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 MARCH 31, 1997
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)
(281) 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: 10,738,693 as of May 12, 1997
<PAGE>
TELESCAN, INC.
Report on Form 10-Q
Quarter Ended March 31, 1997
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 .................................... 11
ITEM 2. CHANGES IN SECURITIES ................................ 11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ..................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS .............................................. 11
ITEM 5. OTHER INFORMATION ................................... 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................... 11
SIGNATURES ..................................................... 12
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELESCAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1997 1996
-------- --------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 736 $ 792
Accounts receivable, net ..................... 1,807 1,616
Receivables from affiliates .................. 255 342
Prepaid expenses ............................. 379 369
Inventory .................................... 109 107
Other current assets ......................... 212 218
-------- --------
TOTAL CURRENT ASSETS ..................... 3,498 3,444
Property and equipment, net ..................... 2,380 2,626
Software development costs, net ................. 4,489 4,182
Software technology rights, net ................. 228 246
Capitalized data costs, net ..................... 590 656
Other assets, net ............................... 299 312
-------- --------
TOTAL ASSETS ............................. $ 11,484 $ 11,466
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................. $ 2,075 $ 1,987
Accrued liabilities .......................... 449 446
Current portion of long-term debt and
capital lease obligations .................. 412 420
Amounts due to stockholders and affiliates ... 117 137
-------- --------
TOTAL CURRENT LIABILITIES ................ 3,053 2,990
Long-term debt .................................. 218 237
Capital lease obligations ....................... 212 251
Minority interest in subsidiary ................. 1 24
CONTINGENCIES (NOTE 2) .......................... -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
10,000,000 shares authorized;
none issued .............................. -- --
Common stock; $.01 par value; 15,000,000
shares authorized;
10,738,364 and 10,733,114 shares issued
and outstanding in 1997 and 1996,
respectively ............................. 107 107
Additional paid-in capital ................... 17,407 17,385
Accumulated deficit .......................... (9,514) (9,528)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ............... 8,000 7,964
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,484 $ 11,466
======== ========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Quarter Ended
March 31,
------------------------
1997 1996
-------- --------
Revenue:
Service ..................................... $ 3,257 $ 2,992
Products .................................... 334 415
Contract revenue earned from affiliates ..... 295 106
-------- --------
Total revenue .......................... 3,886 3,513
Costs and expenses:
Cost of service ............................. 1,959 1,854
Cost of products ............................ 180 251
Selling and marketing expenses .............. 680 730
General and administrative expenses ......... 1,146 1,167
Interest expense ............................ 31 19
-------- --------
Total costs and expenses ............... 3,996 4,021
Loss before minority interest .................... (110) (508)
Minority interest in (income) loss of
subsidiary .................................. 124 (25)
-------- --------
Net income (loss) ...................... $ 14 $ (533)
======== ========
Net income (loss) per common share
and common stock equivalent ................. $ 0.00 $ (0.05)
======== ========
Weighted average common and common
equivalent shares outstanding ............... 10,736 10,425
======== ========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
March 31,
------------------
1997 1996
----- -------
Cash flows from operating activities:
Net income (loss) ...................................... $ 14 $ (533)
Adjustments to reconcile net loss to net cash (used)
provided by operating activities:
Minority interest in income (loss) of subsidiary (124) 25
Depreciation and amortization .................. 595 486
Provision for doubtful accounts ................ 10 43
Changes in current assets and liabilities
Receivables and advances ....................... (33) (602)
Other current assets ........................... (7) 29
Accounts payable ............................... 88 29
Other current liabilities ...................... 4 130
----- -------
Net cash (used) provided by operating
activities ............................. 547 (393)
----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property and equipment ........ 60 (542)
Additions to software development costs ........ (573) (404)
Additions to capitalized data costs ............ -- (45)
Other .......................................... (5) 5
----- -------
Net cash used by investing activities ...... (518) (986)
----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock ........ 22 2,545
Payments on notes payable and capital lease .... (107) (77)
----- -------
Net cash provided by financing activities .. (85) 2,468
----- -------
Increase (decrease) in cash and cash equivalents ....... (56) 1,089
Cash and cash equivalents
Beginning of period ............................ 792 1,796
----- -------
End of period .................................. $ 736 $ 2,885
===== =======
5
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
SUPPLEMENTAL CASH FLOW INFORMATION
The effects of non-cash transactions are excluded from the statements of cash
flow. Supplemental disclosures of cash flow information are as follows:
Three Months Ended
March 31,
----------------------------
1997 1996
------------- -----------
Acquisition of property and equipment financed
by debt or long-term capital leases $ 40 $ --
Capitalization of payable to minority shareholder 100 --
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
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 March 31, 1996 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, 1996. The results of operations for the three-month
period ended March 31, 1997, are not necessarily indicative of the results to be
expected for the full year.
2. 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.
7
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 1997, the Company was named as a defendant in a legal action
regarding royalty payments. Management does not believe the outcome of this
matter will have a material adverse effect on the Company's consolidated
financial position, operating results or cash flows.
During November 1996, the Company and a publisher signed a written release
canceling their agreement to develop and operate an online service. As of March
31, 1997, the Company had capitalized $500,000 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.
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 state-of-the-art Internet
services. The Company develops, markets, and operates major online networks and
Internet sites 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.
The Company's primary product lines are (1) the Telescan system of online and
Internet financial services and products provided directly to users as well as
under private label agreements with third parties. These services allow
sophisticated investors to obtain financial news and information, perform
fundamental and technical analyses and design personalized searches using
current and historical financial information on more than 220,000 equities,
indices and currencies; (2) Numerous non-financial third party online and
Internet services which are developed and operated via alliances with third
parties in the publishing, entertainment, and space industries and Computer
Sports Network division ("CSN"), which offers online computer sports games to
golf and baseball enthusiasts; and (3) Knowledge Express Data Systems, L.C.
("KE"), an online database system for the commercialization and transfer of
technology which serves corporations, government agencies, universities, and
research institutions.
Revenue is generated in the form of online and Internet service fees, fees from
third parties, product sales, contract revenue and advertising. Total revenues
have increased in the first three months of 1997 compared to the corresponding
period of 1996. In the prior year and through March 1996, the Company's revenues
included a large Department of Energy contract. Despite the loss of the
governmental contract which generated $450,000 in the first three months of
1996, revenues have increased due primarily to private label agreements.
8
<PAGE>
The Company's online and Internet revenue is generated from individual
subscribers paying annual usage fees and flat monthly fees, combined with fees
from alliance parties providing private label versions of the Company's service.
Product revenue is derived mainly from the sale of online system software
combined with upgrades and enhancements and related educational and training
products such as books and videotapes. The level of product sales is influenced
by new product releases. No software sales arise from Internet subscription
service.
Contract revenue represents services provided to Telebuild, L.C. ("Telebuild")
in which the Company has a 15.05% equity interest. Revenue is generated on a
profitable basis based on the services provided. At March 31, 1997 and 1996,
amounts due from Telebuild totaled $335,000 and $353,000 respectively.
Results for the three months ended March 31, 1997 reflect the Company's
continuing efforts to grow market share in its existing online services, as well
as to pursue strategic partnership opportunities that will enable the Company to
broaden the usage of its proprietary technology platform and enter new segments
of the online services market. The Company expanded its business relationship
with a division of American Express Company during the quarter to include
management of their brokerage Internet website.
QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996
For the three months ended March 31, 1997, total revenue was $3,886,000 compared
to $3,513,000 for the same period in 1996. Service revenue rose 9% to $3,257,000
during the first quarter of 1997 from $2,992,000 during the corresponding period
of the prior year. The significant growth was due mainly to private labeling
agreements with third parties. The gain was partially offset by the loss of a
governmental contract in March 1996, which contributed $452,000 to first quarter
revenue in 1996. Product revenue decreased $81,000, or 20%, from $415,000 in
1996 to $334,000 in 1997 primarily due to the absence of new product offerings
and to a lesser extent, a reduction in software and enhancement sales with the
introduction of Wall Street City(TM)on the Internet.
Total cost of revenue increased from $1,854,000 during the first quarter of 1996
to $1,959,000 in the first quarter of 1997, a $105,000, or 6% increase. For the
three months ended March 31, 1997, the Company earned a gross margin on its
service revenue of $1,298,000 compared to $1,138,000 for the comparable period
of 1996. Online gross margin as a percentage of online revenue increased from
38% to 40% for the quarters ended March 31, 1996 and 1997. The increase is
primarily attributable to the high gross margin earned on third party alliances
which more than offset the loss of the governmental contract. The contract
contributed $156,000, or 35%, to the gross margin in the first quarter of 1996.
For the quarter ended March 31, 1997, the Company earned a gross margin on its
product revenue of $154,000 compared to $164,000 for the comparable period of
1996. Product gross margin as a percentage of product revenue increased from 40%
to 46%, primarily due to product mix.
Marketing expenses decreased 7% from $730,000 for the three months ended March
31, 1996, to $680,000 for the corresponding 1997 period. This decrease is
primarily the result of reduced sales promotion expense and personnel expenses.
9
<PAGE>
General and administrative expenses decreased 2% from $1,167,000 for the three
months ended March 31, 1996, to $1,146,000 for the three months ended March 31,
1997, primarily due to a larger amount of costs being capitalized and a
reduction in consulting and communication expense.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had cash and cash equivalents of $736,000,
representing a decrease of $56,000 since December 31, 1996. Net cash provided by
operating activities was $547,000 for the three months ended March 31, 1997,
compared to cash used by operations of $393,000 for the three months ended March
31, 1996. This $940,000 increase in cash provided by operations primarily
reflects the $547,000 improvement in earnings, partially offset by a $149,000
decrease in the minority interest in KE's loss and other balance sheet changes.
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 three months March 31, 1997,
the Company invested $573,000 in software development costs and capital
equipment, which equipment have been financed through an operating lease and
notes payable totaling $40,000. Equipment previously capitalized was transferred
to an operating lease during the first quarter of 1997. The Company estimates
that it may invest up to an additional $1 million in capital expenditures over
the next twelve months. The Company intends to fund these capital expenditures
from cash on hand, cash generated from operations, and capital and operating
leases.
Cash flow for the first quarter was negative by $56,000. The Company believes
that existing cash on hand, cash generated from expected improvements in
operations, proceeds from long term capital leasing and borrowings will be
adequate to fund its working capital and other cash requirements over the next
twelve months. Should additional funds be required, Management believes it would
be able to sell additional common stock to provide for a shortfall. There are no
plans to sell additional shares at this time.
Aggregate revenue from the Company's online financial database and related
product sales accounted for approximately 92% of the Company's total revenue for
the three months ended March 31, 1997. 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 continuing its efforts to broaden its revenue
base through alliances with third parties to develop and operate online
databases and Internet sites outside the Company's primary market.
10
<PAGE>
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:
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 3.4 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** 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 June 30, 1995).
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)
11
<PAGE>
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 now 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** 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)
10.6** Stock Purchase Agreement between the Company and TransTerra
Company dated June 28, 1995. (Incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995).
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 Annual Report on Form 10-K for
the annual period ending December 31, 1995).
11* Statement regarding computation of earnings per share.
27* Financial Data Schedule.
- -------------------
* Indicates documents filed herewith.
** Indicates documents incorporated by reference from the
prior filing indicated.
(1) Management contracts or compensation plans or arrangements.
(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: May 14, 1997
TELESCAN, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Shares Days Outstanding Weighted Shares
--------------- --------------- --------------
Quarter Ended March 31, 1997
Balance December 31, 1996 10,733,114 90 10,733,114
Common stock issuances 5,250 45.7 2,666
--------------- -------------
Balance March 31, 1997 10,738,364 10,735,780
=============== =============
<PAGE>
TELESCAN, INC.
CALCULATION OF EARNINGS PER SHARE
QUARTER ENDED
MARCH 31,
--------------------------------
1997 1996
------------- ----------------
PRIMARY:
Weighted average number of shares
of common stock 10,735,780 10,425,346
Assumed exercise of certain
stock options (1) --- ---
Assumed exercise of stock warrants (1) --- ---
------------- ----------------
10,735,780 10,425,346
============= ================
Net income (loss) $ 13,745 $ (533,031)
============= =================
PRIMARY EARNINGS PER SHARE:
Net income (loss) $ 0.00 $ (0.05)
============= =================
FULLY-DILUTED:
Weighted average number of shares
of common stock 10,735,780 10,425,346
Assumed exercise of certain
stock options (1) --- ---
Assumed exercise of stock warrants (1) --- ---
------------- ----------------
$ 10,735,780 $ 10,425,346
============= ================
Net income (loss) $ 13,745 $ (533,031)
============= =================
Fully-diluted earnings per share:
0.00 (0.05)
============= =================
(1) Assumed exercises are anti-dilutive for the above periods and are,
therefore, excluded from the calculations of earnings per share.
<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>
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<PERIOD-END> MAR-31-1997
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<SALES> 334
<TOTAL-REVENUES> 3,886
<CGS> 180
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</TABLE>
