FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30,
1998
COMMISSION FILE NUMBER 0-17508
TELESCAN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-1121748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5959 CORPORATE DRIVE, SUITE 2000, HOUSTON, TEXAS 77036
(Address of principal executive offices) (Zip Code)
(281) 588-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
$.01 par value per share Common Stock: 11,075,256 as of November 16, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELESCAN, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 831 $ 1,090
Accounts receivable, net .......................... 2,779 1,650
Receivables from affiliates ....................... 573 155
Prepaid expenses .................................. 408 455
Inventory ......................................... 78 77
Other current assets .............................. 153 198
Discontinued operations ........................... 366 164
-------- --------
TOTAL CURRENT ASSETS .......................... 5,188 3,789
Property and equipment, net .......................... 1,735 2,048
Software development costs, net ...................... 5,185 4,469
Software technology rights, net ...................... 214 176
Capitalized data costs, net .......................... 170 252
Other assets, net .................................... 55 68
Discontinued operations .............................. 1,405 1,457
======== ========
TOTAL ASSETS .................................. $ 13,952 $ 12,259
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................. $ 1,275 $ 2,021
Accrued liabilities ............................... 693 402
Accrual for phase out costs of discontinued
operations ....................................... -- 20
Current portion of long-term debt and capital
lease obligations ................................ 503 447
Amounts due to stockholders and affiliates ........ -- 154
-------- --------
TOTAL CURRENT LIABILITIES ..................... 2,471 3,044
Long-term debt ....................................... 30 152
Capital lease obligations ............................ 291 314
CONTINGENCIES (NOTE 2) ............................... -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 10,000,000 shares
authorized; 5% Cumulative Convertible Preferred Stock -
120,000 shares issued
and outstanding at September 30, 1998 ......... 1 --
Common stock; $.01 par value; 15,000,000 shares
authorized;
11,075,256 and 10,924,382 shares issued and
outstanding in 1998 and 1997, respectively ....... 110 109
Additional paid-in capital ........................ 21,417 17,972
Accumulated deficit ............................... (10,368) (9,332)
-------- --------
TOTAL STOCKHOLDERS' EQUITY .................... 11,160 8,749
======== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 13,952 $ 12,259
======== ========
The accompanying notes are an integral part of these financial statements.
2
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TELESCAN, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Service ................... $ 3,587 $ 3,204 $ 9,345 $ 9,215
Products .................. 154 441 534 1,205
Contract revenue earned
from affiliates .......... 269 325 961 1,079
-------- -------- -------- --------
Total revenue ........ 4,010 3,970 10,840 11,499
COSTS AND EXPENSES:
Cost of service ........... 1,815 1,687 5,539 5,316
Cost of products .......... 82 141 261 547
Selling and marketing
expenses ................. 503 480 1,573 1,386
General and administrative
expenses ................. 1,574 1,112 4,285 3,117
Interest expense .......... 23 18 75 61
-------- -------- -------- --------
Total costs and
expenses ................. 3,997 3,438 11,733 10,427
5% Cumulative Preferred Stock
dividends ..................... (38) -- (57) --
Incremental yield dividend ..... -- -- (44) --
INCOME (LOSS) FROM:
Continuing operations ... (25) 532 (994) 1,072
Discontinued operations . 56 (140) (40) (497)
======== ======== ======== ========
Net income (loss) to common
shareholders .................. $ 31 $ 392 $ (1,034) $ 575
======== ======== ======== ========
INCOME (LOSS) PER SHARE:
Income (loss) from continuing
operations per common share:
Basic ............... 0.00 0.05 (0.09) 0.10
Diluted ............. 0.00 0.05 (0.09) 0.10
Income (loss) from discontinued
operations per common share:
Basic ............... 0.01 (0.01) 0.00 (0.05)
Diluted ............. 0.01 (0.01) 0.00 (0.05)
NET INCOME (LOSS):
Basic ............... 0.00 0.04 (0.09) 0.05
Diluted ............. 0.00 0.04 (0.09) 0.05
Weighted average shares -
basic ......................... 11,075 10,782 11,026 10,755
Dilutive effect of options ..... 125 312 -- 275
-------- -------- -------- --------
Adjusted weighted average shares
- dilutive .................... 11,200 11,094 11,026 11,030
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
TELESCAN, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) applicable to common
shareholders ........................................ $(1,034) $ 575
Adjustments to reconcile net loss to net cash
(used) provided by
operating activities:
Accrued loss on discontinued operations ...... (20) --
Depreciation and amortization ................ 1,828 1,424
Provision for doubtful accounts .............. 17 11
Changes in current assets and liabilities
Receivables and advances ..................... (1,565) 97
Other current assets ......................... 90 (41)
Accounts payable ............................. (746) 106
Other current liabilities .................... 291 34
Discontinued operations .............................. (150) (293)
------- -------
Net cash (used) provided by
operating activities ................................. (1,289) 1,913
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property and equipment ...... (152) 14
Additions to software development costs ...... (1,716) (1,601)
Additions to capitalized data costs .......... -- (4)
Other ........................................ -- (5)
------- -------
Net cash used by investing
activities .............................. (1,868) (1,596)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of 5%
Convertible Preferred Stock .......................... 3,000 --
Proceeds from issuances of common stock ...... 446 161
Proceeds from notes payable ................. -- 110
Payments on notes payable and capital
lease ................................................ (394) (322)
Payments to stockholder ...................... (154) --
------- -------
Net cash provided by financing
activities ........................................... 2,898 (51)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... (259) 266
CASH AND CASH EQUIVALENTS:
Beginning of period .......................... 1,090 667
======= =======
End of period ................................ $ 831 $ 933
======= =======
The accompanying notes are an integral part of these financial statements.
4
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TELESCAN, INC. AND SUBSIDIARY
SUPPLEMENTAL CASH FLOW INFORMATION
The effects of non-cash transactions are excluded from the statements of cash
flow. Supplemental disclosures of cash flow information are as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
------------ ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Incremental yield dividend ..................... 44 --
Computer equipment acquired under capital
leases ........................................ 306 --
Common stock issued to purchase software
technology .................................... -- 100
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of Telescan, Inc. and
its majority owned subsidiary ("Telescan" or the "Company"), and the effect of
discontinued operations. The Company's consolidated statements of operations,
which include the results of Knowledge Express Data Systems, L.C. ("KE"), have
been adjusted to reflect KE in discontinued operations. The discontinued
operations also include sports, entertainment, advertising and other
non-financial operations.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X for interim financial
statements required to be filed with the Securities and Exchange Commission and
do not include all information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the information
furnished reflects all adjustments, consisting of normal recurring adjustments,
which are necessary to make a fair presentation of financial position and
operating results for the interim periods.
Amounts in the September 30, 1997 condensed consolidated financial statements
have been reclassified whenever necessary to conform with the current period's
presentation.
The accompanying condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1997. The results of operations for the nine-month period
ended September 30, 1998, are not necessarily indicative of the results to be
expected for the full year.
2. CONTINGENCIES
In 1997, Gregory Reagan filed a suit against the Company in the District Court
of Harris County Texas. The plaintiff asserted a claim under a verbal agreement
to pay a royalty or finder's fee incident to a reciprocal marketing agreement
which Telescan signed with Omega Research, Inc. ("Omega Research"). Under the
Omega Agreement, Omega was given a financial incentive to encourage Omega's
customers to subscribe to Telescan's current stock market data services. The
plaintiff claimed a share of the net revenues derived by Telescan under the
Omega Agreement. By letter dated February 28, 1996, Telescan gave notice of
cancellation of the verbal agreement with Gregory Reagan based on the breaches
of Reagan's duties under such verbal agreement. Telescan maintained that the
verbal agreement was properly canceled. Reagan amended his petition to add a
fraud claim to the case with a request for punitive damages. In September 1998,
the Company and the plaintiff reached a settlement agreement in which the
Company paid Gregory Reagan an amount in exchange for being released from
further legal actions.
In August 1998, K. Shawn Walker and Scott Brown filed a lawsuit against
Telebuild, L.C., Friedman Interests, Inc. and the Company in the District Court
of Harris County Texas. The plaintiffs, both former employees of Telebuild,
L.C., assert breach of contract, breach of duty of good faith and fair dealing,
breach of fiduciary duty, fraud and conspiring for a declaratory judgment. The
plaintiffs' cause of action arises from Telebuild's
6
<PAGE>
and Friedman Interests, Inc.'s refusal to purchase the plaintiffs' ownership
interest in Telebuild, L.C. K. Shawn Walker and Scott Brown own 5.6839% and
7.6628%, respectively of Telebuild, L.C. The plaintiffs and defendants have
reached an agreement in principle to settle the lawsuit. The documents to
finalize the settlement are in the process of being prepared, reviewed and
executed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW
Telescan, Inc. ("Telescan" or the "Company") provides state-of-the-art Internet
services, innovative solutions for online technology and sophisticated data
retrieval tools. The Company develops, markets, and operates Internet sites and
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.
The Company's primary product line is a system of Internet and online financial
services and products provided directly to users as well as under private label
agreements with third parties, which allow investors to (1) obtain financial
news and information; (2) perform fundamental and technical analyses; (3) design
and backtest personalized searches using current and historical information on
more than 220,000 equities, indices and currencies; and (4) perform portfolio
management and personal investment planning.
Revenue is generated in the form of Internet and online service fees, fees from
third parties, advertising fees, product sales, and affiliate contract revenue.
The Company's Internet and online service revenue is composed of individual
subscribers paying recurring monthly usage fees and annual subscription fees,
together with fees from third parties for providing private label versions of
the Company's database applications. Product revenue is generated from the sale
of online system software, software and service enhancements, major product
upgrades and related educational and training products such as books and
videotapes. The Company's software products generally reflect a common base
technology to which additional features can be added to satisfy the various
needs of the sophisticated user. Accordingly, product revenue primarily consists
of revenue from product enhancements and major upgrades. The Company's contract
revenue is generated from providing contract service to related parties. These
contract services include developing, operating and maintaining online database
systems and providing administrative services.
In May 1998, the Company retained NationsBanc Montgomery Securities LLC to
assist the Company in exploring strategic alternatives, including a potential
change in ownership of the Company, in order to maximize shareholder value.
Announcements will be made as to any developments as warranted.
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 offer online
computer sports games to golf and baseball enthusiasts; and (3) Knowledge
Express Data Systems, L.C., an online database system for the commercialization
and transfer of technology which serves corporations, government agencies,
universities, and research institutions. The Company previously announced
spinning-off these discontinued operations in order to concentrate efforts and
resources on its core financial business.
The Company has reached a preliminary agreement with an institutional investor
with respect to the non-financial businesses. The agreement contemplates that
all or a majority of the assets and operations of the non-financial businesses,
including interests held by third parties, will be combined and the
institutional investor will make an investment of capital in the combined
entity. As a result of the investment, the Company will own less than a majority
interest in the combined operations. The transaction is subject to the
completion of due diligence, and completion and approval of a definitive
agreement. The transaction is expected to be consummated in the fourth quarter.
Should the Company not consummate the transaction described above, or if less
than all of the operations are contributed to the combined company, Telescan
will abide by the guidelines of the Emerging Issue Task Force 90-16, which
states that discontinued operations will be reclassified to continuing
operations in certain circumstances. In such event, the Company will evaluate
the assets of the non-financial business segment for impairment in accordance
with the Financial Accounting Statements Board Statement 121. While management
expects the transaction to be consummated, there is no assurance the task will
be accomplished within the expected time period and any resulting write-down
will be recorded in the fourth quarter.
7
<PAGE>
The third quarter produced a loss from continuing operations of $25,000. A
significant third party alliance was added during the quarter; however, revenue
streams from these alliances are lagging behind Company expectations. Although
the Company anticipates the acceleration of recurring revenues, there is no
assurance projections will be met. This is due in part to the fact that revenue
sharing from the third party alliances is largely dependent upon the success of
the third party's marketing efforts.
YEAR 2000
The potential problems referred to as "Year 2000" or "Y2K" result from systems
using only two digits to indicate the year in a date and thereby not being able
to distinguish between January 1, 1900 and January 1, 2000. In addition, certain
systems may fail to detect that the year 2000 is a leap year.
The Year 2000 issue affects the Company's internal systems, including
information technology (IT) and non-IT systems. To evaluate these systems, the
Company is organizing a task force to address software, hardware network, PC and
third party data and communication provider issues. The task force will be
responsible for creating an action plan to assess and evaluate current systems,
implement modifications where necessary and thoroughly test its systems. In an
initial review, the Company believes its host system is Y2K compliant since
these systems have control logic based on binary Julian dates rather than the
two digit format. The host system is considered the Company's critical system,
which, if not Y2K compliant, may have a significant impact on future revenues.
Although assessment of the remaining IT systems is still in progress, management
does not believe the cost to address these issues will be material. Furthermore,
the Company expects that all phases of Y2K compliance can be accomplished with
current staffing levels. To date, no Y2K remediation costs have been expensed
and future costs, which are expected to be minimal, will not be reflected in the
financial statements until incurred.
The Company's Internet and online services are highly dependent upon outside
communication and third party data providers. The Company plans to survey key
suppliers to acquire reasonable assurance of Y2K compliance. In addition, the
Company will work with these suppliers to avoid business interruption. However,
noncompliance by third party vendors could have a material affect on the
Company's operations.
There is some uncertainty as to whether the Company will be able to identify,
and thereby resolve, all Y2K issues resulting from outside communication and
third party data providers. The Company will develop contingency plans as
specific problems are identified. Based upon information currently available,
the Company has not formulated a worst case scenario and therefore cannot
estimate potential lost revenue.
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997
Service revenue increased $383,000, or 12%, for the three months ended September
30, 1998 as compared to the three months ended September 30, 1997. Internet
revenue was $1,983,000, or 71% higher, for the quarter ended September 30, 1998
versus $1,158,000 for the same quarter in 1997. Nonrecurring license fee revenue
included in Internet revenue was $1,003,000 for the quarter ended September 30,
1998 and $700,000 for the quarter ended September 30, 1997. These increases were
partially offset by a $252,000 decline in non-Internet revenue from private
alliances for the quarter ended September 30, 1998 as compared to the quarter
ended September 30, 1997. The Company's non-Internet online revenue fell by
$203,000 for the third quarter of 1998 as compared to the third quarter of 1997.
8
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Product revenue decreased from $441,000 for the three months ended September 30,
1997 to $154,000 for the same time period in 1998. The Company continues to
concentrate its efforts on the Internet service portion of the business, which
does not require software products. However, the Company intends to increase its
product offerings in the fourth quarter.
Contract revenue from affiliates declined by $56,000 for the quarter ended
September 30, 1998 as compared to the quarter ended September 30, 1997. The
decrease was due to lower revenues from Telebuild, L.C.
Cost of service for the quarter ended September 30, 1998 was $128,000, or 8%
higher, as compared to the same quarter in 1997. An aggregate of $2,304,000 has
been added to software development, which contributed to an increase of $110,000
in software amortization. Royalty/data costs were higher by $149,000 for the
three months ended September 30, 1998 as compared to the three months ended
September 30, 1997 due to real time quote expenses and increased minimum charges
by some data providers. The increases were slightly offset by a decrease in
communication expense of $100,000 due to reduced minimum charges by two major
telephone providers. Cost of service as a percentage of service revenue was 47%
for the three months ended September 30, 1998 as compared to 48% for the same
time period in 1997. This slight percentage variance was caused by higher
license fee revenue recorded in the 1998 period, which have no associated costs.
Cost of products was $59,000 lower for the three months ended September 30, 1998
as compared to the same time period in 1997. As a percentage of product revenue,
the third quarter of 1998 equaled 53% compared to 32% for the same time period
in 1997. Company software sales, which comprised the majority of product sales
in the third quarter of 1997, have a relatively low cost of sales. The mix
between the Company's products and third party products, which have a higher
cost, was almost equal in the third quarter of 1998.
Selling and marketing expenses were $503,000 for the three months ended
September 30, 1998 as compared to $480,000 for the three months ended September
30, 1997. Salary, related benefits and contract employment was $62,000 higher
for the comparable time periods. Commission expense was lower by $22,000 for the
three months ended September 30, 1998 as compared to the same quarter in 1997
due to lower product sales. Telephone expense decreased by $9,000 for the
quarter ended September 30, 1998 as compared to the quarter ended September 30,
1997.
General and administrative expenses increased by $462,000 for the third quarter
of 1998 compared to the same time period in 1997. Legal fees and settlement
expenses were higher by $242,000 for the comparable time period. Equipment
rent/depreciation expenses increased by $79,000 with the addition of new
equipment through leases and purchases. Salary and related benefits were higher
by $180,000 in the third quarter of 1998 as compared to the same quarter in 1997
principally reflecting additional development personnel and a lower
capitalization level.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Service revenue for the nine months ended September 30, 1998 was $130,000, or
1% higher, than the comparable period in 1997. Internet revenue totaled
$4,107,000 through the first nine months of 1998 versus $2,943,000 in the first
nine months of 1997. Included in Internet revenue is nonrecurring license fee
revenue of $1,909,000 for the 1998 time period and $1,509,000 for the same time
period in 1997. Revenue from non-Internet third party alliances fell $609,000
for the nine months ended September 30, 1998 as compared to the nine months
ended September 30, 1997. The Company's online revenue was $445,000 higher for
the first nine months of 1997 versus the same period in 1998.
9
<PAGE>
Product revenue was $671,000 lower for the nine months ended September 30,1998
as compared to the nine months ended September 30, 1997. Promotional campaigns
during 1997 were more successful than recent promotions due to the Company
concentrating increasing development expenses on Internet services rather than
on new products and enhancements.
Contract revenue from affiliates declined by $118,000 for the first nine months
of 1998 as compared to the same period in 1997 due to reduced revenues from
Telebuild.
Cost of service rose $223,000 for the nine months ended September 30, 1998
versus the nine months ended September 30, 1997. Amortization of software
development costs was higher by $311,000 for the nine months ended September 30,
1998 versus the nine months ended September 30, 1997. Royalty/data costs
increased $197,000 for the first nine months of 1998 as compared to the same
period in 1997. This was partially offset by communication expenses being
$214,000 lower for the first three quarters of 1998 as compared to the first
three quarters of 1997. Customer service costs declined by $119,000 for this
same time comparison. Cost of service as a percentage of revenue totaled 54% for
the nine months ended September 30, 1998 versus 52% for the nine months ended
September 30, 1997. Although license fees, which have no associated costs, were
higher during the first nine months of 1998 as compared to the first nine months
of 1997, this was offset by higher amortization expense, which has no related
revenue, and increased minimums from data providers.
Cost of products declined by $286,000 for the nine months ended September 30,
1998 as compared to the same period in 1997 due to reduced product sales. Cost
of products as a percentage of sales equaled 49% for the nine months ended
September 30, 1998 versus 45% for the nine months ended September 30, 1997.
Selling and marketing expenses rose $187,000 over the first nine months of 1998
from the first nine months of 1997. Advertising and sales promotion expenses
increased $112,000 for the comparable time periods. Salary and related benefit
expenses were higher by $72,000 for the nine months ended September 30, 1998
versus the nine months ended September 30, 1997.
General and administrative expenses were $4,285,000 for the nine months ended
September 30, 1998 as compared to $3,117,000 for the same period in 1997. Legal
and settlement fees were $267,000 higher for the first nine months of 1998
versus the first nine months of 1997. The amount capitalized as software
development decreased by $278,000 for the nine months ended September 30, 1998
as compared to the nine months ended September 30, 1997. Other general and
administrative salary and related benefit expense rose by $264,000 for the
comparable time frame. Equipment rent\depreciation increased by $147,000 for the
first three quarters of 1998 versus the first three quarters in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 the Company had cash and cash equivalents of $831,000
representing a decrease of $102,000 since September 30, 1997. Net cash used by
operating activities was $1,289,000 for the nine months ended September 30,
1998, compared to cash generated from operations of $1,913,000 for the nine
months ended September 30, 1997. The $3,202,000 increase in cash used by
operations primarily reflects the operating loss of $1,034,000 for the nine
months ended September 30, 1998 and the $1,565,000 increase in accounts
receivable. The increase in accounts receivable is partially due to license fee
agreements totaling $1,003,000 which were completed in the latter portion of the
quarter.
10
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The Company's primary capital needs are for the continued investment in
technology through software development activities and the purchase of computer
equipment. During the nine months ended September 30, 1998 the Company invested
$1,716,000 in software development costs and financed $306,000 in equipment
through capital leases. The Company expects to invest approximately $1,000,000
in computer equipment over the next twelve months through capital leases.
In connection with the issuance of the Company's preferred stock, there is an
incremental yield that arises from the conversion discount from fair value that
is considered a dividend to preferred stockholders. The amount is determined as
the fixed discount from market (5%) based on the closing price at May 15, 1998
and is calculated as follows:
Closing price at May 15, 1998 7 3/8
Fixed discount from market .. 5%
--------
$ 0.37
Shares issued ................ 120,000
--------
Incremental yield ........... $ 44,400
========
Since the preferred stockholders have the option to convert at anytime after May
15, 1998, this calculation was performed and recorded in May 1998.
The Company believes the proceeds from the issuance of the preferred stock, cash
flows from continuing operations and contracts with third parties will be
sufficient to meet current obligations. However, there is no assurance that the
Company's expectations will be met.
Aggregate recurring revenue from the Company's Internet and online services,
including advertising revenue and related product sales accounted for
approximately 54% of the Company's total revenue for the nine months ended
September 30, 1998. A downturn in the equity markets could cause a reduction in
recurring revenue, which could have an adverse effect on the Company's financial
position and results of operations. However, the Company believes that the
development fees earned from private party agreements, which totaled 18% of
total revenue for the nine months ended September 30, 1998, will lessen the
effect of such adverse market conditions. The Company is continuing its efforts
to broaden and diversify its revenue base through alliances with third parties.
In accordance with the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that certain statements in this
Form 10-Q which are forward-looking involve risks and uncertainties that may
impact the Company's results of operations. When used herein, the words
"believe", "anticipate", "estimate", "expect", "should", "intend" and similar
expressions are intended to identify such forward-looking statements. While
these forward-looking statements are made in good faith, no statement should be
relied upon as predictions of future events. The Company bases certain revenue
projections upon marketing efforts by third parties, which are not controllable.
In addition, future operating markets, the ability to obtain new
licensing/development fees, competition, legal and other conditions could cause
actual results to differ materially from those in the forward-looking
statements.
11
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits:
11* Statement regarding computation of earnings per share.
27* Financial Data Schedule.
-------------------------------------------------------------
* Indicates documents filed herewith.
(B) Reports on Form 8-K:
None.
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Pursuant to the requirements of the Securities Exchanges Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELESCAN, INC.
By: /s/ RONALD WARREN
-------------------------
Ronald Warren
Chief Financial Officer
a duly authorized officer of the
Registrant
Date: November 16, 1998
13
EXHIBIT 11
PAGE 1 OF 2
TELESCAN, INC. & SUBSIDIARY
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- -----------
<S> <C> <C> <C> <C>
BASIC:
Weighted average number of
shares of common stock .................... 11,075,127 10,782,460 11,026,120 10,755,224
Assumed exercise of certain
stock options ......................... -- -- -- --
---------------- ---------------- ---------------- -----------
11,075,127 10,782,460 11,026,120 10,755,224
================ ================ ================ ===========
Net income (loss) ......................... $ 30,888 $ 392,264 $ (1,033,700) $ 575,302
================ ================ ================ ===========
BASIC EARNINGS PER SHARE:
Net income (loss) ......................... $ 0.00 $ 0.04 $ (0.09) $ 0.05
================ ================ ================ ===========
DILUTED:
Weighted average number of
shares of common stock .................... 11,075,127 10,782,460 11,026,120 10,755,224
Assumed exercise of certain
stock options ......................... 125,056 311,928 -- 275,024
---------------- ---------------- ---------------- -----------
11,200,183 11,094,388 11,026,120 11,030,248
================ ================ ================ ===========
Net income (loss) ......................... $ 30,888 $ 392,264 $ (1,033,700) $ 575,302
================ ================ ================ ===========
DILUTED EARNINGS PER SHARE: ............... $ 0.00 $ 0.04 $ (0.09) $ 0.05
================ ================ ================ ===========
</TABLE>
<PAGE>
TELESCAN, INC. & SUBSIDIARY
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11
PAGE 2 OF 2
DAYS WEIGHTED
SHARES OUTSTANDING SHARES
---------- ---------- ----------
QUARTER ENDED SEPTEMBER 30, 1998:
Balance June 30, 1998 ................ 11,074,742 92 11,074,742
Common stock issuances ............... 514 68.9 385
---------- ---------- ----------
Balance September 30, 1998 ........... 11,075,256 11,075,127
========== ==========
NINE MONTHS ENDED SEPTEMBER 30,
1998:
Balance December 31, 1997 ............ 10,924,382 273 10,924,382
Common stock issuances ............... 150,874 184.1 101,738
---------- ---------- ----------
Balance September 30, 1998 ........... 11,075,256 11,026,120
========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 831
<SECURITIES> 0
<RECEIVABLES> 2,900
<ALLOWANCES> 121
<INVENTORY> 78
<CURRENT-ASSETS> 5,188
<PP&E> 5,499
<DEPRECIATION> 3,764
<TOTAL-ASSETS> 13,952
<CURRENT-LIABILITIES> 2,471
<BONDS> 0
0
1
<COMMON> 110
<OTHER-SE> 11,049
<TOTAL-LIABILITY-AND-EQUITY> 13,952
<SALES> 534
<TOTAL-REVENUES> 10,840
<CGS> 261
<TOTAL-COSTS> 7,373
<OTHER-EXPENSES> 4,386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75
<INCOME-PRETAX> (994)
<INCOME-TAX> 0
<INCOME-CONTINUING> (994)
<DISCONTINUED> (40)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,034)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
