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 MARCH 31, 1999
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: 13,157,258 as of May 14, 1999.
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TELESCAN, INC. AND SUBSIDIARY
Report on Form 10-Q
Quarter Ended March 31, 1999
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ........ 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................. 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .................................... 15
ITEM 2. CHANGES IN SECURITIES ................................ 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ..................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS .............................................. 15
ITEM 5. OTHER INFORMATION ................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................... 15
SIGNATURES .................................................... 16
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-----------------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 8,013 $ 627
Marketable securities .................................. 14,546 --
Accounts receivable, net ............................... 1,998 1,793
Receivable from affiliates ............................. 704 623
Notes receivable, current .............................. 668 793
Prepaid expenses ....................................... 322 370
Inventory .............................................. 45 53
Other current assets ................................... 257 235
-------- --------
TOTAL CURRENT ASSETS ............................... 26,553 4,494
Notes receivable, non-current .............................. 33 59
Property and equipment, net ................................ 1,868 1,698
Software development costs, net ............................ 5,198 5,331
Software technology rights, net ............................ 179 196
Capitalized data costs, net ................................ 123 150
Investments ................................................ 264 20
Other assets ............................................... 346 60
======== ========
TOTAL ASSETS ........................................... $ 34,564 $ 12,008
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 1,638 $ 2,237
Accrued liabilities .................................... 374 431
Deferred revenues ...................................... 2,949 643
Deferred tax liability ................................. 1,618 --
Current portion of long-term debt and capital
lease obligations .......................................... 489 500
Amounts due to stockholders and affiliates ............. 36 36
-------- --------
TOTAL CURRENT LIABILITIES .......................... 7,104 3,847
Long-term debt ............................................. 4 16
Capital lease obligations .................................. 338 327
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 March 31, 1999 ...................... 1 1
Common stock, $.01 par value; 15,000,000 shares
authorized; 13,023,591 and 11,089,792
shares issued and outstanding in 1999
and 1998, respectively ............................. 130 111
Additional paid-in capital ............................. 37,317 21,492
Accumulated other comprehensive income
(net of tax effect of $1,618) ...................... 3,142 --
Accumulated deficit .................................... (13,472) (13,786)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ......................... 27,118 7,818
======== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $ 34,564 $ 12,008
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
1999 1998
--------- ---------
Revenue:
Service ................................. $ 4,947 $ 2,850
Products ................................ 129 238
Contract revenue earned from
affiliates .................................. 271 340
-------- --------
Total revenue ....................... 5,347 3,428
Costs and Expenses:
Cost of service ......................... 2,550 2,209
Cost of products ........................ 80 100
Selling and marketing expenses .......... 822 667
General and administrative
expenses .................................... 1,559 1,351
Interest expense ........................ 16 22
-------- --------
Total costs and expenses ............ 5,027 4,349
-------- --------
Income (loss) before minority interest ...... 320 (921)
Minority interest in loss of
subsidiary .................................. 32 49
-------- --------
Net income (loss) ........................... 352 (872)
Preferred stock dividends ................... 38 --
======== ========
Income (loss) available for common
stockholders ................................ $ 314 $ (872)
======== ========
Net income (loss) per common share:
Basic ............................... $ 0.03 $ (0.08)
Diluted ............................. $ 0.02 $ (0.08)
Weighted average shares - basic ............. 12,199 10,939
Dilutive effect of options .................. 419 --
======== ========
Weighted average shares - diluted ........... 12,618 10,939
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
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TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED
MARCH 31,
1999 1998
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................ $ 352 $ (872)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Minority interest in (loss) of
subsidiary ......................... (32) (49)
Depreciation and amortization ........ 740 686
Non-cash service revenue ............. (1,375) --
Provision for doubtful accounts ...... 1 6
Changes in current assets and liabilities:
Receivables and advances ................. (162) (26)
Other current assets ..................... 33 (94)
Accounts payable ......................... (598) 310
Other current liabilities ................ (23) 27
------- -------
Net cash used in operating activities .... (1,064) (12)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .......... (268) (16)
Additions to software development costs ...... (310) (697)
Additions to investments ..................... (244) --
Reduction in non-current notes receivable .... 26 --
------- -------
Net cash used in investing activities .... (796) (713)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital calls from minority stockholder ...... 37 42
Proceeds from issuances of common stock ...... 9,408 235
Preferred dividends paid ..................... (38) --
Advance from stockholder/affiliates .......... -- (154)
Payments on notes payable and capital
lease obligations .......................... (161) (123)
------- -------
Net cash provided by financing
activities ............................. 9,246 --
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS .......... 7,386 (725)
CASH AND CASH EQUIVALENTS:
Beginning of period .............................. 627 1,105
======= =======
End of period .................................... $ 8,013 $ 380
======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest .................................... $ 18 $ 22
====== ======
Company common stock exchanged for
investment in GlobalNet
Financial.com, Inc. ......................... $6,045 $ --
Marketable securities received for
licensing fees .............................. 1,375 --
Marketable securities received for
deferred revenue ............................ 2,366 --
------ ------
Cost basis of marketable securities ............. $9,786 $ --
Unrealized gain, net of tax effect of $1,618 .... $3,142 $ --
Computer equipment acquired under
capital lease ............................... $ 149 $ --
Company common stock exchanged for option to
purchase additional shares in GlobalNet
Financial.com, Inc. ......................... $ 291 $ --
The accompanying notes are an integral part of
these consolidated financial statements.
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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"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X for interim financial
statements required to be filed with the Securities and Exchange Commission and
do not include all information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the information
furnished reflects all adjustments, consisting of normal recurring adjustments,
which are necessary to make a fair presentation of financial position and
operating results for the interim periods.
Amounts in the March 31, 1998 consolidated financial statements have been
reclassified whenever necessary to conform to the current period's presentation.
The accompanying consolidated financial statements should be read in conjunction
with the audited consolidated financial statements for the year ended December
31, 1998. The results of operations for the three-month period ended March 31,
1999, are not necessarily indicative of the results to be expected for the full
year.
2. CONTINGENCIES
The Company is subject to various legal proceedings and claims, either asserted
or unasserted, which arise 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. Currently, to the
best of the Company's knowledge, it has no unsettled or pending litigation.
3. MARKETABLE SECURITIES
Marketable securities which represent the Company's investment in the common
stock of GlobalNet Financial.com, Inc. ("GlobalNet", previously named MicroCap
Financial Services, Inc.) are classified as available-for-sale in accordance
with statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Available-for-sale securities are
carried at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component accumulated other comprehensive income within
of stockholders' equity.
4. SALE OF UNREGISTERED SECURITIES
In January 1999, the Company issued 1,220,237 shares of its common stock, or
9.9% of its outstanding common stock, to General Electric's National
Broadcasting ("NBC") unit, in conjunction with its affiliate GE Capital Equity
Investments, Inc., for $9,385,824.
5. COMPREHENSIVE INCOME
Effective June 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income and its components
in a full set of financial statements. Comprehensive income
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includes all changes in a company's equity (except those resulting from
investments by and distributions to owners), including, among other things,
foreign currency translation adjustments, and unrealized gains (losses) on
marketable securities classified as available-for-sale. The adoption of this
policy had no effect on the Company's net income (loss) or stockholders' equity
in 1998. Total comprehensive earnings (loss) for the three months ended March
31, 1999 and 1998 follow (in thousands):
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
-------- --------
Net earnings (loss) ........................ $ 352 $ (872)
Unrealized gain on marketable securities ... 4,760 --
Income tax expense ......................... (1,618) --
------- -------
Total comprehensive earnings (loss) ........ $ 3,494 $ (872)
======= =======
6. SEGMENT REPORTING
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", was issued in June 1997 and is effective for fiscal years
beginning after December 31, 1997. The Company operates two major segments,
financial and non-financial. The financial segment includes Internet and online
financial services and products provided by the Company, license fees earned
from third parties for private label versions of the Company's proprietary
database applications and advertising on the Company's website. The
non-financial segment includes Knowledge Express Data Systems, L.C. ("KE"), of
which the Company owns 55.58%; the publishing and entertainment industry
operations; and an Internet baseball game. KE is an online provider of
biotechnology/pharmaceutical databases for universities and research markets.
The publishing and entertainment industry encompasses the development and
operation of online and database services for publications including Billboard
Online, Adweek Online, The Hollywood Reporter Online and Backstage Online for
BPI Communications, L.P. The sports entertainment operation is an online game
designed for baseball enthusiasts.
Intersegment revenues were eliminated in consolidation. The segment information
below is consistent with the basis of segmentation presented in the Company's
annual report.
SALES AND OPERATING PROFIT BY INDUSTRY SEGMENT
SALES OPERATING RESULTS
------------------- --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- --------------------
1999 1998 1999 1998
------ ------- ------- -------
Financial ........... $4,658 $3,022 $ 411 $ (812)
Non-Financial ....... 689 406 (97) (60)
------ ------ ------ ------
Total ............... $5,347 $3,428 $ 314 $ (872)
====== ====== ====== ======
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IDENTIFIABLE ASSETS BY INDUSTRY SEGMENT
PERIOD ENDED
MARCH 31, DECEMBER 31,
1999 1998
---------- -------------
Financial .................. $33,997 $11,453
Non-Financial .............. 567 555
------- -------
Total ...................... $34,564 $12,008
======= =======
SPECIFIC ASSETS AND EXPENSE BY INDUSTRY SEGMENT
THREE MONTHS ENDED
MARCH 31,
1999 1998
-------- -------
Software Capitalization:
Financial ............................ $310 $631
Non-Financial .......................... -- 66
---- ----
$310 $697
==== ====
Depreciation and Amortization Expense:
Financial ............................ $701 $571
Non-Financial .......................... 39 115
---- ----
$740 $686
==== ====
The financial segment bears all expenses associated with capital expenditures
and corporate facilities. These include fixed assets and related depreciation
and other non-allocable expenses such as rent, legal, interest and dividends.
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 and non-financial industries. The
Company's services and products, 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 and under private label
versions from third parties. Such services allow investors to:
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o Obtain financial news and information;
o Perform personalized searches with the Company's optimal search
technology using current and historical information;
o Manage personal portfolios and strategize investment planning; and
o Perform fundamental and technical analyses.
The Company's Internet and online 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 financial Internet site, Wall
Street City(R) (http://www.wallstreetcity.com), employs the Company's
proprietary designs as well as data provided by others on a fee and/or revenue
sharing basis.
The non-financial business segment of the Company includes third party Internet
services, which are hosted and operated via alliances in the publishing,
entertainment, sports and biotechnical/pharmaceutical industries.
Revenue is generated in the form of Internet and online service fees, licensing
and development 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
licensing and developing private label versions of the Company's database
applications. Advertising revenue is derived from ads placed on the Company's
Wall Street City website (http://www.wallstreetcity.com) and certain third party
sites hosted by the Company. 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 video
tapes. 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. The Company's contract revenue is generated
from providing contract service to a related party. The contract services
include developing, operating and maintaining online database systems and
providing administrative services.
The first fiscal quarter of 1999 produced a profit of $352,000, which represents
a $1,224,000 increase over the same quarter in the previous year. The quarter
ended March 31, 1999 included a non-recurring license fee of $1,375,000. License
fees are normally a single charge for access to the Company's technology
database. The revenue generated from this upfront charge is non-recurring,
however, the Company negotiates new license fee agreements on a continuing
basis. Recurring revenues were slightly higher with the introduction of monthly
site management fees, content license fees and cost plus reimbursable expenses
pursuant to previously executed license agreements.
In January 1999, the Company announced that General Electric's NBC unit, in
conjunction with its affiliate, GE Capital Equity Investments, Inc., jointly
purchased 1,200,237 shares, or 9.9%, of the Company's common stock. In February
1999, the Company completed an agreement with NBC to license its technology and
portions of its investor content to NBC as well as provide hosting services (the
"NBC License Agreement").
In March 1999, the Company signed an agreement with GlobalNet which included the
issuance of 2,460,824 shares of GlobalNet's common stock in exchange for license
fees and hosting and content services. In addition, the Company exchanged
520,000 shares of its common stock for 2,715,337 shares of GlobalNet's common
stock giving the Company a 9.9% ownership interest in GlobalNet. In addition,
the Company issued 25,000 shares of its common stock for a one year option to
purchase additional shares such that, upon exercise of the option, the Company
would own an aggregate of 19.9% of GlobalNet's then outstanding common stock.
The option is exercisable at $3.75 per share.
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In March 1999, the Company announced the purchase of a 15% equity interest in
Trading Technologies Corporation in exchange for $600,000 of capital
contributions by the Company to further develop the private label version of an
innovative stock trading software application.
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
Total revenues for the quarter ended March 31, 1999 rose $1,919,000 or 56% over
the same period in 1998 reflecting increases in both the financial and
non-financial business segments. The increase in service revenues was slightly
offset by decreases in product and contract revenue.
Service revenues rose by $2,097,000, reflecting a 74% increase for the quarter
ended March 31, 1999 as compared to the same quarter in 1998. The Internet
revenue portion of service revenues increased from $965,000 for the three months
ended March 31, 1998 to $3,395,000 for the same period in 1999. Included in the
first quarter of 1999 are non-recurring, license fee revenues of $1,375,000.
License fees, which allow purchasers access to the Company's technology, are
normally a one-time up front charge. Although the revenue is non-recurring new
license fees are negotiated on a recurring basis. The first quarter of 1999 also
includes costs, some of which include a mark-up, billable to NBC of $246,000.
Online service revenues and discount brokerage business revenues, both of which
are modem based, were lower for the comparable quarters by a total of $408,000.
By business segment, the financial segment of the Company was $1,816,000, or
74%, higher for the quarter ended March 31, 1999 as compared to the same period
in 1998. The non-financial segment revenue rose from $406,000 for the first
quarter of 1998 to $687,000 for the first quarter of 1999
Product revenues were lower by $109,000, or 46%, for the quarter ended March 31,
1999 compared to the same quarter in 1998. The Company continues to focus its
resources and energy primarily on the further enhancement of its Internet
website and third party alliances, and secondarily on software products.
Contract revenue from affiliates was $69,000 lower for the quarter ended March
31, 1999 as compared to the quarter ended March 31, 1998 due to a reduction in
revenues from TeleBuild, L.C.
Cost of service totaled $2,550,000 for the quarter ended March 31, 1999 and
$2,209,000 for the same quarter in 1998. The increase of $341,000, or 15%, is
attributable primarily to higher data/royalty expenses of $289,000 on increased
revenues. Costs incurred in the first quarter of 1999, which are rebillable to
NBC, totaled $170,000. Amortization of software development costs were $65,000
higher for the quarter ended March 31, 1999 as compared to the quarter ended
March 31, 1998 and were substantially offset with lower communication costs of
$60,000. Communication costs decrease with the shift of revenues from online to
the Internet. Costs associated with contract revenue from affiliates were lower
by $66,000 due to decreased revenues. Cost of service as a percentage of revenue
(service and contract) totaled 49% for the three months ended March 31, 1999 as
compared to 69% for the same period in 1998. The reduction is primarily due to
the non-recurring license fee recognized in 1999, which has no associated costs.
Cost of products was $20,000 lower for the first quarter of 1999 as compared to
the first quarter in 1998. The reduction is mainly due to reduced revenue. Cost
of products as a percentage of revenue totaled 62% for the quarter ended March
31, 1999 as compared to 42% for the same quarter in 1998. The increased
percentage is due primarily to product mix. In the first quarter of 1998, a
larger percent of the total product sales included products with a relatively
low cost to revenue percent.
Selling and marketing expenses rose $155,000, or 23%, from the first quarter of
1998 to the first quarter in 1999. Salary and related benefit expense were
higher by $149,000 in the first quarter of 1999 compared to the first quarter of
1998 primarily due to the inclusion of the non-financial segment comparison. In
1998
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the non-financial segment compensation expense of $143,000 was included in
general and administrative expense. In 1999 the Company began allocating certain
overhead expenses to the marketing group. The most significant overhead expense
allocation, rent, totaled $73,000 for the first quarter of 1999. The increases
in salary and rent expense were partially offset by a decrease of $84,000 in
advertising expense, which is being more closely monitored by the Company.
General and administrative expenses rose by $208,000, or 15%, in the first
quarter of 1999 as compared with the same period in 1998. Salary and related
benefit expense, net of amounts capitalized as software development, were higher
by $352,000 from the first quarter of 1998 as compared to the first quarter of
1999. In 1999 the compensation expense for the non-financial segment was
included in selling and marketing expense and totaled $154,000, whereas in 1998
the expense was included in general and administrative expenses. The first
quarter of 1999 also contained a reduction of general and administrative
expenses of $151,000 which are billable to NBC and as such have been included in
cost of service. Depreciation/rental equipment was higher in the quarter ended
March 31, 1999 as compared to the quarter ended March 31, 1998 by $36,000 due
primarily to an increase in leased computer hardware. The increase in salary and
depreciation/ rental equipment expenses was partially offset by a decrease in
rent of $55,000, which is due mainly to the allocation of certain overhead
expenses to marketing and selling expense.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 the Company had cash and cash equivalents of $8,013,000
representing an increase of $7,386,000 since December 31, 1998. Net cash used in
operating activities was $1,064,000 for the three months ended March 31, 1999,
compared to cash used in operations of $12,000 for the three months ended March
31, 1998. This $1,052,000 increase in cash used in operations primarily reflects
the non-cash service revenues in the first quarter and the decrease in accounts
payable.
The Company's primary capital needs are for the continued investment in
technology through software development activities and the purchase of computers
and communications equipment. During the three months ended March 31, 1999 the
Company invested $310,000 in software development costs and $268,000 (excluding
$149,000 paid directly by the lessor) for capital equipment. The Company
estimates that it may invest up to an additional $1,500,000 to $2,000,000 in
capital expenditures over the next twelve months. A significant portion of the
investment in capital will be to support the NBC License Agreement.
In January 1999, the Company sold 9.9% of its common stock, or 1,220,237 shares,
to General Electric's NBC unit, in conjunction with its GE Capital Equity
Investments, Inc. for $9,385,824. The Company believes that cash on hand is
sufficient to meet working capital requirements.
Aggregate revenue from the Company's own Internet and online services, including
advertising revenue and related product sales accounted for approximately 47% of
the Company's total revenue for the three months ended March 31, 1999. 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 effect of such
adverse market conditions would be lessened by its fixed rate billing structure.
To counter the potential impact, if any, of such a downturn, the Company is
continuing its efforts to broaden its revenue base through alliances with third
parties to develop and operate Internet and online based services as well as
increasing the level of advertising.
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YEAR 2000 READINESS
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 Y2K issue affects the Company's internal systems, including information
technology (IT) and non-IT systems. To evaluate these systems, the Company
maintains a task force that addresses software, hardware network, PC and third
party data and communication provider issues. The task force has created a
comprehensive action plan to assess and evaluate current systems and is
currently implementing replacements and modifications where necessary. The final
phase of the action plan includes thoroughly testing systems and developing
contingency plans as specific problems are identified.
The Company has substantially completed the assessment phase of its internal
hardware and software applications and is in the process of upgrading or
replacing non-compliant systems in the ordinary business course of upgrading the
computer hardware. The Company has not accelerated the replacement dates for
non-compliant equipment, and the cost of upgrading non-compliant equipment was
previously included in the Company's planned capital expenditures. The Company
currently intends to complete its replacement and modification phase for
internal hardware and software applications in the second quarter of 1999. The
Company believes its host system, which is considered by management to be the
Company's critical system, is Y2K compliant since this system has control logic
based on binary Julian dates rather than the two-digit format. The Company has
identified the key programs within the host system that perform the majority of
the functions and has begun studying such programs in detail. It is the
Company's intention to correct any detectable problems and perform a "mock" Year
2000 trial test in the third quarter. 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 has compiled a list of
critical providers and vendors and has contacted them in writing regarding their
compliance and remediation efforts. To date, responses have been negligible and
the Company is in the process of identifying alternative procedures to ascertain
compliance. The Company cannot currently identify whether all Y2K issues
resulting from outside communication and third party data providers will be
resolved.
The most reasonably likely worst case scenario is the failure of one or more
outside communication or third party data providers to be Y2K compliant. Such
failure could require the Company to incur unanticipated expenses to replace
such outside communication or third party data, if needed, to maintain the
Company's products and services at expected levels, which action could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company anticipates being available to determine the
worst case scenario by July 31, 1999. As the Company's testing phases of
internal hardware and software applications are completed and the assessments of
outside communication and third party data providers are received, the Company
will develop an applicable contingency plan for Y2K issues. The contingency plan
to react to the most reasonably likely worst case scenario should be developed
by the Company no later than the end of August 1999.
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
13
<PAGE>
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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
RECENT SALES OF UNREGISTERED SECURITIES
On January 14, 1999, the Company sold 1,220,237 unregistered shares of its
common stock, or 9.9% of the outstanding shares, to General Electric's NBC unit,
in conjunction with its affiliate, GE Capital Equity Investments, Inc. for an
aggregate purchase price of $9,395,824. The securities were issued pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
On March 31, 1999, the Company issued 520,000 unregistered shares of its common
stock to GlobalNet in exchange for 2,715,337 unregistered shares of GlobalNet
common stock. The Company issued an additional 25,000 shares of its common stock
for a one year option to purchase, at $3.75 per share, the number of additional
shares of GlobalNet common stock such that, upon exercise of the option, the
Company would own 19.9% of GlobalNet's then outstanding common stock. The
securities were issued pursuant to Section 4(2) of the Securities Act of 1933,
as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits:
10.1 Stock Purchase Agreement, dated as of January 14, 1999, by
and between the Company and G.E. Capital Equity Investments,
Inc. (incorporated by reference to current report on Form 8-K
filed January 22, 1999).
10.2 Stock Exchange Agreement, dated March 31, 1999, by and
between the Company and GlobalNet.
10.3 Stock Option Agreement, dated March 31, 1999, by and between
the Company and GlobalNet.
11* Statement regarding computation of earnings per share.
27* Financial Data Schedule.
---------------------------------------------------------------------
* Indicates documents filed herewith.
<PAGE>
(B) Reports on Form 8-K:
A current report on Form 8-K was filed by the Company on
January 22, 1999 announcing the purchase by General Electric's
NBC unit, in conjunction with GE Capital Equity Investments,
Inc., on January 14, 1999, of 1,220,237 shares of the
Company's common stock for an aggregate purchase price of
$9,395,824. No financial statements were filed.
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
President & Chief Financial Officer
a duly authorized officer of the
Registrant
Date: May 14, 1999
EXHIBIT 11
PAGE 1 OF 2
TELESCAN, INC. & SUBSIDIARY
CALCULATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
QUARTER ENDED
MARCH 31,
----------------------
1999 1998
------ --------
BASIC:
Weighted average number of shares
of common stock ....................... 12,199 10,939
Assumed exercise of certain
stock options ......................... -- --
------ --------
12,199 10,939
====== ========
Net income (loss) ......................... $ 314 $ (872)
====== ========
BASIC EARNINGS PER SHARE:
Net income (loss) ......................... $ 0.03 $ (0.08)
====== ========
DILUTED:
Weighted average number of shares
of common stock ....................... 12,199 10,939
Assumed exercise of certain
stock options ......................... 419 --
------ --------
12,618 10,939
====== ========
Net income (loss) ......................... $ 314 $ (872)
====== ========
DILUTED EARNINGS PER SHARE:
Net income (loss) ......................... $ 0.02 $ (0.08)
====== ========
Note: Due to a loss for the quarter ended March 31, 1998, no dilution is
reflected.
<PAGE>
TELESCAN, INC. & SUBSIDIARY
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11
PAGE 2 OF 2
DAYS WEIGHTED
SHARES OUTSTANDING SHARES
----------- ----------- -------------
BALANCE DECEMBER 31, 1998 .......... 11,089,792 90 11,089,792
Common stock issuances under
stock option plan .............. 1,933,799 51.6 1,109,688
----------- -----------
BALANCE MARCH 31, 1999 ............. 13,023,591 12,199,480
=========== ===========
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,013
<SECURITIES> 14,546
<RECEIVABLES> 3,685
<ALLOWANCES> 315
<INVENTORY> 45
<CURRENT-ASSETS> 26,553
<PP&E> 4,015
<DEPRECIATION> 2,147
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<BONDS> 0
0
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<COMMON> 130
<OTHER-SE> 26,987
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<CGS> 80
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<LOSS-PROVISION> 0
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<EXTRAORDINARY> 0
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<EPS-PRIMARY> 0.03
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