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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
TELESCAN, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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TELESCAN, INC.
5959 CORPORATE DRIVE, SUITE 2000
HOUSTON, TEXAS 77036
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
MAY 25, 1999
A special meeting of stockholders of Telescan, Inc. (the "Company") will be
held May 25, 1999, at 9:00 a.m., Local Time, at the offices of the Company, 5959
Corporate Drive, Suite 2000, Houston, Texas 77036, for the following purposes:
1. To amend the Company's Certificate of Incorporation to increase the
authorized shares of common stock from 15,000,000 to 30,000,000;
and
2. To transact such other business as may properly come before the
meeting or any adjournments thereof.
Further information regarding the meeting and the above proposals is set
forth in the accompanying proxy statement. The Board of Directors has fixed the
close of business on May 7, 1999 as the record date for the meeting, and the
only holders of Telescan Common Stock of record at such time will be entitled to
vote at the meeting or any adjournments thereof.
Whether or not you plan to attend the meeting, we urge you to sign and
return the enclosed proxy so that your shares will be represented at the
meeting.
By Order of the Board of Directors,
David L. Brown
Chairman of the Board and Chief
Executive Officer
May 10, 1999
PLEASE DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY.
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TELESCAN, INC.
5959 CORPORATE DRIVE, SUITE 2000
HOUSTON, TEXAS 77036
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PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
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This Proxy Statement is being furnished to stockholders in connection with
the solicitation of proxies by the Board of Directors of Telescan, Inc., a
Delaware corporation (the "Company" or "Telescan"), for use at a Special Meeting
of Stockholders of the Company to be held at 5959 Corporate Drive, Suite 2000,
Houston, Texas, 77036 at 9:00 a.m. (local time) on May 25, 1999, and at any
adjournments thereof, for the purpose of considering and voting upon the matters
set forth in the accompanying Notice of Special Meeting of Stockholders. This
Proxy Statement and the accompanying form of Proxy are first being mailed to
stockholders on or about May 10, 1999.
The close of business on May 7, 1999 has been fixed as the record date for
the determination of stockholders entitled to notice of and to vote at the
Special Meeting and any adjournment thereof. As of the record date, there were
13,103,508 shares of the Company's Common Stock, par value $.01 per share (the
"Telescan Common Stock"), issued and outstanding. The presence, in person or by
proxy, of a majority of the outstanding shares of Telescan Common Stock on the
record date is necessary to constitute a quorum at the Special Meeting. Each
share is entitled to one vote on all issues requiring a stockholder vote on Item
1. The affirmative vote of a majority of the shares of Telescan Common Stock
entitled to vote on Item 1, and a majority of shares of each class of the
Company's stock entitled to vote at the Special Meeting, is required for the
approval of Item 1 set forth in the accompanying Notice. Shares represented by
proxy that reflect abstentions and broker non-votes will be treated as shares
that are present and entitled to vote for purposes of determining the presence
of a quorum. Abstentions will be counted in tabulations of the votes cast on
Item 1 whereas broker non-votes will not be counted in tabulations of the votes
cast on Item 1.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Special Meeting in accordance
with the directions on the proxies. If no direction is indicated, the shares
will be voted FOR THE AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION.
The enclosed Proxy, even though executed and returned, may be revoked at any
time prior to the voting of the Proxy (a) by the execution and submission of a
revised Proxy, (b) by written notice to the Secretary of the Company or (c) by
voting in person at the Special Meeting.
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PROPOSAL
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(1) AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED TELESCAN COMMON STOCK
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The Board of Directors of the Company has unanimously adopted resolutions
approving and submitting to a vote of the stockholders an amendment to Article
Fourth of the Company's Certificate of Incorporation to increase the number of
shares of authorized Telescan Common Stock from 15,000,000 to 30,000,000 (the
"Authorized Share Increase"). The full text of the amendment is attached to this
Proxy Statement as Exhibit A. The Board believes that the Authorized Share
Increase is in the best interest of the Company so as to make additional shares
of Telescan Common Stock available for acquisitions, financings, present and
future employee benefit programs and other corporate purposes.
On April 25, 1999, the Company entered into a Merger Agreement (the "Merger
Agreement") with INVESTools, Inc., a California corporation ("INVESTools"),
pursuant to which a newly formed, wholly owned subsidiary of the Company
("Newco") will merge with and into INVESTools (the "Merger"). The Merger will be
effected by the issuance of approximately 2.4 million shares of Telescan Common
Stock to INVESTools shareholders and option holders. The Merger Agreement and
the related transaction documents contain representations, warranties, covenants
and indemnities by the Company and INVESTools and certain INVESTools
shareholders customary in transactions of this nature. The Merger Agreement also
contains conditions to closing customary in transactions of this nature,
including approval by the Company's stockholders of the Authorized Share
Increase. See "The Merger."
As indicated above, the Company is currently authorized to issue 15,000,000
shares of Telescan Common Stock. As of May 7, 1999, there were 13,103,508 shares
of Telescan Common Stock issued and outstanding. Since the consummation of the
Merger will require the issuance of approximately 2.4 million shares of Telescan
Common Stock to the INVESTools shareholders and option holders, there is
currently an insufficient number of authorized but unissued shares of Telescan
Common Stock available for such issuance.
If the Authorized Share Increase is not approved, the Merger will not be
consummated. Further authorization for the issuance of Telescan Common Stock
pursuant to the Merger will not be solicited prior to such issuance.
The additional shares of Telescan Common Stock resulting from the
stockholder approval of the Authorized Share Increase and not issued pursuant to
the Merger Agreement may be issued from time to time as the Board of Directors
may determine without further action of the stockholders of the Company.
Although the Board has no current plans to utilize such shares to entrench
present management, it may, in the future, be able to use the additional shares
of Telescan Common Stock as a defensive tactic against hostile takeover
attempts. The authorization of such additional shares of Telescan Common Stock
will have no current anti-takeover effect. No hostile takeover attempts are, to
management's knowledge, currently threatened.
The relative rights and limitations of the Telescan Common Stock would
remain unchanged under the amendment. Stockholders of the Company do not
currently possess, nor upon the approval of the proposed Authorized Share
Increase will they acquire, preemptive rights, that would entitle such persons,
as a matter of right, to subscribe for the purchase of any shares, rights,
warrants or other securities or obligations convertible into, or exchangeable
for, securities of the Company.
RECOMMENDATION AND REQUIRED VOTE
The affirmative vote of the holders of a majority of the outstanding
Telescan Common Stock of the Company, and a majority of the outstanding stock of
each class of the Company's stock entitled to vote on this proposal, is required
for approval of this proposal. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
APPROVAL OF THE PROPOSED AMENDMENT TO THE CERTIFICATE OF INCORPORATION.
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THE MERGER
The detailed terms and conditions of the Merger, including conditions to
consummation of the Merger, are contained in the Merger Agreement, which is
attached hereto as Exhibit B and incorporated herein by reference. The following
discussion sets forth a description of material terms and conditions of the
Merger Agreement. The description in this Proxy Statement of the terms and
conditions of the Merger is qualified in its entirety by reference to the Merger
Agreement.
If the Authorized Share Increase is not approved, the Merger will not be
consummated. Further authorization for the issuance of Telescan Common Stock
pursuant to the Merger will not be solicited prior to such issuance.
GENERAL DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the effective time of the Merger,
Newco will merge with and into INVESTools, whereupon INVESTools will be the
surviving corporation and will become a wholly owned subsidiary of the Company.
Pursuant to the Merger, each outstanding share of INVESTools Common Stock will
be converted into shares of Telescan Common Stock, subject to adjustment as
provided in the Merger Agreement. In addition, at the effective time of the
Merger, each issued and outstanding share of common stock of Newco, no par value
("Newco Common Stock"), shall be converted into one share of common stock, par
value $0.001 per share, of the corporation surviving the Merger (the "Surviving
Corporation"). Telescan will issue to holders of shares of common stock, par
value $0.001 per share, of INVESTools ("INVESTools Common Stock") an aggregate
of approximately 2,400,000 shares of Telescan Common Stock, and the Company will
assume any outstanding options to purchase INVESTools Common Stock.
Based upon the number of shares of Telescan Common Stock and INVESTools
Common Stock outstanding as of April 23, 1999 and assuming an average selling
price of Telescan Common Stock of $20.50 per share (the closing price on the
Nasdaq Small Cap Market System as of April 23, 1999), and assuming 2,370,731
million shares of Telescan Common Stock will be issued pursuant to the Merger
Agreement, it is expected that approximately 15,403,732 shares of Telescan
Common Stock will be outstanding immediately following the effective time of the
Merger. See "The Merger Agreement."
BACKGROUND OF THE MERGER
During 1998, the Company reviewed a variety of strategic alternatives,
including the acquisition of new businesses that would allow it to broaden the
line of financial products and services it offers to its customers.
Additionally, in the fourth quarter of 1998, INVESTools began to consider a
variety of strategic alternatives.
Ronald Warren, President and Chief Financial Officer of the Company, was
contacted on an unsolicited basis by Chris Schember, INVESTools' financial
advisor, by receipt of a memorandum dated October 8, 1998, and a telephone call
from Mr. Schember and Matthew Kovinsky, Director of Business Development at
INVESTools, on October 26, 1998. In light of INVESTools' projected loss in
revenue in 1999, Mr. Warren advised Messrs. Schember and Kovinsky that the
Company had no interest in discussions that contemplated a business combination
with INVESTools.
On or before February 22, 1999 Mr. Schember contacted both NationsBanc
Montgomery Securities ("NationsBanc") and the Company to stir interest in
INVESTools. On February 22, 1999, Mr. Warren sought clarifying information about
improvement in INVESTools' operations. The reply from INVESTools' President,
Laird Foshay, on February 23, 1999 indicated that INVESTools had made
significant improvement in subscriptions sales and controlling expenses. Based
on the February 22 and 23 conversations, Mr. Foshay and Mr. Warren agreed that a
meeting was in order.
The initial meeting between the Company's and INVESTools' representatives
was held on March 5, 1999 between David L. Brown, the Company's Chairman and
Chief Executive Officer, and Mr. Foshay.
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Mr. Foshay visited the Company's offices on March 10, 1999 and INVESTools
furnished current operating results and projections to the Company on March
11,1999.
Company representatives, including Mr. Warren and representatives of
NationsBanc, visited INVESTools offices in Redwood City, California on March 15,
1999 to gain additional information and meet managing personnel. During that
meeting, the representatives of the two companies reviewed their respective
businesses and exchanged information relevant to the conduct of due diligence.
On March 19, 1999, a preliminary business term sheet was delivered to
INVESTools to provide a basis for negotiating the general business terms of the
contemplated transaction.
On March 23, 1999, a representative of Hein + Associates, LLP, Certified
Public Accountants to the Company, a representative of Locke Liddell & Sapp LLP,
legal advisors to the Company, a representative of NationsBanc, a representative
of Latham & Watkins, legal advisors to NationsBanc, Mr. Schember, Mr. Foshay,
and other INVESTools employees met to conduct due diligence of INVESTools.
On March 30, 1999 Mr. Foshay, along with other employees of INVESTools, met
with representatives of the Company at the Company's offices in Houston, Texas.
At that meeting, representatives of INVESTools conducted operational due
diligence of the Company.
Additional telephone conversations took place among Mr. Brown, Mr. Warren,
Roger C. Wadsworth, the Company's Senior Vice President, and Mr. Foshay during
the period beginning March 5, 1999 and ending April 2, 1999. Representatives of
NationsBanc and Mr. Schember were also involved at times during these telephone
conversations. During these conversations, the Company and INVESTools expressed
interest in entering into a possible combination of the Company and INVESTools.
From March 29 through April 2, 1999, representatives of the Company and
INVESTools, and their respective financial advisors discussed business terms,
principally related to the price range at which a transaction might be possible,
and tax and accounting issues via telephone calls. The parties communicated
various proposals and counter-proposals for a tax-free, pooling of interests
merger, including an appropriate exchange ratio and a "collar" for the exchange
ratio. During this period, outside legal counsel to the Company also commenced
drafting and negotiating the terms of a proposed merger agreement.
On April 1, 1999 the Company's Board of Directors held a special telephonic
meeting to review the proposed merger with INVESTools and the discussions held
to date. NationsBanc discussed the use of share price collars in similar
transactions and engaged in a discussion about the terms and structure of the
transaction with members of the Company's Board of Directors. Following such
review and discussions, the negotiation and execution of a definitive merger
agreement were approved by the Company's Board of Directors.
As a result of these discussions, on April 20, 1999, the number of shares
of Telescan Common Stock to be offered to the Stockholders in the proposed
transaction was set at 2.4 million, with a collar that would maintain the value
of the consideration so long as the price of Telescan Common Stock remained at
or below $20.00 per share. The preliminary understanding between the parties
with respect to a proposed merger continued to be subject to the Company's and
INVESTools' satisfaction with continued due diligence and further negotiations
of the definitive documentation for the transaction.
On April 16, 1999 the INVESTools board also held a telephonic meeting to
review the proposed merger with the Company and the discussions held to date and
to vote upon the proposed merger and related transactions. Mr. Schember
discussed the terms of the proposed transaction. INVESTools' outside legal
counsel reviewed INVESTools Board's fiduciary duties in considering a strategic
business combination and the significant terms of the Merger Agreement.
Following such presentations and further discussion, the execution of such
documents and related matters were approved by the INVESTools Board of
Directors.
Following the parties' respective board meetings, the parties and their
advisors held numerous conference calls to discuss the structure of the proposed
merger.
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Following the parties' respective board meetings, the merger agreement was
finalized and executed by each of the parties.
REASONS FOR THE MERGER
The Company and INVESTools Boards of Directors believe that the Merger is
in the best interests of their respective shareholders and that their respective
companies and shareholders will benefit from the Merger. The respective Boards
of Directors of the Company and INVESTools considered a number of factors,
including among other things, the terms and conditions of the Merger Agreement;
information with respect to the financial condition, business operations and
prospects of each of the Company and INVESTools on both a historical and
prospective basis; and the views and opinions of their respective managements
and advisors.
The Merger will result in the combination of the online newsletter
publishing and consumer marketing capabilities of the Company and INVESTools,
which the Company believes is complementary to its products, and will establish
the Company as one of the largest national online newsletter publishers in the
United States. In general, the companies serve distinct markets, resulting in
minimal customer overlap. Anticipated benefits of the Merger include the
following:
Specialty Niche. INVESTools brings to the Company an operating history and
expertise in the area of marketing financial newsletters, a specialty niche
modestly served by the Company. The Company will emerge as one of the top online
financial newsletter publishing companies in the U. S. market, which is highly
fragmented and presents numerous opportunities for growth.
Knowledgeable and experienced personnel. The Merger will bring together a
knowledgeable team of with many years of experience in consumer subscriptions.
Specifically, the addition of Laird Foshay will serve to enhance the current
management team of the Company.
Increased diversification of customer base and markets. Historically, the
Company and INVESTools have served distinct markets and have offered products
which, to a great extent, are used in dissimilar applications. The Merger will
permit the Company to offer a broader product line to a wider range of
customers, thereby increasing the diversity of its business.
Cost savings. The combination of the businesses of the Company and
INVESTools will result in the consolidation of certain support functions
creating cost savings. For example, sharing of data and use of server capacity
should yield minor savings.
The Company and INVESTools Boards of Directors also believe that the Merger
will facilitate certain strategic objectives of the companies. Through the
Merger, it is the Company's objective to increase revenues and operating results
through strategic expansion and a focus on offering a highly regarded suite of
financial newsletters. Specifically, after the Merger, the Company will seek to:
increase the quantity of newsletters being offered, provide enhanced information
to current and future subscribers, and enhance the performance of its consumer
marketing function.
In addition, the INVESTools Board of Directors believes the Merger, among
other things, offers holders of INVESTools Common Stock and INVESTools Options
(as defined below) the opportunity to acquire an equity interest in a larger,
more diversified corporation, the shares of which are more liquid, in a
transaction that is nontaxable for federal income tax purposes. In making its
determination, the INVESTools Board of Directors considered the risk that the
Merger would not be consummated.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
generally applicable to holders of INVESTools Common Stock ("Stockholders") who,
pursuant to the Merger, exchange their INVESTools Common Stock solely for
Telescan Common Stock. The summary does not purport to deal with all aspects of
federal income taxation that may affect particular Stockholders in light of
their individual circumstances and is not intended for holders of INVESTools
Common Stock subject to special treatment under federal income tax law
(including insurance companies, tax-exempt organizations, financial
institutions,
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broker-dealers, foreign persons or entities, holders of INVESTools Common Stock
who do not hold their stock as capital assets, holders of INVESTools Common
Stock who have acquired their stock upon the exercise of employee options or
otherwise as compensation or through a tax-qualified retirement plan and persons
holding INVESTools Common Stock as part of a straddle or conversion
transaction.) In addition, this discussion does not consider the effect of any
applicable state, local or foreign tax laws. Accordingly, each INVESTools
Stockholder is strongly urged to consult with his or her tax advisor to
determine the tax consequences of the Merger.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), currently applicable Treasury
regulations, and judicial and administrative decisions and rulings. Future
legislative, judicial or administrative changes or interpretations could alter
or modify the statements and conclusions set forth herein, and any such changes
or interpretations could be retroactive and could affect the tax consequences to
the Stockholders.
Tax Opinion. Consummation of the Merger is conditioned upon the receipt of
opinions of Gray, Cary, Ware & Freidenrich, L.L.P. and Locke Liddell & Sapp LLP,
dated as of the Closing Date, to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion, (i) the Merger will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, (ii) the Company, Newco and INVESTools
will each be a party to that reorganization within the meaning of Section 368(b)
of the Code, (iii) the Company, Newco or INVESTools shall not recognize any gain
or loss as a result of the Merger, and (iv) the Stockholders shall not recognize
any gain or loss as a result of the Merger, other than gain to the extent that
they receive cash in lieu of fractional shares. There can be no assurance that
the Internal Revenue Service ("IRS") will not take a contrary view, and no
ruling from the IRS has been or will be sought concerning the federal income tax
consequences of the Merger. An opinion of counsel expresses what counsel
believes a court should hold if properly presented with the issue which is the
subject of the opinion. An opinion is not a guarantee of a certain tax treatment
and is not binding on the IRS or the courts. The following discussion assumes
that the Merger will be treated in the manner described in the above-referenced
opinion.
Treatment of Holders of INVESTools Common Stock. Except as discussed below
under "-- Cash in Lieu of Fractional Shares", a holder of INVESTools Common
Stock who, pursuant to the Merger, exchanges INVESTools Common Stock for
Telescan Common Stock generally will not recognize gain or loss upon such
exchange. Such holder's aggregate tax basis in Telescan Common Stock received
pursuant to the Merger (including Telescan Common Stock held in the escrow
account) will be equal to its aggregate tax basis in INVESTools Common Stock
surrendered in the exchange (reduced by any tax basis allocable to fractional
shares exchanged for cash) and its holding period for Telescan Common Stock will
include its holding period for INVESTools Common Stock surrendered.
Cash in Lieu of Fractional Shares. No fractional shares of Telescan Common
Stock will be issued upon the surrender for exchange of certificates
representing shares of INVESTools Common Stock. A holder of INVESTools Common
Stock who receives cash in lieu of fractional shares of Telescan Common Stock in
exchange for its INVESTools Common Stock will be treated as having received such
fractional shares pursuant to the Merger and then as having received cash for
such fractional shares in a redemption by the Company. Any gain or loss
attributable to the cash payment in lieu of fractional shares generally will be
capital gain or loss unless such payment, under each Stockholder's particular
facts and circumstances, is deemed to have the effect of a dividend distribution
and not a redemption treated as an exchange under the principles of Section 302
of the Code. The amount of such gain or loss will be equal to the difference
between the portion of the tax basis of INVESTools Common Stock surrendered in
the Merger that is allocated to such fractional shares and the cash received in
lieu thereof. Any such capital gain or loss will constitute long-term capital
gain or loss if INVESTools Common Stock has been held by the holder for more
than one year at the effective time of the Merger. Capital gain on assets held
for more than one year recognized by a non-corporate stockholder is generally
subject to federal income tax at a preferential capital gain rate.
THE FOREGOING SUMMARY OF CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER WITH RESPECT TO HOLDERS OF INVESTOOLS COMMON
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STOCK IS WITHOUT REFERENCE TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY
PARTICULAR HOLDER. IN ADDITION, THE FOREGOING SUMMARY DOES NOT ADDRESS ANY
NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE MERGER NOR
DOES IT ADDRESS THE TAX CONSEQUENCES OF ANY TRANSACTIONS OTHER THAN THE MERGER
OR ANY ASPECT OF THE MERGER NOT INVOLVING THE EXCHANGE OF INVESTOOLS COMMON
STOCK. ACCORDINGLY, EACH HOLDER OF INVESTOOLS COMMON STOCK IS STRONGLY URGED TO
CONSULT WITH SUCH HOLDER'S TAX ADVISOR TO DETERMINE THE PARTICULAR UNITED STATES
FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES OF THE MERGER
TO SUCH HOLDER.
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for using the "pooling
of interests" method of accounting pursuant to Opinion No. 16 of the Accounting
Principles Board. The pooling of interests method of accounting assumes that the
combining companies have been merged from inception, and the historical
financial statements for periods prior to consummation of the Merger are
restated as though the companies had been combined from inception.
The Merger Agreement provides that the parties shall use their best efforts
to cause the business combination to be effected by the Merger to be accounted
for as a pooling of interests, and to cause their respective affiliates not to
take any action that would adversely affect the ability of the Company to
account for the business combination to be effected by the Merger as a pooling
of interests. In addition, it is a condition to the Company's obligation to
consummate the Merger (unless such condition is waived by the Company pursuant
to the Merger Agreement) that it receive (i) the opinion of Hein + Associates,
LLP, certified public accountants for the Company, to the effect that no
conditions exist related to the Company that would preclude the Company's
accounting for the Merger as a pooling-of-interests if consummated in accordance
with the Merger Agreement, and (ii) the opinion from a nationally recognized
accounting firm to the effect that the Merger will qualify for a
pooling-of-interests accounting treatment if consummated in accordance with the
Merger Agreement. It is also a condition to INVESTools' obligation to consummate
the Merger that it receive the opinion of PricewaterhouseCoopers LLP, certified
public accountants for INVESTools, to the effect that no conditions exist
related to INVESTools that would preclude the Company's accounting for the
Merger as a pooling-of-interests if consummated in accordance with the Merger
Agreement.
REGULATORY APPROVALS
The Company does not believe that any governmental filings in the United
States, other than the application for qualification under California law (See
"-- Restrictions on Resales by Affiliates") and the filing the Merger Agreement
and an Officer's Certificate of each of Newco and INVESTools with the California
Secretary of State, are required with respect to the Merger. See "Merger
Agreement -- Effective Time of Merger."
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Telescan Common Stock to be issued in connection with the
Merger will be issued in a transaction exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), by reason of Section
3(a)(10) thereof. The shares of Telescan Common Stock will be qualified under
California law, pursuant to Section 25121 thereof, after a fairness hearing
("Fairness Hearing") has been held pursuant to the authority granted by Section
25142 of such law. The Fairness Hearing shall also address the assumption by the
Company of all INVESTools Options pursuant to Merger Agreement.
The shares of Telescan Common Stock issued in the Merger and received by
persons who are deemed to be "affiliates" (as that term is defined in Rule 144
under the Securities Act) of INVESTools prior to the Merger may be resold by
them only in transactions permitted by the resale provisions of Rule 145 under
the Securities Act (or, in the case of persons who become affiliates of
Telescan, Rule 144 under the Securities
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Act) or as otherwise permitted under the Securities Act. The Merger Agreement
provides that INVESTools will deliver to Telescan within fifteen (15) days prior
to closing, a list of persons INVESTools believes, in its reasonable judgment,
are affiliates of INVESTools, and it is a condition to the Company's obligation
to consummate the merger that each person deemed to be an "affiliate" of
INVESTools deliver to the Company on or prior to the effective time of the
Merger a written agreement to the effect that such persons will not offer to
sell, sell or otherwise dispose of any shares of Telescan Common Stock issued in
the Merger except, in each case, pursuant to an effective registration statement
or in compliance with Rule 145 or in a transaction which, in the opinion of
legal counsel satisfactory to the Company, is exempt from the registration
requirements of the Securities Act and, in any case, until after the results
covering 30 days of post-Merger combined operations of the Company and
INVESTools have been publicly issued.
Under Securities and Exchange Commission ("Commission") guidelines
interpreting generally accepted accounting principles ("GAAP"), with certain
limited exceptions, the sale of Telescan Common Stock by an affiliate of either
the Company or INVESTools generally within 30 days prior to the effective time
of the Merger or thereafter prior to the publication of results that include a
minimum of at least 30 days of combined operations of the Company and INVESTools
after the effective time of the Merger could preclude pooling of interests
accounting treatment for the Merger.
MERGER AGREEMENT
The following summary of the terms of the Merger Agreement is qualified in
its entirety by reference to the Merger Agreement, a copy of which is attached
hereto as Exhibit B. Certain capitalized terms used herein without definition
have the respective meanings set forth in the Merger Agreement.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective at such time as the Merger Agreement and
an Officer's Certificate is filed with the California Secretary of State in
accordance with the California General Corporation Law (the "Merger Filing").
The Merger Filing shall be made simultaneously with, or as soon as practicable
after, the closing of the transactions contemplated by the Merger Agreement in
accordance with the Merger Agreement.
EXCHANGE RATIO
At the Effective Time of the Merger, each outstanding share of INVESTools
Common Stock will be automatically converted, subject to certain adjustment and
escrow provisions as discussed below, into the right to receive a validly
issued, fully paid and nonassessable share of Telescan Common Stock in a ratio
(the "Exchange Ratio") equal to 2,400,000 divided by the number of shares of
INVESTools Common Sock issued and outstanding at the Effective Time of the
Merger on a fully diluted basis. For purposes of the Merger Agreement, the term
"fully diluted basis" means that (a) all options to purchase shares of
INVESTools Common Stock ("INVESTools Options") have been exercised in full, (b)
all warrants to purchase shares of INVESTools Common Stock ("INVESTools
Warrants") have been exercised in full, and (c) all shares of preferred stock in
INVESTools ("INVESTools Preferred Stock") have been converted into shares of
INVESTools Common Stock.
ADJUSTMENT TO EXCHANGE RATIO
In the event the Average Stock Price (as defined below) is greater than $20
(the "Ceiling Price"), the Exchange Ratio shall be adjusted by multiplying the
Exchange Ratio by the following fraction: (a) the numerator shall be equal to
(i) the Ceiling Price plus (ii) 50% of the excess of the Average Stock Price
over the Ceiling Price, and (b) the denominator shall be the Average Stock
Price. Notwithstanding anything in the Merger Agreement to the contrary, the
minimum number of shares of Telescan Common Stock issuable in connection with
the Merger shall be 2,000,000 (less the number of shares of Telescan Common
Stock that may be issued upon the exercise of INVESTools Options assumed by the
Company). In the event the Average Stock Price is less than $10 per share,
INVESTools shall have the right, in its sole discretion, to
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terminate the Merger Agreement; provided, however, that there shall be no
adjustment to the Exchange Ratio if the Average Stock Price is less than $10 per
share and INVESTools does not exercise its right to terminate the Merger
Agreement. For purposes of the Merger Agreement, the term "Average Stock Price"
means the average of the Daily Per Share Prices (as defined below) for the ten
(10) consecutive trading days ending on the day immediately prior to the Closing
Date. For purposes of the Merger Agreement, the term "Daily Per Share Price" for
any trading day means the closing prices on the Nasdaq Small Cap Market System
of Telescan Common Stock (as reported in the Wall Street Journal) for that day.
MANNER AND BASIS FOR CONVERTING SHARES
Upon the consummation of the Merger, each Stockholder shall be entitled,
upon surrender thereof to the transfer agent for Telescan Common Stock, to
receive in exchange therefor a certificate or certificates representing the
number of whole shares of Telescan Common Stock into which the INVESTools Common
Stock so surrendered shall have been converted as aforesaid, in such
denominations and registered in such names as the Stockholder may request. Until
so surrendered, each outstanding certificate that prior to the Effective Time
represented INVESTools Common Stock shall be deemed from and after the Effective
Time to evidence the right to receive that number of full shares of Telescan
Common Stock into which such INVESTools Common Stock shall have been converted.
Unless and until any such outstanding certificates shall be surrendered, no
dividends or other distributions payable to the holders of Telescan Common
Stock, as of any time on or after the Effective Time, shall be paid to the
holders of such outstanding certificates which prior to the Effective Time
represented INVESTools Common Stock; provided, however, that upon surrender and
exchange of such outstanding certificates, there shall be paid to the record
holders of the certificates issued and exchanged therefor the amount, without
interest thereon, of dividends and other distributions, if any, that theretofore
were declared and became payable since the Effective Time with respect to the
number of full shares of Telescan Common Stock issued to such holders. If any
certificate for shares of Telescan Common Stock is to be issued in a name other
than that in which the certificate surrendered in exchange therefor is
registered, it shall be a condition of the issuance thereof that the certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer and that the person requesting such exchange shall have paid to the
Company or its transfer agent any transfer or other taxes required by reason of
the issuance of a certificate for shares of Telescan Common Stock in any name
other than that of the registered holder of the certificate surrendered, or
established to the satisfaction of the Company or its transfer agent that such
tax has been paid or is not payable. No fraction of a share of Telescan Common
Stock shall be issued, but in lieu thereof, each Stockholder who would otherwise
be entitled to a fraction of a share of Telescan Common Stock shall, upon
surrender of the shares of INVESTools Common Stock to the transfer agent for the
Company, be paid an amount in cash (without interest) equal to the value of such
fraction of a share based upon the Average Stock Price.
OTHER ADJUSTMENTS
To the extent that (a) there is a net decrease in net working capital
and/or retained earnings, and/or a net increase in long-term indebtedness, of
INVESTools from the Balance Sheet Date through the Effective Time, and (b) the
aggregate amount of such net decreases in net working capital and/or retained
earnings, and/or net increase in long-term indebtedness (collectively, the
"Balance Sheet Adjustment"), exceeds $100,000, then the aggregate number of
shares of Telescan Common Stock to be received by the Stockholders shall be
decreased by an amount equal to the Balance Sheet Adjustment (without
consideration of the $100,000 threshold) divided by the Average Stock Price
("Balance Sheet Adjustment Shares"). Notwithstanding anything in the preceding
sentence to the contrary, for purposes of calculating the Balance Sheet
Adjustment, any net increase in net working capital may be used to offset a net
increase in long-term indebtedness, and any net decrease in long-term
indebtedness may be used to offset a net decrease in net working capital. The
Balance Sheet Adjustment Shares shall be deducted from the General Liability
Escrow Shares as provided below. There shall be no upward adjustment to the
number of shares of Telescan Common Stock based on the Balance Sheet Adjustment.
For purposes of the Merger Agreement, the terms "net working capital", "retained
earnings" and "long-term indebtedness" shall be defined in accordance with
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GAAP, and shall be based on the balance sheet of the Company as of the Effective
Time, which shall be prepared as set forth in the Merger Agreement.
In the event that the Merger is not consummated and the Merger Agreement is
terminated as provided therein, each party will bear its own costs and expenses
incurred in connection with the transactions contemplated thereby (including,
without limitation, all legal, accounting and advisory fees). If, however, the
Merger is consummated, the Company will bear its own costs and expenses incurred
in connection therewith, and the Surviving Corporation will bear such costs and
expenses of INVESTools and its Stockholders ("INVESTools Expenses").
Notwithstanding the foregoing, if the INVESTools Expenses exceed $1,400,000 in
the aggregate, then the aggregate number of shares of Telescan Common Stock to
be received by the Stockholders shall be decreased by an amount equal to such
excess divided by the Average Stock Price ("Expense Adjustment Shares"). The
Expense Adjustment Shares shall be deducted from the General Liability Escrow
Shares as provided below.
ESCROW
Pursuant to the terms of the Merger Agreement, the Company shall deposit
ten percent (10%) of the Aggregate Merger Consideration into an escrow account
with a third-party escrow agent ("General Liability Escrow Shares"). The number
of General Liability Escrow Shares shall be reduced by (i) any Balance Sheet
Adjustment Shares, (ii) any Expense Adjustment Shares, and (iii) an amount equal
to any other liability of INVESTools and/or its Stockholders to the Company
and/or the Surviving Corporation under the Merger Agreement divided by the
Average Stock Price. To the extent that the number of General Liability Escrow
Shares are reduced, such shares shall be deemed retained by the Company, and on
the expiration of the Survival Period (unless there is a dispute regarding such
shares), the escrow agent shall return such shares to the Company. On the
expiration of the Survival Period (unless there is a dispute regarding such
shares), the escrow agent shall deliver any remaining General Liability Escrow
Shares, as adjusted, to the Stockholders' Representative. Any reduction to the
number of General Liability Escrow Shares shall be deducted proportionately from
the Stockholders based on the number of shares deposited on behalf of each such
Stockholder as compared to the aggregate number of shares held in such escrow
account.
Pursuant to the terms of the Merger Agreement, the Company shall also
deposit a number of shares of Telescan Common Stock equal to 150,000 multiplied
by the Exchange Ratio into an escrow account with a third-party escrow agent
(the "Specific Liability Escrow Shares"), which shall be held to satisfy any
liability which may arise due to the specific liability described therein (the
"Specific Liability"). The Specific Liability Escrow Shares shall be held in the
escrow account until the earlier to occur of (i) a court of competent
jurisdiction shall have found the Company or INVESTools liable with respect to
the Specific Liability and shall have ordered that all or a portion of Specific
Liability Escrow Shares be distributed to satisfy such liability, (ii) the
Specific Liability shall have been resolved and settled in the form of a written
agreement, in form and substance reasonably acceptable to the Company and the
Stockholders' Representative, which shall include a full and final release of
the Company, INVESTools and their affiliates, or (iii) the Company receives the
written opinion of counsel to the Stockholders, in form and substance reasonably
acceptable to the Company, that all applicable statutes of limitations with
respect to the Specific Liability have expired and that no person may bring a
valid claim against the Company, INVESTools or their affiliates with respect to
such Specific Liability (each, a "Resolution Event"). To the extent that all or
a portion of the Specific Liability Escrow Shares are required to be distributed
to a third party upon a Resolution Event, such shares shall be distributed to
such third party pursuant to the mutual written instructions from the Company
and the Stockholders' Representative, which instructions shall be delivered to
the escrow agent promptly after such Resolution Event. Conversely, to the extent
that all or a portion of the Specific Liability Escrow Shares are not required
to be distributed to a third party upon a Resolution Event, such shares shall be
distributed to the Stockholders pursuant to the mutual written instructions from
the Company and the Stockholders' Representative, which instructions shall be
delivered to the escrow agent promptly after such Resolution Event. Any
reduction to the number of Specific Liability Escrow Shares shall be deducted
proportionately from the Stockholders based on the number of shares deposited on
behalf of each such Stockholder as compared to the aggregate number of shares
held in the escrow account.
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ASSUMPTION OF INVESTOOLS OPTIONS
As of the Effective Time, any outstanding INVESTools Options, whether
vested or unvested, shall be assumed by the Company. Immediately after the
Effective Time, each INVESTools Option outstanding, immediately prior to the
Effective Time, shall be deemed to constitute an option to acquire, on the same
terms and conditions as were applicable under such INVESTools Option at the
Effective Time, such number of shares of Telescan Common Stock as is equal to
the number of shares of INVESTools Common Stock subject to the unexercised
portion of such INVESTools Option multiplied by the Exchange Ratio (with any
fraction resulting from such multiplication to be rounded down to the nearest
whole number). The exercise price per share of each such assumed INVESTools
Option shall be equal to the exercise price of such INVESTools Option
immediately prior to the Effective Time, divided by the Exchange Ratio. The
term, exercisability, vesting schedule, status as an "incentive stock option"
under Section 422 of the Tax Code, if applicable, and all of the other terms of
the Company Options shall otherwise remain unchanged. As soon as practicable
after the Effective Time, the Company shall deliver to the holders of INVESTools
Options appropriate notices setting forth such holders' rights pursuant to such
options, as amended, and the agreements evidencing such options shall continue
in effect on the same terms and conditions (subject to the amendments provided
in the Merger Agreement). The Company shall take all corporate action necessary
to reserve for issuance a sufficient number of shares of Telescan Common Stock
for delivery upon exercise of the assumed INVESTools Options. As soon as
practicable after the Effective Time, the Company shall file a Registration
Statement on Form S-8 (or any successor form) under the Securities Act with
respect to all shares of Telescan Common Stock subject to such assumed
INVESTools Options that may be registered on a Form S-8, and shall be obligated
to use its best efforts to maintain the effectiveness of such Registration
Statement for so long as such Company Options remain outstanding.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, INVESTools makes various representations and
warranties relating to, among other things, its organization and qualification,
capitalization, authority, required consents, financial statements, books and
records, the absence of changes and undisclosed liabilities, receivables,
suppliers and customers, indebtedness, litigation, tax matters, employee benefit
plans, employment matters, contracts, compliance with laws, insurance,
intellectual property, environmental matters, regulatory actions, title to
assets, condition and sufficiency of asset, financial advisors, SEC matters,
affiliated transactions, accounting treatment and takeover statutes. In the
Merger Agreement, the Company and Newco make various representations and
warranties relating to, among other things, their organization and
qualification, capitalization, authority, required consents, SEC filings,
consents and approvals, financial advisors and accounting treatment. The
representations and warranties of each of the parties to the Merger Agreement
will expire upon the earlier of (i) one (1) year after the Closing Date, or (ii)
the completion of the audit of the Company's consolidated financial statements
for the fiscal year ending on December 31, 1999 (the "Survival Period").
OBLIGATIONS OF INVESTOOLS PENDING CLOSING
For so long as the Merger Agreement is in effect, INVESTools shall, except
as specifically contemplated by the Merger Agreement: (a) operate and conduct
its business in the ordinary course; (b) use all reasonable efforts to preserve
intact its corporate existence, business organization, assets, licenses,
permits, authorizations, Governmental Authorizations, Environmental Permits and
business opportunities and retain the services of its present officers,
employees and agents; (c) comply with all contractual obligations applicable to
its operations; (d) maintain all of is assets in good repair, order and
condition, reasonable wear and tear excepted, and maintain the insurance
coverages described in the Merger Agreement or obtain comparable insurance
coverages from reputable insurers which, in respect to amounts, types and risks
insured, are consistent with the existing insurance coverages; (e) in good faith
and in a timely manner (i) cooperate with the Company in satisfying the
conditions in this Agreement, (ii) obtain as promptly as possible all consents,
approvals, authorizations and rulings, whether regulatory, corporate or
otherwise, as are necessary for INVESTools, Newco and the Company (or any of
them) to carry out and consummate the transactions contemplated by the Merger
Agreement and continue the business of INVESTools, (iii) furnish information
concerning
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INVESTools not previously provided to the Company required for inclusion in any
filings or applications that may be necessary in that regard and (iv) perform
all acts and execute and deliver all documents necessary to cause the
transactions contemplated by the Merger Agreement to be consummated at the
earliest possible date; (f) comply in all material respects with all Legal
Requirements applicable to it and the conduct of its business; (g) promptly
notify the Company upon obtaining knowledge of any additional default, event of
default or condition which with the passage of time or giving of notice would
constitute an additional default or event of default under any of the Company
Loan Documents or Contracts and promptly notify and provide copies to Purchaser
of any material written communications concerning such default; (h) between the
date of the Merger Agreement and Closing, promptly give written notice to the
Company upon obtaining knowledge of any event or fact that would cause any of
the representations or warranties of INVESTools contained in or referred to in
the Merger Agreement to be untrue or misleading; (i) deliver to Purchaser a
list, dated as of the Closing Date, showing: the name of each bank or
institution where INVESTools has accounts or safe deposit boxes, the name(s) in
which such accounts or boxes are held, and the name of each Person authorized to
draw thereon or have access thereto; (j) promptly notify the Company of any
material change or inaccuracies in any data previously given or made available
to Purchaser pursuant to this Agreement; (k) (without making or increasing any
commitment which would be binding on INVESTools) use all reasonable efforts to
preserve the goodwill of, and its good relationships with, its suppliers,
customers, landlords and others having business relations with it; and (l)
expeditiously cause the administrator of each of its benefit plans to provide
the Company with all information that the Company deems necessary or advisable
with respect to such plans.
Except with the prior written consent of the Company or as otherwise
specifically permitted by the Merger Agreement, INVESTools will not, from the
date of the Merger Agreement to the Closing: (a) make any amendment to its
Articles of Incorporation or Bylaws (except to authorize an additional 198,029
shares of Series C Preferred Stock); (b) make any change in the methods used in
allocating and charging costs, except as may be required by applicable law,
regulation or GAAP and after written notice to the Company; (c) except to
authorize an additional 198,029 shares of Series C Preferred Stock, make any
change in the number of shares of the capital stock issued and outstanding, or
issue, reserve for issuance, grant, sell or authorize the issuance of any shares
of its capital stock or subscriptions, options, warrants, calls, rights or
commitments of any kind relating to the issuance or sale of or conversion into
shares of its capital stock; (d) contract to create any obligation or Liability
except in the ordinary course of business; (e) increase the amount of the Long
Term Debt; (f) contract to create any mortgage, pledge, lien, security interest
or encumbrance, restriction, or charge of any kind (other than statutory liens
for which the obligations secured thereby shall not become delinquent); (g)
cancel any debts, waive any claims or rights of value or sell, transfer, or
otherwise dispose of any of its properties or assets, except in the ordinary
course of business; (h) sell any real estate owned as of the date of the Merger
Agreement or acquired thereafter except for fair market value in the ordinary
course of business; (i) dispose of or permit to lapse any rights to the use of
any Intellectual Property or dispose of or disclose to any Person other than its
employees any material trade secret not theretofore a matter of public
knowledge; (j) grant any increase in compensation or pay or agree to pay or
accrue any bonus or like benefit to or for the credit of any director, officer,
employee or other Person or enter into any employment, consulting or severance
agreement or other agreement with any director, officer or employee, or adopt,
amend or terminate any Benefit Plan or change or modify the period of vesting or
retirement age for any participant of such a plan; (k) declare, pay or set aside
for payment any dividend or other distribution or payment in respect of the
capital stock of INVESTools; (l) acquire the capital stock or other equity
securities or interest of any Person or acquire all or substantially all of the
assets of any Person; (m) make any capital expenditure or a series of
expenditures of a similar nature in excess of $25,000 in the aggregate; (n) make
any income tax or franchise tax election or settle or compromise any tax
liability; (o) except for negotiations and discussions between the parties
hereto relating to the transactions contemplated by the Merger Agreement or as
otherwise permitted hereunder, enter into any transaction, or enter into, modify
or amend any Contract or commitment other than in the ordinary course of
business; (p) increase the amount of any indebtedness owed by INVESTools to any
Stockholder or Affiliate of any such Stockholder, or to INVESTools from any such
Stockholder or Affiliate of any such Stockholder; (q) adopt a plan of complete
or partial liquidation, dissolution, merger, consolidation, restructuring,
recapitalization, or other reorganization or business combination of INVESTools;
(r) make any investments except in the ordinary course of business;
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(s) sell or contract to sell any part of INVESTools' premises without the
approval of the terms and conditions of such sale by the Company; (t) change any
fiscal year or the length thereof; (u) enter into any agreement, understanding
or commitment, written or oral, with any other Person which is in any manner
inconsistent with the obligations of INVESTools or its Stockholders under the
Merger Agreement or any related written agreement; (v) change the banking
arrangements and signature authorities currently in effect or grant any general
or special power of attorney; (w) knowingly waive any material right without
receiving fair consideration; or (x) agree to do any of the things described in
clauses (a) through (w) above.
CONDITIONS TO THE MERGER
The respective obligations of the Company and INVESTools to effect the
Merger are subject to the fulfillment at or prior to the Closing Date of the
following conditions: (a) the receipt of any applicable regulatory approvals and
the expiration of any applicable waiting period (including without limitation
any waiting period required by the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 with respect thereto and (b) the Closing will not violate any
injunction, order or decree of any court or Governmental Authority having
competent jurisdiction.
The obligation of the Company to effect the Merger is further subject to
the fulfillment at or prior to the Effective Time of the following additional
conditions, unless waived by the Company: (a) all representations and warranties
of INVESTools in the Merger Agreement shall be true and correct in all material
respects; (b) INVESTools shall have, in all material respects, performed all
obligations and agreements and complied with all covenants and conditions
contained in the Merger Agreement to be performed or complied with by it prior
to the Closing Date; (c) all corporate and other actions necessary to authorize
the execution, delivery and performance of the Merger Agreement by INVESTools
and the consummation by INVESTools of the transactions contemplated therein
shall have been duly and validly taken; (d) there shall not have occurred any
Material Adverse Effect with respect to INVESTools; (e) no more than two percent
(2%) of the shares of INVESTools Common Stock outstanding as of the Effective
Time shall be Dissenting Shares; (f) the Company shall have received
certificates dated the Closing, executed by the President and the Secretary of
INVESTools, certifying the matters described in clauses (a), (b), (c), (d) and
(e) above; (g) all outstanding shares of INVESTools Preferred Stock shall have
been converted to shares of INVESTools Common Stock, and an officer of
INVESTools shall deliver a certificate to the Company to that effect; (h) all
outstanding INVESTools Warrants shall have been exercised, and an officer of
INVESTools shall deliver a certificate to the Company to that effect; (i)
INVESTools shall have delivered to the Company a schedule of all outstanding and
unexercised INVESTools Options as of the Effective Time, and the consents of
holders of unexercised INVESTools Options and/or INVESTools Warrants as required
pursuant to the Merger Agreement; (j) INVESTools shall have executed and
delivered to the Company proper instruments for the transfer of the capital
stock of INVESTools in form and substance satisfactory to counsel for the
Company in accordance with the terms of the Merger Agreement; (k) the principal
amount of any Long Term Debt as of the Effective Time shall not exceed
$2,073,000, and an officer of INVESTools shall deliver a certificate to the
Company to that effect; (l) the Company shall have completed in its sole
discretion the results of its due diligence investigation of INVESTools,
including but not limited to any tax or accounting matters, within 7 days after
the announcement to the general public of the Merger contemplated hereby; (m)
INVESTools shall have furnished the Company with reasonably sufficient evidence
of consents as shall be required to enable the Company to continue to enjoy the
benefit of any Governmental Authorization, lease, license, permit, Environmental
Permit, Contract or other agreement or instrument to or of which INVESTools is a
party or a beneficiary; (n) the form and substance of all actions, proceedings,
instruments and documents required to consummate the transactions contemplated
by the Merger Agreement shall have been satisfactory in all reasonable respects
to the Company and its counsel; (o) INVESTools shall have collected any
outstanding balances with respect to loans or other receivables from officers of
INVESTools; (p) the Company's Certificate of Incorporation shall have been
amended to increase the number of authorized shares of Telescan Common Stock to
30,000,000 shares, and such amendment shall have been filed with the office of
the Secretary of State of Delaware; (q) Mr. Foshay shall have entered into an
employment agreement with the Company; (r) INVESTools shall have delivered to
the Company, prior to the Effective Time, from each Stockholder not considered
to be a Rule 145 Affiliate, the Stockholder's Letter, and from each Stockholder
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considered to be a Rule 145 Affiliate, the Affiliate Letter; (s) the Company,
INVESTools and a third-party escrow agent shall have entered into the General
Liability Escrow Agreement and the Specific Liability Escrow Agreement; (t) the
Company shall have received the opinions of counsel to INVESTools substantially
in the form attached as an exhibit to the Merger Agreement; (u) the Company
shall have received from Locke Liddell & Sapp LLP a written tax opinion, dated
as of the Closing Date; (v) the Company shall have received a letter from Hein +
Associates, L.L.P., certified public accountants for the Company, dated as of
the Closing Date and addressed to the Company, in form and substance reasonably
satisfactory to the Company, to the effect that no conditions exist related to
the Company that would preclude the Company's accounting for the Merger as a
pooling-of-interests if consummated in accordance with the Merger Agreement; and
(w) the Company shall have received a letter from a nationally recognized
accounting firm, dated as of the Closing Date and addressed to the Company, in
form and substance reasonably satisfactory to the Company, to the effect that
the Merger will qualify for a pooling-of-interests accounting treatment if
consummated in accordance with the Merger Agreement.
The obligations of INVESTools to effect the Merger is further subject to
the fulfillment at or prior to the Effective Time of the following additional
conditions, unless waived by INVESTools: (a) all representations and warranties
of the Company and Newco contained in the Merger Agreement shall be true and
correct in all material respects; (b) the Company and Newco shall have, in all
material respects, performed all obligations and agreements and complied with
all covenants and conditions contained in the Merger Agreement to be performed
or complied with by each prior to the Closing Date; (c) there shall not have
occurred any Material Adverse Effect with respect to the Company or Newco; (d)
INVESTools shall have received certificates dated the Closing, executed by an
appropriate officer of the Company and Newco, certifying the matters described
in clauses (a) and (b) above; (e) the Company, INVESTools and a third-party
escrow agent shall have entered into the General Liability Escrow Agreement and
the Specific Liability Escrow Agreement; (f) INVESTools shall have received the
opinions of counsel to the Company substantially in the form attached to the
Merger Agreement; (g) INVESTools shall have received from Gray, Cary, Ware &
Freidenrich, L.L.P., a written tax opinion, dated as of the Closing Date; (h)
INVESTools shall have received a letter from PricewaterhouseCoopers LLP,
certified public accountants for INVESTools, dated as of the Closing Date and
addressed to INVESTools, in form and substance reasonably satisfactory to
INVESTools, to the effect that no conditions exist related to INVESTools that
would preclude the Company's accounting for the Merger as a pooling-of-interests
if consummated in accordance with the Merger Agreement; and (i) the Company
shall have paid in full the certain indebtedness of the Company, including
principal and interest, as set forth in the Merger Agreement.
TERMINATION
The Merger Agreement may be terminated and the transactions contemplated
thereby may be abandoned at any time prior to the Closing Date:
(a) By mutual written consent duly authorized by the board of
directors of the Company and the board of directors of INVESTools;
(b) By the Company if there has been a material breach of a
representation, warranty, covenant or agreement contained in this Agreement
on the part of INVESTools, and as a result of such breach the conditions
precedent set forth above, as the case may be, would not then be satisfied;
provided, however, that if such breach is curable by the INVESTools within
15 days of notice of breach by the Company through the exercise of
INVESTools's reasonable best efforts, then for so long as INVESTools
continues to exercise such reasonable best efforts, the Company may not
terminate the Merger Agreement under this clause unless the breach is not
cured in full within such 15 days;
(c) By INVESTools (i) if the Average Stock Price is less than $10 per
share, or (ii) if there has been a material breach of a representation,
warranty, covenant or agreement contained in this Agreement on the part of
the Company or Newco, and as a result of such breach the conditions
precedent set forth above, as the case may be, would not then be satisfied;
provided, however, that if such breach is curable by the Company or Newco
within 15 days of notice of breach by INVESTools through the exercise of
the
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Company's or Newco's reasonable best efforts, then for so long as the
Company and/or Newco continues to exercise such reasonable best efforts,
INVESTools may not terminate the Merger Agreement under this clause unless
the breach is not cured in full within such 15 days;
(d) By the Company or INVESTools if the Closing Date shall not have
occurred on or before May 31, 1999 or such later date agreed to in writing
by the Company and INVESTools; provided, however, that the right to
terminate this Agreement under this clause shall not be available to any
party whose willful failure to fulfill any obligations hereunder has been
the cause of, or resulted in, the failure of the Closing to occur on or
before such date; and
(e) By the Company or INVESTools if any court of competent
jurisdiction in the United States of America or other (federal or state)
governmental body shall have issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the
transactions herein contemplated and such order, decree, ruling or other
action shall have been final and nonappealable.
INDEMNIFICATION
Pursuant to the Merger Agreement, INVESTools and the Stockholders agree to
indemnify the Company, and each of the Company's subsidiaries, stockholders,
Affiliates, officers, directors, employees, counsel, agents, successors,
assigns, heirs and legal and personal representatives (the Company and all such
other Persons are collectively referred to as the "Company's Indemnified
Persons") from and against, and shall reimburse the Company's Indemnified
Persons for, each and every Loss, paid, imposed on or incurred by the Company's
Indemnified Persons, directly or indirectly, relating to, resulting from or
arising out of, or any allegation by any third party of any inaccuracy in any
representation or warranty of INVESTools under the Merger Agreement, or the
Schedules thereto or any document delivered or to be delivered by INVESTools
pursuant thereto in any respect (except for representations or covenants made by
individual Stockholders in the Stockholders' Letters or Affiliates Letters, as
applicable, which shall be governed by the indemnification provisions set forth
therein), in each case without regard to any applicable materiality thresholds,
whether or not the Company's Indemnified Persons relied thereon or had knowledge
thereof, or any breach or nonfulfillment of any covenant, agreement or other
obligation of INVESTools or the Stockholders under the Merger Agreement or any
agreement delivered pursuant thereto.
Pursuant to the Merger Agreement, the Company agrees to indemnify
INVESTools and its directors, officers, employees, counsel, agents and
contractors, the Stockholders, and INVESTools' and the Stockholders' respective
successors, assigns, heirs and legal and personal representatives (INVESTools,
the Stockholders and such other Persons are collectively referred to as
"INVESTools' Indemnified Persons") from and against, and shall reimburse
INVESTools' Indemnified Persons for, each and every Loss paid, imposed on or
incurred by INVESTools' Indemnified Persons, directly or indirectly, relating
to, resulting from or arising out of, or any allegation by any third party of,
any inaccuracy in any representation or warranty of the Company under the Merger
Agreement or any document delivered or to be delivered by the Company pursuant
thereto in any respect, whether or not INVESTools' Indemnified Persons relied
thereon or had knowledge thereof, or any breach or nonfulfillment of any
covenant, agreement or other obligation of the Company under the Merger
Agreement or any agreement or document delivered pursuant thereto.
An Indemnifying Person shall have no liability under the Merger Agreement
unless a Notice shall have been given within the Survival Period.
Notwithstanding the foregoing, the Stockholders' liability with respect to the
Specific Liability shall continue until the occurrence of a Resolution Event.
No Company's Indemnified Person shall be entitled to indemnification from
INVESTools and/or the Stockholders pursuant to the Merger Agreement (other than
claims with respect to the Specific Liability) unless and until the aggregate of
all Losses for which indemnification would (but for the limitation of this
sentence) be required to be paid by INVESTools and/or the Stockholders
thereunder exceeds $150,000 (the "Loss Threshold"), after which the Company's
Indemnified Persons shall be entitled to recover for all Losses for which
indemnification is required to be paid thereunder, including amounts used in
satisfying the Loss Threshold. With the exception of claims based on fraud or
knowing or intentional misrepresentation or claims with respect to the Specific
Liability, in no event shall the aggregate liability of the Stockholders
thereunder
15
<PAGE> 18
exceed the value of the General Liability Escrow Shares, and the liability of
any individual Stockholder under the Merger Agreement shall not exceed the
Stockholder's pro rata share of the number of shares of Telescan Common Stock
deposited into the escrow account pursuant to the General Liability Escrow
Agreement. The General Liability Escrow Shares shall be the sole and exclusive
remedy for any claims, demands, actions or causes of action (except for claims
based on fraud or intentional misrepresentation or claims with respect to the
Specific Liability) by any of the Company's Indemnified Persons under the Merger
Agreement. Except for claims based on fraud or intentional misrepresentation or
claims with respect to the Specific Liability, the Stockholders shall have no
further obligations under the Merger Agreement at the earlier of the time when
all of the General Liability Escrow Shares have been distributed or are required
to be distributed pursuant to the Merger Agreement and the General Liability
Escrow Agreement. There shall be no limitation on the indemnification liability
of individual Stockholders for breaches of representations or covenants made in
their respective Stockholder Letters or Affiliate Letters, as applicable.
The Stockholders' liability with respect to the Specific Liability shall
not be subject to the Loss Threshold. In no event shall the aggregate liability
of the Stockholders with respect to the Specific Liability exceed the value of
the Specific Liability Escrow Shares, and the liability of any individual
Stockholder for the Specific Liability shall not exceed the Stockholder's pro
rata share of the number of shares of Telescan Common Stock deposited into the
escrow account pursuant to the Specific Liability Escrow Agreement. The Specific
Liability Escrow Shares shall be the sole and exclusive remedy for any claims,
demands, actions or causes of action by any of the Company's Indemnified Persons
with respect to the Specific Liability. The Stockholders shall have no further
obligations with respect to the Specific Liability upon the occurrence of a
Resolution Event.
No Company's Indemnified Person shall be entitled to indemnification from
the Company and/or Newco pursuant to the Merger Agreement thereof unless and
until the aggregate of all Losses for which indemnification would (but for the
limitation of this sentence) be required to be paid by the Company and/or Newco
thereunder exceeds the Loss Threshold, after which INVESTools' Indemnified
Persons shall be entitled to recover for all Losses for which indemnification is
required to be paid thereunder, including amounts used in satisfying the Loss
Threshold. Notwithstanding anything herein to the contrary, with the exception
of claims based on fraud or knowing or intentional misrepresentation, in no
event shall the aggregate liability of the Company and Newco thereunder exceed
$4,000,000 ("Loss Ceiling"), and neither the Company nor Newco shall have any
further obligations under the Merger Agreement at the earlier of the time when
the Company has paid and/or is obligated to pay indemnification thereunder in
amounts equal in the aggregate to the Loss Ceiling.
EMPLOYMENT AGREEMENT
In connection with the Merger, the Company will enter into an Employment
Agreement ("Employment Agreement") with Laird Foshay pursuant to which Mr.
Foshay will serve as Senior Vice President, Internet Marketing of the Company
for a period of two (2) years ("Employment Term"). As compensation for his
services, the Company will pay Mr. Foshay an annual base salary of $130,000 per
year with merit increases in accordance with the Company's salary administration
program based upon performance, which shall be payable in accordance with the
Company's customary payroll practices with respect to time and manner of
payment. The Company shall also provide Mr. Foshay such benefits as are made
generally available to employees of equal title and base salary on the same
basis as the Company makes such benefits available to its other employees,
including, but not limited to, vacation benefits, and participation in health
plans, life and disability insurance and stock purchase and option plans.
Pursuant to the terms of the Employment Agreement, Mr. Foshay shall have
the right to serve as a member of the Board of Directors of the Company, subject
to the requisite vote of the stockholders of the Company at each annual meeting
electing directors. Upon the termination of Mr. Foshay's employment for any
reason, whether or not for good cause, he shall resign as a director of the
Company.
If Mr. Foshay's employment is terminated by the Company for other than
death or "good cause" (as defined in the Employment Agreement), the Company will
pay (or cause to be paid) the compensation
16
<PAGE> 19
provided by the Employment Agreement for the remainder of the Employment Term,
including, vacation benefits, health benefits and any bonus and merit increases
earned during the fiscal year in which such termination occurs (which bonus or
merit increases shall be prorated based on the number of days of employment
during such fiscal year). In the event of the termination of Mr. Foshay's
employment under the Employment Agreement because of his disability (as defined
in the Employment Agreement), the Company shall pay Mr. Foshay all accrued and
unpaid base salary, bonus and merit increases and any reasonable and necessary
business expenses incurred by Mr. Foshay in connection with the performance of
his duties thereunder, all to the date of termination. If Mr. Foshay, dies,
voluntarily resigns or is terminated for "good cause", the Company shall have no
further obligation to Mr. Foshay under the Employment Agreement or otherwise,
except that the Company shall promptly pay Mr. Foshay (or his estate in the case
of death) all accrued and unpaid salary, bonus and merit increases and any
reasonable and necessary business expenses incurred by Mr. Foshay in connection
with the performance of his duties thereunder, all to the date of termination.
In the event Mr. Foshay is terminated by the Company or any of its affiliated
entities for disability or other than for cause, Mr. Foshay shall be entitled to
continued benefits under any benefit plans of the Company or an affiliated
entity in which he is a participant at the time of termination to the full
extent of his rights under such plans, including disability benefits, through
the remainder of the Employment Term.
For a period of three (3) years from the date the parties enter into the
Employment Agreement ("Non-Compete Term"), Mr. Foshay may not directly or
indirectly (i) solicit for hire, employ or engage any past, present or future
employee of the Company, its affiliates or INVESTools, without the prior written
permission of the Chief Executive Officer of the Company, (ii) own, operate,
participate in, undertake any employment with or have any interest in any entity
engaged in the business of providing online security selection and portfolio
management advice, except owning publicly traded stock for investment purposes
only in which Employee owns less than 5%, or (iii) use in any competition,
solicitation or marketing effort any proprietary list of or other confidential
information concerning customers or technology of the INVESTools, the Company or
its affiliates developed by the INVESTools, the Company or its affiliates. Such
non-competition restrictions shall continue until the expiration of the
Non-Compete Term, and shall survive the earlier termination of Mr. Foshay's
employment hereunder for any reason. Notwithstanding the foregoing, the Company
shall have the option, in its sole discretion, to extend the Non-Compete Term by
a period of one (1) year; provided, however, that as consideration for such
extension, the Company must pay Mr. Foshay the same compensation that he
received during his last full year of employment under the Employment Agreement,
including health and other benefits.
DESCRIPTION OF TELESCAN COMMON STOCK
Subject to the prior rights of the holders of any shares of preferred stock
that may from time to time be issued and outstanding, the holders of shares of
Telescan Common Stock (i) have equal pro rata rights to dividends from funds
legally available for the payment of dividends as, if, and when declared by the
Board of Directors of the Company, and (ii) are entitled to share pro rata in
all assets of the Company available for distribution to holders of Telescan
Common Stock upon liquidation of the Company. The holders of shares of Telescan
Common Stock do not have any preemptive subscription or conversion rights and
have one vote per share on all matters upon which the stockholders of the
Company may vote at all meetings of stockholders. All shares of Telescan Common
Stock outstanding are fully paid and nonassessable. There are no redemption or
sinking fund provisions applicable to the Telescan Common Stock.
The holders of Telescan Common Stock do not have cumulative voting rights,
which means that the holders of more than 50% of the voting rights of
outstanding shares of Telescan Common Stock voting for the election of directors
can elect all directors they choose to elect, and the holders of the remaining
shares will not be able to elect any of the Company's directors.
17
<PAGE> 20
MARKET PRICES AND DIVIDEND POLICY
Telescan Common Stock is traded on the Nasdaq Small-Cap Market under the
symbol "TSCN."
The following table sets forth for the periods indicated the high and low
sales prices for Telescan Common Stock reported through the Nasdaq Small-Cap
Market. The prices shown do not include retail mark-ups, mark-downs or
commissions and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
TELESCAN COMMON
STOCK
---------------
PERIOD HIGH LOW
- ------ ------ -----
<S> <C> <C>
1997
First Quarter............................................. $ 5.88 $3.25
Second Quarter............................................ $ 5.31 $2.88
Third Quarter............................................. $ 7.63 $4.75
Fourth Quarter............................................ $ 8.13 $5.88
1998
First Quarter............................................. $ 8.25 $5.00
Second Quarter............................................ $13.25 $4.75
Third Quarter............................................. $ 9.38 $3.88
Fourth Quarter............................................ $10.13 $2.63
1999
First Quarter............................................. $20.13 $8.25
</TABLE>
On April 23, 1999, the business day immediately preceding the announcement
of the execution of the Merger Agreement, the last reported sale price for
Telescan Common Stock was $20.50. There is no assurance that such transactions
or those reflected in the table of actual high and low sales prices represent
all or a representative sample of the actual transactions which occurred or that
the high and low prices shown reflect the full ranges at which transactions
occurred during the period indicated.
The Company has never declared a cash dividend on the Telescan Common
Stock. The convertible preferred stock dividend rate is 5% and is paid
quarterly. 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 on the Telescan Common Stock 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company".
There is no active public trading market for INVESTools Common Stock, which
is traded infrequently in private transactions. INVESTools has no class of
securities registered under Section 12 of the Exchange Act of 1934, as amended,
(the "Exchange Act") and is not subject to the reporting requirements of
Sections 13(a) or 15(d) of the Exchange Act. INVESTools has never declared a
cash dividend on the INVESTools Common Stock.
18
<PAGE> 21
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial statements
are presented for illustrative purposes only and are not necessarily indicative
of the combined financial position or results of operations of future periods or
the results that actually would have been realized had the Company and
INVESTools been a combined entity during the specified periods. The pro forma
combined condensed financial statements, including the notes thereto, are
qualified in their entirety by reference to, and should be read in conjunction
with, the historical consolidated financial statements of the Company and the
financial statements of INVESTools, including the notes thereto, included
elsewhere in this Proxy Statement.
The following pro forma combined condensed financial statements give effect
to the proposed merger of the Company and INVESTools using the pooling of
interests method of accounting. The pro forma combined condensed financial
statements are based on the respective historical audited and unaudited
financial statements and the notes thereto of the Company and INVESTools, which
are included elsewhere in this Proxy Statement.
The pro forma combined condensed balance sheet for the year ended December
31, 1998 assumes that the Merger took place December 31, 1998 and combines the
Company's audited December 31, 1998 consolidated balance sheet and INVESTools'
unaudited December 31, 1998 balance sheet.
The pro forma combined condensed statements of operations for the years
ended December 31, 1998, 1997 and 1996 assume that the merger took place on
January 1, 1996 and combines the Company's audited consolidated statements of
operations for the years ended December 31, 1998, 1997 and 1996 and INVESTools'
unaudited statements of operations for those same years.
19
<PAGE> 22
TELESCAN, INC. AND INVESTOOLS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
TELESCAN INVESTOOLS COMBINED
----------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues............................................... $15,542 $ 2,076 $17,618
Costs of revenues...................................... 9,152 868 10,020
Selling, general and administrative expenses........... 9,240 2,257 11,497
Research and development............................... -- 818 818
Loss on writedown of impaired assets................... 1,530 -- 1,530
Interest expense and other, net........................ 97 655 752
------- ------- -------
Total costs and expenses..................... 20,019 4,598 24,617
======= ======= =======
Loss before minority interest in loss of subsidiary.... (4,477) (2,522) (6,999)
Minority interest loss................................. 142 -- 142
------- ------- -------
Loss from continuing operations........................ (4,335) (2,522) (6,857)
Income from discontinued operations.................... 19 -- 19
------- ------- -------
Net loss..................................... (4,316) (2,522) (6,838)
Preferred stock dividends.............................. 94 -- 94
Incremental yield dividend............................. 44 -- 44
------- ------- -------
Loss available to common stockholders.................. $(4,454) $(2,522) $(6,976)
======= ======= =======
Loss from operations per common share:
Basic and diluted.................................... $ (0.51)
Weighted average shares -- basic and diluted........... 13,439(B)
=======
</TABLE>
See Notes to pro forma combined condensed financial data
20
<PAGE> 23
TELESCAN, INC. AND INVESTOOLS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
TELESCAN INVESTOOLS COMBINED
----------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues............................................... $16,125 $ 758 $16,883
Costs of revenues...................................... 8,756 334 9,090
Selling, general and administrative expenses........... 7,458 1,525 8,983
Research and development............................... -- 480 480
Interest expense, net.................................. 105 179 284
------- ------- -------
Total costs and expenses..................... 16,319 2,518 18,837
======= ======= =======
Loss before minority interest in loss of subsidiary.... (194) (1,760) (1,954)
Minority interest loss................................. 409 -- (409)
------- ------- -------
Income (loss) from continuing operations............... 215 (1,760) (1,545)
Loss from discontinued operations...................... (19) -- (19)
------- ------- -------
Net income (loss)............................ $ 196 $(1,760) $(1,564)
======= ======= =======
Income (loss) from operations per common share:
Basic and diluted.................................... $ (0.12)
Weighted average shares -- basic and diluted........... 13,166(B)
=======
</TABLE>
See Notes to pro forma combined condensed financial data
21
<PAGE> 24
TELESCAN, INC. AND INVESTOOLS, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
TELESCAN INVESTOOLS COMBINED
----------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues............................................... $13,756 $ 114 $13,870
Costs of revenues...................................... 8,549 78 8,627
Selling, general and administrative expenses........... 8,403 646 9,049
Research and development............................... -- 339 339
Loss on writedown of impaired assets
Interest expense, net.................................. 83 9 92
------- ------ -------
Total costs and expenses..................... 17,035 1,072 18,107
Loss before minority interest in loss of subsidiary.... (3,279) (958) (4,237)
Minority interest loss................................. 345 -- 345
------- ------ -------
Net loss..................................... $(2,934) $ (958) $(3,892)
======= ====== =======
Loss from operations per common share:
Basic and diluted.................................... $ (0.30)
Weighted average shares -- basic and diluted........... 13,015(B)
=======
</TABLE>
See Notes to pro forma combined condensed financial data
22
<PAGE> 25
TELESCAN, INC. AND INVESTOOLS, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
TELESCAN INVESTOOLS ADJUSTMENTS COMBINED
-------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 627 $ 438 $ -- $ 1,065
Restricted cash................................ -- 114 114
Accounts receivable, net..................... 2,645 131 2,776
Receivables from affiliates.................. 643 -- 643
Inventories.................................. 53 -- 53
Prepaid expenses............................. 370 -- 370
Other current assets......................... 235 6 241
-------- ------- ------- --------
Total current assets................. $4,573... $ 689 $ $ 5,262
======== ======= ======= ========
Property and equipment, net.................... 1,698 218 1,916
Software development costs, net................ 5,331 -- 5,331
Software technology rights, net................ 196 -- 196
Capitalized data costs, net.................... 150 -- 150
Other assets................................... 60 25 85
-------- ------- ------- --------
Total assets......................... $ 12,008 $ 932 $ $ 12,940
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................. 2,237 423 2,660
Accrued liabilities.......................... 1,074 281 3,100(D) 4,455
Current installments of notes payable........ 136 2,271 2,407
Current installments of obligations under
capital leases............................ 364 -- 364
Amounts due stockholders and affiliates...... 36 -- 36
-------- ------- ------- --------
Total current liabilities............ 3,847 2,976 3,100 9,922
Notes payable, less current installments....... 16 -- 16
Obligations under capital leases, less
current installments...................... 327 327
Mandatorily redeemable convertible preferred
stock, warrants and options............... -- 3,965 (3,965)(C) --
Stockholders' equity:
Preferred stock.............................. 1 -- -- 1
Common stock................................. 111 23 1(A) 135
Additional paid-in capital................... 21,492 47 3,964 25,503
Accumulated deficit.......................... (13,786) (6,078) (3,100)(D) (22,964)
-------- ------- ------- --------
Total stockholders' equity........... 7,818 (6,008) 865 2,675
-------- ------- ------- --------
Total liabilities and stockholders'
equity............................. $ 12,008 $ 932 $ -- $ 12,940
======== ======= ======= ========
</TABLE>
See Notes to pro forma combined condensed financial data
23
<PAGE> 26
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
BASIS OF PRESENTATION
Certain revenues, expenses, assets and liabilities of INVESTools have been
reclassified to conform with the presentation utilized by the Company. The
effect of accounting policy differences are immaterial and have not been
adjusted in the unaudited pro forma combined condensed financial data.
(A) The pro forma combined condensed financial data assumes the maximum
number of shares (2,400,000) are issued by Telescan to consummate
the merger with INVESTools.
(B) The pro forma number of common shares and common equivalent shares
outstanding represents the historical weighted average shares
outstanding of Telescan common stock in addition to the number of
shares assumed to be issued in exchange for the common stock of
INVESTools.
(C) Assumes conversion of redeemable convertible preferred stock,
warrants and options prior to the closing of the Merger.
(D) Accrual for estimated costs of the transaction to the Company and
INVESTools.
24
<PAGE> 27
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table summarizes the per share information for the Company
and INVESTools on a historical, pro forma combined and equivalent basis. The pro
forma information gives effect to the Merger accounted for as a pooling of
interests business combination. The equivalent pro forma combined after the
merger data was calculated by multiplying the Company's pro forma common data by
the Exchange Ratio of .48, which Exchange Ratio assumes that 5,000,000 shares of
INVESTools Common Stock, on a fully diluted basis, are outstanding. You should
read this information together with the Company's and INVESTools' financial
statements and the notes thereto, attached to this proxy statement as Exhibit C
and Exhibit D, respectively. You should not rely on the pro forma combined
information as being indicative of the results that would have been achieved had
the companies been combined or the future results that the combined company will
experience after the Merger.
TELESCAN, INC.
PER COMMON SHARE DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Historical:
Net income (loss) per share, basic........................ $(.41) $ .02 $(.28)
Book value per common share............................... .70 * *
Pro forma combined after the merger:
Net loss per share, basic................................. $(.52) $(.12) $(.30)
Book value per common share............................... .20 * *
</TABLE>
INVESTOOLS, INC.
PER COMMON SHARE DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
---------------- ----------------------
1998 1997 1998 1997 1996
------- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Historical:
Net loss per share, basic.......................... $ (.91) $(.67) $(1.51) $(.96) $(.61)
Book value per common share........................ $(4.19) * $(3.31) * *
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Equivalent Pro forma combined after the merger:
Net loss per share, basic................................. $(.25) $(.06) $(.14)
Book value per common share............................... $(.10) * *
</TABLE>
- ---------------
* not applicable for these periods
25
<PAGE> 28
INFORMATION ABOUT THE COMPANY
BUSINESS
General. 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 major Internet sites and
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 customers to electronically access and
analyze information through their personal computer systems.
The Company's primary business 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:
Obtain financial news and information;
Perform personalized searches with the Company's optimal search
technology using current and historical information;
Manage personal portfolios and strategize investment planning; and
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 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 input
from a large array of information sources while permitting simultaneous output
to users with 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 and a wireless interface. The
hardware configuration and the operating system that make it powerful and
responsive are the proprietary design of the Company, for which the Company was
awarded patents in 1997 and 1998.
The Company's primary market has historically been the sophisticated
individual investor and active trader. With the growth of the Internet, the
Company has broadened its appeal to a wider range of users. The Company has
responded to the increased demand by expanding the editorial content, offering
free, unlimited real-time quotes, increasing the level of educational aid
provided and redesigning the Wall Street City website to facilitate user
friendliness.
The Company's non-financial business segment includes developing and
maintaining several third party Internet and online services in the publishing,
entertainment, sports and biotechnical/pharmaceutical industries. Pertinent
disclosures and related information for the financial and non-financial segments
of the Company are disclosed in Footnote No. 11 "Segment Reporting" in the
financial statements.
The Company or its predecessors have operated the business of the Company
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 the outstanding
Telescan Common Stock to acquire all of the outstanding common stock of D.B.
Technology, Inc. ("DB") d.b.a. Telescan, Inc. After the acquisition of DB by the
Company, DB was merged into the Company and the Company changed its name from
Max Ret, Inc. to Telescan, Inc.
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
26
<PAGE> 29
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 a flat rate dependent upon the
usage of hours logged onto the system. Usage in excess of plan hours are billed
on a per hour basis. 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
Internet and online services; (2) growth in the availability, quality and
marketing of Internet and online 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 include 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 Internet sites and online information
systems 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) build revenue by providing private label financial database
access; (2) increase usage of its Wall Street City website to build advertising
revenue; (3) continue to invest resources to develop new services and
enhancements; (4) increase and maintain Telescan's Internet and online customer
base; and (5) increase the Company's visibility to the public. There can be no
assurance that this strategy will be effective.
In recent years the Company has marketed its proprietary software
technology to third parties for private label and co-branded versions. Normally
the third party incurs an initial license fee for the base technology. The
Company earns development fees through further enhancements and designs to the
primary site. Marketing of the private label version is typically the
responsibility of the third party and net revenues are allocated between the
parties.
Advertising revenue is directly linked to the number of viewers or, as more
commonly referred to, as page impressions. In an effort to attract new and
recurring viewers to its website, the Company has sought to increase or
introduce brand awareness through public relations efforts and increasing web
links.
With the growth of the Internet, a substantial number of new competitors
have entered the Internet and online services market. To remain competitive, the
Company has expended over $2 million in each of the past two years on software
development. Enhancements have included the introduction of free, unlimited
real-time quotes and real-time breakout alerts.
Current customers are a valuable Company asset and are an integral
component in the Company's business strategy. Maintaining the current customer
base is accomplished by providing comprehensive and high quality data, offering
customer training and conducting reactivation campaigns to encourage inactive
customers to return. New customers are attracted by advertising in major trade
journals and allowing free trial periods for potential new customers.
The Company continues to seek avenues to introduce the business community
and public to its products and services through name recognition. The Company
has been cited in national and local publications. In January 1999, the Company
announced an acquisition of Telescan Common Stock by General Electric's National
Broadcasting Company ("NBC") unit in conjunction with its affiliate, GE Capital
Equity Investments, Inc. The Company will license its proprietary technology for
CNBC.com. This presents major
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growth potential for the Company in the process of integrating personal
computers with the Internet and television.
Services and Products. The Company has participated in the growing market
for Internet and online 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 primary product line
is the Telescan system of financial databases and software programs accessed
over the Internet and online. In 1996, the Company substantially expanded its
private labeling arrangements under agreements with such major corporations as
American Express, Charles Schwab, Fidelity Investments and Standard & Poor's. In
1997, the Company continued this expansion by signing agreements with Time Inc.
New Media, Strategic Advisors, Inc. (a subsidiary of Fidelity Investments) and
Citibank, N.A. In 1998, Telescan added Altair Corporation (a subsidiary of
Imperial Bank), Web Street Securities and Texas Galleria Corporation. Telescan
receives per user fees, fees for providing "premium" services and/or reports,
development and licensing fees from such third parties, and revenue sharing for
new customers and advertising. Certain agreements guarantee minimum monthly,
quarterly or annual payments. In February 1996, the Company launched Wall Street
City, a new enhanced financial website, which it has continuously broadened and
upgraded. Page impressions on Wall Street City have grown from 2 million in the
first quarter of 1997 to over 11 million in the last quarter of 1998. The
Company has devoted significant development resources to this part of its
business.
Wall Street City also serves as an advertising medium with rates tied to
thousands of impressions. With the increasing popularity of the website,
advertising revenues grew four-fold from 1997 to 1998.
Financial Services and Products
Wall Street City. Wall Street City is a financial supersite on the Internet
that provides investors with a 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 http://www.wallstreetcity.com. In November 1997, the Company
introduced a new, revamped Wall Street City, providing investors with an
easier-to-navigate format and new features. During 1998, the Company increased
its market commentary and added free, unlimited real-time quotes and real-time
breakout alerts for active traders.
The site features:
ActiveX Stock Graph with Technical Analysis -- Internet Explorer users
with Windows '95 or NT operating systems can download a powerful ActiveX
control to allow technical analysis on stock graphs.
Calculators -- Under an agreement with Financenter, Inc., users can
access their 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.
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.
E-Commerce -- Introduced in 1999, E-commerce allows customers to
purchase books, videos and other educational materials to enhance
investment decisions.
Multiple Portfolios -- Each user can configure up to seven portfolios
with a maximum of 150 symbols per portfolio.
Personal Investment Planner -- Allows investors to assess risks in
their stock and mutual fund portfolios and provides alternatives to better
meet their financial goals.
Portfolio Scanning -- Portfolios can be scanned for end-of-day
technical and positive breakouts, stock cycle strengths, and comparative
rankings.
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Real-Time Market Commentary and Quantitative Analysis -- Provides
intraday articles on the markets, stocks and mutual funds, as well as
strategies. The commentary provides insight into the markets and investing
strategies based on comprehensive and up-to-the-minute data-based analysis
of stocks, mutual funds and market trends. Columns are written by Wall
Street City's research staff and include Stock of the Hour, Stocks in Focus
and Strategic Maneuver.
Real-Time Quotes -- Allows users to obtain free, unlimited real-time
quotes.
Search Capabilities -- An investor can categorize up to 40 criteria
from a selection of 300 to identify the top stocks that "fit" the criteria.
The search capabilities were enhanced in 1998 with Java-based technology
allowing investors to more easily customize searches for stocks, mutual
funds and options.
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.
Wall Street City is one of the leading Internet services for investors,
featuring Telescan's proprietary ProSearch technology on the web. Wall Street
City provides the broad range of services described above, as well as quotes,
news and company reports from industry-leading information sources. The site
also provides investors with access to educational tools, discussion groups,
investment newsletters, an E-commerce site and brokers.
TIP@Wallstreet(TM). Combines the advanced functionality of the Telescan
Investor's Platform(R) ("TIP") and the Wall Street City website. The software
embeds a web browser to take advantage of the depth of market information
available through Wall Street City. TIP allows users to further screen and
analyze the information online or offline, with greater speed and ease of use.
Telescan Investor's Platform 2.0(R). Telescan Investor's Platform is the
Microsoft Windows version of the Company's financial research, screening and
analysis software, Telescan Analyzer 3.0. 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 Telescan 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 investment objectives 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
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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.
ProSearch Alerts. Introduced in October 1998, this product provides a
real-time alert service and enables active traders and investors to instantly
identify stocks that are making significant price moves. This product has been
exclusively licensed to Texas Galleria Corporation and is marketed as an
independent product.
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 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, which
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 including 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. In 1998, four new portfolio reports were added that enable investors to
review insider trading, analyst rankings, Macro*World Forecasts and over/under
valuations on portfolios rather than on an individual stocks.
Telescan Direct(TM). 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, price and volume
alerts on 30 stocks based on parameters the consumer selects.
Private-Labeled Financial Services
Altair Corporation. In June 1998, the Company entered into a licensing
agreement with Altair Corporation (a subsidiary of Imperial Bank) to market the
Company's technology to the banking industry. The Company will share in revenues
from banks utilizing its technology and data.
American Express. The Company maintains an alliance 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. The Company
provides customer support and certain development services for American Express.
Citibank, N.A. In February 1998, the Company and Citibank, N.A.
("Citibank") entered into a five-year master agreement, which contemplates the
issuance of work orders for specific projects and services to be provided on an
ongoing basis in the future. In March 1998 the first work order was issued and
in December
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1998, the website created through this work order was launched utilizing the
Company's technology. Telescan expects to receive additional work orders for
Internet tools and services pursuant to this agreement.
Fidelity. Fidelity Investments, one of the nation's leading providers of
financial services, continues to offer a customized assortment of Telescan's
financial information resources and analytical tools as part of its
Windows-based investment management and trading software package -- Fidelity
On-line Xpress+(TM).
GlobalNet Financial.com, Inc. In April 1999 the Company and GlobalNet
Financial Services, Inc. (formerly known as MicroCap Financial Services, Inc.)
("GlobalNet") entered into a Stock Exchange Agreement pursuant to which the
Company increased its minority interest in GlobalNet by 5% to 9.9%. In
connection with the Stock Exchange Agreement, the Company purchased a one year
option from GlobalNet for 25,000 shares of Telescan Common Stock. Such option
allows the Company to acquire additional shares of GlobalNet to bring its total
ownership to 19.9%. In addition, the Company licensed its technology and content
to GlobalNet in exchange for 2.5 million shares of GlobalNet's common stock.
Information Highway. The Company maintains 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 (http://www.theexecutiveclub.com) is a dedicated suite of services for
business professionals and executives. Commencement of these services took place
in 1998.
NBC. In February 1999, the Company reached an agreement with NBC to license
its proprietary Internet and online financial services technology for CNBC.com.
Under the agreement, the Company will be responsible for developing customized
investment analytics, providing financial data, data retrieval and hosting
services. The Company is substantially increasing its support staff in response
to this contract.
PointCast Inc. Under the terms of the 1998 revenue sharing agreement, the
Company has licensed its proprietary ProSearch technology to PointCast Inc.
Viewers of the PointCast Network(R) will be able to customize searches of stocks
and mutual funds.
Standard & Poor's. The Company and Standard & Poor's ("S&P"), a division of
the McGraw-Hill companies, maintain 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. In 1998, the Company brought S&P's Daily
Dividend Record to the financial community via the Internet. Prior to this
service, the information was available only in printed form. No revenue was
recognized from this product in 1998.
Strategic Advisors, Inc. The Company maintains a multi-year contract with
Strategic Advisors, Inc (a subsidiary of Fidelity Investments) to provide the
database of financial information for the new guide to investing, The Stock Shop
with Peter Lynch(TM), 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.
Texas Galleria, Inc. In October 1998, the Company granted an exclusive
license for its ProSearch Alert Trading Service to Texas Galleria, Inc. to be
used on the trading platform called GroTrader Gold. The Company recognized a
licensing fee in 1998 from this agreement.
Time Inc. New Media. The Company and Time Inc. New Media have 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, is
responsible for sales and marketing. Telescan provides its financial database,
state-of-the-art financial analysis and research tools, web development and site
management. In December 1998, the Company reached an agreement with Time Inc.
New Media to provide customized investment information for Money magazine's
online website, Money.com. The initial scope of the project has broadened and is
currently being re-evaluated.
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Web Street Securities. In March 1998, the Company announced an exclusive
online trading brokerage alliance with Web Street Securities. Under this
sponsorship agreement, visitors to the Company's website, Wall Street City, have
access to real-time quotes and a direct link to Web Street Securities to execute
trades.
Non-Financial Services
Adweek Online. Adweek Online, a joint effort between the Company and BPI
Communications, L.P. ("BPI"), provides easily accessible information to the
advertising industry. It offers users access to full text news and articles from
Brandweek, Mediaweek and all six regional editions of Adweek magazine plus
instant access to other advertising industry information such as Accounts in
Review, Accounts Awarded, the Adweek Client/Brand Directory and details on
breaking campaigns. The full searchable database includes archives dating back
to January 1992, and is updated weekly. The site is supported by both
advertising and subscription revenues and is located at http://www.adweek.com.
Amusement Business. Amusement Business, a joint effort between the Company
and BPI, provides easily accessible information for the international live
entertainment and amusement industry. The site offers industry specific
information such as searchable classified ads and tour searches as well as the
latest industry news. The site is currently supported by advertising and
subscription revenue and is located at http://www.amusementbusiness.com.
Backstage Online. Backstage Online, a joint effort between the Company and
BPI, was launched in March of 1998 to provide easily accessible information for
the performing arts profession. The site offers full-text news and articles as
well as searchable databases including a two year news archive. Backstage Online
includes industry specific features such as casting information and performing
arts directories. The site is supported by both advertising and subscription
revenues and is located at http://www.backstage.com.
Billboard Online. Billboard Online, a joint effort of the Company and BPI,
is a global online network offering full-text news, articles and charts from the
current issue of Billboard magazine. The Internet site also offers full access
to Billboard magazine's vast electronic library of more than 20,000 charts in
all music genres dating back to 1983 and full text articles dating back to 1991.
Billboard Online is supported by both advertising and subscription revenues and
is located at http://www.billboard.com.
Hollywood Reporter Online. The Hollywood Reporter Online (THR Online(TM))
is a joint effort between the Company and BPI to develop and operate databases
serving the entertainment industry. It offers users access to the current and
archived issues of Hollywood Reporter magazine. In addition, the users have
access to film reviews and news articles relating to TV, film, and music, as
well as information on current events and industry developments. The Hollywood
Reporter Online service was launched in December 1996 and is supported by
advertising and subscription revenues. The site is located at
http://www.hollywoodreporter.com.
Knowledge Express Data Systems, L.C. Knowledge Express Data Systems, L.C.
("KE") is a limited liability company in which the Company holds the majority
controlling interest. KE combines its unique proprietary information resources
with commercially available information databases including Bioscan(R),
Corptech(R), PharmaVentures(TM) and MicroPatent(R), as well as others, into its
own easily searchable online database version. KE cost effectively offers
customers access to valid information resources that would be costly and time
consuming to research on an individual basis. The service is accessed by
business development and research professionals in the corporate and university
fields via multi-user annual site license contracts or monthly package
subscriptions. KE also generates revenue through website development, hosting
and online services with business partners focused in the corporate and
university fields. The site is located at http://www.knowledgeexpress.com.
PureBaseball. The Company has an agreement with Reality Sports Inc. to
jointly develop and operate a new online, interactive game, Pure Baseball,
designed for fantasy baseball enthusiasts. This new Internet league play game
became available in April 1998. The site is located at
http://www.purebaseball.com.
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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 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. In prior years, acquisition of databases typically
involved the payment by the Company of fixed, per use license fees and/or
royalties based on revenue received and/or some combination of user
subscriptions and actual database usage. The Company's current agreements with
many information providers require minimum payments with variable rates based
upon revenue. Such agreements will allow the Company lower royalty payments with
expected increased revenue. Information suppliers typically license access to
data on a multi-year or annual renewable basis, subject to termination by either
party upon no less than 90 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. 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 a monthly fee package based upon hourly 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 Internet and online services are
to increase the number of subscribers, sell additional products to existing
subscribers and 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, and Charles Schwab & Co., Inc. These marketing arrangements typically
require 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, Strategic Advisors, Inc. (a subsidiary of Fidelity Investments) and
Time Inc. New Media. In 1998, the Company signed agreements with Altair
Corporation (a subsidiary of Imperial Bank), Web Street Securities and Texas
Galleria Corporation.
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
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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, Equis,
Omega, Nirvana and Indigo.
Material Customers. There were no customers during 1998, 1997 or 1996 to
which sales exceeded 10% of total revenues.
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 Internet and online 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 47 employees who develop new
products and provide maintenance support for existing products. During the years
ended December 31, 1998, 1997 and 1996, the Company spent approximately
$2,519,000, $2,505,000 and $1,873,000, 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 and
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 was granted another patent in 1998 by the
U.S. Patent and Trademark Office for "Interactive systems for remotely creating,
editing and administering an online communication system for a plurality of
online service providers." 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
result in litigation or require the Company to enter into royalty arrangements.
Computer and Network Operations. The Company's data center computer system
consists of commonly available personal computer processors, disk storage
devices and telecommunications equipment, operated by a combination of Microsoft
Windows NT and a proprietary operating system. 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
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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 offices, 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, GTE and MCI WorldCom. 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 meet technological advances that may be necessary in order for its
technology to remain viable.
Competition. The Company competes with companies that operate proprietary
and/or Internet websites and online systems, 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 Internet and
online services 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 Internet and online services markets 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. The Company believes that its business strategy
of building marketing relationships with larger partners and expanding the range
of its Internet and online offerings may serve to lessen the impact of future
competitive pressures on the Company.
Employees. As of December 31, 1998, the Company had 146 full-time employees
with 47 in product development and maintenance; 24 in customer service; 24 in
sales and marketing; 23 in computer operations; and 28 in general management and
administration. None of the Company's employees are 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. The Company cannot predict the impact, if any, future
regulation may have on its business. While not currently regulated, there is a
possibility that the Company may become subject to laws governing investment
advisors or other securities professionals. Regulations in this area are complex
and ensuring compliance could cause a financial burden and become a time
consuming process. There is no assurance the Company could make the necessary
adjustments to achieve compliance.
Discontinued Operations Subsequently Retained. In February 1999, the
Company announced plans to forego the previously reported spin-off of its
non-financial business segment. Negotiations with a prospective buyer were
terminated. The Company determined that there was greater strategic value in
retaining and further developing certain operations within this segment.
35
<PAGE> 38
Accordingly, the financial statements have been reclassified to include
discontinued operations as continuing operations and the Company has applied the
guidelines of Emerging Issue Task Force 90-16 and Financial Accounting Standards
Board Statement No. 121. In applying these standards, the Company determined
that estimated future undiscounted cash flows were below the carrying value of
the long-lived assets. The Company adjusted the carrying value of the long-lived
assets, primarily software development costs and capitalized data, to their fair
market value resulting in a non-cash impairment loss of $1,530,000, which is
included in the Company's 1998 operating results. The non-financial segment
includes operations provided to the advertising, entertainment and publishing
industry through a third party alliance with BPI; Pure Baseball, an
Internet-based game designed for fantasy baseball enthusiasts under an agreement
with Reality Sports, Inc.; and KE, which provides multiple databases for the
biotechnology/pharmaceutical industry.
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 54,108 square
feet. KE maintains a marketing and administrative office of approximately 2,800
square feet in King of Prussia, Pennsylvania. The current monthly aggregate
rental for these facilities is approximately $58,000. The lease for Houston and
King of Prussia expire in 2007 and 2002, respectively. 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. In Houston, the
Company has a five-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.
The Company's principal executive officers are located at 5959 Corporate
Drive, Suite 2000, Houston, Texas, 77036 and its phone number is (281) 588-9700.
The Company has had no changes in or disagreements with accountants on
accounting or financial disclosure.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of April 23, 1999, unless
otherwise indicated, with respect to the number of shares of Telescan Common
Stock beneficially owned by (1) each director and/or named executive officer
individually, (2) all executive officers and directors of the Company as a
group, and (3) each stockholder known by the Company to be the beneficial owner
of more than 5% of the Telescan Common Stock. The number of shares is exclusive
of shares allocated to the person's account through the Company's
36
<PAGE> 39
401(k) plan. Except as noted below, each stockholder has sole voting and
investment power with respect to the shares shown.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OWNERS BENEFICIALLY OWNED % OF CLASS
- ------ ------------------ ----------
<S> <C> <C>
David L. Brown............................................ 947,491(1) 7.2
Dr. Richard K. Carlin..................................... 255,469(2) 2.0
Ronald Warren............................................. 27,806(3) *
Roger C. Wadsworth........................................ 122,889(4) *
Neil S. Waldman........................................... 4,116(5) *
Dr. Ronald W. Hart........................................ 53,750(6) *
Burt H. Keenan............................................ 74,750(7) *
William D. Savoy.......................................... 47,910(8) *
Stephen C. Wood........................................... 5,600 *
Russell I. Pillar......................................... 1,250(9) *
Roy T. Rimmer, Jr. ....................................... 1,500 *
Lacy J. Harber............................................ 2,027,300 15.9
Route 2, Box 49Y
Denison, Texas 75020
Paul G. Allen............................................. 1,290,000(10) 9.9
Vulcan Ventures Incorporated
110 110th Avenue N.E., Suite 685
Bellevue, WA 98004-5840
GE Capital Equity Investments, Inc........................ 1,220,237 9.4
120 Long Ridge Road
Stamford, Connecticut 06927
G. Robert Friedman........................................ 1,053,919 8.1
Friedman & Associates
Five Post Oak Park, Suite 1800
Houston, Texas 77027
All directors and executive officers
as a group (15 persons)................................. 1,564,006 12.2
</TABLE>
- ---------------
* Less than 1%.
(1) Includes 734,818 shares owned by the Brown Family Partnership. David L.
Brown has shared voting and investment power in the Brown Family
Partnership along with other family members who are not officers and/or
directors of the Company. Includes 171,238 shares owned by David L. Brown
personally. Also includes options to purchase 41,435 shares, which are
exercisable within the next sixty days.
(2) Includes options to purchase 39,693 shares which are exercisable within the
next sixty days.
(3) Includes options to purchase 12,416 shares which are exercisable within the
next sixty days.
(4) Includes options to purchase 18,821 shares which are exercisable within the
next sixty days.
(5) Includes options to purchase 4,116 shares which are exercisable within the
next sixty days.
(6) Includes options to purchase 24,750 shares which are exercisable within the
next sixty days.
(7) Includes options to purchase 59,750 shares which are exercisable within the
next sixty days.
(8) Includes options to purchase 17,910 shares which are exercisable within the
next sixty days.
(9) Includes options to purchase 1,250 shares which are exercisable within the
next sixty days.
(10) Vulcan is owned 100% by Paul G. Allen.
37
<PAGE> 40
SELECTED FINANCIAL DATA OF THE COMPANY
The selected consolidated financial data presented below for the five-year
period ended December 31, 1998, has been derived from the audited historical
consolidated financial statements of the Company as reclassified for retaining
the previously reported discontinued operations. The historical consolidated
financial data includes the results of acquired businesses from their dates of
acquisition. The selected data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company" and the Company's consolidated financial statements and the notes
thereto.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenue...................................... $15,542 $16,125 $13,756 $13,989 $10,477
Cost of services and products................ 9,152 8,756 8,549 7,769 6,489
Marketing, general & administrative.......... 9,240 7,458 8,403 7,143 6,425
Loss on writedown of impaired assets......... 1,530 -- -- -- --
Interest expense, net........................ 97 105 83 65 42
Minority interest in (income) loss of
subsidiary(1).............................. 142 409 345 (226) (152)
------- ------- ------- ------- -------
Income (loss) from continuing operations..... (4,335) 215 (2,934) (1,214) (2,631)
Income (loss) from discontinued operations... 19 (19) -- -- --
------- ------- ------- ------- -------
Net income (loss)............................ (4,316) 196 (2,934) (1,214) (2,631)
Preferred dividends including incremental
yield dividend............................. 138 -- -- -- --
------- ------- ------- ------- -------
Income (loss) available for common
stockholders............................... $(4,454) $ 196 $(2,934) $(1,214) $(2,631)
======= ======= ======= ======= =======
Income (loss) per common share from
continuing operations:
Basic...................................... $ (0.41) $ 0.02 $ (0.28) $ (0.12) $ (0.28)
Diluted.................................... $ (0.41) $ 0.02 $ (0.28) $ (0.12) $ (0.28)
Income (loss) per common share from
discontinued operations:
Basic...................................... $ -- $ -- $ -- $ -- $ --
Diluted.................................... $ -- $ -- $ -- $ -- $ --
Net income (loss)
Basic...................................... $ (0.40) $ 0.02 $ (0.28) $ (0.12) $ (0.28)
Diluted.................................... $ (0.40) $ 0.02 $ (0.28) $ (0.12) $ (0.28)
Weighted average shares outstanding:
Basic...................................... 11,039 10,766 10,615 9,777 9,480
Diluted.................................... 11,039 10,939 10,615 9,777 9,480
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $ 726 $ 744 $ 454 $ 2,143 $ 1,369
Total assets................................. 12,008 12,477 11,466 10,859 8,317
Total long-term obligations.................. 343 475 488 488 603
Total stockholders' equity................... 7,818 8,749 7,964 7,965 6,022
</TABLE>
- ---------------
(1) Reflects recognition of income and losses of Knowledge Express Data Systems,
L.C. of which the minority interest holder owns 44.42%. Losses in 1998,
which exceeded the minority stockholder's investment, were absorbed 100% by
the Company.
38
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
The following discussion should be read in conjunction with the Company's
financial statements and related notes, and the preceding "Selected Financial
Data of the Company".
RESULTS OF OPERATIONS
Overview. 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). 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. The Company's contract
revenue is generated from providing contract service to TeleBuild. The contract
services include developing, operating and maintaining online database systems
and providing administrative services.
The expansion of private label arrangements combined with the rapid growth
of the Internet is shifting the concentration of the Company's revenues away
from its more traditional base of online services accessed via modem. All of the
private label agreements the Company entered into in 1997 and 1998 are based on
the delivery of tools and content over the Internet. This emphasis contributed
to the 41% increase in Internet revenue from 1997 to 1998. 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 over 11 million
page impressions in the last quarter of 1998 reflects the growing significance
of Internet based revenue to the Company. The rise in page impressions
contributed to the nearly four-fold increase in advertising revenue.
The Company derives a significant amount of revenue from third parties for
licensing 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 and Standard & Poor's. In 1997, the Company continued
this expansion by signing agreements with Citibank, Time Inc. New Media and
Strategic Advisors, Inc. (a subsidiary of Fidelity Investments). In 1998, the
Company added agreements with Altair Corporation (a subsidiary of Imperial
Bank), Web Street Securities and Texas Galleria Corporation. The Company has
recognized upfront licensing fees from several major third party alliances.
However, the continuing revenue streams will be realized in future periods. The
success of future revenues shared between the alliance partner and the Company
is largely dependent upon marketing efforts by the third party.
The Company's commitment to concentrate efforts and resources on its core
Internet financial services operations contributed to the decline in product
revenues. In 1997 the Company introduced TIP@Wallstreet which allowed
Windows-based customers access to the Company's popular Wall Street City
website. Several software enhancements were released in 1998; however, no new
major software products were introduced in 1998. Costs associated with product
sales are variable in nature and include commissions, production, royalties and
distribution costs. Gross margins are impacted by the mix of in-house product
sales versus the sale of products subject to royalties. Cost of products as a
percentage of product sales was 50%, 45% and 61% in 1998, 1997 and 1996,
respectively. In periods with larger in-house product sales and no royalty
payments, the gross margins will be higher. Royalties on product sales in 1997
were significantly higher than 1998.
The Company's Internet and online cost of service expenses primarily
include communication expenses, royalties and data costs, customer service
expense and amortization of software development costs. Cost of service as a
percentage of service revenue was 64%, 61% and 67% for 1998, 1997 and 1996,
respectively. These percentages can vary significantly with the amount of
licensing fees recognized, which carries no associated costs.
39
<PAGE> 42
In the first quarter of 1999, the Company canceled plans to spin-off the
non-financial segment of the business. Management determined there was a greater
strategic value in developing Internet services for the non-financial industry.
The non-financial segment sustained losses of $1,558,000, $614,000 and $660,000
for years ended December 31, 1998, 1997 and 1996, respectively. The results for
1998 include an impairment loss of $1,530,000 without which the non-financial
segment showed a loss of $28,000. The significant improvement in results in 1998
contributed to management's decision to retain the non-financial segment. The
improvement in 1998 was primarily due to increased revenues from hosting BPI
websites, the addition of two new websites for BPI and higher advertising
revenues. In making the decision to retain the non-financial segment it was
determined that certain operations within the non-financial segment would not
produce future cash flows sufficient to recover recorded costs. Accordingly, the
assets were written down to fair market value in compliance with accounting
principles. The non-financial segment does not operate on a positive cash flow
but is currently expected to perform profitably by the end of the second quarter
of 1999. The Company is committed to devote the necessary capital resources and
personnel to accomplish this goal.
During the fourth quarter of 1998, the Company recorded additional non-cash
charges to the financial segment. These included $315,000 for increased
provision for doubtful accounts and $222,000 in other marketing and general and
administrative expenses.
Portions of certain license fees contracted for in the fourth quarter of
1998 were canceled in the first quarter of 1999 in accordance with the
cancellation provision. The non-canceled portion, which is being negotiated,
will be recognized in 1999.
In May 1998, the Company retained NationsBanc Montgomery Securities LLC to
assist the Company in exploring strategic alternatives to maximize stockholder
value. This agreement has been extended to include maximizing the value of the
non-financial operations.
In January 1999, the Company announced that General Electric's NBC unit, in
conjunction with its affiliate, GE Capital Equity Investments, Inc., jointly
purchased 1,220,237 shares or 9.9% of the Telescan Common Stock. In February
1999, the Company completed an agreement with NBC to license its technology and
portions of its investor content as well as provide hosting services.
1998 Compared to 1997
Revenues for the year ended December 31, 1998 decreased $583,000, or 4%,
compared to the same period in 1997 reflecting lower Company financial service
revenues and reduced product sales.
Service revenues for the year ended December 31, 1998 totaled $13,677,000
as compared to $13,296,000 in 1997. In 1998 the Company recognized revenues of
$1,927,000 from new licensing agreements as compared with $943,000 in 1997. The
increase in licensing revenue was offset by a decrease of $987,000 in revenues
from American Express. License fees for up to an additional $1,400,000 were
contracted for during the fourth quarter of 1998; however, a cancellation
provision will cause the non-canceled revenue to be recognized in 1999.
Advertising revenues were higher by $282,000, or 233%, for the year ended
December 31, 1998 as compared to the same period in 1997. The increase is
attributable to the growing popularity of the Company's Wall Street City
website. Non-financial revenue from the entertainment portion of the Company's
business and KE was $753,000 higher for the year ended December 31,1998 as
compared to the prior year. The improvements were primarily due to increased
revenue from the alliance with BPI and the introduction of two new websites by
BPI, which are hosted by Telescan. Online, or modem based, service revenue was
lower by $768,000 due to the Company's increased concentration in the Internet
arena. Fees earned from services provided to the discount brokerage business
fell $744,000 for the year ended December 31, 1998 as compared to the year ended
December 31, 1997. The majority of the discount brokerage business revenue is
online and is phasing out as the Internet continues to grow.
Product revenues fell $794,000, or 53%, from 1997 to 1998. In 1997 the
Company introduced a major new product, TIP@Wallstreet which allowed
Windows-based customers to access the Company's Wall Street City website. In
1998 the Company focused its resources on the Internet and enhanced existing
products.
40
<PAGE> 43
Contract revenue from affiliates was lower by $170,000 for the year ended
December 31, 1998 as compared to the year ended December 31, 1997 due to lower
sales to TeleBuild.
Cost of services was higher by $728,000, or 9%, for the year ended December
31, 1998 as compared to 1997. Data/royalty expenses were $841,000 higher in 1998
as compared to 1997 due to increased minimum payment requirements to data
suppliers. The Company has agreed to higher minimum payment requirements and
reduced variable costs with its data suppliers in contemplation of increased
revenues. Software development amortization increased $437,000 in 1998. These
increases were partially offset by communication costs, which were lower by
$356,000 due to reduced minimum payment requirements from two providers and
fewer online subscribers. Customer service expenses were lower by $123,000 due
to fewer customer service employees. Cost of sales for TeleBuild was $160,000
lower for 1998 as compared to 1997 due to reduced revenue. Cost of products was
$332,000 lower for the year ended December 31, 1998 as compared to the same
period in 1997. The 48% decrease in cost of products is attributable to the 53%
decrease in product sales.
Marketing expenses totaled $2,889,000 for the year ended December 31, 1998
as compared to $2,487,000 for the year ended December 31, 1997. The $402,000
increase is due primarily to a one-time charge to increase the bad debt reserve
of $315,000 which caused a $293,000 increase in bad debt expense. Another
one-time charge of $102,000 for commissions was incurred in 1998; however, this
was offset by lower salary expense. Advertising/sales promotion expenses were
higher by $234,000, or 38%, in 1998 as compared to 1997 due to increased
marketing campaigns in 1998.
General and administrative expenses were $1,380,000, or 28%, higher in 1998
as compared to 1997. Salary expense, net of capitalization, was $753,000 higher
in 1998 as compared to 1997 resulting from increased staffing levels to
accommodate the development requirements associated with new licensing
agreements. Legal expenses and settlement fees increased by $278,000 as a result
of settling all outstanding lawsuits involving the Company in 1998.
Depreciation/equipment rental was higher by $184,000. One-time non-cash charges
of $120,000 were charged in the last quarter of 1998.
1997 Compared to 1996
Revenue for the fiscal year ended December 31, 1997 increased $2,369,000,
or 17%, from 1996 primarily reflecting higher service revenues under private
label agreements and increased advertising revenue from the Company's Wall
Street City website.
Service revenues increased $2,223,000 from 1996 to 1997. Service revenues
resulting from the Company's alliance with American Express were $1,037,000
higher in 1997. License fees of $750,000 from Citibank and $216,000 from other
third party alliances were included in service revenue in 1997. Revenues from
Wall Street City rose by $500,000, of which $119,000 was attributable to
increased advertising revenues. Revenues from services provided to the discount
brokerage business rose by $1,349,000 from 1996 to 1997, but were offset by
lower Company online revenue of $1,197,000. Revenues from the non-financial
segment decreased $543,000 due mainly to the loss by KE of the Department of
Energy contract, which expired in March 1996.
Product revenues declined $441,000 due to the Company placing greater
emphasis on developing the Company's website in preference to online software
products. Contract revenue from affiliates was higher by $587,000, or 80%,
reflecting higher revenue from the Company's affiliate, TeleBuild.
Cost of services was higher by $706,000, or 10%, for the year ended
December 31, 1997 as compared to the year ended December 31, 1996. The major
contributors to the increase included higher amortization of software
development costs of $341,000, increased royalty/data costs of $254,000 and
increased costs of affiliate revenue of $610,000, partially offset by a $296,000
decrease in costs associated with the Department of Energy contract of $296,000
and communication costs of $92,000. Cost of products was lower by $499,000 from
1997 to 1996. Unprofitable seminars were eliminated which contributed $204,000
to the reduction. Lower costs were also the result of reduced product sales.
41
<PAGE> 44
Marketing expenses were $679,000, or 21%, lower for 1997 as compared to
1996. Salaries and related benefits, net of capitalization, were lower by
$388,000 from 1996 to 1997. Sales promotion expenses were reduced by $211,000
for the same time period.
General and administrative expenses decreased $266,000, or 5%, from 1996 to
1997. Salaries and related benefits, net of expenses capitalized as software
development costs, were $208,000 lower for the year ended December 31, 1997 as
compared to the same period in 1996. Legal, consulting fees and telephone
expenses allocated to general and administrative were all approximately $150,000
lower in 1997 as compared to 1996. These reductions were partially offset by
increased depreciation/equipment lease expense of $275,000.
Liquidity and Capital Resources. At December 31, 1998, the Company had cash
and cash equivalents aggregating $627,000, which represents a $478,000 decrease
from the prior year. Net cash used by operating activities was $736,000 for the
year ended December 31, 1998 compared to cash provided by operations of
$2,201,000 for the year ended December 31, 1997. This $2,937,000 decrease in
cash used by operations was primarily due to the loss of $4,473,000, which
included a non-cash charge of $1,530,000 for the impairment of assets.
The Company's primary capital needs are for (1) the continued investment in
technology through its software development activities and (2) the purchase of
computers and communications equipment. During the year ended December 31, 1998,
the Company invested $2,519,000 in software development costs and acquired
property and equipment totaling $590,000 (including equipment financed by
long-term leases). The Company estimates that it may invest an additional
$1,500,000 to $2,000,000 in capital expenditures over the next twelve months. A
large portion of the capital expenditure requirement will be used to support the
NBC license agreement. Costs incurred in connection with this license agreement
will be reimbursed by NBC.
The Company believes that cash on hand is sufficient to meet working
capital requirements. In May 1998, the Company issued 120,000 shares of 5%
Convertible Preferred Stock in exchange for $3,000,000. In January 1999, the
Company sold 9.9% of the Telescan Common Stock, or 1,220,237 shares, to General
Electric's NBC unit in conjunction with its affiliate, GE Capital Equity
Investments, Inc., for approximately $9,400,000.
A downturn in the equity markets could cause a reduction in revenue since
the number of subscribers tends to increase in an upward market. This 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 conditions would
be minimized by its alliances with third parties, which in some cases provide
for guaranteed minimum payments.
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.
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 has
organized a task force to address 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 course of upgrading
42
<PAGE> 45
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 is
currently testing its host system to ensure that it is Y2K compliant.
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 has compiled a
list of critical providers and vendors, which approximates 30, and is contacting
them to assess and monitor their compliance and remediation efforts. 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 scenarios by June 30, 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 worst case scenario should be developed by the Company no later
than the end of July 1999.
INFORMATION ABOUT INVESTOOLS
INVESTools licenses investment advisor content from proven money managers
and distributes it to individual investor via its Web site,
http://www.investools.com, using both free and paid subscription business
models. This advisory information is integrated with news, market data, third
party research, portfolio monitoring, electronic mail alerts, online discussion
boards and other interactive features to create a compelling online subscription
experience. INVESTools also uses its advanced technology infrastructure and
online sales process to provide relationship marketing and hosting services to
other financial content and service providers.
There is no active public trading market for INVESTools Common Stock, which
is traded infrequently in private transactions. INVESTools has no class of
securities registered under Section 12 of the Exchange Act of 1934, as amended,
(the "Exchange Act") and is not subject to the reporting requirements of
Sections 13(a) or 15(d) of the Exchange Act. INVESTools has never declared a
cash dividend on the INVESTools Common Stock. The shares of Telescan Common
Stock to be issued in connection with the Merger will be issued in a transaction
exempt from registration under the Securities Act of 1933, as amended, by reason
of Section 3(a)(10) thereof. The shares of Telescan Common Stock will be
qualified under California law, pursuant to Section 25121 thereof, after a
fairness hearing has been held pursuant to the authority granted by Section
25142 of such law. Information concerning the Merger meeting the requirements of
California law will be separately provided to the shareholders of INVESTools in
connection with the solicitation of proxies from such shareholders.
INVESTools was incorporated in California in 1994. INVESTools' principal
executive offices are located at 3698 Haven Avenue, Suite A, Redwood City,
California 94063, and its phone number is (650) 482-3050.
43
<PAGE> 46
SELECTED FINANCIAL DATA OF INVESTOOLS
The table set forth below presents selected historical financial data for
INVESTools since its inception on August 31, 1994. The information as of June
30, 1998 and 1997 are for fiscal years ended June 30, 1998 and June 30, 1997 is
derived from audited financial statements of INVESTools. The selected historical
financial data for the six-month periods ended December 31, 1998 and 1997, the
fiscal year ended June 30, 1996 and the ten-month period ended June 30, 1995 was
derived from the unaudited financial statements of INVESTools. In the opinion of
management, the unaudited financial statements include all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the financial data.
SELECTED FINANCIAL DATA OF INVESTOOLS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, YEARS ENDED JUNE 30, TEN-MONTH PERIOD
------------- ---------------------- ENDED
1998 1997 1998 1997 1996 JUNE 30, 1995
------ ---- ------ ------ ---- ----------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues............................. $1,059 $439 $1,456 $ 362 $ 28 $ --
Cost of revenues..................... 492 211 587 144 37 --
------ ---- ------ ------ ---- ----
Gross margin....................... 567 228 869 218 (9) --
Expenses:
Research and development........... 365 244 697 571 322 160
Sales and marketing................ 633 344 1,193 557 214 53
General and administrative......... 559 426 642 477 300 199
------ ---- ------ ------ ---- ----
Loss from operations................. 990 786 1,663 1,387 845 412
Interest expense, net................ 322 168 548 12 (13) (5)
Other (income), expense, net......... -- -- (47) (29) 24 (21)
------ ---- ------ ------ ---- ----
Net loss............................. $1,312 $954 $2,164 $1,370 $856 $386
====== ==== ====== ====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------- ------------------------------------
1998 1997 1998 1997 1996 1995
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital...................... $(2,286) $ (661) $(1,614) $ 162 $ (301) $ 541
Total assets......................... 932 2,009 1,393 701 207 674
Total long-term obligations.......... 3,965 3,118 3,418 2,993 1,000 1,000
Total shareholders' equity
(deficit).......................... (6,008) (3,534) (4,743) (2,581) (1,212) (356)
</TABLE>
44
<PAGE> 47
STATEMENT OF CASH FLOWS OF INVESTOOLS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------------------- ----------------
1996 1997 1998 1997 1998
----------- ------- ------- ------ -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(856) $(1,370) $(2,164) $ (954) $(1,312)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 36 77 114 49 64
Loss on disposal of fixed asset............ -- 1 1 -- --
Common stock issued for services
rendered................................. -- -- -- -- --
Equipment received in lieu of cash......... -- -- (22) -- --
Allowance for doubtful accounts............ -- 7 22 -- --
Issuance of warrants in conjunction with
debt..................................... -- -- 425 -- --
Change in assets and liabilities:.......... -- -- -- -- --
Accounts receivable...................... (11) (49) (180) 1 80
Other assets............................. 12 (28) (3) 3 --
Accounts payable......................... 21 43 73 56 269
Accrued expenses......................... 122 35 263 21 (50)
Deferred salaries........................ -- (90) -- -- --
----- ------- ------- ------ -------
Net cash used in operating
activities.......................... (676) (1,374) (1,471) (824) (949)
----- ------- ------- ------ -------
Cash flows from investing activities:
Purchase of property and equipment............ (35) (221) (113) (44) (18)
Proceeds from sale of fixed assets............ -- -- 3 -- --
----- ------- ------- ------ -------
Net cash used in investing
activities.......................... (35) (221) (110) (44) (18)
----- ------- ------- ------ -------
Cash flows from financing activities:
Proceeds from issuance of notes payable....... 245 100 2,000 -- --
Repayment of notes payable.................... -- (99) 105 -- --
Proceeds from equipment loan.................. -- 139 -- -- --
Repayment of equipment loan................... -- (8) (34) -- --
Proceeds from issuance of common stock upon
exercise of stock options.................. -- -- 2 -- --
Proceeds from issuance of preferred stock,
net........................................ -- 1,743 -- -- --
Proceeds from long-term debt.................. -- -- -- 2,059 38
Cash investment in business................... 1 -- -- 124 594
----- ------- ------- ------ -------
Net cash provided by financing
activities.......................... 246 1,875 2,073 2,183 632
----- ------- ------- ------ -------
Increase in cash and cash
equivalents......................... (465) 280 492 1,315 (335)
Cash and cash equivalents at beginning of
year.......................................... 580 115 395 395 887
----- ------- ------- ------ -------
Cash and cash equivalents at end of year........ $ 115 $ 395 $ 887 $1,710 $ 552
===== ======= ======= ====== =======
Supplemental disclosure of cash flow
information:
Cash paid during the year for taxes........... $ 1 $ 2 $ 1 $ 1 $ 1
===== ======= ======= ====== =======
Cash paid during the year for interest........ $ 3 $ 13 $ 17 $ 5 $ 11
===== ======= ======= ====== =======
Supplemental schedule of noncash investing and
financing activities:
Property and equipment acquired for
liability.................................. $ -- $ -- $ (23) $ -- $ --
===== ======= ======= ====== =======
Common and preferred stock and options issued
for services rendered...................... $ -- $ 1 $ -- $ -- $ 322
===== ======= ======= ====== =======
Conversion note payable for preferred stock... $ -- $ 250 $ -- $ -- $ --
===== ======= ======= ====== =======
Issuance of warrants in conjunction with
debt....................................... $ -- $ -- $ 425 $ -- $ 272
===== ======= ======= ====== =======
</TABLE>
45
<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF INVESTOOLS
The following discussion should be read in conjunction with the financial
statements of INVESTools and related notes, and the preceding "Selected
Financial Data of INVESTools."
RESULTS OF OPERATIONS
Overview. INVESTools operations are primarily related to developing and
maintaining its Web site for individual investors, www.investools.com, and
providing marketing, hosting and development services to other financial service
and content companies. Web site-related revenues consist primarily of content
sales to individuals and advertising sales to companies, most of which are
financial service providers. All revenues and operating expenses were derived
from these two areas of operations.
1998 Compared to 1997
Revenues for the fiscal year ended June 30, 1998 increased $1,093,490, or
302%, compared to the same period in fiscal 1997. The increase was due primarily
to increased sales to individuals of investment advisory subscription services.
Subscription sales growth was driven by the introduction of new services, higher
marketing expenditures and improved marketing efficiencies Revenue from
advertising grew substantially, due to an increase in the sales staff and
continued success of public relations efforts, which led to recognition of
INVESTools as a leading site by the financial press. Service revenue grew also
grew at a similar rate as INVESTools' subscription platform gained more
visibility with potential customers through direct sales efforts.
Cost of revenues for fiscal 1998 increased $442,715, or 306%, compared to
the same period in fiscal 1997 due to the increased sales volume. As a
percentage of revenues, cost of revenues remained relatively flat at 40%.
Research and development expenses for fiscal 1998 increased $126,070, or
22%, compared to the same period in 1997. The increase was due primarily to
increased headcount. As a percentage of revenues, research and development
expenses decreased from 158% to 48% due primarily to the substantial increase in
revenues from fiscal 1997 to fiscal 1998.
Sales and marketing expenses for fiscal 1998 increased $635,853, or 114%,
compared to the same period in 1997. The increase was due primarily to increases
in subscription promotions, including online banner advertising and electronic
mail sponsorships. As a percentage of revenues, sales and marketing expenses
decreased from 154% to 82% due primarily to the substantial increase in revenues
from fiscal 1997 to fiscal 1998.
General and administrative expenses for fiscal 1998 increased $165,362, or
35%, compared to the same period in 1997. The increase was due primarily to
additional headcount. As a percentage of revenues, general and administrative
expenses decreased from 132% to 44% due primarily to the substantial increase in
revenues from fiscal 1997 to fiscal 1998.
Interest expense for fiscal 1998 increased $536,312, or 4,475%, compared to
fiscal 1997, due to interest related to debt financing. Other income, net for
fiscal 1998 increased $18,787, or 62%, compared to the same period in 1997.
1997 Compared to 1996
Revenues for the fiscal year ended June 30, 1997 increased $333,619, or
1,167%, compared to the same period in fiscal 1996. The increase was due
primarily to increased sales to individuals of investment advisory subscription
services. This revenue increase reflects that fiscal 1997 was the first full
fiscal year of sales.
Cost of revenues for fiscal 1997 increased $107,040, or 286%, compared to
the same period in fiscal 1996, due to increased sales volume. As a percentage
of revenues, cost of revenues declined from 132% to 40%. The cost of revenues in
fiscal 1996 reflected start-up costs with certain content suppliers.
46
<PAGE> 49
Research and development expenses for fiscal 1997 increased $248,892, or
77%, compared to the same period in 1996. The increase was due primarily to an
increase in headcount. As a percentage of revenues, research and development
expenses decreased to 158% from 1,125% due primarily to the substantial increase
in revenues for fiscal 1997 compared to fiscal 1996.
Sales and marketing expenses for fiscal 1997 increased $362,879, or 169%,
compared to the same period in 1996. The increase was due primarily to increases
in subscription promotions, especially online banner advertising. As a
percentage of revenues, sales and marketing expenses decreased to 159% from 750%
due primarily to the substantial increase in revenues in fiscal 1997 from fiscal
1996.
General and administrative expenses for fiscal 1997 increased $176,452, or
59%, compared to the same period in 1996. The increase was due primarily to
additional headcount. As a percentage of revenues, general and administrative
expenses decreased to 132% from 1,050% due primarily to the substantial increase
in revenues in fiscal 1997 from fiscal 1996.
Interest expense for fiscal 1997 increased $25,219, compared to fiscal
1996, due to interest related to debt financing. Other income, net for fiscal
1997 increased $18,583, or 221%, compared to the same period in fiscal 1996.
Six Months Ended December 31, 1998 Compared to the Six Months Ended December
31, 1997
Revenues for the six months ended December 31, 1998 increased $620,228 or
141%, compared to the same period in fiscal 1997. The increase was due primarily
to increased sales to individuals of investment advisory subscription services.
Subscription sales growth was driven by the introduction of new services, higher
marketing expenditures and improved marketing efficiencies.
Cost of revenues for the six months ended December 31, 1998 increased
$281,964, or 134%, compared to the same period in fiscal 1997 due to the
increased sales volume. As a percentage of revenues, cost of revenues declined
from 48% to 47%.
Research and development expenses for the six months ended December 31,
1998 increased $120,440, or 49%, compared to the same period in 1997. The
increase was due primarily to increases in headcount. As a percentage of
revenues, research and development expenses decreased from 56% to 34% due
primarily to the substantial increase in revenues from fiscal 1997 to fiscal
1998.
Sales and marketing expenses for the six months ended December 31, 1998
increased $289,396, or 84%, compared to the same period in 1997. The increase
was due primarily to increases in subscription promotions, including online
banner advertising and electronic mail sponsorships. As a percentage of
revenues, sales and marketing expenses decreased from 78% to 60% due primarily
to the substantial increase in revenues for the six months ended December 31,
1997 compared to the same period in 1998.
General and administrative expenses for the six months ended December 31,
1998 increased $132,327, or 31%, compared to the same period in 1997. The
increase was due primarily to additional headcount. As a percentage of revenues,
general and administrative expenses decreased from 97% to 53% due primarily to
the substantial increase in revenues from the six months ended December 31, 1997
to the same period in 1998.
Interest expense for the six months ended December 31, 1998 increased
$154,745, or 92%, compared to fiscal 1997, due to warrants and interested
related to debt financing.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, INVESTools had $552,193 of cash and cash
equivalents, which represented a decrease of $1,159,461 from December 31, 1997.
Net cash used by operating activities was $1,991,401 for the year ending
December 31, 1998 as compared to $1,564,761 for the prior year. The $426,640
increase in cash used by operations was primarily due to the net loss of
$2,523,243, offset by non-cash expenses such as depreciation and amortization,
non cash compensation for employees, and accrued expenses. Net cash used by
investing activities was $117,159 for the year ending December 31, 1998, as
compared to $169,368 for the prior year. Substantially all of this amount was
spent on capital equipment purchases in both years. Net cash
47
<PAGE> 50
provided by financing activities was $949,099 for the year ending December 31,
1998, as compared to $2,235,074 in the prior year.
Although INVESTools sells its products worldwide, its revenues and
receivable collections are in U.S. currency. Therefore, currency fluctuations
have historically not had a significant impact on the INVESTools' net sales,
costs or profits.
YEAR 2000 READINESS
The potential problems referred to as "Year 2000" or "Y2K" result from
computer programs using only two digits rather than four to define the
applicable year. As a result, those computer programs have a time-sensitive
software that recognizes a date using "00" as the Year 1900. This could cause a
systems failure or miscalculations causing disruptions of operations and
internal systems. INVESTools has completed its assessment and evaluation of its
current internal systems for Y2K problems, and it has developed an action plan
which includes thorough testing of systems and the development of contingency
plans to address specific problems as they are identified. INVESTools is
currently implementing replacements and modifications for internal systems where
necessary. INVESTools expects that replacements and modifications necessary to
achieve Y2K compliance will be completed prior to December 31, 1999. The total
Year 2000 cost is not expected to be material to INVESTools' operation or
financial position; and INVESTools expects it will be able to complete all
phases of its Y2K compliance program with current staffing levels.
INVESTools Internet and online services are highly dependent upon outside
communication and third party data and content providers. INVESTOOLS has
compiled a lift of key providers and vendors, and is contracting them to assess
and monitor their compliance and remediation efforts. INVESTools 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 and content providers to be Y2K compliant. Such failure could require
INVESTools to incur unanticipated expenses to replace such outside communication
or third party data and content, if needed, to provide INVESTools' product and
services at expected levels, which action could have a material adverse effect
on INVESTOOLS' business, results of operations and financial condition.
INVESTOOLS anticipates receiving assessments of outside communication and third
party data and content providers by July 31, 1999, and plans to develop
contingency plans with respect to such third party Y2K matters by the end of
August 1999.
MATTERS TO BE PRESENTED
As of the date of this Proxy Statement, the only matter which management
intends to present, or is informed that others will present, for action at the
Special Meeting, is the amendment of the Company's Certificate of Incorporation.
If any other matters are presented to the meeting, the accompanying Proxy will
be voted in accordance with the best judgment of the Proxy holders.
STOCKHOLDER PROPOSALS
Any proposal of an eligible stockholder intended to be presented at the
Company's 1999 Annual Meeting must have been received in writing by the
Secretary of the Company on or before February 1, 1999, if the proposal is to be
considered by the Board of Directors for inclusion in the Company's proxy
material for that meeting.
ACCOUNTANTS
Representatives of Hein + Associates, LLP, the Company's principal
accountants, are not expected to attend the Special Meeting.
48
<PAGE> 51
EXPENSES OF SOLICITATION
The Company will bear the expense of preparing and mailing this Proxy
material, as well as the cost of any required solicitation. In addition to this
solicitation of Proxies, the officers, directors and regular employees of the
Company, without receiving any additional compensation therefor, may solicit
Proxies by mail, telephone, or personal contact. The Company will also request
stockholders, banks and other fiduciaries to forward Proxy material to their
principals or customers who are the beneficial owners of shares and will
reimburse them for reasonable out-of-pocket expenses incurred.
BY ORDER OF THE BOARD OF DIRECTORS
David L. Brown
Chairman of the Board and Chief
Executive Officer
May 10, 1999
Houston, Texas
49
<PAGE> 52
EXHIBIT A
AMENDMENT TO CERTIFICATE OF INCORPORATION
Set forth below is restated Article Fourth of Telescan, Inc.'s Certificate
of Incorporation:
FOURTH: The total number of shares of all classes of stock which the
corporation is authorized to issue is forty million (40,000,000) shares,
consisting of thirty million (30,000,000) shares of common stock with a par
value of $.01 each share, and ten million (10,000,000) shares of preferred
stock with a par value of $.01 each share. The holders of preferred stock
shall have such rights, preferences, and privileges as may be determined,
prior to the issuance of such shares, by the board of directors.
A-1
<PAGE> 53
EXHIBIT B
MERGER AGREEMENT
B-1
<PAGE> 54
AGREEMENT AND PLAN OF MERGER
By and Among
TELESCAN, INC.,
T ACQUISITION CORP.
and
INVESTOOLS, INC.
Dated as of April 25, 1999
B-2
<PAGE> 55
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I...................................................................... B-7
THE MERGER................................................................ B-7
Section The Merger..................................................
1.1 B-7
Section Closing Date................................................
1.2 B-7
Section Consummation of the Merger..................................
1.3 B-7
Section Effects of the Merger.......................................
1.4 B-8
Section Certificate of Incorporation; Bylaws........................
1.5 B-8
Section Directors and Officers......................................
1.6 B-8
Section Conversion of Securities; Exchange..........................
1.7 B-8
Section Escrow......................................................
1.8 B-10
Section Balance Sheet Adjustment....................................
1.9 B-11
Section Expenses; Adjustment........................................
1.10 B-12
Section Options and Warrants........................................
1.11 B-12
Section Exemption from Registration; California Permit..............
1.12 B-13
Section Stockholders' Representative................................
1.13 B-13
Section Taking of Necessary Action; Further Action..................
1.14 B-13
ARTICLE II..................................................................... B-14
REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................. B-14
Section Organization and Qualification..............................
2.1 B-14
Section Capitalization..............................................
2.2 B-14
Section Authority...................................................
2.3 B-14
Section No Violation................................................
2.4 B-14
Section Financial Statements........................................
2.5 B-15
Section Books and Records...........................................
2.6 B-15
Section Absence of Certain Changes..................................
2.7 B-16
Section Absence of Undisclosed Liabilities..........................
2.8 B-16
Section Receivables.................................................
2.9 B-17
Section Suppliers and Customers.....................................
2.10 B-17
Section Company's Indebtedness......................................
2.11 B-17
Section Litigation..................................................
2.12 B-17
Section Tax Matters.................................................
2.13 B-17
Section Employee Benefit Plans......................................
2.14 B-18
Section Employment Matters..........................................
2.15 B-20
Section Leases, Contracts and Agreements............................
2.16 B-20
Section Compliance with Laws........................................
2.17 B-20
Section Insurance...................................................
2.18 B-21
Section Intellectual Property.......................................
2.19 B-21
Section Environmental Matters.......................................
2.20 B-23
Section Regulatory Actions..........................................
2.21 B-24
Section Title to Properties; Encumbrances...........................
2.22 B-24
Section Condition and Sufficiency of Assets.........................
2.23 B-25
Section Brokers; Financial Advisors.................................
2.24 B-25
Section SEC Matters.................................................
2.25 B-25
Section Affiliated Transactions.....................................
2.26 B-25
Section Accounting Treatment........................................
2.27 B-25
Section Takeover Statutes...........................................
2.28 B-25
Section Representations Not Misleading..............................
2.29 B-25
</TABLE>
B-3
<PAGE> 56
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE III.................................................................... B-26
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND NEWCO..................... B-26
Section Organization and Qualification..............................
3.1 B-26
Section Capitalization..............................................
3.2 B-26
Section Authority...................................................
3.3 B-26
Section No Violation................................................
3.4 B-26
Section SEC Filings.................................................
3.5 B-27
Section Consents and Approvals......................................
3.6 B-27
Section Brokers; Financial Advisors.................................
3.7 B-27
Section Accounting Treatment........................................
3.8 B-28
ARTICLE IV..................................................................... B-28
OBLIGATIONS OF THE COMPANY PENDING CLOSING................................ B-28
Section Affirmative Covenants of the Company........................
4.1 B-28
Section Negative Covenants of the Company...........................
4.2 B-29
ARTICLE V...................................................................... B-30
ADDITIONAL AGREEMENTS..................................................... B-30
Section Access To, and Information Concerning, Properties and
5.1 Records..................................................... B-30
Section Preparation of Permit Application/Information Statement.....
5.2 B-30
Section Affiliate Letters...........................................
5.3 B-31
Section Miscellaneous Agreements and Consents.......................
5.4 B-31
Section Best Good Faith Efforts.....................................
5.5 B-31
Section Exclusivity.................................................
5.6 B-31
Section Public Announcement.........................................
5.7 B-32
Section Confidentiality.............................................
5.8 B-32
Section Exercise of Warrants........................................
5.9 B-32
Section Conversion of Preferred Stock...............................
5.10 B-32
Section Pooling Accounting..........................................
5.11 B-32
Section 368(a) Reorganization.......................................
5.12 B-32
Section Blue Sky Laws...............................................
5.13 B-32
Section Indemnification of Officers and Directors...................
5.14 B-32
Section Employee Benefits...........................................
5.15 B-33
ARTICLE VI..................................................................... B-33
CONDITIONS TO CLOSING..................................................... B-33
Section Conditions to Each Party's Obligation to Close..............
6.1 B-33
Section Conditions to the Obligations of Purchaser to Close.........
6.2 B-33
Section Conditions to the Obligations of the Company to Close.......
6.3 B-35
ARTICLE VII.................................................................... B-36
TERMINATION; AMENDMENT; WAIVER............................................ B-36
Section Termination.................................................
7.1 B-36
Section Effect of Termination.......................................
7.2 B-36
Section Amendment...................................................
7.3 B-36
Section Extension; Waiver...........................................
7.4 B-36
ARTICLE VIII................................................................... B-37
SURVIVAL OF REPRESENTATIONS AND WARRANTIES................................ B-37
Section Survival of Representations and Warranties..................
8.1 B-37
</TABLE>
B-4
<PAGE> 57
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE IX..................................................................... B-37
INDEMNIFICATION........................................................... B-37
Section Indemnification by the Company and the Stockholders.........
9.1 B-37
Section Indemnification by Purchaser................................
9.2 B-37
Section Notice and Defense of Third Party Claims....................
9.3 B-38
Section Limitations.................................................
9.4 B-38
Section Inconsistent Provisions.....................................
9.5 B-39
Section Arbitration.................................................
9.6 B-39
ARTICLE X...................................................................... B-40
MISCELLANEOUS............................................................. B-40
Section Entire Agreement............................................
10.1 B-40
Section Assignment..................................................
10.2 B-40
Section Further Assurances..........................................
10.3 B-40
Section Enforcement of the Agreement................................
10.4 B-40
Section Severability................................................
10.5 B-40
Section Notices.....................................................
10.6 B-41
Section Governing Law...............................................
10.7 B-41
Section Gender; "Including" is Not Limiting; Descriptive Headings...
10.8 B-41
Section Parties in Interest.........................................
10.9 B-41
Section Counterparts................................................
10.10 B-41
Section Incorporation by Reference..................................
10.11 B-42
Section Jurisdiction and Venue......................................
10.12 B-42
Section Certain Definitions.........................................
10.13 B-42
</TABLE>
B-5
<PAGE> 58
EXHIBITS
<TABLE>
<S> <C>
Exhibit A -- Adjustment Example
Exhibit B -- Form of General Liability Escrow Agreement
Exhibit B-2 -- Form of Specific Liability Escrow Agreement
Exhibit C -- Form Employment Agreement
Exhibit D-1 -- Form of Stockholder Letter
Exhibit D-2 -- Form of Affiliate Letter
Exhibit E -- Form of Opinion of Counsel to the Company
Exhibit F -- Form of Opinion of Counsel to Purchaser
Exhibit G -- Environmental Laws
LIST OF SCHEDULES
Schedule 1.7 -- Allocation of Purchaser Common Stock
Schedule 2.1 -- Organization and Qualification
Schedule 2.2 -- Capitalization; List of Equity Ownership
Schedule 2.4 -- No Violation
Schedule 2.5 -- Financial Statements
Schedule 2.7 -- Absence of Certain Changes
Schedule 2.8 -- Absence of Undisclosed Liabilities
Schedule 2.10(a) -- Suppliers
Schedule 2.10(b) -- Customers
Schedule 2.12 -- Litigation
Schedule 2.13 -- Tax Matters
Schedule 2.14 -- Employee Benefit Matters
Schedule 2.15 -- Employment Matters
Schedule 2.16 -- Leases, Contracts and Agreements
Schedule 2.17 -- Compliance with Laws
Schedule 2.18 -- Insurance
Schedule 2.19 -- Intellectual Property
Schedule 2.20 -- Environmental Matters
Schedule 2.21 -- Regulatory Actions
Schedule 2.22 -- Title to Properties; Encumbrances
Schedule 2.23 -- Condition and Sufficiency of Assets
Schedule 2.24 -- Financial Advisor
Schedule 3.4 -- No Violation
Schedule 3.6 -- Absence of Certain Changes
Schedule 3.7 -- Brokers; Financial Advisors
Schedule 4.1(i) -- List of Accounts and Safe Deposit Boxes
Schedule 4.1(j) -- List of Liabilities and Obligations of the Company
</TABLE>
B-6
<PAGE> 59
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is dated as of April
25, 1999, by and among Telescan, Inc., a Delaware corporation (the "Purchaser"),
T Acquisition Corp., a California corporation ("Newco"), and INVESTools, Inc., a
California corporation (the "Company").
RECITALS
WHEREAS, Purchaser desires to acquire the Company in the manner provided in
this Agreement;
WHEREAS, Purchaser and the Company believe that the merger of Newco with
and into the Company (the "Merger"), in the manner provided by, and subject to
the terms and conditions set forth in this Agreement and all exhibits, schedules
and supplements hereto, is desirable and in the best interests of their
respective corporations and stockholders;
WHEREAS, subject to and in accordance with the terms and conditions of this
Agreement, the respective Boards of Directors of Purchaser, Newco and the
Company, have approved the Merger, whereby each issued and outstanding share of
Company capital stock, will be converted into the right to receive Purchaser
common stock, par value $0.01 per share ("Purchaser Common Stock") as provided
herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Tax Code"), and the
parties intend, by executing this Agreement, to adopt a plan of reorganization
within the meaning of Tax Code Section 368(a); and
WHEREAS, the parties hereto desire to set forth certain representations,
warranties and covenants made by each to the other as an inducement to the
consummation of the Merger;
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties and covenants contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Subject to and in accordance with the terms and
conditions of this Agreement and in accordance the California General
Corporation Law (the "CGCL"), at the Effective Time (as defined in Section 1.3),
Newco shall be merged with and into the Company. As a result of the Merger, the
separate corporate existence of Newco shall cease and the Company shall continue
as the surviving corporation (sometimes referred to herein as the "Surviving
Corporation").
SECTION 1.2 CLOSING DATE. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Locke Liddell
& Sapp LLP, 3400 Chase Tower, 600 Travis, Houston, Texas 77002, at such time and
on such date as the parties shall mutually agree and as soon as practicable
after the satisfaction or waiver of the conditions set forth in Article VI;
provided, that the closing conditions set forth in Article VI shall have been
satisfied or waived at or prior to such time and further provided, that the
parties hereto agree to use their reasonable best efforts to consummate the
Closing provided for in this Agreement on or before May 31, 1999. Subject to the
provisions of Article VII hereof, failure to consummate the Closing provided for
in this Agreement on the date and time and at the place determined pursuant to
this Section 1.2 shall not result in the termination of this Agreement and shall
not relieve any parties to this Agreement of any obligation hereunder. For
purposes of this Agreement, the date on which the Closing actually occurs is the
"Closing Date."
SECTION 1.3 CONSUMMATION OF THE MERGER. As soon as practicable on the
Closing Date, the parties hereto will cause the Merger to be consummated by
filing this Agreement and an Officer's Certificate with the California Secretary
of State and such other required documents in such forms as required by and
executed in
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accordance with the relevant provisions of the CGCL. The "Effective Time" of the
Merger as that term is used in this Agreement shall mean the latest date on
which the certificate of merger is filed with respect to the Merger, or such
other effective time as may be specified therein.
SECTION 1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in the applicable provisions of the CGCL. Without limiting the generality
of the foregoing and subject thereto, at the Effective Time, all property,
rights, privileges, powers, and franchises of the Company and Newco shall vest
in the Surviving Corporation, and all debts and liabilities and duties of the
Company shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.5 CERTIFICATE OF INCORPORATION; BYLAWS. The Certificate of
Incorporation of Newco, as in effect immediately prior to the Effective Time,
shall be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended, except that Article I of the Certificate shall be amended to
provide that the name of the Surviving Corporation is "INVESTools, Inc." The
Bylaws of Newco, as in effect immediately prior to the Effective Time, shall be
the Bylaws of the Surviving Corporation until thereafter amended.
SECTION 1.6 DIRECTORS AND OFFICERS. The directors and officers of Newco
immediately prior to the Effective Time shall be the initial directors and
officers of the Surviving Corporation, each to hold office in accordance with
the Certificate of Incorporation and Bylaws of the Surviving Corporation until
their respective successors are duly elected or appointed and qualified.
SECTION 1.7 CONVERSION OF SECURITIES; EXCHANGE. Subject to the terms and
conditions of this Agreement, at the Effective Time, by virtue of the Merger and
without any action on the part of the parties hereto:
(a) Each share of the Company's common stock, par value $0.001 per share
("Company Common Stock") issued and outstanding immediately prior to the
Effective Time shall be converted, subject to the provisions of this Section 1.7
and the escrow provisions set forth in Section 1.8 below, into the right to
receive a validly issued, fully paid and nonassessable share of Purchaser Common
Stock in a ratio ("Exchange Ratio") equal to 2,400,000 divided by the number of
shares of Company Common Stock issued and outstanding at the Effective Time on a
fully diluted basis.
(i) For purposes of this Section 1.7(a), the term "fully diluted
basis" shall mean that all outstanding Company Options (as hereinafter
defined) and Company Warrants (as hereinafter defined) shall have been
exercised in full, and all shares of Company Preferred Stock shall have
been converted into shares of Company Common Stock. Attached hereto as
Schedule 1.7 is a list prepared by the Company which sets forth all holders
of Company Common Stock and the number of shares of Purchaser Common Stock
that each will receive upon consummation of the Merger (without regard to
the number of shares to be held in escrow pursuant to the General Liability
Escrow Agreement and the Specific Liability Escrow Agreement) presuming
that (i) there is no adjustment to the Exchange Ratio, (ii) all Company
Options and Company Warrants have been exercised in full prior to the
Effective Time, and (iii) all Company Preferred Stock has been converted to
shares of Company Common Stock prior to the Effective Time.
(ii) Notwithstanding the foregoing, in the event that there are
unexercised Company Options as of the Effective Time, Purchaser shall
assume such Company Options pursuant to Section 1.11, and the holders of
such Company Options shall not be entitled to receive shares of Purchaser
Common Stock upon consummation of the Merger in exchange for the
unexercised portions thereof. The fact that there are unexercised Company
Options as of the Effective Time shall have no effect on the Exchange Ratio
(it being the intent of the parties that the aggregate number of shares of
Purchaser Common Stock issued in connection with the Merger be reduced on a
share for share basis by the number of shares of Purchaser Common Stock
that Purchaser may be required to issue upon exercise of such options).
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(b) As set forth below, the Exchange Ratio is subject to adjustment to the
extent the Average Stock Price (as hereinafter defined) is greater than $20 per
share ("Ceiling Price"), and this Agreement is subject to termination by the
Company to the extent the Average Stock Price is less than $10 per share.
(i) In the event the Average Stock Price is greater than the Ceiling
Price, the Exchange Ratio shall be adjusted by multiplying the Exchange
Ratio by the following fraction: (A) the numerator shall be equal to (i)
the Ceiling Price plus (ii) 50% of the excess of the Average Stock Price
over the Ceiling Price, and (B) the denominator shall be the Average Stock
Price. Notwithstanding anything herein to the contrary, the minimum number
of shares of Purchaser Common Stock issuable in connection with the Merger
shall be 2,000,000 (less the number of shares of Purchaser Common Stock
that may be issued upon the exercise of Company Options assumed by
Purchaser pursuant to Section 1.11 hereof), and the Exchange Ratio shall
not be adjusted below a level that would provide for the issuance of less
than such number of shares. An example of the calculation of the adjustment
to the Exchange Ratio is set forth on Exhibit A hereto.
(ii) In the event the Average Stock Price is less than $10 per share,
the Company shall have the right, in its sole discretion, to terminate this
Agreement pursuant to Section 7.1(c)(3) hereof; provided, however, that
there shall be no adjustment to the Exchange Ratio if the Average Stock
Price is less than $10 per share and Company does not exercise its right to
terminate this Agreement pursuant to Section 7.1(c)(3).
(iii) For purposes of this Agreement, the term "Average Stock Price"
means the average of the Daily Per Share Prices (as hereinafter defined)
for the ten (10) consecutive trading days ending on the day immediately
prior to the Closing Date. For purposes of this Agreement, the term "Daily
Per Share Price" for any trading day means the closing prices on the Nasdaq
Small Cap Market System of Purchaser Common Stock (as reported in the Wall
Street Journal) for that day.
(c) In addition to any adjustment set forth above, the Exchange Ratio shall
be appropriately adjusted to reflect fully the effect of any stock split,
reverse stock split, stock dividend (including any dividend or distribution of
securities convertible into Purchaser Common Stock), reorganization,
recapitalization or other like change with respect to Purchaser Common Stock
occurring after the date hereof and prior to the Effective Time.
(d) At the Effective Time, each share of common stock of Newco issued and
outstanding immediately prior to the Effective Time shall be converted into and
exchanged for one validly issued, fully paid and nonassessable share of common
stock, par value $0.001 per share, of the Surviving Corporation. Each stock
certificate of Newco evidencing ownership of any such shares shall continue to
evidence ownership of such shares of capital stock of Surviving Corporation.
(e) Each share of Company Common Stock held in the treasury of Company
immediately prior to the Effective Time, by virtue of the Merger and without any
action on the part of the holder thereof, shall cease to be outstanding, be
canceled and retired without payment of any consideration therefor and cease to
exist.
(f) Notwithstanding any provision of this Agreement to the contrary, shares
of Company Common Stock that are outstanding immediately prior to the Effective
Time and which are held by Stockholders who shall have not voted in favor of the
Merger and who shall have demanded properly in writing payment of the fair
market value of such shares of Company capital stock in accordance with Chapter
13 of the CGCL (collectively the "Dissenting Shares") shall not be converted
into or represent the right to receive shares of Purchaser Common Stock as
provided hereunder. Such Stockholders shall be entitled to receive payment of
the fair market value of such shares of Company Common Stock held by them in
accordance with the provisions of such Chapter 13, except that all Dissenting
Shares held by Stockholders who shall have failed to perfect or who effectively
shall have withdrawn or lost their rights to appraisal of such shares under such
Chapter 13 shall thereupon be deemed to have been converted into and to have
become exchangeable for the right to receive Purchaser Common Stock as provided
herein, upon surrender, in the manner provided in Section 1.7(g) of the
certificate or certificates that formerly evidenced such shares of Company
capital stock.
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The Company shall give Purchaser (i) prompt notice of any demands for appraisal
received by the Company, withdrawals of such demands, and any other instruments
served pursuant to the CGCL and received by the Company and (ii) the opportunity
to direct all negotiations and proceedings with respect to demands for payment
of fair market value under the CGCL. The Company shall not, except with the
prior written consent of Purchaser, make any payment with respect to any such
demands or offer to settle or settle any such demands.
(g) Each Stockholder shall be entitled, upon surrender thereof to the
transfer agent for Purchaser Common Stock, to receive in exchange therefor a
certificate or certificates representing the number of whole shares of Purchaser
Common Stock into which the Company Common Stock so surrendered shall have been
converted as aforesaid, in such denominations and registered in such names as
the Stockholder may request. Until so surrendered, each outstanding certificate
that prior to the Effective Time represented Company Common Stock shall be
deemed from and after the Effective Time to evidence the right to receive that
number of full shares of Purchaser Common Stock into which such Company Common
Stock shall have been converted pursuant to this Section. Unless and until any
such outstanding certificates shall be surrendered, no dividends or other
distributions payable to the holders of Purchaser Common Stock, as of any time
on or after the Effective Time, shall be paid to the holders of such outstanding
certificates which prior to the Effective Time represented Company Common Stock;
provided, however, that upon surrender and exchange of such outstanding
certificates, there shall be paid to the record holders of the certificates
issued and exchanged therefor the amount, without interest thereon, of dividends
and other distributions, if any, that theretofore were declared and became
payable since the Effective Time with respect to the number of full shares of
Purchaser Common Stock issued to such holders. The Purchaser shall use
commercially reasonable efforts to promptly make available to its transfer agent
the shares of Purchaser Common Stock issuable to the Stockholders hereunder in
exchange for shares of Company Common Stock (less amounts of Purchaser Common
Stock deposited into escrow pursuant to Section 1.8 hereof).
(h) If any certificate for shares of Purchaser Common Stock is to be issued
in a name other than that in which the certificate surrendered in exchange
therefor is registered, it shall be a condition of the issuance thereof that the
certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange shall have paid
to Purchaser or its transfer agent any transfer or other taxes required by
reason of the issuance of a certificate for shares of Purchaser Common Stock in
any name other than that of the registered holder of the certificate
surrendered, or established to the satisfaction of Purchaser or its transfer
agent that such tax has been paid or is not payable.
(i) No fraction of a share of Purchaser Common Stock shall be issued, but
in lieu thereof, each Stockholder who would otherwise be entitled to a fraction
of a share of Purchaser Common Stock shall, upon surrender of the shares of
Company Common Stock to the transfer agent for Purchaser, be paid an amount in
cash (without interest) equal to the value of such fraction of a share based
upon the Average Stock Price.
(j) All shares of Purchaser Common Stock into which the Company Common
Stock shall have been converted pursuant to this Section shall be issued in full
satisfaction of all rights pertaining to such converted Company Common Stock.
SECTION 1.8 ESCROW.
(a) Notwithstanding anything in Section 1.7 to the contrary, pursuant to
the terms of an escrow agreement, in the form attached hereto as Exhibit B-1(the
"General Liability Escrow Agreement"), Purchaser shall deposit into an escrow
account, until the expiration of the Survival Period (as hereinafter defined),
ten percent (10%) of the Adjusted Aggregate Merger Consideration (as defined in
Section 10.13) ("General Liability Escrow Shares"). The portion of the General
Liability Escrow Shares contributed into such escrow fund on behalf of each
Stockholder shall be in proportion to the aggregate number of shares of
Purchaser Common Stock which such Stockholder would otherwise be entitled to
receive under Section 1.7 hereof without regard to this Section 1.8(a). To the
extent that the number of General Liability Escrow Shares are reduced hereunder,
such shares shall be deemed retained by Purchaser, and on the expiration of the
Survival Period (unless there is a dispute regarding such shares as addressed in
the General Liability Escrow Agreement), the escrow agent shall return such
shares to Purchaser, together with appropriate supporting
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documentation. On the expiration of the Survival Period (unless there is a
dispute regarding such shares as addressed in the General Liability Escrow
Agreement), the escrow agent shall deliver any remaining General Liability
Escrow Shares, as adjusted pursuant hereto, to the Stockholders' Representative
(as defined in Section 1.11), together with appropriate supporting
documentation. The number of General Liability Escrow Shares hereunder shall be
reduced by (i) any Balance Sheet Adjustment Shares (as defined in Section 1.9),
(ii) any Expense Adjustment Shares (as defined in Section 1.10), and (iii) an
amount equal to any other liability of the Company and/or the Stockholders to
Purchaser and/or the Surviving Corporation hereunder divided by the Average
Stock Price. Any reduction to the number of General Liability Escrow Shares
shall be deducted proportionately from the Stockholders based on the number of
shares deposited on behalf of each such Stockholder as compared to the aggregate
number of shares held in such escrow account.
(b) Notwithstanding anything in Section 1.7 to the contrary, pursuant to
the terms of an escrow agreement, in the form attached hereto as Exhibit B-2(the
"Specific Liability Escrow Agreement"), Purchaser shall deposit into an escrow
account a number of shares of Purchaser Common Stock equal to 150,000 multiplied
by the Exchange Ratio ("Specific Liability Escrow Shares"), which shall be held
to satisfy any liability which may arise due to the specific liability described
in Section 2.2 of the Company's Disclosure Schedule (the "Specific Liability").
The portion of the Specific Liability Escrow Shares contributed into such escrow
fund on behalf of each Stockholder shall be in proportion to the aggregate
number of shares of Purchaser Common Stock which such Stockholder would
otherwise be entitled to receive under Section 1.7 hereof without regard to this
Section 1.8(b). The Specific Liability Escrow Shares shall be held in the escrow
account until the earlier to occur of (i) a court of competent jurisdiction
shall have found the Company or Purchaser liable with respect to the Specific
Liability and shall have ordered that all or a portion of Specific Liability
Escrow Shares be distributed to satisfy such liability, (ii) the Specific
Liability shall have been resolved and settled in the form of a written
agreement, in form and substance reasonably acceptable to Purchaser and the
Stockholders' Representative, which shall include a full and final release of
Purchaser, the Company and their affiliates, or (iii) Purchaser receives the
written opinion of counsel to the Stockholders, in form and substance reasonably
acceptable to Purchaser, that all applicable statutes of limitations with
respect to the Specific Liability have expired and that no person may bring a
valid claim against Purchaser, the Company or their affiliates with respect to
such Specific Liability (each, a "Resolution Event"). To the extent that all or
a portion of the Specific Liability Escrow Shares are required to be distributed
to a third party upon a Resolution Event, such shares shall be distributed to
such third party pursuant to the mutual written instructions from Purchaser and
the Stockholders' Representative, which instructions shall be delivered to the
escrow agent promptly after such Resolution Event. Conversely, to the extent
that all or a portion of the Specific Liability Escrow Shares are not required
to be distributed to a third party upon a Resolution Event, such shares shall be
distributed to the Stockholders pursuant to the mutual written instructions from
Purchaser and the Stockholders' Representative, which instructions shall be
delivered to the escrow agent promptly after such Resolution Event. Any
reduction to the number of Specific Liability Escrow Shares shall be deducted
proportionately from the Stockholders based on the number of shares deposited on
behalf of each such Stockholder as compared to the aggregate number of shares
held in the escrow account.
SECTION 1.9 BALANCE SHEET ADJUSTMENT.
(a) To the extent that (i) there is a net decrease in net working capital
and/or retained earnings, and/or a net increase in long-term indebtedness, of
the Company from the Balance Sheet Date (as defined in Section 2.7) through the
Effective Time, and (ii) the aggregate amount of such net decreases in net
working capital and/or retained earnings, and/or net increase in long-term
indebtedness (collectively, the "Balance Sheet Adjustment"), exceeds $100,000,
then the aggregate number of shares of Purchaser Common Stock to be received by
the Stockholders shall be decreased by an amount equal to the Balance Sheet
Adjustment (without consideration of the $100,000 threshold) divided by the
Average Stock Price ("Balance Sheet Adjustment Shares"). Notwithstanding
anything in the preceding sentence to the contrary, for purposes of calculating
the Balance Sheet Adjustment, any net increase in net working capital may be
used to offset a net increase in long-term indebtedness, and any net decrease in
long-term indebtedness may be used to offset a net decrease in net working
capital. There shall be no upward adjustment to the number of shares of
Purchaser Common Stock based on this Section 1.9. For purposes of this Section
1.9, the terms "net working capital",
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"retained earnings" and "long-term indebtedness" shall be defined in accordance
with GAAP, and shall be based on the balance sheet of the Company as of the
Effective Time (the "Effective Date Balance Sheet"), prepared as provided below.
(b) As promptly as practicable, but not more than ninety (90) days, after
the Effective Time, Surviving Corporation shall cause to be prepared and
delivered to the Stockholders' Representative (as hereinafter defined) the
Effective Date Balance Sheet. The Effective Date Balance Sheet shall be prepared
in accordance with generally accepted accounting principles consistently
applied, and consistent with the standards and practices applied by the Company
to prepare its February 28, 1999 audited financial statements, by Surviving
Corporation. Such Effective Date Balance Sheet shall exclude all Company
Expenses (as hereinafter defined). Surviving Corporation shall provide the
Stockholders' Representative and his accountants, attorneys and advisors with
access to copies of all work papers and other relevant documents to
Stockholders' Representative. The Stockholders' Representative shall have a
period of thirty (30) days after delivery to him of the Effective Date Balance
Sheet, and related work papers and documents, to review such documents and to
make objections he may have in writing to Surviving Corporation. If written
objections to the Effective Date Balance Sheet are delivered to the Surviving
Corporation within such thirty (30) day period, then Surviving Corporation and
the Stockholders' Representative shall use reasonable efforts to resolve the
matter or matters in dispute. If no written objections are made within the time
period provided above, the Effective Date Balance Sheet shall be deemed accepted
by the Stockholders and shall be final and binding.
(c) If disputes with respect to the Effective Date Balance Sheet cannot be
resolved by Surviving Corporation and the Stockholders' Representative within
thirty (30) days after the delivery of the objections to the Effective Date
Balance Sheet, then the specific matters in dispute shall be submitted to such
independent accounting firm as may be approved by Surviving Corporation and the
Stockholders' Representative, which firm shall render its opinion only as to
such matters. Based on such opinion, that accounting firm will send to Surviving
Corporation and the Stockholders' Representative its determination on the
specific matters in dispute, and its calculation of the Balance Sheet
Adjustment, which determination shall be final and binding on the parties. The
fees and expenses of the independent accounting firm appointed hereunder shall
be borne 50% by the Surviving Corporation and 50% by the Stockholders.
SECTION 1.10 EXPENSES; ADJUSTMENT. In the event that the Merger is not
consummated and this Agreement is terminated pursuant to Article VII hereof,
each party will bear its own costs and expenses incurred in connection with the
transactions contemplated hereby (including, without limitation, all legal,
accounting and advisory fees). If, however, the Merger is consummated, Purchaser
will bear its own costs and expenses incurred in connection therewith, and the
Surviving Corporation will bear such costs and expenses of the Company and the
Stockholders ("Company Expenses"). Notwithstanding the foregoing, if the Company
Expenses exceed $1,400,000 in the aggregate, then the aggregate number of shares
of Purchaser Common Stock to be received by the Stockholders shall be decreased
by an amount equal to such excess divided by the Average Stock Price ("Expense
Adjustment Shares"). The Expense Adjustment Shares shall be deducted from the
Escrow Shares as provided in Section 1.8 above.
SECTION 1.11 OPTIONS AND WARRANTS.
(a) As of the Effective Time, all options to purchase shares of Company
Common Stock issued by the Company pursuant to its stock option plans or
otherwise ("Company Options"), whether vested or unvested, shall be assumed by
Purchaser. Immediately after the Effective Time, each Company Option
outstanding, immediately prior to the Effective Time, shall be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Company Option at the Effective Time, such number of
shares of Purchaser Common Stock as is equal to the number of shares of Company
Common Stock subject to the unexercised portion of such Company Option
multiplied by the Exchange Ratio (with any fraction resulting from such
multiplication to be rounded down to the nearest whole number). The exercise
price per share of each such assumed Company Option shall be equal to the
exercise price of such Company Option immediately prior to the Effective Time,
divided by the Exchange Ratio. The term, exercisability, vesting schedule,
status as an "incentive stock option" under Section 422 of the Tax Code, if
applicable, and all of the other terms of the Company Options shall otherwise
remain unchanged.
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(b) As soon as practicable after the Effective Time, Purchaser or the
Surviving Corporation shall deliver to the holders of Company Options
appropriate notices setting forth such holders' rights pursuant to such Company
Options, as amended by this Section 1.11, and the agreements evidencing such
Options shall continue in effect on the same terms and conditions (subject to
the amendments provided for herein).
(c) Purchaser shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Purchaser Common Stock for delivery
upon exercise of the Company Options assumed in accordance with this Section
1.11. As soon as practicable after the Effective Time, Purchaser shall file a
Registration Statement on Form S-8 (or any successor form) under the Securities
Act of 1933 (as amended, the "Securities Act") with respect to all shares of
Purchaser Common Stock subject to such Company Options that may be registered on
a Form S-8, and shall use its best efforts to maintain the effectiveness of such
Registration Statement for so long as such Company Options remain outstanding.
In connection with such filing on Form S-8, counsel to Purchaser will issue an
opinion that the shares of Purchaser Common Stock, when issued, will be fully
paid, validly issued and non-assessable.
(d) The Company shall obtain, prior to the Closing, the consent from each
holder of a Company Option or an outstanding warrant to purchase shares of
Company Common Stock (a "Company Warrant") to the amendment thereof pursuant to
this Section 1.11 (unless such consent is not required under the terms of the
applicable agreement, instrument or plan).
SECTION 1.12 EXEMPTION FROM REGISTRATION; CALIFORNIA PERMIT. The shares of
Purchaser Common Stock to be issued in connection with the Merger will be issued
in a transaction exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"), by reason of Section 3(a)(10) thereof. The
shares of Purchaser Common Stock will be qualified under California law,
pursuant to Section 25121 thereof, after a fairness hearing has been held
pursuant to the authority granted by Section 25142 of such law. Such fairness
hearing shall also address the assumption by Purchaser of all Company Options
pursuant to Section 1.11 hereof. Each of the Company and Purchaser shall use it
best efforts to (i) file (or assist, in the case of the Company) an application
for issuance of a California permit to issue such securities and assume such
options within three (3) business days from the date of this Agreement and (ii)
obtain such permit.
SECTION 1.13 STOCKHOLDERS' REPRESENTATIVE. Each Stockholder shall appoint
Laird Foshay ("Stockholders' Representative") to act as the agent and
attorney-in-fact, with full power and authority to defend, compromise and settle
on behalf of all of the Stockholders, in the absolute discretion of the
Stockholders' Representative, all matters related to (i) the determination of
the Balance Sheet Adjustment Shares and Expense Adjustment Shares, and (ii) all
claims for indemnification made by Purchaser, Newco or the Surviving Corporation
and each of their affiliates, officers, directors, employees, counsel, agents,
successors, assigns, heirs and legal and personal representatives under Article
IX of this Agreement. This appointment shall be coupled with an interest and
shall be irrevocable and binding in all respects upon the Company and the
Stockholders and their successors and assigns, and heirs and devisees.
SECTION 1.14 TAKING OF NECESSARY ACTION; FURTHER ACTION. The parties
hereto shall take all such reasonable and lawful action as may be necessary or
appropriate in order to effectuate the Merger, and the transactions contemplated
hereby, as promptly as possible. If, at any time after the Effective Time, any
such further action is necessary or desirable to carry out the purposes of this
Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, property, rights, privileges, powers and franchises of
the Company, the Company, Purchaser and Surviving Corporation, as applicable,
shall direct their respective officers and directors to take all such lawful and
necessary action.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby makes the representations and warranties set forth in
this Article II to Purchaser, except as otherwise provided in the disclosure
schedule delivered to Purchaser by the Company as of the date hereof (the
"Disclosure Schedule").
SECTION 2.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation,
duly organized, validly existing and in good standing under the laws of the
State of California. The Company has no subsidiaries. The Company has all
requisite corporate power and authority to carry on its business as now being
conducted and to own, lease and operate its properties and assets as now owned,
leased or operated. The Company does not own or control any Affiliate (as
defined in Section 10.13). True, correct and complete copies of the Articles of
Incorporation and Bylaws of the Company, with all amendments thereto through the
date of this Agreement, have been delivered by the Company to Purchaser. The
Company is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each state or other jurisdiction in which the
properties or assets owned or leased and operated by it or the nature of the
business conducted by it make such qualification necessary, except those states
or jurisdictions in which failure to be so duly qualified and in good standing
would not, individually or in the aggregate, have a Material Adverse Effect.
Each such jurisdiction is listed on Schedule 2.1.
SECTION 2.2 CAPITALIZATION. As of the date hereof, the authorized capital
stock of the Company consists of (i) 5,000,000 shares Company Common Stock,
1,551,301 shares of which are issued and outstanding, (ii) 200,000 shares of
Series A Preferred Stock, all of which shares are outstanding, (iii) 571,428
shares of Series B Preferred Stock, 533,333 shares of which are outstanding, and
(iv) 1,086,495 shares of Series C Preferred Stock, all shares of which are
outstanding (the Series A Preferred Stock, the Series B Preferred Stock and the
Series C Preferred Stock are collectively referred to herein as the "Company
Preferred Stock"). No shares of capital stock are held in treasury. Schedule 2.2
accurately describes the ownership of the Company's capital stock as of the date
hereof. Except as set forth on Schedule 2.2, there are no outstanding
subscriptions, options, convertible securities, rights, warrants, calls, or
other agreements or commitments of any kind issued or granted by, or binding
upon, the Company to purchase or otherwise acquire any security of or equity
interest in the Company. Except as set forth on Schedule 2.2, there are no
outstanding subscriptions, options, convertible securities, rights, warrants,
calls, or other agreements or commitments of any kind obligating the Company to
issue or the Stockholders to sell any shares of capital stock of the Company, or
irrevocable proxies or any agreements restricting the transfer of or otherwise
relating to shares of its capital stock of any class. All of the issued and
outstanding shares of capital stock of the Company have been duly authorized,
validly issued and are fully paid and nonassessable. Except as set forth on
Schedule 2.2, all dividends and other distributions declared prior to the date
hereof with respect to the issued and outstanding shares of capital stock of the
Company have been paid or distributed. The Company has no equity ownership in
any other corporation, association, partnership, trust, joint venture, company
or other business entity or organization (whether for-profit or not-for-profit)
(the "Other Securities").
SECTION 2.3 AUTHORITY. The Company has full corporate power and authority
to execute and deliver this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby free of claims of any Person.
The execution and delivery of this Agreement, the performance of the obligations
hereunder and the consummation of the transactions contemplated hereby have been
duly and validly authorized and approved by the Company's board of directors and
the Stockholders, and no further corporate actions or proceedings on the part of
the Company or actions on the part of the Stockholders are necessary to
authorize the execution and delivery of this Agreement, the performance of the
obligations hereunder, or the consummation of the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by the
Company, and this Agreement constitutes the legal, valid and binding agreement
of the Company enforceable against the Company in accordance with its terms.
SECTION 2.4 NO VIOLATION. Except as set forth on Schedule 2.4 and any
approvals or filings required by the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act"), no prior consent, approval
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or authorization of, or declaration, filing or registration with any party,
domestic or foreign, is necessary in connection with the execution and delivery
of this Agreement by the Company or the Stockholders, the performance of the
obligations hereunder, or the consummation of the transactions contemplated
hereby. Except as set forth on Schedule 2.4, neither the execution, delivery nor
performance of this Agreement in its entirety, nor the consummation of all of
the transactions contemplated hereby will (i) violate (with or without the
giving of notice or the passage of time), any law, order, writ, judgment,
injunction, award, decree, rule, statute, ordinance or regulation applicable to
the Company, the Stockholders, or any of the capital stock of Company or assets
of any of them, (ii) be in conflict with, result in a breach or termination of
any provision of, cause the acceleration of the maturity of any debt or
obligation pursuant to, constitute a default (or give rise to any right of
termination, cancellation or acceleration, with or without the giving of notice
or the passage of time) under, or result in the creation of any security
interest, lien, charge or other encumbrance upon any property or assets of the
Company or the Stockholders pursuant to any terms, conditions or provisions of
any contract, note, license, instrument, indenture, mortgage, deed of trust or
other agreement or understanding or any other restriction of any kind or
character, to which the Company or the Stockholders is a party or by which any
of its or their assets or properties are subject or bound, (iii) give rise to
any lien, charge or other encumbrance on any of the capital stock of the Company
or the assets of the Company, or (iv) conflict with or violate any provision of
the Certificate of Incorporation or Bylaws of the Company except, in the case of
clause (ii) above, for such conflicts which would not, individually or in the
aggregate, have a Material Adverse Effect or prevent or delay the consummation
of the transactions contemplated hereby. Except as set forth on Schedule 2.4,
there are no proceedings pending or threatened, against the Company, the
Stockholders, or the assets of Company, at law or in equity or before or by any
foreign, federal, state, municipal or other governmental court, department,
commission, board, bureau, agency, instrumentality or other Person which may
result in liability to Purchaser upon the consummation of the transactions
contemplated hereby or which would prevent or delay such consummation. Except as
set forth on Schedule 2.4, the corporate existence, business organization, and
assets, including but not limited to the licenses, permits, authorizations and
contracts, of the Company will not be terminated or materially impaired by
reason of the execution, delivery or performance of this Agreement or
consummation of the transactions contemplated hereby.
SECTION 2.5 FINANCIAL STATEMENTS. The Company has provided Purchaser with
true and complete copies of the audited balance sheets of the Company as of June
30, 1998 and 1997, and February 28, 1999, and the related statements of income
for the years ended June 30, 1998 and 1997, and the eight months ended February
28, 1999. The Company has provided or will provide Purchaser with the Company's
unaudited balance sheets and the related statements of income, for each monthly
period ending after June 30, 1998 and prior to the Closing. All of the foregoing
balance sheets and the related statements of income of the Company are
collectively referred to as the "Company's Financial Statements." The accounting
records underlying the Company's Financial Statements accurately and fairly
reflect or will reflect, as the case may be, in all respects the transactions of
the Company. Except as otherwise disclosed to Purchaser in writing and except
for normal year-end and recurring year-end adjustments, and taking into account
the absence of footnotes required by GAAP on any unaudited and interim period
Company Financial Statements, the Company has or will have, as the case may be,
no liabilities or obligations of a type which should be included in or reflected
on the Company's Financial Statements if prepared in accordance with generally
accepted accounting principles on a consistent basis with prior periods
("GAAP"), whether related to tax or non-tax matters, accrued or contingent, due
or not yet due, liquidated or unliquidated, or otherwise, except as and to the
extent disclosed or reflected in the Schedule 2.5.
SECTION 2.6 BOOKS AND RECORDS. The books of account, minute books, stock
record books and other records of the Company, all of which have been or will be
made available to Purchaser, are complete and correct in all material respects
and have been maintained in accordance with sound business practices, including,
but not limited to, the maintenance of an adequate system of internal controls.
The minute books of the Company are accurate and complete in all material
respects. At the Closing, the Company will have delivered to Purchaser all of
those books and records.
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SECTION 2.7 ABSENCE OF CERTAIN CHANGES. Except as and to the extent set
forth on Schedule 2.7, since February 28, 1999 (the "Balance Sheet Date") the
Company has not:
(a) made any amendment to its Articles of Incorporation or Bylaws or
changed the character of its business in any manner;
(b) suffered any Material Adverse Effect (as defined in Section 10.13)
or any event, condition or contingency that will result in a Material
Adverse Effect;
(c) entered into any agreement, commitment or transaction except in
the ordinary course of business;
(d) except in the ordinary course of business, incurred, assumed or
become subject to, whether directly or by way of any guarantee or
otherwise, any obligations or Liabilities;
(e) increased the Long Term Debt (as defined in Section 10.13);
(f) permitted or allowed any of its Properties (as defined in Section
10.13) or assets to be subject to any mortgage, pledge, lien, security
interest, encumbrance, restriction or charge of any kind (other than
statutory liens not yet delinquent);
(g) except in the ordinary course of business, canceled any debts,
waived any claims or rights, or sold, transferred, or otherwise disposed of
any of its Properties or assets;
(h) disposed of or permitted to lapse any rights to the use of any
Intellectual Property (as defined in Section 2.19), or disposed of or
disclosed to any Person other than its employees or agents, any trade
secret not theretofore a matter of public knowledge;
(i) granted any increase in compensation or paid or agreed to pay or
accrue any bonus, percentage compensation, service award, severance payment
or like benefit to or for the credit of any director, officer, employee or
agent, or entered into any employment or consulting contract or other
agreement with any director, officer or employee or adopted, amended or
terminated any Benefit Plans (as defined in Section 2.14(a));
(j) directly or indirectly declared, set aside or paid any dividend or
made any distribution with respect to its capital stock or redeemed,
purchased or otherwise acquired, or arranged for the redemption, purchase
or acquisition of, any shares of its capital stock or other of its
securities;
(k) organized or acquired any capital stock or other equity securities
or acquired any equity or ownership interest in any Person;
(l) issued, reserved for issuance, granted, sold or authorized the
issuance of any shares of its capital stock or subscriptions, options,
warrants, calls, rights or commitments of any kind relating to the issuance
or sale of or conversion into shares of its capital stock or authorized a
stock split or otherwise changed its capitalization in any manner, except
as contemplated in Section 5.9 and Section 5.10 hereof;
(m) made any or acquiesced with any change in any accounting methods,
principles or practices;
(n) experienced any material adverse change in relations with any
customer or client described on Schedule 2.10;
(o) entered into any transaction, or entered into, modified or amended
any Contract (as defined in Section 2.16) or commitment, other than in the
ordinary course of business; or
(p) agreed, whether in writing or otherwise, to take any action the
performance of which would change the representations contained in this
Section 2.7 in the future so that any such representation would not be true
in all respects as of the Closing.
SECTION 2.8 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the
extent (i) fully reflected or reserved against on the Company's Financial
Statements, including the notes thereto, (ii) set forth on Schedule 2.8, or
(iii) incurred in the ordinary course of business of the Company since the
Balance Sheet Date
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consistent with past practices, the Company does not have any Liabilities, and
to the knowledge of the Company, there is no reasonable basis for any assertion
against the Company of any Liabilities, including without limitation any
Liabilities resulting from failure to comply with any Legal Requirement (as
defined in Section 10.13) applicable to the Company or any tax liabilities due
or to become due and whether incurred in respect of or measured by the income or
sales of the Company for any period, or arising out of any transaction entered
into or any state of facts existing, on or before the Effective Time.
SECTION 2.9 RECEIVABLES. All trade accounts and notes receivable of the
Company that are reflected in the Company's Financial Statements and all trade
accounts and notes receivable of the Company as of the Closing Date represent or
will represent valid obligations arising from sales actually made in the
ordinary course of business, and are collectible net of any reserve shown of the
Company's Financial Statements and any reserve as of the Closing Date.
SECTION 2.10 SUPPLIERS AND CUSTOMERS.
(a) Schedule 2.10(a) sets forth a true and complete list of the ten largest
suppliers of the Company, taken as a whole, for the twelve-month period ending
with the Balance Sheet Date and the percentage of the Company's gross purchases
for such period accounted for by each such supplier, and the termination dates
of any contracts with such suppliers. Since the Balance Sheet Date, no supplier
listed on Schedule 2.10(a) has stopped or materially decreased, or has given
notice or any indication to the Company that it will stop or materially
decrease, the rate of business conducted with the Company.
(b) Schedule 2.10(b) sets forth a true and complete list of the 25 largest
customers of the Company, taken as a whole, for the twelve-month period ending
with the Balance Sheet Date and the percentage of the Company's gross sales for
such period accounted for by each such customer. Except as set forth on Schedule
2.10(b), since the Balance Sheet Date, no customer listed on Schedule 2.10(b)
has stopped or materially decreased, or has given notice or any indication to
the Company that it will stop or materially decrease, the rate of business done
with the Company.
SECTION 2.11 COMPANY'S INDEBTEDNESS. The Company has delivered to
Purchaser true and complete copies of all loan documents (the "Company Loan
Documents") related to any indebtedness of the Company (the "Company's
Indebtedness"), and made available to Purchaser all correspondence concerning
the status of the Company's Indebtedness.
SECTION 2.12 LITIGATION. Except as set forth on Schedule 2.12, there are
no actions, suits, claims, investigations, reviews or other proceedings pending
or, to the knowledge of the Company and the Stockholders, threatened against the
Company or involving any of its properties or assets, at law or in equity or
before or by any foreign, federal, state, municipal, or other governmental
court, department, commission, board, bureau, agency, Governmental Authority (as
defined in Section 10.13), or other instrumentality or Person or any board of
arbitration or similar entity (a "Proceeding"). The Company or the Stockholders
will notify Purchaser immediately in writing of any Proceeding initiated against
the Company.
SECTION 2.13 TAX MATTERS. The Company has duly filed on a timely basis all
Tax Returns (as hereinafter defined in Section 10.13) and statements required to
be filed with any Governmental Authority with taxing power over it or its assets
(the "Filed Returns"). Except as otherwise disclosed to Purchaser in writing,
all such Filed Returns were correct and complete in all respects. Except as
otherwise disclosed to Purchaser in writing, the Company has paid, or has
established adequate reserves for the payment of, all federal income taxes,
state, foreign and local income taxes, and all franchise, property, sales,
employment, or other taxes or levies of any nature, whether federal, state,
local or foreign and all related governmental charges and any interest or
penalties payable in connection with the payment of any of the foregoing
(collectively, "Taxes"), required to be paid (whether or not shown on any Filed
Return) with respect to the periods covered by the Filed Returns. The Company
currently is not the beneficiary of any extension of time within which to file
any Tax Return. No claim has been made by an authority in a jurisdiction where
the Company does not file Tax Returns that it is or may be subject to taxation
by that jurisdiction. There are no security interests on any assets of the
Company that arose in connection with any failure (or alleged failure) to pay
any tax. With respect to the periods ending on or before the Effective Time for
which returns have not yet been filed, the
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Company has established and will establish adequate reserves, clearly and
sufficiently reflected on the Company's Financial Statements, for the payment of
all Taxes. Except as set forth on Schedule 2.13, the Company has no direct or
indirect liability for the payment of any Taxes in excess of amounts paid or
reserves established. The Company has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or other third party.
Neither the Company nor any director or officer (or employee responsible for Tax
matters) of the Company expects any authority to assess any additional Taxes for
any period for which Tax Returns have been filed. There is no dispute or claim
concerning any tax liability of the Company either (a) claimed or raised by any
authority in writing or (b) as to which the Company and the directors and
officers (and employees responsible for Tax matters) of the Company has
knowledge based upon personal contact with any agent of such authority. Company
has listed on Schedule 2.13 all federal, state, local and foreign income Tax
Returns filed with respect to the Company for taxable periods ended on or after
June 30, 1995. Schedule 2.13 indicates those Tax Returns that have been audited,
and indicates those Tax Returns that are currently the subject of audit. The
Company has delivered to Purchaser correct and complete copies of all federal
income Tax Returns, examination reports and statements of deficiencies assessed
against or agreed to by the Company since June 30, 1995. Except as set forth on
Schedule 2.13, the Company has not waived any statute of limitations in respect
to Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency. The Company has not filed a consent under Tax Code sec.341(f)
concerning collapsible corporations. The Company has not made any payments, is
not obligated to make any payments and is not a party to any agreement that
under certain circumstances could obligate it to make any payments that will not
be deductible under Tax Code sec.280G. The Company has not been a United States
real property holding corporation within the meaning of Tax Code sec.897(c)(2)
during the applicable period specified in Tax Code sec.897(c)(1)(A)(ii). The
Company is not a member of an affiliated group filing a consolidated federal
income Tax Return and has no liability for the Taxes of any Person under Reg.
sec.1.1502-6 (or any similar provision of state, local or foreign law) as a
transferee or successor, by contract or otherwise. Except as set forth in
Schedule 2.13, the Company is not a party to any Tax allocation or sharing
agreement. The Company has not filed any Forms 1139 (Application for Tentative
Refund). No sales, use, income, franchise or other transfer tax of any type
whatsoever is required to be paid by Purchaser or the Company with respect to
the transfer of the stock provided herein.
SECTION 2.14 EMPLOYEE BENEFIT PLANS. The following are true and correct:
(a) With respect to any collective bargaining agreement or any bonus,
pension, profit sharing, deferred compensation, incentive compensation, stock
ownership, stock purchase, stock option, phantom stock, retirement, vacation,
severance, disability, death benefit, hospitalization, medical or other material
plan, policy, program, arrangement or understanding (whether or not legally
binding), including "employee pension benefit plans" (as defined in Section 3(2)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
(sometimes referred to herein as "Pension Plans"), "employee welfare benefit
plans" (as defined in Section (3)(1) of ERISA) (sometimes referred herein as
"Welfare Plan") (collectively, "Plans") providing benefits to any current or
former employee, officer or director of the Company that are in effect on the
date hereof, and all Plans currently maintained, or contributed to, or required
to be maintained or contributed to, by the Company or any other person or entity
that, together with the Company, is treated as a single employer under Section
414(b), (c), (m) or (o) of the Tax Code or Section 4001(a)(14) or 4001(b) of
ERISA (each a "Commonly Controlled Entity") (including each Pension Plan that
the Company or any Commonly Controlled Entity that is, or within the last six
years was, subject to Title IV of ERISA and for which the Company could have
material liability) (all of the foregoing such plans being herein referred to as
"Benefit Plans"), the Company has delivered, or caused to be delivered, to
Purchaser true, complete and correct copies of (i) each Benefit Plan, (ii)
annual reports (Forms 5500) and all schedules thereto filed with the Internal
Revenue Service with respect to each Benefit Plan for the past five years (if
any such report was required), (iii) the most recent summary plan description
for each Benefit Plan for which such summary plan description is required, (iv)
each trust agreement, group annuity contract, investment management agreement,
and any other insurance contract or funding arrangement relating to any Benefit
Plan; (v) the most recent actuarial report or valuation relating to a Benefit
Plan subject to Title IV of ERISA; and (vi) a list of the Benefit Plans and the
amount of any liability of the Company for contributions more than 30 days past
due
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with respect to each as of the date hereof and as of the end of any subsequent
month ending prior to the Closing.
(b) Neither the Company nor any Commonly Controlled Entity nor any entity
that has ever been a Commonly Controlled Entity has ever maintained any Pension
Plan or any funded Welfare Plan.
(c) No Welfare Plan provides for continuing benefits or coverage for any
participant, beneficiary or former employee after such participant's or former
employee's termination of employment except as may be required by Section 4980B
of the Tax Code and Sections 601-608 of ERISA.
(d) Unless otherwise listed in Schedule 2.14(d), each Benefit Plan has been
administered in accordance with its terms. All of the Benefit Plans and any
related funding instruments comply, and have complied in the past, both as to
form and operation in all material respects (including, but not limited to
applicable reporting and disclosure requirements) with the provisions of ERISA,
the Tax Code and with all other applicable laws, rules and regulations.
(e) Neither the Company nor any Commonly Controlled Entity, nor any plan
fiduciary of any Benefit Plan or, to the best knowledge of the Company and the
Stockholders, any other party in interest of any Benefit Plan, has engaged in
any transaction in violation of Section 406 of ERISA (for which transaction no
exemption exists under Section 408 of ERISA) or in any "prohibited transaction"
as defined in Section 4975(c)(1) of the Tax Code (for which no exemption exists
under Section 4975(c)(2) or 4975(d) of the Tax Code) or engaged in any other
breach of fiduciary responsibility that could subject the Company or any officer
of the Company to tax or penalty under ERISA, the Tax Code or other applicable
law.
(f) Neither the Company nor any Commonly Controlled Entity has ever
maintained or contributed to, or has participated in or agreed to participate
in, a multi-employer plan (as defined in Section 3(37) of ERISA), and neither
Company nor any Commonly Controlled Entity could have any liability under a
multi-employer plan.
(g) Except as set forth on Schedule 2.14(g), there are no claims pending
with respect to, or under, any Benefit Plan other than routine claims for plan
benefits, and there are no disputes or litigation pending or threatened with
respect to any such plans, and no such claim, dispute or litigation appears
reasonably likely to arise to Company.
(h) Except as set forth on Schedule 2.14(h), neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will (i) result in any payment to be made by the Company, Purchaser, as
successor to the Company, or any Commonly Controlled Entity (including, without
limitation, severance, unemployment compensation, golden parachute (defined in
Section 280G of the Tax Code), or otherwise) becoming due to any employee, or
(ii) increase or vest any benefits otherwise payable under any Benefit Plan.
(i) With respect to any Benefit Plan that is a Welfare Plan (i) no such
Benefit Plan is funded through a "welfare benefit fund," as such term is defined
in Section 419(e) of the Tax Code, (ii) each such Benefit Plan that is a "group
health plan," as such term is defined in Section 5000(b)(1) of the Tax Code,
complies in all material respects with the applicable requirements of Section
4980B of the Tax Code and Sections 601-609 of ERISA, and (iii) each such Benefit
Plan may be amended or terminated without any liability to the Company on or at
any time after the consummation of this Agreement.
(j) Except as set forth on Schedule 2.14(j) or as required by applicable
law, since June 30, 1996 there has not been any adoption of amendment in any
material respect of any Benefit Plan. Except as disclosed on Schedule 2.14(j),
there exist no employment, consulting, severance, termination or indemnification
agreements, material arrangements or understandings between the Company and any
current or former employee, officer or director of the Company.
(k) Except as set forth on Schedule 2.14(k), any amount that could be
received (whether in cash or property or the vesting of property) as a result of
any of the transactions contemplated by this Agreement by any employee, officer
or director of the Company who is a "disqualified individual" (as such term is
defined in proposed Treasury Regulation Section 1.280G-1) under any employment,
severance or termination agree-
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ment, other compensation arrangement or Benefit Plan currently in effect would
not be characterized as an "excess parachute payment" (as such term is defined
in Section 280G(b)(1) of the Tax Code).
SECTION 2.15 EMPLOYMENT MATTERS. Except as set forth on Schedule 2.15, the
Company is not a party to any oral or written contracts or agreements granting
benefits or rights to any employees or any collective bargaining agreement or to
any conciliation agreement with the Department of Labor, the Equal Employment
Opportunity Commission or any federal, state or local agency which requires
equal employment opportunities or affirmative action in employment. There are no
unfair labor practice complaints pending against the Company before the National
Labor Relations Board and no similar claims pending before any similar state,
local or foreign agency. There is no activity or proceeding of any labor
organization (or representative thereof) or employee group to organize any
employees of the Company, nor any strikes, slowdowns, work stoppages, lockouts,
or threats thereof, by or with respect to any such employees. The Company is in
compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and the Company is not engaged in any unfair labor practice.
The Company has no knowledge that any employee currently intends to terminate
his or her employment with the Company and/or the Surviving Corporation
following the consummation of the Merger.
SECTION 2.16 LEASES, CONTRACTS AND AGREEMENTS. Schedule 2.16 sets forth an
accurate and complete description of all leases, subleases, licenses,
commitments, contracts and agreements (whether written or oral, and whether or
not legally binding or enforceable) to which the Company is a party or by which
the Company is bound each of which obligates or may obligate the Company for an
amount in excess of $25,000 over the entire term of any such agreement or
contract, or related agreements or contracts of a similar nature which in the
aggregate obligate or may obligate the Company in the aggregate for an amount in
excess of $25,000 over the entire term of such related agreements or contracts
(the "Contracts"). Such Schedule provides reasonably complete details concerning
such Contracts, identifying among other things, the parties to the Contract, the
nature of the Contract, and the amount of the remaining commitment of the
Company thereunder. The Company has delivered to Purchaser true and correct
copies of all Contracts. All of the Contracts are legal, valid and binding
obligations of the Company, and, to the knowledge of the Company, the other
parties to the Contracts, enforceable in accordance with their terms, and are in
full force and effect. Except as set forth on Schedule 2.16, all rent and other
payments by the Company under the Contracts are current, there are no existing
defaults by the Company under the Contracts, and no termination, condition or
other event has occurred which (whether with or without notice, lapse of time or
the happening or occurrence of any other event) would constitute a default or a
basis for force majeure or other claim of excusable delay or non-performance
thereunder. The terms and conditions of all such contracts, agreements, or
commitments are reasonable and customary in the industries and trades in which
the Company operates, and there are no extraordinary terms contained therein.
There are no renegotiations of, or to the knowledge of the Company, attempts to
renegotiate, or outstanding rights to renegotiate, any amounts paid or payable
to the Company under current or completed Contracts with any Person having the
contractual or statutory right to demand or require such renegotiation, and no
such Person has delivered written demand for such renegotiation. The Company has
good and marketable leasehold interest in each parcel of real property leased by
it free and clear of all mortgages, pledges, liens, encumbrances and security
interests.
SECTION 2.17 COMPLIANCE WITH LAWS.
(a) Except as set forth on Schedule 2.17, the Company is not in material
default with respect to or in violation (and has not been in material violation
of during the five-year period prior to the date hereof) of (i) any judgment,
order, writ, injunction or decree of any court or (ii) any Legal Requirement of
any Governmental Authority. The consummation of the transactions contemplated by
this Agreement will not constitute such a material default or violation as to
the Company. The Company has all permits, licenses, and franchises from
Governmental Authorities required to conduct its business as are now being
conducted, and except as set forth on Schedule 2.17, the consummation of the
transactions contemplated by this Agreement will not constitute a material
violation of any permit, license or franchise from a Governmental Authority, and
except as set forth on Schedule 2.17, after the consummation of the transactions
contemplated by this Agreement, Purchaser will have exactly the same rights as
the Company had prior to the consummation of the
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transactions contemplated by this Agreement in such permits, licenses or
franchises from a Governmental Authority without impairment or change of any
kind.
(b) Set forth on Schedule 2.17 are all the Governmental Authorizations held
by the Company on the date hereof, which constitute all of the Governmental
Authorizations necessary to permit the Company to own, operate, use, and
maintain its assets in the manner in which they are now operated and maintained
and to conduct its business as now being conducted. All required filings with
respect to such Governmental Authorizations have been timely made and all
required applications for renewal thereof have been timely filed. All such
Governmental Authorizations are in full force and effect and there are no
proceedings pending or, to the knowledge of the Company, threatened that seek
the revocation, cancellation, suspension, or adverse modification thereof.
SECTION 2.18 INSURANCE.
(a) Schedule 2.18 contains an accurate and complete description of all
policies of property, fire and casualty, product liability, workers'
compensation, liability and other forms of insurance owned or held by the
Company and, except as set forth on Schedule 2.18, the Company has had similar
insurance in force for at least the last five years. Such description provides
reasonably complete details concerning such policies, identifying among other
things, (i) the issuer of each such policy, (ii) the amount of coverage still
available and outstanding under each such policy, (iii) whether each such policy
is a "claims made" or an "occurrences" policy, and (iv) any retrospective
premium adjustments of which the Company has knowledge. True and complete copies
of such policies have been delivered to Purchaser
(b) Except as set forth on Schedule 2.18, all policies described in
paragraph (a) hereof (i) are issued by insurance companies reasonably believed
by the Company to be financially sound and reputable, (ii) are sufficient for
compliance with all Legal Requirements and all Contracts or applicable
agreements to which the Company is a party or by which it is bound, (iii) are
valid, outstanding, and enforceable policies, (iv) provide adequate insurance
coverage for the assets and the operations of the Company for all risks normally
insured against by an entity carrying on the same business or businesses as the
Company, and (iv) will not in any way be affected by, terminate, or lapse by
reason of, the transactions contemplated by this Agreement
(c) Except as set forth on Schedule 2.18, the Company has not received (i)
any notice of cancellation of any policy described in paragraph (a) hereof or
refusal of coverage thereunder, (ii) any notice that any issuer of such policy
has filed for protection under applicable bankruptcy or other insolvency laws or
is otherwise in the process of liquidating or has been liquidated, or (iii) any
other indication that such policies are no longer in full force or effect or
that the issuer of any such policy is no longer willing or able to perform its
obligations thereunder.
SECTION 2.19 INTELLECTUAL PROPERTY.
(a) The Company owns or has the right to use all Intellectual Property (as
defined below) necessary (i) to use, manufacture, market and distribute the
products manufactured, marketed, sold or licensed, and to provide the services
provided, by the Company to other parties (together, the "Customer Deliverables"
or (ii) to operate the Company's internal systems that are material to the
business or operations of the Company, including, without limitation, computer
hardware systems, software applications, firmware, and embedded systems (the
"Internal Systems"; the Intellectual Property owned by or licensed to the
Company and incorporated in or underlying the Customer Deliverables or the
Internal Systems is referred to herein as the "Company Intellectual Property").
Each item of Company Intellectual Property will be owned or available for use by
the Surviving Corporation on substantially identical terms and conditions
immediately following the Closing. The Company has taken all reasonable measures
to protect the proprietary nature of each item of Company Intellectual Property,
and to maintain in confidence all trade secrets and confidential information,
that it owns or uses. To the knowledge of the Company, (a) no other person or
entity has any rights to any of the Company Intellectual Property owned by the
Company (except pursuant to agreements or licenses specified in Schedule 2.19,
and (b) no other person or entity is infringing, violating or misappropriating
any of the Company Intellectual Property. For purposes of this Agreement,
"Intellectual Property" means all forms of industrial or intellectual property
and technology, including (i) patents and patent applications,
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(ii) copyrights and registrations thereof, (iii) mark works and registrations
and applications for registration thereof, (iv) computer software, data and
documentation, (v) inventions, discoveries, trade secrets and confidential
business information, whether patentable or unpatentable and whether or not
reduced to practice, know-how, show-how, manufacturing and production processes
and techniques, research and development information, copyrightable works,
financial, marketing and business data, pricing and cost information, business
and marketing plans and customer and supplier lists and information, (vi)
trademarks, service marks, design marks, trade names, trade dress, Internet
domain names and any applications or registrations therefor, together with the
associated goodwill of each, and (vii) other proprietary rights relating to any
of the foregoing. Schedule 2.19 lists each patent, patent application, copyright
registration or application therefor, mark work registration or application
therefor, and trademark, service mark and domain name registration or
application therefor of the Company.
(b) None of the Customer Deliverables, or the marketing, distribution,
provision or use thereof, infringes or violates, or constitutes a
misappropriation of, any United States Intellectual Property rights of any
person or entity; provided that the representation in this sentence, insofar as
it relates to Intellectual Property rights that may accrue to another party as a
result of the issuance of a patent pursuant to a patent application currently on
file or filed prior to the Closing, shall be limited to the knowledge of the
Company. To the knowledge of the Company, none of the Internal Systems, or the
use thereof, infringes or violates, or constitutes a misappropriation of, any
Intellectual Property rights of any person or entity. Schedule 2.19 lists any
complaint, claim or notice, or written threat thereof, received by the Company
alleging any infringement, violation or misappropriation, or otherwise
challenging the right of the Company to own, use or license others; and the
Company has made available to the Purchaser complete and accurate copies of all
written documentation in the possession of the Company relating to any such
complaint, claim, notice or threat.
(c) Schedule 2.19 identifies each license or other agreement (or type of
license or other agreement) pursuant to which the Company has licensed,
authorized, permitted, distributed or otherwise granted any rights to any third
party with respect to, any Customer Deliverables or Company Intellectual
Property.
(d) Schedule 2.19 identifies each item of Company Intellectual Property
that is owned by a party other than the Company, and the license or agreement
pursuant to which the Company uses it (excluding off-the-shelf software programs
licensed by the Company pursuant to "shrink wrap" licenses).
(e) The Company has not disclosed the source code for any of the software
owned by the Company and incorporated in any Customer Deliverables or Internal
Systems (the "Software") or other confidential information constituting,
embodied in or pertaining to the Software to any person or entity, except
pursuant to the agreements listed on Schedule 2.19, and the Company has taken
reasonable measure to prevent disclosure of such source code.
(f) All of the copyrightable materials incorporated in or bundled with the
Customer Deliverables have been created by employees of the Company within the
scope of their employment by the Company or by independent contractors of the
Company who have executed written agreements expressly assigning all right,
title and interest in such copyrightable materials to the Company. No portion of
such copyrightable materials was jointly developed with any third party.
(g) Schedule 2.19 sets forth a list of all Internet domain names used by
the Company in respective business (collectively, the "Domain Names"). The
Company has, and after the Effective Time the Surviving Corporation will have, a
valid registration and all material rights (free of any material restriction) in
and to the Domain names, including without limitation all rights necessary to
continue to conduct the Company's business as it is currently conducted.
(h) Each hardware, software and firmware product used, licensed or
distributed by the Company in its business (collectively, the "Information
Technology") will accurately process date-related data (including, but not
limited to, calculating, comparing and sequencing) from, into and between the
twentieth and twenty-first centuries, including, without limitation, leap year
calculations, without a decrease in the functionality of the Information
Technology. The Information Technology is designed to be used prior to, during
and after the calendar year 2000 A.D. and will operate during each such time
period without error relating to date-related
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data, specifically including any error relating to, or the product of,
date-related data which represents or references different centuries or more
than one century. Without limiting the generality of the foregoing, the
Information Technology (a) will not abnormally end or provide invalid or
incorrect results as a result of date-related data, specifically including date
data which represents or references different centuries or more than one
century, (b) has been designed to ensure Year 2000 compatibility, including, but
not limited to, date data century recognition, calculations which accommodate
same century and multi-century formulas and date values, and date data interface
values that reflect the century, and (c) includes "Year 2000 Capabilities,"
meaning that the Information Technology (i) will manage and manipulate data
involving dates, including single century formulas and multi-century formulas,
and will not cause an abnormally ending scenario within the application or
general incorrect values or invalid results involving such dates, (ii) provides
that all date-related user interface functionalities and data fields include the
indication of century, and (iii) provides that all data-related interface
functionalities include the indication of century.
SECTION 2.20 ENVIRONMENTAL MATTERS. Without in any manner limiting any
other representations and warranties set forth in this Agreement and except as
set forth in Schedule 2.20:
(a) Neither the Company nor its Business Facilities (as hereinafter
defined in Section 10.13), is in violation of, or has violated, or has been
or is in non-compliance with, any Environmental Laws (as hereinafter
defined in Section 10.13) in connection with the ownership, use,
maintenance or operation of, or conduct of the business of the Company or
any of its Business Facilities.
(b) Without in any manner limiting the generality of subparagraph (a)
above:
(i) Except in compliance with Environmental Laws (including,
without limitation, by obtaining necessary Environmental Permits (as
hereinafter defined in Section 2.21(b)(iv) below)), since the Company
has occupied its Business Facility, no Materials of Environmental
Concern (as defined in Section 10.13) have been used, generated,
extracted, mined, beneficiated, manufactured, stored, treated, or
disposed of, or in any other way released (and no release is
threatened), on, under or about any Business Facility or transferred or
transported to or from any Business Facility, and to the knowledge of
the Company and the Stockholders, no Materials of Environmental Concern
have been generated, manufactured, stored or treated or disposed of, or
in any other way released (and no release is threatened), on, under,
about or from any property adjacent to any current Business Facility;
(ii) The Company is not now, and will not be in the future, as a
result of the operation or condition of the business of the Company on
or prior to the Closing Date, subject to any: (a) contingent liability
in connection with any release or threatened release of any Materials of
Environmental Concern into the environment whether on or off any
Business Facility; (b) reclamation, decontamination or Remediation (as
defined in Section 10.13) requirements under Environmental Laws, or any
reporting requirements related thereto; or (c) consent order, compliance
order or administrative order relating to or issued under any
Environmental Law;
(iii) There are no Environmental Claims known, pending or, to the
knowledge of the Company, threatened against the Company, or with
respect to its occupancy of the Business Facilities, and there is no
basis for any such Environmental Claims;
(iv) The Company and all of its Business Facilities have all
permits, licenses, registrations, identification numbers, applications,
consents, variances, notices of intent, and other authorizations
(collectively, "Environmental Permits") necessary to comply with
Requirements of Environmental Laws (as defined in Section 10.13)
governing the Company and/or the business of the Company; the Company
has all environmental and pollution control equipment necessary for
compliance with all Environmental Laws (including, without limitation,
for compliance with all applicable Environmental Permits) and operation
of the business of the Company as presently conducted; and the Company
and its Business Facilities are in compliance with all terms and
conditions of such required Environmental Permits and will be in such
compliance after the consummation of the transactions herein
contemplated;
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(v) Since the Company's occupancy of the Business Facilities and,
to the knowledge of the Company, prior to its occupancy of the Business
Facilities, there have not been any storage tanks or solid waste
management units located on or under any Business Facility of the
Company, and there have been no Materials of Environmental Concern on
any Business Facility of the Company in an amount exceeding background
levels for such geographic area or which would require reporting to any
Governmental Authority or Remediation to comply with Requirements of
Environmental Laws (as hereinafter defined);
(vi) To the knowledge of the Company, none of the off-site
locations where Materials of Environmental Concern generated from any
Business Facility of the Company (or for which the Company has arranged
for their disposal) has been stored, treated, recycled, disposed of or
released has been nominated or identified as a facility which is subject
to an existing or potential claim under Environmental Laws;
(vii) The Company has not been named as a potentially responsible
party under, and no Business Facility of the Company has been nominated
or identified as a facility which is subject to an existing or potential
claim under CERCLA or comparable Environmental Laws, and no Business
Facility of the Company is subject to any lien arising under
Environmental Laws;
(viii) The Company has not received any notice of any release or
threatened release of Materials of Environmental Concern, or of any
violation of, noncompliance with, or remedial obligation under,
Environmental Laws or Environmental Permits, relating to the ownership,
use, maintenance, or operation of any Business Facility of the Company,
nor is there any basis for any of the foregoing, nor has the Company
voluntarily undertaken Remediation or other decontamination or cleanup
of any facility or site or entered into any agreement for the payment of
costs associated with such activity;
(ix) The Company is not aware of any Requirement of Environmental
Laws that will require future compliance costs on the part of the
Company in excess of Ten Thousand Dollars ($10,000) above costs
currently expended in the ordinary course of business;
(x) There are no present or past events, conditions, circumstances,
activities, practices, incidents, actions or plans which may interfere
with or prevent continued compliance by the Company with Requirements of
Environmental Laws or which may give rise to any common law or statutory
liability under Environmental Laws or form the basis of an Environmental
Claim against the Company;
(xi) There are no obligations, undertakings or liabilities arising
out of or relating to Environmental Laws which the Company has agreed
to, assumed or retained, by contract (whether written or oral, and
whether enforceable or unenforceable) or otherwise; and
(xii) No current Business Facility (or equipment thereon) of the
Company contains any asbestos-containing materials or polychlorinated
biphenyls in any form nor any wetland areas or other land subject to
restricted development under Environmental Laws.
SECTION 2.21 REGULATORY ACTIONS. Except as set forth on Schedule 2.21, the
Company is not subject to any formal or informal agreement, memorandum of
understanding, enforcement action with or any type of financial assistance by
any regulatory authority having jurisdiction over it.
SECTION 2.22 TITLE TO PROPERTIES; ENCUMBRANCES. Schedule 2.22 is a true
and complete description of all real property, leaseholds or other interests in
real property and all machinery, equipment, furniture, fixtures, vehicles and
other fixed assets owned or leased by the Company (the "Assets"). The Company
has unencumbered, good, legal and marketable title to all of the Assets, real
and personal, including, without limitation, all the properties and assets
reflected in the Company's Financial Statements, except for those properties and
assets disposed of for fair market value in the ordinary course of business
since the Balance Sheet Date and otherwise in accordance with this Agreement.
Except as set forth on Schedule 2.22, the Company has a title policy in full
force and effect from a title insurance company which is solvent, insuring
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good and indefeasible title to any real property owned by the Company in favor
of the Company. The Company has made available to Purchaser all of the files and
information in the possession of the Company concerning such properties,
including any title exceptions which might affect marketable title or value of
such property. The Company holds good and legal title or good and valid
leasehold rights to all assets that are necessary for it to conduct its business
as it is currently being conducted. Except as set forth on Schedule 2.22, the
Company owns all furniture, equipment, and other property used to transact
business presently located on its premises.
SECTION 2.23 CONDITION AND SUFFICIENCY OF ASSETS. Except as set forth on
Schedule 2.23, the buildings, plants, structures and equipment leased or owned
by the Company are structurally sound with no known material defects, are in
good operating condition and repair and are adequate for the uses to which they
are being put, and none of such buildings, plants, structures or equipment is in
need of maintenance or repairs except for ordinary, routine maintenance and
repairs that are not material in nature or cost. The building, plants,
structures and equipment leased or owned by the Company are sufficient for the
continued conduct by Purchaser of the Company's business after the Closing in
substantially the same manner as conducted prior to the Closing.
SECTION 2.24 BROKERS; FINANCIAL ADVISORS. Except as set forth on Schedule
2.24, neither the Company nor any of its officers, directors or employees, on
behalf of Company or its Board of Directors (or any committee thereof), has
employed any investment bank, financial advisor, broker or finder or incurred
any liability for any investment bank, financial advisory, brokerage or finders'
fees or commissions in connection with the transactions contemplated hereby.
SECTION 2.25 SEC MATTERS. Neither the Company nor any of its agents has
received any compensation, directly or indirectly, from any company, promoter or
other person or entity in consideration for the recommendation of any stock. To
the knowledge of the Company, no employees or other agents of the Company has
owned or traded stocks discussed on Company's web site, or in subscriber
e-mails, to the extent that such ownership or trading would be in violation of
federal or state securities laws or regulations. The Company is not required to
be registered as an investment advisor or a broker-dealer pursuant to any
federal or state securities laws or regulations.
SECTION 2.26 AFFILIATED TRANSACTIONS. Since January 1, 1997, the Company
has not been a party to any transaction (other than employee compensation and
other ordinary incidents of employment) with a "Related Party." For purposes of
this Agreement, the term "Related Party" shall mean: any present or former
officer or director, 10% shareholder or present affiliate of the Company, any
present or former known spouse, ancestor or descendant of any of the
aforementioned persons or any trust or other similar entity for the benefit of
any of the foregoing persons. No property or interest in any property
(including, without limitation, designs and drawings concerning machinery) which
relates to and is or will be necessary or useful in the present or currently
contemplated future operation of the Company's respective businesses, is
presently owned by or leased or licensed by or to any Related Party. Prior to
the Closing, all amounts due and owing to or from the compensation and other
incidents of employment shall be paid in full. Except for the ownership of
securities representing less than a 2% equity interest in various publicly
traded companies, neither the Company nor, to the Company's knowledge, any
Related Party has an interest, directly or indirectly, in any business,
corporate or otherwise, which is in competition with the Company's respective
businesses.
SECTION 2.27 ACCOUNTING TREATMENT. The Company has not taken or failed to
take any action which would prevent the Merger from being treated as a "pooling
of interests" in accordance with Accounting Principles Board Opinion No. 16, the
interpretative releases issued pursuant thereto, and the pronouncements of the
SEC.
SECTION 2.28 TAKEOVER STATUTES. No "fair price", "moratorium", "control
share acquisition" or other similar antitakeover statute or regulation enacted
under state or federal laws in the United States, applicable to the Company is
applicable to the Merger or the other transactions contemplated hereby.
SECTION 2.29 REPRESENTATIONS NOT MISLEADING. No representation or warranty
by the Company in this Agreement, nor any statement, summary, exhibit or
schedule furnished to Purchaser by the Company
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under and pursuant to, or in anticipation of this Agreement, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF PURCHASER AND NEWCO
Purchaser and Newco hereby make the representations and warranties set
forth in this Article III to the Company.
SECTION 3.1 ORGANIZATION AND QUALIFICATION. Purchaser is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Delaware, and has all requisite corporate power and authority to enter
into and carry out its obligations under this Agreement. Newco is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of California, and has all requisite corporate power and authority to
enter into and carry out its obligations under this Agreement. Newco is a
wholly-owned subsidiary of Purchaser. Each of the Purchaser and Newco have all
requisite corporate power and authority to carry on their respective businesses
as now being conducted and to own, lease and operate their respective properties
and assets as now owned, leased or operated.
SECTION 3.2 CAPITALIZATION. As of the date hereof, the authorized capital
stock of Purchaser consists of 15,000,000 shares of the Purchaser Common Stock,
13,030,116 shares of which are issued and outstanding and 10,000,000 shares of
preferred stock, 120,000 shares of which are issued and outstanding. As of the
date hereof, the authorized capital stock of Newco consists of 1,000 shares of
common stock, 100 shares of which are issued and outstanding. No shares of
capital stock are held in treasury of Purchaser and Newco. When issued at the
Effective Time, the shares of Purchaser Common Stock issued to the Stockholders
shall be validly issued, duly paid and non-assessable.
SECTION 3.3 AUTHORITY. The execution and delivery of the Agreement, the
performance of the obligations thereunder and the consummation of the
transactions contemplated hereby have been duly and validly authorized and
approved by all necessary corporate action on the part of the Purchaser and
Newco, and Purchaser's Board of Directors has approved the increase in the
authorized shares of Purchaser Common Stock necessary to consummate the Merger
and the amendment to Purchaser's Certificate of Incorporation to effect such
increase; provided, however, that such increase is subject to the approval of a
majority of shares of Purchaser's capital stock. This Agreement has been duly
executed and delivered by Purchaser and Newco, and is a valid, legally binding
and enforceable obligation of Purchaser and Newco. There are no proceedings
pending or, to the knowledge of Purchaser, threatened, against it, at law or in
equity or before any foreign, federal, state, municipal or other governmental
court, department, commission, board, bureau, agency, instrumentality or other
Person which seek to prevent or delay the consummation of the transactions
contemplated hereby. There are no proceedings pending or, to the knowledge of
Newco, threatened, against it, at law or in equity or before any foreign,
federal, state, municipal or other governmental court, department, commission,
board, bureau, agency, instrumentality or other Person which seek to prevent or
delay the consummation of the transactions contemplated hereby.
SECTION 3.4 NO VIOLATION. Except as set forth on Schedule 3.4 and any
approvals or filings required by the HSR Act, no prior consent, approval or
authorization of, or declaration, filing or registration with any party,
domestic or foreign, is necessary in connection with the execution and delivery
of this Agreement by Purchaser and Newco, the performance of the obligations
hereunder, or the consummation of the transactions contemplated hereby. Except
as set forth on Schedule 3.4, neither the execution, delivery nor performance of
this Agreement in its entirety, nor the consummation of all of the transactions
contemplated hereby will (i) violate (with or without the giving of notice or
the passage of time), any law, order, writ, judgment, injunction, award, decree,
rule, statute, ordinance or regulation applicable to Purchaser, Newco or any of
the Purchaser Common Stock or assets of any of them, (ii) be in conflict with,
result in a breach or termination of any provision of, cause the acceleration of
the maturity of any debt or obligation pursuant to, constitute a
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default (or give rise to any right of termination, cancellation or acceleration,
with or without the giving of notice or the passage of time) under, or result in
the creation of any security interest, lien, charge or other encumbrance upon
any property or assets of Purchaser or Newco pursuant to any terms, conditions
or provisions of any contract, note, license, instrument, indenture, mortgage,
deed of trust or other agreement or understanding or any other restriction of
any kind or character, to which Purchaser is a party or by which any of its
assets or properties are subject or bound, (iii) give rise to any lien, charge
or other encumbrance on any of the Purchaser Common Stock, or (iv) conflict with
or violate any provision of the Certificate of Incorporation or Bylaws of
Purchaser except, in the case of clause (ii) above, for such conflicts which
would not, individually or in the aggregate, have a Material Adverse Effect or
prevent or delay the consummation of the transactions contemplated hereby.
Except as set forth on Schedule 3.4, there are no proceedings pending or
threatened, against Purchaser, Newco, or any of the Purchaser Common Stock, at
law or in equity or before or by any foreign, federal, state, municipal or other
governmental court, department, commission, board, bureau, agency,
instrumentality or other Person which may result in liability to the Company or
its Affiliates upon the consummation of the transactions contemplated hereby or
which would prevent or delay such consummation. Except as set forth on Schedule
3.4, the corporate existence, business organization, and assets, including but
not limited to the licenses, permits, authorizations and contracts, of Purchaser
and Newco will not be terminated or impaired by reason of the execution,
delivery or performance of this Agreement or consummation of the transactions
contemplated hereby.
SECTION 3.5 SEC FILINGS.
(a) Since January 1, 1996, Purchaser has filed with the Securities and
Exchange Commission (the "SEC") all material forms, statements, reports and
documents (including all exhibits, amendments and supplements thereto) required
to be filed by it under each of the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and the respective rules and
regulations thereunder, all of which complied in all material respects with all
applicable requirements of the appropriate act and the rules and regulations
thereunder.
(b) Purchaser has previously made available or delivered to the Company
copies of its (a) Annual Reports on Form 10-K for the fiscal year ended December
31, 1998, and for each of the two immediately preceding fiscal years, as filed
with the SEC, (b) proxy and information statements relating to (i) all meetings
of its stockholders (whether annual or special) and (ii) any actions by written
consent in lieu of a stockholders' meeting from January 1, 1998, until the date
hereof, and (c) all other reports, including quarterly reports, or registration
statements filed by Purchaser with the SEC since January 1, 1998 (other than
Registration Statements filed on Form S-8) (the documents referred to in clauses
(a), (b) and (c), including the exhibits filed therewith, collectively referred
to as the "Purchaser SEC Reports"). There have been no actions by written
consent in lieu of a stockholders' meeting since January 1998.
(c) As of their respective dates, the Purchaser SEC Reports, and as of the
effective date of any registration statement as amended or supplemented filed by
Purchaser, did not contain any untrue statement of any material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The financial statements included in the Purchaser SEC
Reports were prepared in accordance with the books of account and other
financial records of Purchaser, present fairly the consolidated financial
condition and results of operation of Purchaser as of the dates thereof or
periods covered thereby, have been prepared in accordance with GAAP applied on a
consistent basis with past practices and include all adjustments that are
necessary for a fair presentation of the financial condition of Purchaser and
its results of operation as of the dates thereof or for periods covered thereby.
SECTION 3.6 CONSENTS AND APPROVALS. Except as set forth in Schedule 3.6,
no prior consent, approval or authorization of, or declaration, filing or
registration with, any Person is required of or by Purchaser in connection with
the execution, delivery and performance by Purchaser of this Agreement.
SECTION 3.7 BROKERS; FINANCIAL ADVISORS. Except as set forth on Schedule
3.7, neither Purchaser nor Newco nor any of their officers, directors, or
employees, on behalf of Purchaser or Newco or their respective Boards of
Directors (or any committee thereof), has employed any investment bank,
financial advisor, broker
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or finder or incurred any liability for any investment bank, financial advisory,
brokerage or finders' fees or commissions in connection with the transactions
contemplated hereby.
SECTION 3.8 ACCOUNTING TREATMENT. Neither Purchaser nor Newco has taken or
failed to take any action which would prevent the Merger from being treated as a
"pooling of interests" in accordance with Accounting Principles Board Opinion
No. 16, the interpretative releases issued pursuant thereto, and the
pronouncements of the SEC.
ARTICLE IV
OBLIGATIONS OF THE COMPANY PENDING CLOSING
During the period commencing on the date of this Agreement through the
Closing Date, the Company hereby covenants and agrees to comply with the
covenants and agreements contained in this Article IV, to wit:
SECTION 4.1 AFFIRMATIVE COVENANTS OF THE COMPANY. For so long as this
Agreement is in effect, the Company shall, except as specifically contemplated
by this Agreement:
(a) operate and conduct its business in the ordinary course;
(b) use all reasonable efforts to preserve intact its corporate
existence, business organization, assets, licenses, permits,
authorizations, Governmental Authorizations, Environmental Permits and
business opportunities and retain the services of its present officers,
employees and agents;
(c) comply with all contractual obligations applicable to its
operations;
(d) maintain all of is assets in good repair, order and condition,
reasonable wear and tear excepted, and maintain the insurance coverages
described in Schedule 2.18 or obtain comparable insurance coverages from
reputable insurers which, in respect to amounts, types and risks insured,
are consistent with the existing insurance coverages;
(e) in good faith and in a timely manner (i) cooperate with Purchaser
in satisfying the conditions in this Agreement, (ii) obtain as promptly as
possible all consents, approvals, authorizations and rulings, whether
regulatory, corporate or otherwise, as are necessary for Purchaser, Newco
and the Company (or any of them) to carry out and consummate the
transactions contemplated by this Agreement and continue the business of
the Company, (iii) furnish information concerning the Company not
previously provided to Purchaser required for inclusion in any filings or
applications that may be necessary in that regard and (iv) perform all acts
and execute and deliver all documents necessary to cause the transactions
contemplated by this Agreement to be con summated at the earliest possible
date;
(f) comply in all material respects with all Legal Requirements
applicable to it and the conduct of its business;
(g) promptly notify Purchaser upon obtaining knowledge of any
additional default, event of default or condition which with the passage of
time or giving of notice would constitute an additional default or event of
default under any of the Company Loan Documents or Contracts and promptly
notify and provide copies to Purchaser of any material written
communications concerning such default;
(h) between the date of this Agreement and Closing, promptly give
written notice to Purchaser upon obtaining knowledge of any event or fact
that would cause any of the representations or warranties of the Company
contained in or referred to in this Agreement to be untrue or misleading;
(i) deliver to Purchaser a list (Schedule 4.1(i)), dated as of the
Closing Date, showing: (i) the name of each bank or institution where the
Company has accounts or safe deposit boxes, (ii) the name(s) in which such
accounts or boxes are held, and (iii) the name of each Person authorized to
draw thereon or have access thereto;
(j) promptly notify Purchaser of any material change or inaccuracies
in any data previously given or made available to Purchaser pursuant to
this Agreement;
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(k) (without making or increasing any commitment which would be
binding on the Company) use all reasonable efforts to preserve the goodwill
of, and its good relationships with, its suppliers, customers, landlords
and others having business relations with it; and
(l) expeditiously cause the administrator of each of the Company's
Benefit Plans to provide Purchaser with all information that Purchaser
deems necessary or advisable with respect to such Benefit Plans.
SECTION 4.2 NEGATIVE COVENANTS OF THE COMPANY. Except with the prior
written consent of Purchaser or as otherwise specifically permitted by this
Agreement, the Company will not, from the date of this Agreement to the Closing:
(a) make any amendment to its Articles of Incorporation or Bylaws,
except to authorize an additional 198,029 shares of Series C Preferred
Stock (for issuance upon exercise options as described in Section 2.2 of
the Disclosure Schedule);
(b) make any change in the methods used in allocating and charging
costs, except as may be required by applicable law, regulation or GAAP and
after written notice to Purchaser;
(c) except as provided in Section 5.9 and Section 5.10, and except to
authorize an additional 198,029 shares of Series C Preferred Stock (for
issuance upon exercise of options as described in Section 2.2 of the
Disclosure Schedule), make any change in the number of shares of the
capital stock issued and outstanding, or issue, reserve for issuance,
grant, sell or authorize the issuance of any shares of its capital stock or
subscriptions, options, warrants, calls, rights or commitments of any kind
relating to the issuance or sale of or conversion into shares of its
capital stock;
(d) contract to create any obligation or Liability except in the
ordinary course of business;
(e) increase the amount of the Long Term Debt;
(f) contract to create any mortgage, pledge, lien, security interest
or encumbrance, restriction, or charge of any kind (other than statutory
liens for which the obligations secured thereby shall not become
delinquent);
(g) cancel any debts, waive any claims or rights of value or sell,
transfer, or otherwise dispose of any of its Properties or assets, except
in the ordinary course of business;
(h) sell any real estate owned as of the date of this Agreement or
acquired thereafter except for fair market value in the ordinary course of
business;
(i) dispose of or permit to lapse any rights to the use of any
Intellectual Property or dispose of or disclose to any Person other than
its employees any material trade secret not theretofore a matter of public
knowledge;
(j) except as contemplated in Section 5.9 and Section 5.10, grant any
increase in compensation or pay or agree to pay or accrue any bonus or like
benefit to or for the credit of any director, officer, employee or other
Person or enter into any employment, consulting or severance agreement or
other agreement with any director, officer or employee, or adopt, amend or
terminate any Benefit Plan or change or modify the period of vesting or
retirement age for any participant of such a plan;
(k) declare, pay or set aside for payment any dividend or other
distribution or payment in respect of the capital stock of Company;
(l) acquire the capital stock or other equity securities or interest
of any Person or acquire all or substantially all of the assets of any
Person;
(m) make any capital expenditure or a series of expenditures of a
similar nature in excess of $25,000 in the aggregate;
(n) make any income tax or franchise tax election or settle or
compromise any tax liability;
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(o) except for negotiations and discussions between the parties hereto
relating to the transactions contemplated by this Agreement or as otherwise
permitted hereunder, enter into any transaction, or enter into, modify or
amend any Contract or commitment other than in the ordinary course of
business;
(p) increase the amount of any indebtedness owed by the Company to any
stockholder of the Company or Affiliate of any such stockholder, or to the
Company from any such stockholder or Affiliate of any such stockholder;
(q) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization, or other
reorganization or business combination of the Company;
(r) make any investments except in the ordinary course of business;
(s) sell or contract to sell any part of the Company's premises
without the approval of the terms and conditions of such sale by Purchaser;
(t) change any fiscal year or the length thereof;
(u) enter into any agreement, understanding or commitment, written or
oral, with any other Person which is in any manner inconsistent with the
obligations of the Company or the Stockholders under this Agreement or any
related written agreement
(v) change the banking arrangements and signature authorities
currently in effect or grant any general or special power of attorney;
(w) knowingly waive any material right without receiving fair
consideration; or
(x) agree to do any of the things described in clauses (a) through (w)
of this Section 4.2.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 ACCESS TO, AND INFORMATION CONCERNING, PROPERTIES AND
RECORDS. During the pendency of the transactions contemplated hereby, the
Company and the Stockholders shall give Purchaser, its legal counsel,
accountants and other representatives full access (and shall otherwise fully
cooperate, including by making available copies of all of the following which
are susceptible to photostatic reproduction), during normal business hours,
throughout the period prior to the Closing, to all of the Company's books,
Contracts, Properties, premises, permits, Environmental Permits, licenses,
Governmental Authorizations, commitments of any nature (whether oral or written)
and records, and shall permit Purchaser and such representatives to make such
inspections (including without limitation, with regard to such Properties,
physical inspection of the surface and subsurface thereof and any structure
thereon) and to have discussions with material suppliers and customers of the
Company as Purchaser and such representatives may require and furnish to
Purchaser and such representatives during such period all such information
concerning the Company and its affairs as they may reasonably request. Purchaser
agrees that all discussions and communications with suppliers and customers of
the Company will be with the consent and cooperation of the Company.
SECTION 5.2 PREPARATION OF PERMIT APPLICATION/INFORMATION STATEMENT.
(a) As soon as practicable after the execution of this Agreement, the
Company shall prepare, with the cooperation of Purchaser, an Information
Statement for the Stockholders to approve this Agreement and the transactions
contemplated hereby. The Information Statement shall constitute a disclosure
document for the offer and issuance of the shares of Purchaser Common Stock to
be received by the holders of Company Common Stock in the Merger. The Company
and Purchaser shall each use reasonable commercial efforts to cause the
Information Statement to comply with applicable federal and state securities
laws requirements. Each of the Company and Purchaser agrees to provide promptly
to the other such information concerning its business and financial statements
and affairs as, in the reasonable judgment of the providing party or its
counsel, may be required or appropriate for inclusion in the Information
Statement, or in any amendments or supplements thereto, and to cause its counsel
and auditors to cooperate with the other's counsel and auditors
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in the preparation of the Information Statement. The Company will promptly
advise Purchaser, and Purchaser will promptly advise the Company, in writing if
at any time prior to the Effective Time either the Company or Purchaser shall
obtain knowledge of any facts that might make it necessary or appropriate to
amend or supplement the Information Statement in order to make the statements
contained or incorporated by reference therein not misleading or to comply with
applicable law. The Information Statement shall contain the recommendation of
the Board of Directors of the Company that the Stockholders approve the Merger
and this Agreement and the conclusion of the Board of Directors that the terms
and conditions of the Merger are fair and reasonable to the Stockholders.
Anything to the contrary contained herein notwithstanding, the Company shall not
include in the Information Statement any information with respect to Purchaser
or its affiliates or associates, the form and content of which information shall
not have been approved by Purchaser prior to such inclusion.
(b) As soon as practicable after the execution of this Agreement, Purchaser
shall prepare, with the cooperation of the Company, the permit Application.
Purchaser and the Company shall each use reasonable commercial efforts to cause
the Permit Application to comply with the requirements of applicable federal and
state laws. Each of Purchaser and the Company agrees to provide promptly to the
other such information concerning its business and financial statements and
affairs as, in the reasonable judgment of the providing party or its counsel,
may be required or appropriate for inclusion in the Permit Application, or in
any amendments or supplements thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation of the Permit
Application. The Company will promptly advise Purchaser, and Purchaser will
promptly advise the Company, in writing if at any time prior to the Effective
Time either the Company or Purchaser shall obtain knowledge of any facts that
might make it necessary or appropriate to amend or supplement the permit
Application in order to make the statements contained or incorporated by
reference therein not misleading or to comply with applicable law. Anything to
the contrary contained herein notwithstanding, Purchaser shall not include in
the Permit Application any information with respect to the Company or its
affiliates or associates, the form and content of which information shall not
have been approved by the Company prior to such inclusion.
SECTION 5.3 AFFILIATE LETTERS. At least fifteen (15) days prior to the
Closing Date, the Company shall deliver to Purchaser a list of names and
addresses of those persons who were or will be, in the Company's reasonable
judgment, at the record date for its Stockholders' meeting to approve the
Merger, "affiliates" (each such person, a "Rule 145 Affiliate") of the Company
within the meaning of Rule 145 of the rules and regulations promulgated under
the Securities Act.
SECTION 5.4 MISCELLANEOUS AGREEMENTS AND CONSENTS. Subject to the terms
and conditions of this Agreement, the Company, Purchaser and Newco agree to use
their reasonable best efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, all things necessary, proper, or advisable under
applicable laws and regulations to consummate and make effective, as soon as
practicable after the date hereof, the transactions contemplated by this
Agreement.
SECTION 5.5 BEST GOOD FAITH EFFORTS. All parties hereto agree that the
parties will use their best good faith efforts to promptly secure all necessary
third-party or regulatory consents, waivers and approvals, and to do or cause to
be done, all things necessary, proper or advisable under applicable law or
regulations to consummate and make effective the transactions provided for
herein, and to satisfy the other conditions to Closing contained herein.
SECTION 5.6 EXCLUSIVITY. The Company acknowledges that the due diligence
and other investigations permitted herein will involve the expenditures of
substantial time and expense by Purchaser. In consideration thereof, the
Company, on its own behalf and on behalf of its Affiliates, agrees that for a
period of up to and including the earlier of the date of termination under
Section 7.1 or May 31, 1999, it will not make or encourage any offer or obtain
any offer or otherwise provide any assistance in aid of any offer for the sale,
lease or transfer of all or any part of the business of the Company or of the
stock or assets of the business of the Company, to any Person other than
Purchaser. Immediately upon receipt of any unsolicited offer, the Company will
communicate to Purchaser the terms of any proposal or request for information
and the identity of the parties involved.
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SECTION 5.7 PUBLIC ANNOUNCEMENT. The timing and content of any
announcements, press releases or other public statements concerning the proposal
contained herein will occur upon, and be determined by, the mutual consent of
the Company and Purchaser.
SECTION 5.8 CONFIDENTIALITY. Without the express written consent of all of
the parties hereto, each of the parties hereto agrees to maintain in confidence
and not disclose to any other Person the terms of the transactions contemplated
herein or the information delivered in connection with the proposed due
diligence investigation, other than disclosures required to obtain the approvals
for the transactions contemplated hereby, disclosures to those professionals and
advisors who have a need to know, disclosures of information already available
to the public or any other disclosures required by applicable law. In the event
that Purchaser, the Company or the Stockholders are at any time requested or
required (by oral questions, interrogatories, request for information or
documents, subpoena or other similar process) to disclose any information
supplied to it in connection with this transaction, such party agrees to provide
the other parties hereto prompt notice of such request so that an appropriate
protective order may be sought and/or such other party may waive the first
party's compliance with the terms of this Section 5.8.
SECTION 5.9 EXERCISE OF WARRANTS. Prior to the Effective Time, the Company
shall use its best efforts to cause the exercise of all outstanding Company
Warrants by the holders thereof to purchase shares of Company Common Stock and
Company Preferred Stock. Notwithstanding anything herein to the contrary, the
Company will not take any action with respect to Company Warrants if the parties
determine that such action would jeopardize the accounting treatment of the
merger as a "pooling of interests."
SECTION 5.10 CONVERSION OF PREFERRED STOCK. Prior to the Effective Time,
the holders of Company Preferred Stock (all of which are Stockholders) shall
convert all outstanding shares of Company Preferred Stock into shares of Company
Common Stock pursuant to the terms of the Company's Certificate of
Incorporation, as amended. Notwithstanding anything herein to the contrary, the
holders of Company Preferred Stock will not take any action with respect to
conversion if the parties determine that such action would jeopardize the
accounting treatment of the merger as a "pooling of interests."
SECTION 5.11 POOLING ACCOUNTING. Purchaser and the Company shall each use
their best efforts to cause the business combination to be effected by the
Merger to be accounted for as a pooling of interests. Purchaser and the Company
shall use their best efforts to cause their respective Affiliates not to take
any action that would adversely affect the ability of Purchaser to account for
the business combination to be effected by the Merger as a pooling of interests.
Neither Purchaser nor the Company shall take any action, including the
acceleration of vesting of any options, warrants, restricted stock or other
rights to acquire shares of the capital stock of the Company, which reasonably
would be expected to (i) interfere with Purchaser's ability to account for the
Merger as a pooling of interests or (ii) jeopardize the tax-free nature of the
reorganization hereunder.
SECTION 5.12 368(A) REORGANIZATION. Purchaser and the Company shall each
use their best efforts to cause the business combination to be effected by the
Merger to be treated as a reorganization within the meaning of Section 368(a) of
the Tax Code. From and after the date of this Agreement and after the Effective
Time, each party shall use its best efforts to cause the Merger to qualify and
shall not knowingly take any actions or cause any actions to be taken which
could prevent the Merger from qualifying as a reorganization under the
provisions of Section 368(a) of the Tax Code.
SECTION 5.13 BLUE SKY LAWS. Purchaser shall take such steps as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable to the issuance of the Purchaser Common Stock pursuant
hereto. The Company shall use its best efforts to assist Purchaser as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable in connection with the issuance of Purchaser Common Stock
hereto.
SECTION 5.14 INDEMNIFICATION OF OFFICERS AND DIRECTORS. Purchaser agrees
that the indemnification obligations set forth in the Company's Articles of
Incorporation and the Company's Bylaws shall survive the Merger (and, prior to
the Effective Time, Purchaser shall cause the Certificate of Incorporation and
Bylaws of Newco to reflect as nearly as possible such provisions) and shall not
be amended, repealed or otherwise
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modified for a period of two years after the Effective Time in any manner that
would adversely affect the rights thereunder of the individuals who, on or prior
to the Effective Time, were directors, officers, employees or agents of the
Company.
SECTION 5.15 EMPLOYEE BENEFITS. After the Closing Date and for a period
ending no earlier than December 31, 1999, Purchaser shall take all such actions
as are necessary and appropriate to maintain for the employees of Surviving
Company the vacation, sick leave, sabbatical and bonus policies provided by the
Company immediately preceding the Closing Date, and shall thereafter exercise
commercially reasonable efforts to reconcile such policies with the policies of
Purchaser.
ARTICLE VI
CONDITIONS TO CLOSING
SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO CLOSE. The respective
obligations of each party to close the transactions contemplated hereby are
subject to the satisfaction or waiver of the following conditions prior to the
Closing:
(a) The receipt of any applicable regulatory approvals and the
expiration of any applicable waiting period (including without limitation
any waiting period required by the HSR Act) with respect thereto; and
(b) The Closing will not violate any injunction, order or decree of
any court or Governmental Authority having competent jurisdiction.
SECTION 6.2 CONDITIONS TO THE OBLIGATIONS OF PURCHASER TO CLOSE. The
obligations of Purchaser to close the transactions contemplated hereby are
subject to the satisfaction or waiver of the following conditions prior to the
Closing:
(a) All representations and warranties of the Company shall be true
and correct in all material respects as of the date hereof, and at and as
of the Closing, with the same force and effect as though made on and as of
the Closing;
(b) The Company shall have, in all material respects, performed all
obligations and agreements and complied with all covenants and conditions
contained in this Agreement to be performed or complied with by it prior to
the Closing Date;
(c) All corporate and other actions necessary to authorize the
execution, delivery and performance of this Agreement by the Company and
the consummation by the Company of the transactions contemplated herein
shall have been duly and validly taken.
(d) There shall not have occurred any Material Adverse Effect with
respect to the Company;
(e) No more than two percent (2%) of the shares of Company Common
Stock outstanding as of the Effective Time shall be Dissenting Shares;
(f) Purchaser shall have received certificates dated the Closing
executed by the President and the Secretary of the Company, certifying in
such reasonable detail as Purchaser may reasonably request, to the effect
described in Sections 6.2(a), (b), (c), (d) and (e);
(g) All outstanding shares of Company Preferred Stock shall have been
converted to shares of Company Common Stock, and an officer of Company
shall deliver a certificate to Purchaser to that effect;
(h) All outstanding Company Warrants shall have been exercised, and an
officer of Company shall deliver a certificate to Purchaser to that effect;
(i) The Company shall have delivered to Purchaser a schedule of all
outstanding and unexercised Company Options as of the Effective Time,
setting forth the material terms thereof, and the Company
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shall have delivered to Purchaser the consents of holders of unexercised
Company Options and/or Company Warrants as required pursuant to Section
1.11 hereof;
(j) The Company shall have executed and delivered to Purchaser proper
instruments for the transfer of the capital stock of Company in form and
substance satisfactory to counsel for Purchaser in accordance with the
terms of this Agreement;
(k) The principal amount of any Long Term Debt as of the Effective
Time shall not exceed $2,073,000, and an officer of Company shall deliver a
certificate to Purchaser to that effect;
(l) Purchaser shall have completed in its sole discretion the results
of its due diligence investigation of the Company, including but not
limited to any tax or accounting matters, within 7 days after the
announcement to the general public of the Merger contemplated hereby;
(m) The Company shall have furnished Purchaser with reasonably
sufficient evidence of consents as shall be required to enable Purchaser to
continue to enjoy the benefit of any Governmental Authorization, lease,
license, permit, Environmental Permit, Contract or other agreement or
instrument to or of which the Company is a party or a beneficiary;
(n) The form and substance of all actions, proceedings, instruments
and documents required to consummate the transactions contemplated by this
Agreement shall have been satisfactory in all reasonable respects to
Purchaser and its counsel;
(o) On or before the Closing, the Company shall have collected any
outstanding balances with respect to loans or other receivables from
officers of the Company;
(p) Purchaser's Certificate of Incorporation shall have been amended
to increase the number of authorized shares of Purchaser Common Stock to
30,000,000 shares, and such amendment shall have been filed with the office
of the Secretary of State of Delaware;
(q) Laird Foshay shall have entered into an employment agreement with
Purchaser or an Affiliate thereof, in substantially the form attached
hereto as Exhibit C;
(r) The Company shall deliver or cause to be delivered to Purchaser,
prior to the Effective Time, from (i) each Stockholder not considered to be
a Rule 145 Affiliate, a Stockholder's Letter in substantially the form
attached hereto as Exhibit D-1, and (ii) each Stockholder considered to be
a Rule 145 Affiliate, an Affiliate Letter in substantially the form
attached hereto as Exhibit D-2;
(s) The Company, Purchaser and a third-party escrow agent shall have
entered into the General Liability Escrow Agreement and the Specific
Liability Escrow Agreement;
(t) Purchaser shall have received the opinions of counsel to the
Company substantially in the form of Exhibit E attached hereto;
(u) Purchaser shall have received from Locke Liddell & Sapp LLP a
written opinion, dated as of the Closing Date, for the benefit of Purchaser
to the effect that, on the basis of facts, representations and assumptions
set forth in such opinion, (i) the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Tax Code, (ii) Purchaser, Newco and the Company will each be
a party to that reorganization within the meaning of Section 368(b) of the
Tax Code, (iii) Purchaser, Newco or the Company shall not recognize any
gain or loss as a result of the Merger, and (iv) the Stockholders shall not
recognize any gain or loss as a result of the Merger, other than gain to
the extent the Stockholders receive cash in lieu of fractional shares, and
such opinion shall not have been withdrawn or modified in any material
respect. In rendering its opinion, Locke Liddell & Sapp LLP may require and
rely upon representations contained in letters from Purchaser, Company and
others;
(v) Purchaser shall have received a letter from Hein + Associates,
L.L.P., certified public accountants for Purchaser, dated as of the Closing
Date and addressed to Purchaser, in form and substance reasonably
satisfactory to Purchaser, to the effect that no conditions exist related
to Purchaser
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that would preclude Purchaser's accounting for the Merger as a
pooling-of-interests if consummated in accordance with this Agreement; and
(w) Purchaser shall have received a letter from a nationally
recognized accounting firm (the cost of which shall be paid by Purchaser),
dated as of the Closing Date and addressed to Purchaser, in form and
substance reasonably satisfactory to Purchaser, to the effect that the
transactions contemplated hereby will qualify for a pooling-of-interests
accounting treatment if consummated in accordance with this Agreement.
SECTION 6.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY TO CLOSE. The
obligations of the Company to close the transactions contemplated herein are
subject to the satisfaction or waiver of the following conditions prior to the
Closing:
(a) All representations and warranties of Purchaser and Newco
contained herein shall be true and correct in all material respects as of
the date hereof, and at and as of the Closing, with the same force and
effect as though made on and as of the Closing;
(b) Purchaser and Newco shall have, in all material respects,
performed all obligations and agreements and complied with all covenants
and conditions contained in this Agreement to be performed or complied with
by each prior to the Closing Date;
(c) There shall not have occurred any Material Adverse Effect with
respect to Purchaser or Newco;
(d) The Company shall have received certificates dated the Closing,
executed by an appropriate officer of Purchaser and Newco certifying, in
such detail as the Company may reasonably request, to the effect described
in Sections 6.3(a) and (b);
(e) The Company, Purchaser and a third-party escrow agent shall have
entered into the General Liability Escrow Agreement and the Specific
Liability Escrow Agreement;
(f) The Company shall have received the opinions of counsel to
Purchaser substantially in the form of Exhibit F attached hereto;
(g) The Company shall have received from Gray, Cary, Ware &
Freidenrich, L.L.P., a written opinion, dated as of the Closing Date, for
the benefit of the Company to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion, (i) the Merger
will be treated for federal income tax purposes as a reorganization within
the meaning of Section 368(a) of the Tax Code, (ii) Purchaser, Newco and
the Company will each be a party to that reorganization within the meaning
of Section 368(b) of the Tax Code, (iii) Purchaser, Newco or the Company
shall not recognize any gain or loss as a result of the Merger, and (iv)
the Stockholders shall not recognize any gain or loss as a result of the
Merger, other than gain to the extent the Stockholders receive cash in lieu
of fractional shares, and such opinion shall not have been withdrawn or
modified in any material respect. In rendering its opinion, Gray, Cary,
Ware & Freidenrich, L.L.P. may require and rely upon representations
contained in letters from Purchaser, Company and others;
(h) The Company shall have received a letter from
PricewaterhouseCoopers LLP, certified public accountants for the Company,
dated as of the Closing Date and addressed to the Company, in form and
substance reasonably satisfactory to the Company, to the effect that no
conditions exist related to the Company that would preclude Purchaser's
accounting for the Merger as a pooling-of-interests if consummated in
accordance with this Agreement; and
(i) Purchaser shall have paid in full the indebtedness of the Company,
including principal and interest, under the following agreements: (i) Note
Purchase Agreement by and between the Company and Mohr Davidow Ventures III
dated as of September 26, 1997; (ii) Note Purchase Agreement by and between
the Company and Softven No. 2 Investment Enterprise Partnership dated as of
December 18, 1997; (iii) Note Purchase Agreement by and between the Company
and Laird Foshay dated as of September 9, 1998; and (iv) Promissory Note by
and between the Company and Laird Foshay dated as of January 18, 1995.
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ARTICLE VII
TERMINATION; AMENDMENT; WAIVER
SECTION 7.1 TERMINATION. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing Date:
(a) By mutual written consent duly authorized by the board of
directors of Purchaser and the board of directors of the Company;
(b) By Purchaser if there has been a material breach of a
representation, warranty, covenant or agreement contained in this Agreement
on the part of the Company, and as a result of such breach the conditions
precedent set forth in Section 6.1 or Section 6.2, as the case may be,
would not then be satisfied; provided, however, that if such breach is
curable by the Company within 15 days of notice of breach by Purchaser
through the exercise of the Company's reasonable best efforts, then for so
long as the Company continues to exercise such reasonable best efforts,
Purchaser may not terminate this Agreement under this Section 7.1(b) unless
the breach is not cured in full within such 15 days;
(c) By the Company (i) if the Average Stock Price, calculated pursuant
to Section 1.7 hereof, is less than $10 per share, or (ii) if there has
been a material breach of a representation, warranty, covenant or agreement
contained in this Agreement on the part of Purchaser or Newco, and as a
result of such breach the conditions precedent set forth in Section 6.1 or
Section 6.3, as the case may be, would not then be satisfied; provided,
however, that if such breach is curable by Purchaser or Newco within 15
days of notice of breach by the Company through the exercise Purchaser's or
Newco's reasonable best efforts, then for so long as Purchaser and/or Newco
continues to exercise such reasonable best efforts, the Company may not
terminate this Agreement under this Section 7.1(c) unless the breach is not
cured in full within such 15 days;
(d) By Purchaser or the Company if the Closing Date shall not have
occurred on or before May 31, 1999 or such later date agreed to in writing
by Purchaser and the Company; provided, however, that the right to
terminate this Agreement under this Section 7.1(d) shall not be available
to any party whose willful failure to fulfill any obligations hereunder has
been the cause of, or resulted in, the failure of the Closing to occur on
or before such date; and
(e) By Purchaser or the Company if any court of competent jurisdiction
in the United States of America or other (federal or state) governmental
body shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the transactions herein
contemplated and such order, decree, ruling or other action shall have been
final and nonappealable.
SECTION 7.2 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to Section 7.1 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party or its directors, officers or stockholders, other than the
provisions of Section 1.10, Section 5.8 and this Section 7.2, which provisions
shall remain in full force and effect. Nothing contained in this Section 7.2
shall relieve any party from liability for any breach of this Agreement.
SECTION 7.3 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of all the parties.
SECTION 7.4 EXTENSION; WAIVER. At any time prior to the Closing Date,
either party may (i) extend the time for the performance of any of the
obligations or other acts of the non-waiving party, (ii) waive any inaccuracies
in the representations and warranties contained herein or in any document,
certificate or writing delivered pursuant hereto by the non-waiving party, or
(iii) waive compliance with any of the agreements or conditions contained herein
by the non-waiving party. Any agreement on the part of any party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
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ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
SECTION 8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The parties hereto
agree that except as provided in the sentence immediately next following this
sentence, all of their respective representations and warranties contained in
this Agreement shall survive for a period equal to the earlier of (i) one (1)
year after the Closing Date, or (ii) the completion of the audit of Purchasers'
consolidated financial statements for the fiscal year ending on December 31,
1999 (the "Survival Period"). Notwithstanding the foregoing, the Stockholders'
liability with respect to the Specific Liability shall continue until the
occurrence of a Resolution Event.
ARTICLE IX
INDEMNIFICATION
SECTION 9.1 INDEMNIFICATION BY THE COMPANY AND THE STOCKHOLDERS. The
Company and the Stockholders unconditionally, absolutely and irrevocably agree
to and shall defend, indemnify and hold harmless Purchaser, and each of
Purchaser's subsidiaries, stockholders, Affiliates, officers, directors,
employees, counsel, agents, successors, assigns, heirs and legal and personal
representatives (Purchaser and all such other Persons are collectively referred
to as the "Purchaser's Indemnified Persons") from and against, and shall
reimburse the Purchaser's Indemnified Persons for, each and every Loss (as
defined in Section 10.13), paid, imposed on or incurred by the Purchaser's
Indemnified Persons, directly or indirectly, relating to, resulting from or
arising out of, or any allegation by any third party of any inaccuracy in any
representation or warranty of the Company under this Agreement, or the Schedules
hereto or any agreement or certificate delivered or to be delivered by the
Company pursuant hereto in any respect (except for representations or covenants
made by individual Stockholders in the Stockholders' Letters or Affiliates
Letters, as applicable, which shall be governed by the indemnification
provisions set forth therein), in each case without regard to any applicable
materiality thresholds, whether or not the Purchaser's Indemnified Persons
relied thereon or had knowledge thereof, or any breach or nonfulfillment of any
covenant, agreement or other obligation of the Company or the Stockholders under
this Agreement or any agreement delivered pursuant hereto. With respect to
matters not involving Proceedings commenced or threatened by third parties,
within five days after notification to the Stockholders' Representative from the
Purchaser's Indemnified Persons supported by reasonable documentation setting
forth the nature of the circumstances entitling the Purchaser's Indemnified
Persons to indemnity hereunder (including, but not limited to, references to the
provisions hereof upon which the Purchaser's Indemnified Person is relying in
making such claim), the Stockholders' Representative, at no cost or expense to
the Purchaser's Indemnified Persons, shall diligently commence resolution of
such matters in a manner reasonably acceptable to the Purchaser's Indemnified
Persons and shall diligently and timely prosecute such resolution to completion.
If litigation or any other Proceeding is commenced or threatened, the provisions
of Section 9.3 shall control.
SECTION 9.2 INDEMNIFICATION BY PURCHASER. Purchaser unconditionally,
absolutely and irrevocably agrees to and shall defend, indemnify and hold
harmless the Company and its directors, officers, employees, counsel, agents and
contractors, the Stockholders, and Company's and the Stockholders' respective
successors, assigns, heirs and legal and personal representatives (the Company,
the Stockholders and such other Persons are collectively referred to as the
"Company's Indemnified Persons") from and against, and shall reimburse the
Company's Indemnified Persons for, each and every Loss paid, imposed on or
incurred by the Company's Indemnified Persons, directly or indirectly, relating
to, resulting from or arising out of, or any allegation by any third party of,
any inaccuracy in any representation or warranty of Purchaser under this
Agreement or any agreement, certificate or other document delivered or to be
delivered by Purchaser pursuant hereto in any respect, whether or not the
Company's Indemnified Persons relied thereon or had knowledge thereof, or any
breach or nonfulfillment of any covenant, agreement or other obligation of
Purchaser under this Agreement or any agreement or document delivered pursuant
hereto.
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SECTION 9.3 NOTICE AND DEFENSE OF THIRD PARTY CLAIMS. If any Proceeding
shall be brought or asserted under this Article against an indemnified party or
any successor thereto (the "Indemnified Person") in respect of which indemnity
may be sought under this Article from an indemnifying Person or any successor
thereto (the "Indemnifying Person"), the Indemnified Person shall give prompt
written notice of such Proceeding to the Indemnifying Person who shall assume
the defense thereof, including the employment of counsel reasonably satisfactory
to the Indemnified Person and the payment of all expenses; provided, that any
delay or failure so to notify the Indemnifying Person shall relieve the
Indemnifying Person of its obligations hereunder only to the extent, if at all,
that it is prejudiced by reason of such delay or failure. In no event shall any
Indemnified Person be required to make any expenditure or bring any cause of
action to enforce the Indemnifying Person's obligations and liability under and
pursuant to the indemnifications set forth in this Article. In addition, actual
or threatened action by a Governmental Authority or other entity is not a
condition or prerequisite to the Indemnifying Person's obligations under this
Article. The Indemnified Person shall have the right to employ separate counsel
in any of the foregoing Proceedings and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of the
Indemnified Person unless the Indemnified Person shall in good faith determine
that there exist actual or potential conflicts of interest which make
representation by the same counsel inappropriate, as evidenced by the written
opinion of outside counsel to the Indemnified Person. The Indemnified Person's
right to participate in the defense or response to any Proceeding should not be
deemed to limit or otherwise modify its obligations under this Article. In the
event that the Indemnifying Person, within 15 days after notice of any such
Proceeding, fails to assume the defense thereof, the Indemnified Person shall
have the right to undertake the defense, compromise or settlement of such
Proceeding for the account of the Indemnifying Person, subject to the right of
the Indemnifying Person to assume the defense of such Proceeding with counsel
reasonably satisfactory to the Indemnified Person at any time prior to the
settlement, compromise or final determination thereof. Anything in this Article
to the contrary notwithstanding, the Indemnifying Person shall not, without the
Indemnified Person's prior written consent, which consent shall not be
unreasonably withheld, settle or compromise any Proceeding or consent to the
entry of any judgment with respect to any Proceeding; provided, however, that
the Indemnifying Person may, without the Indemnified Person's prior written
consent, settle or compromise any such Proceeding or consent to entry of any
judgment with respect to any such Proceeding that requires solely the payment of
money damages by the Indemnifying Person and that includes as an unconditional
term thereof the release by the claimant or the plaintiff of the Indemnified
Person from all liability in respect of such Proceeding.
SECTION 9.4 LIMITATIONS.
(a) An Indemnifying Person shall have no liability under this Article
unless notice of a claim for indemnity (a "Notice"), shall have been given
within the Survival Period. Notwithstanding the foregoing, the Stockholders'
liability with respect to the Specific Liability shall continue until the
occurrence of a Resolution Event.
(b) No Purchaser's Indemnified Person shall be entitled to indemnification
from the Company and/or the Stockholders pursuant to Section 9.1 hereof (other
than claims with respect to the Specific Liability, which shall be governed by
subsection (e) below) unless and until the aggregate of all Losses for which
indemnification would (but for the limitation of this sentence) be required to
be paid by the Company and/or the Stockholders hereunder exceeds $150,000 (the
"Loss Threshold"), after which the Purchaser's Indemnified Persons shall be
entitled to recover for all Losses for which indemnification is required to be
paid hereunder, including amounts used in satisfying the Loss Threshold.
Notwithstanding anything herein to the contrary, with the exception of claims
based on fraud or knowing or intentional misrepresentation or claims with
respect to the Specific Liability, in no event shall the aggregate liability of
the Stockholders hereunder exceed the value of the General Liability Escrow
Shares, and the liability of any individual Stockholder under this Article IX
shall not exceed the Stockholder's pro rata share of the number of shares of
Purchaser Common Stock deposited into the escrow account pursuant to the General
Liability Escrow Agreement. The General Liability Escrow Shares shall be the
sole and exclusive remedy for any claims, demands, actions or causes of action
(except for claims based on fraud or intentional misrepresentation or claims
with respect to the Specific Liability) by any of the Purchasers' Indemnified
Persons hereunder. Except for claims based on fraud or intentional
misrepresentation or claims with respect to the Specific Liability, the
Stockholders shall
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have no further obligations under Article IX of this Agreement at the earlier of
the time when all of the General Liability Escrow Shares have been distributed
or are required to be distributed pursuant to this Agreement and the General
Liability Escrow Agreement. Notwithstanding anything herein to the contrary,
there shall be no limitation on the indemnification liability of individual
Stockholders for breaches of representations or covenants made in their
respective Stockholder Letters or Affiliate Letters, as applicable.
(c) The Stockholders' liability with respect to the Specific Liability
shall not be subject to the Loss Threshold. Notwithstanding anything herein to
the contrary, in no event shall the aggregate liability of the Stockholders with
respect to the Specific Liability exceed the value of the Specific Liability
Escrow Shares, and the liability of any individual Stockholder for the Specific
Liability shall not exceed the Stockholder's pro rata share of the number of
shares of Purchaser Common Stock deposited into the escrow account pursuant to
the Specific Liability Escrow Agreement. The Specific Liability Escrow Shares
shall be the sole and exclusive remedy for any claims, demands, actions or
causes of action by any of the Purchasers' Indemnified Persons with respect to
the Specific Liability. The Stockholders shall have no further obligations with
respect to the Specific Liability upon the occurrence of a Resolution Event.
(d) No Company's Indemnified Person shall be entitled to indemnification
from Purchaser and/or Newco pursuant to Section 9.2 hereof unless and until the
aggregate of all Losses for which indemnification would (but for the limitation
of this sentence) be required to be paid by Purchaser and/or Newco hereunder
exceeds the Loss Threshold, after which the Company's Indemnified Persons shall
be entitled to recover for all Losses for which indemnification is required to
be paid hereunder, including amounts used in satisfying the Loss Threshold.
Notwithstanding anything herein to the contrary, with the exception of claims
based on fraud or knowing or intentional misrepresentation, in no event shall
the aggregate liability of Purchaser and Newco hereunder exceed $4,000,000
("Loss Ceiling"), and neither Purchaser nor Newco shall have any further
obligations under Article IX of this Agreement at the earlier of the time when
Purchaser has paid and/or is obligated to pay indemnification hereunder in
amounts equal in the aggregate to the Loss Ceiling.
(e) In calculating the amount of any Loss for which any Indemnifying Person
is liable under this Article IX, there shall be taken into consideration the
amount of any insurance recoveries, net of any amounts which are in effect
self-insured, whether through deductibles, co-payments, retention amounts,
retroactive premium adjustments or other similar adjustments, the Indemnified
Person in fact receives as a direct consequence of the circumstances to which
the Loss related or from which the Loss resulted or arose.
(f) In addition to the rights and remedies of the parties specifically
provided for by this Article, each party hereto shall have such other equitable
remedies as shall be available under applicable law or in equity for the other
party's breach of the representations and warranties contained herein, or the
failure to perform any of its covenants, agreements or obligations under or
contained in this Agreement or in any document furnished or delivered pursuant
hereto; provided, however, that with respect to any remedy providing for the
recovery of monetary damages, any such recovery shall be subject to the
limitations contained in this Article, except for claims based on fraud or
knowing or intentional misrepresentation.
SECTION 9.5 INCONSISTENT PROVISIONS. The provisions of this Article shall
govern and control over any inconsistent provisions of this Agreement.
SECTION 9.6 ARBITRATION. Any dispute arising out of, relating to, or in
any way touching upon this Agreement or the breach, termination or validity
hereof shall be finally settled by arbitration conducted expeditiously in
accordance with the CPR Rules for Non-Administered Arbitration of Business
Disputes. With respect to an arbitral proceeding, the parties agree as follows:
(a) The arbitration shall be conducted by three independent and
impartial arbitrators, none of whom shall be a director, officer or
employee of either party hereto or its affiliates. Purchaser, on the one
hand, and the Company, on the other hand, shall each choose one arbitrator.
The two chosen arbitrators shall choose the third arbitrator. The act or
decision of a majority of the arbitrators shall constitute the act or
decision of the arbitral tribunal.
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<PAGE> 92
(b) The parties acknowledge that this Agreement affects interstate
commerce; thus, the arbitration shall be governed by the American
Arbitration Association, and any judgment upon the award decided upon by
the arbitrators may be entered by any court having jurisdiction thereof.
(c) Any arbitration conducted pursuant to this Section shall be held
at a location chosen by the non-complaining party.
(d) The costs and expenses of the arbitration shall be allocated
equally between the parties; provided, however, that each party's own
attorneys' fees shall be borne by the party incurring same.
(e) It shall not be inconsistent with this Section for any party to
seek from any court of competent jurisdiction interim relief in aid of
arbitration or to protect the rights of either party pending the
establishment of the arbitral tribunal
(f) Nothing in this Article or the fact that arbitration has or may be
commenced shall impair the exercise of any termination rights under this
Agreement.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
among the parties or any of them with respect to the subject matter hereof.
SECTION 10.2 ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests and obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties.
SECTION 10.3 FURTHER ASSURANCES. From time to time as and when reasonably
requested by Purchaser, or its successors or assigns, the Company and the
Stockholders shall execute and deliver and shall cause the Company and the
officers and directors of the Company to execute and deliver such further
agreements, documents, deeds, certificates and other instruments of conveyance
and transfer and to take or cause to be taken such other actions as Purchaser
may reasonably require and as shall be reasonably necessary or advisable to
carry out the purposes of and effect the transactions contemplated by this
Agreement.
SECTION 10.4 ENFORCEMENT OF THE AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which they are entitled pursuant to the terms hereof or
otherwise, at law or in equity.
SECTION 10.5 SEVERABILITY. If any provision of this Agreement is held to
be illegal, invalid or unenforceable under present or future laws in any
jurisdiction, that provision shall be ineffective to the extent of such
illegality, invalidity or unenforceability in that jurisdiction and such holding
shall not, consistent with applicable law, invalidate or render unenforceable
such provision in any other jurisdiction, and the legality, validity and
enforceability of the remaining provisions of this Agreement shall not be
affected thereby, and shall remain in full force and effect in all
jurisdictions.
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SECTION 10.6 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person, by cable, telecopy or telex, or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties as follows:
if to Purchaser:
Telescan, Inc.
Attention: Corporate Secretary
5959 Corporate Drive
Suite 2000
Houston, Texas 77036
with required copy to:
Mr. David F. Taylor
Locke Liddell & Sapp LLP
3500 Chase Tower
600 Travis
Houston, Texas 77002
Fax: (713) 223-3717
if to the Company or the Stockholders:
INVESTools, Inc.
Attn: Laird Foshay
3698 Haven Avenue, Suite A
Redwood City, California 94063
Fax: (650) 482-3061
with required copy to:
Mr. Jim Koshland
Gray, Cary, Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, California 94301-1825
Fax: (650) 327-3699
or to such other address as the Person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
SECTION 10.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, regardless of the
laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 10.8 GENDER; "INCLUDING" IS NOT LIMITING; DESCRIPTIVE
HEADINGS. The masculine and neuter genders used in this Agreement each includes
the masculine, feminine and neuter genders, and the singular number includes the
plural, each where appropriate, and vice versa. Wherever the term "including" or
a similar term is used in this Agreement, it shall be read as if it were written
"including by way of example only and without in any way limiting the generality
of the clause or concept referred to." The descriptive headings are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
SECTION 10.9 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other Person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 10.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
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SECTION 10.11 INCORPORATION BY REFERENCE. Any and all schedules, exhibits,
annexes, statements, reports, certificates or other documents or instruments
referred to herein or attached hereto are incorporated herein by reference
hereto as though fully set forth at the point referred to in the Agreement.
SECTION 10.12 JURISDICTION AND VENUE. Any process against Purchaser, the
Company or the Stockholder in, or in connection with, any suit, action or
proceeding arising out of or relating to this Agreement or any of the
transactions contemplated by this Agreement may be served personally or by
certified mail at the address set forth in Section 10.7 with the same effect as
though served on it or him personally.
SECTION 10.13 CERTAIN DEFINITIONS.
(a) "Adjusted Aggregate Merger Consideration" means the aggregate number of
shares of Company Common Stock outstanding as of the Effective Time (assuming
the exercise of all Company Options and Company Warrants and the conversion of
all Company Preferred Stock) less 150,000 shares to represent the Specific
Liability, multiplied by the Exchange Ratio, as adjusted pursuant to Section
1.7(b) of the Agreement.
(b) "Affiliate" as used in this Agreement means, with respect to any
Person, (i) any Person that, directly or indirectly, controls, is controlled by,
or is under common control with, such Person in question, (ii) any officer,
director or stockholder of such Person in question, or member of the extended
family of such officer, director or stockholder and (iii) any Person that,
directly or indirectly, controls, is controlled by, or is under common control
with, any officer, director or stockholder of such Person in question or member
of the extended family of such officer, director or stockholder. For the
purposes of the definition of Affiliate, "control" (including, with correlative
meaning, the terms "controlled by" and "under common control with") as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities or by contract or
otherwise.
(c) "Business Facility" includes any property (whether real or personal)
which the Company currently leases, operates, or owns or manages in any manner
or which the Company or any of its organizational predecessors formerly leased,
operated, owned or managed in any manner.
(d) "Environmental Claim" means any Proceeding; claim; litigation; demand;
action; cause of action; suit; loss; cost, including, but not limited to,
attorneys' fees, diminution in value, expert's fees; damage; punitive damage;
fine, penalty, expense, Liability, criminal liability, judgment; governmental or
private investigation and testing; notification of status of being potentially
responsible for clean-up of any facility or for being in violation or in
potential violation of any Requirement of Environmental Law; proceeding; lien;
personal injury or death of any Person; or property damage, whether threatened,
sought, brought or imposed, that is related to or that seeks to recover Losses
related to, or seeks to impose liability regarding the Company or operations
conducted by any of them for: (i) improper use or treatment of wetlands,
pinelands or other protected land or wildlife; (ii) noise; (iii) radioactive
materials (including naturally occurring radioactive materials ["NORM"]); (iv)
explosives; (v) pollution, contamination, preservation, protection,
decontamination, remediation or clean-up of the air, surface water, groundwater,
soil or protected lands; (vi) solid, gaseous or liquid waste generation,
handling, discharge, release, threatened release, treatment, storage, disposal
or transportation; (vii) exposure of Persons or property to Materials of
Environmental Concern and the effects thereof; (viii) the release, threatened
release, generation, extraction, mining, beneficiating, manufacture, processing,
distribution in commerce, use, transfer, transportation, treatment, storage,
disposal or Remediation of Materials of Environmental Concern; (ix) injury to,
death of or threat to the health or safety of any Person or Persons caused
directly or indirectly by Materials of Environmental Concern; (x) destruction
caused directly or indirectly by Materials of Environmental Concern or the
release or threatened release of any Materials of Environmental Concern on any
property (whether real or personal); (xi) the implementation of spill prevention
and/or disaster plans relating to Materials of Environmental Concern; (xii)
community right-to-know and other disclosure laws; or (xiii) maintaining,
disclosing or reporting information to governmental authorities under any
Environmental Law. The term, "Environmental Claim" also includes, without
limitation, any Losses incurred in testing for the need for Remediation or for
breach or violation of any Requirements of Environmental Laws; monitoring or
responding to efforts to require Remediation and any claim based upon any
asserted or actual breach or violation of any Requirements of Environmental Law.
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<PAGE> 95
(e) "Environmental Laws" means the laws described on Exhibit G attached
hereto and incorporated herein for all purposes and any and all other laws,
rules, regulations, ordinances, orders or guidance documents now or hereafter in
effect of any applicable Governmental Authority, board or authority or any
judicial or administrative decision relating thereto that relate in any manner
to health, the environment, or a community's right to know.
(f) "Governmental Authority" means any foreign governmental authority, the
United States of America, any State of the United States of America, any local
authority and any political subdivision of any of the foregoing, any
multi-national organization or body, any agency, department, commission, board,
bureau, court or other authority of any of the foregoing, or any
quasi-governmental or private body exercising, or purporting to exercise, any
executive, legislative, judicial, administrative, police, regulatory or taxing
authority or power of any nature.
(g) "Governmental Authorization" means any permit, Environmental Permit,
license, franchise, approval, certificate, consent, ratification, permission,
confirmation, endorsement, waiver, certification, registration, qualification or
other authorization issued, granted, given or otherwise made available by or
under the authority of any Governmental Authority or pursuant to any Legal
Requirement.
(h) "Legal Requirement" means any law, statute, ordinance, decree,
requirement, order, treaty, proclamation, convention, rule or regulation (or
interpretation of any of the foregoing) of, and the terms of any, Governmental
Authorization issued by, any Governmental Authority.
(i) "Liability" means any debt, obligation or liability of any nature
(including any unknown, undisclosed, unliquidated or contingent liability),
regardless of whether such debt, obligation or liability would be required to be
disclosed on a balance sheet prepared in accordance with GAAP.
(j) "Long Term Debt" shall mean the long term debt of Company, including
the current portion thereof, and to the extent not included therein, any amount
then outstanding pursuant to bank notes, revolving credit agreements and any
bank overdraft positions.
(k) "Loss" means any loss, damage, injury, diminution in value, liability,
claim, demand, Proceeding, judgment, punitive damage, fine, penalty, tax, cost
or expense (including reasonable costs of investigation and the fees,
disbursements and expenses of attorneys, accountants and other professionals
incurred in proceedings, investigations or disputes involving third parties,
including governmental agencies), as well as with respect to compliance with the
Requirements of Environmental Law, expenses of Remediation, and response,
monitoring or record keeping costs.
(l) "Material Adverse Effect" shall mean any material adverse change in the
financial condition, assets, Liabilities (absolute, accrued, contingent or
otherwise), reserves, business, prospects or results of operations.
(m) "Materials of Environmental Concern" means: (i) those substances
included within the statutory and/or regulatory definitions of "hazardous
substance," "hazardous waste," "extremely hazardous substance," "regulated
substance," "hazardous materials," or "toxic substances," under any
Environmental Law; (ii) any material, waste or substance which is or contains:
(A) petroleum, oil or a fraction thereof, (B) explosives, (C) radioactive
materials (including NORM), or (D) solid wastes that post imminent and
substantial endangerment to health or the environment; and (iii) such other
substances, materials, or wastes that are or become classified or regulated as
hazardous or toxic under any applicable federal, state or local law or
regulation. To the extent that the laws or regulations of any applicable state
or local jurisdiction establish a meaning for any term defined herein through
reference to federal Environmental Laws which is broader than the meaning under
such federal Environmental Laws, such broader meaning shall apply.
(n) "Person" means any individual, entity or Governmental Authority.
(o) "Property" or "Properties" includes any property (whether real or
personal) which the Company currently or in the past has leased, operated or
owned or managed in any manner including without limitation any property
acquired by foreclosure or deed in lieu thereof and property now held as
security for a loan or other indebtedness by the Company.
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<PAGE> 96
(p) "Remediation" means any action necessary to: (i) comply with and ensure
compliance with the Requirements of Environmental Laws and (ii) the taking of
all reasonably necessary precautions to protect against and/or respond to,
remove or remediate or monitor the release or threatened release of Materials of
Environmental Concern at, on, in, about, under, within or near the air, soil,
surface water, groundwater or soil vapor at any Business Facility or of any
public domain affected by the business of the Company.
(q) "Requirement(s) of Environmental Law(s)" means all requirements,
conditions, restrictions or stipulations of Environmental Laws imposed upon or
related to the Company or the assets and/or the business of the Company.
(r) "Stockholders" means all of the holders of the issued and outstanding
shares of Company Common Stock.
(s) "Tax Return" means any return (including any information return),
report, statement, declaration, schedule, notice, notification, form,
certificate or other document or information filed with or submitted to, or
required to be filed with or submitted to, any Governmental Authority in
connection with the determination, assessment, collection or payment of any tax,
including any schedule or attachments thereto and also including any amendment
thereof, or in connection with the administration, implementation or enforcement
of or compliance with any Legal Requirement relating to any tax.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed as of the day and year first above written.
Telescan, Inc.
By: /s/ DAVID L. BROWN
----------------------------------
David L. Brown, Chairman and CEO
T Acquisition Corp.
By: /s/ ROGER C. WADSWORTH
----------------------------------
Roger C. Wadsworth, President and
CEO
INVESTools, Inc.
By: /s/ LAIRD FOSHAY
----------------------------------
Laird Foshay, President
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<PAGE> 98
EXHIBIT C
FINANCIAL STATEMENTS OF TELESCAN, INC.
C-1
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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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. 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 consolidated financial position of Telescan, Inc.
and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
HEIN + ASSOCIATES LLP
Houston, Texas
February 5, 1999
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<PAGE> 100
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
-------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 627 $ 1,105
Accounts receivable, net of allowance of $351 and $107,
respectively........................................... 2,645 1,956
Receivable from affiliates................................ 643 155
Prepaid expenses.......................................... 370 463
Inventory................................................. 53 81
Other current assets...................................... 235 228
-------- -------
TOTAL CURRENT ASSETS.............................. 4,573 3,988
Property and equipment, net of accumulated depreciation of
$4,196 and $3,271, respectively........................... 1,698 2,182
Software development costs, net............................. 5,331 5,482
Software technology rights, net............................. 196 176
Capitalized data costs, net................................. 150 422
Other assets................................................ 60 227
-------- -------
TOTAL ASSETS...................................... $ 12,008 $12,477
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,237 $ 2,124
Accrued liabilities....................................... 1,074 462
Accrual for phaseout of discontinued operations........... -- 19
Current portion of long-term debt and capital lease
obligations............................................ 500 449
Amounts due to stockholders and affiliates................ 36 190
-------- -------
TOTAL CURRENT LIABILITIES......................... 3,847 3,244
Long-term debt.............................................. 16 152
Capital lease obligations................................... 327 323
Minority interest in subsidiary............................. -- 9
Commitments and contingencies (Note 6 and 13)............... -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; 5% cumulative convertible preferred
stock -- 120,000 shares issued and outstanding at
December 31, 1998...................................... 1 --
Common stock, $.01 par value; 15,000,000 shares
authorized; 11,089,792 and 10,924,382 shares issued and
outstanding in 1998 and 1997, respectively............. 111 109
Additional paid-in capital................................ 21,492 17,972
Accumulated deficit....................................... (13,786) (9,332)
-------- -------
TOTAL STOCKHOLDERS' EQUITY........................ 7,818 8,749
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 12,008 $12,477
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-3
<PAGE> 101
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenue:
Service................................................... $13,677 $13,296 $11,073
Products.................................................. 713 1,507 1,948
Contract revenue earned from affiliates................... 1,152 1,322 735
------- ------- -------
Total Revenue..................................... 15,542 16,125 13,756
Costs and Expenses:
Cost of service........................................... 8,799 8,071 7,365
Cost of products.......................................... 353 685 1,184
Marketing expenses........................................ 2,889 2,487 3,166
General and administrative expenses....................... 6,351 4,971 5,237
Loss on writedown of impaired assets...................... 1,530 -- --
Interest expense, net..................................... 97 105 83
------- ------- -------
Total Costs and Expenses.......................... 20,019 16,319 17,035
Loss before minority interest in loss of subsidiary......... (4,477) (194) (3,279)
Minority interest in loss of subsidiary..................... 142 409 345
------- ------- -------
Income (loss) from continuing operations.................... (4,335) 215 (2,934)
Income (loss) from discontinued operations.................. 19 (19) --
------- ------- -------
Net income (loss)........................................... (4,316) 196 (2,934)
Preferred stock dividends................................... 94 -- --
Incremental yield dividend.................................. 44 -- --
------- ------- -------
Income (loss) available for common stockholders............. $(4,454) $ 196 $(2,934)
======= ======= =======
Income (loss) per share (Note 12):
Income (loss) from continuing operations per common share:
Basic................................................ $ (0.41) $ 0.02 $ (0.28)
Diluted.............................................. $ (0.41) $ 0.02 $ (0.28)
Income (loss) from discontinued operations per common
share:
Basic................................................ $ -- $ -- $ --
Diluted.............................................. $ -- $ -- $ --
Income (loss) available to common stockholders:
Basic................................................ $ (0.40) $ 0.02 $ (0.28)
Diluted.............................................. $ (0.40) $ 0.02 $ (0.28)
Weighted average shares -- basic............................ 11,039 10,766 10,615
Dilutive effect of options.................................. -- 173 --
------- ------- -------
Weighted average shares -- diluted.......................... 11,039 10,939 10,615
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-4
<PAGE> 102
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
5% CONVERTIBLE
COMMON STOCK PREFERRED STOCK ADDITIONAL TOTAL
--------------- --------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1996....... 10,242 $102 -- $ -- $14,457 $ (6,594) $ 7,965
Issuances of stock under stock
option plan................. 75 1 -- -- 152 -- 153
Other issuances............... 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 stock under stock
option plan................. 166 2 -- -- 478 -- 480
Other issuances............... 25 -- -- -- 100 -- 100
Other......................... -- -- -- -- 9 -- 9
Net income.................... -- -- -- -- -- 196 196
------ ---- ------ ---- ------- -------- -------
BALANCE DECEMBER 31, 1997..... 10,924 109 -- -- 17,972 (9,332) 8,749
Issuances of stock under stock
option plan................. 166 2 -- -- 458 -- 460
Issuance of convertible
preferred stock............. -- -- 120 1 2,999 -- 3,000
Incremental yield on preferred
stock....................... -- -- -- -- 44 (44) --
Other......................... -- -- -- -- 19 -- 19
5% convertible preferred stock
dividends................... -- -- -- -- -- (94) (94)
Income (loss)................. -- -- -- -- -- (4,316) (4,316)
------ ---- ------ ---- ------- -------- -------
BALANCE DECEMBER 31, 1998..... 11,090 $111 120 $ 1 $21,492 $(13,786) $ 7,818
====== ==== ====== ==== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-5
<PAGE> 103
TELESCAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(4,316) $ 196 $(2,934)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Minority interest in (loss) of subsidiary............ (142) (409) (345)
Reverse loss on discontinued operations.............. (19) 19 --
Depreciation and amortization........................ 2,917 2,473 2,173
Gain on the sale of equipment........................ -- (15) --
Loss on writedown of impaired assets................. 1,530 -- --
Provision for doubtful accounts...................... 339 127 68
Changes in current assets and liabilities:
Receivables and advances............................. (1,772) (279) (449)
Other current assets................................. 89 (60) 113
Accounts payable..................................... 113 137 524
Other current liabilities................................. 619 12 225
------- ------- -------
Net cash provided by (used in) operating
activities........................................ (642) 2,201 (625)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment........................... 2 178 --
Additions to property and equipment....................... (137) (272) (765)
Additions to software development costs................... (2,519) (2,505) (1,873)
Additions to capitalized data costs....................... -- -- (139)
Other..................................................... (5) (5) (39)
------- ------- -------
Net cash used in investing activities................ (2,659) (2,604) (2,816)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock................. 3,000 -- --
Capital calls from minority stockholder................... 127 294 --
Proceeds from issuances of common stock................... 460 480 2,780
Proceeds from other issuances............................. 18 13 --
Other..................................................... -- -- (97)
Preferred dividends paid.................................. (94) -- --
Proceeds from notes payable............................... -- 110 --
Advance from stockholder/affiliates....................... (154) 154 100
Capital lease obligations................................. -- 143 --
Payments on notes payable and capital lease obligations... (534) (478) (346)
------- ------- -------
Net cash provided by financing activities............ 2,823 716 2,437
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (478) 313 (1,004)
CASH AND CASH EQUIVALENTS:
Beginning of year........................................... 1,105 792 1,796
------- ------- -------
End of year................................................. $ 627 $ 1,105 $ 792
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest.................................................. $ 98 $ 90 $ 75
======= ======= =======
Supplemental non-cash investing and financing activities:
Common stock issued to purchase software technology
rights................................................. -- 100 249
Computer and telephone equipment acquired under long-term
capital leases......................................... 453 273 452
Incremental yield on preferred stock...................... 44 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-6
<PAGE> 104
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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"). The Company's consolidated statements of operations include the
results of Knowledge Express Data Systems, L.C. ("KE"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Nature of Business. The Company provides Internet services, innovative
solutions for online technology and data retrieval tools. The Company develops,
markets and operates major online networks serving the financial, publishing,
entertainment and technology-transfer industries. The Company's products and
services, which are based upon its proprietary online operating system and user
software, allow its customers to electronically access and analyze information
through their personal computer systems either through the Internet or online.
The Company's primary financial products are the Telescan system of
Internet and online 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. The non-financial segment includes third party Internet and
online services, which are developed and operated via alliances with third
parties in the advertising, entertainment and publishing industries; Pure
Baseball, an Internet-based game offered to baseball enthusiasts; and KE, an
online database for the biotechnical/pharmaceutical industry. The Company has a
majority interest (55.58%) in and is the exclusive system operator of KE.
Significant Estimates. Preparation of these consolidated 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.
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. No single customer accounted for 10% of consolidated revenue for
1998, 1997 or 1996. 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.
Fair Value of Financial Instruments. The fair value of financial
instruments, primarily accounts receivable, accounts payable and notes payable,
closely approximate the carrying values of the instruments due to the short-term
maturities of such instruments.
Comprehensive Income (Loss). Comprehensive income is defined as all changes
in stockholders' equity, exclusive of transactions with owners, such as capital
investments. Comprehensive income includes net income or loss, changes in
certain assets and liabilities that are reported directly in equity such as
translation adjustments on investments in foreign subsidiaries and certain
changes in minimum pension liabilities. The Company's comprehensive income
(loss) was equal to its net income (loss) for all periods presented in these
financial statements.
Cash and Cash Equivalents. For purposes of the statement of cash flows, the
Company considers cash equivalents to include all cash items, such as time
deposits and short-term investments that mature in three months or less from the
date of acquisition.
C-7
<PAGE> 105
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories. Inventories are carried at the lower-of-cost or market, with
cost determined on the specific identification method.
Property and 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 property and equipment is as follows:
<TABLE>
<S> <C>
Computer and other equipment............................. 3-5 years
Furniture and fixtures................................... 7 years
Other.................................................... 3-5 years
</TABLE>
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. The Company determines a product to
be technologically feasible when a working model of the product has been
completed and thoroughly tested so as to be available for sale to external
customers. Capitalized software development costs are amortized over the greater
of the ratio of current revenue to the total revenue expected to be generated
for the product or the straight-line method over the life of the product. The
greater expense has been the straight-line method, which the Company has used
over the life of the product, which is typically 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 $1,623,000, $1,205,000, and $864,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Accumulated amortization totaled $6,594,000
and $4,180,000 at December 31, 1998 and 1997, 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
$72,000, $69,000 and $80,000 for the years ended December 31, 1998, 1997 and
1996, respectively. Accumulated amortization totaled $153,000 and $176,000 at
December 31, 1998 and 1997, respectively.
Capitalized Data Costs. Costs incurred to acquire data are capitalized and
amortized on a straight-line basis over 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 $166,000, $235,000 and
$309,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Accumulated amortization totaled $1,638,000 and $1,366,000 at December 31, 1998
and 1997, 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 and $343,000 at December 31, 1998 and
at December 31, 1997, respectively, 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 $61,000 and $164,000 at December 31, 1998 and 1997,
respectively. Goodwill amortization totaled approximately $58,000, $58,000 and
$52,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
C-8
<PAGE> 106
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-lived Assets. The Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
is less than its carrying amount. The Company has identified such impairment
losses in 1998. See discussion of such in Note 2 to these financial statements.
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.
Minority Interest. At the end of 1998, the minority interest investment had
been reduced to zero. The Company elected to absorb an additional $55,000 in
losses rather than request additional capital from the minority stockholder. If
KE is not profitable in 1999 or the minority stockholder does not make
additional capital contributions, the Company will absorb 100% of any loss
generated rather than the Company's ownership share of 55.58%.
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. For revenues recognized on
agreements not requiring significant modifications, the Company follows
Statement of Position 97-2 "Software Revenue Recognition". 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
under which the amount of deferred income taxes is based upon the tax effects of
the differences between the financial and income tax basis of the Company's
assets and liabilities at the balance sheet date based upon existing laws.
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. The dilutive effect
of stock options was not calculated in 1998 and 1996 since the Company incurred
a loss in those years. (See Note 12)
Reclassifications. Amounts in prior years' financial statements have been
restated to conform to the current year's presentation. Such restatements had no
effect on net income or loss.
2. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
In November 1997, the Board of Directors approved a plan to spin-off the
non-financial segment of the Company's business in an effort to concentrate on
the Company's core financial services information business. During the first
quarter of 1999, the Company reviewed a proposal from a prospective buyer and
determined there was a greater strategic value in retaining and developing the
Internet operations of the non-financial business.
Assets, liabilities, revenues and operating loss of the Company's
non-financial segment for 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Assets...................................................... 555 1,881 2,088
Liabilities................................................. 475 260 780
Revenues.................................................... 1,969 1,215 1,758
Operating Loss.............................................. (1,558) (614) (660)
</TABLE>
C-9
<PAGE> 107
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At the date of the spin-off announcement, the Company determined that the
book value of assets of the non-financial business segment approximated fair
market value. There was no loss recorded for the disposal of the business
segment and the assets of the operations were determined to be recorded at the
net realizable value. In the Company's decision to retain the non-financial
operations, it was determined that certain previously capitalized costs were no
longer useful to the Company in its pursuit of high-growth Internet business. In
accordance with the Company's policy of reviewing asset value recoverability, it
was determined that the estimated future undiscounted cash flows were less than
the carrying value of specific long-lived assets. The Company adjusted the
carrying value of such long-lived assets, primarily software development,
capital data costs and related goodwill, to their estimated fair value,
resulting in a non-cash impairment loss of $1,530,000 which is included in
continuing operations.
The remaining assets have been reclassified to continuing operations.
Provision for operating losses during phaseout of $19,000 at December 31, 1997
has been reversed as part of discontinued operations. The remaining revenue and
expenses in discontinued operations have been reclassified to continuing
operations.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Computer and other equipment............................... $ 5,227,000 $ 4,808,000
Furniture and fixtures..................................... 557,000 535,000
Other...................................................... 110,000 110,000
----------- -----------
5,894,000 5,453,000
Accumulated depreciation................................... (4,196,000) (3,271,000)
----------- -----------
$ 1,698,000 $ 2,182,000
=========== ===========
</TABLE>
Depreciation expense was approximately $985,000, $893,000 and $851,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
4. ACQUISITIONS
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. At December 31, 1998 the Company had receivables
from officers totaling $17,000. The balances are repaid through payroll
deductions and bear interest at 8.5%. At the end of 1998, the Company had a
non-interest bearing receivable from a director of $76,000. At December 31, 1997
the Company owed an officer $154,000, which was repaid by the Company in 1998.
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, 1998 and 1997, corresponding amounts due the Company from TeleBuild
totaled $623,000 and $155,000. Included in other current assets is an additional
$106,000 and $111,000 at December 31, 1998 and 1997, respectively, due from
TeleBuild. The Company owns 55.58% of
C-10
<PAGE> 108
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
KE and 15.834% of TeleBuild. GRF Interests, Inc., a company controlled by G.
Robert Friedman ("Friedman"), a significant stockholder and former director of
the Company, owns 44.42% of KE. Friedman Interests, 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,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
TeleBuild......................................... $1,152,000 $1,322,000 $735,000
</TABLE>
The Company maintains a marketing, license and revenue sharing agreement
with CyberAction. A director of CyberAction is on the board of directors of the
Company. No royalties were paid to CyberAction in 1998, 1997 or 1996.
6. LONG-TERM OBLIGATIONS
Capital Leases. Future minimum lease payments under capital leases at
December 31, 1998 together with the present value of the minimum lease payments,
are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999........................................................ $ 408,000
2000........................................................ 278,000
2001........................................................ 64,000
2002........................................................ 2,000
---------
Total minimum lease payments................................ 752,000
Amount representing interest................................ (61,000)
---------
Present value of minimum lease payments................... 691,000
Current portion of capital lease obligations................ (364,000)
---------
Long-term capital lease obligation........................ $ 327,000
=========
</TABLE>
Computer and telephone equipment under capital lease at December 31, 1998
and 1997 totaled $1,435,000 and $961,000 with related accumulated depreciation
of $764,000 and $391,000, respectively.
Line of Credit. The Company has a $500,000 guidance line of credit with a bank
to fund equipment purchases. Financing is limited to 80% of the purchase price
of the equipment. Borrowings under this line bear interest at Wall Street Prime
(7.75% at December 31, 1998), are collateralized by the equipment purchased and
are due in 36 equal monthly installments following the draw. At December 31,
1998 and 1997, $152,000 and $327,000, respectively, were outstanding under this
line of credit.
Future payments under this equipment line of credit are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999........................................................ $136,000
2000........................................................ 16,000
--------
152,000
Current portion of long-term debt........................... (136,000)
--------
$ 16,000
========
</TABLE>
C-11
<PAGE> 109
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating Leases. The Company has commitments to lease office space and
equipment under non-cancelable operating leases. Rent expense under operating
leases totaled $1,042,000, $1,045,000 and $798,000 for the years ended December
31, 1998, 1997 and 1996, respectively. Future minimum payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999........................................................ $ 899,000
2000........................................................ 836,000
2001........................................................ 450,000
2002........................................................ 847,000
2003........................................................ 798,000
Thereafter.................................................. 2,461,000
----------
$6,291,000
==========
</TABLE>
7. STOCKHOLDERS' EQUITY
In May 1998, the Company issued 120,000 shares of 5% Convertible Preferred
Stock in exchange for $3,000,000.
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:
<TABLE>
<S> <C>
Closing price at May 15, 1998............................ 7 3/8
Fixed discount from market............................... 5%
--------
$ 0.37
Shares issued............................................ 120,000
--------
Incremental yield........................................ $ 44,400
========
</TABLE>
The preferred stockholders have the option to convert the preferred shares
into common stock at any time after May 15, 1998.
8. INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $17,000,000, which expire in years 2000
through 2018.
C-12
<PAGE> 110
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities as of December 31, 1998 and 1997 consisted
of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets -
Net operating loss carryforwards......................... $ 6,290,000 $ 4,990,000
Less: Valuation allowance................................ (4,475,000) (2,679,000)
----------- -----------
Deferred tax asset, net.................................. 1,815,000 2,311,000
Deferred tax liability -
Primarily amortization of capitalized software costs..... (1,815,000) (2,311,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The valuation allowance increased during 1998 by approximately $1,796,000.
9. STOCK OPTION PLAN
The Company's stock option plans (the "Plans") for officers, directors and
employees authorizes the grant of options to purchase a maximum of 1,425,000
shares of common stock. The Plans included the plan as amended in 1994 (the
"Amended Plan") and the 1995 stock option plan ("1995 Plan"). The Plans provide
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 Plans, the
exercise price of incentive stock options must equal the fair market value of
the Company's common stock but not less than $1.50 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 Amended
Plan terminating August 13, 2000 and the 1995 Plan terminating March 22, 2005
totaled 163,924 and 335,340, respectively.
Options issued prior to 1998 under the Amended Plan terminating August 13,
2000 expire upon termination of the Amended Plan. Options issued in 1998 and
later under the Amended Plan have a 10 year life from the date of grant. Options
under the 1995 Plan terminating March 22, 2005 expire upon this date.
Transactions with regard to incentive options issued pursuant to the Plans
are as follows:
<TABLE>
<CAPTION>
WEIGHTED
TOTAL SHARES AVERAGE PRICE
UNDER OPTION PER SHARE
------------ -------------
<S> <C> <C>
BALANCE -- JANUARY 1, 1996.................................. 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
Granted................................................... 367,010 $7.68
Canceled.................................................. (18,948) $4.45
Exercised................................................. (165,410) $2.74
--------
BALANCE -- DECEMBER 31, 1998................................ 925,736 $6.43
========
</TABLE>
C-13
<PAGE> 111
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------
WEIGHTED WEIGHTED
RANGE OF WEIGHTED AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING YEARS EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING OF CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ---------- ----------- ------------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.50-3.00.. 99,650 2.11 $1.96 94,650 $1.91
4.50-5.13.. 217,100 3.57 4.78 83,044 4.82
6.25-6.87.. 169,200 8.31 6.46 18,500 6.46
7.37-7.88.. 210,016 1.71 7.61 150,343 7.68
8.44-8.91.. 229,770 8.86 8.85 31,600 8.44
------- -------
925,736 5.17 6.43 378,137 5.61
======= =======
</TABLE>
In addition, as of December 31, 1998 an aggregate of 110,000 non-qualified
stock options have been issued at option prices ranging from $4.75 to $8.37 per
share and 60,000 of such options were exercisable as of that date. Subsequent to
December 31, 1998, certain non-qualified stock options were exercised in
cashless transactions.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock Based Compensation", 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
No. 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 1998 or 1997 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 No. 123, the
Company's net loss and loss per common share would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
----------- --------
<S> <C> <C>
Net income (loss)
As reported............................................... $(4,454,000) $196,000
Pro forma................................................. (5,353,000) (450,000)
Net income (loss) per common share
As reported............................................... $ (0.40) $ 0.02
Pro forma................................................. (0.48) (0.04)
</TABLE>
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 4.16% to 5.6%; volatility of 69.69% and 66.1% for 1998 and
1997, respectively; no assumed dividend yield; and expected lives of 3 years.
10. EMPLOYEE BENEFITS
In January 1995, the Company established a defined contribution 401(k)
Profit Sharing Plan for its employees. The plan provides participants a
mechanism for making contributions for retirement savings. Each participant may
contribute certain amounts of eligible compensation. The plan allows for Company
matched contributions, however, the Company has not invoked this privilege, but
may do so with an amendment to the plan.
C-14
<PAGE> 112
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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 elected early adoption in 1997.
This information was not effective for the Company's 1997 annual report since
the non-financial segment was included in discontinued operations. The Company
operates two major segments. 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 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
and Backstage Online for BPI Communications, L.P. The sports entertainment
operation is an online game designed for baseball enthusiasts.
SALES AND OPERATING PROFIT BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
SALES OPERATING RESULTS
--------------------------- -------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Financial................................ $13,573 $14,910 $11,998 $(2,896) $ 810 $(2,274)
Non-Financial............................ 1,969 1,215 1,758 (1,558) (614) (660)
------- ------- ------- ------- ----- -------
Total.......................... $15,542 $16,125 $13,756 $(4,454) $ 196 $(2,934)
======= ======= ======= ======= ===== =======
</TABLE>
IDENTIFIABLE ASSETS BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Financial................................................... $11,453 $10,596 $ 9,378
Non-Financial............................................... 555 1,881 2,088
------- ------- -------
Total............................................. $12,008 $12,477 $11,466
======= ======= =======
</TABLE>
SPECIFIC ASSETS AND EXPENSE BY INDUSTRY SEGMENT
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Software Capitalization:
Financial................................................. $2,257 $2,188 $1,547
Non-Financial............................................. 262 317 326
------ ------ ------
$2,519 $2,505 $1,873
====== ====== ======
Depreciation and Amortization Expense:
Financial................................................. $2,460 $2,023 $1,721
Non-Financial............................................. 457 450 452
------ ------ ------
$2,917 $2,473 $2,173
====== ====== ======
</TABLE>
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. The loss on impaired assets in 1998 of $1,530,000 is attributable to
the non-financial segment.
C-15
<PAGE> 113
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Basic earnings (loss) per share:
Income (loss) from continuing operations:................... $(4,335) $ 215 $(2,934)
Less preferred stock dividends and incremental yield
dividend............................................... 138 -- --
------- ------- -------
Income (loss) available to common stockholders.............. (4,473) 215 (2,934)
Discontinued operations..................................... 19 (19) --
------- ------- -------
Net income (loss) available to common stockholders.......... $(4,454) $ 196 $(2,934)
======= ======= =======
Weighted average shares outstanding......................... 11,039 10,766 10,615
Basic earnings (loss) per share:
Continuing operations..................................... $ (0.41) $ (0.02) $ (0.28)
Discontinued operations................................... -- -- --
------- ------- -------
Net income (loss)........................................... $ (0.41) $ (0.02) $ (0.28)
Diluted earnings (loss) per share:
Income (loss) available to common stockholders.............. $(4,473) $ 215 $(2,934)
Discontinued operations..................................... 19 (19) --
------- ------- -------
Net income (loss) available to common stockholders.......... (4,454) 196 (2,934)
======= ======= =======
Weighted average shares outstanding......................... 11,039 10,766 10,615
Dilutive effect of options.................................. -- 173 --
------- ------- -------
Weighted average shares -- dilutive......................... 11,039 10,939 10,615
Dilutive earnings (loss) per share:
Continuing operations..................................... $ (0.41) $ (0.02) $ (0.28)
Discontinued operations................................... -- -- --
------- ------- -------
Net income (loss)........................................... $ (0.41) $ (0.02) $ (0.28)
</TABLE>
13. 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"). 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 $142,500 in exchange for being released from further
legal actions.
In August 1998, K. Shawn Walker and Scott Brown filed a lawsuit against
TeleBuild, Friedman Interests, Inc. and the Company in the District Court of
Harris County, Texas. The plaintiffs, both former employees of TeleBuild,
asserted breach of contract, breach of duty of good faith and fair dealing,
breach of fiduciary duty, fraud and conspired for a declaratory judgment. The
plaintiffs' cause of action arose from TeleBuild's and Friedman Interests,
Inc.'s refusal to purchase the plaintiff's ownership interest in TeleBuild.
Before the settlement, K. Shawn Walker and Scott Brown owned 5.6839% and
7.6628%, respectively of TeleBuild. In November 1998 the Company agreed to
purchase a portion of each of the plaintiffs' interest in TeleBuild in
C-16
<PAGE> 114
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
settlement and release of this claim. The Company paid each plaintiff $10,000
for .833% of their interest in TeleBuild.
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.
Presently, the Company has no unsettled or pending litigation to the best of its
knowledge.
14. SUBSEQUENT EVENTS
In January 1999, the Company sold 9.9% or 1,220,237 shares of its common
stock in a private placement to General Electric's National Broadcasting Company
("NBC") unit in conjunction with its affiliate, GE Capital Equity Investments,
Inc. The stock was purchased at $7.70 per share and the resale is restricted
under Rule 144, subject to delayed registration rights on one-half of the
shares.
In February 1999, the Company licensed its proprietary Internet and online
financial services technology to NBC for use by CNBC.com.
Also in February 1999, the Board of Directors approved an amendment to the
Restated Certificate of Incorporation to increase the total number of shares of
all classes of stock which the corporation is authorized to issue. The amendment
would increase the number of shares to 40,000,000 shares, consisting of
30,000,000 shares of common stock with a par value of $.01 per share and
10,000,000 shares of preferred stock with a par value of $.01 per share. The
amendment shall be submitted to the stockholders of the Company for
consideration at the next annual meeting.
C-17
<PAGE> 115
TELESCAN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 and 1997, and for each of the years in the three-year
period ended December 31, 1998. 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, 1998.
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 5, 1999
C-18
<PAGE> 116
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, 1996
Allowance for Doubtful Accounts........... $ 80 $ 68 $(44) $104
DECEMBER 31, 1997
Allowance for Doubtful Accounts........... 104 127 (124) 107
DECEMBER 31, 1998
Allowance for Doubtful Accounts........... $107 $339 $(95) $351
</TABLE>
C-19
<PAGE> 117
EXHIBIT D
FINANCIAL STATEMENTS OF INVESTOOLS, INC.
D-1
<PAGE> 118
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of INVESTools, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' equity deficit and of cash flows present fairly, in
all material respects, the financial position of INVESTools, Inc. at June 30,
1997 and 1998, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has recurring losses from operations and has
an accumulated deficit that raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 5, 1998
D-2
<PAGE> 119
INVESTOOLS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
----------------- DECEMBER 31,
1997 1998 1998
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 395 $ 887 $ 438
Restricted cash........................................... -- -- 114
Accounts receivable, net of allowance for doubtful
accounts of $7 at June 30, 1997 and $22 at June 30,
1998 and December 31, 1998, respectively............... 53 211 131
Prepaid expenses and other current assets................. 3 6 6
------- ------- -------
Total current assets.............................. 451 1,104 689
Property and equipment, net................................. 223 264 218
Intangible and other assets................................. 27 25 25
------- ------- -------
Total assets................................................ $ 701 $ 1,393 $ 932
======= ======= =======
LIABILITIES AND MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 59 $ 154 $ 423
Accrued expenses.......................................... 69 331 281
Notes payable............................................. 22 2,023 2,073
Equipment loans........................................... 139 210 198
------- ------- -------
Total current liabilities......................... 289 2,718 2,975
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, WARRANTS
AND OPTIONS AND SHAREHOLDERS' DEFICIT
Mandatorily redeemable convertible preferred stock; no par
value; Authorized: 1,857,923 shares at June 30, 1997 and
1998 and December 31, 1998 (liquidation value: $3,010,015
at June 30, 1998 and December 31, 1998)................... 2,993 2,993 2,993
Warrants and options........................................ -- 425 972
------- ------- -------
2,993 3,418 3,965
Commitments (Note 4)
SHAREHOLDERS' DEFICIT
Common stock, no par value Authorized: 5,000,000 shares in
1997 and 1998; Issued and outstanding: 1,426,000 shares at
June 30, 1997; 1,433,951 at June 30, 1998 and December 31,
1998...................................................... 21 23 23
Additional paid-in capital.................................. -- -- 47
Accumulated deficit......................................... (2,602) (4,766) (6,078)
------- ------- -------
Total shareholders' deficit....................... (2,581) (4,743) (6,008)
------- ------- -------
Total liabilities and mandatorily redeemable
convertible preferred stock and shareholders'
deficit......................................... $ 701 $ 1,393 $ 932
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-3
<PAGE> 120
INVESTOOLS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
JUNE 30, DECEMBER 31,
--------------- -------------
1997 1998 1997 1998
------ ------ ---- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.................................................... $ 362 $1,456 $439 $1,059
Cost of revenues............................................ 144 587 211 492
------ ------ ---- ------
Gross margin.............................................. 218 869 228 567
Expenses
Research and development.................................. 571 697 244 365
Sales and marketing....................................... 557 1,193 344 633
General and administrative................................ 477 642 426 559
------ ------ ---- ------
Loss from operations........................................ 1,387 1,663 786 990
Interest expense............................................ 12 548 168 322
Other (income), expense, net................................ (29) (47) -- --
------ ------ ---- ------
Net loss.................................................... $1,370 $2,164 $954 $1,312
====== ====== ==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-4
<PAGE> 121
INVESTOOLS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 1997 AND 1998 AND
THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1996.......................... 1,420 $ 20 $ -- $(1,232) $(1,212)
Common stock issued for services rendered in
September 1996 at 0.19 per share............... 6 1 -- -- 1
Net loss......................................... -- -- -- (1,370) (1,370)
----- ---- ---- ------- -------
BALANCE AT JUNE 30, 1997......................... 1,426 21 -- (2,602) (2,581)
Issuance of common stock upon exercise of stock
options for cash in September 1996............. 8 2 -- -- 2
Net loss......................................... -- -- -- (2,164) (2,164)
----- ---- ---- ------- -------
BALANCE AT JUNE 30, 1998......................... 1,434 23 -- (4,766) (4,743)
Issuance of options for non-employee services
(unaudited).................................... -- -- 47 -- 47
Net loss (unaudited)............................. -- -- -- (1,312) (1,312)
----- ---- ---- ------- -------
BALANCE AT DECEMBER 31, 1998 (UNAUDITED)......... 1,434 $ 23 $ 47 $(6,078) $(6,008)
===== ==== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-5
<PAGE> 122
INVESTOOLS, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
JUNE 30, DECEMBER 31,
----------------- ----------------
1997 1998 1997 1998
------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(1,370) $(2,164) $ (954) $(1,312)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 77 114 49 64
Loss on disposal of fixed asset....................... 1 1 -- --
Common stock issued for services rendered............. -- -- -- --
Equipment received in lieu of cash.................... -- (22) -- --
Allowance for doubtful accounts....................... 7 22 -- --
Issuance of warrants in conjunction with debt......... -- 425 -- --
Change in assets and liabilities:
Accounts receivable................................. (49) (180) 1 80
Other assets........................................ (28) (3) 3 --
Accounts payable.................................... 43 73 56 269
Accrued expenses.................................... 35 263 21 (50)
Deferred salaries................................... (90) -- -- --
------- ------- ------ -------
Net cash used in operating activities............ (1,374) (1,471) (824) (949)
------- ------- ------ -------
Cash flows from investing activities:
Purchase of property and equipment....................... (221) (113) (44) (18)
Proceeds from sale of fixed assets....................... -- 3 -- --
------- ------- ------ -------
Net cash used in investing activities............ (221) (110) (44) (18)
------- ------- ------ -------
Cash flows from financing activities:
Proceeds from issuance of notes payable.................. 100 2,000 -- --
Repayment of notes payable............................... (99) 105 -- --
Proceeds from equipment loan............................. 139 -- -- --
Repayment of equipment loan.............................. (8) (34) -- --
Proceeds from issuance of common stock upon exercise of
stock options......................................... -- 2 -- --
Proceeds from issuance of preferred stock, net........... 1,743 -- -- --
Proceeds from long-term debt............................. -- -- 2,059 38
Cash investment in business.............................. -- -- 124 594
------- ------- ------ -------
Net cash provided by financing activities........ 1,875 2,073 2,183 632
------- ------- ------ -------
Increase in cash and cash equivalents............ 280 492 1,315 (335)
Cash and cash equivalents at beginning of year............. 115 395 395 887
------- ------- ------ -------
Cash and cash equivalents at end of year................... $ 395 $ 887 $1,710 $ 552
======= ======= ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for taxes...................... $ 2 $ 1 $ 1 $ 1
======= ======= ====== =======
Cash paid during the year for interest................... $ 13 $ 17 $ 5 $ 11
======= ======= ====== =======
Supplemental schedule of noncash investing and financing
activities:
Property and equipment acquired for liability............ $ -- $ (23) $ -- $ --
======= ======= ====== =======
Common and preferred stock and options issued for
services rendered..................................... $ 1 $ -- $ -- $ 322
======= ======= ====== =======
Conversion note payable for preferred stock.............. $ 250 $ -- $ -- $ --
======= ======= ====== =======
Issuance of warrants in conjunction with debt............ $ -- $ 425 $ -- $ 272
======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-6
<PAGE> 123
INVESTOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
1. FORMATION OF BUSINESS OF THE COMPANY
INVESTools, Inc. ("INVESTools" or the Company) was incorporated on August
31, 1994 for the purpose of providing self-reliant investors with a broad range
of independent financial research and advisory information at an affordable
price. The INVESTools website provides access to investment information and
detailed model portfolios from some of the nations leading investment advisors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has recurring
losses from operations and has an accumulated deficit. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management plans to raise additional financing during the year ending June 30,
1999. The Company has no guarantee that its attempts to raise additional
financing will be successful. These financial statements have been prepared
assuming that the Company will continue as a going concern and do not include
any adjustments that might result from the outcome of this uncertainty.
Use of Estimates. The 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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents consist of highly
liquid investments with original maturities of three months or less, which
include investments in money market accounts and treasury bills. As of June 30,
1997 and 1998, substantially all cash and cash equivalents are on deposit with
three financial institutions.
Intangible Assets. Intangible assets are composed of organization costs
incurred in the formation of the Company and are amortized on a straight-line
basis over four years.
Property and Equipment. Property and equipment are stated at cost, and are
depreciated and amortized on a straight-line basis over three to seven years or
the term of the lease, if shorter, in the case of leasehold improvements. Gains
and losses upon asset disposal are taken into income in the year of disposition.
Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities and the net operating loss and credit carryforwards using enacted
tax rates. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Revenue Recognition. Advertising revenue is recognized when the
advertisement is run on the Company's website. Hosting and online content
revenues are recognized in the period earned when amounts are reasonably
estimable and collection is probable.
Research and Development. All research and development expenditures are
expensed as incurred, including costs relating to patents or rights which may
result from such expenditures.
Certain Risks and Concentrations. The Company maintains allowances for
potential losses, and such losses have been within management's expectations.
Four customers and six customers accounted for 41% and 73% of the accounts
receivable balance at June 30, 1997 and 1998 respectively.
One customer accounted for 23% and 19% of revenue for the years ended June
30, 1997 and 1998, respectively.
D-7
<PAGE> 124
INVESTOOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited Financial Information. The accompanying financial information as
of December 31, 1998 and for the six month periods ended December 31, 1997 and
1998 and the twelve months ended June 30, 1996 has been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The financial statements reflect all adjustments,
consisting of normal recurring accruals, which are, in the opinion of
management, necessary to fairly present such information in accordance with
generally accepted accounting principles.
Recent Pronouncements. In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income". This statement establishes requirements for
disclosure of comprehensive income and becomes effective for the Company for its
fiscal year 1999, with reclassification of earlier financial statements for
comparative purposes. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments or contributions by
stockholders. The Company is evaluating alternative formats for presenting this
information, but does not expect this pronouncement to materially impact the
Company's results of operations.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------- ------------
1997 1998 1998
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment................................... $ 260,000 $ 407,777 $ 424,228
Office furniture..................................... 22,205 25,509 27,556
Office equipment..................................... 28,509 21,887 21,652
Leasehold improvements............................... 24,897 24,968 24,969
--------- --------- ---------
335,611 480,141 498,405
Less accumulated depreciation and amortization....... (112,674) (216,329) (280,290)
--------- --------- ---------
Property and equipment, net.......................... $ 222,937 $ 263,812 $ 218,115
========= ========= =========
</TABLE>
Depreciation expense charged to operations amounted to $68,571 and $112,460
for the years ended June 30, 1997 and 1998, respectively and $48,502 (unaudited)
and $63,961 (unaudited) for the six months ended December 31, 1997 and 1998,
respectively.
4. COMMITMENTS
Operating Leases. The Company leases its office facilities and various
equipment under operating lease.
Future annual minimum obligations under the noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
MINIMUM
RENTAL
YEAR ENDING JUNE 30, PAYMENTS
- -------------------- --------
<S> <C>
1999........................................................ $ 73,896
2000........................................................ 52,660
--------
$126,556
========
</TABLE>
Rent expense for the years ended June 30, 1997 and 1998 totaled $56,097 and
$75,432, respectively and for the six months ended December 31, 1997 and 1998
totaled $39,941 (unaudited) and $43,595 (unaudited), respectively.
D-8
<PAGE> 125
INVESTOOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. EQUIPMENT LOANS
The Company has available a bank promissory note which provides for
borrowings of up to $200,000 for equipment purchases. The note, bearing interest
at 10%, expires on November 24, 2000 and is collateralized by the Company's
assets. Repayments on the note will be paid beginning January 1998. The Company
has available an additional bank promissory note which provides for borrowings
of up to $100,000 for equipment purchases. The note, bearing interest at 10.25%
allows for draws until May 5, 1999, with repayments beginning June 5, 1999,
expiring on May 5, 2002 and is also collateralized by the Company's assets.
Under the agreement, the Company is required to remain solvent and maintain
certain financial ratios. As of June 30, 1998 and December 31, 1998, the entire
balance of $210,298 and $198,403 (unaudited), respectively, has been classified
as a current liability as the Company is out of compliance of certain with their
debt covenants.
6. NOTES PAYABLE
In September and December 1997, the Company entered into two Convertible
Subordinated Promissory Notes ("the Notes") each for $1,000,000. The notes bear
interest at 8% per annum and are payable at the earlier of (I) September 26,
1998 and December 18, 1998 and (ii) when such amounts are declared due and
payable in the event of default. All of the principal and accrued interest then
outstanding shall be converted into Preferred Stock at the closing of an equity
financing in which the Company issues convertible Preferred Stock and receives
an aggregate of at least $2,000,000 in consideration of such issuance. The price
per share for the conversion shall be the same as the price per share of the
Preferred Stock sold in the equity financing. There are no restrictive financial
covenants included in these Notes. In connection with these notes payable, the
Company issued warrants to purchase shares of Preferred Stock (See Note 7). On
December 18, 1998, the September and December 1997 Notes were amended and the
interest and warrant provisions of the notes were suspended for the period from
December 1, 1998 to May 31, 1999.
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
JUNE 30,
----------------------- DECEMBER 31,
1997 1998 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Series A
Designated: 200,000 shares Issued and Outstanding:
200,000 shares at June 30, 1997 and 1998 and December
31, 1998.............................................. $ 200,000 $ 200,000 $ 200,000
Series B
Designated: 571,428 shares Issued and Outstanding:
533,333 shares at June 30, 1997 and 1998 and December
31, 1998.............................................. 800,000 800,000 800,000
Series C
Designated: 1,086,495 shares Issued and Outstanding:
1,086,495 shares at June 30, 1997 and 1998 and
December 31, 1998..................................... 1,992,750 1,992,750 1,992,750
---------- ---------- ----------
$2,992,750 $2,992,750 $2,992,750
========== ========== ==========
</TABLE>
D-9
<PAGE> 126
INVESTOOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Dividends. Each share of Series A, B and C Preferred Stock entitles the
holder to receive annual noncumulative dividends, in preference to Common Stock,
of $0.08, $0.12 and $0.15 per share, respectively, when and as declared by the
Board of Directors.
Conversion. The holders of the Preferred Stock have certain conversion
rights as follows: Each share of Preferred Stock is convertible, at the option
of the holder, at any time after the date of issuance. The price at which shares
of Common Stock are deliverable upon conversion are initially $1.00, $1.50 and
$1.85 per share of Common Stock for conversions of Series A, Series B and Series
C, respectively. The initial Conversion Prices are subject to further
adjustment.
Conversion is automatic upon (i) the closing of an underwritten public
offering of the Company's Common Stock for an aggregate offering price of not
less than $7,500,000, or (ii) the written consent of holders of not less than
50% of the outstanding Preferred Stock.
Voting Rights. The consent of the holders of at lease a majority of the
then outstanding Preferred Stock, voting as a single class, shall be required in
connection with any amendment of a provision of the articles of incorporation
which would materially adversely affect the rights, preferences or privileges of
Preferred Stock, authorization or issuance of additional shares of the
corporation capital stock having a preference over the Series A, Series B and
Series C Preferred Stock, payment of dividends on a repurchase of any shares of
Common Stock, and the merger or consolidation of the corporation with or into
another corporation, person, or entity, other than a wholly owned subsidiary of
the corporation or a merger in which the existing shareholders hold at least 50%
of the voting securities of the surviving entity and the articles of
incorporation of the surviving entity shall be substantially identical to the
Company's articles of incorporation.
Redemption. Each holder of Preferred Stock shall have the right to redeem
all of the shares of Preferred Stock held by such shareholder. The shareholder
who wishes to initiate the transaction shall give written notice to the
corporation, such notice to be received by the corporation not earlier than
October 3, 1999 (the "Redemption Notice"). Upon receipt of the Redemption
Notice, the corporation shall be obligated to redeem all of the shares of
Preferred Stock held by such shareholder if permitted to do so at that time
under the laws of the state of California. The redemption price of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock to be
redeemed by the corporation shall be $1.00, $1.50 and $1.85, respectively, plus
any declared but unpaid dividends. The amount shall be paid to each shareholder
delivering a notice of redemption to the corporation as follows: 1/3 of the
aggregate redemption price 90 days after receipt of Redemption Notice (the
"Initial Payment Date"), 1/3 of the aggregate redemption price on the first
anniversary of the Initial Payment Date, and the final 1/3 of the aggregate
redemption price on the second anniversary of the Initial Payment Date.
Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the Company, the holders of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock are entitled to receive in preference to any
distribution to Common Stock holders, the amount of $1.00 per share for Series A
Preferred Stock, $1.50 per share for Series B Preferred Stock and $1.85 per
share for Series C Preferred Stock held plus all declared but unpaid dividends.
Participation Rights. Upon redemption of all Preferred Stock, any remaining
assets and funds which are legally available for distribution shall be
distributed among holders of Common Stock and Preferred Stock on a pro rata
basis. The distribution is relative to the aggregate number of shares of Common
Stock and the number of shares of Preferred Stock which is convertible.
Warrants. In March 1995, the Company issued warrants to an investor to
purchase 38,095 shares of Series B Preferred Stock at an exercise price of $1.50
per share. These warrants are exercisable for five years after the date of
issuance. The warrants were still outstanding as of June 30, 1998 and December
31, 1998.
D-10
<PAGE> 127
INVESTOOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During June 1995 through March 1996, the Company issued warrants to
investors and suppliers to purchase 400,000 shares of Common Stock at exercise
prices between $1.00 and $2.00 per share. These warrants were still outstanding
as of June 30, 1998 and December 31, 1998.
In connection with the Convertible Subordinated Promissory Notes (Note 6),
the Company agreed to issue a warrant to purchase that number of shares of
Preferred Stock equal to the quotient obtained by dividing the result of the
principal outstanding times 0.05 times the number of full months outstanding by
the warrant exercise price. The warrant exercise price is equal to (i) the price
for which shares of Series D Preferred Stock of the Company are issued or (ii)
if no such shares of Series D Preferred Stock of the Company are issued, $1.85
per share. The agreements were amended on December 18, 1998 and at that date,
warrants ceased to be issued in respect of the Convertible Subordinated
Promissory Note. At June 30, 1998, the Company is obligated to issue warrants to
purchase 405,405 shares of Preferred Stock at an exercise price of $1.85;
warrants to purchase 243,243 shares and 162,162 shares of Preferred Stock will
expire on September 26, 2002 and December 18, 2002, respectively.
The warrants were valued using the Black-Scholes method and $425,000 and
$271,500 (unaudited) were recognized as interest expense for the year ended June
30, 1998 and the six months ended December 31, 1998. The
weighted-average-grant-date fair value of these warrants was $1.05.
8. STOCK OPTIONS
1994 Stock Option Plan. The Company has reserved 480,000 shares of its
Common Stock under its 1994 Stock Option Plan (the "Plan") for issuance to
employees and consultants. The Plan expires in 2004. Under the Plan, options may
be granted at prices not less than 100% of the fair market value at the date of
grant, as determined by the Board of Directors, in case of incentive options,
and at not less than 85% of the fair market value at the date of grant, as
determined by the Board of Directors, in the case of nonstatutory options.
Options generally expire ten years from the date of grant.
1999 Stock Option Plan (unaudited). The Company has reserved 500,000 shares
of Series C Preferred Stock under its 1999 Stock Option Plan. The Plan expires
in 2009. Under the Plan, options may be granted at 100% of fair market value at
the date of grant of the option as determined by the Board of Directors, in the
case of incentive stock options, at not less than 85% of the fair market value
at the date of grant as determined by the Board of Directors, in the case of
nonstatutory options. Options generally expire ten years from the date of grant.
Stock Option Plan for Publishing Partners (unaudited). The Company has
reserved 125,000 shares of its common stock for issuance under its Stock Option
Plan for Publishing Partners. The Plan expires in 2009. Under the Plan, options
are granted at not less than fair market value as determined by the Board of
Directors. All options granted under the Plan are nonstatutory stock options.
Options generally expire ten years from the date of grant.
D-11
<PAGE> 128
INVESTOOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------- WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE AGGREGATE EXERCISE
FOR GRANT OF SHARES PRICE PRICE PRICE
--------- --------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1996...................... 253,000 177,000 $0.10 - $0.15 $ 25,200 $0.14
Options granted............................ (96,410) 96,410 $ 0.19 18,318 $0.19
Options exercised.......................... -- (6,000) $ 0.19 (1,140) $0.19
-------- ------- ------------- -------- -----
BALANCE, JUNE 30, 1997..................... 156,590 267,410 $0.10 - $0.19 42,378 $0.16
Options granted............................ (165,771) 165,771 $ 0.19 31,496 $0.19
Options exercised.......................... -- (7,951) $0.15 - $0.19 (1,281) $0.16
Options canceled........................... 59,959 (59,959) $0.10 - $0.19 (8,676) $0.14
-------- ------- ------------- -------- -----
BALANCE, JUNE 30, 1998..................... 50,778 365,271 $0.10 - $0.19 63,917 $0.17
Options authorized (unaudited)............. 625,000 -- -- -- --
Options granted (unaudited)................ (206,000) 206,000 $0.19 - $0.85 142,786 $0.69
Options exercised (unaudited).............. -- -- -- -- --
Options canceled (unaudited)............... 28,458 (28,458) $ 0.19 (5,407) $0.19
-------- ------- ------------- -------- -----
BALANCE, DECEMBER 31, 1998
(UNAUDITED)................................ 498,236 542,813 $0.10 - $0.85 $201,296 $0.37
======== ======= ============= ======== =====
</TABLE>
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation". The Company has continued to account for its stock based
compensation under the Plan in accordance with APB 25. Accordingly, no
compensation expense has been recognized under the Plan. Had compensation costs
for the Company's stock option been determined based on the fair value at the
grant date for awards in fiscal years 1997 and 1998 consistent with the
provisions of SFAS No. 123, the Company's net loss for fiscal years 1997 and
1998 would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Net loss -- as reported..................................... $1,369,838 $2,163,873
Net loss -- pro forma....................................... $1,372,376 $2,167,589
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
During the six month period ended December 31, 1998, the Company granted
options to acquire 157,040 shares of Series C Preferred Stock to employees and
options to acquire 29,487 shares of Common Stock to non-employees for services
received. The Company recorded non-cash compensation of $275,164 (unaudited) in
respect of options granted to employees and $47,000 (unaudited) in respect of
options granted to non-employees during the six month period.
The weighted-average-grant-date fair value of options granted was $0.05 per
option for the years ended June 30, 1997 and 1998, respectively.
In accordance with the provisions of SFAS 123, the fair value of each
option is estimated using the minimum value method with the following
assumptions used for grants during the years ended June 30, 1997 and June 30,
1998; dividend yield of 0%, risk-free interest rates of between 5.58% to 5.82%
at the date of grant and an expected term of five years.
D-12
<PAGE> 129
INVESTOOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The options outstanding and currently exercisable by exercise price at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10 - $0.15 142,000 2.7 $0.15 112,038 $0.15
$0.19 243,773 6.5 $0.19 114,487 $0.19
$0.85 157,040 10 $0.85 157,040 $0.85
------- ---- ----- ------- -----
542,813 6.52 $0.38 383,565 $0.45
======= ==== ===== ======= =====
</TABLE>
The options outstanding and currently exercisable by exercise price at June
30, 1998 are as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10 - $0.15 142,000 7.22 $0.15 98,591 $0.15
$0.19 223,271 9.05 $0.19 31,777 $0.19
------- ---- ----- ------- -----
365,271 8.34 $0.18 130,368 $0.18
======= ==== ===== ======= =====
</TABLE>
The options outstanding and exercisable by exercise price at June 30, 1997
are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------- ----------- ----------- -------- ------------------- --------
<S> <C> <C> <C> <C> <C>
$0.10 -- $0.15 177,000 5.11 $0.14 90,956 $0.14
$0.19 90,410 6.34 $0.19 21,410 $0.19
------- ---- ----- ------- -----
267,410 5.52 $0.15 112,366 $0.15
======= ==== ===== ======= =====
</TABLE>
9. INCOME TAXES
Taxable income is computed on the cash basis of accounting, and the
difference between the cash basis of accounting for tax purposes and accrual
basis of accounting results in deferral of income and deductions to years which
the related asset and liabilities are realized or used up.
As of June 30, 1998, the Company had federal and state net operating loss
carryforwards of $3,700,000 and $3,000,000, respectively, to reduce future
taxable income. These carryforwards expire in 2009 through 2012, if not
utilized.
D-13
<PAGE> 130
INVESTOOLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax assets are:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Capitalized research and development....................... $ 82,000 $ 57,000
Net operating loss......................................... 899,000 1,445,000
Tax credits................................................ 59,000 151,000
Accrual to cash adjustment................................. -- 109,000
Other...................................................... 42,000 21,000
----------- -----------
1,082,000 1,783,000
Valuation allowance........................................ (1,082,000) (1,783,000)
----------- -----------
Net deferred tax asset..................................... $ -- $ --
=========== ===========
</TABLE>
A full valuation allowance is provided due to the uncertainty surrounding
the realization of the net deferred tax assets.
10. RELATED PARTY TRANSACTIONS
Notes payable includes a short-term note payable to shareholder and officer
of the Company of $22,644 bearing interest at 10% per annum due on demand. As of
June 30, 1997 and 1998 and December 31, 1998 (unaudited), this note and related
interest were still outstanding.
D-14
<PAGE> 131
PROXY TELESCAN, INC. PROXY
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
MAY 25, 1999
The undersigned hereby appoints David L. Brown and Roger C.
Wadsworth, with or without the other, proxies, with full power of
substitution, to vote all shares of common stock that the
undersigned is entitled to vote at the Special Meeting of the
Stockholders of Telescan, Inc., to be held on May 25, 1999, at 9.00
a.m. Local Time at the corporate offices of Telescan, Inc., located
at 5959 Corporate Drive, Suite 2000, Houston, Texas 77036, and at
all adjournments thereof as follows:
(1) Approval and adoption of the amendment to the Certificate of
Incorporation of Telescan, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) In their discretion, upon any other business which may properly
come before said meeting.
[ ] FOR [ ] AUTHORITY WITHHELD
This Proxy will be voted as you specify above. If no
specification is made, the Proxy will be voted FOR proposal (1)
above. Receipt of the Notice of Special Meeting of Stockholders and
the Proxy Statement dated May 10, 1999 is hereby acknowledged.
THIS PROXY IS SOLICITED BY TELESCAN, INC. BOARD OF DIRECTORS.
(Continued, and to be dated and signed, on the other side)
<PAGE> 132
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE PROXY CARD
USING THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
Please sign your name
exactly as it appears
below. Joint owners must
each sign. When signing as
attorney, executor,
administrator, trustee or
guardian, please give full
title as it appears hereon.
If held by a corporation,
please sign in full
corporate name by the
president or other
authorized officer. If held
by a partnership, please
sign in the partnership's
name by an authorized
partner or officer.
---------------------------
Dated
---------------------------
Signature
---------------------------
Signature, if held jointly,
or office or title held
