FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1996
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
incorporation or organization) Identification No.)
5959 CORPORATE DRIVE, SUITE 2000, HOUSTON, TEXAS 77036
(Address of principal executive offices) (Zip Code)
(713) 588-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
$.01 par value per share Common Stock: 10,773,076 as of November 12, 1996
<PAGE>
TELESCAN, INC.
Report on Form 10-Q
Quarter Ended September 30, 1996
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS .............................. 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ................. 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................... 14
ITEM 2. CHANGES IN SECURITIES ............................... 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS ............................................. 14
ITEM 5. OTHER INFORMATION .................................. 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................... 14
SIGNATURES ..................................................... 16
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELESCAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------- --------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 1,541 $ 1,796
Accounts receivable, net ....................... 1,490 1,265
Receivables from affiliates .................... 289 311
Prepaid expenses ............................... 287 416
Inventory ...................................... 154 190
Other current assets ........................... 155 201
-------- --------
TOTAL CURRENT ASSETS ....................... 3,916 4,179
Property and equipment, net ....................... 2,765 2,260
Software development costs, net ................... 3,906 3,173
Software technology rights, net ................... 272 76
Capitalized data costs, net ....................... 701 826
Other assets, net ................................. 320 345
-------- --------
TOTAL ASSETS ............................... $ 11,880 $ 10,859
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................... $ 1,728 $ 1,463
Accrued liabilities ............................ 624 221
Current portion of long-term debt and
capital lease obligations .................... 384 315
Amounts due to stockholders and affiliates ..... 37 37
-------- --------
TOTAL CURRENT LIABILITIES .................. 2,773 2,036
Long-term debt .................................... 259 175
Capital lease obligations ......................... 207 313
Minority interest in subsidiary ................... 138 370
CONTINGENCIES (NOTE 3) ............................ -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
10,000,000 shares authorized; none issued .. -- --
Common stock; $.01 par value; 15,000,000
shares authorized; 10,697,000 and
10,242,506 shares issued and outstanding
in 1996 and 1995, respectively ............. 107 102
Additional paid-in capital ..................... 17,347 14,457
Accumulated deficit ............................ (8,951) (6,594)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ................. 8,503 7,965
======== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . $ 11,880 $ 10,859
======== ========
The accompanying notes are an integral part of these financial statements.
3
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TELESCAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1996 1995 1996 1995
-------- ------- -------- --------
Revenue:
Online service .............. $ 2,333 $ 2,202 $ 7,103 $ 6,398
Products .................... 444 706 1,516 1,897
Contract and license revenue 274 718 848 1,828
Contract revenue earned from
affiliates ................ 173 94 456 308
Other revenue ............... 11 14 55 23
-------- ------- -------- --------
Total revenue .......... 3,235 3,734 9,978 10,454
Costs and expenses:
Cost of revenue - online .... 1,599 1,305 4,665 3,513
Cost of revenue - products .. 282 281 862 832
Cost of revenue - other ..... 193 384 758 1,173
Marketing expenses .......... 806 891 2,321 2,283
General and administrative
expenses .................. 1,345 870 3,905 2,659
Interest expense ............ 17 23 56 66
-------- ------- -------- --------
Total costs and expenses 4,242 3,754 12,567 10,526
Loss before minority interest .... (1,007) (20) (2,589) (72)
Minority interest in (income)
loss of subsidiary .......... 123 (58) 232 (203)
-------- ------- -------- --------
Net loss ............... $ (884) $ (78) $ (2,357) $ (275)
======== ======= ======== ========
Net loss per common share ........ $ (0.08) $ (0.01) $ (0.22) $ (0.03)
======== ======= ======== ========
Weighted average common and common
equivalent shares outstanding 10,686 9,864 10,580 9,643
======== ======= ======== ========
The accompanying notes are an integral part of these financial statements.
4
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TELESCAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $(2,357) $ (275)
Adjustments to reconcile net loss to net cash (used)
provided by operating activities:
Minority interest in income (loss) of subsidiary . (232) 203
Depreciation and amortization .................... 1,590 1,097
Provision for doubtful accounts .................. 42 42
Changes in current assets and liabilities
Receivables and advances ......................... (245) (665)
Other current assets ............................. 211 (100)
Accounts payable ................................. 265 110
Other current liabilities ........................ 403 125
------- -------
Net cash (used) provided by operating
activities ................................ (323) 537
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property and equipment .......... (839) (317)
Additions to software development costs .......... (1,351) (1,121)
Additions to capitalized data costs .............. (117) (170)
Other ............................................ (28) (3)
------- -------
Net cash used by investing activities ........ (2,335) (1,611)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock .......... 2,646 2,572
Payments on notes payable and capital lease ...... (243) (218)
Other ............................................ -- (45)
------- -------
Net cash provided by financing activities .... 2,403 2,309
------- -------
Increase (decrease) in cash and cash equivalents ......... (255) 1,235
Cash and cash equivalents
Beginning of period .............................. 1,796 956
------- -------
End of period .................................... $ 1,541 $ 2,191
======= =======
The accompanying notes are an integral part of these financial statements.
5
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TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Telescan, Inc., and its majority owned subsidiaries ("Telescan" or the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with Rule 10-01 of Regulation S-X for interim
financial statements required to be filed with the Securities and Exchange
Commission and do not include all information and footnotes required by
generally accepted accounting principles. However, in the opinion of management,
the information furnished reflects all adjustments, consisting of normal
recurring adjustments, which are necessary to make a fair presentation of
financial position and operating results for the interim periods.
Amounts in the September 30, 1995 condensed consolidated financial
statements have been reclassified whenever necessary to conform with the current
period's presentation.
The accompanying condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements for the
year ended December 31, 1995. The results of operations for the nine-month
period ended September 30, 1996, are not necessarily indicative of the results
to be expected for the full year.
2. UNCONSOLIDATED SUBSIDIARY
The Company owns 21.25% of Telebuild, L.C., ("Telebuild") a limited
liability company formed in 1990 to develop and market online databases for
which the Company has served as a contract software developer.
Selected statement of operations data of Telebuild are as follows (in
thousands):
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
Revenue ............................ $ 39 $ 24 $ 90 $ 82
Cost of revenue .................... 56 59 185 211
Marketing expenses ................. 77 38 214 117
General and administrative ......... 71 44 156 131
------- ------- ------- -------
Net loss ........................... $ (165) $ (117) $ (465) $ (377)
======= ======= ======= =======
6
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TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company performed services under contract for Telebuild totaling
approximately $456,000 and $308,000, respectively, during the nine months ended
September 30, 1996 and 1995. As of September 30, 1996, the Company has $337,000
due from Telebuild of which $68,000 had not been billed as of September 30,
1996. This receivable arose from programming, system operations, selling and
administrative services provided to Telebuild by the Company.
3. CONTINGENCIES
In 1986, a stockholder of Telescan, Inc. (predecessor business to D.B.
Technology, Inc.) filed suit in the 269th District Court in Texas against the
Company, certain stockholders of the Company, and others. The suit sought to set
aside the 1986 merger of D.B. Technology and Telescan, Inc., money damages from
all defendants, and sums due under alleged promissory notes. The case went to
trial in October 1989 and judgment was rendered in favor of the defendants on a
directed verdict including an order for the plaintiff to pay certain court costs
and certain attorney's fees of Telescan, Inc. Subsequent to an appeal by the
stockholder in the Texas Court of Appeals 14th Judicial District, the appellate
court remanded the case to trial court. At the conclusion of presentation of
evidence, the case was submitted to the jury by means of questions in order to
determine issues of liability and damages. Based on a lack of evidence which
would impose liability upon Telescan, Inc., no questions were submitted which
asked the jury to determine whether or not the Company bears any liability to
any plaintiff. A hearing on pending matters, including entry of Judgment, was
held April 10, 1995. At the hearing the court ruled that plaintiffs take nothing
other than the payment, with interest, of $40,000 in promissory notes in favor
of plaintiff Investa, Inc. and Hoggett, which notes preceded the merger. The
defendants were awarded attorney's fees and court costs. The Judgment has been
entered. The plaintiffs have appealed and oral argument was made on June 25,
1996 before the Texas Court of Appeals, 14th Judicial District. The court's
decision is pending. Management does not believe that any material adverse
outcome is reasonably possible nor probable and thus, no qualified disclosure as
to a range of reasonable possible loss or accrual in the financial statements of
probable loss have been made.
During June 1996 the Company and a publisher verbally agreed to cancel
their agreement to develop and operate an online service. As of September 30,
1996, the Company had capitalized $488,000 in software development and data
costs related to its development effort under the agreement which began August
1, 1993. The Company has had discussions with other parties interested in
developing such an online system and currently believes that the asset's net
realizable value is not impaired.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW
Telescan is an industry leader in providing innovative solutions for online
technology, sophisticated data retrieval tools and Internet services. The
Company develops, markets, and operates major online networks and Internet sites
serving the financial, publishing, home design and building, 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.
The Company's primary product lines are (1) the Telescan system of online
financial databases and software tools which allow sophisticated investors to
obtain financial news and information and to design a variety of sophisticated
searches and perform fundamental and technical analyses using current and
historical financial information on more than 350,000 global equities, indices
and currencies; (2) Computer Sports Network division, which offers online
computer sports games to golf and baseball enthusiasts; (3) the numerous third
party online services which are developed and operated via alliances with third
parties in the publishing, entertainment, and home design and building
industries; and (4) Knowledge Express Data Systems, L.C. ("KEDS"), which is an
online database system for the commercialization and transfer of technology
serving corporations, government agencies, universities, and research
institutions. The Company owns 55.58% of KEDS and acts under contract as the
exclusive system operator.
Revenue is generated in the form of online service fees, product sales and
contract revenue. The Company has experienced a significant increase in revenue
over the past three fiscal years. Total revenues have declined slightly in the
first nine months of 1996 compared to the corresponding period of 1995. The
lower revenue in the first nine months of 1996 is primarily attributable to the
DOE Contract, as defined herein, which expired in the first quarter of 1996,
partially offset by increases in revenue derived from the Company's subscriber
base. The subscriber growth is a result of the growth in the online services
industry, the diversification of the Company's product and service offerings,
and the Company's continued investment in customer acquisition through
technology development and marketing.
The Company's online revenue is generated primarily from individual subscribers
paying annual subscription fees plus recurring monthly usage fees. Until
recently, the monthly usage fees for the Company's financial online service were
based upon actual hours of prime time and non-prime time usage, with prime-time
hours charged at a premium. In December 1995, the Company implemented a new
fixed rate pricing plan for the Telescan Financial online service, whereby all
customers are charged a flat monthly fee for a specified number of hours, with
no stipulations as to time of day access.
The Company's incremental online operating expenses primarily include
telecommunications costs, royalties and customer service expenses, while fixed
online operating costs include data costs, amortization of software development
and amortization of capitalized data. On a going forward basis,
telecommunications costs will become semi-variable due to modifications of
vendor contracts resulting in increased fixed and lower variable costs. As a
result of this mixed cost structure, the online gross margin rate will typically
increase as online revenue increases and will decrease as online revenue
decreases.
8
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Product revenue is primarily generated from the sale of online access 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 needs of the more sophisticated user.
Accordingly, product revenue principally represents revenue from product
enhancements or major upgrades. During 1995, the first version of Telescan
Investor's Platform for Windows ("TIP") software was released and generated a
significant increase in product revenue. There were no 1996 new product releases
of a similar magnitude to the 1995 TIP release.
Product costs are variable in nature and include production, duplication,
royalties and distribution costs. Due to the variable nature of these costs,
increases or decreases in product revenue typically do not impact the gross
margin rate.
The Company's contract revenue is generated from providing contract services to
other companies which include developing, operating and maintaining online
database systems as well as providing administrative and marketing services. In
recent years, contract revenue has increased primarily due to the Department of
Energy Contract (the "DOE Contract") awarded to KEDS in April 1994. Under the
terms of the DOE Contract, the Company was responsible for the development,
marketing and operation of an online service enabling technology transfer among
universities, federal laboratories, and small to medium sized businesses. In
exchange, the Department of Energy subsidized online services for up to 1,200
subscribers, pursuant to which $452,000 and $1,610,000 of contract revenue and
$156,000 and $716,000 of gross margin was recognized by the Company during the
nine months ended September 30, 1996 and 1995, respectively. The DOE Contract
expired in March 1996. To counter the impact of the expiration of the DOE
Contract, KEDS has been actively working to expand its unsubsidized subscriber
base. Since the beginning of 1995 through the end of the third quarter of 1996,
the number of unsubsidized subscribers has increased resulting in higher revenue
from such subscribers. Accordingly, for the nine months ended September 30,
1996, unsubsidized revenue increased to an average of $34,000 per month from an
average of $13,000 per month of such revenue during the first quarter of 1995.
Management will continue to closely monitor the operating results of KEDS, and
will make modifications, if necessary, to optimize KEDS' operating results.
Results for the nine months ended September 30, 1996 reflect the Company's
ongoing efforts to grow market share in its existing online services, as well as
to pursue strategic partnership opportunities that could enable the Company to
broaden the usage of its proprietary technology platform and enter new segments
of the online services market. The Company has continued to invest in
infrastructure to support new business development activity, as well as in
upfront marketing and selling expenses to acquire new customers. As a result,
since the beginning of the year Telescan has entered into a number of new
contracts. These contracts include expanded relationships with Charles Schwab &
Co. and NETCOM On-Line Communications; building a new online service for
Standard and Poor's and new ventures with Independent Economic Analysis
(Holdings) Pte Limited (I.D.E.A.), a leading international provider of
independent financial and economic analysis; and an agreement with American
Express Direct, a division of American Express, to provide investment decision
support services.
9
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QUARTER ENDED SEPTEMBER 30, 1996, COMPARED TO QUARTER ENDED SEPTEMBER 30, 1995
For the three months ended September 30, 1996, total revenue was $3,235,000
compared to $3,734,000 for the same period in 1995. Recurring online service
revenue rose 6% to $2,333,000 during the third quarter of 1996 from $2,202,000
during the corresponding period of the prior year. Product revenue decreased
$262,000, or 37%, from $706,000 in 1995 to $444,000 in 1996 primarily due to
higher third quarter 1995 revenues associated with the release of Telescan
Investor's Platform ("TIP") software. Contract and license revenue decreased
$365,000, or 45%, from $812,000 to $447,000, primarily due to the expiration of
the DOE Contract during March 1996.
Total cost of revenue increased from $1,970,000 during the third quarter of 1995
to $2,074,000 in the third quarter of 1996, a $104,000, or 5% increase. For the
three months ended September 30, 1996, the Company earned a gross margin on its
online service revenue of $734,000 compared to $897,000 for the comparable
period of 1995. Online gross margin as a percentage of online revenue decreased
from 41% to 32% for the quarters ended September 30, 1995 and 1996. The decrease
is primarily attributable to a $143,000, or 31%, increase in data and royalty
costs, and a $113,000, or 64%, increase in amortization of capitalized data and
software development costs. Data and royalty costs increased as a percentage of
online revenue primarily due to the addition of more database options and the
migration of the Company's data contracts from a variable to a fixed cost
structure. Amortization of software development costs increased due to the
release of the TIP software during 1995.
For the quarter ended September 30, 1996, the Company earned a gross margin on
its product revenue of $162,000 compared to $425,000 for the comparable period
of 1995. Product gross margin as a percentage of product revenue decreased from
60% to 36% primarily due to a higher margin third quarter 1995 sales mix
reflecting the TIP software release.
Marketing expenses decreased 10% from $891,000 for the three months ended
September 30, 1995, to $806,000 for the corresponding 1996 period. This decrease
is primarily the result of decreased advertising expense of $95,000 partially
offset by $40,000 of increased salary expense.
General and administrative expenses increased 54% from $870,000 for the three
months ended September 30, 1995, to $1,345,000 for the three months ended
September 30, 1996, primarily due to increased salary expense of $109,000,
higher rent expense of $66,000, increased depreciation expense of $41,000,
increased consulting expense of $55,000 and a $43,000 rise in legal expense.
10
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NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
Total revenue for the nine months ended September 30, 1996 was $9,978,000
compared to $10,454,000 for the corresponding period of 1995. Recurring online
service revenue rose 11% to $7,103,000 during the first nine months of 1996 from
$6,398,000 during the same 1995 period. Product revenue decreased $381,000, or
20%, from $1,897,000 in 1995 to $1,516,000 in 1996. Contract and license revenue
decreased $832,000, or 39%, from $2,136,000 to $1,304,000, primarily due to the
expiration of the DOE Contract during March 1996.
Total cost of revenue increased from $5,518,000 during the first nine months of
1995 to $6,285,000 in 1996, a $767,000 or 14% increase. This increase is
primarily attributable to the overall increase in revenue discussed above, as
well as the increase in the cost of online revenue as a percentage of online
revenue discussed below.
For the nine months ended September 30, 1996, the Company earned a gross margin
on its online service revenue of $2,438,000 compared to $2,885,000 for the same
period in 1995. Online gross margin as a percentage of online revenue decreased
from 45% to 34% for the nine months ended September 30, 1995 and 1996,
respectively. The decrease is primarily attributable to a $575,000, or 50%,
increase in data and royalty costs (as discussed above in the quarterly
comparison), and a $363,000, or 82%, increase in amortization of capitalized
data and software development costs primarily reflecting the release of the TIP
software in 1995.
For the nine months ended September 30, 1996, the Company earned a gross margin
on its product revenue of $654,000 compared to $1,065,000 for the same period of
1995. Product gross margin as a percentage of product revenue decreased from 56%
to 43% primarily due to the higher contribution of 1995 TIP software product
release.
Marketing expenses increased 2% from $2,283,000 for the nine months ended
September 30, 1995 to $2,321,000, for the nine months ended September 30, 1996.
The increase reflects an increase of $120,000 in salary expense associated with
Internet business development partially offset by a reduction in tradeshow and
seminar expenses of $101,000.
General and administrative expenses increased 47% from $2,659,000 for the nine
months ended September 30, 1995, to $3,905,000 for the nine months ended
September 30, 1996, primarily due to increased salary expense of $363,000, a
$157,000 increase in consulting expense, increased rent of $175,000 and
increased depreciation expense of $120,000, and $117,000 of higher legal
expense.
During June 1996 the Company and a publisher verbally agreed to cancel their
agreement to develop and operate an online service. As of September 30, 1996,
the Company had capitalized $488,000 in software development and data costs
related to its development effort under the agreement which began August 1,
1993. The Company has had discussions with other parties interested in
developing such an online system and currently believes that the asset's net
realizable value is not impaired.
11
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash and cash equivalents of $1,541,000,
representing a decrease of $255,000 since December 31, 1995. Net cash used by
operating activities was $323,000 for the nine months ended September 30, 1996,
compared to cash provided by operations of $537,000 for the nine months ended
September 30, 1995. This $860,000 decrease in cash provided by operations
primarily reflects the net loss of $2,357,000, partially offset by a $402,000
increase in other current liabilities and $1,590,000 of depreciation and
amortization.
The Company's primary capital needs are for (1) the continued investment in
technology through its software development activities, (2) the purchase of
capitalized data and (3) the purchase of computers and communications equipment.
During the nine months ended September 30, 1996, the Company invested $1,351,000
in software development costs and acquired property and equipment totaling
$1,167,000, of which $290,000 was financed through notes payable. The Company
estimates that it may invest up to an additional $2 million in capital
expenditures over the next twelve months. The Company intends to fund these
capital additions through existing cash on hand and cash generated from
operations and equipment leases.
The Company believes that the existing cash on hand, cash generated from
operations, and equipment leasing will be adequate to fund its working capital
and other cash requirements over the next twelve months. Due to the uncertainty
of the timing of any new product introductions and the uncertainty of the timing
of the development of new markets for the Company's technology, capital
expenditures for future equipment and software development projects beyond a
twelve-month period are uncertain. Accordingly, additional outside sources of
capital could be required beyond the next twelve-month period should the Company
embark upon major software development or hardware acquisition projects or
should the Company obtain major contracts to develop online systems for other
parties.
Aggregate revenue from the Company's online financial database and related
product sales accounted for approximately 76% of the Company's total revenue for
the nine months ended September 30, 1996. A downturn in the equity markets could
cause a reduction in this revenue, which 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 market conditions would be lessened by
its fixed rate billing structure. To counter the potential impact, if any, of
such a downturn, the Company is broadening its revenue base through initiating
alliances with third parties to develop and operate online databases and
Internet sites outside the Company's primary market.
IMPACT OF RELATIONSHIP WITH TELEBUILD, L.C.
The Company owns 21.25% of Telebuild, L.C. ("Telebuild"). Friedman Interests,
Inc. ("Friedman Interests"), a company controlled by G. Robert Friedman, a
director of the Company, owns 40.5875% of Telebuild. JST Technology Center, Inc.
("JST") (which is owned 93.98% by the Brown Family Partnership and 6.02% by a
third party) owns 38.1625% of Telebuild. The Brown Family Partnership is owned
by David L. Brown, the Company's Chairman and Chief Executive Officer, and Scott
L. Brown, a former Vice President of the Company, and other members of the Brown
family.
During the nine months ended September 30, 1996, the Company performed services
under contract for Telebuild which consisted primarily of software development,
operation of an online database system, and selling and administrative services.
12
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During the three months ended September 30, 1996, the Company earned revenue of
$173,000 and incurred expense of $138,000 under its contract with Telebuild. For
the nine months ended September 30, 1996, the Company recognized $456,000 of
contract revenue and incurred $376,000 of expenses related to the Telebuild
contract. The Company anticipates that there may be an increase in the related
contract revenue and expense over the next twelve months due to a recent
acceleration in the business development activities of Telebuild.
It is uncertain when Telebuild will reach break-even cash flow levels and be
able to meet its operating and capital requirements. As of September 30, 1996,
$337,000 was due from Telebuild, $68,000 of which was not billed at that date.
The Company believes that JST and Friedman Interests have both the ability and
intent to continue to fund Telebuild. The Company bases this belief on the fact
that JST and Friedman Interests have funded Telebuild approximately $2,326,000
in the form of capital and advances, and have made assurances to the Company of
continued funding. The Company has not provided, is not obligated to provide and
has no present or future commitment to provide any funding of Telebuild. In the
unlikely event JST and Friedman Interests, either individually or jointly, elect
to or are unable to continue funding Telebuild, the Company has been advised
that Telebuild will seek other third-party investors as a source of funding.
Should Telebuild be unable to obtain such third party funding, the Company would
re-evaluate the business prospects of Telebuild and would consider various
business alternatives, including the possibility of purchasing additional equity
in Telebuild, provided it had the resources to do so.
13
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits:
4.1** Asset Purchase Agreement dated September 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)).
4.2** Exhibits to Asset Purchase Agreement dated September 30, 1990,
between TIC Software, Inc. and the Registrant which set 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)).
4.3** 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)).
4.4** 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)).
4.5** Registration Rights Agreement between Vulcan Ventures
Incorporated and the Registrant dated May 20, 1992.
(Incorporated by reference to the Company's Form S-1 dated
September 14, 1993 (Registration No. 33-52182)).
4.6** Form of Redeemable Warrant Certificate issued by the Registrant
to Vulcan Ventures Incorporated to purchase 600,000 shares of
Common Stock of the
14
<PAGE>
Registrant at $3.25 per share dated May 20, 1992. (Incorporated
by reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.7** Form of Registration Rights Agreement between Sanders Morris
Mundy Inc. and the Registrant dated May 20, 1992. (Incorporated
by reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.8** Form of Warrant Certificate issued by the Registrant to Sanders
Morris Mundy Inc. to purchase 60,000 shares of Common Stock of
the Registrant at $1.75 per share dated May 20, 1992.
(Incorporated by reference to the Company's Form S-1 dated
September 14, 1993 (Registration No. 33-52182)).
4.9** Form of Warrant Certificate issued by Registrant to Sanders
Morris Mundy Inc. to purchase 60,000 shares of Common Stock of
Registrant at $3.25 per share dated May 20, 1992. (Incorporated
by reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.10** Form of Registration Rights Agreement between the Registrant and
47 private investors dated August 5, 1992. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.11** Form of Redeemable Warrant Certificate issued by the Registrant
to 47 private investors to purchase, in the aggregate, 1,200,000
shares of Common Stock of the Registrant at $3.25 per share
dated August 5, 1992. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.12** Form of Registration Rights Agreement between the Registrant and
Sanders Morris Mundy Inc. dated August 5, 1992. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.13** Form of Warrant Certificate issued by the Registrant to Sanders
Morris Mundy Inc. to purchase 120,000 shares of Common Stock of
the Registrant at $1.75 per share dated August 5, 1992.
(Incorporated by reference to the Company's Form S- 1 dated
September 14, 1993 (Registration No. 33-52182)).
4.14** Form of Warrant Certificate issued by the Registrant to Sanders
Morris Mundy Inc. to purchase 120,000 shares of Common Stock of
the Registrant at $3.25 per share dated August 5, 1992.
(Incorporated by reference to the Company's Form S- 1 dated
September 14, 1993 (Registration No. 33-52182)).
4.15** Form of Registration Rights Agreement between the Registrant and
G. Robert Friedman dated May 24, 1990. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.16** Registration Rights Agreement between TransTerra Company and the
Registrant dated June 28, 1995. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995.)
15
<PAGE>
4.17** Asset Purchase Agreement By and Among Telescan, Inc., OP/COM
Partners, Ltd., and Raymond S. Wicker, Jr., dated June 14, 1996.
11* Statement regarding computation of earnings per share.
15* Letter regarding unaudited financial information.
27* Financial Data Schedule.
-------------------------------------
* Indicates documents filed herewith.
** Indicates documents incorporated by reference from the prior
filing indicated.
(B) Reports on Form 8-K:
None.
Pursuant to the requirements of the Securities Exchanges Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELESCAN, INC.
By: /s/ RONALD WARREN
----------------------------
Ronald Warren
Chief Financial Officer
a duly authorized officer of the Registrant
Date: NOVEMBER 14, 1996
16
TELESCAN , INC. EXHIBIT 11
Calculation of Earnings Per Share page 1 of 2
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Primary:
Weighted average number of shares
of common stock ................... 10,686 9,864 10,580 9,643
Assumed exercise of certain
stock options (1) ................. -- -- -- --
Assumed exercise of stock warrants (1) -- -- -- --
-------- -------- -------- -------
10,686 9,864 10,580 9,643
======== ======== ======== =======
Net income (loss) .................... $ (884) $ (78) $ (2,357) $ (275)
======== ======== ======== =======
Primary earnings per share:
Net income (loss) .................... $ (0.08) $ (0.01) $ (0.22) $ (0.03)
======== ======== ======== =======
Fully-diluted:
Weighted average number of shares
of common stock ................... 10,686 9,864 10,580 9,643
Assumed exercise of certain
stock options (1) ................. -- -- -- --
Assumed exercise of stock warrants (1) -- -- -- --
-------- -------- -------- -------
10,686 9,864 10,580 9,643
======== ======== ======== =======
Net income (loss) .................... $ (884) $ (78) $ (2,357) $ (275)
======== ======== ======== =======
Fully-diluted earnings per share: .... $ (0.08) $ (0.01) $ (0.22) $ (0.03)
======== ======== ======== =======
</TABLE>
(1) Assumed exercises are anti-dilutive for the above periods and are,
therefore, excluded from the calculations of earnings per share
<PAGE>
EXHIBIT 11
page 2 of 2
TELESCAN, INC. AND SUBSIDIARIES
Statement Regarding Computation of Per Share Earnings
(in thousands, except per share amounts)
Days
Out- Weighted
Shares Standing Shares
------ -------- ------
Quarter Ended September 30, 1996:
Balance June 30, 1996 ....................... 10,684 90 10,684
Common stock issuances ...................... 13 12.4 2
------ ------
Balance September 30, 1996 .................. 10,697 -- 10,686
====== ======
Nine Months Ended September 30, 1996:
Balance December 31, 1995 ................... 10,243 270 10,243
Common stock issuances ...................... 454 200.3 337
------ ------
Balance September 30, 1996 .................. 10,697 -- 10,580
====== ======
EXHIBIT 15
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Telescan, Inc.
Houston, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Telescan, Inc. and subsidiaries as of September 30, 1996, the related condensed
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 1996 and 1995, and the related condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 1996 and
1995. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
statements consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements in order
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
February 13, 1996, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1995, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
HEIN + ASSOCIATES LLP
Houston, Texas
November 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TELESCANS
QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> 1
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,541
<SECURITIES> 0
<RECEIVABLES> 1,598
<ALLOWANCES> 108
<INVENTORY> 154
<CURRENT-ASSETS> 3,916
<PP&E> 5,007
<DEPRECIATION> 2,242
<TOTAL-ASSETS> 11,880
<CURRENT-LIABILITIES> 2,773
<BONDS> 0
107
0
<COMMON> 0
<OTHER-SE> 8,396
<TOTAL-LIABILITY-AND-EQUITY> 11,880
<SALES> 1,516
<TOTAL-REVENUES> 9,978
<CGS> 862
<TOTAL-COSTS> 8,606
<OTHER-EXPENSES> 3,905
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> (2,357)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,357)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,357)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
