SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-17508
TELESCAN, INC.
(exact name of Registrant as specified in its charter)
DELAWARE 72-1121748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5959 CORPORATE DRIVE, SUITE 2000 77036
HOUSTON, TEXAS (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code:
(281) 588-9700
SECURITIES REGISTERED PURSUANT TO NONE
SECTION 12(B) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO COMMON STOCK, $.01 PAR VALUE
SECTION 12(G) OF THE ACT: PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 25, 1998, based upon the average bid and asked price of the
common stock on NASDAQ Small-Cap Market for such date, was approximately
$31,700,000. The number of outstanding shares of the Registrant's common stock
on March 25, 1998 was 11,042,901.
DOCUMENTS INCORPORATED BY REFERENCE Portions of the
Registrant's Proxy Statement related to its 1998 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Form 10-K.
TELESCAN, INC.
FORM 10-K REPORT INDEX
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<S> <C>
PART I ........................................................................................................ 3
ITEM 1. BUSINESS ............................................................................................. 3
ITEM 2. PROPERTIES ........................................................................................... 14
ITEM 3. LEGAL PROCEEDINGS .................................................................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .................................................. 15
PART II ....................................................................................................... 16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ................................ 16
ITEM 6. SELECTED FINANCIAL DATA .............................................................................. 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................ 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .......................................................... 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ................ 22
PART III ...................................................................................................... 23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .................................................. 23
ITEM 11. EXECUTIVE COMPENSATION .............................................................................. 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ...................................... 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................................................... 23
PART IV
24
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K .............................................. 24
</TABLE>
PART I
ITEM 1. BUSINESS
GENERAL
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.
The Company's online and Internet financial services and products contain
proprietary software technologies, developed or acquired by the Company, which
increase the speed, power and user friendliness of information retrieval while
lowering costs to users. The Company's primary Internet site, Wall Street
City(Registered Trademark) (www.wallstreetcity.com), also employs software
provided by others on a fee and/or revenue sharing basis.
The core of the Company's technology is its unique modular and parallel host
configuration, designed and developed by the Company's founder, Dr. Richard K.
Carlin. This configuration permits simultaneous reception of multiple inputs
from a large array of information sources while permitting simultaneous output
to thousands of users with entirely different information processing requests.
The system supports the addition of a wide variety of specialty designed modular
tools created by both the Company and outside vendors. In addition, the Company
has interfaced the host configuration to a wide variety of communication
sources, including the Internet, several major package switch carriers, a number
of wireless interfaces and other gateways to online hosts. The hardware
configuration and the operating system that make it so powerful and responsive
are all the proprietary design of the Company. In 1997, the Company was awarded
a patent on its core database development technology for quickly building
customized online systems for multiple users.
The most important retrieval technique developed by Telescan is the optimal
search technology, which replaces the outmoded sequential elimination type
search used by most competitors. The Company fully supports the earlier search
methodology as well. The optimal search allows for a large number of criteria to
be used in a scoring type system with full weighting capability. This allows the
user to retrieve a list of "search hits" in order of their ability to satisfy
the user's requirements on an optimal basis as opposed to an elimination basis.
In addition, the Company has developed graphical interfaces for Windows.
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 significant increase in revenue over the past three years is
primarily attributable to the expansion of private labeling agreements,
increases in the Company's subscriber base and the growing popularity of the
Company's financial website, Wall Street City. This growth reflects an increase
in the online and Internet services market, the growth of the discount brokerage
market and the Company's continued investment in customer acquisition through
technology development and marketing.
The Company's online and Internet service revenue is generated from 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's primary market has historically been the sophisticated individual
investor. However, the growth of the Internet in concert with the burgeoning
discount brokerage market has broadened the appeal of the Company's products and
services. The Company has responded by expanding editorial content and
availability of newsletters, redesigned its Wall Street City website to
facilitate its user friendliness, and increased the level of educational
information and aids it provides.
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. ("KE"), 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 business of the Company has been operated by the Company or its predecessors
since 1983. The Company, which is a Delaware corporation, was incorporated in
1988 under the name Max Ret, Inc. for the purpose of acquiring or participating
in a business opportunity. In 1989 the Company issued 75% of its outstanding
common stock to acquire all of the outstanding common stock of D.B. Technology,
Inc. ("DB") d.b.a. Telescan, Inc., and DB's wholly owned subsidiary, Computer
Sports Network ("CSN"). After the acquisition of DB and CSN by the Company, DB
was merged into the Company and the Company changed its name from Max Ret, Inc.
to Telescan, Inc. In December 1991, CSN was merged into the Company.
INDUSTRY
Online services allow personal computer users to access outside sources of
information and interact with other users via telephone line connections
channeled through a central host computer or computers. Online services
typically include information databases and specialized search and retrieval
software maintained by the service provider on the host computer. Interface
software, which is used on the customer's computer, permits users to access
information through the online system. The service provider usually rents or
purchases databases on a non-exclusive basis from third parties and then further
develops such databases for use within the provider's online system. Customers
typically subscribe to an online system for an initial base charge for which
they are granted a license for the interface software needed to access the
online service. Following their subscription, customers are typically charged in
one of two ways. The most common method used by consumer based services is a
periodic subscription fee for which users receive a fixed allotment of time on
the online system, after which they are charged on a per- minute basis. The
second method bills users at varying per minute rates, according to time
actually spent online on the databases. Under both of these methods there are
often additional charges for specific services used within the databases.
Fees for Internet access are similar to online service charges, though lower due
to reduced communication costs. Customers select from several rate plans that
offer varying levels of information and technical features.
The industry's dynamic growth in recent years has resulted from a number of key
factors which are expected to contribute to continued growth in future years.
Some of these key factors include (1) the increasing market awareness of online
services and the Internet; (2) growth in the availability, quality and marketing
of online and Internet products and services; (3) growth in the home and
personal computer markets including mobile "laptop" computing; (4) increased use
of modems for telecommunications; and (5) the development of alternative access
devices such as dedicated communications terminals and pagers. The Company
believes that as the market continues to expand, important competitive factors
will be system performance, product differentiation, quality and quantity of
content, user friendliness, price, customer support and effective marketing
techniques.
BUSINESS STRATEGY
The Company's mission is to be a worldwide leader in the development of
sophisticated interactive online information systems and Internet sites for
individuals and businesses, through the delivery of superior, cost effective
data retrieval technology, customer user interface programs and communications
services. To achieve this mission, the Company's business strategy is to (1)
increase Telescan's online and Internet customer base and recurring revenue; (2)
build revenue by providing private label financial database access; (3) increase
usage of its Wall Street City website to build advertising revenue; (4) continue
investing in the development of new technology; and (5) increase current
customer usage. There can be no assurance that this strategy will be effective.
Management believes that the continued investment in customer acquisition and
the resulting increase in recurring revenue are crucial to the future growth of
the Company. This is achieved by creatively marketing its services and
exploiting the Company's existing proprietary software technologies in the
development of new online systems and Internet sites. Joint marketing
relationships with companies selling related products or services and having
large, preexisting customer bases are also a major source of growth for the
Company. Typically the Company is responsible for software design, development
and programming services while the partner is responsible for supplying the data
and marketing the service. The net revenues of the project are allocated between
the parties as agreed.
Developing state-of-the-art technology is key to establishing the Company as a
leader in the industry and is important to the long-term growth and success of
the Company. The Company is continually investing its resources in the
development of new products and services that provide powerful online and
Internet capabilities to users. The Company recently announced a joint venture
to expand its technological base, which includes interfaces to wireless hosts
managed by Wireless Corporation. This program will allow the Company and its
partners to launch innovative wireless services such as a powerful alert system
for stock monitoring, utilizing most major pager networks.
Current customers are a valuable Company asset and are an integral component in
the Company's overall business strategy. With customer acquisition costs high,
maintaining current customer usage is of key importance. Maintaining usage is
accomplished by (1) providing access to an increasing array of comprehensive,
high-quality data coupled with powerful and easy-to-use search and analytical
tools; (2) providing free customer training and support to educate existing
customers on the capabilities of the system; and (3) conducting reactivation
campaigns to encourage inactive subscribers to log back onto the system.
The Company has sought to develop brand awareness through public relations
efforts and increasing web links. The Company's services have been frequently
cited in local and national publications and on television. Wall Street City has
received top rankings on the Internet and in the press from Barron's, Lycos, and
Net Guide, among others.
PRODUCTS AND SERVICES
The Company has attempted to develop the market for online and Internet services
by creating and marketing products that build and expand upon the Company's base
technology of proprietary operating systems and user software for database
applications. The Company's single product line is the Telescan system of
financial databases and software programs accessed online and over the Internet.
In 1996, the Company substantially expanded its private labeling arrangements
under agreements with such major corporations as American Express, Charles
Schwab, Fidelity Investments, NETCOM and Standard & Poor's. In 1997, the Company
continued this expansion by signing agreements with Time Inc. New Media, a
subsidiary of Fidelity Investments, and Citibank, N.A. Telescan receives per
user fees, fees for providing "premium" services and/or reports, and development
and licensing fees from such third parties. Certain agreements guarantee minimum
monthly or quarterly payments.
In October 1995, Telescan launched an Internet website which provides access to
the Company's online databases and search and retrieval services. In February
1996, the Company launched its successor site, Wall Street City, a new enhanced
financial website, which it has continuously broadened and upgraded. By December
1997, Wall Street City was receiving over 1,000,000 page impressions each week.
The Company has devoted significant development resources to this part of its
business.
The website also serves as an advertising medium with rates tied to thousands of
impressions. Advertising revenues, while not significant in 1997, are expected
to grow proportionately with the popularity of Wall Street City.
FINANCIAL FACILITIES
WALL STREET CITY. Wall Street City is a powerful financial supersite on the
Internet that provides investors with the most comprehensive database,
state-of-the-art financial analysis and research tools. The site is an effective
combination of Telescan's most dynamic, innovative analysis tools built into one
supersite located at www.wallstreetcity.com. In November 1997, the Company
introduced a new, revamped Wall Street City, providing investors with an even
easier-to-navigate format and new features.
The site features:
o Customizable Technical Analysis Charts - Allows users to select multiple
indicators they want to see on a single chart for individual stocks or groups
of stocks. Users can also create technical analysis profiles for a variety of
stocks and save up to 10 separate profiles, which will appear each time the
stocks are called up on their personal computers.
o What's Working Now - A major step forward in automated backtesting and
optimization, wherein the system runs in excess of 35 million searches weekly
to identify the "best" and "worst" combinations of characteristics and
generates a list of stocks or funds having the most similar characteristics.
o Multiple Portfolios - Each user can configure up to seven portfolios with a
maximum of 150 symbols per portfolio.
o Portfolio Scanning - Portfolios can be scanned for end-of-day technical and
positive breakouts, stock cycle strengths, and comparative rankings.
o ActiveX Stock Graph with Technical Analysis - Internet Explorer users with
Windows '95 or NT can download a powerful ActiveX control to allow technical
analysis on stock graphs.
o Search Capabilities - An investor can categorize up to 40 criteria from a
selection of 300 to identify the top stocks that "fit" the criteria.
o Personal Investment Planner - Allows investors to assess risks in their
stock and mutual fund portfolios and provides alternatives to better meet
their financial goals.
o Availability of Intranets - Institutions and corporations can provide
information for brokers, financial planners or employees by buying a site
license for their Intranets. With the addition of a Common Gateway Interface
(CGI) program to the Internet server, each employee can log onto Wall Street
City without separate ID's and passwords.
o Calculators - Under an agreement with SmartCalc Financial Calculators, Inc.,
users can access SmartCalc's powerful and programmable calculators. Investors
can use the calculators to answer questions on stock, mutual funds and bond
returns. Consumers can use the calculators to compute answers on home
purchases and refinancing, credit cards and household budgeting.
Wall Street City is one of the premier investment analysis products of Telescan.
Wall Street City provides the broad range of services described above for all
levels of investors, as well as quotes, news and fundamentals. It also gives
users access to educational tools, discussion groups and brokers who can help
them make more profitable investment decisions.
TIP@WALLSTREET(TRADEMARK). Combines Telescan Investor's Platform(Registered
Trademark) ("TIP") software with the Wall Street City Internet supersite. The
program uniquely embeds a web browser in the software to combine the
extraordinary screening tools and analytical capabilities of the Company's TIP
program with the comprehensive database of market information and the graphics
and ease of use of Wall Street City.
TELESCAN INVESTOR'S PLATFORM 2.0(Registered Trademark). Telescan Investor's
Platform is the MS Windows version of the Company's popular financial research,
screening and analysis software described below. Introduced in 1995, TIP offers
numerous enhancements over the DOS-based Analyzer 3.0 software. Some of its
features are improved charting capabilities, unique portfolio-based control for
greater flexibility and faster data retrieval, additional database information
such as end-of-day quotes for most major international exchanges, full-text
analyst's reports, a Market Snapshot for major indexes, improved communications
options including TCP/IP access and interactive roundtables, a Top Picks
screening feature, and expanded automation tools. Features such as multi-tasking
and graphic toolbars that are inherent in the Windows operating environment make
TIP more user-friendly and lead to its improved data presentation options.
TELESCAN ANALYZER 3.0. This is the most recent DOS-based version of the Telescan
Analyzer product with the capability of accessing other Telescan products, such
as ProSearch and Mutual Fund Search. This product features a graphical user
interface similar to the Microsoft Windows and Apple Macintosh operating
environments. The software allows the user to access the Telescan database of
over 20,000 stocks, over 7,000 mutual funds, over 80,000 options, 1,000 market
indexes and more than 1,200 futures and commodities contracts. Telescan Analyzer
3.0 helps the investor evaluate stock portfolios and mutual fund holdings. Over
80 fundamental and technical indicators such as price, volume, insider trading,
key company facts, volume indexes, trend lines, news releases, Moving Average
Convergence/Divergence ("MACD") and relative strength are available for
analyzing securities. Users can retrieve historical price and volume charts of
up to 23 years of data. Additional features include multiple graphs per screen,
higher graphics resolution, 28,800 baud modem support, mouse interface and pull
down menus, and enhanced system integration and visual presentation.
PROSEARCH 5.0. ProSearch is a powerful search program that allows the user to
develop custom screening routines to select securities that best meet the
individual's specific investment goals. The program was designed for serious
investors as a tool for identifying stocks to meet virtually any investment
objective as defined by a wide variety of fundamental and technical indicators.
ProSearch allows the user to select up to 40 parameters from a list of about 300
criteria for building a search strategy. Additionally, investors can utilize
composite, weighted indicators (i.e., short/long term value and technical ranks)
fundamental, momentum, and volume ranks for simplified searches that meet one's
specific investment strategies. ProSearch users can test and retest strategies
by searching their historical performance back to 36 months. The program is
shipped with 30 pre-defined search strategies that can also be used for
narrowing the list of potentially profitable investments.
ESEARCH. Built as a complement to the ProSearch program, ESearch adds the
ability to screen for investment candidates based on earnings estimate
information. Earnings estimates are very important to investors in that they are
often a preview of Wall Street's positive or negative perception of a particular
stock.
OPTIONS SEARCH. This product is a screening program that allows an investor to
sort through more than 80,000 equity and index options using the Company's
unique scoring system to pick the options that best fit the user's investment
objectives. The investor chooses up to 30 of the 122 screening criteria to
produce a list of options that are best suited to his or her needs.
QUOTELINK. This product permits users of competing financial analysis software
and spreadsheet programs to download information from the Telescan database into
such programs. QuoteLink is compatible with all the major competitive programs
such as AIQ, Metastock, Super Charts, OmniTrader, OmniPro, Indigo, Quicken,
Lotus
and Excel.
TELESCAN MUTUAL FUND SEARCH. This product is a mutual fund screening program
that allows an investor to sort through more than over 7,000 mutual funds using
the Company's unique scoring system to pick the funds that best fit the user's
investment objectives. The selection criteria are grouped into three main
categories: purchase requirements, performance and consistency characteristics,
and portfolio composition. The investor then chooses up to 30 of the 80
individual criteria contained within the categories to produce a list of mutual
funds that are best suited to their needs.
TELESCAN PORTFOLIO MANAGER. Telescan Portfolio Manager is a DOS- based
securities portfolio management program that was developed as a joint venture
between the Company and The Pilot Group, Inc. The program offers a wide variety
of report options and was designed to provide speed and power in a user-friendly
manner that forgives many common user mistakes and accepts corrections with
ease.
TELESCAN DIRECT(TRADEMARK). A customizable wireless service that helps consumers
keep track of their investments anywhere, any time, via their alpha-numeric
pagers, PCS mobile phones or personal e-mail addresses. An investor can schedule
and receive stock price updates up to 15 times a day for their custom portfolio.
Telescan Direct also automatically tracks and delivers news alerts, price and
volume alerts on 30 stocks based on parameters the consumer selects.
PRIVATE-LABELED FINANCIAL FACILITIES
AMERICAN EXPRESS. In September 1996, the Company entered into an alliance
agreement with American Express Financial Direct ("American Express"), a
division of American Express Company, under which Telescan's online financial
services are available as part of American Express' InvestDirect, a
state-of-the-art Internet-based trading and investment research and analysis
service. Under the agreement Telescan provides a proprietary assortment of
investment decision support services.
CITIBANK, N.A. In September 1997, the Company entered into an initial letter
agreement with Citibank, N.A. ("Citibank") setting out in broad terms various
services that the Company would provide to Citibank. In February, 1998, the
Company and Citibank entered into a master agreement, which contemplates the
issuance of work orders for specific projects and services to be provided on an
ongoing basis. Telescan expects to receive and carry out a number of such work
orders for Internet tools and services.
FIDELITY. In October 1996, the Company announced that Fidelity Investments, one
of the nation's leading providers of financial services, began offering a
customized assortment of Telescan's financial information resources and
analytical tools as part of its newly introduced Windows-based investment
management and trading software package - Fidelity On-line Xpress+(Trademark).
FIDELITY STOCK SHOP. In July 1997, the Company signed a multi-year contract with
a subsidiary of Fidelity Investments to provide the database of financial
information for the new guide to investing, The Stock Shop with Peter
Lynch(Trademark), an interactive CD-ROM that links with the Internet. The
program helps consumers learn how to become more informed investors based on key
concepts taken from Peter Lynch's best-selling personal finance books. Users can
then apply these concepts to assess financial information about markets and
companies. Telescan's online stock research is the source of much of that
information.
I.D.E.A. In May 1996, the Company announced an alliance with
Independent Economic Analysis (Holdings) Pte. Limited ("I.D.E.A."), a
leading international provider of independent financial and economic
analysis, servicing 1,700 major trading rooms worldwide. Telescan
has been developing private-labeled online services for I.D.E.A.
Commencement of services to the public by I.D.E.A. will take place in
1998.
INFORMATION HIGHWAY. In December 1997, the Company reached an agreement with
Information Highway, Inc. to develop and manage financial content for the
Canadian-based Internet company's Unique Networks division. Telescan's financial
content will be co-branded for Unique Network's The Executive Club website. The
Executive Club (www.theexecutiveclub.com) is a dedicated suite of services for
business professionals and executives. Commencement of these services will take
place in 1998.
NETCOM. In January 1996, the Company and NETCOM On-line
Communication Services, Inc. ("NETCOM") initiated an arrangement
under which NETCOM's subscribers, which are in excess of 500,000,
were offered access to the Company's financial website.
SCHWAB. Under the terms of a 1993 agreement, Telescan provides customers of
Charles Schwab & Co. ("Schwab") access to Telescan's data and third party
reports. In 1996, Schwab and Telescan entered into a second agreement under
which the Company provides its financial research and screening software, TIP,
as part of Schwab's electronic trading platform, Streetsmart Pro, that Schwab is
offering at no charge to its most active retail traders. The Company and Schwab
are in the process of converting those users to direct Telescan subscribers.
STANDARD & POOR'S. In July 1996, the Company and Standard & Poor's ("S&P"), a
division of the McGraw-Hill companies, announced the introduction of an online
platform built and hosted by Telescan. The application allows the investment
community to access a suite of S&P's financial information products.
TIME INC. NEW MEDIA. In October 1997, the Company and Time Inc. New Media
announced a strategic agreement to develop FORTUNEInvestor, an Internet website
for investors that combines FORTUNE editorial content with Telescan's
comprehensive stock and mutual fund information and analysis tools. Under the
agreement, Time Inc. New Media, in addition to providing FORTUNE editorial
content for the website, will be responsible for sales and marketing. Telescan
will provide its financial database, state-of-the-art financial analysis and
research tools, web development and site management.
OTHER
In addition to its online database services, the Company also performs software
design, development, and programming under contract for third parties and for
related parties. The Company also offers video training tapes, financial books,
and monthly newsletters in conjunction with its Telescan financial products.
The Company's online services employ databases that consist of information
typically obtained from public and private third-party sources, usually on a
non-exclusive basis. Therefore, the Company's business is dependent upon its
ability to obtain and maintain, on an ongoing basis, information for inclusion
in the Company's databases. Acquisition of databases typically involves the
payment by the Company of a one-time fee and/or royalties based on some
combination of user subscriptions and actual database usage. Information
suppliers typically license access to data on a yearly renewable basis, subject
to termination by either party upon 90 to 180 days notice. The Company also
obtains information pursuant to non-exclusive licenses from private sector
information compilers, some of which currently are or in the future may be
direct or indirect competitors of the Company. There can be no assurance that
the Company will be able to renew its current contracts with data sources,
maintain comparable price levels for information acquired, or negotiate
additional contracts with data sources as necessary to maintain existing
products or introduce new products. Termination of the Company's relationship
with one or more of the Company's information suppliers could have a material
adverse effect on the Company's operations if the data became available through
one of the Company's competitors and if the Company was unable to obtain
comparable data through other sources. The Company considers continued access to
databases as a critical factor in the competitiveness of its existing products
and believes that future product development will depend on the availability of
data in specific markets targeted by the Company. However, the Company does not
believe at this time that the loss of any single source of data would be
detrimental to its business.
MARKETING
The Company's online services are sold to customers for an initial licensing fee
followed by monthly charges under either a monthly fixed fee package or on a per
minute basis based upon actual online usage. Internet services are sold on fixed
fee plans that are differentiated by the data and reports that can be accessed.
To attract new subscribers, the Company typically offers initial money back
guarantees and trial subscriptions. The Company also offers free trial periods
for one month to subscribers of Wall Street City.
The Company's marketing objectives for its online and Internet services are to
increase the number of subscribers, to sell additional products to existing
subscribers and to increase average monthly online use per subscriber. The
channels for increasing the number of subscribers include public relations,
joint marketing agreements, trade shows and seminars, advertising, direct sales
and word-of-mouth. The Company advertises in Investor's Business Daily,
Barron's, Stocks & Commodities, other print media, and through Internet banner
ads.
The Company's primary market has historically been the sophisticated individual
investor. The Company has significantly increased its individual subscriber base
through advertising and marketing arrangements with major discount brokerage
firms including American Express, Fidelity Investments Retail Services, Quick &
Reilly, AccuTrade, and Charles Schwab & Co., Inc. These marketing arrangements
typically call for the brokerage firm to incorporate and package the Telescan
financial software and a gateway to the Telescan database into their software
products, or to incorporate an application interface in their software that
allows access to the Telescan database. Typically, these third parties are
responsible for their own marketing programs.
The Company actively seeks additional private labeling relationships for its
financial products. In 1997, the Company entered into agreements with Citibank,
N.A., a subsidiary of Fidelity Investments and Time Inc. New Media.
Telescan markets advertising space on Wall Street City and shares in advertising
revenue marketed by affiliates.
Because of the breadth and cost effectiveness of the Company's financial online
system, the Company targets users of competitors' financial analysis software
packages as a source of online revenue. The Company has application interface
products facilitating the downloading of information from the Telescan database
to users of competitors' analysis software. The Company has continued to
leverage the opportunity to tap the large data downloading market through
cooperative alliances with several major charting software publishers including
AIQ, Metastock, Omega, OmniPro, Indigo and Nirvana.
MATERIAL CUSTOMERS
Revenue earned from American Express amounted to 10.1% and 3.9% of consolidated
revenue during the years ended December 31, 1997 and 1996, respectively. There
were no revenues earned from American Express during the fiscal year 1995.
PRODUCT DEVELOPMENT
The Company has developed and acquired proprietary software technologies to make
its products easy to use and to achieve efficient searching of extensive
databases using simple, non-Boolean logic search queries. Consequently, the
Company believes that by using its proprietary technologies it can deliver
superior online and Internet database services. The Company intends to employ
its proven software technologies in developing additional products serving new
markets and customers.
Telescan's software development staff includes 40 employees who develop new
products and provide maintenance support for existing products. During the years
ended December 31, 1997, 1996 and 1995, the Company spent approximately
$2,188,000, $1,547,000 and $1,107,000, respectively, for software development
activities, all of which was capitalized. All software development costs are
charged to expense until technological feasibility is established, after which
remaining software production costs are capitalized and amortized over periods
ranging from three to five years. The Company also continuously evaluates
opportunities to obtain new products through acquisition.
PROPRIETARY RIGHTS
The Company relies upon a combination of contract provisions and copyrights,
patents, trademarks and trade secret laws to protect its proprietary rights in
its products. The Company attempts to protect its trade secrets and other
proprietary information through software licenses, nondisclosure agreements with
product development partners, employees and consultants. Although the Company
intends to protect and defend its proprietary rights vigorously, there can be no
assurance that these measures will be successful.
With respect to software technologies that the Company has licensed to third
parties for use in specific applications, the Company has entered into licensing
agreements which are intended to protect the proprietary rights of the Company
in such technologies. The Company seeks to protect the source code of its
products as a trade secret and as an unpublished copyright work.
The Company was granted a patent in 1997 by the U.S. Patent and Trademark Office
for its core database development technology for quickly building customized
online systems for multiple users. The patent was awarded for Telescan's
"Multi-provider online communications system, an interactive system for remotely
creating, editing and administering communications systems for online service
providers". The Company has filed a patent application with the U.S. Patent and
Trademark Office for a new patent, "Interactive systems for remotely creating,
editing and administering an online communication system for a plurality of
online service providers". In addition, the Company has filed patent
applications in certain foreign countries. The Company believes that its
products, trademarks and other proprietary rights do not infringe on the
proprietary rights of third parties, and the Company is not aware of any current
infringement claims against the Company. There can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future features or contents of services or that any
such assertion may not require the Company to enter into royalty arrangements or
result in litigation.
COMPUTER AND NETWORK OPERATIONS
The Company's data center computer system consists of commonly available PC
processors, disk storage devices and telecommunications equipment, operated by a
common operating system which is proprietary to the Company. The Company
typically screens and filters incoming data feeds from third parties, using
specific software routines, in order to detect errors and certain detectable
viruses.
The Company's data center is located at the Company's headquarters facility. The
data center has separate air conditioning units and the equipment room has a
raised floor. The power system includes power conditioning, back-up battery, and
full "zero downtime" emergency generator support on site, which is supplied by
the facility owner. Data is regularly backed up and stored off-site and certain
data is duplicated on separate storage devices within the data center. The
building in which the data center is located has off-hours card key access, card
key access to the Company's officers, separate card key access to the data
center and 24 hour on site security personnel. The Company believes that data
center system redundancy is afforded by the Company's ability to use commonly
available computer processors, storage devices, and communications equipment,
including the Company's non-data center computer systems, in its data center in
case of equipment failure or other emergency. The Company's telecommunications
network consists of the public packet switching networks provided by Sprint,
Network Two, UUNET and MCI. Through these networks, subscribers in hundreds of
cities in the U.S. and Canada can dial a local number to connect to the
Company's online services.
The Company believes that its computer and communications hardware systems are
adequate for existing operations. The Company purchases additional hardware as
required in order to accommodate any significant increases in the customer base
for the Company's existing products and services, and to accommodate additional
products and services.
The Company continually upgrades its computers and peripheral hardware to take
advantage of technological advances. Further, the Company believes that future
hardware and software advances will serve to improve the performance of the
Company's systems. While the Company does not believe that it faces a material
risk due to technological changes, there can be no assurance that the Company's
existing technology will remain viable or that the Company will be able to
achieve technological advances that may be necessary in order for its technology
to remain viable.
COMPETITION
The Company competes with many companies who operate proprietary and/or online
systems and Internet websites, many of which have significantly greater
financial, technical and marketing resources than the Company. In addition, a
substantial number of new competitors are entering the online services and
Internet market as a result of the recent growth and the perceived future
opportunities in this market. The Company believes the principal competitive
factors in the online services market include system performance, product
differentiation, quality and quantity of content, user friendliness, price,
customer support and effective marketing techniques. The Company believes that
it competes effectively in these areas. Competitive pressures could result in
reduced market share, price reductions and increased spending on marketing and
product development, which could adversely affect the Company's financial
condition and operating results. However, the Company believes that its business
strategy of building marketing relationships with larger partners and expanding
the range of its online and Internet offerings may serve to lessen the impact of
future competitive pressures on the Company.
EMPLOYEES
As of December 31, 1997, the Company had 134 full-time employees with 40 in
product development and maintenance; 33 in customer service; 20 in sales and
marketing; 18 in computer operations; and 23 in general management and
administration. None off the Company's employees is represented by a labor union
and the Company has never experienced a work stoppage.
GOVERNMENTAL REGULATION
The Company is not subject to direct regulation other than regulation generally
applicable to businesses. However, changes in the regulatory environment
relating to the telecommunications and media industries could have an effect on
the Company's business, including regulatory changes which directly or
indirectly affect telecommunication costs or increase the likelihood or scope of
competition from regional telephone and cable television companies. See "Item 1
- - Competition". The Company cannot predict the impact, if any, future regulation
may have on its business.
SPIN-OFF
In the fourth quarter of 1997, the Company initiated a plan to spin-off the
Company's non-financial assets and operations in a move to focus on its core
financial services information-technology business. Under the preliminary plan
approved by the Company's Board of Directors, the Company intends to spin-off
its online publishing and sports entertainment lines of business. The Company
will also dispose of its approximate 56 percent interest in Knowledge Express
Data Systems, L.C. ("Knowledge Express"), a provider of online databases for the
governmental, educational and research markets, and its approximate 15 percent
interest in Telebuild, L.C. ("Telebuild"), which provides online services and
software products to the building and construction industry. The Company expects
to announce detailed plans for the spin-off during the first half of 1998.
Results of the operations and assets to be disposed of are treated as
discontinued operations. The Company currently intends to distribute the
proceeds of the spin-off to shareholders in the form of a stock dividend.
The Company's publishing industry operations encompass the development and
operation of online and database services for a variety of publications. The
Company, for example, operates Billboard Online, Adweek Online and the Hollywood
Reporter for BPI Communications, L.P. Its sports entertainment operations
include database and online support for The Links Tour interactive computer golf
tournaments under an agreement with Access Software, Inc. Also included is Pure
Baseball, an online game designed for fantasy baseball enthusiasts, under an
agreement with Reality Sports, Inc.
Telebuild provides architects, engineers and construction professionals access
to business-related information and services via the Internet and enables
municipal building departments to provide access to their information on the
Internet. Telebuild's Online Permits service allows tracking and researching the
building permits process from any personal computer without having to visit the
municipal building departments. Its AIAOnline service, in conjunction with the
American Institute for Architects, provides architects with content and services
to assist them with their daily professional lives.
Knowledge Express provides multiple databases combining proprietary information
on ongoing research, emerging technologies and new invention abstracts with
third-party databases. The Company's customers are typically decision-makers for
research and invention sources seeking to supplement their research and
development or product pipelines, and researchers and scientists in search of
partners or sponsors.
ITEM 2. PROPERTIES
The Company's principal executive offices, as well as its principal marketing,
computer operations and product development activities, are located in leased
facilities in Houston, Texas, consisting of a total of approximately 54,108
square feet. The current monthly rental for this facility is approximately
$53,000. The lease expires in 2007. The Company believes that its facilities are
adequate for its present needs and that suitable space will be available to
accommodate its anticipated future needs. The Company has a 5 year option for
15,769 square feet of contiguous office space plus the right of first refusal
for an additional 20,103 square feet of contiguous office space.
ITEM 3. LEGAL PROCEEDINGS
In 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 on Telescan, Inc., no questions were submitted which
asked the jury to determine whether or not the Company bears any liability to
any plaintiff. At the hearing on pending matters including entry of Judgment,
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
Derek Hoggett which notes preceded the merger. The defendants were awarded
attorney's fees and court costs. The plaintiffs appealed the Court's decision
and as of March 26, 1998 their appeals had been rejected by the Court of Appeals
and the Texas Supreme Court. Accordingly, the litigation has been completed.
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 Agreement").
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 Greg Reagan based on the
breaches of Reagan's duties under such verbal agreement. Telescan has made
offers of settlement, which have been rejected. The case went to court-ordered
mediation which did not result in settlement. Telescan maintains that the verbal
agreement was properly canceled. Telescan has undertaken a review of its
financial and operational records and to date has determined that no sums are
due under the verbal agreement with the plaintiff. The case is set for trial on
March 30, 1998. The plaintiff filed a motion 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 or that there is just cause for
making the pleading amendment after the deadline.
From time to time the Company is involved in certain other legal actions arising
in the ordinary course of business. It is the opinion of management that such
litigation will be resolved without a material effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, there were no matters submitted to a vote of
the security holders, through solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on the NASDAQ Small-Cap Market tier of the
NASDAQ Stock Market under the symbol "TSCN". The following table sets forth, for
the periods indicated, the high and low closing bid prices for the common stock
as reported by the NASDAQ Small-Cap Market. The bid prices reflect inter-dealer
quotations, do not include retail markups, markdowns or commissions and do not
necessarily represent actual transactions.
Common Stock Prices
------------------
High Low
------ ------
1996
Quarter ended March 31 ....................... $ 8.31 $ 6.50
Quarter ended June 30 ........................ $ 9.12 $ 6.87
Quarter ended September 30 ................... $ 8.12 $ 5.00
Quarter ended December 31 .................... $ 7.62 $ 4.75
1997
Quarter ended March 31 ....................... $ 5.88 $ 3.25
Quarter ended June 30 ........................ $ 5.31 $ 2.88
Quarter ended September 30 ................... $ 7.63 $ 4.75
Quarter ended December 31 .................... $ 8.13 $ 5.88
On March 25, 1998, the last closing price of the Company's common stock as
reported by the NASDAQ Small-Cap Market was $5.75. As of March 25, 1998, the
Company had approximately 300 stockholders of record.
DIVIDEND POLICY
The Company has never declared a cash dividend on its common stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business, and therefore, does not anticipate paying any cash dividends in the
foreseeable future. The declaration of dividends, if any, in the future would be
subject to the discretion of the Board of Directors, which may consider factors
such as the Company's results of operations, financial condition, capital needs
and acquisition strategy, among others. See "Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the five-year
period ended December 31, 1997, has been derived from the audited historical
consolidated financial statements of the Company as adjusted for discontinued
operations. The historical consolidated financial data includes the results of
continuing operations, discontinued operations and operations of acquired
businesses from their dates of acquisition. The selected data should be read in
conjunction with "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and the notes thereto.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Statement of Operations: Years Ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue ............................................................. $ 14,939 $ 12,129 $ 10,935 $ 8,524 $ 6,515
Cost of services and products ....................................... 7,800 7,578 6,037 5,410 3,452
Marketing, general & administrative ................................. 6,239 6,753 6,161 5,670 2,791
Interest expense, net ............................................... 90 72 63 16 21
-------- -------- -------- ------- -------
Income (loss) from continuing operations ............................ 810 (2,274) (1,326) (2,572) 251
Income (loss) from discontinued operations .......................... (558) (660) 112 (59) (282)
Provision for operating loss
during phase out period ............................................. (56) -- -- -- --
-------
Net income (loss) ................................................... $ 196 $ (2,934) $ (1,214) $(2,631) $ (31)
======== ======== ======== ======= =======
Income (loss) per common share from continuing operations:
Basic ............................................................... $ 0.08 $ (0.21) $ (0.14) $ (0.01) $ 0.03
Diluted ............................................................. $ 0.07 $ (0.21) $ (0.14) $ (0.01) $ 0.03
Income (loss) per common share
from discontinued operations - including
phaseout period:
Basic ............................................................... $ (0.06) $ (0.06) $ 0.01 $ (0.27) $ (0.04)
Diluted ............................................................. $ (0.06) $ (0.06) $ 0.01 $ (0.27) $ (0.04)
Net income (loss)
Basic ............................................................... $ 0.02 $ (0.28) $ (0.12) $ (0.28) $----
Diluted ............................................................. $ 0.02 $ (0.28) $ (0.12) $ (0.28) $----
Balance Sheet Data:
Working capital ..................................................... $ 745 $ 455 $ 2,143 $ 1,370 $ 5,174
Total assets ........................................................ 12,259 11,408 10,136 7,780 9,712
Total long-term obligations ......................................... 466 457 441 541 311
Total stockholders' equity .......................................... 8,749 7,964 7,965 6,022 8,617
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and related notes, and the preceding "Item 6 - Selected
Financial Data".
RESULTS OF OPERATIONS
OVERVIEW
Telescan provides 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
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.
Revenue is generated in the form of online and Internet service fees, fees from
third parties, product sales, contract and advertising revenue. The Company has
experienced a significant increase in revenues over the past three years. The
higher revenue is primarily attributable to the expansion of private labeling
agreements, increases in the Company's subscriber base and the growing
popularity of the Company's financial website, Wall Street City. This growth
reflects an increase in the online and Internet services market, the growth of
the discount brokerage market and the Company's continued investment in customer
acquisition through technology development and marketing.
The expansion of private label arrangements in consort with the rapid growth of
the Internet is shifting the concentration of the Company's revenues from its
more traditional base of online services accessed via modem. In 1997 the Company
introduced its TIP@Wallstreet product which enables users of its online service
to also access the Wall Street City website.
Most of the private label agreements that the Company entered into in 1996 and
1997 are based on the delivery of tools and content over the Internet.
Additionally, the growth in popularity of the Company's Wall Street City website
from an average of 2 million page impressions in the first quarter of 1997 to
approximately 5.3 million page impressions in the first quarter of 1998 also
reflects the growing significance of Internet based revenue to the Company.
In 1997 approximately twenty-five percent of the Company's revenues were derived
from Internet based services. The Company expects approximately half of its 1998
revenue to be Internet based.
The Company's online and Internet service revenue is generated primarily from
individual subscribers paying recurring monthly usage fees and annual
subscription fees. The Company also derives a significant amount of its revenue
from third parties for providing private label versions of its data and search
technology. In 1996, the Company substantially expanded its private labeling
arrangements under agreements with such major corporations as American Express,
Charles Schwab & Co., Fidelity Investments, NETCOM and Standard & Poor's. In
1997, the Company continued this expansion by signing agreements with Citibank,
N.A., Time Inc. New Media and a subsidiary of Fidelity Investments. Telescan
receives per user fees, fees for providing "premium" services and/or reports,
and development and licensing fees from such third parties. Certain agreements
guarantee minimum monthly or quarterly payments.
The Company's online and Internet operating expenses primarily include
telecommunications costs, royalties and data costs, customer service expenses,
amortization of software development and capitalized data and depreciation
expense. The shift to Internet access and away from dial up services is reducing
the relative cost of communications. While communications costs were reduced
only slightly in 1997 from 1996, they declined from 16% of service revenue to
12% of the greater service revenue in 1997. This trend is expected to continue
with the increasing level of Internet based revenue.
Product revenue is primarily 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 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 software was released and generated a
significant increase in product revenue. In 1996, the Company had fewer product
releases, most significantly the release of ProSearch 5.0. In 1997, the Company
released several enhancements to its Wall Street City website and also released
a new product, TIP@Wallstreet, at the end of the third quarter.
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 gross margin rate is more significantly affected by the mix of
in-house product sales versus the sale of products subject to royalties.
Consequently, in periods of lower relative sales of Telescan products, the gross
margin rate will be lower, as is the case when comparing 1996 margins to 1997
margins.
The Company's contract revenue from affiliates is generated from providing
contract services to affiliated companies which include developing, operating
and maintaining online database systems as well as providing general and
administrative services. See "Item 13 Certain Relationships and Related
Transactions".
1997 COMPARED TO 1996
Revenue for the fiscal year ended December 31, 1997 increased $2,810,000, or
23%, from 1996 reflecting higher revenues under private label agreements and
increased subscription and advertising revenue from the Company's Wall Street
City website. Service revenues from the Company's alliance with American Express
were $1,037,000 higher in 1997. The additional fees were for licenses,
development, website management and customer service support. License fees of
$750,000 from Citibank were included in service revenue in 1997. Revenues from
Wall Street City rose by $502,000 from 1996 to 1997. Product revenues declined
$383,000 due to greater emphasis placed on development of the Company's website
in preference to online software products and reduced marketing expenditures.
Contract revenue from affiliates was higher by $485,000, or 56%, reflecting
higher development expenses.
Cost of services was higher by 11% or $680,000 between the year ended December
31, 1997 and 1996. Royalty/data costs remained relatively consistent at
approximately $2,000,000 for both 1997 and 1996. Amortization expense rose
$256,000 in 1997 from 1996. Costs associated with affiliated revenue increased
by $523,000 over 1996. Cost of products was $458,000, or 40%, lower for the year
ended December 31, 1997 as compared to the same period in 1996. In 1997 the
Company eliminated unprofitable seminars which resulted in a $204,000 reduction
in seminar expense. The reduction in product sales and the reduced seminar
expenses accounted for the lower product costs.
Selling expense was lower by $199,000, or 10%, for the year ended December 31,
1997 as compared to December 31, 1996. Sales promotion expenses were
approximately $47,000 lower in the current year. Also contributing to the
reduction were decreases in travel and entertainment and tradeshows/seminars
expense.
General and administrative expenses decreased from 1996 to 1997 by $315,000, or
7%. Consulting fees and legal fees were each lower by approximately $150,000.
Telephone expenses allocated to general and administrative expenses were
$130,000 lower. Some leases previously considered to be operating leases and
categorized as lease expense have been determined to be capital leases and the
related expense has been reclassified as depreciation expense. Notwithstanding
this adjustment, lease expenses were higher in 1997 than in 1996 by $230,000.
1996 COMPARED TO 1995
Total revenue increased $1,194,000, or 11%, from 1995 to 1996. Service revenue
accounted for the majority of the increase with the addition of the American
Express contract for a total of $473,000. Other new private label agreements
added $544,000 to service revenue. Product revenue decreased $370,000, or 16%.
Product revenue was higher in 1995 due to the release of TIP for Windows during
the year. This was partially offset by the release of ProSearch 5.0 in 1996.
Contract revenue from affiliates increased $295,000 as Telebuild development
activities increased significantly.
Cost of service and products increased from $6,037,000 for the year ended
December 31, 1995 to $7,578,000 for the year ended December 31, 1996. Due to
increased service revenue, royalty and data costs increased by $464,000.
Amortization of capitalized costs was higher by $366,000. Costs of services
associated with contract revenues from affiliates increased $261,000 from 1995
to 1996.
Marketing expenses decreased $381,000, or 16%, from the fiscal year 1995 to
1996. In 1995, there was no capitalization of salaries within marketing
expenses. In 1996, the effect of salary capitalization was a net reduction in
expense of $421,000.
General and administrative expense was higher in 1996 as compared to 1995 by
$973,000. Salary expense, net of capitalization as software development,
increased by $383,000. Certain departments included in marketing expense in 1995
were reclassified to general and administrative expense in 1996. Legal expense
increased by $138,000 in 1996 and depreciation expense was higher by $168,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents aggregating
$1,090,000, which represents a $423,000 increase from the prior year. Net cash
provided by operating activities was $2,257,000 for the year ended December 31,
1997 compared to cash used by operations of $666,000 for the year ended December
31, 1996. This $2,923,000 increase in cash provided by operations was primarily
due to the turnaround from a net loss of $2,934,000 in 1996 to a profit of
$196,000 in 1997.
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 year ended December 31, 1997,
the Company invested $2,188,000 in software development costs and acquired
property and equipment totaling $483,000 (including equipment financed by
long-term debt and capital leases). The Company estimates that it may invest an
additional $800,000 in capital expenditures over the next twelve months.
The Company believes that cash generated from expected improvements in
operations, proceeds from long-term capital leasing and borrowings will increase
its working capital over the next twelve months. However, such increases are
expected to occur in the second half of 1998 as revenues from the newer
contracts are realized. If the Board of Directors determines that additional
working capital is in the best interest of the Company, the Company may sell
additional shares of common stock sufficient to provide adequate funds during
1998.
A downturn in the equity markets could cause a reduction in 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 alliances with third parties.
INFLATION
Although management believes that inflation has not had a material effect on the
results of its operations during the past three years, there can be no assurance
that the Company's results of operations will not be affected by inflation in
the future.
SEASONALITY
The Company does not believe that seasonality has a discernible effect on the
Company's aggregate results of operations, which is influenced by an array of
other diverse factors, including general economic and stock market conditions,
new product releases, and the existence or absence of significant contracts.
FORWARD-LOOKING INFORMATION
In accordance with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that certain statements in this
Form 10-K and elsewhere which are forward- looking and which provide other than
historical information, involve risks and uncertainties that may impact the
Company's results of operations. These forward-looking statements include, among
others, statements concerning the Company's general business strategies,
financing decisions, and expectations for funding capital expenditures and
operations in the future. When used herein, the words "believe", "anticipate",
"hope", "estimate", "project", "intend", "expect", and similar expressions are
intended to identify such forward-looking statements. Although the Company
believes the expectations reflected in such forward-looking statements are based
on reasonable assumptions, no statements contained in this Form 10-K should not
be relied upon as predictions of future events. Such statements are necessarily
dependent on assumptions, data or methods that may be incorrect or imprecise and
may be incapable of being realized. The risks and uncertainties inherent in
these forward- looking statements could cause actual results to differ
materially from those expressed in or implied by these statements.
Important factors that could cause actual results to differ materially from the
expectations reflected in any forward-looking statements herein include, among
other things, (1) the volatile nature of the securities business, (2) the
uncertainties surrounding the rapidly evolving markets in which the Company
competes, (3) the uncertainties surrounding technological change and the
Company's dependence on computer systems, (4) the Company's dependence on its
intellectual property rights, (5) the potential of increased governmental
regulation of the telecommunications industry and the Internet, (6) the changing
demands of customers, and (7) arrangements with present and future customers and
third parties.
Readers are cautioned not to place undue reliance on the forward- looking
statements contained herein, which speak only as of the date hereof. The
information contained in this Form 10-K is believed by the Company to be
accurate as of the date hereof. Changes may occur after that date, and the
Company will not update that information except as required by law in the normal
course of its public disclosure practices.
YEAR 2000 ISSUE
The Company has developed a task force to review its computer programs and
systems and ensure that the programs and systems will function properly and be
Year 2000 compliant. In this process, the Company expects to upgrade some
existing systems. The Company presently believes that, with modifications to
existing software, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems. The estimated cost of these efforts
are not expected to be material to the Company's financial position or any
year's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are filed pursuant to Item 14(a)1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears in the sections entitled "Nominees
for Directors" and "Compensation of Executive Officers and Directors" in the
Company's Proxy Statement relating to the 1998 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the section entitled "Executive
Compensation" in the Company's Proxy Statement relating to the 1998 Annual
Meeting of Shareholders, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item appears in the section entitled "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement relating to the 1998 Annual Meeting of Shareholders, which information
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the section entitled "Certain
Relationships and Related Transactions" in the Company's Proxy Statement
relating to the 1998 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES ON FORM 10-K
The following documents are filed as part of this Form 10-K:
PAGE
1. Financial Statements
Independent Auditor's Report ..................................... 27
Consolidated Balance Sheets as of December 31, 1997 and 1996 ..... 28
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 ......................... 29
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995 ............... 30
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 ......................... 31
Notes to Consolidated Financial Statements ....................... 32
2. Financial Statements Schedules
Independent Auditor's Report on Schedule ......................... 43
Schedule I - Valuation and Qualifying Accounts ................... 44
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements or notes thereto.
3. Exhibits
Exhibit No.
3.1** Restated Certificate of Incorporation of Registrant.
(Incorporated by reference to the Company's Form S-1
dated September 14, 1993 (Registration No. 33-52182)).
3.2** Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant. (Incorporated by reference to the Company's Form S-1
dated September 14, 1993 (Registration No. 33-52182)).
3.3** By-laws of the Registrant. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.1** See Exhibits 3.1 through 3.3 for provisions of the Certificate of
Incorporation and By-laws of the Registrant defining rights of
holders of common stock of the Registrant. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.2** Asset Purchase Agreement dated June 30, 1990, between TIC Software,
Inc. and the Registrant which sets forth certain registration rights
of TIC Software, Inc. (Incorporated by reference to the Company's
Form S-1 dated September 14, 1993 (Registration No. 33-52182)).
4.3** Exhibits to Asset Purchase Agreement dated June 30, 1990, between
TIC Software, Inc. and the Registrant which set forth certain
registration rights of TIC Software, Inc. (Incorporated by reference
of the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.4** Assignment of Agreement between Jacob Sobotka, Marvin Deuell,
Raymond C. Wicker and the Registrant which sets forth certain
registration rights of those parties, effective as of January 1,
1992. (Incorporated by reference to the Company's Form S-1 dated
September 14, 1993 (Registration No. 33-52182)).
4.5** Assignment of General Partnership interest between New World
Technologies, a Texas general partnership, and the Registrant which
sets forth certain registration rights effective as of January 1,
1992. (Incorporated by reference to the Company's Form S-1 dated
September 14, 1993 (Registration No. 33-52182)).
10.1** Amended Stock Option Plan. (Incorporated by reference
to Exhibit 4.1 to the Company's Post-Effective Amendment
No. 1 to Form S-8 (File No. 33-63172) as filed with the
Commission on February 2, 1994). (1)
10.2** 1995 Stock Option Plan. (Incorporated by reference to
Exhibit 99.1 to the Company's Registration Statement on
Form S-8 (File No. 33-94514). (1)
10.3** Regulations of Telescan (TRC), L.C. effective January 1, 1992 by and
between the Registrant and The Radnor- Houston Joint Venture.
(Incorporated by reference to the Company's Form S-1 dated September
14, 1993
(Registration No. 33-52182)).
10.4** First Amendment to Regulations of Knowledge Express, L.C. (formally
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** Regulations of Telebuild, L.C. entered into effective
July 31, 1992, by and among the Registrant, JST
Technology Center, Inc. and Friedman Interests, Inc.
(Incorporated by reference to Amendment No. 2 to the
Company's Form S-1 dated February 1, 1993).
10.6** Employment Agreement by and between the Company and
David L. Brown dated March 10, 1994. (Incorporated by
reference to Post-Effective Amendment No. 1 to the
Company's Form S-1 dated August 11, 1994). (1)
10.7** Office Lease Agreement between the Registrant and Chevron U.S.A.,
Inc. dated November 8, 1995. (Incorporated by reference to the
Company's Form 10-K for the annual period ended December 31, 1995).
21* Subsidiaries of the Registrant.
23* Consent of Independent Public Accountants.
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.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Houston, State of
Texas, on March 27, 1998.
Telescan, Inc.
By: /s/ DAVID L. BROWN
David L. Brown, Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities and on the date
indicated
SIGNATURE TITLE DATE
/s/ DAVID L. BROWN Chairman of the Board, Chief Executive Officer
David L. Brown and Director (Principal Executive Officer)
/s/ DR. RICHARD K.CARLIN Vice Chairman of the Board,
Dr. Richard K. Carlin Chief Technology Officer
/s/ RONALD WARREN Chief Financial Officer
Ronald Warren (Principal Financial Officer and Principal
Accounting Officer)
/s/ ROGER C. WADSWORTH Senior Vice President and Director
Roger C. Wadsworth
/s/ DR. RONALD W. HART Director
Dr. Ronald W. Hart
/s/ BURT H. KEENAN Director
Burt H. Keenan
/s/ RUSSELL I. PILLAR Director
Russell I. Pillar
/s/ WILLIAM D. SAVOY Director
William D. Savoy
/s/ STEPHEN C. WOOD Director
Stephen C. Wood
INDEPENDENT AUDITOR'S REPORT
BOARD OF DIRECTORS AND STOCKHOLDERS
TELESCAN, INC.
HOUSTON, TEXAS
We have audited the accompanying consolidated balance sheets of Telescan, Inc.
and subsidiary as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Telescan, Inc. and subsidiary
as of December 31, 1997 and 1996, and the results of their operations and cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Houston, Texas
February 24, 1998
<PAGE>
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................................................... $ 1,090 $ 667
Accounts receivable, net of allowance of $105 and $86, respectively .......................... 1,650 1,791
Receivable from affiliates ................................................................... 155 342
Prepaid expenses ............................................................................. 455 360
Inventory .................................................................................... 77 101
Other current assets ......................................................................... 198 181
Discontinued operations ...................................................................... 164 --
-------- --------
Total Current Assets ......................................................................... 3,789 3,442
Property and equipment, net of accumulated depreciation of
$3,121 and $2,319, respectively .............................................................. 2,048 2,448
Software development costs, net .............................................................. 4,469 3,248
Software technology rights, net .............................................................. 176 246
Capitalized data costs, net .................................................................. 252 377
Other assets ................................................................................. 68 82
Discontinued operations ...................................................................... 1,457 1,565
-------- --------
Total Assets ................................................................................. $ 12,259 $ 11,408
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................................................. $ 2,021 $ 1,892
Accrued liabilities .......................................................................... 402 434
Accrual for phase out costs on discontinued operations ....................................... 20 --
Current portion of long-term debt and capital lease obligations .............................. 447 404
Amounts due to stockholders and affiliates ................................................... 154 --
Discontinued operations ...................................................................... -- 257
-------- --------
Total Current Liabilities .................................................................... 3,044 2,987
Long-term debt ............................................................................... 152 237
Capital lease obligations .................................................................... 314 220
Commitments and contingencies (Note 6 and 10) ................................................ -- --
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued ................... -- --
Common stock, $.01 par value; 15,000,000 shares authorized;
10,924,382 and 10,733,114 shares issued and outstanding in 1997
and 1996, respectively ....................................................................... 109 107
Additional paid-in capital ................................................................... 17,972 17,385
Accumulated deficit .......................................................................... (9,332) (9,528)
-------- --------
Total Stockholders' Equity ................................................................... 8,749 7,964
-------- --------
Total Liabilities and Stockholders' Equity ................................................... $ 12,259 $ 11,408
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Service ............................................................................... $ 12,084 $ 9,376 $ 8,107
Products .............................................................................. 1,504 1,887 2,257
Contract revenue earned from affiliates ............................................... 1,351 866 571
-------- -------- --------
Total Revenue ......................................................................... 14,939 12,129 10,935
Costs and Expenses:
Cost of service ....................................................................... 7,120 6,440 4,877
Cost of revenue - products ............................................................ 680 1,138 1,160
Marketing expenses .................................................................... 1,867 2,066 2,447
General and administrative expenses ................................................... 4,372 4,687 3,714
Interest expense, net ................................................................. 90 72 63
-------- -------- --------
Total Costs and Expenses .............................................................. 14,129 14,403 12,261
Income (loss) from:
Continuing operations ................................................................. 810 (2,274) (1,326)
Discontinued operations ............................................................... (558) (660) 112
Provision for operating losses during phase out ....................................... (56) -- --
-------- -------- --------
Net income (loss) ..................................................................... $ 196 $ (2,934) $ (1,214)
======== ======== ========
Income (loss) per share: Income (loss) from continuing operations per common
share:
Basic ................................................................................. $ 0.08 $ (0.21) $ (0.14)
Diluted ............................................................................... $ 0.07 $ (0.21) $ (0.14)
Income (loss) from discontinued
operations per common share:
Basic ................................................................................. $ (0.06) $ (0.06) $ 0.01
Diluted ............................................................................... $ (0.06) $ (0.06) $ 0.01
Net income (loss)
Basic ................................................................................. $ 0.02 $ (0.28) $ (0.12)
Diluted ............................................................................... $ 0.02 $ (0.28) $ (0.12)
Weighted average shares - basic ....................................................... 10,766 10,615 9,777
Dilutive effect of options ............................................................ 173 -- --
-------- -------- --------
Adjusted weighted average shares - diluted ............................................ 10,939 10,615 9,777
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Total
---------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------- ----- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1995 ...................... 9,500 $ 95 $ 11,307 $(5,380) $ 6,022
Issuances of common stock under
stock option plan .............................. 280 3 618 -- 621
Issuance of common stock for
acquired business .............................. 44 -- 232 -- 232
Other issuances of common stock ................ 428 4 2,355 -- 2,359
Other .......................................... (10) -- (55) -- (55)
Net loss ....................................... -- -- -- (1,214) (1,214)
------- ---- -------- ------- -------
Balance - December 31, 1995 .................... 10,242 102 14,457 (6,594) 7,965
Issuances of common stock under
stock option plan .............................. 75 1 152 -- 153
Other issuance of common stock ................. 416 4 2,776 -- 2,780
Net loss ....................................... -- -- -- (2,934) (2,934)
------- ---- -------- ------- -------
Balance - December 31, 1996 .................... 10,733 107 17,385 (9,528) 7,964
Issuances of common stock under
stock option plan .............................. 166 2 478 -- 480
Other issuance of common stock ................. 25 -- 100 -- 100
Other .......................................... -- -- 9 -- 9
Net income ..................................... -- -- -- 196 196
------- ---- -------- ------- -------
Balance - December 31, 1997 .................... 10,924 $109 $ 17,972 $(9,332) $ 8,749
======= ==== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................ $ 196 $(2,934) $(1,214)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Accrued loss on discontinued operations ...................................... 20 -- --
Depreciation and amortization ................................................ 2,021 1,721 1,188
Gain on the sale of equipment ................................................ -- -- (4)
Provision for doubtful accounts .............................................. 119 31 22
Changes in assets and liabilities
Receivables and advances ..................................................... 209 (711) (338)
Other current assets ......................................................... (88) (19) (69)
Accounts payable ............................................................. 129 658 246
Other current liabilities .................................................... (36) 238 188
Discontinued operations ...................................................... (313) 350 (787)
------- ------- -------
Net cash provided (used) by operating activities ............................. 2,257 (666) (768)
Cash flows from investing activities:
Proceeds from sale of equipment .............................................. 147 -- 32
Additions to property and equipment .......................................... (219 (743) (620)
Additions to software development costs ...................................... (2,188) (1,547) (1,107
Additions to capitalized data costs .......................................... (5) (72) (73)
Other ........................................................................ (5) (18) (10)
------- ------- -------
Net cash used by investing activities ........................................ (2,270) (2,380) (1,778)
Cash flows from financing activities:
Proceeds from issuances of common stock ...................................... 493 2,683 3,157
Proceeds from notes payable .................................................. 109 -- 181
Advance from stockholder ..................................................... 154 -- --
Capital lease obligations .................................................... 143 -- --
Payments on notes payable and capital lease obligations ...................... (463) (331) (277)
------- ------- -------
Net cash provided by financing activities .................................... 436 2,352 3,061
Increase (decrease) in cash and cash equivalents ............................. 423 (694) 515
Cash and cash equivalents:
Beginning of year ............................................................ 667 1,361 846
------- ------- -------
End of year .................................................................. $ 1,090 $ 667 $ 1,361
======= ======= =======
Supplemental cash flow information:
Cash paid for:
Interest ..................................................................... $ 90 $ 73 $ 66
======= ======= =======
Common stock issued to purchase software technology rights ................... 100 249 --
Computer equipment acquired under long-term capital leases .................. 264 452 75
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements reflect the
accounts of Telescan, Inc. and its majority owned subsidiary ("Telescan" or the
"Company"), 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.
NATURE OF BUSINESS. The Company is an industry leader in providing innovative
solutions for online technology, data retrieval and Internet services. The
Company develops, markets, and operates major online networks 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 either on an online basis or through the Internet.
The Company's primary products are the Telescan system of online and Internet
financial databases and software tools, which offer current and historical
financial news and information as well as search and analytical tools provided
directly by the Company and under private label arrangements with third parties.
SIGNIFICANT ESTIMATES. Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosed amounts of contingent assets and liabilities, and the reported amounts
of revenues and expenses. Actual results could differ from those estimates. (See
Note 2)
CONCENTRATION OF CREDIT RISK. The Company markets its products to a diverse
customer base, and as such does not have any significant concentrations of
credit risk. In 1997 American Express accounted for 10.1% of consolidated
revenue. The Company maintains deposits in banks which may exceed the amount of
federal deposit insurance available. Management believes the potential risk of
loss on these accounts is minimal.
INVENTORIES. Inventories are carried at the lower-of-cost or market,
determined on the specific identification method.
EQUIPMENT. Equipment is recorded at cost and depreciated over the estimated
useful life of the related assets. Equipment under capital lease is amortized
over the lease term. Depreciation and amortization expense is determined
principally on the straight-line method. The estimated useful lives of the
Company's equipment is as follows:
Computer and other equipment 5 years
Furniture and fixtures 7 years
Other 5 years
SOFTWARE DEVELOPMENT COSTS. Costs incurred in the research, design and
development of software are charged to expense until technological feasibility
is established, after which remaining software production costs are capitalized
and amortized on a product- by-product basis on the straight-line basis over
periods of three to five years. Amortization of capitalized software development
costs begins when the related product is available for general release to
customers. The Company periodically reviews software development costs to assess
impairment. Amounts impaired are charged to expense as identified. Amortization
of software development costs is included in cost of service in the accompanying
statements of operations and totaled $967,000, $653,000, and $319,000 for the
years ended December 31, 1997, 1996, and 1995, respectively. Accumulated
amortization totaled $2,818,000 and $1,851,000 at December 31, 1997 and 1996,
respectively.
SOFTWARE TECHNOLOGY RIGHTS. The Company has acquired rights to certain core
software technologies. These rights are recorded at cost and amortized over a
period of five years. Amortization of software technology rights is included in
cost of service in the accompanying statements of operations and totaled
$69,000, $80,000 and $55,000 for the years ended December 31, 1997, 1996, and
1995, respectively. Accumulated amortization totaled $176,000 and $258,000 at
December 31, 1997 and 1996, respectively.
CAPITALIZED DATA COSTS. Costs incurred to acquire data are capitalized and
amortized on a straight-line basis over three to five years. Capitalized data
costs include actual costs to acquire the data plus personnel costs specifically
related to loading the purchased data and performing the required programming.
Amortization of capitalized data costs is included in cost of service in the
accompanying statements of operations and totaled $131,000, $178,000 and
$171,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Accumulated amortization totaled $930,000 and $800,000 at December 31, 1997 and
1996, respectively. The Company periodically reviews capitalized data costs to
assess impairment. Amounts impaired are charged to expense as identified.
DIRECT-RESPONSE ADVERTISING COSTS. The Company expenses direct-
response advertising costs in the period in which the costs are
incurred.
GOODWILL. Goodwill totaling $94,000 at December 31, 1997 and at December 31,
1996 represents the cost in excess of the fair value of the net assets of
companies acquired and is being amortized on the straight-line basis over
periods ranging from ten to fifteen years. Accumulated amortization totaled
$52,000 and $44,000 at December 31, 1997 and 1996, respectively. Goodwill
amortization totaled approximately $8,000, $8,000 and $8,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
EQUITY INVESTMENTS. The Company accounts for its investments in less than
majority-owned entities using the equity method of accounting, provided its
ownership is not less than 20 percent. The Company discontinues recognition of
losses on such investments once the Company's investment has been reduced to
zero, provided the Company is not committed to fund the operations of the joint
venture and is not contingently liable for obligations of such joint ventures.
The Company accounts for investments in entities in which its ownership is less
than 20 percent on the cost method.
REVENUE RECOGNITION. The Company recognizes service revenue when the service is
provided. Software license fee revenue is recognized upon contract signing
unless significant future obligations remain. In these instances, revenue is not
recognized until obligations have been satisfied or are no longer significant.
Product revenue is recognized when the product is shipped.
INCOME TAXES. The Company accounts for income taxes on the liability
method as prescribed by Statement of Financial Accounting Standards
No. 109.
EARNINGS PER SHARE. Basic earnings per share is computed based on the weighted
average number of common shares outstanding. Diluted earnings per share is
calculated under the treasury stock method and reflects the potential dilution
that could occur if certain options were exercised.
RECENT ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of". This statement was
effective beginning in 1996. The adoption of this pronouncement in
1996 did not have a material impact on the financial statements.
The FASB issued SFAS No. 123, "Accounting for Stock Based Compensation". This
statement allows companies to choose to adopt the statement's new rules for
accounting for employee stock-based compensation plans. For those companies who
choose not to adopt the new rules, the statement requires disclosures as to what
earnings per share would have been if the new rules had been adopted. Management
adopted the disclosure requirements of this statement in 1996.
The FASB also issued SFAS No. 128, "Earnings Per Share", during February 1997.
The new statement, which is effective for financial statements issued after
December 31, 1997, including interim periods, establishes standards for
computing and presenting earnings per share. The new statement requires
retroactive restatement of all prior-period earnings per share data presented.
The Company has adopted the new statement and has retroactively restated
previously presented earnings per share information. The adoption of this
statement had no effect on the financial statements.
The FASB also issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information". SFAS
No. 130 establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
displays with the same prominence as other financial statements. SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 establishes standards on the way that public companies
report financial information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, SFAS No. 130
may have on the future financial statement disclosures. Results of operations
and financial position, however, will be unaffected by implementation of this
standard. The Company has implemented SFAS No. 131 and has restated its prior
disclosures to be comparable. The effect of adopting this statement was to
segregate the Company's financial and non-financial assets. During 1997, the
Company adopted a plan to spin-off the non-financial segment. All non-financial
segment information has been disclosed and classified as a discontinued
operation (See Note 2).
MAJOR CUSTOMERS. Revenue earned from a private label agreement with American
Express amounted to 10.1% and 3.9% for the years ended December 31, 1997 and
1996, respectively. There were no revenues generated from American Express in
1995.
RECLASSIFICATIONS. Amounts in prior years' financial statements have
been restated to conform with the current year's presentation. Such
restatements had no effect on net income or loss.
2. SPIN-OFF
In November 1997, the Company adopted a plan to spin-off its non-financial
segment of the business. The completion of this transaction is expected by the
end of the second quarter 1998. Shareholders will own shares in two publicly
traded companies; however, the ratio of shares to be distributed in the new
business entity has yet to be determined.
The financial statements represent the historical amounts of the Company
restated to show the financial operations of the Company and the non-financial
operations as discontinued operations.
Management is not currently able to determine the gain or loss of this
transaction. Estimated losses on discontinued operations through June 30, 1998
have been recorded as accrued liabilities. Operating results of discontinued
non-financial operations are as follows:
Assets and liabilities of the discontinued operations are as follows:
(in thousands)
Years Ended December 31,
-------------------------------------
1997 1996 1995
----- ---- ----
Revenue ....................... $ 1,215 $ 1,758 $3,218
Net income (loss) ............. (595) (660) 112
(in thousands)
Years Ended December 31,
----------------------
1997 1996
------- -------
Current Assets:
Cash .......................................... $ 15 $ 125
Accounts receivable, net ...................... 349 292
Inventories ................................... 4 6
Prepaid expenses .............................. 9 9
Other current assets .......................... 30 36
------- -------
407 468
Non Current Assets:
Property, plant and equipment at cost ......... 283 327
Accumulated depreciation ...................... (149) (149)
Software development at cost .................. 2,374 2,057
Accumulated amortization ...................... (1,362) (1,124)
Capitalized data at cost ...................... 606 610
Accumulated amortization ...................... (436) (332)
Other, net .................................... 158 231
------- -------
1,474 1,620
Current Liabilities:
Accounts payable .............................. (145) (561)
Accrued liabilites ............................ (60) (11)
Current installments of obligations
under capital lease ........................... (2) (16)
Amounts due stockholders ...................... (36) (137)
------- -------
(243) (725)
Long-term capital lease obligations ........... (8) (31)
Minority interest ............................. (9) (24)
------- -------
Net assets .................................... $ 1,621 $ 1,308
======= =======
Other non-current assets include goodwill of $249,000 and $248,000 at December
31, 1997 and 1996 with accumulated amortization of $112,000 and $62,000,
respectively.
<PAGE>
3. EQUIPMENT
A summary of property and equipment at December 31, 1997 and 1996 is as follows:
1997 1996
----------- -----------
Computer and other equipment ............. $ 4,611,000 $ 4,216,000
Furniture and fixtures ................... 491,000 485,000
Other .................................... 67,000 66,000
----------- -----------
5,169,000 4,767,000
Accumulated depreciation ................. (3,121,000) (2,319,000)
----------- -----------
$ 2,048,000 $ 2,448,000
=========== ===========
Depreciation and amortization expense was approximately $836,000, $792,000 and
$624,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
4. ACQUISITIONS
In June 1996, the Company purchased the technology rights of Op/Com Partners,
Ltd. ("Op/Com") for 38,000 shares of the Company's common stock. The acquisition
was accounted for on the purchase method of accounting and the entire purchase
price of $249,000, the fair value of the shares issued, was assigned to software
technology rights. At the time of the acquisition G. Robert Friedman, a former
director, owned 33.9% of Op/Com.
In June 1997, the Company acquired the assets of Notable Technologies, L.L.C.
for $100,000. The Company funded this acquisition through the issuance of 25,197
shares of restricted common stock pursuant to Section 4(2) of the Securities Act
of 1933. The transaction was accounted for under the purchase method of
accounting and assets have been recorded at fair market value. Stephen C. Wood,
a director of the Company , is Chief Executive Officer of Notable Technologies.
5. RELATED PARTY TRANSACTIONS
The Company has receivables from and payables to officers, stockholders, joint
ventures and affiliates. The balances are generally due on demand and are
non-interest bearing. At December 31, 1997 the net amounts due to officers
amounted to $154,000.
The Company has provided computer hardware, programming, systems maintenance,
data loading, telecommunications and certain administrative services to KE and
Telebuild, L.C. ("Telebuild"), a limited liability company formed in 1990. As of
December 31, 1997 and 1996, corresponding amounts due the Company from Telebuild
totaled $155,000 and $342,000. Included in other current assets is an additional
$111,000 and $111,000 at December 31, 1997 and 1996, respectively, due from
Telebuild; however, these will be included in the spin-off (See Note 2). The
Company owns 55.58% of KE and 14.168% of Telebuild however, there will be
included in the spin off (see Note 2). GRF Interests, Inc., a company controlled
by G. Robert Friedman ("Friedman"), a significant stockholder and previous
director of the Company, owns 44.42% of KE. Friedman Interest, Inc., also
controlled by Friedman, and the Brown Family Partnership own 45.42% and 25.44%,
respectively, of Telebuild. The Brown Family Partnership is owned by David L.
Brown, the Company's Chairman and Chief Executive Officer and other members of
the Brown family.
Contract service revenue earned from affiliates for the years ended December 31,
1997, 1996 and 1995 is as follows:
1997 1996 1995
---------- -------- --------
Telebuild, L.C. ............ $1,322,000 $735,000 $408,000
During 1996, the Company entered into a marketing, license and revenue sharing
agreement with CyberAction. Two of the directors of CyberAction are on the board
of directors of the Company.
6. LONG-TERM OBLIGATIONS
CAPITAL LEASES. Future minimum lease payments under capital leases at December
31, 1997 together with the present value of the minimum lease payments, are as
follows:
Years Ending December 31,
1998 $322,000
1999 235,000
2000 104,000
--------
Total minimum lease payments 661,000
Amount representing interest (75,000)
Present value of minimum lease payments 586,000
Current portion capital lease obligations (272,000)
--------
Long-term capital lease obligation $314,000
========
Computer equipment under capital lease at December 31, 1997 and 1996 totaled
$951,000 and $799,000 with related accumulated depreciation of $391,000 and
$397,000, respectively.
LINE OF CREDIT. The Company has a $500,000 revolving line of credit with a bank
to fund equipment purchases. Borrowings under this line bear interest at Wall
Street Prime (8.5% at December 31, 1997), are collateralized by the equipment
purchased, and are due in 36 equal monthly installments following the draw. At
December 31, 1997 and 1996, $327,000 and $488,000, respectively were outstanding
under this equipment line.
Future payments under this equipment line of credit are as follows:
Years Ending December 31,
1998 $ 175,000
1999 136,000
2000 16,000
327,000
Current portion of long-term debt (175,000)
-----------
$ 152,000
===========
OPERATING LEASES. The Company has commitments to lease office space and
equipment under non-cancelable operating leases. Rent expense under operating
leases totaled $868,000, $621,000 and $420,000 for the years ended December 31,
1997, 1996 and 1995, respectively. Future minimum payments are as follows:
Years Ending December 31,
1998 $921,000
1999 723,000
2000 664,000
2001 399,000
2002 798,000
Thereafter 3,259,000
---------
$ 6,764,000
===========
7. STOCKHOLDERS' EQUITY
AMERITRADE HOLDING CORPORATION TRANSACTION. In June 1995, the Company entered
into a Stock Purchase Agreement with AmeriTrade Holding Corporation (previously
named TransTerra Company), whereby AmeriTrade agreed to purchase $5 million of
restricted common stock in four equal installments over a nine month period. The
number of shares of common stock issued for each installment was calculated
based upon the average market price of the common stock over the preceding
quarter. In connection with this agreement, the Company granted certain
registration rights to AmeriTrade. During 1995, pursuant to the terms of this
agreement, 427,998 shares of restricted common stock were issued for total
consideration of $2.5 million. An additional 173,459 shares were issued in
January 1996 in exchange for the third installment of $1,250,000. In March 1996,
168,337 shares were issued for the final installment of $1,248,614.
In October 1997, AmeriTrade filed a Schedule 13-D with the Securities and
Exchange Commission stating that its holdings of the Company's common stock had
fallen below 5% (or 529,296 shares).
WARRANTS. During 1995, the Company issued 157,500 shares of common stock upon
the exercise of various stock purchase warrants at exercise prices ranging from
$1.75 to $3.00 per share. As of December 31, 1995, warrants to acquire 67,500
shares of common stock at an exercise price of $3.00 per share were outstanding.
During 1996, warrants were exercised for 36,000 shares and the remaining
warrants were canceled.
8. INCOME TAXES
At December 31, 1997, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $13,300,000, which expire in years 2000
through 2012.
Deferred tax assets and liabilities as of December 31, 1997 and 1996 consisted
of the following:
1997 1996
Deferred tax assets -
Net operating loss carryforwards ............. $ 4,990,000 $ 4,630,000
Less: Valuation allowance ................... (2,679,000) (2,388,000)
--------- ---------
Deferred tax asset, net ...................... 2,311,000 2,242,000
Deferred tax liability -
Accumulated depreciation and amortization .... (2,311,000) (2,242,000)
--------- ---------
$ -- $ --
========= =========
The valuation allowance increased during 1997 by approximately $291,000.
9. STOCK OPTION PLAN
The Company's stock option plans (the "Plan") for officers, directors and
employees authorizes the grant of options to purchase a maximum of 1,425,000
shares of common stock. The Plan provides for the issuance of incentive stock
options or non-statutory stock options, as defined by the Internal Revenue Code.
Pursuant to the terms of the Plan, the exercise price of incentive stock options
must equal the greater of $1.50 or the fair market value of the Company's common
stock on the date of grant. The exercise price of non-statutory options may be
any amount equal to or greater than $1.50 per share. Vesting terms vary from
immediate at date of grant to four years from date of grant. The Compensation
Committee of the Board of Directors determines the vesting period of each grant.
Options remaining under the Plan terminating August 13, 2000 and March 22, 2005
totaled 632,874 and 110,210, respectively. Options not exercised prior to the
Plan termination date will expire.
Transactions with regard to incentive options issued pursuant to the Plan are as
follows:
Weighted
Total Shares Average Price
Under Option Per Share
-------- --------
Balance - January 1, 1995 .............. 718,440 $ 3.35
Granted ................................ 148,395 $ 4.91
Canceled ............................... (39,148) $ 5.27
Exercised .............................. (122,763) $ 1.67
-------
Balance - December 31, 1995 ............ 704,924 $ 3.87
Granted ................................ 190,535 $ 7.26
Canceled ............................... (52,998) $ 6.33
Exercised .............................. (74,812) $ 2.04
-------
Balance - December 31, 1996 ............ 767,649 $ 4.69
Granted ................................ 215,347 $ 4.85
Canceled ............................... (73,841) $ 6.82
Exercised .............................. (166,071) $ 3.01
-------
Balance - December 31, 1997 ............ 743,084 $ 4.94
=======
At December 31, 1997, options under the plan to purchase a total of 413,336
shares of common stock were exercisable at prices ranging from $1.50 to $8.44
per share. In addition, as of December 31, 1997 60,000 non-qualified stock
options have been issued at option prices ranging from $4.75 to $8.37 per share
and 10,000 options were exercisable as of that date. Subsequent to December 31,
1997, additional 149,290 options were granted to employees at an exercise price
of $6.44 per share, the market price at the date of grant. Another 50,000
options were granted under a non-qualified stock option agreement at $6.75 per
share.
SFAS 123 encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options, and other equity instruments to
employees based on fair value. Fair value is generally determined under an
option pricing model using the criteria set forth in SFAS 123.
The Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized in 1997 or 1996 for its stock option
plans. Had compensation expense for the Company's stock-based compensation plans
been determined based on fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net loss and loss
per common share would have been increased to the pro forma amounts indicated
below:
1997 1996
Net income (loss)
As reported ................................ $ 196,000 $ (2,934,000)
Pro forma .................................. (450,000) (3,417,000)
Net income (loss) per common share
As reported ................................ $ 0.02 $ (0.28)
Pro forma .................................. (0.04) (0.32)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions; risk free
rates of 5.7 to 6.2%; volatility of 66.1%; no assumed dividend yield; and
expected lives of 3 years.
10. 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 on Telescan, Inc., no questions were submitted which
asked the jury to determine whether or not the Company bears any liability to
any plaintiff. At the hearing on pending matters including entry of Judgment,
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
Derek Hoggett which notes preceded the merger. The defendants were awarded
attorney's fees and court costs. The plaintiffs appealed the Court's decision
and as of March 26, 1998 their appeals had been rejected by the Court of Appeals
and the Texas Supreme Court. Accordingly, the litigation has been completed.
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 Agreement").
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 Greg Reagan based on the
breaches of Reagan's duties under such verbal agreement. Telescan has made
offers of settlement, which have been rejected. The case went to court-ordered
mediation which did not result in settlement. Telescan maintains that the verbal
agreement was properly canceled. Telescan has undertaken a review of its
financial and operational records and to date has determined that no sums are
due under the verbal agreement with the plaintiff. The case is set for trial on
March 30, 1998. The plaintiff filed a motion 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 or that there is just cause for
making the pleading amendment after the deadline.
INDEPENDENT AUDITOR'S REPORT ON SCHEDULE
STOCKHOLDERS AND BOARD OF DIRECTORS
TELESCAN, INC.
HOUSTON, TEXAS
We have audited the financial statements of Telescan, Inc. and subsidiary as of
December 31, 1997 and 1996, and for each of the years in the three-year period
ended December 31, 1997. Our audits for such years also included the financial
statement schedule of Telescan, Inc. and subsidiaries, listed in Item 14-2, for
each of the years in the three-year period ended December 31, 1997. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to report on this schedule based on our audits. In our
opinion, such a financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth herein.
HEIN + ASSOCIATES LLP
Houston, Texas
February 24, 1998
TELESCAN, INC. AND SUBSIDIARY
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Deductions:
Additions Accounts
Charged to Written
Balance at Costs and Off Against Balance at
Description Beginning of Year Expenses Allowance End of Year
- ------------------ ----------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1995
Allowance for Doubtful Accounts ............. $87 $ 22 $ (41) $ 68
December 31, 1996
Allowance for Doubtful Accounts ............. 68 31 (13) 86
December 31, 1997
Allowance for Doubtful Accounts ............. $86 $119 $(100) $105
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,090
<SECURITIES> 0
<RECEIVABLES> 1,755
<ALLOWANCES> 105
<INVENTORY> 77
<CURRENT-ASSETS> 3,789
<PP&E> 5,169
<DEPRECIATION> 3,121
<TOTAL-ASSETS> 12,259
<CURRENT-LIABILITIES> 3,044
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 8,640
<TOTAL-LIABILITY-AND-EQUITY> 12,259
<SALES> 1,504
<TOTAL-REVENUES> 14,939
<CGS> 680
<TOTAL-COSTS> 7,800
<OTHER-EXPENSES> 6,239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90
<INCOME-PRETAX> 810
<INCOME-TAX> 0
<INCOME-CONTINUING> 810
<DISCONTINUED> 614
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 196
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
