<PAGE>
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
---------------------------------
[x] Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934 For the period ended March 31, 1999
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
-------------to--------------
---------------------------------------
Commission file number 0-13093
I.R.S. Employer Identification Number 36-3131704
PC QUOTE, INC.
(a Delaware Corporation)
300 S. Wacker
Chicago, Illinois 60606
Telephone (312) 913-2800
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve months, (or for such
shorter period that the Company was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No ____
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date: 14,830,351 shares of the Company's
common stock ($.001 par value) and 47,866 shares of preferred stock ($.001 par
value) were outstanding as of May 10, 1999.
Page 1
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PC QUOTE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. Financial Information
Item 1. Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the three month periods
ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the three month periods
ended March 31, 1999 and 1998 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of:
Results of Operations and Financial Condition 10
Liquidity and Capital Resources 14
PART II. Other Information
Item 2. Changes in Securities 18
Item 6. Exhibits and Reports on Form 8-K 19
Company's Signature Page 20
</TABLE>
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PC QUOTE, INC.
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,020,610 $ 1,139,785
Accounts receivable, less allowance for doubtful
accounts of: 1999: $390,117;1998: $443,037 1,976,057 1,490,139
Prepaid expenses and other current assets 111,949 114,011
----------- -----------
TOTAL CURRENT ASSETS 3,108,616 2,743,935
----------- -----------
Property and equipment
Satellite receiving equipment 426,959 525,730
Computer equipment 3,322,683 4,260,589
Communication equipment 864,625 1,254,010
Furniture and fixtures 241,808 252,050
Leasehold improvements 402,692 402,692
----------- -----------
5,258,767 6,695,071
Less: Accumulated depreciation and amortization 3,181,548 4,613,526
----------- -----------
2,077,219 2,081,545
----------- -----------
Software development costs, net of accumulated
amortization of: 1999: $5,013,681; 1998: $4,442,673 4,741,274 5,012,971
----------- -----------
Deposits and other assets 183,904 214,916
----------- -----------
TOTAL ASSETS $ 10,111,013 $ 10,053,367
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 3
<PAGE>
PC QUOTE, INC.
Consolidated Balance Sheets (continued)
March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
(Unaudited) (Audited)
----------- ------------
<S> <S> <C>
Current Liabilities
Note payable, bank, current $ 300,000 $ 300,000
Accounts payable 3,922,140 4,138,517
Accrued expenses 472,112 218,866
Accrued compensation 393,449 313,838
Income taxes payable --- 3,161
Unearned revenue, current 1,333,586 1,241,933
------------ ------------
TOTAL CURRENT LIABILITIES 6,421,287 6,216,315
------------ ------------
Note payable, bank, noncurrent 424,634 499,634
Unearned revenue, noncurrent 236,170 261,027
Accrued expenses, noncurrent 154,514 161,120
------------ ------------
TOTAL NONCURRENT LIABILITIES 815,318 921,781
------------ ------------
TOTAL LIABILITIES 7,236,605 7,138,096
------------ ------------
Stockholders' Equity
Preferred Stock, $.001 par value; authorized 5,000,000; issued and outstanding:
Series A 5% convertible: 19,075 at March 31, 1999 and December 31, 1998 19 19
Series B 5% convertible: 28,791 at March 31, 1999 and December 31, 1998 29 29
Common stock, $.001 par value; authorized 50,000,000
shares; issued and outstanding 14,549,276 at March 31,1999 and 14,183,183 at
December 31, 1998 14,549 14,183
Additional paid-in capital - Series A 5% convertible preferred stock 3,086,013 3,086,013
Additional paid-in capital - Series B 5% convertible preferred stock 4,664,891 4,664,891
Additional paid-in capital - common stock 20,635,553 19,950,981
Additional paid-in capital - convertible subordinated
debenture and warrants 2,750,491 2,750,491
Accumulated deficit (28,277,137) (27,551,336)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,874,408 2,915,271
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,111,013 $ 10,053,367
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
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PC QUOTE, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For The Three Months Ended
- ----------------------------------------------------------------------------------------------------------
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
HyperFeed and LAN Services $ 4,161,637 $ 3,087,286
Internet Services 3,258,641 1,897,908
----------- ------------
TOTAL REVENUE 7,420,278 4,985,194
----------- ------------
DIRECT COST OF SERVICES
HyperFeed and LAN Services 3,101,605 2,473,929
Internet Services 2,269,874 1,567,147
----------- ------------
TOTAL DIRECT COST OF SERVICES 5,371,479 4,041,076
----------- ------------
GROSS MARGIN 2,048,799 944,118
----------- ------------
OPERATING EXPENSES
Sales 880,838 947,212
General and administrative 1,049,687 726,640
Product and market development 593,765 506,993
Depreciation and amortization 242,830 288,384
----------- ------------
TOTAL OPERATING EXPENSES 2,767,120 2,469,229
----------- ------------
LOSS FROM OPERATIONS (718,321) (1,525,111)
----------- ------------
INTEREST INCOME (EXPENSE)
Interest income 7,512 7,662
Interest expense (14,992) (364,039)
----------- ------------
NET INTEREST EXPENSE (7,480) (356,377)
----------- ------------
LOSS BEFORE INCOME TAXES (725,801) (1,881,488)
INCOME TAXES --- ---
----------- ------------
NET LOSS ($ 725,801) ($ 1,881,488)
----------- ------------
----------- ------------
Basic net loss per share ($0.05) ($0.15)
Diluted net loss per share ($0.05) ($0.15)
Weighted-average common shares outstanding 14,412,358 12,546,019
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 5
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PC QUOTE, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
For The Three Months Ended
-------------------------------
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($ 725,801) ($1,881,488)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment 242,830 288,384
Provision for doubtful accounts 90,000 104,000
Amortization of software development costs 571,009 520,000
Amortization of deferred discount on convertible
subordinated debenture --- 203,456
Common stock issued in lieu of cash compensation 17,900 ---
Changes in assets and liabilities:
Accounts receivable (575,918) (225,447)
Prepaid expenses and other current assets 2,062 3,008
Deposits and other assets 31,012 21,096
Accounts payable (216,377) 406,896
Accrued expenses 326,251 281,208
Accrued income taxes payable (3,161) ---
Unearned revenue 66,796 382,407
---------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (173,397) 103,520
---------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (238,504) (255,551)
Software development costs capitalized (299,312) (533,877)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (537,816) (789,428)
---------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 667,038 3,000,547
Purchase and retirement of common stock --- (2,988,949)
Principal payments on note payable, bank (75,000) (75,000)
---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 592,038 (63,402)
---------- -----------
Net decrease in cash and cash equivalents (119,175) (749,310)
Cash and cash equivalents:
Beginning of the period 1,139,785 1,113,130
---------- -----------
End of the period $1,020,610 $ 363,820
---------- -----------
---------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
Page 6
<PAGE>
PC QUOTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
PRINCIPALS OF CONSOLIDATION: The accompanying interim consolidated financial
statements include the accounts of PC Quote, Inc. and its subsidiary
PCQuote.com, Inc., and have been prepared in accordance with generally accepted
accounting principles for interim financial information and in conjunction
with the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The consolidated interim financial statements include all
adjustments, including the elimination of all significant intercompany
transactions in consolidation, which, in the opinion of management, are
necessary in order to make the financial statements not misleading. The
amounts indicated as "audited" have been extracted from the Company's
December 31, 1998 annual report. For further information, refer to the
financial statements and footnotes included in PC Quote's annual report on
Form 10-K for the year ended December 31, 1998.
SOFTWARE DEVELOPMENT COSTS: The Company's continuing investment in software
development consists primarily of enhancements to its existing Windows-based
private network and Internet services, development of new data analysis
software and programmer tools designed to afford easy access to its data-feed
for data retrieval and analysis purposes, and application of new technology
to increase the data volume and delivery speed of its distribution system and
network.
Costs associated with the planning and design phase of software development,
including coding and testing activities necessary to establish technological
feasibility of computer software products to be licensed or otherwise marketed,
are charged to research and development as incurred. Once technological
feasibility has been determined, costs incurred in the construction phase of
software development including coding, testing, and product quality assurance
are capitalized.
Amortization commences at the time of capitalization or, in the case of a new
service offering, at the time the service becomes available for use. Unamortized
capitalized costs determined to be in excess of the net realizable value of the
product are expensed at the date of such determination. The accumulated
amortization and related software development costs are removed from the
respective accounts in the year following full amortization.
PC Quote, Inc.'s policy is to amortize capitalized software costs by the greater
of (a) the ratio that current gross revenue for a product bear to the total of
current and anticipated future gross revenue for that product or (b) the
straight line method over the remaining estimated economic life of the product
including the period being reported on, principally three to five years. The
Company assesses the recoverability of its software development costs against
estimated future undiscounted cash flows. Given the highly competitive
environment and technological changes, it is reasonably possible that those
estimates of anticipated future gross revenue, the remaining estimated economic
life of the product, or both may be reduced significantly.
In March 1998 the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
SOP provides guidance on accounting for the costs of computer software
developed or obtained for internal use and provides guidance for determining
whether computer software is for internal use. The Company adopted the
provisions of SOP 98-1 effective January 1, 1999.
FINANCIAL INSTRUMENTS: The Company has no financial instruments for which
the carrying value materially differs from fair value.
Page 7
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PC QUOTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
REVENUE RECOGNITION: The Company principally derives its revenue from service
contracts for the provision of market data only ("HyperFeed license fees"),
service contracts for the provision of market data together with analytical
software ("PC Quote 6.0 license fees"), and the sale of advertising on its
web-site www.pcquote.com. Revenue from service contracts is recognized using the
percentage-of-completion method, ratably over the contract term as the
contracted services are rendered. Revenue from the sale of advertising is
recognized as the advertising is displayed on the web-site. HyperFeed license
fees and PC Quote 6.0 license fees for satellite and landline services are
generally billed one month in advance with 30-day payment terms. License fees
for PC Quote 6.0 on the Internet are generally paid by credit card within five
days prior to the month of service. These and other payments received prior to
services being rendered are classified as unearned revenue on the balance sheet.
Revenue and the related receivable for advance billings are not reflected in the
financial statements. Customers' deposits on service contracts are classified as
either current unearned revenue, if the contract expires in one year or less, or
non-current unearned revenue, if the contract expiration date is greater than
one year.
The Company adopted the provisions of Statement of Position 97-2, "Software
Revenue Recognition," on January 1, 1998. SOP 97-2 specifies the following four
criteria that must be met prior to recognizing revenue: (1) persuasive evidence
of the existence of an arrangement, (2) delivery, (3) fixed or determinable fee,
and (4) probable collection. In addition, revenue earned on software
arrangements involving multiple elements is allocated to each element based on
the relative fair value of the elements. When applicable, revenue allocated to
the Company's software products (including specified upgrades/enhancements) is
recognized upon delivery of the products. Revenue allocated to post contract
customer support is recognized ratably over the term of the support and revenue
allocated to service elements (such as training and installation) is recognized
as the services are performed.
(2) RECLASSIFICATIONS
The statement of operations has been modified to enhance information to the
stockholder. The 1998 statement of operations has been reclassified to conform
to the 1999 presentation.
(3) INCOME TAXES
At December 31, 1998, the Company had federal income tax net operating loss
carryforwards of approximately $26,005,000 for federal income tax purposes and
approximately $24,843,000 for the alternative minimum tax. Approximately
$1,058,000 of these net operating losses relate to the exercise of incentive
employee stock options and will be credited directly to stockholders' equity
when realized. The Company also had research and development credits of $106,000
which will expire in years 2010 to 2011 if not previously utilized. The future
utilization of these net operating losses and research and development credits
will be limited due to changes in Company ownership. The net operating loss
carryforwards will expire, if not previously utilized, as follows: 1999:
$546,000; 2000: $1,370,000; 2001: $1,539,000; 2002: $560,000; 2003: $79,000;
2004: $576,000; 2005: $1,557,000 and thereafter $19,778,000.
Page 8
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(4) FINANCING AND RELATED PARTY TRANSACTIONS
On January 23, 1998, the Company completed a rights offering that entitled
stockholders of record as of November 21, 1997 to purchase one additional share
of common stock for each right at a price of $1.00 per share. The Company
received approximately $3.0 million in gross proceeds from the sale of shares
underlying exercised rights. Pursuant to the Stock and Warrant Purchase
Agreement dated October 15, 1997 (the "Purchase Agreement"), between PC Quote
and Imprimis Investors LLC and Wexford Spectrum Investors LLC (collectively, the
"Wexford Affiliates"), the entire proceeds were used to fulfill the Company's
obligation to repurchase shares from the Wexford Affiliates.
In February 1999, the Wexford Affiliates exercised the remaining portion of
their common stock purchase warrants, previously acquired pursuant to the
Purchase Agreement and purchased 267,200 shares of Common Stock for $534,400.
(5) SUBSEQUENT EVENTS
On April 22, 1999, the Company entered into Stock Purchase Agreements with four
third-party investors. On April 23, 1999, the investors purchased 190,476 shares
of common stock in exchange for $1,999,998. The investors acquired the common
stock for investment purposes.
In December 1998, the Company segregated its Internet related services into a
separate business unit within the Company. The Company is transferring its
Internet-related services to PCQuote.com, Inc., which was incorporated in
March 1999 as a wholly-owned subsidiary. On April 26, 1999, the Company's
subsidiary, PCQuote.com, Inc., announced that it intends to make an initial
public offering of its common stock for cash in the near future.
On April 12, 1999 the Company's wholly-owned subsidiary, PCQuote.com entered
into a strategic partnership with CNNfn, the financial network. Under a
limited exclusive licensing agreement, PCQuote.com will provide CNNfn's
financial news to users of its financial content website, www.pcquote.com. In
exchange for the limited exclusive license, CNNfn will receive, over the term
of the agreement, an equity position in PCQuote.com, Inc. equivalent to 5% of
the common stock outstanding at the time the agreement was executed.
Page 9
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition
INTRODUCTION - SAFE HARBOR DISCLOSURE
The following discussion and analysis contains historical information. It also
contains forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, particularly
in reference to statements regarding our expectations, plans and objectives. You
can generally identify-forward-looking statements by the use of the words "may,"
"will," "expect," "intend," "estimate," "anticipate," "believe," or "continue,"
or similar language. Forward-looking statements involve substantial risks and
uncertainties. You should give careful consideration to cautionary statements
made in this discussion and analysis. We base our statements on our current
expectations. Forward-looking statements may be impacted by a number of factors,
risks and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. Our filings with the
Securities and Exchange Commission identify factors that could cause material
differences. Among these factors are our ability to:
(i) fund our current and future business strategies as a going-concern
either through continuing operations or external financing;
(ii) attract and retain key employees;
(iii) compete successfully against competitive products and services;
(iv) maintain relationships with key suppliers and providers of market
data; and
(v) respond to the effect of economic and business conditions generally.
RECENT BUSINESS DEVELOPMENTS
PC QUOTE TO BECOME HYPERFEED TECHNOLOGIES
We have submitted a request to our shareholders for approval to change our
name to HyperFeed Technologies, Inc. Our subsidiary, PCQuote.com, Inc., has
announced its intention to make an initial public offering of its common
stock for cash. In contemplation of the offering by our subsidiary, we are
seeking the name change to further differentiate the entities and eliminate
confusion in the marketplace. Management believes that formally separating
the two entities will permit the parent and subsidiary to focus on their
relative strengths. In management's opinion, the separation will permit each
entity to better (i) attract and retain key employees by relating
compensation to relevant business performance, (ii) enter into strategic
relationships with business partners, and (iii) permit each entity to pursue
its own financing avenues. In view of the separation, the Company determined
that it is in its best interest to change its name to HyperFeed Technologies,
Inc. to avoid confusion in the marketplace between its business and
operations and those of its subsidiary. Because its business will be
primarily related to its proprietary datafeed, HyperFeed-TM- 2000, the
Company believes the name HyperFeed Technologies, Inc. is more descriptive of
the services they offer, while the PC Quote brand name is more descriptive of
the services offered by its subsidiary. On May 6, 1999 the Company submitted
a request to its stockholders for approval to change the corporate name to
HyperFeed Technologies, Inc. If approved at the Company's annual meeting on
June 16, 1999, the name change will become effective immediately thereafter.
Page 10
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PART 1. ITEM 2
Management's Discussion and Analysis of Results of Operations and Financial
Condition (continued)
HYPERFEED 2000 NOW AVAILABLE FOR OMEGA RESEARCH PRODUCTS
On March 22, 1999 we announced the culmination of our previously announced
agreement with Omega Research, Inc. (NASDAQ: OMGA). Omega Research's new 2000i
series of software products is now fully compatible with HyperFeed-TM- 2000, our
recently released premier datafeed. The products are available for delivery via
broadcast and Internet. Our datafeed is now available for some of the most
popular high-end trading software on the market. Omega Research software users
can subscribe to HyperFeed-TM- 2000 online at www.pcquote.com.
HYPERFEED 2000
In March 1999 we released HyperFeed 2000, the next generation in market data
technology. Combining advanced IP Multicast technologies with a new
proprietary compression technique, HyperFeed 2000 boasts the flexibility and
expandability to consistently deliver massive volumes of market data in true
real-time. Our proprietary compression technology actually reduces bandwidth
consumption allowing HyperFeed 2000 recipients to enjoy the benefits of the
full T-1 HyperFeed with over 350,000 equity, option and commodity issues,
including full option chains, at a fraction of the current communications
cost. Our product introduction came at a time when an increasing number of
data vendors were faced with imminent threats to their capacity and bandwidth
capabilities. We are committed to delivering execution-quality, complete,
real-time market data faster, more reliably, and cost-effectively than our
competition.
JB OXFORD
In October, 1998, we entered into an agreement with JB Oxford & Co. (NASDAQ:
JBOH) to private-label our PC Quote 6.0 for Windows. We and JB Oxford released
the private-labeled version, named ORQA, to JB Oxford's customers in February
1999. With the addition of ORQA, JB Oxford customers will have instant access to
a wider variety of investment tools, including real-time streaming quotes,
intra-day charting, time and sales and technical analysis. PC Quote will be paid
a monthly fee determined by the number of JB Oxford's clients that subscribe to
the service.
Page 11
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PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
RESULTS OF OPERATIONS:
FOR THE THREE MONTHS AND QUARTER ENDED MARCH 31, 1999
Total revenue increased 49% for the first three months of 1999 to $7.4
million from $5.0 million for the comparable period in 1998. Our HyperFeed
and LAN services and Internet services both posted increases for the first
quarter of 1999 over 1998. HyperFeed and LAN service revenue increased $1.1
million, or 35%, from $3.1 million in 1998 to $4.2 million in 1999. Revenue
growth was experienced through increases in PC Quote 6.0 subscriptions and
datafeed sales. Revenue from our Internet services increased $1.4 million, or
72%, to $3.3 million for the first three months of 1999 from $1.9 million for
the same period in 1998. The growth is principally due to our PC Quote 6.0
Internet service where the number of subscribers grew from 3,300 at the end
of the first quarter of 1998 to 6,100 at the end of the first quarter of 1999.
Direct costs of services increased approximately 33% to $5.4 million for the
first quarter of 1999 from $4.0 million in 1998. Principal components of the
increase were royalties and payments to providers of market data, directly
attributable to the growth in subscribers to both of our PC Quote 6.0
services, Internet and LAN. Amortization of software development costs
increased slightly for the quarter from $520,000 in 1998 to $571,000 in 1999.
Direct costs associated with HyperFeed and LAN services increased from $2.5
million for the quarter ended March 31, 1998 to $3.1 million for the March
31, 1999 quarter, a 25% increase. Increases in license and exchange fees and
data-feed operations were offset to a degree by cost-savings related to
leased equipment and personnel costs effected in customer service and
support. Amortization of software development costs was essentially unchanged
at $302,000 for the 1999 quarter and $312,000 for the 1998 quarter. The
resulting gross margin increased 73% to $1.1 million in 1999 from $613,000 in
1998.
Direct costs associated with Internet services increased to $2.3 million for
the 1999 quarter from $1.6 million in the comparable 1998 quarter, a 45%
increase. The significant growth we experienced caused us to incur increases
in license and exchange fees and data acquisition and distribution costs.
Savings were effected in customer support operations, principally due to
lower leased equipment costs as we have been purchasing versus leasing new
equipment additions. Software amortization increased 29% in the quarter to
$269,000 in 1999 from $208,000 in 1998, as a result of the increase in
development resources diverted to this portion of our business. The gross
margin on Internet services increased from $331,000 for the first quarter of
1998 to $989,000 for the first quarter of 1999, as we were able to leverage
our infrastructure and support operations.
Page 12
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
Total operating expenses increased $298,000, or 12%, principally due to
increases in administrative costs required for supporting operations.
Sales costs decreased 7% to $881,000 for the first three months of 1999 as
compared to $947,000 for the same 1998 period. The decrease was the result of
a change in our previous sales incentive compensation structure, in addition
to lower sales support costs.
General and administrative expenses increased 44% to $1.0 million in the
first quarter of 1999 from $727,000 for the first quarter of 1998. The
increase was principally due additional personnel and related costs required
in support of the increase in business, and an increased need to utilize
consultants and external professionals to assist with business issues as
compared to the prior year.
Product and market development costs increased $87,000, or 17%, to $594,000
for the 1999 quarter from $507,000 for the 1998 quarter. The increase was due
to an increase in the number of development personnel and related costs, in
addition to an increase in promotional activities.
Depreciation and amortization decreased $46,000 to $243,000 for the first
three months of 1999 from $288,000 for the comparable 1998 period. The
decrease is a result of a combination of lower overall equipment purchases in
recent years and lower prices for equipment additions.
Interest expense was $15,000 for the first quarter of 1999 or $349,000 less
than the $364,000 recognized for the first quarter of 1998. The decrease is
the result of the conversion of the convertible subordinated debenture and
borrowings on the credit facility into equity in December 1998. With the debt
conversion the only debt on which interest is due is on our bank term loan.
Page 13
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
LIQUIDITY AND CAPITAL RESOURCES:
FOR THE THREE MONTHS AND QUARTER ENDED MARCH 31, 1998
Net cash and cash equivalents declined $119,000 from year-end 1998 to
$1,021,000 at the end of the first quarter of 1999. Expenditures for new
equipment were $239,000, essentially the same for the first three months of
1999 versus $256,000 for the same period in 1998. Capitalized software costs
of $299,000 were $235,000, or 44%, lower for the quarter ended March 31,
1999, compared to the same period for 1998, principally as a result of lower
development costs and adoption of Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," as
required by the American Institute of Certified Public Accountants. The SOP
provides guidance on accounting for the costs of computer software developed
or obtained for internal use and provides guidance for determining whether
computer software is for internal use. There were no new direct borrowings
during the period, and the Company repaid $75,000 of the principal balance on
the bank term loan. The Company received approximately $667,000 in net
proceeds from (i) the purchase of Common Stock by the Wexford Affiliates
through exercise of previously issued warrants (ii) the sale of shares of
Common Stock to employees pursuant to the Company's Employee Stock Purchase
Plan and (iii) the sale of shares of Common Stock to employees who exercised
options previously granted to them under the Company's Employee Incentive
Stock Option Plan.
Total revenue for the first quarter of 1999 increased 49% to $7.4 million
versus $5.0 million for the 1998 period, while direct costs of services
increased only 33% to $5.4 million versus $4.0 million in 1998. The resulting
gross margin increased 117% from $944,000 in the 1998 quarter to $2.0 million
in 1999 quarter. The increase in revenue was due to the growth in
subscriptions to our PC Quote 6.0 services, both LAN and Internet, as well as
an increase in datafeed sales. This together with operating cost containment
contributed to our gross margin improvement. Although cash flows have
improved, they are still negative and insufficient to fund operations and
future growth. Consequently, we have explored, and continue to explore
multiple alternatives that may be available for the purpose of enhancing
stockholder value. These alternatives include a merger, a spin-off or sale of
part of our business, a strategic relationship or joint venture with another
technology or financial services firm and future equity financing to further
fund our business. In December 1998, we segregated our Internet related
services into a separate internal business unit. We incorporated the business
as a wholly-owned subsidiary, PCQuote.com, Inc., on March 19, 1999 and are
transferring our Internet-related services to the subsidiary. On April 26,
1999, our subsidiary, PCQuote.com, Inc., announced that it intends to make an
initial public offering of its common stock for cash in the near future. We
believe net proceeds from the offering will be sufficient for working capital
purposes of both PCQuote.com and PC Quote.
There can be no assurances, however, that the offering will occur. If the
offering does not occur, we would pursue other alternatives to raise capital.
We raised a substantial amount of capital in 1998 and 1999 through the debt
conversion, exercise of warrants and other sales of common stock. These
transactions have significantly improved our financial condition. In order to
minimize dilution to existing stockholders, our objective is to raise the
minimal amount of capital for operations, if and when necessary. We believe
we have the ability to raise external capital. However, any capital raised
could be costly to us and/or dilutive to stockholders. There can be no
assurances, however, that we will be successful in concluding a transaction.
Page 14
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
YEAR 2000 ISSUES
1. Overview
PC Quote does not have or use mainframe computers in its internal operations.
Consequently, we do not have the extent of Y2K issues other companies have
that depend on what is commonly known as "legacy" systems. We use PC's and
"server class" computers in our operations. Our end-user applications also
run on the same type of hardware. These systems still may have Y2K issues. We
have implemented a plan to attempt to assess, remediate, and correct any year
2000 critical issues. A "Year 2000" problem will occur where date-sensitive
software uses two digit year date fields, sorting the year 2000 ("00") before
the year 1999 ("99"). The Year 2000 problem may result in data corruption and
processing errors occurring where software, technology equipment, or any
other equipment or process uses date-dependent software.
Our plan has been structured to address the following areas:
A. Processing Plant and Communications Network
B. PC Quote Retail Applications
C. Operational Infrastructure
2. State Of Readiness
We have approached each of the above areas in four phases: assessment,
remediation, testing, and contingency planning. "Assessment" summarizes the
process of issue identification. "Remediation" refers to the process of
taking corrective action to best mitigate identified Year 2000 risks.
"Testing" is the process of validating a specific PC Quote remediation effort
or confirming a third party capability or certification of Year 2000
compliance. "Contingency planning" means the process by which we identify an
alternate course of action and/or procedure in the event we cannot or fail to
remediate or mitigate a known Year 2000 risk. We may or may not engage in
contingency planning for individual subproject components where successful
Year 2000 remediation has been validated through the testing process or other
methods.
The following is a status report on our state of readiness.
A. Processing Plant And Communications Network
Assessment phase has been completed. A full inventory has been taken of
the processing plant, our data-feed input, consolidation and output
process, and communications areas. We are currently in the remediation and
testing phases. This includes verifying Y2K compliance of outside vendors
and suppliers and testing all mission critical items. Testing also
includes all PC's, routers, modems, phone lines, Internet service
providers (ISP's), and production computers, known as servers, used
internally in the communications room. We are also checking our outbound
satellite, phone companies and ISP's distribution network, in addition to
some ISP's that our customers may use.
Page 15
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
The Testing completion percentages as of 5/10/99 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------
Equipment/
Areas Systems Compliant
- ------------------------------------------------
Processing Plant 301 218
- ------------------------------------------------
Communications Network 35 22
- ------------------------------------------------
</TABLE>
On 5/1/99, PC Quote participated in the SIA/FIF Year 2000 Market Data Test
which tested our production Processing Plant and Communications Network
with quotes dated in the future to 1/3/00. This data was transmitted to
us from all of the major exchanges. PC Quote has passed this Y2K test on
this "mission critical" software and hardware. We are in the process of
upgrading all other hardware and software to match the tested components.
We have scheduled this to be completed by 6/30/99.
B. PC Quote Retail Applications
Our retail applications include proprietary and 3rd party software
applications, licensed to our customers for use only with our data-feed.
These applications include Internet web-site and browser-based
applications, local area network (LAN) based applications, and Windows NT
client/server applications. One OS/2 based application will become
obsolete in 2000. Customers using this application will be converted to a
compliant application.
We have participated in the full "end-to-end" Year 2000 scenario test
sponsored by the Financial Information Forum in conjunction with the
Securities Industry Association. This industry-wide test provided
securities, options and futures exchanges and market data providers with
the ability to test their systems under simulated Year 2000 conditions.
Time was essentially moved forward to 1/3/00 for that test day. During
this test we had a large Y2K team in-house monitoring all of our major
products. This testing was performed on several different operating
systems, data servers, and methods of transmission. We compared all final
data and reported our results to the SIA/FIF, which informed us that we
had passed the test. We plan to release the Y2K simulated data to our
customers so they may do their own internal testing by 7/1/99.
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------
Applications Tested Compliant
- ------------------------------------------------------
PC Quote Customer Apps 14 12
- ------------------------------------------------------
3rd Party Customer Apps 5 4
- ------------------------------------------------------
</TABLE>
All major end user applications have now been tested and are compliant. We
expect to complete the testing process for the remaining three minor
applications by 6/30/99.
C. Operational Infrastructure
We are assessing our main facility and field offices for compliance in the
security systems, HVAC systems, pagers, phone system, utility providers
and other mission critical systems. We have started to upgrade, at minimal
cost, non-compliant equipment.
Based on our current assessment, we believe we will be able to meet our
Y2K compliance goals.
Page 16
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
3. Costs
As part of the ordinary course of our business, we continually develop major
enhancements to our operating systems and applications. For instance, we
spent three years developing the first 100% Windows NT based processing plant
that was put into production in 1998. In addition to many other benefits, it
is fully Y2K compliant. We have not in the past separately tracked the cost
of Y2K remediation, as these efforts were incorporated into our on-going
maintenance and equipment replacement program. We have started to track costs
in 1999 and have spent approximately $103,550 so far this year on the cost of
Year 2000. This includes internal personnel resources, hardware, software and
equipment replacement and upgrades necessary to be Y2K compliant. We will be
upgrading various administrative systems that use commercial third party
software for accounting, billing and customer management. The total remaining
cost of software, replacement equipment, and internal resources for
remediation and testing to become Y2K compliant is not expected to exceed
$500,000.
Based upon currently available information, we do not believe that the cost
of Y2K compliance will have a material impact on our financial condition,
results of operations or liquidity.
4. Risks
Achieving Y2K compliance depends on many factors. Some factors may be beyond
our control, because we use services of others. Should our internal systems
or the internal system of one of our critical vendors fail to achieve Y2K
compliance and fail in the year 2000, our business and results of operations
could be adversely affected. For example:
A piece of communications equipment has an internal clock that is not Y2K
compliant. Although end-to-end testing is done, if for some reason, we or
a vendor of ours fail to detect the non-compliance. Y2K comes and the
clock shuts down, causing an inability to transmit over that channel. Our
customers on that channel do not receive our service. We or our vendor
have the cost of finding and fixing the problem. Our customer could make a
claim against us for the lost service. Many of our customers have back-up
systems in place with us which could mitigate any damage caused by the
disruption. In the event that there are claims for damages, our contracts
with our customers limit our liability in such instances. However, if
there were a large number of customers affected for a prolonged period of
time, we could be put in a position of either granting credits or risk
losing the customers and our reputation could be adversely effected.
We have customers that use our Quote Tools to access our data-feed for
software applications. Quote Tools is a set of programmer tools known as
application programming interfaces or APIs for short. Our Quote Tools are
written and tested to be Y2K compliant. If for some reason Y2K came and
our Quote Tools did not function properly because of the date change, we
would have to spend money and resources to fix the bug. If the bug could
not be fixed, and we had no alternative solution, for our customers using
the service, we could lose the customers and related revenue. Our
contracts with our customers generally limit our liability to total fees
paid over the preceding year, which in 1998 was under $200,000 for Quote
Tools' customers.
Page 17
<PAGE>
PART I. ITEM 2
Management's Discussion and Analysis of
Results of Operations and Financial Condition (continued)
5. Contingency Plans
PC Quote plans on completing at least 90% of the testing relating to the
Processing Plant/Communications Network, and Retail Applications by 6/30/99.
All testing, including internal infrastructure, is scheduled to be completed
by 7/30/99. We have not started extensive contingency planning because we are
concentrating our efforts on remediation and testing. We believe effective
contingency planning should not begin until after these phases are complete.
We expect to begin comprehensive contingency planning at the start of the
third quarter of 1999.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We will implement the provisions of Statement of Financial Accounting
Standards No. 133, ("Statement 133") "Accounting for Derivative Instruments
and Hedging Activities" which is required to be adopted for financial
statements issued for the fiscal year ending December 31, 2000. Statement 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring us to
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. We believe that adoption of
Statement 133 will not have a material impact on our financial statements.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On February 4, 1999 Imprimis Investors LLC and Wexford Spectrum Investors LLC
exercised the remaining portion of their common stock purchase warrants,
previously acquired pursuant to the Stock and Warrant Purchase Agreement
dated October 15, 1997, and purchased 267,200 shares of common stock for
$534,400.
During the first quarter of 1999, we issued 32,922 shares of our common stock
to employees, who purchased the shares under our Employee Stock Purchase Plan.
During the first quarter of 1999, 61,225 shares of our common stock were
purchased by employees who exercised stock options granted to them under our
Employee Incentive Stock Option Plan.
During the first quarter of 1999, we issued 4,746 shares of our common stock
to our Chairman and Chief Executive Officer, in lieu of cash salary payments,
under an agreement approved by our Board Of Directors in which the Chairman
would receive the shares at market price.
Page 18
<PAGE>
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS and REPORTS on FORM 8-K
(a) FINANCIAL STATEMENTS
The financial statements of the Company are filed herewith in Item 1 of this
report.
(b) REPORTS ON FORM 8-K
In the first quarter of the period covered by this report, we filed a Report
on Form 8-K dated January 12, 1999 reporting, in Item 5. Other Events, the
stockholder approval and closing of conversion of debt into equity of the
Company and that the Company completed a private placement of common stock
and warrants.
(c) EXHIBITS
27. Financial Data Schedule
Page 19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the Company caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
PC QUOTE, INC.
Date: May 17, 1999
By: /s/ Jim R. Porter
--------------------
Jim R. Porter
Chairman and Chief Executive Officer
By: /s/ John E. Juska
--------------------
John E. Juska
Chief Financial Officer and Principal Accounting Officer
Page 20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,020,610
<SECURITIES> 0
<RECEIVABLES> 1,976,057
<ALLOWANCES> 390,117
<INVENTORY> 0
<CURRENT-ASSETS> 3,108,616
<PP&E> 5,258,767
<DEPRECIATION> 3,181,548
<TOTAL-ASSETS> 10,111,013
<CURRENT-LIABILITIES> 6,421,287
<BONDS> 0
0
48
<COMMON> 14,549
<OTHER-SE> 2,859,811
<TOTAL-LIABILITY-AND-EQUITY> 10,111,013
<SALES> 7,420,278
<TOTAL-REVENUES> 7,420,278
<CGS> 5,371,479
<TOTAL-COSTS> 5,371,479
<OTHER-EXPENSES> 2,767,120
<LOSS-PROVISION> 90,000
<INTEREST-EXPENSE> 14,992
<INCOME-PRETAX> (725,801)
<INCOME-TAX> 0
<INCOME-CONTINUING> (725,801)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (725,801)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
