 36 months. The program is
shipped with 30 pre-defined search strategies that can also be used for
narrowing the list of potentially profitable investments.
PROSEARCH ALERTS. Introduced in October 1998, this product provides a real-time
alert service and enables active traders and investors to instantly identify
stocks that are making significant price moves. This product has been
exclusively licensed to Texas Galleria Corporation and is marketed as an
independent product.
ESEARCH. Built as a complement to the ProSearch program, ESearch adds the
ability to screen for investment candidates based on earnings estimate
information. Earnings estimates are important to investors in that they are
often a preview of Wall Street's positive or negative perception of a particular
stock.
OPTIONS SEARCH. This product is a screening program that allows an investor to
sort through more than 80,000 equity and index options using the Company's
unique scoring system to pick the options that best fit the user's investment
objectives. The investor chooses up to 30 of the 122 screening criteria, which
produce a list of options that are best suited to his or her needs.
QUOTELINK. This product permits users of competing financial analysis software
and spreadsheet programs to download information from the Telescan database into
such programs. QuoteLink is compatible with all the major competitive programs
including AIQ, Metastock, Super Charts, OmniTrader, OmniPro, Indigo, Quicken,
Lotus and Excel.
TELESCAN MUTUAL FUND SEARCH. This product is a mutual fund screening program
that allows an investor to sort through more than over 7,000 mutual funds using
the Company's unique scoring system to pick the funds that best fit the user's
investment objectives. The selection criteria are grouped into three main
categories: purchase requirements, performance and consistency characteristics
and portfolio composition. The investor then chooses up to 30 of the 80
individual criteria contained within the categories to produce a list of mutual
funds that are best suited to their needs.
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TELESCAN PORTFOLIO MANAGER. Telescan Portfolio Manager is a DOS-based securities
portfolio management program that was developed as a joint venture between the
Company and The Pilot Group, Inc. The program offers a wide variety of report
options and was designed to provide speed and power in a user-friendly manner
that forgives many common user mistakes and accepts corrections with ease. In
1998, four new portfolio reports were added that enable investors to review
insider trading, analyst rankings, Macro*World Forecasts and over/under
valuations on portfolios rather than on an individual stocks.
TELESCAN DIRECT(TM). A customizable wireless service that helps consumers keep
track of their investments anywhere, any time, via their alpha-numeric pagers,
PCS mobile phones or personal e-mail addresses. An investor can schedule and
receive stock price updates up to 15 times a day for their custom portfolio.
Telescan Direct also automatically tracks and delivers news, price and volume
alerts on 30 stocks based on parameters the consumer selects.
PRIVATE-LABELED FINANCIAL SERVICES
ALTAIR CORPORATION. In June 1998, the Company entered into a licensing agreement
with Altair Corporation (a subsidiary of Imperial Bank) to market the Company's
technology to the banking industry. The Company will share in revenues from
banks utilizing its technology and data.
AMERICAN EXPRESS. The Company maintains an alliance with American Express
Financial Direct ("American Express"), a division of American Express Company,
under which Telescan's online financial services are available as part of
American Express' InvestDirect, a state-of-the-art Internet-based trading and
investment research and analysis service. Under the agreement Telescan provides
a proprietary assortment of investment decision support services. The Company
provides customer support and certain development services for American Express.
CITIBANK, N.A. In February 1998, the Company and Citibank, N.A. ("Citibank")
entered into a five-year master agreement, which contemplates the issuance of
work orders for specific projects and services to be provided on an ongoing
basis in the future. In March 1998 the first work order was issued and in
December 1998, the website created through this work order was launched
utilizing the Company's technology. Telescan expects to receive additional work
orders for Internet tools and services pursuant to this agreement.
FIDELITY. Fidelity Investments, one of the nation's leading providers of
financial services, continues to offer a customized assortment of Telescan's
financial information resources and analytical tools as part of its
Windows-based investment management and trading software package - Fidelity
On-line Xpress+(TM).
INFORMATION HIGHWAY. The Company maintains an agreement with Information
Highway, Inc. to develop and manage financial content for the Canadian-based
Internet company's Unique Networks division. Telescan's financial content will
be co-branded for Unique Network's The Executive Club website. The Executive
Club (http://www.theexecutiveclub.com) is a dedicated suite of services for
business professionals and executives. Commencement of these services took place
in 1998.
NBC. In February 1999, the Company reached an agreement with NBC to license its
proprietary Internet and online financial services technology for CNBC.com.
Under the agreement, the Company will be responsible for developing customized
investment analytics, providing financial data, data retrieval and hosting
services. The Company is substantially increasing its support staff in response
to this contract.
8
POINTCAST INC. Under the terms of the 1998 revenue sharing agreement, the
Company has licensed its proprietary ProSearch technology to PointCast Inc.
Viewers of the PointCast Network(R) will be able to customize searches of stocks
and mutual funds.
STANDARD & POOR'S. The Company and Standard & Poor's ("S&P"), a division of the
McGraw-Hill companies, maintain an online platform built and hosted by Telescan.
The application allows the investment community to access a suite of S&P's
financial information products. In 1998, the Company brought S&P's Daily
Dividend Record to the financial community via the Internet. Prior to this
service, the information was available only in printed form. No revenue was
recognized from this product in 1998.
STRATEGIC ADVISORS, INC. The Company maintains a multi-year contract with
Strategic Advisors, Inc (a subsidiary of Fidelity Investments) to provide the
database of financial information for the new guide to investing, The Stock Shop
with Peter Lynch(TM), an interactive CD-ROM that links with the Internet. The
program helps consumers learn how to become more informed investors based on key
concepts taken from Peter Lynch's best-selling personal finance books. Users can
then apply these concepts to assess financial information about markets and
companies. Telescan's online stock research is the source of much of that
information.
TEXAS GALLERIA, INC. In October 1998, the Company granted an exclusive license
for its ProSearch Alert Trading Service to Texas Galleria, Inc. to be used on
the trading platform called GroTrader Gold. The Company recognized a licensing
fee in 1998 from this agreement.
TIME INC. NEW MEDIA. The Company and Time Inc. New Media have a strategic
agreement to operate FORTUNEInvestor, an Internet website for investors that
combines FORTUNE editorial content with Telescan's comprehensive stock and
mutual fund information and analysis tools. Under the agreement, Time Inc. New
Media, in addition to providing FORTUNE editorial content for the website, is
responsible for sales and marketing. Telescan provides its financial database,
state-of-the-art financial analysis and research tools, web development and site
management. In December 1998, the Company reached an agreement with Time Inc.
New Media to provide customized investment information for Money magazine's
online website, Money.com. The initial scope of the project has broadened and
is currently being re-evaluated.
WEB STREET SECURITIES. In March 1998, the Company announced an exclusive online
trading brokerage alliance with Web Street Securities. Under this sponsorship
agreement, visitors to the Company's website, Wall Street City, have access to
real-time quotes and a direct link to Web Street Securities to execute trades.
NON-FINANCIAL SERVICES
ADWEEK ONLINE. Adweek Online, a joint effort between the Company and BPI
Communications, L.P. ("BPI"), provides easily accessible information to the
advertising industry. It offers users access to full text news and articles from
Brandweek, Mediaweek and all six regional editions of Adweek magazine plus
instant access to other advertising industry information such as Accounts in
Review, Accounts Awarded, the Adweek Client/Brand Directory and details on
breaking campaigns. The full searchable database includes archives dating back
to January 1992, and is updated weekly. The site is supported by both
advertising and subscription revenues and is located at http://www.adweek.com.
AMUSEMENT BUSINESS. Amusement Business, a joint effort between the Company and
BPI, provides easily accessible information for the international live
entertainment and amusement industry. The site offers industry specific
information such as searchable classified ads and tour searches as well as the
latest industry news. The site is currently supported by advertising and
subscription revenue and is located at http://www.amusementbusiness.com.
9
BACKSTAGE ONLINE . Backstage Online, a joint effort between the Company and BPI,
was launched in March of 1998 to provide easily accessible information for the
performing arts profession. The site offers full-text news and articles as well
as searchable databases including a two year news archive. Backstage Online
includes industry specific features such as casting information and performing
arts directories. The site is supported by both advertising and subscription
revenues and is located at http://www.backstage.com.
BILLBOARD ONLINE. Billboard Online, a joint effort of the Company and BPI, is a
global online network offering full-text news, articles and charts from the
current issue of Billboard magazine. The Internet site also offers full access
to Billboard magazine's vast electronic library of more than 20,000 charts in
all music genres dating back to 1983 and full text articles dating back to 1991.
Billboard Online is supported by both advertising and subscription revenues and
is located at http://www.billboard.com.
HOLLYWOOD REPORTER ONLINE. The Hollywood Reporter Online (THR Online(TM)) is a
joiNT effort between the Company and BPI to develop and operate databases
serving the entertainment industry. It offers users access to the current and
archived issues of Hollywood Reporter magazine. In addition, the users have
access to film reviews and news articles relating to TV, film, and music, as
well as information on current events and industry developments. The Hollywood
Reporter Online service was launched in December 1996 and is supported by
advertising and subscription revenues. The site is located at
http://www.hollywoodreporter.com.
KNOWLEDGE EXPRESS DATA SYSTEMS, L.C. Knowledge Express Data Systems, L.C. ("KE")
is a limited liability company in which the Company holds the majority
controlling interest. KE combines its unique proprietary information resources
with commercially available information databases including Bioscan(R),
Corptech(R), PharmaVentures(TM) and MicroPatent(R), as well as others, into its
own easily searchABLe online database version. KE cost effectively offers
customers access to valid information resources that would be costly and time
consuming to research on an individual basis. The service is accessed by
business development and research professionals in the corporate and university
fields via multi-user annual site license contracts or monthly package
subscriptions. KE also generates revenue through website development, hosting
and online services with business partners focused in the corporate and
university fields. The site is located at http://www.knowledgeexpress.com.
PUREBASEBALL. The Company has an agreement with Reality Sports Inc. to jointly
develop and operate a new online, interactive game, Pure Baseball, designed for
fantasy baseball enthusiasts. This new Internet league play game became
available in April 1998. The site is located at www.purebaseball.com.
OTHER
In addition to its online database services, the Company also performs software
design, development and programming under contract for third parties and for
related parties. The Company also offers video training tapes, financial books
and monthly newsletters in conjunction with its financial products.
The Company's online services employ databases that consist of information
typically obtained from public and private third-party sources, usually on a
non-exclusive basis. Therefore, the Company's business is dependent upon its
ability to obtain and maintain, on an ongoing basis, information for inclusion
in the Company's databases. In prior years, acquisition of databases typically
involved the payment by the Company of fixed, per use license fees and/or
royalties based on revenue received and/or some combination of user
subscriptions and actual database usage. The Company's current agreements with
many information providers require minimum payments with variable rates based
upon revenue. Such agreements will allow the Company lower royalty payments with
expected increased revenue. Information suppliers typically license access to
data on a multi-year or annual renewable basis, subject to termination by either
party upon no less than 90 days notice. The Company also obtains information
pursuant to non-exclusive licenses from private sector information compilers,
some of which currently are, or in the future may be, direct or indirect
competitors of the Company. There can be no assurance that the Company will be
able to renew its current contracts with data sources, maintain comparable price
levels for information acquired, or negotiate additional contracts with data
sources as necessary to maintain existing products or introduce new products.
Termination of the Company's relationship with one or more of the Company's
information suppliers could have a material adverse effect on the Company's
operations if the data became available through one of the Company's competitors
and if the Company was unable to obtain comparable data through other sources.
The Company considers continued access to databases as a critical factor in the
competitiveness of its existing products and believes that future product
development will depend on the availability of data in specific markets targeted
by the Company. The Company does not believe at this time that the loss of any
single source of data would be detrimental to its business.
10
MARKETING
The Company's online services are sold to customers for an initial licensing fee
followed by a monthly fee package based upon hourly usage. Internet services are
sold on fixed fee plans that are differentiated by the data and reports that can
be accessed. To attract new subscribers, the Company typically offers initial
money back guarantees and trial subscriptions. The Company also offers free
trial periods for one month to subscribers of Wall Street City.
The Company's marketing objectives for its Internet and online services are to
increase the number of subscribers, sell additional products to existing
subscribers and increase average monthly online use per subscriber. The channels
for increasing the number of subscribers include public relations, joint
marketing agreements, trade shows and seminars, advertising, direct sales and
word-of-mouth. The Company advertises in Investor's Business Daily, Barron's,
Stocks & Commodities, other print media and through Internet banner ads.
The Company's primary market has historically been the sophisticated individual
investor. The Company has significantly increased its individual subscriber base
through advertising and marketing arrangements with major discount brokerage
firms including American Express, Fidelity Investments Retail Services, and
Charles Schwab & Co., Inc. These marketing arrangements typically require the
brokerage firm to incorporate and package the Telescan financial software and a
gateway to the Telescan database into their software products, or to incorporate
an application interface in their software that allows access to the Telescan
database. Typically, these third parties are responsible for their own marketing
programs.
The Company actively seeks additional private labeling relationships for its
financial products. In 1997, the Company entered into agreements with Citibank,
Strategic Advisors, Inc. (a subsidiary of Fidelity Investments) and Time Inc.
New Media. In 1998, the Company signed agreements with Altair Corporation (a
subsidiary of Imperial Bank), Web Street Securities and Texas Galleria
Corporation.
Telescan markets advertising space on Wall Street City and shares in advertising
revenue marketed by affiliates.
Because of the breadth and cost effectiveness of the Company's financial online
system, the Company targets users of competitors' financial analysis software
packages as a source of online revenue. The Company has application interface
products facilitating the downloading of information from the Telescan database
to users of competitors' analysis software. The Company has continued to
leverage the opportunity to tap the large data downloading market through
cooperative alliances with several major charting software publishers including
AIQ, Equis, Omega, Nirvana and Indigo.
MATERIAL CUSTOMERS
There were no customers during 1998, 1997 or 1996 to which sales exceeded 10% of
total revenues.
PRODUCT DEVELOPMENT
The Company has developed and acquired proprietary software technologies to make
its products easy to use and to achieve efficient searching of extensive
databases using simple, non-Boolean logic search queries. Consequently, the
Company believes that by using its proprietary technologies it can deliver
superior Internet and online database services. The Company intends to employ
its proven software technologies in developing additional products serving new
markets and customers.
11
Telescan's software development staff includes 47 employees who develop new
products and provide maintenance support for existing products. During the years
ended December 31, 1998, 1997 and 1996, the Company spent approximately
$2,519,000, $2,505,000 and $1,873,000, respectively, for software development
activities, all of which was capitalized. All software development costs are
charged to expense until technological feasibility is established, after which
remaining software production costs are capitalized and amortized over periods
ranging from three to five years. The Company also continuously evaluates
opportunities to obtain new products through acquisition.
PROPRIETARY RIGHTS
The Company relies upon a combination of contract provisions and copyrights,
patents, trademarks and trade secret laws to protect its proprietary rights in
its products. The Company attempts to protect its trade secrets and other
proprietary information through software licenses and nondisclosure agreements
with product development partners, employees and consultants. Although the
Company intends to protect and defend its proprietary rights vigorously, there
can be no assurance that these measures will be successful.
With respect to software technologies that the Company has licensed to third
parties for use in specific applications, the Company has entered into licensing
agreements which are intended to protect the proprietary rights of the Company
in such technologies. The Company seeks to protect the source code of its
products as a trade secret and as an unpublished copyright work.
The Company was granted a patent in 1997 by the U.S. Patent and Trademark Office
for its core database development technology for quickly building customized
online systems for multiple users. The patent was awarded for Telescan's
"Multi-provider online communications system, an interactive system for remotely
creating, editing and administering communications systems for online service
providers". The Company was granted another patent in 1998 by the U.S. Patent
and Trademark Office for, "Interactive systems for remotely creating, editing
and administering an online communication system for a plurality of online
service providers". The Company believes that its products, trademarks and other
proprietary rights do not infringe on the proprietary rights of third parties,
and the Company is not aware of any current infringement claims against the
Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to current or
future features or contents of services or that any such assertion may not
result in litigation or require the Company to enter into royalty arrangements.
COMPUTER AND NETWORK OPERATIONS
The Company's data center computer system consists of commonly available
personal computer processors, disk storage devices and telecommunications
equipment, operated by a combination of Microsoft Windows NT and a proprietary
operating system. The Company typically screens and filters incoming data feeds
from third parties, using specific software routines, in order to detect errors
and certain detectable viruses.
The Company's data center is located at the Company's headquarters facility. The
data center has separate air conditioning units and the equipment room has a
raised floor. The power system includes power conditioning, back-up battery, and
full "zero downtime" emergency generator support on site, which is supplied by
the facility owner. Data is regularly backed up and stored off-site and certain
data is duplicated on separate storage devices within the data center. The
building in which the data center is located has off-hours card key access, card
key access to the Company's offices, separate card key access to the data center
and 24 hour on site security personnel. The Company believes that data center
system redundancy is afforded by the Company's ability to use commonly available
computer processors, storage devices, and communications equipment, including
the Company's non-data center computer systems, in its data center in case of
equipment failure or other emergency. The Company's telecommunications network
consists of the public packet switching networks provided by Sprint, Network
Two, UUNET, GTE and MCI WorldCom. Through these networks, subscribers in
hundreds of cities in the U.S. and Canada can dial a local number to connect to
the Company's online services.
12
The Company believes that its computer and communications hardware systems are
adequate for existing operations. The Company purchases additional hardware as
required in order to accommodate any significant increases in the customer base
for the Company's existing products and services, and to accommodate additional
products and services.
The Company continually upgrades its computers and peripheral hardware to take
advantage of technological advances. Further, the Company believes that future
hardware and software advances will serve to improve the performance of the
Company's systems. While the Company does not believe that it faces a material
risk due to technological changes, there can be no assurance that the Company's
existing technology will remain viable or that the Company will be able to meet
technological advances that may be necessary in order for its technology to
remain viable.
COMPETITION
The Company competes with companies that operate proprietary and/or Internet
websites and online systems, many of which have significantly greater financial,
technical and marketing resources than the Company. In addition, a substantial
number of new competitors are entering the Internet and online services market
as a result of the recent growth and the perceived future opportunities in this
market. The Company believes the principal competitive factors in the Internet
and online services markets include system performance, product differentiation,
quality and quantity of content, user friendliness, price, customer support and
effective marketing techniques. The Company believes that it competes
effectively in these areas. Competitive pressures could result in reduced market
share, price reductions and increased spending on marketing and product
development, which could adversely affect the Company's financial condition and
operating results. The Company believes that its business strategy of building
marketing relationships with larger partners and expanding the range of its
Internet and online offerings may serve to lessen the impact of future
competitive pressures on the Company.
EMPLOYEES
As of December 31, 1998, the Company had 146 full-time employees with 47 in
product development and maintenance; 24 in customer service; 24 in sales and
marketing; 23 in computer operations; and 28 in general management and
administration. None off the Company's employees is represented by a labor union
and the Company has never experienced a work stoppage.
GOVERNMENTAL REGULATION
The Company is not subject to direct regulation other than regulation generally
applicable to businesses. However, changes in the regulatory environment
relating to the telecommunications and media industries could have an effect on
the Company's business, including regulatory changes which directly or
indirectly affect telecommunication costs or increase the likelihood or scope of
competition from regional telephone and cable television companies. The Company
cannot predict the impact, if any, future regulation may have on its business.
While not currently regulated, there is a possibility that the Company may
become subject to laws governing investment advisors or other securities
professionals. Regulations in this area are complex and ensuring compliance
could cause a financial burden and become a time consuming process. There is no
assurance the Company could make the necessary adjustments to achieve
compliance.
13
DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
In February 1999, the Company announced plans to forego the previously reported
spin-off of its non-financial business segment. Negotiations with a prospective
buyer were terminated. The Company determined that there was greater strategic
value in retaining and further developing certain operations within this
segment.
Accordingly, the financial statements have been reclassified to include
discontinued operations as continuing operations and the Company has applied the
guidelines of Emerging Issue Task Force 90-16 and Financial Accounting Standards
Board Statement No. 121. In applying these standards, the Company determined
that estimated future undiscounted cash flows were below the carrying value of
the long-lived assets. The Company adjusted the carrying value of the long-lived
assets, primarily software development costs and capitalized data, to their fair
market value resulting in a non-cash impairment loss of $1,530,000, which is
included in the Company's 1998 operating results.
The non-financial segment includes operations provided to the advertising,
entertainment and publishing industry through a third party alliance with BPI;
Pure Baseball, an Internet-based game designed for fantasy baseball enthusiasts
under an agreement with Reality Sports, Inc.; and KE, which provides multiple
databases for the biotechnology/pharmaceutical industry.
ITEM 2. PROPERTIES
The Company's principal executive offices, as well as its principal marketing,
computer operations and product development activities, are located in leased
facilities in Houston, Texas, consisting of a total of 54,108 square feet. KE
maintains a marketing and administrative office of approximately 2,800 square
feet in King of Prussia, Pennsylvania. The current monthly aggregate rental for
these facilities is approximately $58,000. The lease for Houston and King of
Prussia expire in 2007 and 2002, respectively. The Company believes that its
facilities are adequate for its present needs and that suitable space will be
available to accommodate its anticipated future needs. In Houston, the Company
has a five-year option for 15,769 square feet of contiguous office space plus
the right of first refusal for an additional 20,103 square feet of contiguous
office space.
ITEM 3. LEGAL PROCEEDINGS
In 1997, Gregory Reagan filed a suit against the Company in the District Court
of Harris County Texas. The plaintiff asserted a claim under a verbal agreement
to pay a royalty or finder's fee incident to a reciprocal marketing agreement,
which Telescan signed with Omega Research, Inc. ("Omega"). Under the Omega
agreement, Omega was given a financial incentive to encourage Omega's customers
to subscribe to Telescan's then current stock market data services. The
plaintiff claimed a share of the net revenues derived by Telescan under the
Omega agreement. By letter dated February 28, 1996, Telescan gave notice of
cancellation of the verbal agreement with Gregory Reagan based on the breaches
of Reagan's duties under such verbal agreement. Telescan maintained that the
verbal agreement was properly canceled. Reagan amended his petition to add a
fraud claim to the case with a request for punitive damages. In September 1998,
the Company and the plaintiff reached a settlement agreement in which the
Company paid Gregory Reagan an amount in exchange for being released from
further legal actions.
In August 1998, K. Shawn Walker and Scott Brown filed a lawsuit against
TeleBuild, L.C. ("TeleBuild"), Friedman Interests, Inc. and the Company in the
District Court of Harris County Texas. The plaintiffs, both former employees of
TeleBuild, asserted breach of contract, breach of duty of good faith and fair
dealing, breach of fiduciary duty, fraud and conspired for a declaratory
judgment. The plaintiffs' cause of action arose fromTeleBuild's and Friedman
Interests, Inc.'s refusal to purchase the plaintiff's ownership interest in
TeleBuild. K. Shawn Walker and Scott Brown owned 5.6839% and 7.6628%,
respectively of TeleBuild. In November 1998 the Company agreed to purchase a
portion of each of the plaintiffs' interest in TeleBuild in settlement and
release of this claim.
14
From time to time the Company is involved in certain other legal actions arising
in the ordinary course of business. It is the opinion of management that such
litigation will be resolved without a material effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, there were no matters submitted to a vote of
the security holders through solicitation of proxies or otherwise.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on the Nasdaq Small-Cap Market under the
symbol "TSCN". The following table sets forth, for the periods indicated, the
high and low closing bid prices for the common stock as reported by the Nasdaq
Small-Cap Market. The bid prices reflect inter-dealer quotations, do not include
retail markups, markdowns or commissions and do not necessarily represent actual
transactions.
COMMON STOCK PRICES
-------------------------
HIGH LOW
------------- ----------
1997
Quarter ended March 31 $ 5.88 $3.25
Quarter ended June 30 $ 5.31 $2.88
Quarter ended September 30 $ 7.63 $4.75
Quarter ended December 31 $ 8.13 $5.88
1998
Quarter ended March 31 $ 8.25 $5.00
Quarter ended June 30 $13.25 $4.75
Quarter ended September 30 $ 9.38 $3.88
Quarter ended December 31 $10.13 $2.63
On March 26, 1999, the last closing price of the Company's common stock as
reported by the Nasdaq Small-Cap Market was $19.562. As of March 26, 1999, the
Company had approximately 300 stockholders of record, but believes it has
approximately 3,000 beneficial holders.
DIVIDEND POLICY
The Company has never declared a cash dividend on its common stock. The
convertible preferred stock dividend rate is 5% and is paid quarterly. The Board
of Directors presently intends to retain all earnings for use in the Company's
business, and therefore, does not anticipate paying any cash dividends on its
common stock in the foreseeable future. The declaration of dividends, if any, in
the future would be subject to the discretion of the Board of Directors, which
may consider factors such as the Company's results of operations, financial
condition, capital needs and acquisition strategy, among others. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the five-year
period ended December 31, 1998, has been derived from the audited historical
consolidated financial statements of the Company as reclassified for retaining
the previously reported discontinued operations. The historical consolidated
financial data includes the results of acquired businesses from their dates of
acquisition. The selected data should be read in conjunction with "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the notes
thereto.
16
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS: YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Revenue ............................ $ 15,542 $ 16,125 $ 13,756 $ 13,989 $ 10,477
Cost of services and products ...... 9,152 8,756 8,549 7,769 6,489
Marketing, general & administrative 9,240 7,458 8,403 7,143 6,425
Loss on writedown of impaired assets 1,530 -- -- -- --
Interest expense, net .............. 97 105 83 65 42
Minority interest in (income)
loss of subsidiary(1) ............ 142 409 345 (226) (152)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations ....................... (4,335) 215 (2,934) (1,214) (2,631)
Income (loss) from
discontinued operations .......... 19 (19) -- -- --
-------- -------- -------- -------- --------
Net income (loss) .................. (4,316) 196 (2,934) (1,214) (2,631)
Preferred dividends including
incremental yield dividend ....... 138 -- -- -- --
-------- -------- -------- -------- --------
Income (loss) available for
common stockholders .............. $ (4,454) $ 196 $ (2,934) $ (1,214) $ (2,631)
======== ======== ======== ======== ========
Income (loss) per common share
from continuing operations:
Basic .......................... $ (0.41) $ 0.02 $ (0.28) $ (0.12) $ (0.28)
Diluted ........................ $ (0.41) $ 0.02 $ (0.28) $ (0.12) $ (0.28)
Income (loss) per common share
from discontinued operations:
Basic .......................... $ -- $ -- $ -- $ -- $ --
Diluted ....................... $ -- $ -- $ -- $ -- $ --
Net income (loss)
Basic .......................... $ (0.40) $ 0.02 $ (0.28) $ (0.12) $ (0.28)
Diluted ........................ $ (0.40) $ 0.02 $ (0.28) $ (0.12) $ (0.28)
Weighted average shares outstanding:
Basic .......................... 11,039 10,766 10,615 9,777 9,480
Diluted ........................ 11,039 10,939 10,615 9,777 9,480
BALANCE SHEET DATA: DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Working capital .................... $ 726 $ 744 $ 454 $ 2,143 $ 1,369
Total assets ....................... 12,008 12,477 11,466 10,859 8,317
Total long-term obligations ........ 343 475 488 488 603
Total stockholders' equity ......... 7,818 8,749 7,964 7,965 6,022
(1) Reflects recognition of income and losses of Knowledge Express Data Systems,
L.C. of which the minority interest holder owns 44.42%. Losses in 1998,
which exceeded the minority stockholder's investment, were absorbed 100% by
the Company.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and related notes, and the preceding "Item 6 - Selected
Financial Data".
RESULTS OF OPERATIONS
OVERVIEW
Revenue is generated in the form of Internet and online service fees, licensing
and development fees, fees from third parties, advertising fees, product sales,
and affiliate contract revenue. The Company's Internet and online service
revenue is composed of individual subscribers paying recurring monthly usage
fees and annual subscription fees, together with fees from third parties for
licensing and developing private label versions of the Company's database
applications. Advertising revenue is derived from ads placed on the Company's
Wall Street City website (http://www.wallstreetcity.com). Product revenue is
generated from the sale of online system software, software and service
enhancements, major product upgrades and related educational and training
products such as books and videotapes. The Company's software products generally
reflect a common base technology to which additional features can be added to
satisfy the various needs of the sophisticated user. The Company's contract
revenue is generated from providing contract service to TeleBuild. See "Item 13
- - - Certain Relationships and Related Transactions". The contract services include
developing, operating and maintaining online database systems and providing
administrative services.
The expansion of private label arrangements combined with the rapid growth of
the Internet is shifting the concentration of the Company's revenues away from
its more traditional base of online services accessed via modem. All of the
private label agreements the Company entered into in 1997 and 1998 are based on
the delivery of tools and content over the Internet. This emphasis contributed
to the 41% increase in Internet revenue from 1997 to 1998. Additionally, the
growth in popularity of the Company's Wall Street City website from an average
of 2 million page impressions in the first quarter of 1997 to over 11 million
page impressions in the last quarter of 1998 reflects the growing significance
of Internet based revenue to the Company. The rise in page impressions
contributed to the nearly four-fold increase in advertising revenue.
The Company derives a significant amount of revenue from third parties for
licensing private label versions of its data and search technology. In 1996, the
Company substantially expanded its private labeling arrangements under
agreements with such major corporations as American Express, Charles Schwab &
Co., Fidelity Investments and Standard & Poor's. In 1997, the Company continued
this expansion by signing agreements with Citibank, Time Inc. New Media and
Strategic Advisors, Inc. (a subsidiary of Fidelity Investments). In 1998, the
Company added agreements with Altair Corporation (a subsidiary of Imperial
Bank), Web Street Securities and Texas Galleria Corporation. The Company has
recognized upfront licensing fees from several major third party alliances.
However, the continuing revenue streams will be realized in future periods. The
success of future revenues shared between the alliance partner and the Company
is largely dependent upon marketing efforts by the third party.
The Company's commitment to concentrate efforts and resources on its core
Internet financial services operations contributed to the decline in product
revenues. In 1997 the Company introduced TIP@Wallstreet which allowed
Windows-based customers access to the Company's popular Wall Street City
website. Several software enhancements were released in 1998; however, no new
major software products were introduced in 1998. Costs associated with product
sales are variable in nature and include commissions, production, royalties and
distributioncosts. Gross margins are impacted by the mix of in-house product
sales versus the sale of products subject to royalties. Cost of products as a
percentage of product sales was 50%, 45% and 61% in 1998, 1997 and 1996,
respectively. In periods with larger in-house product sales and no royalty
payments, the gross margins will be higher. Royalties on product sales in 1997
were significantly higher than 1998.
18
The Company's Internet and online cost of service expenses primarily include
communication expenses, royalties and data costs, customer service expense and
amortization of software development costs. Cost of service as a percentage of
service revenue was 64%, 61% and 67% for 1998, 1997 and 1996, respectively.
These percentages can vary significantly with the amount of licensing fees
recognized, which carries no associated costs.
In the first quarter of 1999, the Company canceled plans to spin-off the
non-financial segment of the business. Management determined there was a greater
strategic value in developing Internet services for the non-financial industry.
The non-financial segment sustained losses of $1,558,000, $614,000 and $660,000
for years ended December 31, 1998, 1997 and 1996, respectively. The results for
1998 include an impairment loss of $1,530,000 without which the non-financial
segment showed a loss of $28,000. The significant improvement in results in 1998
contributed to management's decision to retain the non-financial segment. The
improvement in 1998 was primarily due to increased revenues from hosting BPI
websites, the addition of two new websites for BPI and higher advertising
revenues. In making the decision to retain the non-financial segment it was
determined that certain operations within the non-financial segment would not
produce future cash flows sufficient to recover recorded costs. Accordingly, the
assets were written down to fair market value in compliance with accounting
principles. The non-financial segment does not operate on a positive cash flow
but is currently expected to perform profitably by the end of the second quarter
of 1999. The Company is committed to devote the necessary capital resources and
personnel to accomplish this goal.
During the fourth quarter of 1998, the Company recorded additional non-cash
charges to the financial segment. These included $315,000 for increased
provision for doubtful accounts and $222,000 in other marketing and general and
administrative expenses.
Portions of certain license fees contracted for in the fourth quarter of 1998
were cancelled in the first quarter of 1999 in accordance with the cancellation
provision. The non-cancelled portion, which is being negotiated, will be
recognized in 1999.
In May 1998, the Company retained NationsBanc Montgomery Securities LLC to
assist the Company in exploring strategic alternatives to maximize Stockholder
value. This agreement has been extended to include maximizing the value of the
non-financial operations.
In January 1999, the Company announced that General Electric's NBC unit, in
conjunction with its affiliate, GE Capital's Equity Capital Group, jointly
purchased 1,220,237 shares or 9.9% of the Company's common stock. In February
1999, the Company completed an agreement with NBC to license its technology and
portions of its investor content as well as provide hosting services.
1998 COMPARED TO 1997
Revenues for the year ended December 31, 1998 decreased $583,000, or 4%,
compared to the same period in 1997 reflecting lower Company financial service
revenues and reduced product sales.
Service revenues for the year ended December 31, 1998 totaled $13,677,000 as
compared to $13,296,000 in 1997. In 1998 the Company recognized revenues of
$1,927,000 from new licensing agreements as compared with $943,000 in 1997. The
increase in licensing revenue was offset by a decrease of $987,000 in revenues
from American Express. License fees for up to an additional $1,400,000 were
contracted for during the fourth quarter of 1998; however, a cancellation
provision will cause the non-cancelled revenue to be recognized in 1999.
Advertising revenues were higher by $282,000, or 233%, for the year ended
December 31, 1998 as compared to the same period in 1997. The increase is
attributable to the growing popularity of the Company's Wall Street City
19
website. Non-financial revenue from the entertainment portion of the Company's
business and KE was $753,000 higher for the year ended December 31,1998 as
compared to the prior year. The improvements were primarily due to increased
revenue from the alliance with BPI and the introduction of two new websites by
BPI, which are hosted by Telescan. Online, or modem based, service revenue was
lower by $768,000 due to the Company's increased concentration in the Internet
arena. Fees earned from services provided to the discount brokerage business
fell $744,000 for the year ended December 31, 1998 as compared to the year ended
December 31, 1997. The majority of the discount brokerage business revenue is
online and is phasing out as the Internet continues to grow.
Product revenues fell $794,000, or 53%, from 1997 to 1998. In 1997 the Company
introduced a major new product, TIP@Wallstreet which allowed Windows-based
customers to access the Company's Wall Street City website. In 1998 the Company
focused its resources on the Internet and enhanced existing products.
Contract revenue from affiliates was lower by $170,000 for the year ended
December 31, 1998 as compared to the year ended December 31, 1997 due to lower
sales to TeleBuild.
Cost of services was higher by $728,000, or 9%, for the year ended December 31,
1998 as compared to 1997. Data/Royalty expenses were $841,000 higher in 1998 as
compared to 1997 due to increased minimum payment requirements to data
suppliers. The Company has agreed to higher minimum payment requirements and
reduced variable costs with its data suppliers in contemplation of increased
revenues. Software development amortization increased $437,000 in 1998. These
increases were partially offset by communication costs, which were lower by
$356,000 due to reduced minimum payment requirements from two providers and
fewer online subscribers. Customer service expenses were lower by $123,000 due
to fewer customer service employees. Cost of sales for TeleBuild was $160,000
lower for 1998 as compared to 1997 due to reduced revenue. Cost of products was
$332,000 lower for the year ended December 31, 1998 as compared to the same
period in 1997. The 48% decrease in cost of products is attributable to the 53%
decrease in product sales.
Marketing expenses totaled $2,889,000 for the year ended December 31, 1998 as
compared to $2,487,000 for the year ended December 31, 1997. The $402,000
increase is due primarily to a one-time charge to increase the bad debt reserve
of $315,000 which caused a $293,000 increase in bad debt expense. Another
one-time charge of $102,000 for commissions was incurred in 1998; however, this
was offset by lower salary expense. Advertising/sales promotion expenses were
higher by $234,000, or 38%, in 1998 as compared to 1997 due to increased
marketing campaigns in 1998.
General and administrative expenses were $1,380,000, or 28%, higher in 1998 as
compared to 1997. Salary expense, net of capitalization, was $753,000 higher in
1998 as compared to 1997 resulting from increased staffing levels to accommodate
the development requirements associated with new licensing agreements. Legal
expenses and settlement fees increased by $278,000 as a result of settling all
outstanding lawsuits involving the Company in 1998. Depreciation/equipment
rental was higher by $184,000. One-time non-cash charges of $120,000 were
charged in the last quarter of 1998.
1997 COMPARED TO 1996
Revenue for the fiscal year ended December 31, 1997 increased $2,369,000, or
17%, from 1996 primarily reflecting higher service revenues under private label
agreements and increased advertising revenue from the Company's Wall Street City
website.
Service revenues increased $2,223,000 from 1996 to 1997. Service revenues
resulting from the Company's alliance with American Express were $1,037,000
higher in 1997. License fees of $750,000 from Citibank and $216,000 from other
third party alliances were included in service revenue in 1997. Revenues from
Wall Street City rose by $500,000, of which $119,000 was attributable to
increased advertising revenues. Revenues from services provided to the discount
brokerage business rose by $1,349,000 from 1996 to 1997, but were offset by
lower Company online revenue of $1,197,000. Revenues from the non-financial
segment decreased $543,000 due mainly to the loss by KE of the Department of
Energy contract, which expired in March 1996.
20
Product revenues declined $441,000 due to the Company placing greater emphasis
on developing the Company's website in preference to online software products.
Contract revenue from affiliates was higher by $587,000, or 80%, reflecting
higher revenue from the Company's affiliate, TeleBuild.
Cost of services was higher by $706,000, or 10%, for the year ended December 31,
1997 as compared to the year ended December 31, 1996. The major contributors to
the increase included higher amortization of software development costs of
$341,000, increased royalty/data costs of $254,000 and increased costs of
affiliate revenue of $610,000, partially offset by a $296,000 decrease in costs
associated with the Department of Energy contract of $296,000 and communication
costs of $92,000. Cost of products was lower by $499,000 from 1997 to 1996.
Unprofitable seminars were eliminated which contributed $204,000 to the
reduction. Lower costs were also the result of reduced product sales.
Marketing expenses were $679,000, or 21%, lower for 1997 as compared to 1996.
Salaries and related benefits, net of capitalization, were lower by $388,000
from 1996 to 1997. Sales promotion expenses were reduced by $211,000 for the
same time period.
General and administrative expenses decreased $266,000, or 5%, from 1996 to
1997. Salaries and related benefits, net of expenses capitalized as software
development costs, were $208,000 lower for the year ended December 31, 1997 as
compared to the same period in 1996. Legal, consulting fees and telephone
expenses allocated to general and administrative were all approximately $150,000
lower in 1997 as compared to 1996. These reductions were partially offset by
increased depreciation/equipment lease expense of $275,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents aggregating
$627,000, which represents a $478,000 decrease from the prior year. Net cash
used by operating activities was $736,000 for the year ended December 31, 1998
compared to cash provided by operations of $2,201,000 for the year ended
December 31, 1997. This $2,937,000 decrease in cash used by operations was
primarily due to the loss of $4,473,000, which included a non-cash charge of
$1,530,000 for the impairment of assets.
The Company's primary capital needs are for (1) the continued investment in
technology through its software development activities and (2) the purchase of
computers and communications equipment. During the year ended December 31, 1998,
the Company invested $2,519,000 in software development costs and acquired
property and equipment totaling $590,000 (including equipment financed by
long-term leases). The Company estimates that it may invest an additional
$1,500,000 to $2,000,000 in capital expenditures over the next twelve months. A
large portion of the capital expenditure requirement will be used to support the
NBC license agreement. Costs incurred in connection with this license agreement
will be reimbursed by NBC.
The Company believes that cash on hand is sufficient to meet working capital
requirements. In May 1998, the Company issued 120,000 shares of 5% Convertible
Preferred Stock in exchange for $3,000,000. In January 1999, the Company sold
9.9% of its common stock, or 1,220,237 shares, to General Electric's NBC unit
for approximately $9,400,000.
A downturn in the equity markets could cause a reduction in revenue since the
number of subscribers tends to increase in an upward market. This could have an
adverse effect on the Company's financial position and results of operations;
however, the Company believes that the effect of such adverse conditions would
be minimized by its alliances with third parties, which in some cases provide
for guaranteed minimum payments.
21
INFLATION
Although management believes that inflation has not had a material effect on the
results of its operations during the past three years, there can be no assurance
that the Company's results of operations will not be affected by inflation in
the future.
SEASONALITY
The Company does not believe that seasonality has a discernible effect on the
Company's aggregate results of operations, which is influenced by an array of
other diverse factors, including general economic and stock market conditions,
new product releases and the existence or absence of significant contracts.
FORWARD-LOOKING INFORMATION
In accordance with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that certain statements in this
Form 10-K and elsewhere which are forward-looking and which provide other than
historical information, involve risks and uncertainties that may impact the
Company's results of operations. These forward-looking statements include, among
others, statements concerning the Company's general business strategies,
financing decisions and expectations for funding capital expenditures and
operations in the future. When used herein, the words "believe", "anticipate",
"hope", "estimate", "project", "intend", "expect" and similar expressions are
intended to identify such forward-looking statements. Although the Company
believes the expectations reflected in such forward-looking statements are based
on reasonable assumptions, no statements contained in this Form 10-K should be
relied upon as predictions of future events. Such statements are necessarily
dependent on assumptions, data or methods that may be incorrect or imprecise and
may be incapable of being realized. The risks and uncertainties inherent in
these forward-looking statements could cause actual results to differ materially
from those expressed in or implied by these statements.
Important factors that could cause actual results to differ materially from the
expectations reflected in any forward-looking statements herein include, among
other things, (1) the volatile nature of the securities business, (2) the
uncertainties surrounding the rapidly evolving markets in which the Company
competes, (3) the uncertainties surrounding technological change and the
Company's dependence on computer systems, (4) the Company's dependence on its
intellectual property rights, (5) the success of marketing efforts by third
parties in revenue sharing agreements, (6) the potential of increased
governmental regulation of the telecommunications industry and the Internet, (7)
the changing demands of customers, and (8) arrangements with present and future
customers and third parties.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. Changes may
occur after that date and the Company will not update that information except as
required by law in the normal course of its public disclosure practices.
YEAR 2000 READINESS
The potential problems referred to as "Year 2000" or "Y2K" result from systems
using only two digits to indicate the year in a date and thereby not being able
to distinguish between January 1, 1900 and January 1, 2000. In addition, certain
systems may fail to detect that the year 2000 is a leap year.
The Y2K issue affects the Company's internal systems, including information
technology (IT) and non-IT systems. To evaluate these systems, the Company has
organized a task force to address software, hardware network, PC and third party
data and communication provider issues. The task force has created a
comprehensive action plan to assess and evaluate current systems and is
currently implementing replacements and modifications where necessary. The final
phase of the action plan includes thoroughly testing systems and developing
contingency plans as specific problems are identified.
22
The Company has substantially completed the assessment phase of its internal
hardware and software applications and is in the process of upgrading or
replacing non-compliant systems in the course of upgrading the computer
hardware. The Company has not accelerated the replacement dates for
non-compliant equipment, and the cost of upgrading non-compliant equipment was
previously included in the Company's planned capital expenditures. The Company
currently intends to complete its replacement and modification phase for
internal hardware and software applications in the second quarter of 1999. The
Company believes its host system, which is considered by management to be the
Company's critical system, is Y2K compliant since this system has control logic
based on binary Julian dates rather than the two-digit format. The Company is
currently testing its host system to ensure that it is Y2K compliant.
Furthermore, the Company expects that all phases of Y2K compliance can be
accomplished with current staffing levels. To date, no Y2K remediation costs
have been expensed and future costs, which are expected to be minimal, will not
be reflected in the financial statements until incurred.
The Company's Internet and online services are highly dependent upon outside
communication and third party data providers. The Company has compiled a list of
critical providers and vendors, which approximates 30, and is contacting them to
assess and monitor their compliance and remediation efforts. The Company cannot
currently identify whether all Y2K issues resulting from outside communication
and third party data providers will be resolved.
The most reasonably likely worst case scenario is the failure of one or more
outside communication or third party data provider to be Y2K compliant. Such
failure could require the Company to incur unanticipated expenses to replace
such outside communication or third party data, if needed, to maintain the
Company's products and services at expected levels, which action could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company anticipates being available to determine the
worst case scenarios by June 30, 1999. As the Company's testing phases of
internal hardware and software applications are completed and the assessments of
outside communication and third party data providers are received, the Company
will develop an applicable contingency plan for Y2K issues. The contingency plan
to react to the worst case scenario should be developed by the Company no later
than the end of July 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are filed pursuant to Item 14(a)1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's directors and executive officers are as follows:
Name Age Position
------------------------------------------------------------------------------------------
David L. Brown 58 Director, Chairman and Chief Executive Officer
Richard K. Carlin, Ph.D. 43 Director, Vice Chairman and Chief Technology Officer
Ronald Warren 52 President, Chief Financial Officer
Luiz V. Alvim** 68 Executive Vice President and Chief Operating Officer
Roger C. Wadsworth 51 Director and Senior Vice President
Joseph F. Frantz, II 35 Vice President
Danny E. Hoover 51 Vice President
William T. Melton 62 Vice President
Jerrold B. Smith 46 Vice President
Neil S. Waldman 41 Vice President
Christopher A. Glowacki 31 Director
Ronald W. Hart, Ph.D. 57 Director
Burt H. Keenan 59 Director
Russell I. Pillar 33 Director
Roy T. Rimmer, Jr. 58 Director
William D. Savoy 34 Director
Steven C. Wood 47 Director
** Retired
Each director holds office until the next annual meeting of stockholders or
until his successor has been elected and qualified. The Compensation Committee
and Audit Committee of the Board of Directors are each composed of Messrs.
Glowacki, Hart, Keenan, Pillar, Rimmer, Savoy, and Wood.
DAVID L. BROWN, Chairman of the Board and Chief Executive Officer since 1990,
has served as a Director of the Company since 1989. Mr. Brown is co-author of
CYBER-INVESTING: CRACKING WALL STREET WITH YOUR PERSONAL COMPUTER, a best seller
on computerized investing, WALL STREET CITY, a guide to investing on the
Internet, and GETTING STARTED IN ONLINE INVESTING, the latest release in the
Getting Started series, all published by John Wiley and Sons, Inc. From 1978 to
1986, Mr. Brown was President, and from 1992 to 1993 a Director, of Time Energy
Systems, Inc., a public company now known as the ACR Group, Inc. He has served
as Chairman of the U.S. Science and Technology Commission for the Emerging
Leaders Summit Conference series with the USSR. For the past ten years, he has
served as a Director of the Alliance for Aging Research, based in Washington,
D.C. He has also served as Chairman of the New Millennium Committee of the
Planetary Society, a group based in Pasadena, California, which supports space
exploration. He has served as Chairman of the Advisory Board of the Southwest
Council of Public CEOs and on the boards of several banks and financial
institutions. Mr. Brown began his career in the space program at NASA, where he
headed the team of engineers who designed the landing gear for the first lunar
module. Mr. Brown holds a B.S. degree in mechanical engineering from the
University of Pittsburgh and a M.B.A. from the University of Houston.
DR. RICHARD K. CARLIN, Vice Chairman of the Board since 1993 and Chief
Technology Officer since 1997, was one of the founders of Telescan and has
served as a Director of the Company since 1989. From 1988 to April 1990, Dr.
Carlin served as the Director of Technology Information Center, a subsidiary of
Maxwell Communications, where he managed the development and maintenance of a
technology transfer online database. From 1983 to 1988, he was with D.B.
Technology, Inc., the predecessor to the Company. From 1981 to 1983, Dr. Carlin
was Assistant Professor at Rockefeller University. Dr. Carlin holds a B.S.
degree in biophysical sciences from the University of Houston and a Ph.D. in
biochemistry, also from the University of Houston. Dr. Carlin is co-inventor of
the technology for which the Company was awarded two patents.
24
RONALD WARREN was appointed to the additional position of President in 1999
after having served as Chief Financial Officer since 1996. From 1986 to 1996,
Mr. Warren served as Vice president and Chief Financial Officer of CogniSeis
Development, Inc., a multinational company that developed and sold computer
software, hardware and systems to a worldwide customer base. From 1975 to 1985,
Mr. Warren held various financial management positions at Sonat Offshore
Drilling, Inc., a large international drilling contractor, including Treasurer
and Controller. Mr. Warren holds M.B.A. and B.A. degrees from Hofstra University
and is a Certified Public Accountant.
LUIZ V. ALVIM was appointed Chief Operating Officer in May 1996. He was named
Executive Vice President and "Acting" Chief Operating Officer of the Company in
March 1996, after having served as the Company's Director of Financial Research
and Chairman of the International Committee since 1994. From 1975 to 1977, Mr.
Alvim was the Director of Special Operations at A. Schulman, Inc. From 1977
through 1987, Mr. Alvim served as president of Intergulf, Inc. In 1987, Mr.
Alvim joined the Company as the Special Assistant to the CEO where he served
until 1988 when he joined PanAtlantica SA. as Executive Vice President and Chief
Operating Officer. Mr. Alvim returned to the Company in 1994. Mr. Alvim holds a
Masters degree in civil engineering from the University of Porto in Portugal.
Mr. Alvim retired from the Company in March 1999 after nearly ten years of
service.
ROGER C. WADSWORTH, Senior Vice President since 1990, has served as a Director
since 1989. From 1988 to 1990, Mr. Wadsworth served as President of the Company.
From 1983 to 1988, Mr. Wadsworth was employed as Vice President of Information
Management Services, Inc., in Houston, Texas, where he provided management
services to investment vehicles such as limited partnerships and joint ventures.
From 1979 to 1983, he served as co-owner of D. Russell Smith Associates, a
restaurant and tenant finish general contractor. Mr. Wadsworth holds a B.B.A.
degree from the University of Houston.
JOSEPH F. FRANTZ II, Vice President of the Company since May 1995, was appointed
to the additional position of Chief Information Officer in February 1999. Mr.
Frantz previously held the positions of Computer Operations Manger, End-User
Software Product Manager and Senior Programmer after joining the Company in 1987
as a Technical Support Representative. Mr. Frantz holds a B.S. in Applied
Mathematics from the University of Houston and a M.S. in Management Computing
and Systems from Houston Baptist University. Mr. Frantz is co-inventor of the
technology for which the Company was awarded two patents.
DANNY E. HOOVER, Vice President since September 1996, previously held the
positions of Manager of Development, Manager of Windows Development and Senior
Windows Programmer. Before joining the Company in 1992, Mr. Hoover was employed
as operations manager for Praxis Incorporated, a supervisory control automation
company in Houston, Texas. Mr. Hoover holds a B.S. in Electrical Engineering
from Texas A&M University.
WILLIAM T. MELTON, Vice President since January 1995, previously held the
position of Manager of Project Development. Before joining the Company in
October 1993, Mr. Melton served as a Project Manager with IBM, having previously
served in other sales positions as a 30-year employee of that company. Mr.
Melton holds both a B.S. in Business Administration and a M.B.A. from the
University of Arkansas.
JERROLD B. SMITH, Vice President since March 1998, previously held the positions
of Business Development Manager for the Company's Internet site, Wall Street
City, and Technical Support Supervisor after joining the Company in 1995. Prior
to joining the Company, Mr. Smith practiced financial planning and asset
management in Houston, Texas. From 1986 to 1988, Mr. Smith was national Sales
Manager for USOne Apparel of New York. From 1976 to 1986, Mr. Smith was a
salesman and ultimately regional Vice President of Donmoor, Inc., a wholesale
apparel manufacturer, also of New York. Mr. Smith holds a B.S. in Business
Administration from the University of Houston.
25
NEIL S. WALDMAN, Vice President since May 1995, previously held the position of
Director of Institutional Sales. Before joining the Company in 1993, Mr. Waldman
was employed as Manager of Business Development for IDD Information Services,
Inc., where he was instrumental in the introduction of three new products for
the investment management and brokerage communities. From 1989 to 1991, Mr.
Waldman served as Vice President of sales and marketing for Vista Computer,
Inc., where he directed sales and marketing for the developer of integrated
software solutions targeted at international commodities traders. Mr. Waldman
holds a B.S. in Business Administration from Northeastern University.
CHRISTOPHER A. GLOWACKI has worked in business development at NBC for over five
years. In his current role as Vice President of Business Development for NBC
Interactive, Mr. Glowacki oversees the development and implementation of NBC's
strategy in interactive media, including the Internet and Interactive
Television. Additionally, Mr. Glowacki is responsible for the development of new
business opportunities that arise from the network's conversion to digital
broadcasting. Mr. Glowacki, who reports to Martin Yudkovitz, President of NBC
Interactive, has a team of executives reporting to him who create opportunities
through internal development, joint ventures, mergers and acquisitions and
minority investment. In addition to such projects as MSNBC and SNAP, NBC has
minority investments in several high profile Interactive companies, including
the Company, CNET, TalkCity, iVillage, InterVu, Intertainer, Wink and U.S. Web,
as well as two venture capital funds, Media Technology Ventures and Media
Technology Equity Partners. Mr. Glowacki holds a M.B.A. from the University of
Michigan and a B.A. from Amherst College. Mr. Glowacki has been a director since
February 1999.
DR. RONALD W. HART has been a Distinguished Scientist in Residence for the Food
and Drug Administration, Public Health Service, since 1992. From 1980 to 1992,
he was the director for the National Center for Toxicological Research, Food and
Drug Administration, Public Health Service, Department of Health and Human
Services in Jefferson, Arkansas. From 1987 to 1993, Dr. Hart served on the Board
of Directors of First Commercial Bank Corporation of Little Rock, Arkansas. Dr.
Hart has received over 30 awards and recognition for his research and
administrative accomplishments and is an internationally recognized scientist
and science manager holding the position of Distinguished Professor at a number
of universities and colleges, including Cairo University, Cairo, Egypt; Gangzou
University, Gangzou, China; and Moscow State University, Moscow, Russia. Dr.
Hart also serves as a Professor at the University of Arkansas Center for Medical
Sciences and the University of Tennessee Center for Health Sciences. Dr. Hart
has published over 600 manuscripts on various topics, including research
management and administration and is a fellow of the American College of
Toxicology, American Association for the Advancement of Science, and the
Gerontology Society of America. Dr. Hart received his B.A. in 1967 from Syracuse
University, a M.S. in 1970 and a Ph.D. in 1971 at the University of Illinois,
Urbana. Dr. Hart has been a Director since 1990.
BURT H. KEENAN is Chairman and Chief Executive Officer of Independent Energy
Holdings, plc, a London Stock Exchange and Nasdaq listed company, which is the
largest independent generator/supplier of electricity in the deregulated markets
of the United Kingdom. From 1969 to 1986, Mr. Keenan was the founder, Chairman
and Chief Executive Officer of Offshore Logistics, Inc., a Nasdaq quoted marine
and aviation oil and gas service company. Mr. Keenan is a Director of Halter
Marine, Inc., an American Stock Exchange listed company engaged in U.S.
shipbuilding. He has a Bachelors and Masters degree from Tulane University and
resides in London. Mr. Keenan has been a Director since 1988.
RUSSELL I. PILLAR has served as President and Chief Executive Officer of Virgin
Entertainment Group, Inc., the North American operations of Richard Branson's
Virgin group of companies, since November 1998. Mr. Pillar served as President
and Chief Executive Officer of Prodigy Communications Corporation's Prodigy
Internet division from September 1997 through August 1998, having joined
Prodigy's Board of Directors as part of the group which purchased the company in
October 1996. Since October 1991, Mr. Pillar has also served as Managing Partner
of Critical Mass, a technology incubator/venture capital firm. From December
1993, through October 1996, he served as President, Chief Executive Officer and
Director of Precision Systems, Inc., a publicly traded international
telecommunications software provider. Mr. Pillar serves on a number of public
and private boards, including Prodigy Communications Corporation and is an
active member of the Young President's Organization and the Council on Foreign
Relations. Mr. Pillar graduated Phi Beta Kappa, cum laude from Brown University.
Mr. Pillar has been a Director since 1997.
26
ROY T. RIMMER, JR. was appointed to the Board of Directors in October 1998. Mr.
Rimmer is Chairman and Chief Executive Officer of Producers Pipeline
Corporation, a growing independent oil and gas operator, primarily engaged in
the acquisition and construction of crude oil and natural gas gathering and
transportation systems. Prior to joining Producers Pipeline in 1986, Mr. Rimmer,
a veteran oil industry executive, was Chairman and Chief Executive Officer of
Republic Gas Gathering Systems, Inc. Mr. Rimmer has also held senior management
positions with Republic Aluminum Corporation, Capital Building Systems,
Universal Lancaster Corporation, and AGC Industries.
WILLIAM D. SAVOY currently serves as Vice President of Vulcan Ventures
Incorporated, a venture capital fund wholly-owned by Paul G. Allen, co-founder
of Microsoft Corporation. From 1987 until November 1990, Mr. Savoy was employed
by Layered, Inc., a company controlled by Mr. Allen, and became its President in
1988. From November 1990 until the present, Mr. Savoy has served as President
for Vulcan Northwest Inc., a company which manages the personal financial
activities of Mr. Allen. Mr. Savoy serves on the Advisory Board of Dream Works
SKG of Los Angeles, California and serves on the Board of Directors of CNET,
Inc. of San Francisco, California; Harbinger Corporation of Atlanta, Georgia;
Metricom, Inc. of Los Gatos, California; Ticketmaster Online-CitySearch, Inc.,
of Pasadena California; USA Networks, Inc., of St. Petersburg, Florida; and U.S.
Satellite Broadcasting of Minneapolis, Minnesota. Mr. Savoy also represents Mr.
Allen in a wide variety of other personal financial transactions. Mr. Savoy
holds a B.S. in Computer Science, Accounting and Finance from Atlantic Union
College. Mr. Savoy has been a Director since 1993.
STEPHEN C. WOOD is currently President and Chief Executive Officer of Wireless
Services Corporation based in Bellevue, Washington. Until May 1996, Mr. Wood was
President and CEO of Notable Technologies, L.L.C., which filed for bankruptcy in
1996. From 1993 through 1994, Mr. Wood served as Vice President of Information
Broadcasting for McCaw Development Corporation located in Kirkland, Washington.
Until February 1993, he was President of Starwave Corporation, a company he
formed in 1991 with Microsoft Corporation co-founder Paul G. Allen to develop
and market data and information products. From 1986 through 1991, Mr. Wood
served in several executive positions at Asymetrix Corporation, a software
development and marketing firm founded by Mr. Allen. From 1980 until 1985, Mr.
Wood was in charge of building a microcomputer software development organization
for Datapoint Corporation in Austin, Texas, after serving in Research &
Development and marketing positions. Mr. Wood began his career in 1976 when he
became the sixth employee of Microsoft Corporation, where he was general manager
from 1977 to 1980. Mr. Wood holds a B.S. in Computer Engineering from Case
Western Reserve University and a M.S. in Electrical Engineering from Stanford
University. Mr. Wood has been a Director since 1992.
ITEM 11. EXECUTIVE COMPENSATION
The following table reflects all forms of compensation for services to the
Company for the years ended December 31, 1998, 1997, and 1996, of the Chief
Executive Officer and the Company's other most highly compensated executive
officers who were serving the Company at the end of 1998 and who earned $100,000
or more that year. No other executive officers of the Company received
compensation exceeding $100,000 during 1998.
27
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- ---------------------
SECURITIES UNDERLYING
NAME YEAR SALARY BONUS OPTIONS
- - ---- ---- ------ ----- ---------------------
David L. Brown 1998 $140,000 --- 28,800
CHIEF EXECUTIVE OFFICER 1997 $138,425 --- 31,443
1996 $124,906 --- 12,000
Richard K. Carlin 1998 $107,700 --- 17,400
CHIEF TECHNOLOGY OFFICER 1997 $101,598 $2,911 15,941
1996 $ 89,257 --- 7,500
Ronald Warren 1998 $100,000 --- 14,000
PRESIDENT AND CHIEF 1997 $ 95,333 --- 9,416
FINANCIAL OFFICER 1996 $ 16,731 --- 12,000
Luiz V. Alvim 1998 $116,205 --- 7,000
CHIEF OPERATING OFFICER 1997 $105,404 --- 16,505
1996 $ 87,894 --- 22,000
Neil S. Waldman 1998 $112,575 --- 5,300
VICE PRESIDENT 1997 $111,755 $6,267 7,474
1996 $103,216 --- 2,500
DIRECTOR COMPENSATION
The Company does not currently pay any directors' fees in cash, but it
reimburses expenses incurred by its directors to attend board meetings.
Directors who are not officers of the Company were granted stock options (i) in
February 1998 for 5,000 shares at an exercise price of $6.44 per share until
January 31, 2008 and (ii) on December 30, 1998 for 6,000 shares at an exercise
price of $8.91 per share exercisable until December 30, 2008 for services
provided to the Company as directors.
STOCK OPTIONS
The following tables set forth information relating to the named executive
officers with respect to (i) stock options granted in 1998 and (ii) the total
number of exercised options through 1998 and the value of the unexercised
in-the-money options.
28
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES ASSUMED ANNUALRATE OF
UNDERLYING PERCENT OF TOTAL EXERCISE STOCK PRICE APPRECIATION FOR
OPTIONS OPTIONS GRANTED TO PRICE PER EXPIRATION OPTION TERM
NAME GRANTED FISCAL YEARN SHARE DATE 5% 10%
- - ---- ------- ----------- ---------- ----------- --------- ---------
David L. Brown 12,000(1) 3.3% $6.44 1/31/2008 $48,601 $123,164
16,800(1) 4.6% $8.91 12/30/2008 $94,138 $238,564
Richard K. Carlin 7,400(1) 2.0% $6.44 1/31/2008 $29,971 $ 75,951
10,000(1) 2.7% $8.91 12/30/2008 $56,035 $142,002
Ronald Warren 6,000(1) 1.6% $6.44 1/31/2008 $24,300 $ 61,582
8,000(1) 2.2% $8.91 12/30/2008 $44,828 $113,602
Luiz V. Alvim 7,000(2) 1.9% $6.44 1/31/2008 $28,351 $ 71,846
Neil S. Waldman 2,300(1) 0.6% $6.44 1/31/2008 $ 9,315 $ 23,607
3,000(1) 0.8% $8.91 12/30/2008 $16,810 $ 42,601
(1) Options vest 25% annually beginning 12 months after the date of grant.
(2) Options vest 33 1/3% annually beginning 12 months after the date of grant.
- - --------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END FISCAL YEAR END
------------------------ --------------------------
VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISECQUIRED ON REALIZED UNEXERCISABLE UNEXERCISABLE
- - ---- ------------------ ------------- ------------------------ -------------------
David L. Brown 0 0 26,000/50,735 $35,140/$115,735
Richard K. Carlin 59,000 $236,710 30,071/31,110 $79,177/$71,958
Ronald Warren 0 0 10,916/24,500 $31,349/$43,835
Luiz V. Alvim 5,130 $ 4,771 36,423/21,952 $105,293/$64,949
Neil S. Waldman 11,641 $34,116 6,250/12,383 $ 9,963/$34,358
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 26, 1999, unless
otherwise indicated with respect to the number of shares of Common Stock
beneficially owned by (1) each director and/or named executive officer
individually, (2) all executive officers and directors of the Company as a group
and (3) each stockholder known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock. The number of shares is exclusive of
shares allocated to the person's account through the Company's 401(k) plan.
Except as noted below, each stockholder has sole voting and investment power
with respect to the shares shown.
NUMBER OF SHARES
OWNERS BENEFICIALLY OWNED % OF CLASS
- - ------ ------------------- -------------
David L. Brown 947,491(1) 7.6
Dr. Richard K. Carlin 255,469(2) 2.0
Ronald Warren 27,806(3) *
Roger C. Wadsworth 122,889(4) 1.0
Neil S. Waldman 4,116(5) *
Dr. Ronald W. Hart 53,750(6) *
Burt H. Keenan 74,750(7) *
William D. Savoy 47,910(8) *
Stephen C. Wood 5,600 *
Russell I. Pillar 1,250(9) *
Roy T. Rimmer, Jr. 1,500 *
Lacy J. Harber 2,027,300 16.6
Route 2, Box 49Y
Denison, Texas 75020
Paul G. Allen 1,290,000(10) 10.3
Vulcan Ventures Incorporated
110 110th Avenue N.E., Suite 685
Bellevue, WA 98004-5840
GE Capital Equity Investment, Inc. 1,220,237 9.8
120 Long Ridge Road
Stamford, Connecticut 06927
G. Robert Friedman 1,053,919 8.4
Friedman & Associates
Five Post Oak Park, Suite 1800
Houston, Texas 77027
All directors and executive officers 1,564,006 12.5
as a group (16 persons)
- - --------------------------------------------------------------------------------
Less than 1%.
(1) Includes 734,818 shares owned by the Brown Family Partnership. David L.
Brown has shared voting and investment power in the Brown Family
Partnership along with other family members who are not officers and/or
directors of the Company. Includes 171,238 shares owned by David L. Brown
personally. Also includes options to purchase 41,435 shares, which are
exercisable within the next sixty days.
30
(2) Includes options to purchase 39,693 shares, which are exercisable within
the next sixty days.
(3) Includes options to purchase 12,416 shares, which are exercisable within
the next sixty days.
(4) Includes options to purchase 18,821 shares, which are exercisable within
the next sixty days.
(5) Includes options to purchase 4,116 shares, which are exercisable within the
next sixty days.
(6) Includes options to purchase 24,750 shares, which are exercisable within
the next sixty days.
(7) Includes options to purchase 59,750 shares, which are exercisable within
the next sixty days.
(8) Includes options to purchase 17,910 shares, which are exercisable within
the next sixty days.
(9) Includes options to purchase 1,250 shares, which are exercisable within the
next sixty days.
(10) Vulcan is owned 100% by Paul G. Allen.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the normal course of business some members of the Board of Directors have
proposed business alliances with companies with which they are associated. In
the opinion of management, each of these transactions or arrangements were
entered into on terms as favorable to the Company as could have been obtained in
transactions or arrangements with unaffiliated third parties.
VULCAN VENTURES, INCORPORATED
Pursuant to the terms of a May 20, 1992 stock purchase agreement between Vulcan
and the Company, Vulcan has the right to designate one nominee director to the
Company's Board of Directors for as long as Vulcan (or its affiliate) owns at
least 540,000 shares of Common Stock of the Company. In addition, the Company
has agreed not to take any corporate action to increase its number of directors
without the unanimous written consent of all directors for as long as Vulcan (or
its affiliate) owns at least 540,000 shares of Common Stock of the Company.
KNOWLEDGE EXPRESS DATA SYSTEMS, L.C.
KE, of which the Company owns 55.58%, is 30% owned by GRF Interests, Inc.
("GRF"), a company controlled by G. Robert Friedman, a significant stockholder
and a former director of the Company. The Company provides computer hardware,
programming, systems maintenance, data loading, telecommunications and certain
administrative services to KE. The Company charges KE a fixed monthly fee for
the use of its systems operations plus 140% of the actual salaries for personnel
working on KE services. Non-personnel expenditures are billed at the Company's
actual cost. During 1998, the maximum indebtedness of KE to the Company was
approximately $119,000, representing the amount due under the service contract
and amounts loaned to KE for operating expenses. As of December 31, 1998 KE had
a balance owing to the Company of $66,000. For the year ended December 31, 1998,
KE had a net loss of $376,000, of which $233,000 was recognized by the Company.
The Company absorbed 100% of the impairment loss of $55,000 since the loss
caused the minority investment to be below zero.
TELEBUILD, L.C.
Friedman Interests, Inc., a company controlled by G. Robert Friedman, owns
45.42% of TeleBuild, L.C. ("TeleBuild"). The Company and the Brown Family
Partnership own 15.834% and 25.44%, respectively, of TeleBuild. The Brown Family
Partnership is owned by David L. Brown, the Company's Chairman and Chief
Executive Officer and other members of the Brown family. The Company performs
services under contract for TeleBuild, which consist primarily of the
development, maintenance and operation of the TeleBuild database system and the
provision of office space, equipment and furniture. The Company charges
TeleBuild for its personnel at a
31
stipulated rate, which reflects the full absorption of overhead costs to the
Company plus an appropriate profit margin determined by management and approved
by the outside directors. Non-personnel expenditures under the agreement are
billed at actual cost. For the year ended December 31, 1998, $1,152,000, or
7.4%, of the Company's total revenue was derived from services provided to
TeleBuild. TeleBuild made payments totaling $643,000 during 1998 on the balance
owed the Company. As of December 31, 1998, TeleBuild owed the Company $729,000,
which was the maximum indebtedness during the year.
CYBERACTION LIMITED
The Company maintains a marketing license and revenue sharing agreement with
CyberAction Limited. Dr. Ronald W. Hart, a director of the Company, is on the
Board of Directors of CyberAction. No royalties were paid to CyberAction in 1998
and none are expected to be paid in 1999.
WIRELESS SERVICES CORPORATION
The Company maintains a service agreement with Wireless Services Corporation,
for which Stephen C. Wood serves as Chief Executive Officer and Dr. Ronald W.
Hart serves on the Board of Directors. The service became operational during
1997 and the Company paid Wireless Services Corporation $31,000 in 1998. The
Company does not expect to pay minimum fees or royalties in excess of $60,000 in
1999.
INDEBTEDNESS OF MANAGEMENT
Roy T. Rimmer, Jr. a member of the Company's Board of Directors, was indebted to
the Company for $71,250 at March 31, 1999. The non-interest bearing indebtedness
arises from license fees and contract personnel reimbursement. The maximum
indebtedness during 1998 was $101,000.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES ON FORM 10-K
The following documents are filed as part of this Form 10-K:
1. Financial Statements
- Independent Auditor's Report............................. 36
- Consolidated Balance Sheets as of
December 31, 1998 and 1997............................. 37
- Consolidated Statements of Operations for
the years ended December 31, 1998, 1997
and 1996............................................... 38
- Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1998, 1997 and 1996.................................... 39
- Consolidated Statements of Cash Flows for
the years ended December 31, 1998, 1997
and 1996............................................... 40
- Notes to Consolidated Financial Statements............... 42
2. Financial Statements Schedules
- Independent Auditor's Report on Schedule................. 54
- Schedule I - Valuation and Qualifying Accounts........... 55
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements or notes thereto.
3. Exhibits
Exhibit No.
3.1** Restated Certificate of Incorporation of Registrant.
(Incorporated by reference to the Company's Form S-1 dated
September 14, 1993 (Registration No. 33-52182)). 3.2**
Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration
No. 33-52182)).
3.3** By-laws of the Registrant. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.1** See Exhibits 3.1 through 3.3 for provisions of the Certificate
of Incorporation and By-laws of the Registrant defining rights
of holders of common stock of the Registrant. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.2** Asset Purchase Agreement dated June 30, 1990, between TIC
Software, Inc. and the Registrant which sets forth certain
registration rights of TIC Software, Inc. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
33
4.3** Exhibits to Asset Purchase Agreement dated June 30, 1990,
between TIC Software, Inc. and the Registrant which set forth
certain registration rights of TIC Software, Inc. (Incorporated
by reference of the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.4** Assignment of Agreement between Jacob Sobotka, Marvin Deuell,
Raymond C. Wicker and the Registrant which sets forth certain
registration rights of those parties, effective as of January 1,
1992. (Incorporated by reference to the Company's Form S-1 dated
September 14, 1993 (Registration No. 33-52182)).
4.5** Assignment of General Partnership interest between New World
Technologies, a Texas general partnership, and the Registrant
which sets forth certain registration rights effective as of
January 1, 1992. (Incorporated by reference to the Company's
Form S-1 dated September 14, 1993 (Registration No. 33-52182)).
4.6** Certificate of Designation of Preferred Stock (Incorporated by
reference to the Company's Form S-1 dated June 15, 1998).
10.1** Amended Stock Option Plan. (Incorporated by reference to Exhibit
4.1 to the Company's Post-Effective Amendment No. 1 to Form S-8
(File No. 33-63172) as filed with the Commission on February 2,
1994). (1)
10.2** 1995 Stock Option Plan. (Incorporated by reference to Exhibit
99.1 to the Company's Registration Statement on Form S-8 (File
No. 33-94514). (1)
10.3** Regulations of Telescan (TRC), L.C. effective January 1, 1992 by
and between the Registrant and The Radnor-Houston Joint Venture.
(Incorporated by reference to the Company's Form S-1 dated
September 14, 1993 (Registration No. 33-52182)). 10.4** First
Amendment to Regulations of Knowledge Express, L.C. (formally
known as Telescan (TRC), L.C.) entered into effective July 23,
1992, by and between the Registrant and The Radnor-Houston Joint
Venture. (Incorporated by reference to Amendment No. 1 to the
Company's Form S-1 dated January 8, 1993.)
10.5** Regulations of TeleBuild, L.C. entered into effective July 31,
1992, by and among the Registrant, JST Technology Center, Inc.
and Friedman Interests, Inc. (Incorporated by reference to
Amendment No. 2 to the Company's Form S-1 dated February 1,
1993).
10.6** Employment Agreement by and between the Company and David L.
Brown dated March 10, 1994. (Incorporated by reference to
Post-Effective Amendment No. 1 to the Company's Form S-1 dated
August 11, 1994). (1) 10.7** Office Lease Agreement between the
Registrant and Chevron U.S.A., Inc. dated November 8, 1995.
(Incorporated by reference to the Company's Form 10-K for the
annual period ended December 31, 1995).
10.8** Stock Purchase Agreement by and between the Company and GE
Capital Equity Investment Inc. (Incorporated by reference to the
Company's Form 8-K dated January 14, 1999).
11* Statement regarding computation of earnings per share.
21* Subsidiaries of the Registrant.
23* Consent of independent auditors.
27.1 Restated Financial Data Schedule for the year ended December 31,
1996.
27.2 Restated Financial Data Schedule for the three months ended
March 31, 1997.
27.3 Restated Financial Data Schedule for the six months ended June
30, 1997.
27.4 Restated Financial Data Schedule for the nine months ended
September 30, 1997.
27.5 Restated Financial Data Schedule for the year ended December 31,
1997.
27.6 Restated Financial Data Schedule for the three months ended
March 31, 1998.
27.7 Restated Financial Data Schedule for the six months ended June
30, 1998.
27.8 Restated Financial Data Schedule for the nine months ended
September 30, 1998.
27.9 Financial Data Schedule for the year ended December 31, 1998.
- - --------------------------------------------------------------------------------
* Indicates documents filed herewith.
** Indicates documents incorporated by reference from the prior
filing indicated.
(1) Management contracts or compensation plans or arrangements.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1998.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Houston, State of
Texas, on March 26, 1999.
Telescan, Inc.
By: /s/ DAVID L. BROWN
David L. Brown, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities and on the date
indicated
SIGNATURE TITLE DATE
-------------- ------------ --------
/s/ DAVID L. BROWN Chairman of the Board, Chief Executive Officer March 26, 1999
David L. Brown and Director (Principal Executive Officer)
/s/ DR. RICHARD K. CARLIN Vice Chairman of the Board, March 26, 1999
Dr. Richard K. Carlin Chief Technology Officer
/s/ RONALD WARREN President, Chief Financial Officer (Principal Financial March 26, 1999
Ronald Warren Officer and Principal Accounting Officer)
/s/ ROGER C. WADSWORTH Senior Vice President and Director March 26, 1999
Roger C. Wadsworth
/s/ CHRISTOPHER A. GLOWACKI Director March 26, 1999
Christopher A. Glowacki
/s/ DR. RONALD W. HART Director March 26, 1999
Dr. Ronald W. Hart
/s/ BURT H. KEENAN Director March 26, 1999
Burt H. Keenan
/s/ RUSSELL I. PILLAR Director March 26, 1999
Russell I. Pillar
/s/ROY T. RIMMER JR. Director March 26, 1999
Roy T. Rimmer Jr.
/s/ WILLIAM D. SAVOY Director March 26, 1999
William D. Savoy
/s/ STEPHEN C. WOOD Director March 26, 1999
Stephen C. Wood
35
INDEPENDENT AUDITOR'S REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS
TELESCAN, INC.
HOUSTON, TEXAS
We have audited the accompanying consolidated balance sheets of Telescan, Inc.
and subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Telescan, Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Houston, Texas
February 5, 1999
36
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
DECEMBER 31,
--------------------
1998 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 627 $ 1,105
Accounts receivable, net of allowance
of $351 and $107, respectively ................... 2,645 1,956
Receivable from affiliates ......................... 643 155
Prepaid expenses ................................... 370 463
Inventory .......................................... 53 81
Other current assets ............................... 235 228
-------- --------
TOTAL CURRENT ASSETS ........................... 4,573 3,988
Property and equipment, net of accumulated
depreciation of$4,196 and $3,271, respectively ..... 1,698 2,182
Software development costs, net ........................ 5,331 5,482
Software technology rights, net ........................ 196 176
Capitalized data costs, net ............................ 150 422
Other assets ........................................... 60 227
TOTAL ASSETS ....................................... $ 12,008 $ 12,477
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................... $ 2,237 $ 2,124
Accrued liabilities ................................ 1,074 462
Accrual for phaseout of discontinued operations .... -- 19
Current portion of long-term debt and
capital lease obligations ........................ 500 449
Amounts due to stockholders and affiliates ......... 36 190
-------- --------
TOTAL CURRENT LIABILITIES ...................... 3,847 3,244
Long-term debt ......................................... 16 152
Capital lease obligations .............................. 327 323
Minority interest in subsidiary ........................ -- 9
Commitments and contingencies (Note 6 and 13) .......... -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000
shares authorized; 5% cumulative
convertible preferred stock - 120,000
shares issued and outstanding at
December 31, 1998 .............................. 1 --
Common stock, $.01 par value; 15,000,000
shares authorized; 11,089,792 and
10,924,382 shares issued and outstanding
in 1998 and 1997, respectively ................. 111 109
Additional paid-in capital ......................... 21,492 17,972
Accumulated deficit ................................ (13,786) (9,332)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ..................... 7,818 8,749
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 12,008 $ 12,477
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
37
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Revenue:
Service .................................................... $ 13,677 $ 13,296 $ 11,073
Products ................................................... 713 1,507 1,948
Contract revenue earned from affiliates .................... 1,152 1,322 735
-------- -------- --------
Total Revenue .......................................... 15,542 16,125 13,756
Costs and Expenses:
Cost of service ............................................ 8,799 8,071 7,365
Cost of products ........................................... 353 685 1,184
Marketing expenses ......................................... 2,889 2,487 3,166
General and administrative expenses ........................ 6,351 4,971 5,237
Loss on writedown of impaired assets ....................... 1,530 -- --
Interest expense, net ...................................... 97 105 83
-------- -------- --------
Total Costs and Expenses ............................... 20,019 16,319 17,035
Loss before minority interest in loss of subsidiary ............ (4,477) (194) (3,279)
Minority interest in loss of subsidiary ........................ 142 409 345
-------- -------- --------
Income (loss) from continuing operations ....................... (4,335) 215 (2,934)
Income (loss) from discontinued operations .................... 19 (19) --
-------- -------- --------
Net income (loss) .............................................. (4,316) 196 (2,934)
Preferred stock dividends ...................................... 94 -- --
Incremental yield dividend ..................................... 44 -- --
-------- -------- --------
Income (loss) available for common stockholders ................ $ (4,454) $ 196 $ (2,934)
======== ======== ========
Income (loss) per share (Note 12):
Income (loss) from continuing operations per
common share:
Basic .................................................. $ (0.41) $ 0.02 $ (0.28)
Diluted ................................................ $ (0.41) $ 0.02 $ (0.28)
Income (loss) from discontinued operations per common share:
Basic .................................................. $ -- $ -- $ --
Diluted ................................................ $ -- $ -- $ --
Income (loss) available to common stockholders:
Basic .................................................. $ (0.40) $ 0.02 $ (0.28)
Diluted ................................................ $ (0.40) $ 0.02 $ (0.28)
Weighted average shares - basic ................................ 11,039 10,766 10,615
Dilutive effect of options ..................................... -- 173 --
-------- -------- --------
Weighted average shares - diluted .............................. 11,039 10,939 10,615
The accompanying notes are an integral part of
these consolidated financial statements.
38
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
5% CONVERTIBLE
COMMON STOCK PREFERRED STOCK ADDITIONAL TOTAL
--------------------- ------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------------------- ------------------ --------- ---------- -------------
BALANCE JANUARY 1, 1996 ... 10,242 $ 102 -- $ -- $ 14,457 $ (6,594) $ 7,965
Issuances of stock
under stock option plan 75 1 -- -- 152 -- 153
Other issuances ........... 416 4 -- -- 2,776 -- 2,780
Net loss .................. -- -- -- -- -- (2,934) (2,934)
------------------- ------------------- -------- -------- --------
BALANCE DECEMBER 31, 1996 . 10,733 107 -- -- 17,385 (9,528) 7,964
Issuances of stock
under stock option plan . 166 2 -- -- 478 -- 480
Other issuances ........... 25 -- -- -- 100 -- 100
Other ..................... -- -- -- -- 9 -- 9
Net income ................ -- -- -- -- -- 196 196
------------------- ------------------- -------- -------- --------
BALANCE DECEMBER 31, 1997 . 10,924 109 -- -- 17,972 (9,332) 8,749
Issuances of stock
under stock option plan . 166 2 -- -- 458 -- 460
Issuance of convertible
preferred stock ......... -- -- 120 1 2,999 -- 3,000
Incremental yield on
preferred stock ......... -- -- -- -- 44 (44) --
Other ..................... -- -- -- -- 19 -- 19
5% convertible
preferred stock dividends -- -- -- -- -- (94) (94)
Income (loss) ............. -- -- -- -- -- (4,316) (4,316)
------------------- ------------------- -------- -------- --------
BALANCE DECEMBER 31, 1998 . 11,090 $ 111 120 $ 1 $ 21,492 $(13,786) $ 7,818
=================== =================== ======== ======== ========
The accompanying notes are an
integral part of these consolidated financial statements.
39
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................... $(4,316) $ 196 $(2,934)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Minority interest in (loss) of subsidiary ..... (142) (409) (345)
Reverse loss on discontinued operations ....... (19) 19 --
Depreciation and amortization ................. 2,917 2,473 2,173
Gain on the sale of equipment ................. -- (15) --
Loss on writedown of impaired assets .......... 1,530 -- --
Provision for doubtful accounts ............... 339 127 68
Changes in current assets and liabilities:
Receivables and advances .......................... (1,772) (279) (449)
Other current assets .............................. 89 (60) 113
Accounts payable .................................. 113 137 524
Other current liabilities ............................. 619 12 225
------- ------- -------
Net cash provided by (used in) operating activities (642) 2,201 (625)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment ....................... 2 178 --
Additions to property and equipment ................... (137) (272) (765)
Additions to software development costs ............... (2,519) (2,505) (1,873)
Additions to capitalized data costs ................... -- -- (139)
Other ................................................. (5) (5) (39)
------- ------- -------
Net cash used in investing activities ............. (2,659) (2,604) (2,816)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock ............. 3,000 -- --
Capital calls from minority stockholder ............... 127 294 --
Proceeds from issuances of common stock ............... 460 480 2,780
Proceeds from other issuances ......................... 18 13 --
Other ................................................. -- -- (97)
Preferred dividends paid .............................. (94) -- --
Proceeds from notes payable ........................... -- 110 --
Advance from stockholder/affiliates ................... (154) 154 100
Capital lease obligations ............................. -- 143 --
Payments on notes payable and capital lease obligations (534) (478) (346)
------- ------- -------
Net cash provided by financing activities ......... 2,823 716 2,437
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... (478) 313 (1,004)
CASH AND CASH EQUIVALENTS:
Beginning of year ......................................... 1,105 792 1,796
------- ------- -------
End of year ............................................... $ 627 $ 1,105 $ 792
======= ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
40
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest ................................................. $ 98 $ 90 $ 75
==== ==== ====
Supplemental non-cash investing and financing activities:
Common stock issued to purchase software technology rights -- 100 249
Computer and telephone equipment acquired under long-term
capital leases ......................................... 453 273 452
Incremental yield on preferred stock ..................... 44 -- --
The accompanying notes are an integral part
of these consolidated financial statements.
41
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements reflect the
accounts of Telescan, Inc. and its majority owned subsidiary ("Telescan" or the
"Company"). The Company's consolidated statements of operations include the
results of Knowledge Express Data Systems, L.C. ("KE"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
NATURE OF BUSINESS. The Company provides Internet services, innovative solutions
for online technology and data retrieval tools. The Company develops, markets,
and operates major online networks serving the financial, publishing,
entertainment and technology-transfer industries. The Company's products and
services, which are based upon its proprietary online operating system and user
software, allow its customers to electronically access and analyze information
through their personal computer systems either through the Internet on online.
The Company's primary financial products are the Telescan system of Internet and
online financial databases and software tools, which offer current and
historical financial news and information as well as search and analytical tools
provided directly by the Company and under private label arrangements with third
parties. The non-financial segment includes third party Internet and online
services, which are developed and operated via alliances with third parties in
the advertising, entertainment and publishing industries; Pure Baseball, an
Internet-based game offered to baseball enthusiasts; and KE, an online database
for the biotechnical/pharmaceutical industry. The Company has a majority
interest (55.58%) in and is the exclusive system operator of KE.
SIGNIFICANT ESTIMATES. Preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosed amounts of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
CONCENTRATION OF CREDIT RISK. The Company markets its products to a diverse
customer base, and as such does not have any significant concentrations of
credit risk. No single customer accounted for 10% of consolidated revenue for
1998, 1997 or 1996. The Company maintains deposits in banks, which may exceed
the amount of federal deposit insurance available. Management believes the
potential risk of loss on these accounts is minimal.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The fair value of financial instruments,
primarily accounts receivable, accounts payable and notes payable, closely
approximate the carrying values of the instruments due to the short-term
maturities of such instruments.
COMPREHENSIVE INCOME (LOSS). Comprehensive income is defined as all changes in
stockholders' equity, exclusive of transactions with owners, such as capital
investments. Comprehensive income includes net income or loss, changes in
certain assets and liabilities that are reported directly in equity such as
translation adjustments on investments in foreign subsidiaries, and certain
changes in minimum pension liabilities. The Company's comprehensive income
(loss) was equal to its net income (loss) for all periods presented in these
financial statements.
CASH AND CASH EQUIVALENTS. For purposes of the statement of cash flows, the
Company considers cash equivalents to include all cash items, such as time
deposits and short-term investments that mature in three months or less from the
date of acquisition.
INVENTORIES. Inventories are carried at the lower-of-cost or market, with cost
determined on the specific identification method.
42
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT. Equipment is recorded at cost and depreciated over the
estimated useful life of the related assets. Equipment under capital lease is
amortized over the lease term. Depreciation and amortization expense is
determined principally on the straight-line method. The estimated useful lives
of the Company's property and equipment is as follows:
Computer and other equipment 3-5 years
Furniture and fixtures 7 years
Other 3-5 years
SOFTWARE DEVELOPMENT COSTS. Costs incurred in the research, design and
development of software are charged to expense until technological feasibility
is established, after which remaining software production costs are capitalized
and amortized on a product-by-product basis. The Company determines a product to
be technologically feasible when a working model of the product has been
completed and thoroughly tested so as to be available for sale to external
customers. Capitalized software development costs are amortized over the greater
of the ratio of current revenue to the total revenue expected to be generated
for the product or the straight-line method over the life of the product. The
greater expense has been the straight-line method, which the Company has used
over the life of the product, which is typically three to five years.
Amortization of capitalized software development costs begins when the related
product is available for general release to customers. The Company periodically
reviews software development costs to assess impairment. Amounts impaired are
charged to expense as identified. Amortization of software development costs is
included in cost of service in the accompanying statements of operations and
totaled $1,623,000, $1,205,000, and $864,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Accumulated amortization totaled $6,594,000
and $4,180,000 at December 31, 1998 and 1997, respectively.
SOFTWARE TECHNOLOGY RIGHTS. The Company has acquired rights to certain core
software technologies. These rights are recorded at cost and amortized over a
period of five years. Amortization of software technology rights is included in
cost of service in the accompanying statements of operations and totaled
$72,000, $69,000 and $80,000 for the years ended December 31, 1998, 1997 and
1996, respectively. Accumulated amortization totaled $153,000 and $176,000 at
December 31, 1998 and 1997, respectively.
CAPITALIZED DATA COSTS. Costs incurred to acquire data are capitalized and
amortized on a straight-line basis over five years. Capitalized data costs
include actual costs to acquire the data plus personnel costs specifically
related to loading the purchased data and performing the required programming.
Amortization of capitalized data costs is included in cost of service in the
accompanying statements of operations and totaled $166,000, $235,000 and
$309,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Accumulated amortization totaled $1,638,000 and $1,366,000 at December 31, 1998
and 1997, respectively. The Company periodically reviews capitalized data costs
to assess impairment. Amounts impaired are charged to expense as identified.
DIRECT-RESPONSE ADVERTISING COSTS. The Company expenses direct-response
advertising costs in the period in which the costs are incurred.
GOODWILL. Goodwill totaling $94,000 and $343,000 at December 31, 1998 and at
December 31, 1997, respectively, represents the cost in excess of the fair value
of the net assets of companies acquired and is being amortized on the
straight-line basis over periods ranging from ten to fifteen years. Accumulated
amortization totaled $61,000 and $164,000 at December 31, 1998 and 1997,
respectively. Goodwill amortization totaled approximately $58,000, $58,000 and
$52,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
LONG-LIVED ASSETS. The Company reviews for the impairment of long-lived assets
and certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss would be recognized when estimated future cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount. The Company has identified such impairment losses in 1998. See
discussion of such in Note 2 to these financial statements.
43
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EQUITY INVESTMENTS . The Company accounts for its investments in less than
majority-owned entities using the equity method of accounting, provided its
ownership is not less than 20 percent. The Company discontinues recognition of
losses on such investments once the Company's investment has been reduced to
zero, provided the Company is not committed to fund the operations of the joint
venture and is not contingently liable for obligations of such joint ventures.
The Company accounts for investments in entities in which its ownership is less
than 20 percent on the cost method.
MINORITY INTEREST. At the end of 1998, the minority interest investment had been
reduced to zero. The Company elected to absorb an additional $55,000 in losses
rather than request additional capital from the minority stockholder. If KE is
not profitable in 1999 or the minority stockholder does not make additional
capital contributions, the Company will absorb 100% of any loss generated rather
than the Company's ownership share of 55.58%.
REVENUE RECOGNITION. The Company recognizes service revenue when the service is
provided. Software license fee revenue is recognized upon contract signing
unless significant future obligations remain. For revenues recognized on
agreements not requiring significant modifications, the Company follows
Statement of Position 97-2 "Software Revenue Recognition". In these instances,
revenue is not recognized until obligations have been satisfied or are no longer
significant. Product revenue is recognized when the product is shipped.
INCOME TAXES. The Company accounts for income taxes on the liability method
under which the amount of deferred income taxes is based upon the tax effects of
the differences between the financial and income tax basis of the Company's
assets and liabilities at the balance sheet date based upon existing laws.
EARNINGS PER SHARE. Basic earnings per share is computed based on the weighted
average number of common shares outstanding. Diluted earnings per share is
calculated under the treasury stock method and reflects the potential dilution
that could occur if certain options were exercised. The dilutive effect of stock
options was not calculated in 1998 and 1996 since the Company incurred a loss in
those years. (See Note 12)
RECLASSIFICATIONS. Amounts in prior years' financial statements have been
restated to conform to the current year's presentation. Such restatements had no
effect on net income or loss.
2. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
In November 1997, the Board of Directors approved a plan to spin-off the
non-financial segment of the Company's business in an effort to concentrate on
the Company's core financial services information business. During the first
quarter of 1999, the Company reviewed a proposal from a prospective buyer and
determined there was a greater strategic value in retaining and developing the
Internet operations of the non-financial business.
Assets, liabilities, revenues and operating loss of the Company's non-financial
segment for 1998, 1997 and 1996 were as follows:
(In thousands) 1998 1997 1996
Assets ..................... 555 1,881 2,088
Liabilities ................ 475 260 780
Revenues ................... 1,969 1,215 1,758
Operating Loss ............. (1,558) (614) (660)
At the date of the spin-off announcement, the Company determined that the book
value of assets of the non-financial business segment approximated fair market
value. There was no loss recorded for the disposal of the business segment and
the assets of the operation were determined to be recorded at the net realizable
value. In the Company's decision to retain the non-financial operations, it was
determined that certain previously capitalized costs were no longer useful to
the Company in its pursuit of high-growth Internet business. In accordance with
the Company's policy of reviewing asset value recoverability, it was determined
that the estimated future undiscounted cash flows were less than the carrying
value of specific long-lived assets. The Company adjusted the carrying value of
such long-lived assets, primarily software development, capital data costs and
related goodwill, to their estimated fair value, resulting in a non-cash
impairment loss of $1,530,000 which is included in continuing operations.
44
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The remaining assets have been reclassified to continuing operations. Provision
for operating losses during phaseout of $19,000 at December 31, 1997 has been
reversed as part of discontinued operations. The remaining revenue and expenses
in discontinued operations have been reclassified to continuing operations.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1998 and 1997 is as follows:
1998 1997
------------ -----------
Computer and other equipment .......... $ 5,227,000 $ 4,808,000
Furniture and fixtures ................ 557,000 535,000
Other ................................ 110,000 110,000
----------- -----------
5,894,000 5,453,000
Accumulated depreciation .............. (4,196,000) (3,271,000)
----------- -----------
$ 1,698,000 $ 2,182,000
=========== ===========
Depreciation expense was approximately $985,000, $893,000 and $851,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
4. ACQUISITIONS
In June 1997, the Company acquired the assets of Notable Technologies, L.L.C.
for $100,000. The Company funded this acquisition through the issuance of 25,197
shares of restricted common stock pursuant to Section 4(2) of the Securities Act
of 1933. The transaction was accounted for under the purchase method of
accounting and assets have been recorded at fair market value. Stephen C. Wood,
a director of the Company, is Chief Executive Officer of Notable Technologies.
5. RELATED PARTY TRANSACTIONS
The Company has receivables from and payables to officers, stockholders, joint
ventures and affiliates. At December 31, 1998 the Company had receivables from
officers totaling $17,000. The balances are repaid through payroll deductions
and bear interest at 8.5%. At the end of 1998, the Company had a non-interest
bearing receivable from a director of $76,000. At December 31, 1997 the Company
owed an officer $154,000, which was repaid by the Company in 1998.
The Company has provided computer hardware, programming, systems maintenance,
data loading, telecommunications and certain administrative services to KE and
TeleBuild, L.C. ("TeleBuild"), a limited liability company formed in 1990. As of
December 31, 1998 and 1997, corresponding amounts due the Company from TeleBuild
totaled $623,000 and $155,000. Included in other current assets is an additional
$106,000 and $111,000 at December 31, 1998 and 1997, respectively, due from
TeleBuild. The Company owns 55.58% of KE and 15.834% of TeleBuild. GRF
Interests, Inc., a company controlled by G. Robert Friedman ("Friedman"), a
significant stockholder and former director of the Company, owns 44.42% of KE.
Friedman Interests, Inc., also controlled by Friedman, and the Brown Family
Partnership own 45.42% and 25.44%, respectively, of TeleBuild. The Brown Family
Partnership is owned by David L. Brown, the Company's Chairman and Chief
Executive Officer and other members of the Brown family.
45
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contract service revenue earned from affiliates for the years ended December 31,
1998, 1997 and 1996 is as follows:
1998 1997 1996
---------- ---------- ----------
TeleBuild ............ $1,152,000 $1,322,000 $ 735,000
The Company maintains a marketing, license and revenue sharing agreement with
CyberAction. A director of CyberAction is on the board of directors of the
Company. No royalties were paid to CyberAction in 1998, 1997 or 1996.
LONG-TERM OBLIGATIONS
CAPITAL LEASES. Future minimum lease payments under capital leases at December
31, 1998 together with the present value of the minimum lease payments, are as
follows:
YEARS ENDING DECEMBER 31,
1999 $ 408,000
2000 278,000
2001 64,000
2002 2,000
--------
Total minimum lease payments ........................ 752,000
Amount representing interest ........................ (61,000)
--------
Present value of minimum lease payments ......... 691,000
Current portion of capital lease obligations ........ (364,000)
--------
Long-term capital lease obligation .............. $327,000
========
Computer and telephone equipment under capital lease at December 31, 1998 and
1997 totaled $1,435,000 and $961,000 with related accumulated depreciation of
$764,000 and $391,000, respectively.
LINE OF CREDIT. The Company has a $500,000 guidance line of credit with a bank
to fund equipment purchases. Financing is limited to 80% of the purchase price
of the equipment. Borrowings under this line bear interest at Wall Street Prime
(7.75% at December 31, 1998), are collateralized by the equipment purchased, and
are due in 36 equal monthly installments following the draw. At December 31,
1998 and 1997, $152,000 and $327,000, respectively, were outstanding under this
line of credit.
46
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future payments under this equipment line of credit are as follows:
YEARS ENDING DECEMBER 31,
1999 $136,000
2000 16,000
--------
152,000
Current portion of long-term debt .......... (136,000)
--------
$ 16,000
========
OPERATING LEASES. The Company has commitments to lease office space and
equipment under non-cancelable operating leases. Rent expense under operating
leases totaled $1,042,000, $1,045,000 and $798,000 for the years ended December
31, 1998, 1997 and 1996, respectively. Future minimum payments are as follows:
YEARS ENDING DECEMBER 31,
1999 $ 899,000
2000 836,000
2001 450,000
2002 847,000
2003 798,000
Thereafter 2,461,000
----------
$6,291,000
==========
7. STOCKHOLDERS' EQUITY
In May 1998, the Company issued 120,000 shares of 5% Convertible Preferred Stock
in exchange for $3,000,000.
In connection with the issuance of the Company's preferred stock, there is an
incremental yield that arises from the conversion discount from fair value that
is considered a dividend to preferred stockholders. The amount is determined as
the fixed discount from market (5%) based on the closing price at May 15, 1998
and is calculated as follows:
Closing price at May 15, 1998 7 3/8
Fixed discount from market 5%
----------
$0.37
Shares issued 120,000
----------
Incremental yield $ 44,400
==========
The preferred stockholders have the option to convert the preferred shares into
common stock at any time after May 15, 1998.
8. INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $17,000,000, which expire in years 2000
through 2018.
47
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets and liabilities as of December 31, 1998 and 1997 consisted
of the following:
1998 1997
------------ ------------
Deferred tax assets -
Net operating loss carryforwards ............. $ 6,290,000 $ 4,990,000
Less: Valuation allowance ................... (4,475,000) (2,679,000)
----------- -----------
Deferred tax asset, net ...................... 1,815,000 2,311,000
Deferred tax liability -
Primarily amortization of capitalized software
costs .................................... (1,815,000) (2,311,000)
----------- -----------
$ -- $ --
=========== ===========
The valuation allowance increased during 1998 by approximately $1,796,000.
9. STOCK OPTION PLAN
The Company's stock option plans (the "Plans") for officers, directors and
employees authorizes the grant of options to purchase a maximum of 1,425,000
shares of common stock. The Plans included the plan as amended in 1994 (the
"Amended Plan") and the 1995 stock option plan ("1995 Plan"). The Plans provide
for the issuance of incentive stock options or non-statutory stock options, as
defined by the Internal Revenue Code. Pursuant to the terms of the Plans, the
exercise price of incentive stock options must equal the fair market value of
the Company's common stock but not less than $1.50 on the date of grant. The
exercise price of non-statutory options may be any amount equal to or greater
than $1.50 per share. Vesting terms vary from immediate at date of grant to four
years from date of grant. The Compensation Committee of the Board of Directors
determines the vesting period of each grant. Options remaining under the Amended
Plan terminating August 13, 2000 and the 1995 Plan terminating March 22, 2005
totaled 163,924 and 335,340, respectively.
Options issued prior to 1998 under the Amended Plan terminating August 13, 2000
expire upon termination of the Amended Plan. Options issued in 1998 and later
under the Amended Plan have a 10 year life from the date of grant. Options under
the 1995 Plan terminating March 22, 2005 expire upon this date.
Transactions with regard to incentive options issued pursuant to the Plan are as
follows:
WEIGHTED
TOTAL SHARES AVERAGE PRICE
UNDER OPTION PER SHARE
---------------- ---------------
BALANCE - JANUARY 1, 1996 704,924 $3.87
Granted 190,535 $7.26
Canceled (52,998) $6.33
Exercised (74,812) $2.04
----------------
BALANCE - DECEMBER 31, 1996 767,649 $4.69
Granted 215,347 $4.85
Canceled (73,841) $6.82
Exercised (166,071) $3.01
----------------
BALANCE - DECEMBER 31, 1997 743,084 $4.94
Granted 367,010 $7.68
Canceled (18,948) $4.45
Exercised (165,410) $2.74
----------------
BALANCE - DECEMBER 31, 1998 925,736 $6.43
================
48
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- -------------------------------------
RANGE OF WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING YEARS WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING OF CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------- ------------- --------------------- ------------------- -------------- --------------------
$ 1.50-3.00 99,650 2.11 $ 1.96 94,650 $ 1.91
4.50-5.12 17,100 3.57 4.78 83,044 4.82
6.25-6.81 69,200 8.31 6.46 18,500 6.46
7.37-7.82 10,016 1.71 7.61 150,343 7.68
8.44-8.92 29,770 8.86 8.85 31,600 8.44
------- ---------
925,736 5.17 6.43 378,137 5.61
======= =========
In addition, as of December 31, 1998 an aggregate of 110,000 non-qualified stock
options have been issued at option prices ranging from $4.75 to $8.37 per share
and 60,000 of such options were exercisable as of that date. Subsequent to
December 31, 1998, certain non-qualified stock options were exercised in
cashless transactions.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation", encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and other
equity instruments to employees based on fair value. Fair value is generally
determined under an option pricing model using the criteria set forth in SFAS
No.123.
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees",
and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized in 1998 or 1997 for its stock option
plans. Had compensation expense for the Company's stock-based compensation plans
been determined based on fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net loss and
loss per common share would have been increased to the pro forma amounts
indicated below:
1998 1997
------------- -------------
Net income (loss)
As reported ................. $ (4,454,000) $ 196,000
Pro forma ................... (5,353,000) (450,000)
Net income (loss) per common share
As reported ................. $ (0.40) $ 0.02
Pro forma ................... (0.48) (0.04)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions; risk free
rates of 4.16% to 5.6%; volatility of 69.69% and 66.1% for 1998 and 1997,
respectively; no assumed dividend yield; and expected lives of 3 years.
10. EMPLOYEE BENEFITS
In January 1995, the Company established a defined contribution 401(k) Profit
Sharing Plan for its employees. The plan provides participants a mechanism for
making contributions for retirement savings. Each participant may contribute
certain amounts of eligible compensation. The plan allows for Company matched
contributions, however, the Company has not invoked this privilege, but may do
so with an amendment to the plan.
49
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SEGMENT REPORTING
SFAS No. 131 "Disclosure about Segments of an Enterprise and Related
Information" was issued in June 1997 and is effective for fiscal years beginning
after December 31, 1997. The Company elected early adoption in 1997. This
information was not effective for the Company's 1997 annual report since the
non-financial segment was included in discontinued operations. The Company
operates two major segments. The financial segment includes Internet and online
financial services and products provided by the Company, license fees earned
from third parties for private label versions of the Company's proprietary
database applications and advertising on the Company's website. The
non-financial segment includes KE, of which the Company owns 55.58%; the
publishing and entertainment industry operations; and an Internet baseball game.
KE is an online provider of biotechnology/pharmaceutical databases for
universities and research markets. The publishing and entertainment industry
encompasses the development and operation of online and database services for
publications including Billboard Online, Adweek Online, the Hollywood Reporter
and Backstage Online for BPI Communications, L.P. The sports entertainment
operation is an online game designed for baseball enthusiasts.
SALES AND OPERATING PROFIT BY INDUSTRY SEGMENT
SALES OPERATING RESULTS
---------------------------- ------------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
Financial ....... $13,573 $14,910 $11,998 $(2,896) $ 810 $(2,274)
Non-Financial ... 1,969 1,215 1,758 (1,558) (614) (660)
------- ------- ------- ------- ------- -------
Total ........... $15,542 $16,125 $13,756 $(4,454) $ 196 $(2,934)
======= ======= ======= ======= ======= =======
IDENTIFIABLE ASSETS BY INDUSTRY SEGMENT
1998 1997 1996
------- ------- -------
Financial ................... $11,453 $10,596 $ 9,378
Non-Financial ............... 555 1,881 2,088
------- ------- -------
Total ....................... $12,008 $12,477 $11,466
======= ======= =======
50
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPECIFIC ASSETS AND EXPENSE BY INDUSTRY SEGMENT
1998 1997 1996
------ ------ ------
Software Capitalization:
Financial ..................... $2,257 $2,188 $1,547
Non-Financial ................. 262 317 326
------ ------ ------
$2,519 $2,505 $1,873
====== ====== ======
Depreciation and
Amortization Expense:
Financial ..................... $2,460 $2,023 $1,721
Non-Financial ................. 457 450 452
------ ------ ------
$2,917 $2,473 $2,173
====== ====== ======
The financial segment bears all expenses associated with capital expenditures
and corporate facilities. These include fixed assets and related depreciation
and other non-allocable expenses such as rent, legal, interest and dividends.
The loss on impaired assets in 1998 of $1,530,000 is attributable to the
non-financial segment.
12. EARNINGS PER SHARE
(in thousands, except per share data)
1997 1996 1995
-------- -------- --------
Basic earnings (loss) per share:
Income (loss) from continuing operations: ........ $ (4,335) $ 215 $ (2,934)
Less preferred stock dividends and incremental
yield dividend ........................... 138 -- --
-------- -------- --------
Income (loss) available to common stockholders ... (4,473) 215 (2,934)
Discontinued operations .......................... 19 (19) --
-------- -------- --------
Net income (loss) available to common
stockholders ................................. $ (4,454) $ 196 $ (2,934)
======== ======== ========
Weighted average shares outstanding .............. 11,039 10,766 10,615
Basic earnings (loss) per share:
Continuing operations ........................ $ (0.41) $ (0.02) $ (0.28)
Discontinued operations ...................... -- -- --
-------- -------- --------
Net income (loss) ................................ $ (0.41) $ (0.02) $ (0.28)
51
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
1997 1996 1995
-------- -------- --------
Diluted earnings (loss) per share:
Income available to common stockholders . $ (4,473) $ 215 $ (2,934)
Discontinued operations .................. 19 (19) --
-------- -------- --------
Net income (loss) available to common
stockholders ......................... (4,454) 196 (2,934)
Weighted average shares outstanding ...... 11,039 10,766 10,615
-------- -------- --------
Dilutive effect of options ............... -- 173 --
-------- -------- --------
Weighted average shares - dilutive ....... 11,039 10,939 10,615
Dilutive earnings (loss) per share:
Continuing operations ................ $ (0.41) $ (0.02) $ (0.28)
Discontinued operations .............. -- -- --
-------- -------- --------
Net income (loss) ........................ $ (0.41) $ (0.02) $ (0.28)
13. CONTINGENCIES
In 1997, Gregory Reagan filed a suit against the Company in the District Court
of Harris County Texas. The plaintiff asserted a claim under a verbal agreement
to pay a royalty or finder's fee incident to a reciprocal marketing agreement,
which Telescan signed with Omega Research, Inc. ("Omega Research"). Under the
Omega agreement, Omega was given a financial incentive to encourage Omega's
customers to subscribe to Telescan's current stock market data services. The
plaintiff claimed a share of the net revenues derived by Telescan under the
Omega agreement. By letter dated February 28, 1996, Telescan gave notice of
cancellation of the verbal agreement with Gregory Reagan based on the breaches
of Reagan's duties under such verbal agreement. Telescan maintained that the
verbal agreement was properly canceled. Reagan amended his petition to add a
fraud claim to the case with a request for punitive damages. In September 1998,
the Company and the plaintiff reached a settlement agreement in which the
Company paid Gregory Reagan $142,500 in exchange for being released from further
legal actions.
In August 1998, K. Shawn Walker and Scott Brown filed a lawsuit against
TeleBuild, Friedman Interests, Inc. and the Company in the District Court of
Harris County Texas. The plaintiffs, both former employees of TeleBuild,
asserted breach of contract, breach of duty of good faith and fair dealing,
breach of fiduciary duty, fraud and conspired for a declaratory judgment. The
plaintiffs' cause of action arose from TeleBuild's and Friedman Interests,
Inc.'s refusal to purchase the plaintiff's ownership interest in TeleBuild.
Before the settlement, K. Shawn Walker and Scott Brown owned 5.6839% and
7.6628%, respectively of TeleBuild. In November 1998 the Company agreed to
purchase a portion of each of the plaintiffs' interest in TeleBuild in
settlement and release of this claim. The Company paid each plaintiff $10,000
for .833% of their interest in TeleBuild.
The Company is subject to various legal proceedings and claims, either asserted
or unasserted, which arise in the ordinary course of business. Presently, the
Company has no unsettled or pending litigation to the best of its knowledge.
14. SUBSEQUENT EVENTS
In January 1999, the Company sold 9.9% or 1,220,237 shares of its common stock
in a private placement to General Electric's National Broadcasting Corporation
("NBC") unit. The stock was purchased at $7.70 per share and the resale is
restricted under Rule 144, subject to delayed registration rights on one-half of
the shares.
52
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 1999, the Company licensed its proprietary Internet and online
financial services technology to NBC for use by CNBC.com.
Also in February 1999, the Board of Directors approved an amendment to the
Restated Certificate of Incorporation to increase the total number of shares of
all classes of stock which the corporation is authorized to issue. The amendment
would increase the number of shares to 40,000,000 shares, consisting of
30,000,000 shares of common stock with a par value of $.01 per share and
10,000,000 shares of preferred stock with a par value of $.01 per share. The
amendment shall be submitted to the stockholders of the Company for
consideration at the next annual meeting.
43
INDEPENDENT AUDITOR'S REPORT ON SCHEDULE
STOCKHOLDERS AND BOARD OF DIRECTORS
TELESCAN, INC.
HOUSTON, TEXAS
We have audited the financial statements of Telescan, Inc. and subsidiary as of
December 31, 1998 and 1997, and for each of the years in the three-year period
ended December 31, 1998. Our audits for such years also included the financial
statement schedule of Telescan, Inc. and subsidiaries, listed in Item 14-2, for
each of the years in the three-year period ended December 31, 1998. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to report on this schedule based on our audits. In our
opinion, such a financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth herein.
HEIN + ASSOCIATES LLP
Houston, Texas
February 5, 1999
54
TELESCAN, INC. AND SUBSIDIARY
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
DEDUCTIONS:
ADDITIONS ACCOUNTS
CHARGED TO WRITTEN
BALANCE AT COSTS AND OFF AGAINST BALANCE AT
DESCRIPTION BEGINNING OF YEAR EXPENSES ALLOWANCE END OF YEAR
- - ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
Allowance for Doubtful Accounts ....... $ 80 $ 68 $ (44) $ 104
DECEMBER 31, 1997
Allowance for Doubtful Accounts ....... 104 127 (124) 107
DECEMBER 31, 1998
Allowance for Doubtful Accounts ....... $ 107 $ 339 $ (95) $ 351
55