FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 0-17508
TELESCAN, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 72-1121748
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5959 CORPORATE DRIVE, SUITE 2000, HOUSTON, TEXAS 77036
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(Address of principal executive offices) (Zip Code)
(281) 588-9700
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
$.01 par value per share Common Stock: 16,818,676 as of August 9, 2000.
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TELESCAN, INC. AND SUBSIDIARIES
Report on Form 10-Q
Quarter Ended June 30, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................. 2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk............11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................12
Item 2. Changes in Securities and Use of Proceeds.............................12
Item 3. Defaults upon Senior Securities.......................................12
Item 4. Submission of Matters to a Vote of Security Holders...................12
Item 5. Other Information.....................................................12
Item 6. Exhibits and Reports on Form 8-K......................................12
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................................... $ 4,633 $ 12,625
Accounts receivable, net (allowance: $521; $299) ................................. 5,299 5,033
Notes receivable .................................................................. 4,342 5,468
Other current assets .............................................................. 692 552
------------------ ------------------
TOTAL CURRENT ASSETS ...................................................... 14,966 23,678
Marketable securities ................................................................ 25,852 46,761
Deferred taxes ....................................................................... 5,718 57
Investments .......................................................................... 4,728 3,919
Property and equipment, net .......................................................... 3,745 3,644
Software development costs, net ...................................................... 659 4,506
Other assets ......................................................................... 10 334
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TOTAL ASSETS .............................................................. $ 55,678 $ 82,899
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................................. $ 3,033 $ 3,550
Deferred revenue .................................................................. 7,276 8,817
Other current liabilities ......................................................... 2,480 1,262
------------------ ------------------
TOTAL CURRENT LIABILITIES ................................................. 12,789 13,629
Capital lease obligations ............................................................ 150 271
Deferred taxes ....................................................................... -- 11,229
STOCKHOLDERS' EQUITY:
Convertible preferred stock (liquidation preference $25 per share)
(shares issued and outstanding: 120,000; 120,000) ................................. 1 1
Common stock
(shares issued and outstanding: 16,816,239; 16,548,859) .......................... 167 165
Additional paid in capital ........................................................... 69,320 66,875
Accumulated comprehensive income ..................................................... (8,910) 18,321
Accumulated deficit .................................................................. (17,839) (27,592)
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TOTAL STOCKHOLDERS' EQUITY ................................................ 42,739 57,770
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................ $ 55,678 $ 82,899
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Service ........................................................ $ 8,890 $ 5,859 $ 18,662 $ 10,466
Products ....................................................... 35 180 90 309
------------ ------------ ------------ ------------
Total revenue ........................................... 8,925 6,039 18,752 10,775
COSTS AND EXPENSES
Cost of service ................................................ 4,535 3,523 9,249 6,486
Cost of products ............................................... 94 108 160 188
Selling and marketing expenses ................................. 1,735 1,117 3,230 2,229
General and administrative expenses ............................ 5,603 2,126 9,676 3,875
Write-down of assets and unusual charges ....................... 5,674 -- 7,174 --
Acquisition costs .............................................. 545 3,181 545 3,181
------------ ------------ ------------ ------------
Total costs and expenses ................................ 18,186 10,055 30,034 15,959
LOSS FROM OPERATIONS ............................................... (9,261) (4,016) (11,282) (5,184)
OTHER INCOME (EXPENSE)
Gain on sale of marketable securities .......................... 8,695 -- 20,696 --
Interest, net .................................................. 169 37 413 8
Other, net ..................................................... 1 (3) 1 (63)
------------ ------------ ------------ ------------
Total other income (expense) ............................ 8,865 34 21,110 (55)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST ............ (396) (3,982) 9,828 (5,239)
Income tax benefit ............................................. 2,041 -- -- --
Minority loss .................................................. -- 24 -- 56
------------ ------------ ------------ ------------
NET INCOME (LOSS) .................................................. 1,645 (3,958) 9,828 (5,183)
Less: Preferred stock dividends .............................. (38) (37) (75) (75)
------------ ------------ ------------ ------------
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS .................. $ 1,607 $ (3,995) $ 9,753 $ (5,258)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC .......................................................... $ 0.10 $ (0.26) $ 0.58 $ (0.36)
DILUTED ........................................................ $ 0.09 $ (0.26) $ 0.56 $ (0.36)
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net income (loss) .............................................. $ 1,645 $ (3,958) $ 9,828 $ (5,183)
Change in net unrealized gains (losses)
on marketable securities ..................................... (21,613) (4,278) (43,922) 482
Deferred taxes on net unrealized
gains (losses) on marketable
securities ................................................... 8,213 1,454 16,690 (164)
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS ....................................... $ (11,755) $ (6,782) $ (17,404) $ (4,865)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
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TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
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2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................................. $ 9,828 $ (5,183)
Reconciling adjustments:
Gain on sale of GlobalNet stock .............................................................. (20,696) --
Write-down of assets and unusual charges ..................................................... 7,120 --
Acquisition costs ............................................................................ 545 --
Stock options/ warrants provided for services ................................................ 362 189
Amortization of deferred revenue ............................................................. (1,612) (654)
Depreciation and amortization ................................................................ 1,770 1,593
Minority interest in loss of subsidiary ...................................................... -- (56)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ................................................... 41 (2,237)
Decrease in other current assets ............................................................. 122 87
Increase (decrease) in accounts payable ...................................................... (1,543) 1,688
Increase in other current liabilities ........................................................ 578 1,082
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Net cash used in operating activities ................................................. (3,485) (3,491)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ............................................................ (1,191) (1,320)
Additions to software development cost ......................................................... (386) (553)
Purchases of investments ....................................................................... (3,639) (451)
Other .......................................................................................... 383 --
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Net cash used in investing activities ................................................. (4,833) (2,324)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock ........................................................ -- 8,656
Proceeds from exercise of stock options ........................................................ 633 1,181
Preferred dividends paid ....................................................................... (75) (75)
Equity transaction of pooled company, net of cash .............................................. -- 157
Increase in capital lease obligations .......................................................... 20 318
Payments on notes payable and capital lease obligations ........................................ (252) (2,351)
Other .......................................................................................... -- (10)
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Net cash used in / provided by financing activities ................................... 326 7,876
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................................... (7,992) 2,061
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................................................ 12,625 1,539
------------ ------------
End of period .................................................................................. $ 4,633 $ 3,600
============ ============
OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:
Net unrealized gain, net of tax ................................................................ $ 15,115 $ 482
Exercise of GlobalNetFinancial.com option through sale of GlobalNetFinancial.com ............... 33,227 --
Stock received in lieu of payment of services rendered ......................................... 69 3,740
Acquisition of assets for stock ................................................................ 350 --
Conversion of note receivable into equity investment ........................................... 64 --
Company common stock exchanged for investment in GlobalNetFinancial.com ........................ -- 6,335
</TABLE>
The accompanying notes are an integral part of these financial
statements.
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TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements reflect the accounts of Telescan, Inc.
(the "Company") and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 1999 included in the Company's Annual Report on Form 10-K/A.
The Company has restated its 1999 and 1998 financial statements and has filed a
Form 10-K/A which brings the Company into compliance on Emerging Issues Task
Force ("EITF") Issue No. 00-3. The EITF consensus indicated that for those
agreements in which hosting by the vendor is essential to the functionality of
the software, the license revenue arising from those agreements should be
recognized over the term of the hosting arrangement.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X for interim financial
statements required to be filed with the Securities and Exchange Commission and
do not include all information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the information
furnished reflects all adjustments, consisting of normal recurring adjustments,
which are necessary to make a fair presentation of financial position and
operating results for the interim periods. The results of operations for the six
month period ended June 30, 2000 are not necessarily indicative of the results
to be expected for the full year.
2. 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 filed a counterclaim alleging and
seeking damages for non-payment of amounts due and unpaid for services rendered.
3. MARKETABLE SECURITIES TRANSACTIONS
In March 2000, the Company agreed to license its proprietary technology and
investment analytics to Stockwalk.com Group, Inc. ("Stockwalk") in exchange for
142,333 shares of common stock of Stockwalk, valued at $7.50 per share, with
warrants attached to purchase an additional 14,233 shares. In a separate
agreement, the Company purchased an additional 166,667 shares of Stockwalk
common stock for $1.25 million in cash, or $7.50 per share, with warrants
attached to purchase an additional 16,667 shares. This investment is classified
as available-for-sale and carried at fair market value with changes in fair
market value included in comprehensive income, net of tax, and classified as a
separate component of stockholders' equity.
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In March 2000, the Company sold 702,713 shares of its investment in GlobalNet
Financial.com ("GlobalNet") stock for approximately $20.0 million or $28.42 per
share, realizing a pretax gain on the sale of $12.0 million. The Company
originally acquired the stock in March 1999 at a cost of $11.34 per share. The
Company used these proceeds to exercise a portion of the GlobalNet option, which
was entered into at March 31, 1999 and allowed the Company to purchase up to
19.9% of the then outstanding equity of GlobalNet for an adjusted exercise price
of $12.00 per share. In April 2000, the Company exercised the remaining portion
of the GlobalNet option using a combination of a cashless exercise (through the
redemption of 329,882 shares of GlobalNet stock) and proceeds received from the
sale of an additional 50,000 shares of GlobalNet Stock to a third party,
resulting in a gain of $8.7 million in the second quarter. At June 30, 2000, the
Company holds 2,548,993 shares of GlobalNet stock with a discounted market value
of approximately $21.4 million.
4. INVESTMENTS
In March 2000, the Company invested $1.75 million to acquire 872,128 shares of
Investor IQ.com plc, a UK public limited company. The acquisition represented a
13.3% interest in the company at the date of acquisition and is carried at cost.
5. WRITE-DOWN OF ASSETS AND UNUSUAL CHARGES
Management performed a thorough review of operations to identify assets and
product lines expected to provide the greatest growth potential for the Company
along with those that do not offer sufficient returns. As a result, the Company
recognized $7.2 million in write-downs and unusual charges as follows:
o Technology Assets - Capitalized software that is non-strategic or no
longer generating revenues - $4.1 million
o Investment in Trading Technologies Corporation - Company does not have
a viable product - $900,000
o Investment in Telebuild - Based on conversations with interested
parties, the Company does not expect to recover its investment in the
event of a sale - $384,000
o CyberAction settlement - contract terminated - $1.1 million
o Severance charges - due to workforce reductions - $387,000
o Discontinued product lines - no longer strategic - $264,000
6. ACQUISITION COST
As part of the Company's announced plans to expand through mergers and
acquisitions, the Company incurred $545,000 in costs during the second quarter
of 2000 related to acquisition targets that are no longer being pursued.
7. INCOME TAXES
Upon further review of the estimated financial results for the year, the Company
believes it has sufficient net operating loss carryforwards to absorb any
potential tax impact that may arise by the end of the year and has reversed the
provision recorded in the first quarter. The Company has approximately $19
million in net
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operating loss carryforwards and a valuation allowance has been provided for the
majority of the deferred tax assets related to these net operating losses.
8. CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
The calculation of earnings per share was as follows: JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) attributable to common
shareholders (a) ......................................... $ 1,607 $ (3,995) $ 9,753 $ (5,258)
Dividends on preferred stock ............................. 38 -(c) 75 - (c)
--------------- --------------- --------------- ---------------
Net income (loss) attributable to common
shareholders, assuming dilution (b) .................... $ 1,645 $ (3,995) $ 9,828 $ (5,258)
=============== =============== =============== ===============
Average shares outstanding (a) ........................... 16,747 15,131 16,690 14,618
Effect of dilutive securities
Convertible preferred stock ........................... 443 -(c) 443 - (c)
Stock options ......................................... 181 -(C) 338 - (c)
--------------- --------------- --------------- ---------------
Average shares outstanding, assuming
dilution (b) ............................................. 17,371 15,131 17,471 14,618
=============== =============== =============== ===============
Net income (loss) per common share
Basic ................................................. $ 0.10 $ (0.26) $ 0.58 $ (0.36)
Diluted ............................................... $ 0.09 $ (0.26) $ 0.56 $ (0.36)
</TABLE>
(a) Used to compute basic earnings per share.
(b) Used to compute diluted earnings per share.
(c) Because the Company is in a loss position, the stock options and
convertible preferred stock are antidilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Telescan, Inc. ("Telescan" or the "Company") is an industry leader in providing
Internet services for the financial 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 (http://www.wallstreetcity.com), (ii) private-labeled 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;
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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 includes developing, hosting and
maintaining several third party Internet services in the publishing,
entertainment, sports and biotechnical/pharmaceutical industries.
The Company's INVESTools website features 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.
BUSINESS STRATEGY
The Company's business strategy is to continue to expand its services and
customer base through (i) development of new and expanded strategic corporate
alliances, (ii) continued development of proprietary analysis tools, (iii)
acquisition of complementary businesses that add key services or market
presence, and (iv) global expansion.
The Company continues to expand its domestic and international presence by
developing strategic alliances and developing or acquiring analytical tools
which strategically position the Company as a leading provider of Internet
financial services and data.
Telescan is building the capability to help both domestic and international
investors to research and analyze international stocks with the ease and
convenience offered to investors interested in U.S. stocks. As the financial
world becomes increasingly integrated worldwide, all investors need information
about global markets. Telescan is positioning itself to supply these investors
with global financial information wherever they may be located.
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999
Service revenues for the quarter ended June 30, 2000 increased $3.0 million or
52% over the prior year. Business to consumer revenues increased 69% over the
prior year primarily due to continued increases in subscriptions and
advertising. Revenue from business to business commerce increased 52% over the
prior year due to new contracts with Forbes and Quick & Reilly and site
enhancements for Stockwalk, American Express, Citibank and TeamVest. Product
revenue continues to decline as the market continues to shift to Internet based
services.
Cost of service increased $1.0 million or 29% when compared to the second
quarter of 1999 primarily due to increased data acquisition costs offset by
declining communication and royalty costs. Cost of products decreased due to
lower sales.
Selling and marketing expenses increased $618,000 or 55% when compared to the
second quarter of 1999 primarily due to increased advertising costs and
increased compensation expense related to increased revenue.
General and administrative costs increased $3.5 million to $5.6 million for the
second quarter of 2000. The increase in costs is partially due to increased
compensation of approximately $1.7 million reflecting increases in staffing and
salary adjustments during the period. In addition, rent, depreciation,
recruiting expenses, consulting fees and contract labor costs increased a total
of approximately $500,000. Costs related to
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implementing the Company's new management structure and growth strategy, such as
legal fees, travel, accounting fees and investor relations' fees, also increased
approximately $700,000 over the prior year. Also included is a one-time charge
for compensation expense of approximately $400,000 related to extending options
to a retiring employee.
Management performed a thorough review of operations to identify assets and
product lines expected to provide the greatest growth potential for the Company
along with those that do not offer sufficient returns. As a result, the Company
recognized $5.7 million in write-downs and unusual charges as follows:
o Technology Assets - Capitalized software that is non-strategic or no
longer generating revenues - $4.1 million
o Investment in Trading Technologies Corporation - Company does not have
a viable product - $900,000
o Investment in Telebuild - Based on conversations with interested
parties, the Company does not expect to recover its investment in the
event of a sale - $384,000
o Severance charges - due to workforce reductions - $387,000
o Discontinued product lines - no longer strategic - $264,000
o CyberAction settlement - recovery of accrual - ($428,000)
Reported separately in the income statement is a charge for $545,000 for
acquisition costs related to targets no longer being pursued. The Company
continues to explore targets for merger or acquisition in its global expansion
efforts. Acquisition costs of $3.2 million in 1999 relate to the Company's
acquisition of INVESTools in May 1999.
In April 2000, the Company exercised the remaining portion of the GlobalNet
option using a combination of a cashless exercise (through the redemption of
329,882 shares of GlobalNet stock) and proceeds received from the sale of an
additional 50,000 shares of GlobalNet Stock to a third party, resulting in a
gain of $8.7 million in the second quarter. At June 30, 2000, the Company holds
2,548,993 shares of GlobalNet stock with a discounted market value of
approximately $21.4 million.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Service revenues for the six months ended June 30, 2000 increased $8.2 million
or 78% over the prior year. Revenue from business to business commerce increased
124% over the prior year primarily due to new contracts with Quick & Reilly,
Forbes, FreeRealTime.com and Individual Investor, and additional site
enhancements in the current year for Stockwalk, American Express, Citibank, and
TeamVest. Business to consumer revenues increased $3.7 million or 73% primarily
due to increases in subscription, advertising, and marketing service revenues.
Product revenue continues to decline as the market continues to shift to
Internet based services.
Cost of services increased $2.8 million or 43% compared to the six months ended
June 30, 1999 primarily due to increased data acquisition cost and royalties
partially offset by decreasing communication costs. Cost of products decreased
due to lower sales.
Selling and marketing expenses increased $1.0 million or 45% compared to the six
months ended June 30, 1999 primarily due to increased advertising costs and
increased compensation expense. However, as a percentage of revenue, selling and
marketing expense has decreased from 21% to 17% over the prior year.
General and administrative costs increased $5.8 million to $9.7 million for the
six months ended June 30, 2000. The increase in costs is due to increased
compensation totaling approximately $2.8 million, reflecting increases in
staffing and salary adjustments during the period. In addition, rent,
depreciation, recruiting expenses, and consulting fees increased a total of
approximately $800,000. Cost related to implementing the Company's new
management structure and growth strategy, such as legal fees, travel, accounting
fees, and investor relations'
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fees also increased approximately $1.3 million over the prior year. Included in
this amount is a one-time charge for compensation expense of approximately
$400,000 related to extending options to a retiring employee.
Management performed a thorough review of operations to identify assets and
product lines expected to provide the greatest growth potential for the Company
along with those that do not offer sufficient returns. As a result, the Company
recognized $7.2 million in write-downs and unusual charges as follows:
o Technology Assets - Capitalized software that is non-strategic or no
longer generating revenues - $4.1 million
o Investment in Trading Technologies Corporation - Company does not have
a viable product - $900,000
o Investment in Telebuild - Based on conversations with interested
parties, the Company does not expect to recover its investment in the
event of a sale - $384,000
o CyberAction settlement - contract terminated - $1.1 million
o Severance charges - due to workforce reductions - $387,000
o Discontinued product lines - no longer strategic - $264,000
Reported separately in the income statement is a charge for $545,000 for
acquisition costs related to targets no longer being pursued costs associated
with ongoing acquisition activity as the Company continues to explore targets
for merger or acquisition in its global expansion efforts. Acquisition costs of
$3.2 million in 1999 relate to the Company's acquisition of INVESTools in May
1999.
In March 2000, the Company sold 702,713 shares of its investment in GlobalNet
Financial.com ("GlobalNet") stock for approximately $20.0 million or $28.42 per
share. The Company originally acquired the stock in March 1999 at a cost of
$11.34 per share. The Company used these proceeds to exercise a portion of the
GlobalNet option which was entered into at March 31, 1999 and allowed the
Company to purchase up to 19.9% of the then outstanding equity of GlobalNet for
an adjusted exercise price of $12.00 per share. In April 2000, the Company
exercised the remaining portion of the GlobalNet option using a combination of a
cashless exercise (through the redemption of 329,882 shares of GlobalNet stock)
and proceeds received from the sale of an additional 50,000 shares of GlobalNet
Stock to a third party, resulting in a total gain of $20.1 million for the six
months ended June 30, 2000. At June 30, 2000, the Company holds 2,548,993 shares
of GlobalNet stock with a discounted market value of approximately $21.4
million.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, cash and cash equivalents totaled $4.6 million, an $8.0
million decrease from December 31, 1999. The decrease was primarily due to net
cash used by operations and investing activities, partially offset by cash
provided by financing activities.
Net cash used in operations totaled $3.5 million for the six months ended June
30, 2000. The primary source of cash was net income of $9.8 million which
included non-cash gains from the sale of GlobalNet stock of $20.7 million and
non-cash revenue of $1.6 million offset by non-cash charges of $7.1 million for
asset write-downs and unusual charges discussed above and routine non-cash
depreciation and amortization of $1.8 million. Working capital assets used
$800,000 in cash primarily due to the decrease in accounts payable offset
slightly by an increase in other current liabilities.
Net cash used by investing activities was $4.2 million for the six months ended
June 30, 2000. Uses of cash included purchases of investments and equipment.
Net cash provided by financing activities was $326,000 in first six months of
2000, primarily attributable to proceeds from the exercise of stock options
partially offset by payments on capital lease obligations.
The Company currently has no material commitments other than those under
operating and capital lease agreements. The Company continues to make additional
capital expenditures 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
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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 common stock could result in additional
dilution to the Company's shareholders.
RECENTLY ISSUED ACCOUNTING STANDARDS
On March 16, 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 00-3 that addresses the accounting for hosting arrangements. The
EITF consensus indicated that for those arrangements in which hosting by the
vendor is essential to the functionality of the software, the revenue should be
recognized over the term of the hosting arrangement. The Company has restated
its 1999 and 1998 financials and has filed an amended 10-K/A to restate prior
years' results to bring the Company into compliance on EITF Issue No. 00-3. The
effect of these revisions was to reduce revenues by $4,214,000 and $1,722,000
for the years ended December 31, 1999 and 1998, respectively, and to increase
deferred revenue $5,936,000 and $1,722,000 at December 31, 1999 and 1998,
respectively. The additional amounts deferred will be recognized ratably over
two to five years, based on the term of the related hosting agreement.
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" (SAB 101), which provides guidance related
to revenue recognition based on interpretations and practices followed by the
SEC. The SEC extended the effective date of SAB 101 to the fourth fiscal quarter
of fiscal years beginning after December 15, 1999 and requires companies to
report any changes in revenue recognition as a cumulative change in accounting
principle at the time of implementation. The Company's management believes that
its revenue recognition policy is in accordance with SAB 101 and adopted SAB 101
in the first quarter of 2000 without having to report accumulative change in
accounting principle.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk, which is the potential loss arising from
adverse changes in market prices and rates. The Company's exposure to interest
rates changes is not considered to be material to the Company. The Company does
not enter, or intend to enter, into derivative financial instruments for trading
or speculative purposes.
The Company is exposed to the impact of changes in the market values of its
investments. The Company invests in equity instruments of privately held,
information technology companies for business and strategic purposes. These
investments are included in long-term assets and are accounted for under the
cost method when ownership is less than 20%. For these non-quoted investments,
the Company's policy is to regularly review the assumptions underlying the
operating performance and cash flow forecasts in assessing the carrying values.
The Company identifies and records impairment losses on long-lived assets when
events and circumstances indicate that such assets might be impaired. During the
six months ended June 30, 2000, the Company recorded $1.3 million of impairments
to investments.
A downturn in the equity markets could cause a reduction in revenue since the
number of subscribers tends to increase in an upward market. 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time the Company is involved in certain legal actions arising in
the ordinary course of business. It is the opinion of management that 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
provisions 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 filed a counterclaim alleging and
seeking damages for non-payment of amounts due and unpaid for services rendered.
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. During the
second quarter, the agreement was terminated and all outstanding claims were
settled for $15,000 in cash, 91,628 shares of the Company's common stock and an
option to purchase an additional 25,000 shares of the Company's common stock in
the future, for a total value of $1.1 million.
ITEM 2. CHANGES IN SECURITIES.
During the second quarter, the Company issued to CyberAction 91,628 shares of
the Company's common stock and an option to purchase an additional 25,000 shares
of the Company's common stock in the future pursuant to an exemption under
section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits:
10.1 Employment Agreement by and between the Company and David M. Berray
dated March 14, 2000.
10.2 Employment Agreement by and between the Company and Dennis L.
Santiago dated May 4, 2000.
27 Financial Data Schedule
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(B) Reports on Form 8-K:
A current report on Form 8-K was filed by the Company on May 17, 2000
announcing results of the first quarter of 2000.
A current report on Form 8-K was filed by the Company on April 13, 2000
announcing the dismissal of Hein + Associates LLP as the Company's
independent accountants and the engagement of Arthur Andersen LLP as the
Company's new independent accountants.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELESCAN, INC.
/s/ PAUL A. HELBLING
-----------------------------------
Paul A. Helbling
Chief Financial Officer
A duly authorized officer of the
Registrant
Date: August 14, 2000
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