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, 1998
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: 11,063,441 as of May 15, 1998.
<PAGE>
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS ............................... 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................. 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ....................................10
ITEM 2. CHANGES IN SECURITIES ................................10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .....................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS ..............................................10
ITEM 5. OTHER INFORMATION ...................................10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................10
SIGNATURES ......................................................11
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
TELESCAN, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 315 $ 1,090
Accounts receivable, net ........................................... 1,487 1,650
Receivables from affiliates ........................................ 220 155
Prepaid expenses ................................................... 454 455
Inventory .......................................................... 68 77
Other current assets ............................................... 299 198
Discontinued operations ............................................ 234 164
-------- --------
TOTAL CURRENT ASSETS ............................................. 3,077 3,789
Property and equipment, net ........................................ 1,764 2,048
Software development costs, net .................................... 4,794 4,469
Software technology rights, net .................................... 250 176
Capitalized data costs, net ........................................ 223 252
Other assets, net .................................................. 63 68
Discontinued operations ............................................ 1,413 1,457
-------- --------
TOTAL ASSETS ..................................................... $ 11,584 $ 12,259
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................... $ 2,252 $ 2,021
Accrued liabilities ................................................ 410 402
Accrual for phase out costs of discontinued operations ............. 6 20
Current portion of long-term debt and capital lease obligations .... 438 447
Amounts due to stockholders and affiliates ......................... -- 154
-------- --------
TOTAL CURRENT LIABILITIES ........................................ 3,106 3,044
Long-term debt ...................................................... 112 152
Capital lease obligations ........................................... 241 314
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;
11,044,568 and 10,924,382 shares issued and outstanding in
1998 and 1997, respectively ...................................... 110 109
Additional paid-in capital ......................................... 18,206 17,972
Accumulated deficit ................................................ (10,191) (9,332)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ....................................... 8,125 8,749
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $ 11,584 $ 12,259
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
TELESCAN, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUE:
Service ................................................... $ 2,444 $ 2,985
Products .................................................. 238 332
Contract revenue earned from affiliates ................... 350 309
-------- --------
TOTAL REVENUE ........................................... 3,032 3,626
COSTS AND EXPENSES:
Cost of service ........................................... 1,906 1,739
Cost of products .......................................... 100 178
Selling and marketing expenses ............................ 571 499
General and administrative expenses ....................... 1,245 967
Interest expense .......................................... 22 22
-------- --------
TOTAL COSTS AND EXPENSES ................................ 3,844 3,405
INCOME (LOSS) FROM:
Continuing operations ..................................... (812) 221
Discontinued operations ................................... (46) (207)
-------- --------
NET INCOME (LOSS) .......................................... $ (858) $ 14
======== ========
INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations per common share:
Basic ................................................... (0.07) 0.02
Diluted ................................................. (0.07) 0.02
Income (loss) from discontinued operations per common share:
Basic ................................................... 0.00 (0.02)
Diluted ................................................. 0.00 (0.02)
Net income (loss):
Basic ................................................... (0.08) --
Diluted ................................................. (0.08) --
Weighted average shares - basic ............................ 10,939 10,735
Dilutive effect of options ................................. -- 196
-------- --------
Adjusted weighted average shares - diluted ................. 10,939 10,931
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED
----------------
1998 1997
------- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ (858) $ 14
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Accrued loss on discontinued operations ................ (14) --
Depreciation and amortization .......................... 566 474
Provision for doubtful accounts ........................ 6 10
Changes in assets and liabilities
Receivables and advances .................................. 92 148
Other current assets ...................................... (91) 10
Accounts payable .......................................... 231 47
Other current liabilities ................................. 7 (15)
Discontinued operations ................................... (26) (196)
------- -----
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ........ (87) 492
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ....................... (15) 21
Additions to software development costs ................... (631) (483)
Additions to capitalized data costs ....................... -- (4)
Other ..................................................... -- (4)
------- -----
NET CASH USED BY INVESTING ACTIVITIES ................... (646) (470)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock ................... 235 22
Proceeds from notes payable ............................... -- 40
Payments to stockholder ................................... (154) --
Payments on notes payable and capital lease obligations ... (123) (103)
------- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES ............... (42) (41)
DECREASE IN CASH AND CASH EQUIVALENTS ...................... (775) (19)
CASH AND CASH EQUIVALENTS:
Beginning of period ....................................... 1,090 667
------- -----
End of period ............................................. $ 315 $ 648
======= =====
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
TELESCAN, INC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of Telescan, Inc. and
its majority owned subsidiary ("Telescan" or the "Company"), and the effect of
discontinued operations. The Company's consolidated statements of operations,
which include the results of Knowledge Express Data Systems, L.C. ("KE"), have
been adjusted to reflect KE in discontinued operations. The discontinued
operations also include Computer Sports Network, entertainment, advertising and
other non-financial operations.
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, 1997 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, 1997. The results of operations for the three-month period
ended March 31, 1998, are not necessarily indicative of the results to be
expected for the full year.
2. CONTINGENCIES
In 1997, Gregory Reagan filed a suit against the Company in the District Court
of Harris County Texas. The plaintiff has asserted a claim under a verbal
agreement to pay a royalty or finder's fee incident to a reciprocal marketing
agreement which Telescan signed with Omega Research, Inc. ("Omega Research").
Under the Omega Agreement, Omega is given a financial incentive to encourage
Omega's customers to subscribe for Telescan's current stock market data
services. The plaintiff claims a share of the net revenues derived by Telescan
under the Omega Agreement. By letter dated February 28, 1996, Telescan gave
notice of cancellation of the verbal agreement with Gregory Reagan based on the
breaches of Reagan's duties under such verbal agreement. Telescan has made
offers of settlement. Telescan maintains that the verbal agreement was properly
canceled. The trial, which was set to begin March 30, 1998, has been postponed
and has been rescheduled for June 22, 1998. Reagan recently amended his petition
to add a fraud claim to the case with a request for punitive damages. Telescan
vigorously denies that there is a proper basis for the fraud claim on the
merits.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW
Telescan, Inc. ("Telescan" or the "Company") provides 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 industry. 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 line is a system of online and Internet financial
services and products provided directly to users as well as under private label
agreements with third parties, which allow investors to (1) obtain financial
news and information; (2) perform fundamental and technical analyses; (3) design
and backtest personalized searches using current and historical information on
more than 220,000 equities, indices and currencies; and (4) perform portfolio
management and personal investment planning.
Revenue is generated in the form of online and Internet service fees, fees from
third parties, product sales, and affiliate contract and advertising revenue.
The Company's online and Internet service revenue is composed of individual
subscribers paying recurring monthly usage fees and annual subscription fees,
together with fees from third parties for providing private label versions of
the Company's database applications. Product revenue is generated from the sale
of online system software, software and service enhancements, major product
upgrades and related educational and training products such as books and
videotapes. The Company's software products generally reflect a common base
technology to which additional features can be added to satisfy the various
needs of the sophisticated user. Accordingly, product revenue primarily consists
of revenue from product enhancements and major upgrades. The Company's contract
revenue is generated from providing contract service to related parties. These
contract services include developing, operating and maintaining online database
systems and providing administrative services.
The Company currently operates the following non-financial businesses that have
been classified as discontinued operations as of November 1997: (1) 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; (2) sports entertainment operations, which offers online
computer sports games to golf and baseball enthusiasts; and (3) Knowledge
Express Data Systems, L.C., an online database system for the commercialization
and transfer of technology which serves corporations, government agencies,
universities, and research institutions. The Company is in the process of
spinning-off these segments to concentrate efforts and resources on core
financial business and its potential growth opportunities.
Subsequent to the spin-off of non-financial operations, the Company will
maintain one business segment which provides financial content and tools to
subscribers.
The first quarter produced a loss of $812,000 from continuing operations.
Recurring revenues were steady. However, temporary delays in executing contracts
resulted in significantly less than anticipated licensing and
7
<PAGE>
development fees. Significant progress has been made on important third-party
Internet-based projects which should result in increased revenue in future
quarters.
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
- ----------------------------------------------------------------------
For the three months ended March 31, 1998, service revenues were lower by
$541,000, or 18%, as compared to March 31, 1997. An agreement with American
Express terminated during 1997 and combined with other American Express revenues
in 1997 accounted for a revenue decrease of $390,000 for the quarter ended March
31, 1998 compared with March 31, 1997. Revenue from other private label
agreements was lower by $136,000 for the same time period. Online revenue
totaled $1,791,000 and $1,864,000 for the quarter ended March 31, 1998 and 1997,
respectively. The decreases in service revenue and online revenue were partially
offset by a $69,000 increase in advertising revenue for the quarter ended March
31, 1998 over the same period in 1997.
Product revenue decreased from $332,000 for the three months ended March 31,
1997 to $238,000 for March 31, 1998. Marketing efforts targeted at increasing
software product sales were not as successful as anticipated in the first
quarter.
Contract revenue from affiliates was higher by $41,000, or 13%, for the quarter
ended March 31, 1998 as compared to March 31, 1997, due to increased revenues
from Telebuild.
Cost of service for the quarter ended March 31, 1998 was $1,906,000 as compared
to $1,739,000 for the three months ended March 31, 1997, representing an
increase of $167,000, or 10%. Amortization of software development costs totaled
$307,000 for the three months ended March 31, 1998 as compared to $209,000 for
the quarter ended March 31, 1997. Data costs rose $57,000, or 24%, due to new
data providers and increases in minimum fees. Costs associated with the higher
Telebuild revenue increased $37,000 for the three months ended March 31, 1998 as
compared to the same period in 1997. These increases were partially offset by a
$51,000 decrease in communication expense.
Cost of products decreased $78,000, or 44%, for the three months ended March 31,
1998 compared to March 31, 1997, reflecting a decrease in products sold.
Selling and marketing expenses increased $72,000, or 14%, from $499,000 to
$571,000 for March 31, 1997 versus March 31, 1998. Advertising/sales promotion
expenses increased by $92,000 compared to the prior year quarter.
General and administrative expenses were higher for the three months ended March
31, 1998 over March 31, 1997 by $278,000, or 29%. Of the total increase, $70,000
was attributable to higher net salary expenses. Net salary expense includes
gross salary reduced by amounts capitalized as software development costs.
Depreciation/equipment rental was higher by $45,000 for the period ended March
31, 1998 over the same time period in 1997. Public relation/shareholder expenses
were higher by $29,000 for the period ended March 31, 1998 as compared to the
same time period in 1997. Accruals for tax expense increased by $30,000 for the
same time period comparison.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents of $315,000,
representing a decrease of $775,000 since December 31, 1997. Net cash used by
operating activities was $87,000 for the three
8
<PAGE>
months ended March 31, 1998, compared to cash provided by operations of $492,000
for the three months ended March 31, 1997. This $579,000 decrease in cash used
by operations primarily reflects the loss of $858,000 for the quarter ended
March 31, 1998, partially offset by a reduction in discontinued operation losses
and an increase in accounts payable.
The Company's primary capital needs are for the continued investment in
technology through its software development activities and the purchase of
computers and communications equipment. During the three months ended March 31,
1998, the Company invested $631,000 in software development costs. The Company
estimates that it may invest up to an additional $800,000 in capital
expenditures over the next twelve months.
The Company expects the cash position to improve over the next several months
from revenue associated with a recently signed contract with third parties and
other contracts currently being negotiated with third parties. However, it is
possible that the timing of cash inflows may not be sufficient to satisfy
current obligations. The Company is currently pursuing various alternatives with
respect to raising capital, including the issuance of certain equity securities.
Aggregate revenue from the Company's online and Internet services and related
product sales accounted for approximately 69% of the Company's total revenue for
the three months ended March 31, 1998. 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 and
Internet based services as well as increasing the level of advertising.
In accordance with the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that certain statements in this
Form 10-Q which are forward-looking involve risks and uncertainties that may
impact the Company's results of operations. When used herein, the words
"believe", "anticipate", "estimate", "expect", "should" and similar expressions
are intended to identify such forward-looking statements. While these
forward-looking statements are made in good faith, future operating, market,
competition, legal and other conditions could cause actual results to differ
materially from those in the forward-looking statements.
9
<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.
RECENT SALES OF UNREGISTERED SECURITIES
In January 1998, the Company issued non-qualified stock options
for 37,500 shares and 12,500 shares to Scott Griffith and E.B.
Lyon, III, respectively, at an exercise price of $6.75 per share
(the "Options") pursuant to Section 4(2) of the Securities Act of
1933, as amended. The Options are exercisable for five years and
were issued as partial consideration for service as a
non-exclusive financial advisor.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits:
11* Statement regarding computation of earnings per share.
27* Financial Data Schedule.
-------------------------------------
* Indicates documents filed herewith.
(B) Reports on Form 8-K:
None.
10
<PAGE>
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 15, 1998
11
EXHIBIT 11
TELESCAN, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
DAYS WEIGHTED
SHARES OUTSTANDING SHARES
-------------- -------------- -------------
QUARTER ENDED MARCH 31, 1998
Balance December 31, 1997 10,924,382 90 10,924,382
Common stock issuances under
stock option plan 120,186 10.8 14,436
-------------- -------------
Balance March 31, 1998 11,044,568 10,938,818
============== =============
12
<PAGE>
TELESCAN, INC.
CALCULATION OF EARNINGS PER SHARE
QUARTER ENDED
MARCH 31,
-----------------------------------
1998 1997
------------- --------------
PRIMARY:
Weighted average number of shares
of common stock 10,938,818 10,735,780
Assumed exercise of certain
stock options --- ---
Assumed exercise of stock warrants --- ---
------------- --------------
10,938,818 10,735,780
============= ==============
Net income (loss) $ (858,778) $ 13,745
============== ==============
BASIC EARNINGS PER SHARE:
Net income (loss) $ (0.08) $ 0.00
============== ==============
DILUTED:
Weighted average number of shares
of common stock 10,938,818 10,735,780
Assumed exercise of certain
stock options --- 196,229
Assumed exercise of stock warrants --- ---
------------- --------------
$ 10,938,818 $ 10,932,009
============= ==============
Net income (loss) $ (858,778) $ 13,745
============== ==============
DILUTED EARNINGS PER SHARE:
Net income (loss) (0.08) 0.00
============== ==============
Note: Due to a loss for the quarter ended March 31, 1998, no dilution is
reflected.
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 315
<SECURITIES> 0
<RECEIVABLES> 1,596
<ALLOWANCES> 109
<INVENTORY> 68
<CURRENT-ASSETS> 3,077
<PP&E> 5,084
<DEPRECIATION> 3,320
<TOTAL-ASSETS> 11,584
<CURRENT-LIABILITIES> 3,106
<BONDS> 0
0
0
<COMMON> 110
<OTHER-SE> 8,015
<TOTAL-LIABILITY-AND-EQUITY> 11,584
<SALES> 238
<TOTAL-REVENUES> 3,032
<CGS> 100
<TOTAL-COSTS> 2,006
<OTHER-EXPENSES> 1,816
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (812)
<INCOME-TAX> 0
<INCOME-CONTINUING> (812)
<DISCONTINUED> (46)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (858)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
