FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-17508
TELESCAN, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 72-1121748
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5959 CORPORATE DRIVE, SUITE 2000, HOUSTON, TEXAS 77036
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(Address of principal executive offices) (Zip Code)
(281) 588-9700
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
$.01 par value per share Common Stock: 16,296,026 as of November 6, 2000.
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
Report on Form 10-Q
Quarter Ended September 30, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................15
Item 2. Changes in Securities and Use of Proceeds...........................15
Item 3. Defaults upon Senior Securities.....................................15
Item 4. Submission of Matters to a Vote of Security Holders.................15
Item 5. Other Information...................................................16
Item 6. Exhibits and Reports on Form 8-K....................................16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................. $ 886 $ 12,625
Accounts receivable, net (allowance: $565; $299) ......................................... 8,529 5,033
Notes receivable .......................................................................... 4,200 5,468
Other current assets ...................................................................... 462 552
--------------- ---------------
TOTAL CURRENT ASSETS .............................................................. 14,077 23,678
Marketable securities ........................................................................ 10,217 46,761
Deferred taxes ............................................................................... 9,134 57
Investments .................................................................................. 2,978 3,919
Property and equipment, net .................................................................. 3,477 3,644
Software development costs, net .............................................................. 761 4,506
Other assets ................................................................................. 8 334
--------------- ---------------
TOTAL ASSETS ...................................................................... $ 40,652 $ 82,899
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................................... $ 3,812 $ 3,550
Deferred revenue .......................................................................... 5,289 8,817
Other current liabilities ................................................................. 2,373 1,262
--------------- ---------------
TOTAL CURRENT LIABILITIES ......................................................... 11,474 13,629
Capital lease obligations .................................................................... 97 271
Deferred taxes ............................................................................... -- 11,229
STOCKHOLDERS' EQUITY:
Convertible preferred stock (liquidation preference $25 per share)
(shares issued and outstanding: 120,000; 120,000) ......................................... 1 1
Common stock
(shares issued and outstanding: 16,841,026; 16,548,859) .................................. 168 165
Additional paid in capital ................................................................... 69,372 66,875
Accumulated comprehensive income (loss) ...................................................... (14,484) 18,321
Accumulated deficit .......................................................................... (25,976) (27,592)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY ........................................................ 29,081 57,770
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................ $ 40,652 $ 82,899
=============== ===============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
2
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Service ........................................................ $ 9,163 $ 6,647 $ 27,825 $ 17,113
Products ....................................................... 20 88 110 397
------------ ------------ ------------ ------------
Total revenue ........................................... 9,183 6,735 27,935 17,510
COSTS AND EXPENSES
Cost of service ................................................ 4,157 3,640 13,406 10,126
Cost of products ............................................... 58 82 218 270
Selling and marketing expenses ................................. 1,993 1,256 5,223 3,485
General and administrative expenses ............................ 4,782 2,689 14,458 6,564
Write-down of assets and unusual charges ....................... 2,008 -- 9,182 --
Cost of acquisition opportunities .............................. 4,464 106 5,009 3,287
------------ ------------ ------------ ------------
Total costs and expenses ................................ 17,462 7,773 47,496 23,732
LOSS FROM OPERATIONS ............................................... (8,279) (1,038) (19,561) (6,222)
OTHER INCOME (EXPENSE)
Gain on sale of marketable securities .......................... -- -- 20,696 --
Interest, net .................................................. 135 164 548 172
Other, net ..................................................... 45 2 46 (61)
------------ ------------ ------------ ------------
Total other income ...................................... 180 166 21,290 111
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST ............ (8,099) (872) 1,729 (6,111)
Income tax benefit ............................................. -- -- -- --
Minority loss .................................................. -- -- -- 56
------------ ------------ ------------ ------------
NET INCOME (LOSS) .................................................. (8,099) (872) 1,729 (6,055)
Less: Preferred stock dividends .............................. (38) (38) (113) (113)
------------ ------------ ------------ ------------
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS .................. $ (8,137) $ (910) $ 1,616 $ (6,168)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC .......................................................... $ (0.48) $ (0.06) $ 0.10 $ (0.41)
DILUTED ........................................................ $ (0.48) $ (0.06) $ 0.09 $ (0.41)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C> <C>
Net income (loss) .................................................. $ (8,099) $ (872) $ 1,729 $ (6,055)
Change in net unrealized gains (losses) on marketable
securities ..................................................... (8,989) (364) (52,911) 118
Deferred taxes on net unrealized gains (losses) on
marketable securities .......................................... 3,416 124 20,106 (40)
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS ...................................... $ (13,672) $ (1,112) $ (31,076) $ (5,977)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
3
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................................ $ 1,729 $ (6,055)
Reconciling adjustments:
Gain on sale of GlobalNet stock ........................................................... (20,696) --
Write-down of assets and unusual charges .................................................. 8,704 --
Cost of acquisition opportunities ......................................................... 4,194 --
Stock option compensation / warrants provided for services ................................ 362 189
Amortization of deferred revenue .......................................................... (3,258) (1,215)
Depreciation and amortization ............................................................. 2,320 2,532
Minority interest in loss of subsidiary ................................................... -- (56)
Changes in assets and liabilities:
Increase in accounts receivable ........................................................... (7) (3,681)
Decrease in other current assets .......................................................... 328 99
Decrease in accounts payable .............................................................. (1,118) (151)
Increase in other current liabilities ..................................................... 550 1,901
--------------- ---------------
Net cash used in operating activities ................................................ (6,892) (6,437)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ........................................................ (1,381) (2,002)
Additions to software development cost ..................................................... (581) (898)
Purchases of investments ................................................................... (3,639) (6,600)
Other ...................................................................................... 525 114
--------------- ---------------
Net cash used in investing activities ................................................ (5,076) (9,386)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock .................................................... -- 32,628
Proceeds from exercise of stock options .................................................... 685 1,289
Preferred dividends paid ................................................................... (113) (113)
Equity transaction of pooled company, net of cash .......................................... -- 157
Increase in capital lease obligations ...................................................... 20 340
Payments on notes payable and capital lease obligations .................................... (363) (2,547)
Other ..................................................................................... -- 28
--------------- ---------------
Net cash provided by financing activities ............................................ 229 31,782
--------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................................. (11,739) 15,959
CASH AND CASH EQUIVALENTS:
Beginning of period ........................................................................ 12,625 1,539
--------------- ---------------
End of period .............................................................................. $ 886 $ 17,498
=============== ===============
OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:
Net unrealized gain (loss), net of tax ..................................................... $ (30,302) $ 78
Exercise of GlobalNet option through sale of GlobalNet stock ............................... 33,227 --
Stock received in lieu of payment of services rendered ..................................... -- 4,875
Acquisition of assets for stock ............................................................ 350 --
Conversion of note receivable into equity investment ....................................... 64 --
Company common stock exchanged for investment in GlobalNet ................................. -- 6,335
</TABLE>
The accompanying notes are an integral
part of these financial statements.
4
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of Telescan, Inc.
(the "Company") and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1999 included in the Company's Annual Report on Form 10-K/A.
The Company has restated its 1999 and 1998 financial statements and has filed a
Form 10-K/A which brings the Company into compliance on Emerging Issues Task
Force ("EITF") Issue No. 00-3. The EITF consensus indicated that for those
agreements in which hosting by the vendor is essential to the functionality of
the software, the license revenue arising from those agreements should be
recognized over the term of the hosting arrangement.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X for interim financial
statements required to be filed with the Securities and Exchange Commission and
do not include all information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the information
furnished reflects all adjustments, consisting of normal recurring adjustments,
which are necessary to make a fair presentation of financial position and
operating results for the interim periods. The results of operations for the
nine month period ended September 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
2. COST OF ACQUISITION OPPORTUNITIES
On August 16, 2000, the Company entered into a merger agreement with GlobalNet
Financial.com, Inc. ("GlobalNet"). During the ensuing due diligence period, the
companies determined that each of their strategies would be best served if they
were pursued separately. On September 25, 2000, a termination agreement was
signed. The costs associated with this acquisition opportunity totaling $4.5
million were expensed in third quarter 2000. The material terms of the
termination agreement and the resulting accounting treatment are as follows:
o GlobalNet purchased 276,495 shares of GlobalNet common stock the Company
owned for $6.00 per share. The Company recognized a loss of $1.7 million
on this transaction, which is included in Cost of Acquisition
Opportunities.
o The Company delivered 272,500 shares of GlobalNet common stock the Company
owned to GlobalNet in exchange for the 545,000 shares of the Company
common stock GlobalNet owned, which the Company subsequently canceled. The
Company recognized a loss of $1.6 million on this exchange, which is
included in Cost of Acquisition Opportunities.
o GlobalNet paid the Company $250,000 as compensation for expenses incurred
in connection with the acquisition thereby reducing the Company's legal,
accounting, investment banking services and other costs to $1.1 million,
which is included in Cost of Acquisition Opportunities.
5
<PAGE>
o The Company and GlobalNet terminated most of their contracts and
agreements. Termination of the contracts relieved the Company of any
future obligation to perform under these contracts and thus, the deferred
license and hosting fees of $1.0 million are recognized currently into
revenue. In addition, Telescan incurred $90,000 of expense to write off
outstanding receivables from GlobalNet, which is included in Cost of
Acquisition Opportunities.
During the second quarter, the Company had incurred $545,000 in cost associated
with other acquisition opportunities that failed to materialize.
3. MARKETABLE SECURITIES TRANSACTIONS
In the first quarter of 2000, the Company acquired 309,000 shares of the common
stock of Stockwalk.com Group, Inc. ("Stockwalk"), with warrants attached to
purchase an additional 30,900 shares, in exchange for licensing proprietary
technology and investment analytics and $1.25 million in cash. This investment
is classified as available-for-sale and carried at fair market value with
changes in fair market value included in comprehensive income, net of tax, and
classified as a separate component of stockholders' equity.
During the first six months of 2000, the Company sold 752,713 shares of its
investment in GlobalNet common stock for approximately $21.4 million, or $28.42
per share. The proceeds from this sale, along with an additional 329,882 shares,
were used to exercise an option the Company had obtained in March 1999 to
acquire up to 19.9% of total GlobalNet common stock. As a result of these
transactions, the Company recognized a $20.7 million realized gain and held an
approximate 14.8% interest in GlobalNet at the end of June. In September 2000,
due to the merger termination agreement with GlobalNet, the Company exchanged
272,500 shares of GlobalNet common stock for 545,000 shares of the Company's
common stock GlobalNet owned. In addition, GlobalNet purchased 276,495 shares of
GlobalNet common stock from the Company for $6.00 per share. The losses on these
transactions are included in Cost of Acquisition Opportunities discussed in Note
2 above. At September 30, 2000, the Company holds 2,000,001 shares of GlobalNet
common stock with a discounted market value of $6.7 million. This investment is
classified as available-for-sale. See Note 8 for discussion of subsequent
dispositions of GlobalNet shares.
4. WRITE-DOWN OF ASSETS AND UNUSUAL CHARGES
Management is continuing its review of operations to identify assets and product
lines expected to provide the greatest growth potential for the Company along
with those that do not offer sufficient returns. The Company recognized the
following write-downs and other charges during the year:
<TABLE>
<CAPTION>
($ in millions) SEPTEMBER 30, 2000
---------------------------------
NINE
THREE MONTHS
DESCRIPTION OF CHARGE MONTHS ENDED ENDED
--------------------------------------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Technology assets no longer deemed strategic or productive .................................. $ -- $ 4.1
Investments:
o InvestorIQ - company in liquidation ...................................................... 1.8 1.8
o Telebuild - Impaired; Company does not expect to recover investment ...................... -- .4
o Trading Technologies Corp. - product being pursued was not viable ........................ -- .9
Legal settlement - CyberAction .............................................................. -- 1.1
Severance charges ........................................................................... .1 .5
Discontinued product lines .................................................................. .1 .4
--------------- ---------------
Total write-down of assets and unusual charges ........................................ $ 2.0 $ 9.2
=============== ===============
</TABLE>
6
<PAGE>
5. INCOME TAXES
The Company believes it has sufficient net operating loss carryforwards to
absorb any potential tax impact that may arise by the end of the year. The
Company has approximately $19 million in net operating loss carryforwards and a
valuation allowance has been provided for the majority of the deferred tax
assets related to these net operating losses.
6. CALCULATION OF EARNINGS PER SHARE
The calculation of earnings per share was as follows:
<TABLE>
<CAPTION>
(in thousands, except THREE MONTHS ENDED NINE MONTHS ENDED
per share amounts) SEPTEMBER 30 SEPTEMBER 30
------------------------- ------------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income (loss) attributable $(8,137) $ (910) $ 1,616 $(6,168)
to common shareholders (a)
Dividends on preferred stock - (c) - (c) 113 - (c)
------- ------- -------- -------
Net income (loss) attributable
to common shareholders,
assuming dilution (b) $(8,137) $ (910) $ 1,729 $(6,168)
======= ======= ======== ========
Average shares outstanding (a) 16,829 16,174 16,737 15,142
Effect of dilutive securities
Convertible preferred stock -(c) - (c) 1,742 - (c)
Stock options -(c) - (c) 277 - (c)
------ ------- -------- -------
Average shares outstanding,
assuming dilution (b) 16,829 16,174 18,756 15,142
======= ======= ======== =======
Net income (loss) per common
share
Basic $ (0.48) $ (0.06) $ 0.10 $ (0.41)
Diluted $ (0.48) $ (0.06) $ 0.09 $ (0.41)
</TABLE>
(a) Used to compute basic earnings per share.
(b) Used to compute diluted earnings per share.
(c) Because the Company is in a loss position, the stock options and
convertible preferred stock are antidilutive.
7. CONTINGENCIES
From time to time the Company is involved in certain legal actions arising in
the ordinary course of business. It is the opinion of management that all
pending litigation will be resolved without a material effect on the Company's
financial position or results of operations.
In August 2000, a lawsuit was filed against the Company in the United States
District Court for the Southern District of New York by a former employee
alleging that the Company failed to grant him certain stock options to which he
was entitled. The Company has responded to the complaint and the case is
proceeding before the court. Although no assurances can be given, the Company
believes that the ultimate resolution of the litigation will not have a material
adverse impact on the Company's financial position or results of operations.
7
<PAGE>
8. SUBSEQUENT EVENTS
In October 2000, the Company settled its outstanding claim with Web Street
Securities, Inc. The terms of the settlement are confidential and its impact on
the Company's financial statements was immaterial.
The GlobalNet termination agreement discussed in Note 2 above included a
provision to prevent the Company from selling, transferring, or disposing of its
shares of GlobalNet common stock before July 1, 2001, except for the right to
sell 50,000 shares per month for six consecutive months beginning October 1,
2000. The Company exercised this right and sold 50,000 shares in October 2000
and will recognize a $353,000 realized loss on marketable securities for the
October sales in the fourth quarter. Management may sell the shares as needed to
meet liquidity needs in the future.
In October 2000, the Company reduced staffing further. At November 1, total
personnel are 206, reflecting a 35% reduction for the year through layoffs,
attrition and the elimination of open positions. In addition, the Board of
Directors approved a proposal to grant current employees approximately 391,000
new stock options and to accelerate the vesting of approximately 922,000
existing options to motivate and retain the Company's remaining core talent
pool. Because the market price was below the strike price on the unvested
options, no compensation expense was required to be recorded as a result of this
action.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Telescan, Inc. ("Telescan" or the "Company") is an industry leader in providing
Internet services for the financial industry and proprietary analytical tools
and content to individual investors. The Company markets its products to
consumers and businesses. The Company's Consumer Division manages a collection
of Web sites, including INVESTools.com and WallStreetCity.com with the common
goal of simplifying and enriching the investing consumer's financial life. The
consumer division manages more than 1.4 million active users and more than
50,000 paying subscribers. The Company's Business to Business Division provides
Internet services via private-label and co-branded versions of its proprietary
Internet technology to many of the nation's leading financial services and media
companies including America Online, American Express, CNBC.com, Forbes, and Time
Inc. New Media (Fortune). The Business to Business Division also markets a
QuickTools product line of predefined technology modules to the middle market,
offering greater flexibility to meet the needs of the middle market customer.
BUSINESS STRATEGY
The Company's business strategy is to continue to expand its services and
customer base through (i) development of new and expanded strategic corporate
alliances, (ii) continued development of proprietary analysis tools, (iii)
acquisition of complementary businesses that add key services or market
presence, and (iv) global expansion.
The Company continues to expand its domestic and international presence by
developing strategic alliances and developing or acquiring analytical tools
which strategically position the Company as a leading provider of Internet
financial services and data.
Telescan is building the capability to help both domestic and international
investors to research and analyze international stocks with the ease and
convenience offered to investors interested in U.S. stocks. As the financial
world becomes increasingly integrated worldwide, all investors need information
about global markets. Telescan is positioning itself to supply these investors
with global financial information wherever they may be located.
RECENT DEVELOPMENTS
On August 16, 2000, the Company entered into a merger agreement with GlobalNet
Financial.com ("GlobalNet") in which each share of Telescan common stock would
be exchanged for 0.50 shares of GlobalNet common stock. During the ensuing due
diligence period, the companies determined that each of their strategies would
be best served if they were pursued separately. On September 25, 2000, a
termination agreement was signed and the costs associated with this acquisition
opportunity totaling $4.5 million were expensed. A summary of the material terms
of the termination agreement is as follows:
o The Company delivered 272,500 shares of GlobalNet common stock the Company
owned to GlobalNet in exchange for the 545,000 shares of the Company common
stock GlobalNet owned, which the Company subsequently canceled.
o GlobalNet purchased 276,495 shares of GlobalNet common stock the Company
owned for $6.00 per share.
9
<PAGE>
o GlobalNet paid the Company $250,000 in cash as compensation for expenses
incurred in connection with the acquisition.
o The Company and GlobalNet terminated most of their contracts and
agreements, and dismissed all outstanding receivables.
o The Company cannot sell, transfer, or dispose of its shares of GlobalNet
common stock until July 1, 2001, except for 50,000 shares per month for six
consecutive months beginning October 1, 2000.
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
Service revenues for the quarter ended September 30, 2000 increased $2.5 million
or 38% over the same period in the prior year. Business to consumer revenues
increased 31% over the prior year primarily due to an increase in both
subscription and advertising revenue. Revenue from business to business commerce
includes accelerated deferred revenue related to the termination of the
GlobalNet contract discussed above. Termination of the contracts relieved the
Company of any future obligation to perform under these contracts and thus, the
deferred license and hosting fees of $1.0 million are recognized currently into
revenue. Excluding the accelerated revenue, revenue from business to business
commerce increased 21% over the third quarter of 1999 due to increased business
with Citicorp, Individual Investor, Stockwalk and FreeRealTime, and the
generation of new business through the Company's QuickTools product line. As the
market continues to shift to Internet-based services, product revenue continues
to decline and is now a non-strategic and immaterial part of our business.
Cost of service increased $517,000 or 14% compared to the third quarter of 1999
primarily due to increased royalties offset by declines in capitalized software
amortization and communications costs. Cost of products decreased due to lower
sales.
Selling and marketing expenses increased $737,000 or 59% compared to the third
quarter of 1999 primarily due to increased advertising costs and salaries.
General and administrative costs increased $2.1 million to $4.8 million for the
third quarter of 2000. The increase in costs is due to increased compensation of
approximately $1.3 million reflecting increased salaries and personnel during
the period. In addition, rent, depreciation, equipment rental, legal fees, and
travel increased a total of approximately $598,000 primarily due to implementing
the new management structure. However, in response to market conditions, the
Company began scaling back operations in May and reduced the workforce by 16%
through the end of September. As a result, general and administrative costs are
down slightly from the second quarter of 2000.
During the third quarter, the Company recognized the following additional
write-downs and other charges as a result of its continuing review of
operations:
o Investment in Investor IQ - company in liquidation - $1.8 million
o Discontinued product line - no longer deemed strategic - $127,000.
o Severance charges - due to additional workforce reductions in the third
quarter - $130,000.
Cost of Acquisition Opportunities in the third quarter of 2000 includes the
costs associated with the termination of the merger agreement with GlobalNet
discussed above of $4.5 million as follows:
o $1.7 million loss on sale of GlobalNet shares.
o $1.6 million loss on exchange of shares.
o $1.1 million in acquisition costs for legal, accounting, investment
banking and other fees.
10
<PAGE>
o $90,000 write-off of GlobalNet receivables.
In the third quarter of 1999, these costs related to the acquisition of
INVESTools, Inc. in May 1999, which was accounted for as a pooling of interests.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30
1999
Service revenues for the nine months ended September 30, 2000 increased $10.7
million or 63% over the prior year. Revenue from business to business commerce
includes $1.0 million of accelerated revenue related to the termination of the
GlobalNet contract discussed above. Excluding the accelerated deferred revenue,
revenue from business to business commerce increased 92% over the prior year
primarily due to (i) new contracts with Forbes, TeamVest, Individual Investor,
FreeRealTime, Quick & Reilly, and Tachyon, (ii) additional site enhancements in
the current year for NBC, GlobalNet, Stockwalk, CitiCorp, American Express and
Online Investor's Advantage and (iii) the generation of new business through the
Company's QuickTools product line. Business to consumer revenues increased $4.2
million or 50% primarily due to increases in subscription and advertising
revenue partially offset by declines in online software revenue. As the market
continues to shift to Internet-based services, product revenue continues to
decline and is now a non-strategic and immaterial part of our business.
Cost of services increased $3.3 million or 32% compared to the nine months ended
September 30, 1999 primarily due to increased royalties partially offset by
decreasing capitalized software amortization and communication costs. Cost of
products decreased due to lower sales.
Selling and marketing expenses increased $1.7 million or 50% compared to the
nine months ended September 30, 1999 primarily due to increased advertising and
travel expenses.
General and administrative costs increased $7.9 million to $14.5 million for the
nine months ended September 30, 2000. The increase in costs is primarily due to
increased compensation of approximately $4.5 million, reflecting higher salaries
due to increased staffing at the end of 1999 and beginning of 2000. In response
to changing market conditions, the Company began scaling back operations and has
reduced personnel by 16% during the third quarter and continues to do so into
the fourth quarter. In addition, rent, depreciation, equipment rental,
recruiting expenses and consulting fees increased a total of approximately $1.3
million. Cost related to implementing the Company's new management structure and
growth strategy, such as legal fees, travel, accounting fees, and investor
relations' fees also increased approximately $1.1 million over the prior year.
11
<PAGE>
As discussed above, management continues its review of operations to identify
assets and product lines expected to provide the greatest growth potential for
the Company along with those that do not offer sufficient returns. The Company
recognized the following write-downs and other charges during the year:
<TABLE>
<CAPTION>
($ in millions) SEPTEMBER 30, 2000
---------------------------------
THREE MONTHS NINE MONTHS
DESCRIPTION OF CHARGE ENDED ENDED
----------------------------------------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Technology assets no longer deemed strategic or productive .................................... $ -- $ 4.1
Investments:
o InvestorIQ - company in liquidation ........................................................ 1.8 1.8
o Telebuild - Impaired; Company does not expect to recover investment ........................ -- .4
o Trading Technologies Corp. - product being pursued was not viable .......................... -- .9
Legal settlement - CyberAction ................................................................ -- 1.1
Severance charges ............................................................................. .1 .5
Discontinued product lines .................................................................... .1 .4
--------------- ---------------
Total write-down of assets and unusual charges .......................................... $ 2.0 $ 9.2
=============== ===============
</TABLE>
Cost of Acquisition Opportunities includes $4.5 million of costs associated with
the termination of the merger agreement with GlobalNet discussed above and the
remaining $545,000 relates to other acquisition opportunities earlier in the
year. In 1999, $3.3 million of costs were expensed related to the acquisition of
INVESTools, Inc., which closed in May 1999 and was accounted for as a pooling of
interests.
During the first six months of 2000, the Company sold 752,713 shares of its
investment in GlobalNet common stock for approximately $21.4 million, or $28.42
per share. The proceeds from this sale, along with an additional 329,882 shares,
were used to exercise an option the Company had obtained in March 1999 to
acquire up to 19.9% of total GlobalNet common stock. As a result of these
transactions, the Company recognized a $20.7 million realized gain and held an
approximate 14.8% interest in GlobalNet at the end of June. At September 30,
2000, the Company held 2,000,001 shares of GlobalNet common stock with a
discounted market value of $6.7 million. See Note 8 for discussion of subsequent
dispositions of GlobalNet shares.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, cash and cash equivalents totaled $886,000, an $11.7
million decrease from December 31, 1999. The decrease was primarily due to net
cash used by operations, including merger activities, and investing activities.
Net cash used in operations totaled $6.9 million for the nine months ended
September 30, 2000. Net income of $1.7 million included non-cash gains from the
sale of GlobalNet stock of $20.7 million and non-cash revenue of $3.3 million
offset by non-cash charges of $8.7 million for asset write-downs and unusual
charges discussed above, $4.2 million of non-cash Cost of Acquistion
Opportunities and routine non-cash depreciation and amortization of $2.3
million. Working capital assets used $247,000 in cash primarily due to the
decrease in accounts payable offset slightly by an increase in other current
liabilities.
Net cash used by investing activities was $5.1 million for the nine months ended
September 30, 2000. Uses of cash included purchases of investments earlier in
the year and equipment.
Net cash provided by financing activities was $229,000 in first nine months of
2000, primarily attributable to proceeds from the exercise of stock options
partially offset by payments on capital lease obligations.
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The Company currently has no material commitments other than those under
operating and capital lease agreements.
As a result of the termination of the merger agreement with GlobalNet,
aggressive collections of receivables, and the sale of GlobalNet shares on the
market, the Company's current cash balance is in excess of $3 million.
Additionally, the cost reduction steps taken by the Company during the second
and third quarter have reduced negative cash flow to approximately $500,000 per
month and that negative cash flow is expected to continue to decline. As a
result, the Company's current cash on hand is sufficient to fund operations
through the end of the first quarter of 2001. Additionally, given its marketable
securities, investments, and receivables, combined with no current debt balance,
the Company is confident in its ability to raise further capital.
RECENTLY ISSUED ACCOUNTING STANDARDS
On March 16, 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 00-3 that addresses the accounting for hosting arrangements. The
EITF consensus indicated that for those arrangements in which hosting by the
vendor is essential to the functionality of the software, the revenue should be
recognized over the term of the hosting arrangement. The Company has restated
its 1999 and 1998 financials and has filed an amended 10-K/A to restate prior
years' results to bring the Company into compliance on EITF Issue No. 00-3. The
effect of these revisions was to reduce revenues by $4,214,000 and $1,722,000
for the years ended December 31, 1999 and 1998, respectively, and to increase
deferred revenue $5,936,000 and $1,722,000 at December 31, 1999 and 1998,
respectively. The additional amounts deferred will be recognized ratably over
two to five years, based on the term of the related hosting agreement.
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" (SAB 101), which provides guidance related
to revenue recognition based on interpretations and practices followed by the
SEC. The SEC extended the effective date of SAB 101 to the fourth fiscal quarter
of fiscal years beginning after December 15, 1999 and requires companies to
report any changes in revenue recognition as a cumulative change in accounting
principle at the time of implementation. The Company's management believes that
its revenue recognition policy is in accordance with SAB101.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133, and as amended by Financial Accounting Standards Board Statement
No. 137, effective for years beginning after June 15, 2000, requires derivatives
to be recorded in the balance sheet as an asset or liability measured at its
fair value, with changes in the derivatives fair value recognized currently in
earnings unless specific hedge accounting criteria are met. The Company does not
invest in derivative instruments and therefore does not believe that this
statement will have a material impact on the financial statements.
SUBSEQUENT EVENTS
In October 2000, the Company settled its outstanding claim with Web Street
Securities, Inc. The terms of the settlement are confidential and its impact on
the Company's financial statements was immaterial.
The GlobalNet termination agreement discussed in Note 2 above included a
provision to prevent the Company from selling, transferring, or disposing of its
shares of GlobalNet common stock before July 1, 2001, except for the right to
sell 50,000 shares per month for six consecutive months beginning October 1,
2000. The Company exercised this right and sold 50,000 shares in October 2000
and will
13
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recognize a $353,000 realized loss on marketable securities related to the
October sales in the fourth quarter. Management may sell the shares as needed to
meet liquidity needs in the future.
In October 2000, the Company reduced staffing further bringing the total
personnel count down to 206 at the end of October, a 35% reduction for the year
through layoffs, attrition and the elimination of open positions. In addition,
the Board of Directors approved a proposal to grant current employees
approximately 391,000 new stock options and to accelerate the vesting of
approximately 922,000 existing options to motivate and retain the Company's
remaining core talent pool. Because the market price was below the strike price
on the unvested options, no compensation expense was required to be recorded as
a result of this action.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk, which is the potential loss arising from
adverse changes in market prices and rates. The Company's exposure to interest
rate changes is not considered to be material to the Company. The Company does
not enter, or intend to enter, into derivative financial instruments for trading
or speculative purposes.
The Company is exposed to the impact of changes in the market values of its
investments. The Company invests in equity instruments of publicly and
privately-held, information technology companies for business and strategic
purposes. These investments are included in long-term assets and are accounted
for under the cost method when ownership is less than 20%. For these non-quoted
investments, the Company's policy is to regularly review the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values. The Company identifies and records impairment losses on
long-lived assets when events and circumstances indicate that such assets might
be impaired. During the nine months ended September 30, 2000, the Company
recorded $3.1 million of impairments to investments.
A downturn in the equity markets could cause a reduction in revenue since the
number of subscribers tends to increase in an upward market. Such a downturn
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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time the Company is involved in certain legal actions arising in
the ordinary course of business. It is the opinion of management that all
pending litigation will be resolved without a material effect on the Company's
financial position or results of operations.
In August 2000, a lawsuit was filed against the Company in the United States
District Court for the Southern District of New York by a former employee
alleging that the Company failed to grant him certain stock options to which he
was entitled. The Company has responded to the complaint and the case is
proceeding before the court. Although no assurances can be given, the Company
believes that the ultimate resolution of the litigation will not have a material
adverse impact on the Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders ("Annual Meeting") on August
9, 2000. The purpose of the Annual Meeting was to elect its directors for the
ensuing year, to ratify Arthur Andersen LLP as auditors for 2000, and to ratify
the Company's 2000 Stock Option Plan.
At the Annual Meeting, Lee K. Barba, David L. Brown, Elisabeth Y. Sami, William
D. Savoy and Stephen C. Wood were elected as directors of the Company. The
number of votes for and withheld are detailed below for each director.
FOR WITHHELD
----------------- --------------------
Lee K. Barba 10,878,474 448,247
David L. Brown 10,878,702 448,019
Elisabeth Sami 10,880,144 446,577
William D. Savoy 10,495,079 831,642
Stephen C. Wood 10,889,782 436,939
The Board of Directors recommended that the stockholders ratify their action in
appointing Arthur Andersen LLP as independent auditors for the fiscal year
ending December 31, 2000. The stockholders voted 11,253,253 shares for the
ratification of Arthur Andersen LLP as auditors for 2000. There were 21,333
abstentions and 52,135 votes cast against such ratification.
15
<PAGE>
The Board of Directors recommended that the stockholders ratify the Company's
2000 Stock Option Plan. The stockholders voted 9,918,317 shares for the
ratification of the 2000 Stock Option Plan. There were 116,766 abstentions and
1,291,638 votes cast against such ratification.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits:
27 Financial Data Schedule
(B) Reports on Form 8-K:
A current report on Form 8-K was filed by the Company on September 28,
2000 announcing the termination of the merger agreement with GlobalNet.
A current report on Form 8-K was filed by the Company on August 18, 2000
announcing that the Company entered into a merger agreement with
GlobalNet.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELESCAN, INC.
/s/ PAUL A. HELBLING
-----------------------------------
Paul A. Helbling
Chief Financial Officer
A duly authorized officer of the
Registrant
Date: November 10, 2000
16
