SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
For the fiscal year ended December 31, 1999
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-17508
TELESCAN, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 72-1121748
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5959 CORPORATE DRIVE, SUITE 2000 77036
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(281) 588-9700
SECURITIES REGISTERED PURSUANT TO
SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO
SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 27, 2000, based upon the average bid and asked price of the
common stock on Nasdaq National Market for such date, was approximately
$358,000,000. The number of outstanding shares of the Registrant's common stock
on March 27, 2000 was 16,669,650.
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TELESCAN, INC.
FORM 10-K REPORT INDEX
PART I.........................................................................3
ITEM 1. BUSINESS............................................................3
ITEM 2. PROPERTIES..........................................................9
ITEM 3. LEGAL PROCEEDINGS...................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................9
PART II.......................................................................10
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................10
ITEM 6. SELECTED FINANCIAL DATA............................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...............................................17
PART III......................................................................18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................18
ITEM 11. EXECUTIVE COMPENSATION.............................................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................25
PART IV.......................................................................27
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.............27
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PART I
ITEM 1. BUSINESS
GENERAL
Telescan, Inc. ("Telescan" or the "Company") is an industry leader in providing
Internet services for the financial and publishing industries, as well as
proprietary analytics and content to individual investors. The Company's
services and products contain or utilize proprietary software technologies
developed or acquired by the Company, which provide a powerful suite of search
tools, technical analysis and financial data. Users access the Company's
services and products through the Internet.
The Company's primary business line is a system of Internet financial services
and products provided directly to users via (i) Telescan's Internet supersite,
Wallstreetcity.com (HTTP://WWW.WALLSTREETCITY.COM), (ii) private-label and
co-branded financial websites with alliance partners and (iii) the Company's
investment advice website (HTTP://WWW.INVESTOOLS.COM). Such financial services
allow investors to:
o Perform personalized searches with the Company's optimal search
technology using current and historical information;
o Perform fundamental and technical analysis;
o Obtain quotes, financial news and other financial information;
o Manage personal portfolios and strategize investment planning;
o Subscribe to investment advisory newsletters; and
o Access broker services.
The Company's non-financial business segment includes developing, hosting and
maintaining several third party Internet services in the publishing,
entertainment, sports and biotechnical/pharmaceutical industries.
In May 1999, the Company acquired INVESTools, Inc. ("INVESTools") in exchange
for 2,345,931 shares of the Company's common stock, in a transaction accounted
for as a pooling-of-interests. Of the total shares exchanged, 2,124,976 shares
were issued at the date of acquisition. The remaining 220,955 shares will be
issued upon the exercise of INVESTools stock options assumed by the Company.
INVESTools operates an investment advice website (http://www.investools.com)
featuring continually updated portfolio advice from recognized money managers,
as well as online investment advisory newsletters. INVESTools also has developed
strategic alliances with Quicken.com, CBS.MarketWatch.com, CNBC.com, and
multiple other sites, which distribute their advisory content.
INVESTools' investment portfolio advice includes buy and sell recommendations,
and interactive online tools such as email hotlines, discussion threads, and
portfolio alerts. INVESTools develops and supports these value-added online
interfaces that encourage interactive relationships between advisors and their
subscribers, as well as among the subscribers themselves.
CORPORATE BACKGROUND
The Company or its predecessors has 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 its outstanding 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.
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.
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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 the top 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.
EXPANDED STRATEGIC CORPORATE ALLIANCES
During the past year, Telescan expanded or created new strategic alliances with
prestigious first-tier financial services and media companies, including
American Express, America Online, Citibank and National Broadcasting Company.
Further, the Company formed strategic alliances and made investments in
GlobalNetFinancial.com, Inc., FreeRealTime.com, Inc., Individual Investor Group,
Inc., Tachyon Systems, L.L.C., TeamVest, Inc. and Zisto.com, Inc. (formerly
Trading Technologies Corporation), thereby creating new channels of distribution
and providing access to new technologies.
DEVELOPMENT OF PROPRIETARY ANALYSIS TOOLS
To maintain its technology leadership position, the Company has expended over $1
million on software development in 1999. In addition, the Company invested
approximately $13 million during 1999 in companies which provide access to new
technologies, such as FreeRealTime.com, Inc., Individual Investor Group, Inc.,
Tachyon Systems, L.L.C., TeamVest, Inc. and Zisto.com, Inc. Enhancements to
products, services and analysis tools have included the introduction of
D-Cipher, Streetshow, streaming real-time stock quotes, unlimited free real-time
quotes, real-time breakout alerts, and the "What's Working Now" search tool.
ACQUISITIONS
Telescan continually reviews potential acquisitions to add key technologies,
enhance market presence and complement existing services. Our acquisition of
INVESTools reflects our desire to broaden the services offered to our customers.
GLOBAL EXPANSION
Within the past year, Telescan has positioned itself for global expansion, and
has recently engaged Rothschild, Inc. to provide financial advice related to
developing its business in Europe. The Company has developed a data delivery
system to facilitate quick development and enhance our ability to offer services
and products which encompass multiple exchanges and countries. The Company has
acquired delayed quote data rights for Canadian and German exchanges. In
addition, the Company is pursuing relationships with international exchanges to
provide international real-time data to investors.
Telescan currently offers the following services and products associated with
international exchange data on its financial supersite Wallstreetcity.com.
o News
o Stock Quotes
o Commentary
o Search Tools
o Portfolio Development
o Ticker
SERVICES AND PRODUCTS
The Company has participated in the growing market for Internet services by
creating and marketing products that build and expand upon the Company's base
technology of proprietary operating systems and user software for database
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applications. The Company's primary product line is the Telescan system of
financial databases and tools accessed over the Internet.
WALLSTREETCITY.COM
Wallstreetcity.com is Telescan's financial supersite. It provides investors with
a comprehensive historical market database, free real-time quotes, streaming
real-time data feeds, state-of-the-art analysis, and powerful research tools.
The site is a culmination of more than 15 years of Telescan's effort to create
the most dynamic, innovative analysis tools available to the investor.
In March 2000, the Company introduced a new, redesigned Wallstreetcity.com. As
with prior versions of Wallstreetcity.com, the site's revenue is generated from
both paid subscriptions and advertising sales.
The redesigned Wallstreetcity.com navigation system leads users to the most
popular information with fewer mouse clicks and makes the site's extensive set
of information easier to find and use. For example, a full profile on a company,
fund or option can now be retrieved with one click, including not just crucial
information such as real-time quotes, but also less widely available information
such as intraday trades, technical analysis break-outs and international
equities and currencies data. The site pages are now designed for fast
transmission over the Internet, making the entire user experience much faster.
While a wealth of information is available at no charge, the redesign gives
prominence to Telescan's cutting edge search technology and streaming real-time
data, which are available only to paid subscribers. The entry-level service,
`WALL STREET CITY PRO,' includes ProSearch(R), an award-winning screening tool
that allows investors to define database searches on key fundamental or
technical data. The advanced service, `WALL STREET CITY PRO PLUS,' pushes
streaming real time quotes to the investor's computer, enabling the investor to
monitor securities in real-time without having to actively retrieve data.
The site features:
o Unique Market Commentary and Quantitative Analysis - Provides intraday
articles on domestic and international markets, stocks and mutual
funds, as well as strategies. The commentary provides insight into the
markets and investing strategies based on comprehensive,
up-to-the-minute, data-based analysis of stocks, mutual funds, and
market trends. Columns are written by Wallstreetcity.com's research
staff and include Stock-of-the-Hour, Stocks in Focus, and Strategic
Maneuver.
o Real-Time Quotes - Allows users to obtain free, unlimited real-time
quotes.
o Search Capabilities - An investor can categorize up to 40 criteria from
a selection of 300 to identify the top stocks that "fit" the criteria.
The search capabilities are enhanced to allow investors an easy method
to customize searches for stocks, mutual funds and options.
o Streaming Real-Time Quotes - Allows investors access to streaming
real-time quotes.
o Snapshot - Gives investors a unique snapshot of important statistics,
articles, news, and breakouts for each of their favorite stocks.
o Streaming Ticker - Once this streaming stock ticker has been launched,
users can visit other sites while monitoring their investments. By
clicking on one of the tickers, they are taken back to the WSC snapshot
page.
o Advisors - INVESTools' investment advice and newsletters are featured
throughout the WallStreetCity.com site.
o Discussions - New discussion section includes an interactive chat board
for every stock listed in the Telescan database.
o Customizable Technical Analysis Charts - Allows users to select
multiple indicators they want to see on a single chart for individual
stocks or groups of stocks. Users also can create technical analysis
profiles for a variety of
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stocks and save up to 10 separate profiles, which will appear each
time the stocks are called up on their personal computers.
o Multiple Portfolios - Each user can configure up to seven portfolios
with a maximum of 150 symbols per portfolio.
o Online Brokerage Access - Provides investors with access to brokerage
websites for online trading.
o Portfolio Scanning - Portfolios can be scanned for end-of-day technical
and positive breakouts, stock cycle strengths, and comparative
rankings.
o What's Working Now - A major step forward in automated backtesting and
optimization, wherein the system runs in excess of 35 million searches
weekly to identify the "best" and "worst" combinations of
characteristics and generates a list of stocks or funds having the most
similar characteristics.
o Advanced Asset Allocation - Allows users to select the best mix of
assets based on the level of risk they want.
o E-Commerce - Allows customers to purchase books, videos and other
educational materials to enhance investment decisions.
o 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 fund and bond
returns. Consumers can use the calculators to compute answers on home
purchases and refinancing, credit cards and household budgeting.
o Personal Investment Planner - Allows investors to assess risks in their
stock and mutual fund portfolios and provides alternatives to better
meet their financial goals.
PRIVATE-LABELED AND CO-BRANDED FINANCIAL SERVICES AND PRODUCTS
Telescan licenses, develops and hosts private label and co-branded financial
websites for alliance partners. These websites utilize the Company's proprietary
technology, search tools, technical analysis and financial data. In 1999, the
Company signed and/or expanded agreements with many of the nation's leading
financial services companies including America Online, NBC, American Express,
Citibank and GlobalNetFinancial.com to design, develop and host private-label or
co-branded sites.
Recently, Telescan introduced a totally new type of website product line,
QuickTools, which allows small and mid-sized companies seeking fast and
affordable solutions, the ability to deliver a high value, low cost, financially
oriented website. The co-branded packages include such tools as stock quotes,
graphs, portfolio reports and news reports, along with "Quick Search," a
feature-rich, easy-to-use stock and mutual fund screening tool. Content within
each package is organized in easy-to-use templates that can be quickly dropped
into a customer's existing website with a minimum of development time and
expense. Under the terms of each package agreement, Telescan requires a one-year
minimum contract. Additionally, all pages containing Telescan text and data are
co-branded with Telescan's name and the customer's name.
INVESTOOLS.COM
INVESTools operates the leading investment advice website (www.investools.com),
featuring continually updated portfolio advice from recognized money managers.
The site has 35,000 paying subscribers, receives 300,000 unique visitors per
month, and provides more than 180,000 investors with a free weekly email digest
of recommendations called "The INVESTools Advisory." This free content is also
distributed on Quicken.com, CBS.MarketWatch.com, CNBC.com and multiple other
sites.
INVESTools is not a content aggregator but rather a value-added service provider
of investment advice. Customers pay a monthly fee to access interactive content
delivered by 32 investment advisors. Focused on portfolio advice that includes
buy and sell recommendations, the content is enhanced by interactive online
tools such as email hotlines, discussion threads, portfolio alerts and more.
INVESTools differentiates itself from the standard investment newsletter by
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developing and supporting these value-added online interfaces that encourage
interactive relationships between advisors and their subscribers, and among the
subscribers themselves.
INVESTools also offers business-to-business subscription marketing, e-commerce
services and content hosting for digital content providers. The premier list of
clients includes Phillips Publishing, the nation's largest newsletter publisher
and the American Association of Individual Investors, a non-profit group
supporting education for individual investors. INVESTools launched five online
subscription products for Phillips Publishing in October 1999, located at
investools.investorplace.com. In December 1999, INVESTools began to support
private-label subscription products on CNBC.com, located at
www.investools.cnbc.com.
In February 1999, INVESTools announced the launch of its email list management
service. The new service helps online financial information companies create
quality, free email content focused on information that helps consumers improve
their financial lives. In addition to aiding in content development, the service
will manage mailings, represent the list to advertisers and track advertising
results. FreeRealTime.com signed on as the premier list management client.
Phillips Publishing signed a one-year agreement to be the premier sponsor for
the service.
OTHER SERVICES AND PRODUCTS
The Company develops and manages websites for third parties which provide online
magazines, articles and news for industries such as publishing, entertainment
and sports to individual users. In addition, Telescan provides searchable online
databases related to biotechnical and pharmaceutical information. This service
is primarily used by business development and research professionals in
corporate and university fields.
MARKETING
The Company's marketing objectives for its Internet services are focused on
increasing the number of subscribers, as well as selling additional products and
services to existing customers. The channels for increasing the number of
subscribers include public relations, email marketing, joint marketing
agreements, print advertising and banner ads. 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.
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.
The Company's online revenue streams are based upon monthly subscription plans.
Wallstreetcity.com subscribers pay a monthly fee for premium content, including
ProSearch and streaming real-time quotes. Wallstreetcity.com users can also
access a wide variety of free content that does not require registration. Free
content available to investors is primarily funded by advertising revenue.
In addition, the Company actively seeks additional private labeling
relationships for its financial products. In 1999, the Company entered into
agreements with AOL, GlobalNetFinancial.com and NBC, among others.
CUSTOMERS
There were no customers during 1998 or 1997 accounting for 10% or more of total
revenues. In 1999, one customer, National Broadcasting Company ("NBC"),
accounted for 13% of total revenue. The Company maintains a license with NBC,
whereby NBC uses Telescan's proprietary Internet and online financial services
technology for CNBC.com, a comprehensive website for personal finance. Under the
agreement, Telescan is responsible for developing customized investment
analytics, providing financial data, hosting services, and data retrieval.
Telescan's revenue comes from cost reimbursement, fixed monthly license fees,
and a percentage of revenue from the site.
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.
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The Company intends to employ its recognized software technologies in developing
additional products serving new markets and customers.
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 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 or
services, or that any such assertion may not result in litigation or require the
Company to enter into royalty arrangements.
COMPETITION
The Company competes with companies that operate proprietary and/or Internet
websites, many of which have significantly greater financial, technical and
marketing resources than the Company. In addition, a substantial number of new
competitors are entering the Internet market as a result of the recent growth
and the perceived future opportunities in this market. The Company believes the
principal competitive factors in the Internet 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 offerings may serve to lessen the impact
of future competitive pressures on the Company.
EMPLOYEES
As of December 31, 1999, the Company had 237 full-time employees. Telescan
believes that its relationship with its employees is good. None of the Company's
employees is represented by a labor union and the Company has never experienced
a work stoppage.
GOVERNMENTAL REGULATION
The Company is not subject to direct regulation other than regulation generally
applicable to businesses. However, changes in the regulatory environment
relating to the Internet industry could have an effect on the Company's
business, financial condition and operating results. The Company is unable at
this time to 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.
The Company files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. Any document the
Company files with the Commission may be read or copied at the Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the Commission at
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1-800-SEC-0330 for further information on the public reference room. The
Company's Commission filings are also available to the public at the
Commission's website at http://www.sec.gov.
ITEM 2. PROPERTIES
The Company's principal executive offices, as well as its principal marketing,
computer operations and product development activities, are located in leased
facilities in Houston, Texas, consisting of a total of 77,116 square feet. The
Company also leases office space for marketing and administrative personnel in
New York, New York; King of Prussia, Pennsylvania; Menlo Park, California; and
Montecito, California.
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.
ITEM 3. 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 such
litigation will be resolved without a material effect on the Company's financial
position or results of operations.
Effective June 11, 1999 the Company terminated its contract with Web Street
Securities, Inc. ("Web Street"). The Company activated the mandatory mediation
provision in the contract and participated in the mediation. The differences
between the Company and Web Street were not resolved at the mediation, and on
December 13, 1999, the day of the mediation, Web Street sued the Company
alleging that the Company did not perform its obligations under the contract and
seeking damages for lost profits. The Company has filed a counterclaim alleging
and seeking damages for non-payment for the services rendered.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, there were no matters submitted to a vote of
the security holders through solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS MARKET INFORMATION
The Company's common stock is traded on the Nasdaq National Market under the
symbol "TSCN." The following table sets forth, for the periods indicated, the
high and low closing bid prices for the common stock as reported by the Nasdaq
National Market. The bid prices reflect inter-dealer quotations, do not include
retail markups, markdowns or commissions and do not necessarily represent actual
transactions.
COMMON STOCK PRICES
------------------------
HIGH LOW
---------- ----------
1999
----
Quarter ended March 31* ............................ $ 22.94 $ 7.50
Quarter ended June 30* ............................. 26.38 16.50
Quarter ended September 30 ......................... 24.31 13.25
Quarter ended December 31 .......................... 32.88 14.06
1998*
----
Quarter ended March 31 ............................. $ 8.25 $ 5.00
Quarter ended June 30 .............................. 13.25 4.75
Quarter ended September 30 ......................... 9.38 3.88
Quarter ended December 31 .......................... 10.13 2.63
*The Company's stock was traded on the Nasdaq Small-Cap Market prior to July 1,
1999.
On March 27, 2000, the last closing price of the Company's common stock as
reported by the Nasdaq National Market was $21.50. As of March 27, 2000, the
Company had approximately 200 stockholders of record, but believes it has
approximately 3,000 beneficial holders.
DIVIDEND POLICY
The Company has never declared a cash dividend on its common stock. The
convertible preferred stock dividend rate is 5% and the dividend is paid
quarterly. The Board of Directors currently intends to retain all earnings for
use in the Company's business, and therefore, does not anticipate paying any
cash dividends on its 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
other things. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and the notes thereto.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial data
for the periods indicated. Prior year financial data have been restated to
reflect the pooling-of-interest acquisition of INVESTools. The selected data
should be read in conjunction with "Item 7-Management's Discussion and Analysis
of Financial Condition and Results of Operations" and with the Company's
consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
STATEMENT OF OPERATIONS .................................. 1999(A) 1998(A) 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue .................................................. $ 26,438 $ 15,234 $ 16,467 $ 13,721 $ 13,946
Cost of online services and products ..................... 15,072 10,436 9,471 8,908 7,929
Marketing, general and administrative expenses ........... 14,364 11,075 8,492 8,943 7,395
Acquisition costs ........................................ 3,287 -- -- -- --
Loss on writedown of impaired assets ..................... -- 1,530 -- -- --
Interest and other (income) expense, net ................. (379) 555 68 (4) (5)
Minority interest expense (loss) ......................... (56) (142) (409) (345) 226
-------- -------- -------- -------- --------
Loss from continuing operations .......................... (5,850) (8,220) (1,155) (3,781) (1,599)
Income (loss) from discontinued operations ............... -- 19 (19) -- --
-------- -------- -------- -------- --------
Net loss ................................................. (5,850) (8,201) (1,174) (3,781) (1,599)
Preferred dividends (including incremental yield) ........ (150) (138) -- -- --
-------- -------- -------- -------- --------
Loss attributable to common shareholders ................. $ (6,000) $ (8,339) $ (1,174) $ (3,781) $ (1,599)
======== ======== ======== ======== ========
EARNINGS PER COMMON SHARE -
BASIC AND DILUTED
Loss from continuing operations .......................... $ (0.39) $ (0.66) $ (0.10) $ (0.32) $ (0.15)
Loss from discontinued operations ........................ -- -- -- -- --
-------- -------- -------- -------- --------
Net loss ................................................. $ (0.39) $ (0.66) $ (0.10) $ (0.32) $ (0.15)
======== ======== ======== ======== ========
Basic and diluted weighted average shares outstanding .... 15,486 12,654 12,203 11,655 10,604
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
BALANCE SHEET DATA 1999(A) 1998(A) 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working Capital .......................................... $ 10,049 $ (641) $ 956 $ 436 $ 2,707
Total assets ............................................. 82,899 13,401 13,178 11,673 11,533
Total long-term obligations .............................. 11,500 2,366 507 784 881
Total stockholders' equity ............................... 57,770 4,771 9,160 7,750 8,597
</TABLE>
(a) See Note 1 of the Notes to Consolidated Financial Statements regarding the
restatement of 1999 and 1998 financial statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and related notes, and the preceding "Item 6 - Selected
Financial Data".
FORWARD-LOOKING INFORMATION
CERTAIN MATTERS DISCUSSED HEREIN MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE
SUBJECT TO RISKS AND UNCERTAINTIES. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT
ARE NOT LIMITED TO, THE FOLLOWING: THE VOLATILE NATURE OF THE SECURITIES
BUSINESS, THE UNCERTAINTIES SURROUNDING THE RAPIDLY EVOLVING MARKETS IN WHICH
THE COMPANY COMPETES, THE UNCERTAINTIES SURROUNDING TECHNOLOGICAL CHANGE AND THE
COMPANY'S DEPENDENCE ON COMPUTER SYSTEMS, THE COMPANY'S DEPENDENCE ON ITS
INTELLECTUAL PROPERTY RIGHTS, THE SUCCESS OF MARKETING EFFORTS BY THIRD PARTIES
IN REVENUE SHARING AGREEMENTS, THE POTENTIAL OF INCREASED GOVERNMENTAL
REGULATION OF THE TELECOMMUNICATIONS INDUSTRY AND THE INTERNET, THE CHANGING
DEMANDS OF CUSTOMERS, AND THE ARRANGEMENTS WITH PRESENT AND FUTURE CUSTOMERS AND
THIRD PARTIES.
SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE AND SHOULD ANY OF
THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS OF CURRENT AND FUTURE
OPERATIONS MAY VARY MATERIALLY FROM THOSE ANTICIPATED.
BUSINESS OVERVIEW
Telescan, Inc. ("Telescan" or the "Company") is an industry leader in providing
Internet services for the financial and publishing industries, as well as
proprietary analytics and content to individual investors. The Company's
services and products contain proprietary software technologies developed or
acquired by the Company, which provide a powerful suite of search tools,
technical analysis and financial data. Users access the Company's services and
products through the Internet.
The Company's primary business line is a system of Internet financial services
and products provided directly to users via (i) Telescan's Internet supersite,
Wallstreetcity.com(R) (http://www.wallstreetcity.com), (ii) private-label and
co-branded financial websites with alliance partners and (iii) the Company's
investment advice website (http://www.investools.com). Such financial services
allow investors to:
o Perform personalized searches with the Company's optimal search
technology using current and historical information;
o Perform fundamental and technical analysis;
o Obtain quotes, financial news and other financial information;
o Manage personal portfolios and strategize investment planning;
o Subscribe to investment advisory newsletters; and
o Access broker services.
The Company's non-financial business segment includes developing, hosting and
maintaining several third party Internet services in the publishing,
entertainment, sports and biotechnical/pharmaceutical industries.
In May 1999, the Company acquired INVESTools, Inc. ("INVESTools") in exchange
for 2,345,931 shares of the Company's common stock, in a transaction accounted
for as a pooling-of-interests. Of the total shares exchanged, 2,124,976 shares
were issued at the date of acquisition. The remaining 220,955 shares will be
issued upon the exercise of INVESTools stock options assumed by the Company.
INVESTools operates an investment advice website (HTTP://WWW.INVESTOOLS.COM),
featuring continually updated portfolio advice from recognized money managers,
as well as online investment advisory newsletters. INVESTools also has developed
strategic alliances with Quicken.com, CBS.MarketWatch.com, CNBC.com, and
multiple other sites, which distribute their advisory content.
INVESTools' investment portfolio advice includes buy and sell recommendations,
and interactive online tools such as email hotlines, discussion threads, and
portfolio alerts. INVESTools develops and supports these value-added online
interfaces that encourage interactive relationships between advisors and their
subscribers, as well as among the subscribers themselves.
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<PAGE>
RESULTS OF OPERATIONS
On March 16, 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 00-3 that addresses 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.
During 1999 and 1998, the Company recognized revenues from license fees related
to certain hosting arrangements upon execution of the license agreement, as
opposed to recognizing the non-refundable fees ratably over the term of the
hosting arrangement. As a result, the timing of reporting revenue from license
fees related to these types of hosting arrangements requires revision to comply
with EITF Issue No. 00-3. The effect of these revisions is to defer the time in
which revenue is recognized. These revisions also resulted in an increase in
deferred revenue reflected on the Company's balance sheet at December 31, 1999
and 1998. The total 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. These
revenues, which have been deferred, will be recognized ratably over two to five
years, based on the term of the related hosting agreement. See Note 1 to the
consolidated financial statements.
1999 COMPARED TO 1998
Revenues for the year ended December 31, 1999 increased $11,204,000, or 74%,
compared to the same period in 1998 reflecting dramatic growth in the Internet
service business.
Service and license fee revenues for the year ended December 31, 1999 increased
$11,237,000 or 84% over 1998. In 1999, the Company recognized approximately
$4,884,000 in revenue from new private label and licensing agreements, of which
approximately $3,477,000 came from an agreement with NBC. The Company has
licensed its proprietary Internet and online financial services technology to
NBC for CNBC.com, a comprehensive website for personal finance. Under the
agreement, the Company is responsible for developing customized investment
analytics, providing financial data, data retrieval and hosting services.
Telescan's revenue comes from fixed monthly fees, cost reimbursement and a
percentage of the revenue from the site. Revenue from INVESTools increased
$3,545,000 over 1998 to $5,000,000 as demand for online newsletters increased.
The Company's WallStreetCity website continues to grow adding $690,000 to
revenue in 1999 primarily due to advertising revenue. Other service revenues
increased $1,216,000, or 84%, primarily due to growing demand for the various
Internet publications while dial up modem revenue declined $1,074,000 reflecting
the Company shifting its growth to more Internet services.
Cost of services increased $4,624,000, or 46%, over 1998 resulting in a gross
margin increase of 154% or $6,830,000. Cost of services associated with the NBC
agreement discussed above represented approximately $1,879,000 of the total cost
of service increase. Cost of services for INVESTools was $1,273,000 higher for
1999 due to higher royalty obligations associated with increased revenue.
Marketing expenses increased 15% over 1998, as the Company shifted its marketing
focus. General and administrative expenses increased $2,668,000, or 38%
primarily due to increased staffing costs to accommodate the development
requirements associated with the growing businesses.
During 1999, the Company recorded a one-time charge of $3,287,000 for costs
related to the acquisition of INVESTools. These costs consisted of investment
banking fees, legal and accounting fees, and certain other expenses directly
related to the acquisition.
1998 COMPARED TO 1997
Revenues for the year ended December 31, 1998 decreased $1,233,000, or 7%, from
1997 primarily due to declining sales of products and modem based business
partially offset by growth in the Internet business.
Service revenues for the year ended December 31, 1998 totaled $13,369,000 as
compared to $13,638,000 in 1997. In 1998 the Company recognized increased
revenues from new private label and licensing agreements and the INVESTools
newsletters. Dial up modem revenue declined $768,000 as the Company shifted its
focus increasingly toward the Internet services.
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<PAGE>
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.
Contract revenue from affiliates was $170,000 lower in 1998 due to fewer
transactions with Telebuild, L.C., a non-consolidated subsidiary of the Company.
Cost of services was higher by $1,297,000, or 15%, for the year ended December
31, 1998 resulting in a gross margin decrease of $1,736,000 or 28% from 1997.
Data and royalty expenses were $1,284,000 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. The 48%
decrease in cost of products is attributable to the 53% decrease in product
sales.
Marketing expenses totaled $4,082,000 for the year ended December 31, 1998 as
compared to $3,044,000 for the year ended December 31, 1997. The $1,038,000
increase is primarily due to a one-time charge of $417,000 for bad debt and
commissions partially offset by lower salary expense. General and administrative
expenses increased $1,545,000, or 28%, in 1998 primarily due to 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.
During 1998, a review of certain operations revealed that they would not produce
the future cash flow sufficient to recover recorded costs and the assets were
written down to fair market value resulting in a non-cash charge of $1,530,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of $12,625,000
representing an increase of $11,086,000 from the prior year. Net cash used in
operating activities increased $351,000 over the prior year, reflecting strong
revenue growth during the year offset by the $3,287,000 cash costs of the
INVESTools acquisition and the $1,398,000 of securities received in lieu of cash
for services rendered and license fees recognized.
The Company's primary capital needs are for the continued investment in
technology through its software development activities and the purchase of
computers and communications equipment. During 1999, the Company invested
$1,273,000 in software development costs and $3,002,000 in property and
equipment (including equipment financed by long-term leases). The Company
focused on forming strategic alliances with several companies in 1999 that
provide us with data or technology and invested $13,135,000 in cash in these
companies through the purchase of equity or extension of credit as follows (in
thousands):
<TABLE>
<CAPTION>
AMOUNT % OF
COMPANY CLASSIFICATION INVESTED EQUITY
- -------------------------------------------------------------------------- ------------------- ---------- ----------
<S> <C> <C> <C>
TeamVest, Inc ............................................................ Notes Receivable $ 4,200 N/A
Individual Investor Group, Inc. .......................................... Marketable Security 3,000 11.0%
FreeRealtime.com, Inc. ................................................... Marketable Security 3,000 8.1%
Tachyon Systems, L.L.C. .................................................. Investment 2,250 19.9%
Zisto.com, Inc. .......................................................... Investment 685 15.0%
----------
TOTAL INVESTMENTS $ 13,135
==========
</TABLE>
The Company is financing its growth through the issuance of equity. During 1999
the Company issued 2,331,348 shares of common stock to National Broadcasting
Company, Inc. ("NBC") for $34,396,000 (and incurred $1,771,000 in transaction
costs), resulting in NBC owning 14.1% of the Company's outstanding stock at the
end of 1999. The Company used $2,890,000 primarily to repay existing debt and
debt acquired in the INVESTools acquisition. The
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<PAGE>
Company believes the cash received from the sale of stock to NBC, combined with
the cash the business is generating, to be sufficient to meet working capital
requirements.
The Company currently has no material commitments other than those under capital
lease agreements. The Company has experienced an increase in its capital
expenditures and capital lease arrangements in the past year, which is
consistent with increased staffing, and anticipates that this will continue in
the future. Additionally, the Company will continue to evaluate possible
acquisitions of, or investments in businesses, products, and technologies that
are complementary to those of the Company, which may require the use of cash.
Management believes existing cash and investments will be sufficient to meet the
Company's operating requirements for at least the next twelve months; however,
the Company may sell additional equity or debt securities or obtain credit
facilities to further enhance its liquidity position. The sale of additional
securities could result in additional dilution to the Company's shareholders.
SUBSEQUENT EVENTS
STOCKWALK.COM GROUP
In March 2000, the Company entered into an agreement with Stockwalk.com Group,
Inc. to license its proprietary technology and investment analytics.
Stockwalk.com Group issued the Company 142,333 shares of its common stock at
$7.50 per share. In a separate agreement, the Company purchased 166,666 shares
of Stockwalk.com Group's common stock for $1.25 million in cash at a price of
$7.50 per share.
CYBERACTION, LTD.
CyberAction, Ltd. ("CyberAction") and the Company entered into a Marketing,
License and Revenue Sharing Agreement (the "Agreement") dated May 21, 1996, as
amended, granting certain international marketing rights to CyberAction. The
parties have disagreed about contractual provisions and obligations. Subsequent
to filing the Company's Form 10-K and pursuant to the Company's globalization
efforts, the Company has engaged in negotiations to terminate the Agreement and
believes settlement will be reached during second quarter 2000 for which it has
accrued $1.5 million at March 31, 2000 for costs associated with the settlement.
GLOBALNETFINANCIAL.COM
On March 31, 1999, the Company entered into an option agreement with
GlobalNetFinancial.com ("GlobalNet") to purchase up to 19.9% of the outstanding
equity of GlobalNet at an adjusted exercise price of $12.00 per share. On March
31, 2000, the Company sold 702,713 shares of its GlobalNet stock to third
parties for approximately $20.0 million. The Company used these funds to
exercise a portion of the GlobalNet option on March 31, 2000. In April, the
Company sold an additional 50,000 shares of GlobalNet stock to third parties
which proceeds were used in combination with a cashless exercise to exercise the
remaining portion of the GlobalNet option. Currently the Company holds
approximately 2.5 million shares of GlobalNet stock.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and
Hedging Activities," which requires all derivative instruments to be recognized
at fair value in the balance sheet. Changes in the fair value of a derivative
instrument will be reported as earnings or other comprehensive income, depending
upon the intended use of the derivative instrument. The Company will adopt SFAS
133 on January 1, 2001. The Company does not expect adoption to have a material
impact on the Company's results of operations and financial position.
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.
15
<PAGE>
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
As of March 25, 2000, all major technology systems, programs, and applications,
including those that rely on third parties, are operating smoothly following the
transition into 2000. The Company experienced no interruptions to normal
business operations. The Company will continue to monitor the technology
systems, including critical third party dependencies, as necessary to maintain
Year 2000 readiness. The Company does not expect any future disruptions, if they
occur, to have a material effect on the Company's results of operations,
liquidity, or financial condition. The Company does not anticipate incurring any
significant costs in the future to maintain Year 2000 readiness.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of changes in the market values of its
investments. The Company invests in equity instruments of 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. To date,
no such impairment has been recorded. Such investments, which are in the
Internet industry, are subject to significant fluctuations in fair market value
due to the volatility of the stock market, and are recorded as long-term
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. This 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are filed pursuant to Item 14(a)1.
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Previous Independent Accountants
(i) On April 10, 2000, Telescan, Inc. (the "Registrant") dismissed
Hein + Associates LLP as the Registrant's independent accountant.
(ii) Neither of the reports of Hein + Associates LLP on the
financial statements for the past two years contained an adverse opinion or
disclaimer of opinion or were qualified or modified as to uncertainty,audit
scope or accounting principles.
(iii) The dismissal of Hein + Associates LLP was recommended and
approved by the Audit Committee of the Board of Directors of the Registrant.
(iv) During the Registrant's two most recent fiscal years and
through the period from December 31, 1999 to April 10, 2000, there have been no
disagreements with Hein + Associates LLP on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of Hein + Associates LLP
would have caused them to make reference thereto in their reports on the
consolidated financial statements for such years.
(v) During the Registrant's two most recent fiscal years and through
the period from December 31, 1999 to April 10, 2000, there have been no
reportable events (as defined in Regulation S-K Item 304(a)(1)(v)).
(vi) The Registrant has provided Hein + Associates LLP with a copy
of the disclosure it is making in response to Item 304 (a) of Regulation S-K.
The Registrant requested Hein + Associates LLP to furnish, and Hein + Associates
LLP furnished to, the Registrant a letter addressed to the Commission stating
that it agreed with the statements made by the Registrant.
(b) Newly Engaged Independent Accountants
(i) On April 10, the Registrant engaged Arthur Andersen LLP as its
new independent accountant. Through April 10, 2000, neither the Registrant
nor anyone on its behalf consulted Arthur Andersen LLP regarding (i) the
application of accounting principles to any transaction, either completed
or proposed, or (ii) the type of audit opinion that might be rendered by
Arthur Andersen LLP on the Company's financial statements. In addition,
through April 10, 2000, neither the Registrant nor anyone on its behalf
has consulted Arthur Andersen LLP regarding any matter that was the
subject of a disagreement (as defined in Regulation S-K Item
304(a)(i)(iv)) or a reportable event (as defined in Regulation S-K Item
304(a)(1)(v)).
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 27, 2000, the Company's directors and executive officers are as
follows:
Name Age Position
---------------------------------------------------------------------------
Lee K. Barba 49 Chief Executive Officer
David L. Brown 59 Director and Chairman
Dr. Richard K. Carlin 44 Director, Vice Chairman and Chief
Technology Officer
Ronald Warren 53 Director and President
Roger C. Wadsworth 52 Director and Senior Vice President
Paul Helbling 46 Chief Financial Officer
Edward C. Oliver 52 Senior Vice President
Joseph F. Frantz, II 36 Vice President
Greg E. Gensemer 33 Vice President
Danny E. Hoover 52 Vice President
William T. Melton 63 Vice President
Jerrold B. Smith 47 Vice President
Alexander T. Wyche 52 Vice President, Corporate Secretary
Laird G. Foshay 40 Director
Christopher A. Glowacki 32 Director
Dr. Ronald W. Hart 58 Director
Burt H. Keenan 60 Director
Roy T. Rimmer, Jr. 59 Director
William D. Savoy 35 Director
Stephen C. Wood 48 Director
Each director holds office until the next annual meeting of stockholders or
until his successor has been elected and qualified. The Compensation Committee
and Audit Committee of the Board of Directors are each composed of Messrs.
Foshay, Glowacki, Hart, Keenan, Rimmer, Savoy, and Wood.
LEE K. BARBA, was appointed to the position of Chief Executive Officer February
29, 2000. He implemented the European expansion of Open Link by forming
strategic partnerships with several Fortune 500 companies. Mr. Barba joined Open
Link after 22 years on Wall Street, where most recently, he was responsible for
managing global trading businesses for Bankers Trust Company. While based in
London he was responsible for managing their European offices, as well as the
Global Risk Management Advisory practice which had offices in Asia and Latin
America. Upon returning to New York, Mr. Barba was the senior executive of the
bank responsible for managing and consolidating the firm's technology and
operations functions for the global capital markets businesses, which included
over 2,100 in staff operating throughout Asia, Europe and North America. Earlier
in his career Mr. Barba served as a co-head of the Fixed Income Division at
PaineWebber and as a Vice President of Lehman Brothers Kuhn Loeb. He earned his
M.B.A. from Columbia University and his B.A. from the University of North
Carolina.
DAVID L. BROWN, Chairman of the Board since 1990, has served as a Director of
the Company since 1989 and was the Company's Chief Executive Officer from 1990
until February 29, 2000. Mr. Brown is co-author of CYBER-INVESTING: CRACKING
WALL STREET WITH YOUR PERSONAL COMPUTER, a best seller on computerized
investing, WALL STREET CITY, a guide to investing on the Internet, and GETTING
STARTED IN ONLINE INVESTING, the latest release in the Getting Started series,
all published by John Wiley and Sons, Inc. From 1978 to 1986, Mr. Brown was
President, and from 1992 to 1993 a Director, of Time Energy Systems, Inc., a
public company now known as the ACR Group, Inc. He has served as Chairman of the
U.S. Science and Technology Commission for the Emerging Leaders Summit
Conference series with the USSR. For the past eleven years, he has served as a
Director of the Alliance for Aging Research, based in Washington, D.C. He has
also served as Chairman of the New Millennium Committee of the Planetary
Society, a group based in Pasadena, California, which supports space
exploration. He has served as Chairman of the Advisory Board of the Southwest
Council of Public CEOs and on the boards of several banks and financial
institutions. Mr. Brown began his career in the space program at NASA, where he
headed the team of engineers who designed the landing gear for the
18
<PAGE>
first lunar module. Mr. Brown holds a B.S. degree in mechanical engineering from
the University of Pittsburgh and an M.B.A. from the University of Houston.
DR. RICHARD K. CARLIN, Vice Chairman of the Board since 1993 and Chief
Technology Officer since 1997, was one of the founders of Telescan and has
served as a Director of the Company since 1989. From 1988 to April 1990, Dr.
Carlin served as the Director of Technology Information Center, a subsidiary of
Maxwell Communications, where he managed the development and maintenance of a
technology transfer online database. From 1983 to 1988, he was with D.B.
Technology, Inc., the predecessor to the Company. From 1981 to 1983, Dr. Carlin
was Assistant Professor at Rockefeller University. Dr. Carlin holds a B.S.
degree in biophysical sciences from the University of Houston and a Ph.D. in
biochemistry, also from the University of Houston. Dr. Carlin is co-inventor of
the technology for which the Company was awarded two patents.
RONALD WARREN was appointed to the position of President in February 1999 and
was elected to the Board of Directors in October 1999, after having served as
Chief Financial Officer since 1996. From 1986 to 1996, Mr. Warren served as Vice
President and Chief Financial Officer of CogniSeis Development, Inc., a
multinational company that developed and sold computer software, hardware and
systems to a worldwide customer base. From 1975 to 1985, Mr. Warren held various
financial management positions at Sonat Offshore Drilling, Inc., a large
international drilling contractor, including Treasurer and Controller. Mr.
Warren holds M.B.A. and B.A. degrees from Hofstra University and is a Certified
Public Accountant.
ROGER C. WADSWORTH, Senior Vice President since 1990, has served as a Director
since 1989. From 1988 to 1990, Mr. Wadsworth served as President of the Company.
From 1983 to 1988, Mr. Wadsworth was employed as Vice President of Information
Management Services, Inc., in Houston, Texas, where he provided management
services to investment vehicles such as limited partnerships and joint ventures.
From 1979 to 1983, he served as co-owner of D. Russell Smith Associates, a
restaurant and tenant finish general contractor. Mr. Wadsworth is Corporate
Secretary of IMS Securities, Inc. a full service NASD broker/dealer owned by his
wife. Mr. Wadsworth holds a B.B.A. degree from the University of Houston.
PAUL A. HELBLING, joined the Company as Chief Financial Officer in August 1999.
From 1997 until joining Telescan, Mr. Helbling was Vice President Finance at PCC
Flow Technologies, Inc., a subsidiary of Precision Castparts Corporation and a
$350 million manufacturer of pumps and valves in the U.S. and Europe. From 1991
to 1997 Mr. Helbling served as Vice President and Chief Financial Officer of
HydroChem Industrial Services, a $150 million provider of industrial cleaning
services to the petrochemical, refining, and utility industries. Mr. Helbling
became a Certified Public Accountant in 1978, with experience in Big-5 public
accounting, and in the contract drilling and oil and gas exploration and
production industries. Mr. Helbling holds B.A. and M.A. degrees from Rice
University.
EDWARD C. OLIVER, Senior Vice President, Sales and Marketing, who joined the
Company in June 1999, previously served as Strategic Business Manager for Altec
Lansing Technologies, Inc. from 1997 to 1999. From 1989 to 1997, Mr. Oliver was
employed by Compaq Computer Corporation, where he helped develop and found
Compaq's Internet Solutions Division and was the Senior Manager for Relationship
Sales and Marketing in Europe, the Middle East and Africa. From 1986 to 1989,
Mr. Oliver was the Director of Electronics Engineering and Evening programs for
the New London School of Business in New London, Connecticut. Mr. Oliver holds
degrees from the University of New York and Southern Illinois University, and is
a graduate of the Project Management Institute's training for Professional
Project Managers (PMP).
JOSEPH F. FRANTZ II, Vice President of the Company since May 1995, was appointed
to the additional position of Chief Information Officer in February 1999. Mr.
Frantz previously held the positions of Computer Operations Manager, End-User
Software Product Manager and Senior Programmer after joining the Company in 1987
as a Technical Support Representative. Mr. Frantz holds a B.S. in Applied
Mathematics from the University of Houston and a M.S. in Management Computing
and Systems from Houston Baptist University. Mr. Frantz is a co-inventor of the
technology for which the Company was awarded two patents.
GREG E. GENSEMER, has been Vice President since rejoining the Company in April
1999. Prior to rejoining the Company, Mr. Gensemer was General Manager for
Paragon Software, a provider of streaming real-time quotes to individual
investors, money managers and brokers. When previously employed by the Company,
Mr. Gensemer held the positions of Director of Business Development, Project
Manager, Retail Sales Executive and Technical Support Representative after
originally joining the Company in 1990. Prior to joining the Company, Mr.
Gensemer was the Area Manager for
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<PAGE>
Pilgrim Cleaners of Houston, Texas from 1986 to 1990. Mr. Gensemer serves on the
Board of Directors of GRO Corporation of Houston, Texas.
DANNY E. HOOVER, Vice President since September 1996, previously held the
positions of Manager of Development, Manager of Windows Development and Senior
Windows Programmer. Before joining the Company in 1992, Mr. Hoover was employed
as operations manager for Praxis Incorporated, a supervisory control automation
company. Mr. Hoover holds a B.S. in Electrical Engineering from Texas A&M
University.
WILLIAM T. MELTON, Vice President since January 1995, previously held the
position of Manager of Project Development. Before joining the Company in
October of 1993, Mr. Melton served as a Project Manager with IBM, having
previously served in other sales positions as a 30-year employee of that
company. Mr. Melton holds both a B.S. in Business Administration and an M.B.A.
from the University of Arkansas.
JERROLD B. SMITH, Vice President since March 1998, previously held the positions
of Business Development Manager for the Company's Internet site, Wall Street
City, and Technical Support Supervisor after joining the Company in 1995. Prior
to joining the Company, Mr. Smith practiced financial planning and asset
management in Houston, Texas. From 1986 to 1988, Mr. Smith was national Sales
Manager for USOne Apparel of New York. From 1976 to 1986, Mr. Smith was a
salesman and ultimately regional Vice President of Donmoor, Inc., a wholesale
apparel manufacturer, also of New York. Mr. Smith holds a B.S. in Business
Administration from the University of Houston.
ALEXANDER T. WYCHE, Vice President, Corporate Counsel and Corporate Secretary,
who joined the Company in May 1999, previously served as an attorney for Koch
Industries, Inc., a privately held international conglomerate with interests in
the natural gas industry, from 1997 to 1999. Prior to 1997, Mr. Wyche held
positions in the legal departments of Enron Corp. and Tenneco, Inc., and served
as a legal consultant to the natural gas industry. Mr. Wyche holds a B.B.A. from
Campbell University, a J.D. from North Carolina Central University and is
licensed to practice law in Texas and North Carolina.
LAIRD G. FOSHAY, has served as a Director since the acquisition of INVESTools
Inc. by the Company in May 1999. Mr. Foshay founded INVESTools in 1994 to serve
individual investors with online access to advisory information from recognized
investment letters and portfolio managers. Previously, Mr. Foshay was one of the
founders of M&T Publishing, where he served as President from 1983 to 1992,
before selling the business to Miller Freeman/United News. Under Mr. Foshay's
leadership, M&T became the world's leading independent publisher of software
development information, including Dr. Dobb's Journal, Microsoft Systems Journal
and DBMS magazine. Mr. Foshay holds a bachelor's degree in history with high
honors from the University of California at Santa Barbara, where he was a member
of Phi Beta Kappa.
CHRISTOPHER A. GLOWACKI has worked in business development at NBC for over six
years. In his current role as Vice President of Business Development for NBC
Interactive, Mr. Glowacki oversees the development and implementation of NBC's
strategy in interactive media, including the Internet and Interactive
Television. Additionally, Mr. Glowacki is responsible for the development of new
business opportunities that arise from the network's conversion to digital
broadcasting. Mr. Glowacki, who reports to Martin Yudkovitz, President of NBC
Interactive, has a team of executives reporting to him who create opportunities
through internal development, joint ventures, mergers and acquisitions and
minority investment. In addition to such projects as MSNBC and SNAP, NBC has
minority investments in several high profile Interactive companies, including
Telescan, CNET, TalkCity, iVillage, InterVu, Intertainer, Wink and U.S. Web, as
well as two venture capital funds, Media Technology Ventures and Media
Technology Equity Partners. Mr. Glowacki holds an M.B.A. from the University of
Michigan and a B.A. from Amherst College. Mr. Glowacki has been a director since
February 1999.
DR. RONALD W. HART has been a Distinguished Scientist in Residence for the Food
and Drug Administration, Public Health Service, since 1992. From 1980 to 1992,
he was the director for the National Center for Toxicological Research, Food and
Drug Administration, Public Health Service, Department of Health and Human
Services in Jefferson, Arkansas. From 1987 to 1993, Dr. Hart served on the Board
of Directors of First Commercial Bank Corporation of Little Rock, Arkansas. Dr.
Hart has received over 30 awards and recognition for his research and
administrative accomplishments and is an internationally recognized scientist
and science manager holding the position of Distinguished Professor at a number
of universities and colleges, including Cairo University, Cairo, Egypt; Gangzou
University, Gangzou, China; and Moscow State University, Moscow, Russia. Dr.
Hart also serves as a Professor at the University of Arkansas Center for Medical
Sciences and the University of Tennessee Center for Health Sciences. Dr.
20
<PAGE>
Hart has published over 600 manuscripts on various topics, including research
management and administration and is a fellow of the American College of
Toxicology, American Association for the Advancement of Science, and the
Gerontology Society of America. Dr. Hart received his B.A. in 1967 from Syracuse
University, an M.S. in 1970 and a Ph.D. in 1971 at the University of Illinois,
Urbana. Dr. Hart has been a Director since 1990.
BURT H. KEENAN is Chairman and formerly Chief Executive Officer of Independent
Energy Holdings, plc, a London Stock Exchange and Nasdaq listed company, which
is the largest independent generator/supplier of electricity in the deregulated
markets of the United Kingdom. From 1969 to 1986, Mr. Keenan was the founder,
Chairman and Chief Executive Officer of Offshore Logistics, Inc., a Nasdaq
quoted marine and aviation oil and gas service company. Mr. Keenan is a Director
of Halter Marine, Inc., an American Stock Exchange listed company engaged in
U.S. shipbuilding. He has Bachelors and Masters degrees from Tulane University.
Mr. Keenan has been a Director since 1988.
ROY T. RIMMER, JR. was appointed to the Board of Directors in October 1998. Mr.
Rimmer is Chairman and Chief Executive Officer of Producers Pipeline
Corporation, a growing independent oil and gas operator, primarily engaged in
the acquisition and construction of crude oil and natural gas gathering and
transportation systems. Prior to joining Producers Pipeline in 1986, Mr. Rimmer,
a veteran oil industry executive, was Chairman and Chief Executive Officer of
Republic Gas Gathering Systems, Inc. Mr. Rimmer has also held senior management
positions with Republic Aluminum Corporation, Capital Building Systems,
Universal Lancaster Corporation, and AGC Industries.
WILLIAM D. SAVOY currently serves as Vice President of Vulcan Ventures
Incorporated, a venture capital fund wholly-owned by Paul G. Allen, co-founder
of Microsoft Corporation. From 1987 until November 1990, Mr. Savoy was employed
by Layered, Inc., a company controlled by Mr. Allen, and became its President in
1988. From November 1990 until the present, Mr. Savoy has served as President
for Vulcan Northwest Inc., a company which manages the personal financial
activities of Mr. Allen. Mr. Savoy serves on the Advisory Board of Dream Works
SKG of Los Angeles, California and serves on the Board of Directors of CNET,
Inc. of San Francisco, California; Harbinger Corporation of Atlanta, Georgia;
Metricom, Inc. of Los Gatos, California; Ticketmaster Online-CitySearch, Inc.,
of Pasadena California; USA Networks, Inc., of St. Petersburg, Florida; and U.S.
Satellite Broadcasting of Minneapolis, Minnesota. Mr. Savoy also represents Mr.
Allen in a wide variety of other personal financial transactions. Mr. Savoy
holds a B.S. in Computer Science, Accounting and Finance from Atlantic Union
College. Mr. Savoy has been a Director since 1993.
STEPHEN C. WOOD is currently President and Chief Executive Officer of Wireless
Services Corporation based in Bellevue, Washington. Until May 1996, Mr. Wood was
President and CEO of Notable Technologies, L.L.C., which filed for bankruptcy in
1996. From 1993 through 1994, Mr. Wood served as Vice President of Information
Broadcasting for McCaw Development Corporation located in Kirkland, Washington.
Until February 1993, he was President of Starwave Corporation, a company he
formed in 1991 with Microsoft Corporation co-founder Paul G. Allen to develop
and market data and information products. From 1986 through 1991, Mr. Wood
served in several executive positions at Asymetrix Corporation, a software
development and marketing firm founded by Mr. Allen. From 1980 until 1985, Mr.
Wood was in charge of building a microcomputer software development organization
for Datapoint Corporation in Austin, Texas, after serving in Research &
Development and marketing positions. Mr. Wood began his career in 1976 when he
became the sixth employee of Microsoft Corporation, where he was general manager
from 1977 to 1980. Mr. Wood holds a B.S. in Computer Engineering from Case
Western Reserve University and an M.S. in Electrical Engineering from Stanford
University. Mr. Wood has been a Director since 1992.
21
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table reflects all forms of compensation for services to the
Company for the years ended December 31, 1999, 1998, and 1997, of the Chief
Executive Officer and the Company's other most highly compensated executive
officers who were serving the Company at the end of 1999 and who earned $100,000
or more that year. No other executive officers of the Company received
compensation exceeding $100,000 during 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- ----------
SECURITIES
UNDERLYING
NAME YEAR SALARY BONUS OPTIONS
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
David L. Brown ................................................. 1999 $ 158,750 -- 4,393
CHIEF EXECUTIVE OFFICER 1998 $ 140,000 -- 28,800
1997 $ 138,425 -- 31,443
Dr. Richard K. Carlin .......................................... 1999 $ 116,925 -- 3,195
CHIEF TECHNOLOGY OFFICER 1998 $ 107,700 -- 17,400
1997 $ 101,598 $ 2,911 15,941
Ronald Warren .................................................. 1999 $ 118,269 -- 13,195
PRESIDENT 1998 $ 100,000 -- 14,000
1997 $ 95,333 -- 9,416
</TABLE>
DIRECTOR COMPENSATION
The Company currently pays non-employee Directors cash fees of $1,500 per Board
meeting attended and reimburses expenses incurred by Directors to attend such
meetings. Directors who are not officers of the Company are typically granted
stock options annually, at an exercise price consistent with the market.
22
<PAGE>
STOCK OPTIONS
The following tables set forth information relating to the named executive
officers with respect to (i) stock options granted in 1999 and (ii) the total
number of exercised options through 1999 and the value of the unexercised
in-the-money options at the end of 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS ASSUMED ANNUAL RATE OF
UNDERLYING GRANTED TO EXERCISE STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION OPTION TERM
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- ---- ------------ ---------- ---------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
David L. Brown ..................... 4,393(2) 2.7% $ 14.13 10/21/2009 $ 39,037 $ 98,929
Dr. Richard K. Carlin .............. 3,195(2) 2.0% $ 14.13 10/21/2009 $ 28,392 $ 71,950
Ronald Warren ...................... 10,000(1) 6.2% $ 18.00 2/1/2009 $ 113,201 $ 286,874
3,195(2) 2.0% $ 14.13 10/21/2009 $ 28,392 $ 71,950
</TABLE>
(1) Options vest 25% annually beginning 12 months after the date of grant.
(2) Options vest immediately upon grant.
- --------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR END
----------------- -----------------
SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
David L. Brown ................................. -- -- 77,266/31,100 $546,156/$357,527
Dr. Richard K. Carlin .......................... 20,000 $ 374,765 45,388/18,988 $333,371/$218,875
Ronald Warren .................................. -- -- 22,111/26,500 $241,914/$192,830
</TABLE>
23
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 27, 2000 unless
otherwise indicated, with respect to the number of shares of 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 Company's Common Stock. The number of shares is exclusive of
shares allocated to the person's account through the Company's 401(k) plan.
Except as noted below, each stockholder has sole voting and investment power
with respect to the shares shown.
<TABLE>
<CAPTION>
OWNERS NUMBER OF SHARES BENEFICIALLY OWNED % OF CLASS
- ------ ----------------------------------- ----------
<S> <C> <C>
David L. Brown 835,776(1) 5.0%
Dr. Richard K. Carlin 81,181(2) *
Ronald Warren 79,748(3) *
Roger C. Wadsworth 114,510(4) *
Paul A. Helbling 4,324(5) *
Edward C. Oliver 3,129(6) *
Joseph F. Frantz, II 10,206(7) *
Greg E. Gensemer 4,924(8) *
Danny E. Hoover 15,264(9) *
William T. Melton 8,003(10) *
Jerrold B. Smith 11,152(11) *
Alexander T. Wyche 2,550(12) *
Laird G. Foshay 431,249(13) 2.6%
Christopher A. Glowacki 5,000(14) *
Dr. Ronald W. Hart 36,599(15) *
Burt H. Keenan 65,481(16) *
Roy T. Rimmer, Jr. 20,500(17) *
William D. Savoy 56,973(18) *
Stephen C. Wood 44,950(19) *
National Broadcasting Company, Inc. and GE Capital Equity
Investment, Inc.
120 Long Ridge Road
Stamford, Connecticut 06927 2,331,348 14.0%
Lacy J. Harber
LJH, Corp.
377 Neva Lane
Denison, Texas 75020 1,495,000 9.0%
Paul G. Allen
Vulcan Ventures Incorporated
110 110th Avenue N.E., Suite 550
Bellevue, Washington 98004-5840 1,290,000(20) 7.7%
G. Robert Friedman
Friedman & Associates
Five Post Oak Park, Suite 1800
Houston, Texas 77027 1,053,919 6.3%
All directors and executive officers as a group (20 persons) 1,831,519 11.0%
</TABLE>
- --------------------------------------------------------------------------------
* Less than 1%.
(1) Includes 651,318 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
24
<PAGE>
directors of the Company. Includes 118,038 shares owned by David L.
Brown personally. Includes options to purchase 66,420 shares, which
are exercisable within the next sixty days.
(2) Includes options to purchase 24,972 shares, which are exercisable
within the next sixty days.
(3) Includes options to purchase 28,942 shares, which are exercisable
within the next sixty days.
(4) Includes options to purchase 30,942 shares, which are exercisable
within the next sixty days.
(5) Includes options to purchase 4,324 shares, which are exercisable
within the next sixty days.
(6) Includes options to purchase 2,929 shares, which are exercisable
within the next sixty days.
(7) Includes options to purchase 10,206 shares, which are exercisable
within the next sixty days.
(8) Includes options to purchase 3,049 shares, which are exercisable
within the next sixty days.
(9) Includes options to purchase 15,264 shares, which are exercisable
within the next sixty days.
(10) Includes options to purchase 8,003 shares, which are exercisable
within the next sixty days.
(11) Includes options to purchase 11,152 shares, which are exercisable
within the next sixty days.
(12) Includes options to purchase 2,550 shares, which are exercisable
within the next sixty days.
(13) Includes options to purchase 8,401 shares, which are exercisable
within the next sixty days.
(14) Includes options to purchase 5,000 shares, which are exercisable
within the next sixty days.
(15) Includes options to purchase 9,500 shares, which are exercisable
within the next sixty days.
(16) Includes options to purchase 9,500 shares, which are exercisable
within the next sixty days.
(17) Includes options to purchase 6,500 shares, which are exercisable
within the next sixty days.
(18) Includes options to purchase 26,973 shares, which are exercisable
within the next sixty days.
(19) Includes options to purchase 5,000 shares, which are exercisable
within the next sixty days.
(20) Vulcan is owned 100% by Paul G. Allen.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the normal course of business some members of the Board of Directors have
proposed business alliances with companies with which they are associated. In
the opinion of management, each of these transactions or arrangements were
entered into on terms as favorable to the Company as could have been obtained in
transactions or arrangements with unaffiliated third parties.
25
<PAGE>
VULCAN VENTURES, INCORPORATED
Pursuant to the terms of a May 20, 1992 stock purchase agreement between Vulcan
and the Company, Vulcan has the right to designate one nominee director to the
Company's Board of Directors for as long as Vulcan (or its affiliate) owns at
least 540,000 shares of Common Stock of the Company. In addition, the Company
has agreed not to take any corporate action to increase its number of directors
without the unanimous written consent of all directors for as long as Vulcan (or
its affiliate) owns at least 540,000 shares of Common Stock of the Company.
KNOWLEDGE EXPRESS DATA SYSTEMS, L.C. ("KE")
KE, of which the Company owns 55.58%, is 30% owned by GRF Interests, Inc.
("GRF"), a company controlled by G. Robert Friedman, a stockholder and a former
director of the Company. The Company provides computer hardware, programming,
systems maintenance, data loading, telecommunications and certain administrative
services to KE. Non-personnel expenditures are billed at the Company's actual
cost. For the year ended December 31, 1999, KE has a net loss of $287,000. The
Company recognized its share of $159,000 plus an additional $72,000 ($231,000 in
total) attributable to the minority shareholders because the minority
shareholders' interest had been reduced to zero.
TELEBUILD, L.C.
Friedman Interests, Inc., a company controlled by G. Robert Friedman, owns
45.42% of Telebuild, L.C. ("Telebuild"). The Company and the Brown Family
Partnership own 15.834% and 25.44%, respectively, of Telebuild. The Brown Family
Partnership is owned by David L. Brown, the Company's Chairman, and other
members of the Brown family. The Company performs services under contract for
Telebuild, which consists primarily of the development, maintenance and
operation of the Telebuild database system and the provision of office space,
equipment and furniture. The Company charges Telebuild for its personnel at a
stipulated rate, which reflects the full absorption of overhead costs to the
Company plus an appropriate profit margin determined by management and approved
by the outside directors. Non-personnel expenditures under the agreement are
billed at actual cost. For the year ended December 31, 1999, $1,369,000, or
5.2%, of the Company's total revenue was derived from services provided to
Telebuild.
NATIONAL BROADCASTING COMPANY, INC.
In a letter agreement dated February 22, 1999 between the National Broadcasting
Company, Inc. ("NBC") and the Company, NBC was granted the right to have an
individual designated by NBC (the "NBC Designee") included as a nominee for the
Board of Directors of the Company. NBC shall have this right until GE Capital
Equity Investments, Inc. ("GE Equity") owns less than 5% of the outstanding
common stock of the Company or the license agreement with NBC terminates or
expires, whichever event occurs earlier. Pursuant to this agreement, NBC has
designated and the Board of Directors has approved Mr. Glowacki.
In addition, GE Equity has the right to designate an individual to be present at
all Board of Director meetings. Such individual will not be a participating or
voting member of the Board of Directors and may remain as a designee as long as
GE Equity owns at least 5% of the Company's outstanding common stock.
GRO CORPORATION
Mr. Greg E. Gensemer, an officer of Telescan, serves on the Board of Directors
for GRO Corporation. The Company has entered into licensing and servicing
agreements with this company. As of December 31, 1999, GRO Corporation owed the
Company $64,000 in accrued interest on two notes that were converted to stock
during 1999. This accrued interest was also converted to stock in the first
quarter of 2000. The Company owned 550 shares of GRO Corporation representing an
ownership interest of 4.8% at December 31, 1999. After the first quarter
conversion, the Company's holdings increased to 603 shares.
INDEBTEDNESS OF MANAGEMENT
Roy T. Rimmer, Jr., a member of the Company's Board of Directors, was indebted
to the Company for $71,250 at December 31, 1999. The non-interest bearing
indebtedness arises from license fees and contract personnel reimbursement. The
maximum indebtedness during 1999 was $71,250. The indebtedness was paid in the
first quarter of 2000.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES ON FORM 10-K
The following documents are filed as part of this Form 10-K:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. FINANCIAL STATEMENTS
- Independent Auditor's Report 31
- Consolidated Balance Sheets as of December 31, 1999 and 1998 32
- Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 33
- Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 34
- Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 36
- Notes to Consolidated Financial Statements 37
2. FINANCIAL STATEMENTS SCHEDULES
- Independent Auditor's Report on Schedule 52
- Schedule I - Valuation and Qualifying Accounts 53
</TABLE>
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements or notes thereto.
3. EXHIBITS
Exhibit No.
3.1** Restated Certificate of Incorporation of Registrant.
(Incorporated by reference to the Company's Form S-1 dated
September 14, 1993 (Registration No. 33-52182)).
3.2** Certificate of Amendment of Restated Certificate of Incorporation
of the Registrant. (Incorporated by reference to the Company's
Form S-1 dated September 14, 1993 (Registration No. 33-52182)).
3.3*** Certificate of Amendment of Restated Certificate of Incorporation
of the Registrant. Filed with the Delaware Secretary of State on
May 31, 1999.
3.4** By-laws of the Registrant. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.1** See Exhibits 3.1 through 3.3 for provisions of the Certificate of
Incorporation and By-laws of the Registrant defining rights of
holders of common stock of the Registrant. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.2** Asset Purchase Agreement dated June 30, 1990, between TIC
Software, Inc. and the Registrant which sets forth certain
registration rights of TIC Software, Inc. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.3** Exhibits to Asset Purchase Agreement dated June 30, 1990, between
TIC Software, Inc. and the Registrant which set forth certain
registration rights of TIC Software, Inc. (Incorporated by
reference of the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.4** Assignment of Agreement between Jacob Sobotka, Marvin Deuell,
Raymond C. Wicker and the Registrant which sets forth certain
registration rights of those parties, effective as of January 1,
1992. (Incorporated by reference to the Company's Form S-1 dated
September 14, 1993 (Registration No. 33-52182)).
4.5** Assignment of General Partnership interest between New World
Technologies, a Texas general partnership, and the Registrant
which sets forth certain registration rights effective as of
January 1, 1992. (Incorporated by reference to the Company's Form
S-1 dated September 14, 1993 (Registration No. 33-52182)).
4.6** Certificate of Designation of Preferred Stock (Incorporated by
reference to the Company's Form S-1 dated June 15, 1998).
10.1** Amended Stock Option Plan. (Incorporated by reference to Exhibit
4.1 to the Company's Post-Effective Amendment No. 1 to Form S-8
(File No. 33-63172) as filed with the Commission on February 2,
1994). (1)
10.2** 1995 Stock Option Plan. (Incorporated by reference to Exhibit
99.1 to the Company's Registration Statement on Form S-8 (File
No. 33-94514)). (1)
10.3** Regulations of Telescan (TRC), L.C. effective January 1, 1992 by
and between the Registrant and The Radnor-Houston Joint Venture.
(Incorporated by reference to the Company's Form S-1 dated
September 14, 1993 (Registration No. 33-52182)).
10.4** First Amendment to Regulations of Knowledge Express, L.C.
(formerly known as Telescan (TRC), L.C.) entered into effective
July 23, 1992, by and between the Registrant and The
Radnor-Houston Joint Venture. (Incorporated by reference to
Amendment No. 1 to the Company's Form S-1 dated January 8, 1993.)
10.5** Regulations of Telebuild, L.C. entered into effective July 31,
1992, by and among the Registrant, JST Technology Center, Inc.
and Friedman Interests, Inc. (Incorporated by reference to
Amendment No. 2 to the Company's Form S-1 dated February 1,
1993).
10.6** Employment Agreement by and between the Company and David L.
Brown dated March 10, 1994. (Incorporated by reference to
Post-Effective Amendment No. 1 to the Company's Form S-1 dated
August 11, 1994). (1)
10.7** Office Lease Agreement between the Registrant and Chevron U.S.A.,
Inc. dated November 8, 1995. (Incorporated by reference to the
Company's Form 10-K for the annual period ended December 31,
1995).
10.8** Stock Purchase Agreement by and between the Company and GE
Capital Equity Investment Inc. (Incorporated by reference to the
Company's Form 8-K dated January 14, 1999).
10.9** Stock Purchase Agreement by and between the Company and GE
Capital Equity Investment Inc. (Incorporated by reference to the
Company's Form 8-K dated July 30, 1999).
10.10*** Employment Agreement by and between the Company and Lee K. Barba
dated February 28, 2000.
21*** Subsidiaries of the Registrant.
23* Consent of independent auditors.
27.1* Amended Financial Data Schedule for the year ended December 31,
1999.
27.2* Amended Financial Data Schedule for nine months ended September
30, 1999
27.3* Amended Financial Data Schedule for six months ended June 30,
1999
27.4* Amended Financial Data Schedule for three months ended March 31,
1999
27.5* Amended Financial Data Schedule for the year ended December 31,
1998
27.6* Amended Financial Data Schedule for nine months ended September
30, 1998
27.7* Amended Financial Data Schedule for six months ended June 30,
1998
27.8* Amended Financial Data Schedule for three months ended March 31,
1998
--------------------------------------------------------------------------
* Indicates documents filed herewith.
** Indicates documents incorporated by reference from the prior
filing indicated.
*** Indicates documents previously filed.
(1) Management contracts or compensation plans or arrangements.
28
<PAGE>
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Houston, State of
Texas, on May 17, 2000.
Telescan, Inc.
By: /s/ LEE K. BARBA
------------------------------------------
Lee. K. Barba, Chief Executive Officer and
Director
29
<PAGE>
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities and on the date
indicated
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER
/s/ LEE K. BARBA Chief Executive Officer and Director May 17, 2000
- -----------------------------------------
Lee K. Barba
PRINCIPAL FINANCIAL/ ACCOUNTING OFFICER:
/s/ PAUL A. HELBLING Chief Financial Officer May 17, 2000
- -----------------------------------------
Paul A. Helbling
DIRECTORS:
/s/ DAVID L. BROWN Chairman of the Board May 17, 2000
- -----------------------------------------
David L. Brown
/s/ DR. RICHARD K. CARLIN Vice Chairman of the Board May 17, 2000
- -----------------------------------------
Dr. Richard K. Carlin
/s/ RONALD WARREN President and Director May 17, 2000
- -----------------------------------------
Ronald Warren
/s/ ROGER C. WADSWORTH Senior Vice President and Director May 17, 2000
- -----------------------------------------
Roger C. Wadsworth
/s/ LAIRD G. FOSHAY Director May 17, 2000
- -----------------------------------------
Laird S. Foshay
/s/ CHRISTOPHER A. GLOWACKI Director May 17, 2000
- -----------------------------------------
Christopher A. Glowacki
/s/ DR. RONALD W. HART Director May 17, 2000
- -----------------------------------------
Dr. Ronald W. Hart
/s/ BURT H. KEENAN Director May 17, 2000
- -----------------------------------------
Burt H. Keenan
/s/ ROY T. RIMMER JR. Director May 17, 2000
- -----------------------------------------
Roy T. Rimmer Jr.
/s/ WILLIAM D. SAVOY Director May 17, 2000
- -----------------------------------------
William D. Savoy
/s/ STEPHEN C. WOOD Director May 17, 2000
- -----------------------------------------
Stephen C. Wood
</TABLE>
30
<PAGE>
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 subsidiaries as of December 31, 1999 and 1998, 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, 1999. 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
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
HEIN + ASSOCIATES LLP
Houston, Texas
February 25, 2000, except as to the third and
fourth paragraphs of Note 1 which are dated
March 17, 2000
31
<PAGE>
TELESCAN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
ASSETS (restated) (restated)
<S> <C> <C>
CURRENT ASSETS:
Cash, cash equivalents and restricted cash ($25; $25) ............................................ $ 12,625 $ 1,539
Accounts receivable (allowance: $299; $374) ...................................................... 5,033 2,004
Notes receivable ................................................................................. 5,468 793
Receivables from affiliates ...................................................................... -- 623
Other current assets ............................................................................. 552 664
------------ ------------
TOTAL CURRENT ASSETS ................................................................. 23,678 5,623
Marketable securities ............................................................................ 46,761 --
Software development costs, net .................................................................. 4,506 5,331
Property and equipment, net ...................................................................... 3,644 1,962
Investments ...................................................................................... 3,919 20
Other assets ..................................................................................... 391 465
------------ ------------
TOTAL ASSETS ......................................................................... $ 82,899 $ 13,401
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................................. $ 3,550 $ 2,376
Deferred revenue ................................................................................. 8,817 2,365
Other current liabilities ........................................................................ 1,262 1,523
------------ ------------
TOTAL CURRENT LIABILITIES ............................................................ 13,629 6,264
Long term debt ................................................................................... -- 2,039
Capital lease obligations ........................................................................ 271 327
Deferred taxes ................................................................................... 11,229 --
STOCKHOLDERS' EQUITY:
Convertible preferred stock (liquidation preference $25 per share)
(shares issued and outstanding at December 31, 1999 and 1998, respectively: 120,000; 120,000)... 1 1
Common stock,
(shares issued and outstanding at December 31, 1999 and 1998, respectively: 16,548,859;
16,845,940)..................................................................................... 165 129
Additional paid-in capital ....................................................................... 66,875 24,915
Accumulated comprehensive income ................................................................. 18,321 --
Accumulated deficit .............................................................................. (27,592) (20,274)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ........................................................... 57,770 4,771
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................... $ 82,899 $ 13,401
============ ============
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
32
<PAGE>
TELESCAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
REVENUE: (restated) (restated)
<S> <C> <C> <C>
Online service and license fees .................................................. $ 24,606 $ 13,369 $ 13,638
Products ......................................................................... 463 713 1,507
Contract revenue earned from affiliates .......................................... 1,369 1,152 1,322
---------- ---------- ----------
TOTAL REVENUE ............................................................... 26,438 15,234 16,467
COSTS AND EXPENSES FROM OPERATIONS:
Cost of online service ........................................................... 14,707 10,083 8,786
Cost of products ................................................................. 365 353 685
Marketing expenses ............................................................... 4,703 4,082 3,044
General and administrative expenses .............................................. 9,661 6,993 5,448
Acquisition costs ................................................................ 3,287 -- --
Loss on writedown of impaired assets ............................................. -- 1,530 --
---------- ---------- ----------
TOTAL COSTS AND EXPENSES FROM OPERATIONS .................................... 32,723 23,041 17,963
---------- ---------- ----------
Loss from operations ............................................................... (6,285) (7,807) (1,496)
Interest (income) expense, net .................................................... (455) 597 97
Other (income) expense, net ....................................................... 76 (42) (29)
---------- ---------- ----------
Loss before minority interest in loss of subsidiary ............................... (5,906) (8,362) (1,564)
Minority interest loss ............................................................ (56) (142) (409)
---------- ---------- ----------
Loss from continuing operations ................................................... (5,850) (8,220) (1,155)
Income (loss) from discontinued operations ........................................ -- 19 (19)
---------- ---------- ----------
Net loss .......................................................................... (5,850) (8,201) (1,174)
Preferred stock dividend .......................................................... (150) (94) --
Incremental yield dividend ........................................................ -- (44) --
---------- ---------- ----------
Loss attributable to common stockholders ...................................... $ (6,000) $ (8,339) $ (1,174)
========== ========== ==========
EARNINGS PER COMMON SHARE - BASIC AND DILUTED
Loss from continuing operations .................................................. $ (0.39) $ (0.66) $ (0.10)
Loss from discontinued operations ................................................ -- -- --
---------- ---------- ----------
Net loss ......................................................................... $ (0.39) $ (0.66) $ (0.10)
========== ========== ==========
Basic and diluted weighted average shares outstanding ............................ 15,486 12,654 12,203
</TABLE>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss ........................................................................... $ (5,850) $ (8,201) $ (1,174)
Net unrealized gains (loss) on marketable securities ............................... 29,550 -- --
Deferred taxes ..................................................................... (11,229) -- --
---------- ---------- ----------
Comprehensive income (loss) ................................................... $ 12,471 $ (8,201) $ (1,174)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
TELESCAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
--------------------------- --------------------------- ------------
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1997 ............................... -- $ -- 11,774 $ 117 $ 18,394
Net loss ................................................ -- -- -- -- --
Issuance of stock under stock option plan ........... -- -- 166 2 478
Other issuances ..................................... -- -- 25 -- 100
Equity transactions of pooled company ............... -- -- 528 6 1,989
Other ............................................... -- -- -- -- 9
------------ ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 1997 ............................. -- -- 12,493 125 20,970
Net loss (restated) ..................................... -- -- -- -- --
Issuance of stock under stock option plan ........... -- -- 166 2 458
Issuance of convertible preferred stock ............. 120 1 -- -- 3,000
Incremental yield on preferred stock ................ -- -- -- -- 44
5% convertible preferred stock dividends ............ -- -- -- -- --
Equity transactions of pooled company ............... -- -- 187 2 424
Other ............................................... -- -- -- -- 19
------------ ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 1998 ............................. 120 1 12,846 129 24,915
Net loss (restated) ..................................... -- -- -- -- --
Change in net unrealized gains (losses) ................. -- -- -- -- --
Deferred taxes .......................................... -- -- -- -- --
Issuance of stock under stock option plan ........... -- -- 458 5 1,731
Issuance of common stock ............................ -- -- 2,876 27 39,103
5% convertible preferred stock dividends ............ -- -- -- -- --
Equity transactions of pooled company ............... -- -- 252 3 530
Change in fiscal year of pooled company ............. -- -- 117 1 596
------------ ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 1999 ............................. 120 $ 1 16,549 $ 165 $ 66,875
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
TELESCAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands, except per share amounts)
(Continued)
<TABLE>
<CAPTION>
ACCUMULATED
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE JANUARY 1, 1997 .................................................... $ (10,761) $ -- $ 7,750
Net loss ..................................................................... (1,174) -- (1,174)
Issuance of stock under stock option plan ................................ -- -- 480
Other issuances .......................................................... -- -- 100
Equity transactions of pooled company .................................... -- -- 1,995
Other .................................................................... -- -- 9
------------ ------------ ------------
BALANCE DECEMBER 31, 1997 .................................................. (11,935) -- 9,160
Net loss (restated) ......................................................... (8,201) -- (8,201)
Issuance of stock under stock option plan ................................ -- -- 460
Issuance of convertible preferred stock .................................. -- -- 3,001
Incremental yield on preferred stock ..................................... (44) -- --
5% convertible preferred stock dividends ................................. (94) -- (94)
Equity transactions of pooled company .................................... -- -- 426
Other .................................................................... -- -- 19
------------ ------------ ------------
BALANCE DECEMBER 31, 1998 .................................................. (20,274) -- 4,771
Net loss (restated) .......................................................... (5,850) -- (5,850)
Change in net unrealized gains (losses) ...................................... -- 29,550 29,550
Deferred taxes ............................................................... -- (11,229) (11,229)
Issuance of stock under stock option plan ................................ -- -- 1,736
Issuance of common stock ................................................. -- -- 39,130
5% convertible preferred stock dividends ................................. (150) -- (150)
Equity transactions of pooled company .................................... -- -- 533
Change in fiscal year of pooled company .................................. (1,318) -- (721)
------------ ------------ ------------
BALANCE DECEMBER 31, 1999 .................................................. $ (27,592) $ 18,321 $ 57,770
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
TELESCAN, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: ........................................ (restated) (restated)
Net loss ..................................................................... $ (5,850) $ (8,201) $ (1,174)
Reconciling adjustments:
Stock received for services and licenses recognized as revenue ......... (1,398) -- --
Minority interest in loss of subsidiary ................................ (56) (142) (409)
Depreciation and amortization .......................................... 3,563 3,031 2,550
Loss on write down of impaired assets .................................. -- 1,530 --
Change in current assets and liabilities:
Increase in receivables ................................................ (3,713) (1,613) (328)
Increase in accounts payable ........................................... 1,408 186 179
Increase in deferred revenue ........................................... 2,974 2,365 --
Other .................................................................. 606 729 36
------------ ------------ ------------
Net cash provided by (used in) operating activities .......................... (2,466) (2,115) 854
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ......................................... (3,002) (249) (493)
Additions to software development costs ..................................... (1,273) (2,519) (2,505)
Additions to investments .................................................... (8,935) -- --
Additions to notes receivable ............................................... (5,643) -- --
Other ....................................................................... 433 -- 173
------------ ------------ ------------
Net cash used in investing activities ........................................ (18,420) (2,768) (2,825)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................................... 32,625 -- --
Proceeds from issuance of convertible preferred stock ....................... -- 3,000 --
Proceeds from exercise of stock options ..................................... 1,736 460 480
Preferred dividends paid .................................................... (150) (94) --
Proceeds from notes payable ................................................. -- 2,000 210
Increase in capital lease obligations ....................................... 488 105 282
Payments on notes payable and capital lease obligations ..................... (2,890) (568) (585)
Equity transactions of pooled company, net of cash .......................... 194 1 1,743
Other ....................................................................... (31) (9) 461
------------ ------------ ------------
Net cash provided by financing activities .................................... 31,972 4,895 2,591
INCREASE IN CASH AND CASH EQUIVALENTS ....................................... 11,086 12 620
CASH AND CASH EQUIVALENTS:
Beginning of year ............................................................ 1,539 1,527 907
------------ ------------ ------------
End of year .................................................................. $ 12,625 $ 1,539 $ 1,527
============ ============ ============
OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS (IN
THOUSANDS):
Net unrealized gain (loss) .................................................... $ 18,321 $ -- $ --
Conversion of note receivable into equity investment .......................... 664 -- --
Company common stock in exchange for investment in GlobalNetFinancial.com ..... 6,335 -- --
Stock received for services and licenses ...................................... 3,298 -- --
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
36
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES AND RELATED INFORMATION
THE COMPANY
Telescan, Inc. ("Telescan" or the "Company") provides Internet services for the
financial and publishing industries, as well as proprietary analytics and
content to individual investors. The Company's services and products contain or
utilize proprietary software technologies developed or acquired by the Company,
which provide a powerful suite of search tools, technical analysis and financial
data. Users access the Company's services and products through the Internet.
On May 28, 1999, the Company completed the acquisition of INVESTools, Inc.
("INVESTools") upon which the INVESTools shareholders exchanged all of their
shares for shares of the Company's common stock in a business combination that
was accounted for as a pooling of interests. The consolidated financial
statements for the three years ended December 31, 1999 and the accompanying
notes reflect the Company's financial position and the results of operations as
if INVESTools was a wholly-owned subsidiary of the Company since inception.
Prior to the acquisition, INVESTools had a fiscal year end of June 30. The
adjustment for the change in the year-end is reflected in the current period
statement of shareholders' equity.
RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
On March 16, 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 00-3 that addresses 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.
During 1999 and 1998, the Company recognized revenues from license fees related
to certain hosting arrangements upon execution of the license agreement, as
opposed to recognizing the non-refundable fees ratably over the term of the
hosting arrangement. As a result, the timing of reporting revenue from license
fees related to these types of hosting arrangements requires revision to comply
with EITF Issue No. 00-3. The effect of these revisions is to defer the time in
which revenue is recognized. These revisions also resulted in an increase in
deferred revenue reflected on the Company's balance sheet at December 31, 1999
and 1998. The total 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. These
revenues, which have been deferred, will be recognized ratably over two to five
years, based on the term of the related hosting agreement.
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ----------------------------------
(in thousands, except per share amounts) AS REPORTED AS RESTATED AS REPORTED AS RESTATED
--------------- --------------- --------------- ---------------
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenues ............................................... $ 30,652 $ 26,438 $ 16,956 $ 15,234
Net loss ............................................... (1,636) (5,850) (6,479) (8,201)
Net loss per share:
Basic ............................................ $ (0.12) $ (0.39) $ (0.52) $ (0.66)
Diluted .......................................... $ (0.12) $ (0.39) $ (0.52) $ (0.66)
BALANCE SHEET DATA:
Total assets ........................................... $ 82,899 $ 82,899 $ 13,401 $ 13,401
Deferred revenue ....................................... 2,881 8,817 643 2,365
Current liabilities .................................... 7,693 13,629 4,542 6,264
Accumulated deficit .................................... $ (21,656) $ (27,592) $ (18,552) $ (20,274)
</TABLE>
37
<PAGE>
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Telescan, Inc. and
its majority-owned subsidiaries. All significant intercompany transactions have
been eliminated. The equity and net loss attributable to the minority interests
that related to the Company's subsidiaries is shown separately in the
consolidated balance sheet and consolidated statement of operations,
respectively.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
disclosures of contingent assets and liabilities. Ultimate results could differ
from these estimates.
RECLASSIFICATIONS
Certain prior years' balances have been reclassified to conform to the current
year's presentation. These reclassifications had no impact on operating results.
CONCENTRATION OF CREDIT RISK
The Company markets its products to a diverse customer base. 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 to be minimal. Accounts receivable are generally unsecured and are
derived primarily from revenues earned from customers located in the United
States. The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses; historically, such losses have
been within management's expectations.
At December 31, 1998 and 1997, no one customer accounted for 10% or more of
revenues for the years then ended. During 1999, there was one customer, National
Broadcasting Company ("NBC"), which accounted for 13% of total revenue and 21%
of the total accounts receivable balance at December 31, 1999. On February 22,
1999, the Company entered into an agreement with NBC, whereby NBC licensed
Telescan's proprietary Internet and online financial services technology for
CNBC.com, a comprehensive website for personal finance. Under the agreement,
Telescan is responsible for developing customized investment analytics,
providing financial data, hosting services, and data retrieval. Telescan's
revenue comes from cost reimbursement, fixed monthly license fees, and a
percentage of revenue from the site.
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
The Company considers all cash and cash investments with an original maturity of
three months or less to be cash equivalents. The Company has invested excess
cash in commercial paper and money market accounts and amounts included in the
consolidated financial statements approximate fair value at the balance sheet
date. The restricted cash relates to a certificate of deposit securing a
building lease.
MARKETABLE SECURITIES
The Company's marketable securities are classified as available-for-sale
securities. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component within
stockholders' equity entitled "accumulated comprehensive income." Realized gains
and losses and permanent declines in value, if any, on available-for-sale
securities will be reported in other income or expense as incurred. Realized
investment gains (losses) are recognized using the specific identification
method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is calculated on a straight-line method over the useful lives of
the assets, which range from three to seven years. Equipment under capital lease
is amortized over the lease term.
38
<PAGE>
Depreciation expense was approximately $1,242,000, $1,097,000 and $962,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
SOFTWARE DEVELOPMENT COSTS
Costs for the development of software, including the costs of coding, software
configuration, upgrades and enhancements are capitalized and amortized over the
expected useful life, generally three to five years. Unamortized capitalized
costs determined to be in excess of the net realizable value of the product are
expensed at the date of such determination. The accumulated amortization and
related software development costs are removed from the respective accounts
effective in the year following full amortization.
Amortization expense for the years ended December 31, 1999, 1998 and 1997 was
$2,098,000, $2,627,000, and $1,205,000, respectively.
INVESTMENTS
The Company invests in equity instruments of 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-marketable 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. To date,
no such impairment has been recorded on these assets.
OTHER ASSETS
The Company has acquired rights to certain core software technologies and these
rights are being amortized over five years on a straight-line basis.
Amortization expense included in cost of service in the accompanying financial
statements totaled $73,000, $72,000 and $69,000 for the years ended December 31,
1999, 1998 and 1997, respectively. Accumulated amortization totaled $226,000 and
$153,000 at December 31, 1999 and 1998 respectively.
The Company reviews all long-lived assets and identifiable intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss is
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 did not recognize any such impairment in 1999. In 1998, the Company
adjusted the carrying value of certain long-lived assets, primarily capitalized
software development costs, 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. Estimated fair value was determined
based upon expected cash flows to be derived from these assets.
39
<PAGE>
INCOME TAXES
Deferred tax assets and liabilities are established for temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities, at the enacted tax rates expected to be in effect when the
temporary differences reverse.
A valuation allowance for deferred tax assets is provided if it is more likely
than not that some portion of the deferred tax asset will not be realized. An
increase or decrease in a valuation allowance that results from a change in
circumstances that causes a change in judgment about the realizability of the
related deferred tax asset is included in income. A change related to
fluctuations in fair value of available-for-sale securities is included in
accumulated comprehensive income in stockholders' equity.
MINORITY INTEREST
At the end of 1999, the minority interest investment had been reduced to zero.
The Company absorbed an additional $72,000 in losses because the minority
investment had been reduced to zero. The Company will continue to absorb all of
the losses of the venture until the minority stockholders make additional
contributions.
REVENUE RECOGNITION
Online service revenue and contract revenue earned from affiliates is recognized
as services are completed. License fees are recognized ratably over the term of
the hosting arrangements which range from two to five years. Product revenue is
recognized as the products are delivered.
DEFERRED REVENUE
Deferred revenue is primarily comprised of billings in excess of recognized
revenue relating to license and service fees.
STOCK-BASED COMPENSATION
The Company's long-term incentive plans provide for the award of stock options
to employees and directors. No compensation expense is recognized for stock
options since the exercise price equals the market price at the grant date.
ADVERTISING COSTS
Advertising costs are expensed when the initial advertisement is run and are
included in sales and marketing expenses in the accompanying statements of
income. Advertising costs for the years ended December 31, 1999, 1998 and 1997
were $433,000, $808,000 and $5,000, respectively.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing earnings available to common
shareholders by average common shares outstanding. Diluted earnings per share
are not computed for any period presented because the Company incurred losses
for all periods.
COMPREHENSIVE INCOME
Comprehensive income includes all changes in Company's equity (except those
resulting from investments by and distributions to owners).
40
<PAGE>
SEGMENT REPORTING
The Company adopted SFAS 131, "Disclosure about Segments of an Enterprise
Related Information," in 1997. Management evaluates and operates the business as
two segments: (i) financial and (ii) non-financial. The non-financial portion of
the business makes up less than 10% of the consolidated business for 1999, 1998
and 1997, thus no business segments disclosure is necessary.
2. BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT: 1999 1998
- ----------------------- --------------- ---------------
<S> <C> <C>
Property, computer and other equipment ................................................... $ 5,487 $ 5,345
Furniture and fixtures ................................................................... 655 583
Software ................................................................................. 504 446
--------------- ---------------
Total property and equipment ......................................................... 6,646 6,374
Less: accumulated depreciation and amortization .......................................... (3,002) (4,412)
--------------- ---------------
PROPERTY AND EQUIPMENT, NET ....................................................... $ 3,644 $ 1,962
=============== ===============
SOFTWARE DEVELOPMENT COSTS: 1999 1998
- --------------------------- --------------- ---------------
Costs capitalized:
Balance at January 1 ............................................................ $ 8,249 $ 5,730
Additions ....................................................................... 1,273 2,519
--------------- ---------------
Balance at December 31 ....................................................... 9,522 8,249
--------------- ---------------
Accumulated amortization:
Balance at January 1 ............................................................ 2,918 291
Additions ....................................................................... 2,098 2,627
--------------- ---------------
Balance at December 31 ....................................................... 5,016 2,918
--------------- ---------------
SOFTWARE DEVELOPMENT COSTS, NET .................................................... $ 4,506 $ 5,331
=============== ===============
OTHER CURRENT ASSETS: 1999 1998
- --------------------- --------------- ---------------
Prepaid expenses ......................................................................... $ 427 $ 376
Inventory ................................................................................ 27 53
Other .................................................................................... 98 235
--------------- ---------------
OTHER CURRENT ASSETS ................................................................. $ 552 $ 664
=============== ===============
</TABLE>
41
<PAGE>
OTHER ASSETS: 1999 1998
- ------------- --------- ---------
Software technology rights, net ................ $ 274 $ 196
Capitalized data costs, net .................... 24 150
Goodwill, net .................................. 21 34
Patents and trademarks, net .................... 15 26
Deferred tax asset ............................. 57 --
Notes receivable, non-current .................. -- 59
--------- ---------
OTHER ASSETS ............................... $ 391 $ 465
========= =========
OTHER CURRENT LIABILITIES 1999 1998
- ------------------------- --------- ---------
Accrued liabilities ............................ $ 821 $ 813
Current portion of long term obligations ....... 425 364
Other .......................................... 16 346
--------- ---------
OTHER CURRENT LIABILITIES .................. $ 1,262 $ 1,523
========= =========
3. ACQUISITIONS
INVESTOOLS
On May 28, 1999, the Company completed the acquisition of INVESTools, Inc., a
privately held company. INVESTools operates an investment advice website
(http://www.investools.com), featuring continually updated portfolio advice from
recognized money managers, as well as online investment advisory newsletters.
Under the terms of the agreement, which was accounted for as a
pooling-of-interests, Telescan issued 2,124,976 shares of common stock in
exchange for all of INVESTools' outstanding shares and assumed 220,955 options
to purchase Telescan common stock. All outstanding INVESTools, Inc. preferred
stock and warrants were converted to common stock immediately prior to the
acquisition. During 1999, the Company recorded a one-time charge of $3.3 million
for acquisition-related costs. These costs consisted of investment banking fees,
legal and accounting fees, and certain other expenses directly related to the
acquisition.
INVESTools had a June 30 fiscal year end and, accordingly, the INVESTools
statements of operations for the years ended June 30, 1998 and 1997 have been
combined with the Company's statements of operations for the calendar years
ended December 31, 1998 and 1997, respectively. In order to conform INVESTools'
year-end to the Company's calendar year end, the consolidated statement of
stockholders' equity was adjusted for the operating results of INVESTools for
the period from July 1, 1998 to December 31, 1998 which is not included in the
consolidated results of operations. The following is a summary of operating
results for that period (in thousands):
Revenue $ 1,058
Expenses 2,376
-------
Net loss $(1,318)
=======
INVESTools' historical financial statements have been adjusted to conform to the
accounting policies and practices of the Company. These adjustments primarily
related to the classification of interest and other income and the
classification of restricted cash. These conforming adjustments did not change
the net loss INVESTools reported.
42
<PAGE>
Separate revenues, net income (loss) and related per share amounts of the merged
entities are presented in the following table. All amounts are in thousands,
except per share data.
1998 1997
------------ ------------
REVENUE:
Telescan, Inc. (restated) .............. $ 13,778 $ 16,105
INVESTools ............................. 1,456 362
------------ ------------
Revenue as reported .................... $ 15,234 $ 16,467
============ ============
NET INCOME (LOSS):
Telescan, Inc. (restated) .............. $ (6,038) $ 196
INVESTools ............................. (2,163) (1,370)
------------ ------------
Net loss, as reported .................. $ (8,201) $ (1,174)
============ ============
4. NOTES RECEIVABLE
In November 1999, the Company entered into a loan agreement with TeamVest to
loan $4,200,000 for one year at a rate of LIBOR + 2%, payable at maturity. The
note is secured by guarantees from certain key principals of TeamVest. The note
can be prepaid at any time without a penalty. The note may be converted into
equity interests in TeamVest, subject to certain conditions in the agreement. In
addition, the agreement contained a warrant permitting the Company to purchase
additional equity interests in TeamVest at such time that the loan is converted
into an equity interest if certain conditions are met. The Company received
$900,000 during 1999 from transactions with TeamVest and has recognized $25,000
into revenue in 1999.
5. MARKETABLE SECURITIES
At December 31, 1999, the Company had the following marketable securities (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
GROSS GROSS FAIR
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
GlobalNetFinancial.com - stock ............................ $ 9,786 $ 5,873 $ -- $ 15,659
GlobalNetFinancial.com - option ........................... 291 25,423 -- 25,714
Individual Investor - stock ............................... 4,134 -- (1,423) 2,711
FreeRealTime - stock ...................................... 3,000 -- (323) 2,677
--------------- --------------- --------------- ---------------
Total ..................................................... $ 17,211 $ 31,296 $ (1,746) $ 46,761
=============== =============== =============== ===============
</TABLE>
All marketable securities are common shares which are unregistered. No
marketable securities were sold during 1999.
The Company recognized revenues of $1.5 million during 1999 from transactions
with these companies. No revenues were derived from these companies in 1998 and
1997.
43
<PAGE>
6. INVESTMENTS
Periodically, the Company will make strategic investments in other companies
which have technologies that are compatible with or enhance the Company's
technology or content. During the fourth quarter of 1999, the Company invested
$2,250,000 in Tachyon Systems, L.L.C., a developer of technologies that capture,
clean, and analyze real time market data for traders and investors. The Company
also holds investments in Zisto.com, Inc., GRO Corporation and Telebuild of
$685,000, $664,000 and $320,000, respectively. The Company recognized revenues
of $1.6 million, $1.2 million and $1.3 million in 1999, 1998 and 1997,
respectively, from transactions with these companies.
7. LONG-TERM OBLIGATIONS
LONG TERM DEBT
Subsequent to the acquisition of INVESTools, the Company paid off INVESTools'
outstanding debt of $2,039,000. The debt was comprised of two convertible
subordinated promissory notes each for $1,000,000 and one convertible promissory
note for $50,000, all bearing 8% interest per annum convertible into preferred
stock of INVESTools.
CAPITAL LEASES
Future minimum lease payments under capital leases at December 31, 1999 together
with the present value of the minimum lease payments, are as follows (in
thousands):
YEARS ENDING DECEMBER 31,
-----------------------------------------
1999 $ 447
2000 227
2001 49
-------
Total minimum lease payments 723
Amount representing interest (27)
-------
Present value of minimum lease payments 696
Current portion of capital lease obligations (425)
-------
Long-term capital lease obligation $ 271
=======
Interest rates on capital leases range from .99% to 14%.
Computer and telephone equipment under capital lease at December 31, 1999 and
1998 totaled $1,795,000 and $1,435,000 with related accumulated depreciation of
$1,166,000 and $764,000 respectively.
44
<PAGE>
OPERATING LEASES
The Company has commitments to lease office space and equipment under
non-cancelable operating leases. Rent expense under operating leases totaled
$1,293,000, $1,120,000 and $1,165,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Future minimum payments under non-cancelable leases
are as follows (in thousands):
YEARS ENDING DECEMBER 31,
----------------------------------
2000 $ 1,514
2001* 876
2002 1,461
2003 1,470
2004 1,479
Thereafter 2,398
----------
$ 9,198
==========
*In 2001, the Company does not pay rent for the first six months of the
year.
INTEREST PAID
The Company paid $264,000, $115,000 and $103,000 for interest during the years
ended December 31, 1999, 1998 and 1997 respectively.
8. INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards for
income tax reporting purposes of approximately $14,000,000, which expire in
years 2000 to 2018. The Company's net operating loss carryforwards may be
limited as to use if the Company has undergone a change in control as defined in
Section 382 of the Internal Revenue Code.
Deferred tax assets and liabilities consisted of the following at December 31,
1999 and 1998:
1999 1998
-------- --------
Deferred tax assets:
Acquisition costs capitalized for tax purposes ... $ 1,217 $ --
Deferred revenue ................................. 2,196 637
Net operating loss carryforwards ................. 5,155 7,548
-------- --------
Total deferred tax asset ............. 8,568 8,185
Less: Valuation allowance ........................ (7,148) (6,370)
-------- --------
Deferred tax asset, net .............................. 1,420 1,815
Deferred tax liability:
Accumulated depreciation ......................... (1,420) (1,815)
Net unrealized gains (losses) on securities ...... 11,229 --
-------- --------
Deferred tax liability, net .......................... $ 11,229 $ --
======== ========
The valuation allowance decreased during 1999 by approximately $781,000.
45
<PAGE>
The following is a reconciliation of expected to actual income tax expense based
upon the statutory rates:
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
Federal income tax benefit at statutory rates . $(2,040) $(2,788) $ (400)
Acquisition costs capitalized for tax purposes 1,217 -- --
Other, net .................................... 45 (295) 109
Change in valuation allowance ................. 778 3,083 291
------- ------- -------
Actual provision .............................. $ -- $ -- $ --
======= ======= =======
9. SHAREHOLDERS' EQUITY
CLASSES OF CAPITAL STOCK
The Company has two classes of capital stock: convertible preferred stock and
common stock. During 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 capital stock to a total of 40,000,000 shares. The Company is
authorized to issue up to 30,000,000 shares of common stock with a par value of
$.01 and 10,000,000 shares of convertible preferred stock with a par value of
$.01.
CAPITAL STOCK ACTIVITY
In January 1999, the Company sold 1,220,237 shares of its common stock in a
private placement to NBC in conjunction with its affiliate, GE Capital Equity
Investments, Inc. The Company received net proceeds of $8,655,000 from the
transaction. The resale of the stock is restricted under Rule 144 subject to
demand registration rights on one-half of the shares.
In July 1999, the Company sold an additional 1,111,111 shares of its common
stock in a private placement to NBC and received net proceeds of $23,970,000.
The resale of the stock is also restricted under Rule 144 subject to demand
registration rights on one-half of the shares. At December 31, 1999, NBC held
14.2% of the shares outstanding.
In March 1999, the Company entered into an agreement with GlobalNetFinancial.com
to exchange 520,000 shares of its common stock for 2,715,337 shares of
GlobalNetFinancial.com common stock giving the Company a 9.9% ownership interest
in GlobalNetFinancial.com. In addition the Company issued 25,000 shares of its
common stock for a one-year option to purchase additional shares such that, upon
exercise of the option, the Company could own an aggregate of 19.9% of
GlobalNetFinancial.com's then outstanding common stock. The exercise price of
the option is $12.00 per share.
In May 1998, the Company issued 120,000 shares of 5% Convertible Preferred Stock
for $3 million dollars. In connection with the issuance of the 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:
46
<PAGE>
Closing price at May 15, 1998 7 3/8
Fixed discount from market 5%
-------
$ 0.37
Shares issued 120,000
-------
Incremental yield $44,400
=======
Preferred stockholders have the option to convert the preferred shares into
common stock at any time after May 15, 1998. The conversion price of the
preferred stock conversion into common stock is based on a defined formula and
capped at a maximum of $8.62 per share. None of the preferred stock has been
converted at December 31, 1999.
10. STOCK OPTION PLANS
AMENDED 1994 STOCK OPTION PLAN
The Company has reserved 1.5 million shares for grant under this plan for
issuance to officers, directors, and employees. The Plan expires August 2000.
Under the Plan, incentive options may be granted at the fair market value of the
Company's common stock at the date of grant, as determined by the Board of
Directors, but not at less than $1.50 per share. Non-statutory options may be
granted at prices equal to or greater than $1.50 per share, as determined by the
Board of Directors. Options granted prior to 1998 expire upon termination of the
Plan. Options granted after 1998 generally expire ten years from the date of
grant.
THE 1995 STOCK OPTION PLAN
The Company has reserved 638,000 shares for grant under this plan for issuance
to officers, directors, and employees. The Plan expires March 2005. Under the
Plan, incentive options may be granted at the fair market value of the Company's
common stock at the date of the grant, as determined by the Board of Directors,
but not at less than $1.50 per share. Non-statutory options may be granted at
prices equal to or greater than $1.50 per share, as determined by the Board of
Directors. Options generally expire ten years from the date of grant or when the
Plan terminates, whichever is earlier.
INVESTOOLS' STOCK OPTION PLANS
The Company reserved 220,995 shares of its common stock for issuance under three
Stock Option Plans for employees and consultants of INVESTools. No new options
are being granted under these plans. Options granted under these plans were
granted at fair market value at the grant date and generally expire ten years
from the date of the grant.
47
<PAGE>
Stock option activity is as follows:
WEIGHTED
TOTAL SHARES AVERAGE
UNDER OPTION EXERCISE PRICE
------------ --------------
BALANCE - JANUARY 1, 1997 ................... 853,207 $ 4.30
Granted ..................................... 261,949 4.13
Canceled .................................... (73,841) 6.82
Exercised ................................... (168,972) 2.89
------------ --------------
BALANCE - DECEMBER 31, 1997 ................. 872,343 4.31
Granted ..................................... 447,140 6.45
Canceled .................................... (47,931) 2.19
Exercised ................................... (169,254) 2.69
------------ --------------
BALANCE - DECEMBER 31, 1998 ................. 1,102,298 5.52
Pooling Adjustment .......................... (9,177) 0.81
Granted ..................................... 310,810 12.23
Canceled .................................... (75,901) 5.28
Exercised ................................... (516,700) 4.14
------------ --------------
BALANCE - DECEMBER 31, 1999 ................. 811,330 $ 9.05
============ ==============
Information about options outstanding at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ---------------------------------
WEIGHTED AVERAGE WEIGHTED
NUMBER REMAINING YEARS OF WEIGHTED AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$0.00 - $4.99 ................. 236,999 5 $ 2.76 190,159 $ 2.27
5.00 - 9.99 .................. 406,956 6 7.80 155,457 7.71
10.00 - 14.99 ................. 46,367 10 13.50 34,867 13.31
15.00 - 19.99 ................. 44,800 9 17.80 -- --
20.00 - 24.99 ................. 62,208 9 22.00 -- --
25.00 - 30.00 ................. 14,000 10 25.55 5,000 25.00
--------------- --------------- --------------- --------------- ---------------
TOTAL .......... 811,330 7 $ 9.05 385,483 $ 5.75
=============== =============== =============== =============== ===============
</TABLE>
48
<PAGE>
NON-QUALIFIED OPTIONS
As of December 31, 1999, the Company has issued 110,000 non-qualified options to
outside vendors and directors as payment for services provided in 1996, 1997,
and 1998. Activity for the year ended December 31, 1999 is as follows:
TOTAL SHARES UNDER WEIGHTED AVERAGE
OPTION EXERCISE PRICE
-------------------- --------------------
BALANCE JANUARY 1, 1997 ..... 5,000 $ 8.37
Granted .............. 55,000 4.98
-------------------- --------------------
BALANCE DECEMBER 31, 1997 ... 60,000 5.26
Granted .............. 50,000 6.75
-------------------- --------------------
BALANCE DECEMBER 31, 1998 ... 110,000 5.94
Exercised ............ (60,000) 6.72
Canceled ............. (37,500) 5.00
-------------------- --------------------
BALANCE DECEMBER 31, 1999 ... 12,500 $ 5.00
==================== ====================
The options exercised during 1999 were cashless exercises. The remaining options
outstanding have a weighted average remaining life of five years.
PRO FORMA DISCLOSURES
Under an alternative accounting method (SFAS 123), compensation expense arising
from stock options would be measured at the estimated fair value of the options
at the date of grant and recognized over the options' vesting period. Had
compensation expense been determined using this method, net income and net
income per share would have been as follows (in thousands except per share
amounts):
1999 1998
------------ ------------
Net loss (restated)
As reported ............................... $ (5,850) $ (8,201)
Pro forma ................................. (6,974) (9,100)
Net loss per common share
As reported (restated) .................... $ (0.39) $ (0.66)
Pro forma ................................. (0.46) (0.73)
The average fair values of the options granted during 1999, 1998 and 1997 were
$10.79, $3.79 and $2.30, respectively. The fair value of each option grant was
estimated at the date of grant using the Black-Scholes option pricing model with
the following assumptions; risk free rates of 5.0% to 6.15%; volatility of
78.67% to 86.14% for 1999 and 1998, respectively; no assumed dividend yield; and
expected lives of 3 years.
11. 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 matching
contributions, and effective January 1, 2000, the Company invoked this
privilege, matching 25% of participant contributions up to 1% of salary.
49
<PAGE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments is as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash and cash equivalents ........................ $ 12,625 $ 12,625 $ 1,539 $ 1,539
Notes receivable:
TeamVest ................................... 4,200 * -- --
Other ...................................... 1,268 1,268 793 793
Marketable securities ............................ 46,761 46,761
Investments ...................................... 3,919 * 20 *
Capital lease obligation ......................... 696 696 1,037 1,037
*Not readily determinable
</TABLE>
Fair values were determined as follows:
The carrying amounts of cash and cash equivalents approximate fair value because
of the short-term maturity of these instruments.
The fair market value of the TeamVest note receivable is not readily
determinable, because it is convertible into common stock of a private company.
The fair value of GlobalNetFinancial.com stock and option was determined using
values obtained from an independent pricing service. The fair value of all other
marketable securities was determined to be 70% of quoted market price at
December 31, 1999. A discount of 30% was deemed necessary since the securities
are unregistered and/or thinly traded.
The fair value of investments are not readily determinable since they represent
equity investments in private companies.
50
<PAGE>
13. EARNINGS PER SHARE
The Company was in a loss position in all periods presented. Therefore, any
potential common shares would be antidilutive. The calculation for basic and
diluted earnings per share is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
(restated) (restated)
------------ ------------ ------------
<S> <C> <C> <C>
Loss from continuing operations ............ $ (5,850) $ (8,220) $ (1,155)
Less: preferred stock dividend
(incremental yield dividend) ...... (150) (138) --
------------ ------------ ------------
Net loss attributable to common stockholders (6,000) (8,358) (1,155)
Discontinued operations .................... -- 19 (19)
------------ ------------ ------------
Net loss attributable to common stockholders $ (6,000) $ (8,339) $ (1,174)
============ ============ ============
Weighted average shares outstanding ........ 15,486 12,654 12,203
Basic and diluted loss per share:
Continuing operations ................... $ (0.39) $ (0.66) $ (0.10)
Discontinued operations ................. -- -- --
------------ ------------ ------------
Net loss ................................... $ (0.39) $ (0.66) $ (0.10)
============ ============ ============
</TABLE>
Common equivalent shares for 1999, 1998 and 1997 were excluded from the
computation of loss per share as their effect was anti-dilutive.
14. 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 such
litigation will be resolved without a material effect on the Company's financial
position or results of operations.
Effective June 11, 1999 the Company terminated its contract with Web Street
Securities, Inc. ("Web Street"). The Company activated the mandatory mediation
provision in the contract and participated in the mediation. The differences
between the Company and Web Street were not resolved at the mediation, and on
December 13, 1999, the day of the mediation, Web Street sued the Company
alleging that the Company did not perform its obligations under the contract and
seeking damages for lost profits. The Company has filed a counterclaim alleging
and seeking damages for non-payment for the services rendered.
15. RELATED PARTIES
KNOWLEDGE EXPRESS DATA SYSTEMS
The Company owns 55.58% of Knowledge Express Data Systems and GRF Interests,
Inc. owns 30%. G. Robert Friedman, a stockholder and former director of the
Company, controls GRF Interests, Inc.
51
<PAGE>
TELEBUILD, L.C.
At December 31, 1999, the Company owns 15.83% of Telebuild, L.C. (Telebuild).
Friedman Interests, Inc, and the Brown Family Partnership own 45.42% and 25.44%,
respectively. G. Robert Friedman, a significant stockholder and former director
of the Company, controls Friedman Interests, Inc. David L. Brown, Chairman of
the Board of Directors of the Company and other members of the Brown family own
the Brown Family Partnership. The Company recognized contract revenue from
Telebuild of $1,369,000, $1,152,000, and $1,322,000 and contract expense of
$1,241,000, 1,016,000, and $1,182,000 during the years ended December 31, 1999,
1998, and 1997, respectively. As of December 31, 1999 and 1998, $1,043,000 and
$623,000 were due from Telebuild for contract services provided. During 1999,
the amounts due from Telebuild, net of $523,000 in payables, were reclassified
to account for such amounts as an investment.
GRO CORPORATION
Mr. Greg E. Gensemer, an officer of Telescan, serves on the Board of Directors
for GRO Corporation. The Company has entered into licensing and servicing
agreements with this Company. As of December 31, 1999, GRO Corporation owed the
Company $64,000 in accrued interest on two notes that were converted to stock
during 1999. This accrued interest was also converted to stock in the first
quarter of 2000. The Company owned 550 shares of GRO Corporation representing an
ownership interest of 4.8% at December 31, 1999. After the first quarter
conversion, the Company's holdings increased to 603 shares.
NATIONAL BROADCASTING COMPANY, INC.
In a letter agreement dated February 22, 1999 between the National Broadcasting
Company, Inc. ("NBC") and the Company, NBC was granted the right to have an
individual designated by NBC (the "NBC Designee") included as a nominee for the
Board of Directors of the Company. NBC shall have this right until GE Capital
Equity Investments, Inc. ("GE Equity") owns less than 5% of the outstanding
common stock of the Company or the license agreement with NBC terminates or
expires, whichever event occurs earlier. Pursuant to this agreement, NBC has
designated and the Board of Directors has approved Mr. Glowacki.
In addition, GE Equity has the right to designate an individual to be present at
all Board of Director meetings. Such individual will not be a participating or
voting member of the Board of Directors and may remain as a designee as long as
GE Equity owns at least 5% of the Company's outstanding common stock. Note 1 to
the financial statements discusses activity with NBC during 1999 under the
caption "Concentration of Credit Risk."
INDEBTEDNESS OF MANAGEMENT
Roy T. Rimmer, Jr., a member of the Company's Board of Directors, was indebted
to the Company for $71,250 at December 31, 1999. The non-interest bearing
indebtedness arises from license fees and contract personnel reimbursement. The
maximum indebtedness during 1999 was $71,250. The indebtedness was paid in the
first quarter of 2000.
OTHER
Refer to notes 4, 5, and 6 for additional related party information.
16. SUBSEQUENT EVENTS (UNAUDITED)
STOCKWALK.COM GROUP
In March 2000, the Company entered into an agreement with Stockwalk.com Group,
Inc. to license its proprietary technology and investment analytics.
Stockwalk.com Group issued the Company 142,333 shares of its common stock at
$7.50 per share. In a separate agreement, the Company purchased 166,666 shares
of Stockwalk.com Group's common stock for $1.25 million in cash at a price of
$7.50 per share.
52
<PAGE>
CYBERACTION, LTD.
CyberAction and the Company entered into a Marketing, License and Revenue
Sharing Agreement (the "Agreement") dated May 21, 1996, as amended, granting
certain international marketing rights to CyberAction. The parties have
disagreed about contractual provisions and obligations. Subsequent to filing
the Company's 10-K and pursuant to the Company's globalization efforts, the
Company has engaged in negotiations to terminate the Agreement and believes
settlement will be reached during second quarter 2000 for which it has accrued
$1.5 million at March 31, 2000 for costs associated with the settlement.
GLOBALNETFINANCIAL.COM
On March 31, 1999, the Company entered into an option agreement with
GlobalNetFinancial.com ("GlobalNet") to purchase up to 19.9% of the outstanding
equity of GlobalNet at an adjusted exercise price of $12.00 per share. On March
31, 2000, the Company sold 702,713 shares of its GlobalNet stock to third
parties for approximately $20.0 million. The Company used these funds to
exercise a portion of the GlobalNet option on March 31, 2000. In April, the
Company sold an additional 50,000 shares of GlobalNet stock to third parties
which proceeds were used in combination with a cashless exercise to exercise the
remaining portion of the GlobalNet option. Currently the Company holds
approximately 2.5 million shares of GlobalNet stock.
53
<PAGE>
17. UNAUDITED SELECTED QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTERS ENDED
(restated)
------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 12/31/99 9/30/99 6/30/99 3/31/99
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue ............................................................ $ 8,928 $ 6,735 $ 6,039 $ 4,736
Cost and expenses from operations .................................. 8,991 7,773 10,055 5,904
------------ ------------ ------------ ------------
Loss from operations ............................................... (63) (1,038) (4,016) (1,168)
Other (income) expense ............................................. (268) (166) (34) 89
Minority interest loss ............................................. -- -- (24) (32)
------------ ------------ ------------ ------------
Net income (loss) .................................................. 205 (872) (3,958) (1,225)
============ ============ ============ ============
Net income (loss) attributable to common stockholders .............. 168 (910) (3,995) (1,263)
============ ============ ============ ============
EARNINGS PER SHARE - BASIC
Net income (loss) .................................................. $ 0.01 $ (0.06) $ (0.26) $ (0.09)
============ ============ ============ ============
Weighted average shares ............................................ 16,511 16,174 15,131 14,068
============ ============ ============ ============
EARNINGS PER SHARE - DILUTED
Net income (loss) .................................................. $ 0.01 $ (0.06) $ (0.26) $ (0.09)
============ ============ ============ ============
Weighted average shares ............................................ 17,348 16,174 15,131 14,068
============ ============ ============ ============
<CAPTION>
QUARTERS ENDED
(restated)
------------------------------------------------------------
12/31/98 9/30/98 6/30/98 3/31/98
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue ............................................................ $ 3,937 $ 4,074 $ 3,615 $ 3,608
Cost and expenses from operations .................................. 7,789 5,323 5,042 4,887
------------ ------------ ------------ ------------
Loss from operations ............................................... (3,852) (1,249) (1,427) (1,279)
Other (income) expense ............................................. 166 186 182 21
Minority interest loss ............................................. (26) (16) (51) (49)
------------ ------------ ------------ ------------
Loss from operations ............................................... (3,992) (1,419) (1,558) (1,251)
Income from discontinued operations ................................ 19 -- -- --
------------ ------------ ------------ ------------
Net income (loss) .................................................. (3,973) (1,419) (1,558) (1,251)
============ ============ ============ ============
Net income (loss) attributable to common stockholders .............. (4,010) (1,457) (1,621) (1,251)
============ ============ ============ ============
EARNINGS PER SHARE - BASIC AND DILUTED
Earnings from continuing operations ................................ $ (0.31) $ (0.11) $ (0.13) $ (0.10)
Earnings from discontinued operations .............................. -- -- -- --
------------ ------------ ------------ ------------
Net loss ........................................................... (0.31) (0.11) (0.13) (0.10)
============ ============ ============ ============
Weighted average shares ............................................ 12,770 12,702 12,526 12,502
============ ============ ============ ============
</TABLE>
54
EXHIBIT 21
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 subsidiaries as
of December 31, 1999 and 1998, and for each of the years in the three-year
period ended December 31, 1999. 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, 1999.
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 25, 2000
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
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, 1997
Allowance for Doubtful Accounts ........................... $ 104 $ 134 $ (124) $ 114
DECEMBER 31, 1998
Allowance for Doubtful Accounts ........................... 114 399 (139) 374
DECEMBER 31, 1999
Allowance for Doubtful Accounts ........................... $ 374 $ 184 $ (259) $ 299
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to incorporation by reference in the registration statements (Nos.
33-63172 and 33-94514) on Form S-8 of Telescan, Inc. and subsidiaries of our
report dated February 25, 2000, except as to the third and fourth paragraphs of
Note 1 which are dated March 17, 2000, relating to the consolidated balance
sheets of Telescan, Inc. and subsidiaries, as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years in the three-year period ending December 31, 1999 which
report appears in the December 31, 1999 annual report on Form 10-K/A of
Telescan, Inc. and subsidiaries.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Houston, Texas
May 17, 2000
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</TABLE>
