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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-13093
PC QUOTE, INC.
Incorporated in the State of Delaware FEIN 36-3131704
Principal Executive Offices:
300 South Wacker Drive, #300, Chicago, Illinois 60606
Telephone Number: (312) 913-2800
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par Value
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities 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. [ ]
As of February 12, 1998, the aggregate market value of the Common Stock of the
Registrant (based upon the closing price of the Common Stock as reported by the
American Stock Exchange) on such date held by non-affiliates of the Registrant
was $8,461,000.
As of March 23, 1998, there were 12,436,800 shares of Common Stock of the
Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: See Page 3
Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of Stockholders to be held in
1998 are incorporated by reference into Part III hereof.
PART OF FORM 10-K DOCUMENT
PART I None
PART II None
PART III
ITEM 10 Directors, Executive Officers, Company's Proxy Statement
Promoters and Control Persons; to be filed in connection with
Compliance with Section 16(a) its Annual Meeting of
of the Exchange Act Stockholders
ITEM 11 Executive Compensation Company's Proxy Statement
to be filed in connection with
its Annual Meeting of
Stockholders
ITEM 12 Security Ownership of Company's Proxy Statement
Certain Beneficial Owners to be filed in connection with
and Management its Annual Meeting of
Stockholders
ITEM 13 Certain Relationships and Company's Proxy Statement
Related Transactions to be filed in connection with
its Annual Meeting of
Stockholders
PART IV
ITEM 14 Exhibits and Reports Exhibits as specified in Item
on Form 8-K 14 of this Report
PC QUOTE, INC.
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
The Registrant consummated several financing transactions during the year ended
December 31,1997 and the first quarter of 1998. See the LIQUIDITY AND CAPITAL
RESOURCES section of PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS of this Report
GENERAL DEVELOPMENT OF BUSINESS
PC Quote, Inc. (the "Company" or the "Registrant") was incorporated in the
State of Illinois on June 23, 1980 as On-Line Response, Inc. and was
incorporated in Delaware on August 12, 1987. The Company provides real-time and
delayed securities quotations and news to professional and consumer markets
worldwide. Professional clients include brokerage firms, banks, insurance
companies, fund managers, institutional and professional traders. The Company
has expanded its service offerings to the individual investor, application
developers and businesses by offering its products through the Internet. The
Company's "web site" offers non-fee delayed quotes to all visitors and real
time subscription market data services to fee-based subscribers.
The Company generates revenue from its securities quotations services,
individual investor subscriptions, Internet business services, software and web
site development services, OEM and redistributor services, and from advertising
sold on its web site. The Company classifies its data services into two
categories: real-time satellite broadcast or dedicated landline for
professional trading desktops and networks; and Internet services for
individual investors, developers, corporations and financial institutions.
The Company's executive offices are located in Chicago, Illinois. The Company
also maintains sales offices in New York, Dallas and Chicago.
GENERAL
The Company maintains a real-time database of last sale and bid/ask prices of
more than 250,000 issues that contains the most comprehensive options data and
has also been optimized for Level 2 NASDAQ market-maker quotes. The database
includes all North American equities and options, major stock indices, Level 1
NASDAQ-quoted stocks, Level 2 NASDAQ market-maker quotes, mutual funds, money
market funds, futures contracts and options on futures contracts. Also covered
are exchange-traded issues from Europe and Asia. The Company creates its
database by gathering ticker and news feeds from stock, options and commodities
exchanges and other sources and processing such information into a single data
feed. The Company's primary processing plant is located in its executive
offices in Chicago, Illinois.
PC Quote software applications, running on the customer's computer, process the
data stream to allow the user to monitor securities on an on-going real-time
basis. They also create in the user's computer a complete database of trading
symbols, continuously updated by the data stream. This database gives the user
instant access to security prices. The same data stream is used to create an
equivalent database on the Company's computers, accessible to its customers via
the Internet.
The following is a description of the principal products and services marketed
by Company.
PART I-ITEM 1. BUSINESS
PRODUCTS AND SERVICES
HYPERFEED-TM-
HyperFeed, the cornerstone of the services provided by the Company, is the
Registrant's digital real-time market data feed. It is broadcast at 1024
kilobytes per second and 112 kilobytes per second and contains all North
American stock, options, and commodity exchange, in addition to international
exchange, issues. HyperFeed also carries:
- Dynamic Nasdaq Level II market maker quotes;
- Dow Jones Composite News Service (up to 90-day retrieval of nine
wires "Broadtape", Professional Investor Report, Capital Markets
Report, International News Wire, World Equities Report, European
Corporate Report, Electronic Wall Street Journal, International
Petroleum Reports, Federal Filings);
- Multiple levels of fundamental data;
- Fixed income pricing; and
- Other types of fixed and dynamic financial data.
HyperFeed underlies all of the Registrant's other products and services, which
capitalize on Hyperfeed to access, view and utilize data in a variety of ways.
To produce and transmit HyperFeed, PC Quote uses multiple redundant, high-speed
data circuits to gather ticker and news feeds from securities exchanges and
other sources. At the Registrant's production center in Chicago, these feeds
are directed into multiple redundant dynamic real-time databases from which
HyperFeed is generated.
HyperFeed is transmitted to customer sites either over a satellite
communications network or by dedicated digital data circuits. At the customer
site HyperFeed is received by a Quote Server, an industry standard PC which
creates and maintains databases of real-time news and fundamental information.
The Quote Server can reside on a local area network, where the data it
maintains is accessible to software applications running on workstations on a
network, or it can function as a stand-alone unit, in which case its data is
available to software applications running on the Quote Server itself. In both
instances the software applications accessing the data may be supplied by the
Registrant, by third parties, or by the customer themself.
Third party or customer supplied software utilize the Registrant's
high-performance application program interfaces (APIs) to access the Quote
Server's data. In this way the Quote Server can supply data for virtually any
purpose, including proprietary order execution systems, analytical modeling,
internal risk management, order matching, or redistribution via on-line
systems, the Internet, or wide area networks. Third party developers and
customers using the APIs for their own development pay a monthly fee for the
interfaces, in addition to monthly HyperFeed licensing fees and per-user or
per-unit charges once the application is ready for distribution or
redistribution.
The Registrant also maintains Internet Quote Servers at its facility. These
Quote Servers function just like any other Quote Servers, supporting
applications developed by the Registrant, or by third parties or customers
using Internet-enabled versions of the Registrant's APIs. In this way the
Registrant and its customers are able to benefit from the Internet's
substantially lower costs for service, communications and startup, its ease of
access, and its worldwide availability.
PART I-ITEM 1. BUSINESS
PRODUCTS AND SERVICES, CONTINUED
SOFTWARE APPLICATIONS AND SERVICES MARKETED BY REGISTRANT
To complement the Hyperfeed database, the Company has several high-end
applications and programming tools which it licenses to Hyperfeed subscribers.
PC Quote 6.0 for Windows is a comprehensive suite of real-time professional
trading tools. Running under Microsoft-TM- Windows-TM- 3.1 or Windows-TM- 95,
or Windows NT-TM-, PC Quote 6.0 offers unlimited quote pages, charting,
technical analysis, searchable news, time of sale and quote, Nasdaq Level II
market maker screens, options analytical tools, dynamic data exchange into
Microsoft-TM- Excel-TM-, tickers, alerts, baskets and more.
PC Quote 6.0 can be fed by Quote Servers on the customer's local area network
or through a connection to the Internet. Monthly fees for Internet service are
lower than fees for local area network service; this makes PC Quote 6.0 more
affordable around the world for individual investors and affords a wide range
of options for the professional marketplace. The software application for PC
Quote 6.0 is licensed from an unaffiliated third party pursuant to a Software
Distributor Agreement.
Quote Server with Quote Tools - custom applications using robust and
easy-to-use APIs, the Quote Tools enable a customer to build anything from
real-time trading desktop interfaces to Web Sites with portfolio management and
the latest in Internet push technology. The Quote Server APIs are unique in
that they give a complete suite of programming interfaces, from Visual Basic to
CGI to C++ for all levels of programming in all environments.
In 1995 the Company established an Internet web site, and MarketSmart, offering
free delayed quotes and other information to all visitors. Commencing in 1996
and continuing to build throughout 1997, the Company generated revenue by
selling advertising on its web site's free quote pages and MarketSmart,
providing market information for other web sites, offering development tools
for internet-based applications, and forming strategic relationships with other
major Internet players. The Company's expanded web site now offers, in addition
to links to unlimited free delayed quote information, subscription fee
real-time quote information, corporate profiles and press releases, information
about PC Quote's products and services and paths for learning about and signing
up for subscription services available on the site.
The Company's Internet Business Services provide custom and template web-site
services and software development services--from basic tools to complete
turnkey installations--to software vendors, financial institutions,
corporations, and Internet content providers. All of the Company's Internet
services, including the web site, advertising, PC Quote 6.0 on the Internet,
and Quote Tools, can be wholesaled, private labeled, cloned or customized to
meet a customer's specific needs.
The Company has become a quote service for the major office applications
companies. In Microsoft Excel's new 1997 version, Web Query technology features
the ability to access data from PC Quote. In February 1997 Lotus development
Corporation also featured PC Quote's data as the "in the box" feature for its
SmartSuite application.
PART I ITEM 1. BUSINESS
PRODUCTS AND SERVICES, CONTINUED
PATENTS, TRADEMARKS AND LICENSES
The Company does not have patent or federal copyright protection for its
proprietary software products. Although applicable software is readily
duplicated illegally by anyone having access to appropriate hardware, the
Company attempts to protect its proprietary software through license agreements
with customers and common law trade secret protection and non-disclosure
contract provisions in its agreements with its employees. The Company uses
security measures, including a hardware key, which restricts access to its
on-line services unless proper password identification from a PC Quote user is
provided. As an additional safeguard, the Company provides only the object code
on its diskette and retains the source code.
The following products are registered trademarks: BasketMaker-Registered
Trademark-, QuoteWare-Registered Trademark-, PriceWare-Registered Trademark-
and QuoteBlaster-Registered Trademark-. The HyperFeed-TM- product is a
servicemark of the Company.
COMPETITION
The market for the on-line provision of financial information such as equities,
commodities, futures and options quotations and news through services and
software applications similar to those the Company provides includes a large
number of competitors and is subject to rapid change. The Company believes its
primary competitors include Automatic Data Processing, the Telerate unit of Dow
Jones & Co., Bloomberg, the Comstock unit of Standard & Poors, the ILX unit of
Thomson Corporation, Telesphere Global Ticker, Reuters, Quote.com and Data
Broadcasting Corporation. Many of these competitors have significantly greater
financial, technical and marketing resources and greater name recognition than
the Company.
SEASONALITY
The Company has not experienced any material seasonal fluctuations in its
business. Barring any prolonged period of investor inactivity in trading
securities, the Company does not believe that seasonality is material to its
business activities.
RESEARCH AND DEVELOPMENT
The Company's systems development personnel expend their time and effort
developing new software programs and high-speed data delivery systems and
expanding or enhancing existing ones. Development efforts focus on providing
a solution to the informational and analytical needs of both the professional
and private investors. Development activity has increased with the
implementation of high-level design and prototyping tools. The Company's
continuing investment in software development consists primarily of
enhancements to its existing Windows-based private network and Internet
products and services, development of new data analysis software and
programmer tools (application programming interfaces) designed to afford easy
access to its datafeed for data retrieval and analysis purposes, and
application of new technology to increase the data volume and delivery speed
of its distribution system and network. During the fiscal years ended
December 31, 1997, 1996 and 1995, the Company expensed $873,579, $706,618 and
$558,671 respectively, for research and development. In addition, for the
period ending December 31, 1997 the Company wrote-off, net of amortization,
$571,647 of previously capitalized projects. See "Management Discussion and
Analysis."
ENVIRONMENT
Compliance with federal, state, and local provisions with respect to the
environment has not had a material adverse effect on the Company's capital
expenditures, earnings, or competitive position.
PART I-ITEM 1. BUSINESS
PRODUCTS AND SERVICES, CONTINUED
EMPLOYEES
As of December 31, 1997, the Company employed 113 people, none of whom are
represented by a collective bargaining unit. The Company believes it has a
satisfactory relationship with its employees. From time to time the Company
retains the services of outside consultants on an hourly basis.
GOVERNMENT CONTRACTS
The Company has no material contracts with the Government.
BACKLOGS
Due to the nature of the business, backlogs are not a typical occurrence in
the industry.
MAJOR CUSTOMERS
For information concerning the Company's major customers, see the discussion
in the section of this report entitled "Management's Discussion and Analysis".
ITEM 2. PROPERTIES
The Company's executive offices and data center are located in approximately
15,000 square feet of leased space on the 3rd floor of 300 South Wacker
Drive, Chicago, Illinois. The lease for the premises expires on December 31,
2004. Lease payments are subject to escalating base rent as well as
adjustment for changes in real estate taxes and other operating expenses.
(See Note 6 of the Notes to Financial Statements.)
The Company also leases approximately 5,000 square feet of office space in
Aurora, Illinois, through March 2000. The lease for 3,000 square feet of
office space in New York City was extended in September 1997, through July
2002, and its office in San Diego, California was converted in June 1997 to a
"Business Identity" presence, cancelable upon 30 days notice. (See Note 6 of
the Notes to Financial Statements.)
ITEM 3. LEGAL PROCEEDINGS
Richard F. Chappetto, a former officer of the Company, filed a complaint
against the Company on December 31, 1996. The action entitled RICHARD F.
CHAPPETTO VS. P.C. QUOTE, INC., was filed in the Circuit Court of Cook County,
Illinois bearing Case No. 96L015250. Mr. Chappetto's employment with the
Company ceased on November 1, 1996. Mr. Chappetto's complaint alleges that
the Company breached various verbal and written agreements by failing to pay
certain commission, bonuses and severance pay and failing to provide him with
certain stock options. Mr. Chappetto seeks monetary damages of approximately
$680,000. The Company has filed a Motion to Dismiss a major portion of the
complaint and is vigorously contesting the matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 16, 1997 at the Registrant's Annual Meeting the following matters
were submitted to a vote of shareholders and approved.
1. To elect five (5) directors to hold office until the next annual meeting
of stockholders or until their successors shall have been elected and
qualified.
2. To approve an amendment to the Company's Certificate of Incorporation to
increase the Company's total authorized Common Stock from 10,000,000
shares to 50,000,000 shares, eliminate the Preferred Stock, par value
$1.312704617 per share, from the Company's authorized capital, and to
authorize the Company to issue up to 5,000,000 shares of Preferred Stock,
par value $0.001 per share.
3. To approve an amendment to the Company's Combined Incentive and
Non-Statuatory Stock Option Plan (the "Option Plan" to increase the
aggregate number of shares of the Company's Common Stock from 1,000,000
shares to 2,000,000 shares which are reserved for issuance under the
Option Plan.
4. To ratify the appointment of KPMG Peat Marwick LLP as independent
auditors of the Company for the year ending December 31, 1997.
The results of the shareholder vote were as follows:
- ---------------------------------------------------------------------------------------
Proposal #1 - Directors For Withhold Total Voted
- ---------------------------------------------------------------------------------------
Louis J. Morgan Shares 6,848,838 305,421 7,154,259
Pct of O/S 92.38% 4.12% 96.49%
Pct of Voted 95.73% 4.27% 100.00%
- ---------------------------------------------------------------------------------------
Jim R. Porter Shares 6,865,039 289,220 7,154,259
Pct of O/S 92.59% 3.90% 96.49%
Pct of Voted 95.69% 4.04% 100.00%
- ---------------------------------------------------------------------------------------
Ronald Langley Shares 6,865,339 288,920 7,154,259
Pct of O/S 92.60% 3.90% 96.49%
Pct of Voted 95.96% 4.04% 100.00%
- ---------------------------------------------------------------------------------------
John R. Hart Shares 6,863,689 290,570 7,154,259
Pct of O/S 92.58% 3.92% 96.49%
Pct of Voted 95.94% 6.06% 100.00%
- ---------------------------------------------------------------------------------------
Timothy K. Krauskopf Shares 6,863,159 291,100 7,154,259
- ---------------------------------------------------------------------------------------
Pct of O/S 92.57% 3.93% 96.49%
Pct of Voted 95.93% 4.07% 100.00%
- ---------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
For Against Abstain Not Voted Total Voted
- -----------------------------------------------------------------------------------------------------------
Proposal #2 Shares 4,951,878 319,587 39,902 1,842,892 5,311,367
Pct of O/S 66.79% 4.31% 0.54% 24.86% 71.64%
Pct of Voted 93.23% 6.02% 0.75% 74.24%
- -----------------------------------------------------------------------------------------------------------
Proposal #3 Shares 6,426,638 501,010 35,756 190,855 6,963,404
Pct of O/S 86.68% 6.76% 0.48% 2.57% 93.92%
Pct of Voted 92.29% 7.19% 0.51% 97.33%
- -----------------------------------------------------------------------------------------------------------
Proposal #4 Shares 7,098,688 15,066 40,505 7,154,259
Pct of O/S 95.75% 0.20% 0.55% 96.49%
Pct of Voted 99.22% 0.21% 0.57% 100.00%
- -----------------------------------------------------------------------------------------------------------
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's shares of common stock are traded on the American Stock
Exchange under the symbol "PQT."
The following tables show for 1997 and 1996 the high and low closing prices
of the Company's Common Stock for the periods indicated, as reported by the
American Stock Exchange.
TRADE
-----
1997 QUARTERLY INFORMATION HIGH LOW
- -------------------------- ---- ---
First 3-7/16 2-5/16
Second 2-7/16 1-1/8
Third 2-7/16 1-9/16
Fourth 2-3/16 15/16
1996 QUARTERLY INFORMATION
- --------------------------
First 15-1/8 8-3/4
Second 13-3/8 7-1/8
Third 7-11/16 3-15/16
Fourth 5-5/16 2-3/8
As of December 31, 1997, the Company had 412 stockholders of record of its
Common Stock.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and it does not
presently anticipate making any such payments in the near future. The
Company's agreement with a lender prohibits the payment of dividends without
the lender's prior consent.
PART II - ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
INCOME DATA:
Net Sales $ 17,119,372 $17,032,164 $13,391,982 $12,903,645 $12,205,916
Gross profit $ 2,011,648 $ 5,908,644 $ 7,700,031 $ 6,496,441 $ 5,860,869
Income (loss) before
income taxes ($11,135,654) ($ 3,091,705) $ 1,376,597 $ 312,410 $ 211,055
Net income (loss) ($11,141,416) ($ 3,255,969) $ 1,512,239 $ 305,410 $ 185,407
BALANCE SHEET
DATA:
Total assets $ 10,536,448 $11,554,070 $10,522,840 $ 9,071,731 $ 8,226,053
Long term obligations $ 2,833,734 $ 2,291,178 $ 712,904 $ 1,292,989 $ 1,242,783
Shareholders' equity $ 66,329 $ 5,331,577 $ 6,611,278 $ 4,830,369 $ 4,427,444
PER SHARE DATA:
Basic net income (loss) ($1.33) ($0.45) $ 0.21 $ 0.04 $ 0.03
Diluted net income (loss) ($1.33) ($0.45) $ 0.21 $ 0.04 $ 0.03
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION - SAFE HARBOR DISCLOSURE
The statements made herein that are not historical facts may contain
forward-looking information that involve substantial risks and uncertainties.
The Company's actual results, performance or achievements could differ
materially from the results, performance or achievements expressed in, or
implied by, these forward-looking statements. Among the factors that could
cause or contribute to such differences include the Company's ability to (i)
obtain adequate financing to continue as a going-concern and fund its current
and future business strategies (see Note 14 of Notes to Financial
Statements), (ii) attract and retain its key employees, (iii) compete
successfully against competitive products and services, (iv) maintain its
relationships with key suppliers and providers of market data, (v) pay,
refinance, or extend the up to $2.25 million loan from PICO Holdings, Inc. on
or before April 30, 1998, and (vi) the effect of economic and business
conditions generally.
RESULTS OF OPERATIONS FOR 1997 COMPARED TO 1996
Service revenue increased 0.5% in 1997 to $17.1 million from $17.0 million in
1996. The increase is despite the loss of two major customers in the
Company's traditional direct data feed business. (See Note 8 of the Notes to
Financial Statements.) The lost revenue from the two customers, $4.9 million,
has been offset by increases in product and service revenue in the Company's
traditional and Internet businesses.
Direct costs of services increased approximately 36% to $15.1 million in 1997
from $11.1 million in 1996. Principal components of the increase were
royalties, leased equipment, communication costs, and compensation directly
attributable to Internet operations and sales of PCW6.0, payments to
providers of market data, and maintenance of and enhancements to the
Company's traditional direct data feed systems.
PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, RESULTS OF OPERATIONS FOR 1997 COMPARED
TO 1996, CONTINUED
Amortization of software development costs increased 53% to $1.9 million in
1997 from $1.2 million in 1996, reflecting the Company's continued investment
in Internet and direct data feed products and delivery mechanisms.
Similarly, research and development costs increased 24% to $874,000 in 1997
from $707,000 in 1996. The increase was due to additional charges for
equipment leased to upgrade systems' design and testing equipment, in
addition to costs of maintaining and enhancing previously developed products
and services.
Selling and marketing costs increased 17% to $3.6 million in 1997 as compared
to $3.1 million in 1996. The increase was mainly due to commissions on
increased sales of the Company's PCW 6.0 product.
General and administrative expenses decreased 11% to $3.4 million from $3.8
million in 1996. The decrease was principally due to reductions in
compensation and related employee costs and a decrease in bad debt expense as
compared to the prior year.
In June 1997, the Company underwent a significant management reorganization
and restructuring of operations and, as a result, recognized restructuring
expense of $1.1 million. The Company wrote off approximately $572,000 of
unamortized software development costs for previously capitalized software
projects that were discontinued. The management reorganization resulted in
the Company incurring employment related termination costs of $425,000 and
$150,000 was paid to terminate a contractual arrangement related to
unprofitable operations.
Interest expense was $2.3 million for 1997, an increase of 1,469% over the
$144,000 incurred in 1996. The increase reflects the recognition of non-cash
amortization of $674,992 for the value of the $2.5 million convertible
subordinated debenture's beneficial conversion feature and amortization of
$979,097 for the value of the common stock purchase warrants issued to PICO
Holdings, Inc. in connection with a financing arrangement. Also included is
interest on the bank term loan, the convertible subordinated debenture and
financing arrangement borrowings. (See Note 2 and Note 3 of the Notes to
Financial Statements.)
RESULTS OF OPERATIONS FOR 1996 COMPARED TO 1995
Service revenue increased 27% to $17,032,164 in 1996 from $13,391,982 in
1995. The increase in service revenue was attributable to the release of a
new product in December 1995, PC Quote for Windows 6.0, in the Company's core
and Internet business. Net income decreased 315% to a loss of $3,255,969 in
1996 from a profit of $1,512,239 in 1995. The loss was due to significantly
higher costs (Direct and Overhead departments) and Research and Development
relative to revenue increases in the traditional business.
Direct cost of services increased approximately 95% to $11,123,520 in 1996
from $5,691,951 in 1995. This primarily reflects an increase in staffing
levels in customer support and operations and royalty and communications
costs related to the increase in volume in the core business. Additional
technological infrastructure costs--principally, staffing, equipment and
communications--were incurred in scaling up the core business and the
Internet operations for anticipated revenues which were not fully realized.
Research and Development expenses increased approximately 26% to $706,618 in
1996 from $558,671 in 1995. The increase in research costs is related
primarily to Internet based projects.
Sales and marketing costs increased 36% to $3,078,384 in 1996 from $2,267,798
in 1995. The increase was due to the increase in commission costs relating to
the increase in service revenues and higher commission rate.
PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, RESULTS OF OPERATIONS FOR 1996 COMPARED TO 1995,
CONTINUED
General and administrative costs increased 61% to $3,836,950 in 1996 from
$2,384,336 in 1995. The main increases were in salaries and related costs due
to additional staffing and reallocation of personnel to support major
business opportunities. There was also an increase in the bad debt expense
and shareholders services compared to 1995.
Interest income decreased 56% to $9,743 in 1996 from $22,037 in 1995.
Interest income decreased due to the Company's use of cash over credit for
some equipment needs.
Interest expense decreased 30% to $143,618 in 1996 from $205,435 in 1995. The
decrease was primarily due to a decrease in the amount of outstanding capital
lease indebtedness and a change in the use of capital leases to operating
leases for financing customer server equipment.
LIQUIDITY AND CAPITAL RESOURCES
Net cash and cash equivalents declined by 16% to $1.1 million at the end of
1997. Expenditures for new equipment was 13% higher in 1997 versus 1996,
while capitalized software costs were 36% lower in 1997 than 1996. New direct
borrowings of $2,250,000 from the 1997 loan facility with PICO Holdings,
Inc., discussed below, were also incurred. The Company also received $4.8
million in net proceeds from the sale of common stock, further discussed
below. Agreements were reached with various vendors to extend payments under
negotiated payment plans.
The Company's $1.0 million line of credit with Lakeside Bank expired in
February 1997. The Company was experiencing, and continues to experience,
working capital constraints which has hindered operations. To lessen such
constraints the Company entered into several financing transactions during
1997. On May 5, 1997 the Company entered into a loan and security agreement
with its principal shareholder, PICO Holdings, Inc. ("PICO"), to provide
working capital loans of up to $1.0 million. In connection with the extension
by PICO of such $1.0 million facility, the Company and Physicians Insurance
Company of Ohio, a wholly-owned subsidiary of PICO, restructured the terms of
its $2.5 million subordinated convertible debenture ("Debenture"). In August
1997, the Company and PICO amended the loan and security agreement increasing
the facility by $1.0 million to $2.0 million. In September 1997, the Company
and PICO further amended the loan and security agreement increasing the
facility by $0.25 million to $2.25 million and extending the due date for all
borrowings on the facility, plus accrued interest to December 31, 1997. The
loan and security agreement was further amended in December 1997, February
1998 and March 1998 to extend the due date to January 31, 1998, February 28,
1998 and April 30, 1998, respectively. (See Note 3 of the Notes to
Financial Statements.)
In October 1997 the Company issued five million (5,000,000) shares of Common
Stock in exchange for five million dollars ($5,000,000), subject to the
Company's obligation to repurchase up to four million shares at one dollar
($1) per share upon completion of a rights offering. (See Note 3 and Note 15
of the Notes to Financial Statements.)
PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
In November 1997 the Company commenced the rights offering whereby it granted
7,402,246 transferable subscription rights to shareholders as of November 21,
1997, entitling them to purchase one additional share of Common Stock for
each right at a price of $1.00 per share. If fully subscribed, the Company
anticipated it would have received approximately $7.0 million in net proceeds
from the sale of shares of common stock underlying the rights, of which $4.0
million would then have been used to repurchase, at $1.00 per share, a
portion of the shares previously issued in October. Proceeds in excess of
$4.0 million, if received, would then be available for general corporate
purposes.
In January 1998 the Company completed the rights offering and received
approximately $3.0 million in gross proceeds from the sale of shares
underlying exercised rights. Pursuant to the October stock purchase
agreement, the entire proceeds were used to fulfill the Company's obligation
to repurchase shares. (See Note 15 of the Notes to Financial Statements.)
Due to the decline in cash flow from operating activities, to levels expected
to be insufficient for working capital, capital expenditures, and debt
services, the Company is exploring multiple alternatives to raise capital.
Such alternatives include refinancing existing debt, a merger, a spin-off or
sale of part of the Company's business, a strategic relationship or joint
venture with another technology or financial service firm or other financing
to further fund the Company's business. Any capital raised may be costly to
the Company and/or dilutive to stockholders. There can be no assurances,
however, that the Company will be successful in concluding a transaction, or
that if a transaction is concluded such transaction will result in
alleviating the Company's present financial situation. If the Company is not
able to secure additional capital, the lack of funds may significantly limit
the Company's ability to realize value from its assets and its product
offerings, and its ability to continue its business as currently conducted.
(See Note 14 of the Notes to Financial Statements.)
MAJOR CUSTOMERS
The Company entered into an agreement with Global Financial Services,
(formerly Bridge Information Systems) ("Global") on January 25, 1995, whereby
the Company would provide domestic data to Global for $2,100,000 (1996) and
$450,000 through March 31, 1997. For the remainder of the contract term,
amounts would be charged on a per-site basis at December 31, 1996. In
September 1996, the Company agreed to accelerate the termination date of the
fixed fee portion of the agreement to January 1, 1997. For the fiscal year
ending December 31, 1996 and 1995, Global accounted for revenues
approximating $3,414,000 and $3,920,000, respectively.
In December 1996, the Company discontinued providing services to Charles
Schwab and Company that accounted for net revenues of approximately
$1,693,000 and $557,000 in 1996 and 1995, respectively.
PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED OTHER
The Company believes general inflation does not materially impact its sales
and operating results nor is it expected that the effect of current tax
legislation will significantly affect its future financial position,
liquidity or operating results.
At December 31, 1997, the Company had federal income tax net operating loss
carryforwards of approximately $23,183,315 for federal income tax purposes
and approximately $20,387,000 for the alternative minimum tax. The net
operating loss carryforwards will expire, if not previously utilized, as
follows: 1999: $546,000; 2000: $1,370,000; 2001: $1,539,000; 2002: $560,000;
2003: $79,000; 2004: $576,000; and thereafter $18,513,315. (See Note 5 of the
Notes to Financial Statements.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
Pursuant to Rule 12b-23 under the Securities Exchange Act of 1934, the
information called for by this Item is incorporated herein by reference to
the "Index of Financial Statements", which appears elsewhere in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURE
On July 9, 1997, McGladrey & Pullen LLP declined to stand for re-election as
the independent auditors for the Company. At a meeting held August 19, 1997,
the Company's Board of Directors unanimously approved the appointment of KPMG
Peat Marwick LLP to be the independent auditors for the year ending December
31, 1997.
The reports of McGladrey & Pullen LLP on the financial statements for the two
fiscal years ended December 31, 1996 and 1995 contained no adverse opinions
or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle, except for a going concern
phrase that was included in the report relating to the Company's audited
financial statements for the year ended December 31, 1996 as follows: "The
accompanying financial statements have been prepared assuming that PC Quote,
Inc. will continue as a going concern. As more fully described in Note 14,
the Company has experienced significant operating losses, which adversely
affected the Company's current results of operations and liquidity. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 14. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty."
In connection with its audits for the two years ended December 31, 1996 and
1995 and through July 9, 1997, there were no disagreements with McGladrey &
Pullen LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if
not resolved to the satisfaction of McGladrey & Pullen LLP would have caused
them to make reference thereto in their report on the financial statements
for such years.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information concerning directors and executive officers of the Company will
be set forth in the Company's proxy statement to be used in connection with
its 1998 annual meeting of stockholders, and such information is herein
incorporated by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation will be set forth in the
Company's proxy statement to be used in connection with its 1998 annual
meeting of stockholders, and such information is herein incorporated by
reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management will be set forth in the Company's proxy statement to be used in
connection with its 1998 annual meeting of stockholders, and such information
is herein incorporated by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions will be
set forth in the Company's proxy statement to be used in connection with its
1998 annual meeting of stockholders, and such information is herein
incorporated by reference thereto.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements of the Company filed herewith are included in Item 8
of this Report.
2. Financial Statement Schedules
The financial statement schedule for the valuation and qualifying accounts is
included in Item 8 of this report.
(b) REPORTS ON FORM 8-K:
No Reports on Form 8-K were filed by the Company during the fourth quarter of
the period covered by this report.
(c) EXHIBITS
3(a) Articles of Incorporation of Company, incorporated by reference
to Appendix B of Company's Proxy Statement dated July 2, 1987.
3(b) By-laws of the Company, as amended and restated, incorporated by
reference to Exhibit 3(b) to Company's Annual Report on Form 10-K
for the year ended December 31, 1987.
3(c) Certificate of Amendment, dated as of October 22, 1997, to
Company's Certificate of Incorporation, incorporated by reference
to Exhibit 4.12 of the Company's Report on Form 10-Q for the
quarter ended September 30, 1997.
4(a) Specimen Common Share Certificate of the Company, incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-18, Commission File No. 2-90939C.
4(b) $2,500,000 Convertible Subordinated Debenture due 2001 issued by
the Company to Physicians Insurance Company of Ohio, Inc.,
incorporated by reference to Exhibit 4(b) to Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
4(c) Form of First Amendment to Convertible Subordinated Debenture and
Debenture Agreement, incorporated by reference to Exhibit 10.2 of
the Company's Report on Form 10-Q for the quarter ended June 30,
1997.
4(d) Form of Loan and Security Agreement dated as of May 5, 1997 between
the Company and PICO Holdings, Inc., incorporated by reference to
Exhibit 10.1 of the Company's Report on Form 10-Q for the quarter
ended June 30, 1997.
4(e) Form of Promissory Note made by the Company to the order of PICO
Holdings, Inc., incorporated by reference to Exhibit 10.4 of the
Company's Report on Form 10-Q for the quarter ended June 30, 1997.
4(f) Form of Common Stock Purchase Warrant for 640,000 shares of the
Company's Common Stock issued to PICO Holdings, Inc., incorporated
by reference to Exhibit 10.3 of the Company's Report on Form 10-Q
for the quarter ended June 30, 1997.
4(g) Form of First Amendment to Loan and Security Agreement dated as of
August 8, 1997 between the Company and PICO Holdings, Inc.,
incorporated by reference to Exhibit 10.5 of the Company's Report
on Form 10-Q for the quarter ended June 30, 1997.
4(h) Form of Common Stock Purchase Warrant for 500,000 shares of the
Company's Common Stock issued to PICO Holdings, Inc., incorporated
by reference to Exhibit 10.6 of the Company's Report on Form 10-Q
for the quarter ended June 30, 1997.
PART IV. - ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
4(i) Form of Second Amendment to Loan and Security Agreement dated as
of September 22, 1997 between the Company and PICO Holdings, Inc.,
incorporated by reference to Exhibit 10.1 of the Company's Report
on Form 10-Q for the quarter ended September 30, 1997.
4(j) Form of Common Stock Purchase Warrant for 129,032 shares of the
Company's Common Stock issued to PICO Holdings, Inc., incorporated
by reference to Exhibit 4.1 of the Company's Report on Form 10-Q
for the quarter ended September 30, 1997.
4(k) Form of Stock And Warrant Purchase Agreement dated as of
October 15, 1997 between the Company and Imprimis Investors LLC
and Wexford Spectrum Investors LLC, incorporated by reference to
Exhibit 10.2 of the Company's Report on Form 10-Q for the quarter
ended September 30, 1997.
4(l) Form of Common Stock Purchase Warrant for 350,000 shares of the
Company's Common Stock issued to Imprimis Investors LLC,
incorporated by reference to Exhibit 4.2 of the Company's Report
on Form 10-Q for the quarter ended September 30, 1997.
4(m) Form of Common Stock Purchase Warrant for 150,000 shares of the
Company's Common Stock issued to Wexford Spectrum Investors LLC,
incorporated by reference to Exhibit 4.3 of the Company's Report
on Form 10-Q for the quarter ended September 30, 1997.
4(n) Form of Common Stock Purchase Warrant for 101,500 shares of the
Company's Common Stock issued to Imprimis Investors LLC,
incorporated by reference to Exhibit 4.4 of the Company's Report
on Form 10-Q for the quarter ended September 30, 1997.
4(o) Form of Common Stock Purchase Warrant for 43,500 shares of the
Company's Common Stock issued to Wexford Spectrum Investors LLC,
incorporated by reference to Exhibit 4.5 of the Company's Report
on Form 10-Q for the quarter ended September 30, 1997.
4(p) Form of Common Stock Purchase Warrant for 38,500 shares of the
Company's Common Stock issued to Imprimis Investors LLC,
incorporated by reference to Exhibit 4.6 of the Company's
Report on Form 10-Q for the quarter ended September 30, 1997.
4(q) Form of Common Stock Purchase Warrant for 16,500 shares of the
Company's Common Stock issued to Wexford Spectrum Investors LLC,
incorporated by reference to Exhibit 4.7 of the Company's Report
on Form 10-Q for the quarter ended September 30, 1997.
4(r) Form of Common Stock Purchase Warrant for 175,000 shares of the
Company's Common Stock issued to Imprimis Investors LLC,
incorporated by reference to Exhibit 4.8 of the Company's Report
on Form 10-Q for the quarter ended September 30, 1997.
4(s) Form of Common Stock Purchase Warrant for 75,000 shares of the
Company's Common Stock issued to Wexford Spectrum Investors LLC,
incorporated by reference to Exhibit 4.9 of the Company's Report
on Form 10-Q for the quarter ended September 30, 1997.
4(t) Form of Common Stock Purchase Warrant for 35,000 shares of the
Company's Common Stock issued to Imprimis Investors LLC,
incorporated by reference to Exhibit 4.10 of the Company's Report
on Form 10-Q for the quarter ended September 30, 1997.
4(u) Form of Common Stock Purchase Warrant for 15,000 shares of the
Company's Common Stock issued to Wexford Spectrum Investors LLC,
incorporated by reference to Exhibit 4.11 of the Company's Report
on Form 10-Q for the quarter ended September 30, 1997.
PART IV. - ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
4(v) Form of Third Amendment to Loan and Security Agreement dated as
of December 30, 1997 between the Company and PICO Holdings, Inc.,
located after the Financial Statements of this report.
4(w) Form of Fourth Amendment to Loan and Security Agreement dated as
of February 5, 1998 between the Company and PICO Holdings, Inc.,
located after the Financial Statements of this report.
4(x) Form of Fifth Amendment to Loan and Security Agreement dated as
of March 10, 1998 between the Company and PICO Holdings, Inc.,
located after the Financial Statements of this report.
10(a) Vendor Agreement with the Option Price Reporting Authority,
incorporated by reference to Exhibit 10.4 of Company's Registration
Statement on Form S-18, Commission File No. 2-90939C.
10(b) Vendor Agreement with the New York Stock Exchange, Inc.,
incorporated by reference to Exhibit 10.5 of Company's Registration
Statement on Form S-18, Commission File No. 2-90939C.
10(c) Vendor Agreements with the National Association of Securities
Dealers, Inc. incorporated by reference to Exhibit 10(d) of
Company's Annual Report on Form 10-K for the year ended
December 31, 1989.
10(d) Form of Employee Non-Disclosure Agreement, incorporated by
reference to Exhibit 10.10 of Company's Registration Statement on
Form S-18, Commission File No. 2-90939C.
10(e) Amended and Restated PC Quote, Inc. Employees' Combined Incentive
and Non-Statutory Stock Option Plan, incorporated by reference to
Appendix E to Company's Proxy Statement dated July 2, 1987 and
Company's Proxy Statement dated September 15, 1997.
10(f) Lease regarding office space at 50 Broadway, New York City, dated
January 31, 1987, as amended by First Amendatory Agreement dated
May 18, 1987, by and between Company and 50 Broadway Joint Venture,
incorporated by reference to Exhibit 10(y) to Company's Annual
Report on Form 10-K for the year ended December 31, 1987.
10(g) Satellite Service Agreement dated June 12, 1991 between Company
and Space Com Systems, Inc. incorporated by reference to
Exhibit 10(r) to Company's Annual Report on Form 10-K for the year
ended December 31, 1991.
10(h) Amendment to satellite service agreement dated September 6, 1991
between Company and SpaceCom Systems, Inc. incorporated by
reference to Exhibit 10(s) to Company's Annual Report on Form 10-K
for the year ended December 31, 1991.
10(i) Amendment to point-to-multipoint satellite network service
agreement dated November 22, 1989 between Company and GTE SpaceNet
Satellite Services Corporation incorporated by reference to
Exhibit 10(v) to Company's Annual Report on Form 10-KSB for the
year ended December 31, 1992.
10(j) Amendment to satellite service agreement dated
October 4, 1993 between Company and SpaceCom Systems, Inc.
incorporated by reference to Exhibit 10(z) to Company's Annual
Report on Form 10-KSB for the year ended December 31, 1993.
10(k) Satellite Service Agreement dated September 15, 1994 between
Company and SpaceCom Systems, Inc. incorporated by reference to
Exhibit 11(a) to Company's Annual Report on Form 10-K for the
year ended December 31, 1994.
10(l) Satellite Service Agreement dated October 15, 1993 between Company
and SpaceCom Systems, Inc. incorporated by reference to
Exhibit 11(b) to Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
PART IV - ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
10(m) Satellite Service Agreement dated June 1, 1993 between Company and
SpaceCom Systems, Inc. incorporated by reference to Exhibit 11(b)
to Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
10(n) Vendor Agreement with Global Information Systems Inc. incorporated
by reference to Exhibit 11(d) of Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
10(o) Lease regarding office space at 300 South Wacker Drive, Chicago,
Illinois dated June 1, 1994, by and between Company and
Markborough 300 WJ Limited Partnership, incorporated by reference
to Exhibit 11(e) to Company's Annual Report on Form 10-KSB for the
year ended December 31, 1994.
10(p) Agreement dated November 14, 1996 between the Company and
Physicians Insurance Company of Ohio, Inc., incorporated by
reference to Exhibit 10(p) to Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
10(q) Employment agreement dated July 16, 1996 between the Company and
Howard Meltzer, incorporated by reference to Exhibit 10(q) to
Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10(r) Employment agreement dated December 2, 1996 between the Company
and Louis J. Morgan, incorporated by reference to Exhibit 10(r)
to Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
PC QUOTE, INC.
By: /s/ JIM R. PORTER
---------------------
Jim R. Porter, Chairman of the Board and
Chief Executive Officer
By: /s/ JOHN E. JUSKA
---------------------
John E. Juska, Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
/s/ JIM R. PORTER
- ------------------------------
Jim R. Porter, Chairman of the Board and
Chief Executive Officer
March 31, 1998
/s/ JOHN R. HART
- ------------------------------
John R. Hart, Director
March 31, 1998
/s/ TIMOTHY K. KRAUSKOPF
- ------------------------------
Timothy K. Krauskopf, Director
March 31, 1998
/s/ RONALD LANGLEY
- ------------------------------
Ronald Langley, Director
March 31, 1998
/s/ LOUIS J. MORGAN
- ------------------------------
Louis J. Morgan, Director
March 31, 1998
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORTS F-1-2
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets F-3-4
Statements of operations F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7-8
Notes to financial statements F-9-22
Auditors' reports on Schedule II F-23-24
Supplemental Schedule II F-25
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
PC Quote, Inc.
Chicago, Illinois
We have audited the accompanying balance sheet of PC Quote, Inc. as of
December 31, 1997, and the related statement of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PC Quote, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that PC
Quote, Inc. will continue as a going concern. As more fully described in
Note 14, the Company has experienced significant operating losses, which have
adversely affected the Company's current results of operations and liquidity.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 14. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 24, 1998
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PC Quote, Inc.
Chicago, Illinois
We have audited the accompanying balance sheet of PC Quote, Inc. as of
December 31, 1996, and the related statements of operations, stockholders'
equity and cash flows for each of the two years for the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
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 financial position of PC Quote, Inc. as of
December 31, 1996 and the results of its operations and its cash flows for
each of the two years for the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that PC
Quote, Inc. will continue as a going concern. As more fully described in
Note 14, the Company has experienced significant operating losses, which have
adversely affected the Company's current results of operations and liquidity.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 14. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ McGladrey & Pullen, LLP
Schaumburg, Illinois
March 7, 1997
F-2
PC QUOTE, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
Current Assets
Cash and cash equivalents $ 1,113,130 $ 1,321,512
Accounts receivable, less allowance for
doubtful accounts of: 1997: $346,000; 1996: $234,000 1,435,450 1,100,253
Income tax refunds receivable - 40,000
Prepaid expenses and other current assets 61,981 185,071
----------- -----------
TOTAL CURRENT ASSETS 2,610,561 2,646,836
----------- -----------
Property and equipment
Satellite receiving equipment 895,126 865,454
Computer equipment 7,266,576 6,382,179
Communication equipment 2,716,415 2,656,057
Furniture and fixtures 293,240 293,240
Leasehold improvements 366,325 359,126
----------- -----------
11,537,682 10,556,056
Less: Accumulated depreciation and amortization 9,035,571 7,791,849
----------- -----------
2,502,111 2,764,207
----------- -----------
Software development costs, net of accumulated
Amortization of: 1997: $5,045,080; 1996: $3,600,204 5,126,473 5,789,845
----------- -----------
Deposits and other assets 297,303 353,182
----------- -----------
TOTAL ASSETS $10,536,448 $11,554,070
----------- -----------
----------- -----------
See Notes to Financial Statements.
F-3
PC QUOTE, INC.
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
Current Liabilities
Note payable, bank, current $ 300,000 $ 300,000
Note payable, credit facility 2,250,000 -
Capital lease obligations, current - 142,685
Accounts payable 2,834,460 1,774,390
Accrued expenses 604,916 396,876
Accrued compensation 618,289 315,500
Accrued interest 388,253 -
Income taxes payable 5,192 6,264
Unearned revenue, current 635,275 995,600
----------- -----------
TOTAL CURRENT LIABILITIES 7,636,385 3,931,315
----------- -----------
Note payable, bank, noncurrent 799,634 1,100,000
Convertible subordinated debenture bond
payable, net of unamortized discount of:
1997: $1,096,402; 1996: $1,650,000 1,403,598 850,000
Unearned revenue, noncurrent 442,953 134,636
Accrued expenses, noncurrent 187,549 206,542
----------- -----------
TOTAL NONCURRENT LIABILITIES 2,833,734 2,291,178
----------- -----------
TOTAL LIABILITIES 10,470,119 6,222,493
----------- -----------
Stockholders' Equity
Common stock, $.001 par value; authorized
50,000,000 shares in 1997 and 10,000,000
shares in 1996; issued and outstanding
12,436,800 at December 31, 1997 and
7,355,621 at December 31, 1996 12,437 7,356
Additional paid-in capital 17,386,591 12,615,995
Additional paid-in capital - convertible
subordinated debenture and warrants 2,750,491 1,650,000
Accumulated deficit (20,083,190) (8,941,774)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 66,329 5,331,577
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,536,448 $11,554,070
----------- -----------
----------- -----------
See Notes to Financial Statements.
F-4
PC QUOTE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Net Revenues:
Services $ 17,119,372 $17,032,164 $11,417,388
Services-related party - - 1,974,594
------------ ----------- -----------
17,119,372 17,032,164 13,391,982
Direct cost of services 15,107,724 11,123,520 5,691,951
------------ ----------- -----------
2,011,648 5,908,644 7 ,700,031
------------ ----------- -----------
Operating costs and expenses:
Amortization of software
development costs 1,909,652 1,244,522 929,231
Research and development 873,579 706,618 558,671
Selling and marketing 3,593,696 3,078,384 2,267,798
General and administrative 3,408,770 3,836,950 2,384,336
Restructuring 1,146,677 - -
------------ ----------- -----------
10,932,374 8,866,474 6,140,036
------------ ----------- -----------
OPERATING INCOME (LOSS) (8,920,726) (2,957,830) 1,559,995
------------ ----------- -----------
Financial income (expenses):
Interest income 37,873 9,743 22,037
Interest expense (2,252,801) (143,618) (205,435)
------------ ----------- -----------
(2,214,928) (133,875) (183,398)
------------ ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (11,135,654) (3,091,705) 1,376,597
Income taxes (credits) 5,762 164,264 (135,642)
------------ ----------- -----------
NET INCOME (LOSS) ($11,141,416) ($3,255,969) $ 1,512,239
------------ ----------- -----------
------------ ----------- -----------
Basic net income (loss) per share ($1.32) ($0.45) $ 0.21
Diluted net income (loss) per share ($1.32) ($0.45) $ 0.21
See Notes to Financial Statements.
F-5
PC QUOTE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------
Additional
Paid-In
Common Common Additional Capital
Stock Stock Paid-In Convertible Accumulated
Shares Amount Capital Debentures Deficit Total
- ------------------------------------------------------------------------------------------------------------------------
Balances
12/31/94 6,969,174 6,969 12,021,444 - (7,198,044) 4,830,369
Net income - - - - 1,512,239 1,512,239
Issuance of common stock 216,558 217 268,453 - - 268,670
12/31/95 7,185,732 7,186 12,289,897 - (5,685,805) 6,611,278
Net loss - - - - (3,255,969) (3,255,969)
Issuance of common stock 169,889 170 326,098 - - 326,268
Value assigned to conversion
feature of convertible debentures 1,650,000 1,650,000
--------- ----- ---------- --------- ------------ ------------
12/31/96 7,355,621 7,356 12,615,995 1,650,000 (8,941,774) 5,331,577
Net loss - - - - (11,141,416) (11,141,416)
Issuance of common stock 5,081,179 5,081 4,751,520 - - 4,756,601
Value assigned to amendment
of convertible debenture
and warrants issued 1,100,491 1,100,491
Value assigned to employee stock
options issued 19,076 19,076
--------- ----- ---------- --------- ------------ ------------
12/31/97 12,436,800 12,437 17,386,591 2,750,491 (20,083,190) 66,329
See Notes to Financial Statements.
F-6
PC QUOTE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Cash Flows From Operating Activities
Net income (loss) ($11,141,416) ($3,255,969) $1,512,239
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment 1,243,722 1,230,809 1,289,506
Provision for doubtful accounts 683,639 734,346 361,369
Amortization of software development costs 1,909,652 1,244,522 929,231
Amortization of deferred discount on convertible
subordinated debenture 674,992 -- --
Amortization of deferred debt on warrants 979,097 -- --
Write-off of capitalized software development costs 571,647 -- --
Compensation value assigned to employee stock options granted 19,076 -- --
Deferred income taxes -- 158,000 (158,000)
(Gain) loss on disposal of equipment -- (52,206) (15,975)
Changes in assets and liabilities:
Accounts receivable (1,018,836) (514,091) (1,126,643)
Accounts receivable - related party -- -- 287,334
Income tax refunds receivable 40,000 -- (40,000)
Prepaid expenses and other current assets 123,090 109,465 20,257
Deposits and other assets 55,879 (77,489) (100,074)
Accounts payable 1,060,070 157,986 266,669
Accrued expenses 880,089 345,727 108,480
Unearned revenue (52,008) 329,176 224,418
Income taxes payable (1,072) 6,264 --
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (3,972,379) 416,540 3,558,811
------------ ----------- -----------
Cash Flows From Investing Activities
Purchase of property and equipment (1,037,569) (914,898) (668,178)
Proceeds from sale of equipment 55,943 190,498 15,975
Software development costs capitalized (1,817,927) (2,862,152) (2,586,519)
------------ ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,799,553) (3,586,552) (3,238,722)
------------ ----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of common stock 4,756,601 326,268 268,670
Proceeds from notes payable -- 2,500,000 --
Proceeds from issuance of subordinated
convertible debenture -- 2,500,000 --
Net borrowings under credit facility 2,250,000
Principal payments under capital lease obligations (142,685) (578,222) (829,367)
Principal payments on note payable, bank (300,366) (1,300,000) (100,000)
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 6,563,550 3,448,046 (660,697)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents (208,382) 278,034 (340,608)
Cash and cash equivalents:
Beginning of year 1,321,512 1,043,478 1,384,086
------------ ----------- -----------
End of year $1,113,130 $1,321,512 $1,043,478
------------ ----------- -----------
------------ ----------- -----------
See Notes to Financial Statements.
F-7
PC QUOTE, INC
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Interest paid $ 218,531 $ 143,618 $205,435
Income taxes paid $ 6,834 $1,000 $ 37,950
Supplemental Disclosures of Noncash Investing and Financing
Activities
Additional paid-in-capital from issuance of subordinated
convertible debenture bonds $1,650,000
Additional paid-in-capital from amendment of
Convertible debenture agreement and issuance of warrants $1,100,491
Additional paid-in-capital from issuance of
employee stock options $19,076
See Notes to Financial Statements.
F-8
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company maintains a real-time database of last sale, bid/ask, and
historical prices of more than 250,000 security issues that contains the most
comprehensive options data and has also been optimized for Level 2 NASDAQ
market-maker quotes. The database includes all North American equities and
options, major stock indices, Level I NASDAQ-quoted stocks, Level II NASDAQ
market maker quotes, mutual funds, money market funds, futures contracts and
options on futures contracts. Also covered are exchange-traded issues from
Europe and Asia. The Company generates a digital data stream from the
Company's database and broadcasts it to the customer's personal computer. The
Company's software applications, running on the user's computer, process the
data stream to allow the user to monitor securities on an on-going real-time
basis. They also create in the user's computer a complete database of trading
symbols, continuously updated by the data stream. This database gives the
user instant access to security prices. The same data stream is used to
create an equivalent database on the Company's computers, accessible to its
customers via the Internet.
The Company's continuing investment in software development consists
primarily of enhancements to its existing Windows-based private network and
Internet products and services, development of new data analysis software and
programmer tools (application programming interfaces) designed to afford easy
access to its datafeed for data retrieval and analysis purposes, and
application of new technology to increase the data volume and delivery speed
of its distribution system and network.
The Company's customer base consists primarily of professional investors,
securities brokers, dealers and traders, and portfolio managers. The Company
has expanded its service offerings to the individual investor, application
developers and businesses by offering its products through the Internet. The
Company requires its customers to make cash deposits as collateral for
payment of services rendered. Customers are located primarily in the United
States and North America.
Significant accounting policies are as follows.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: The Company considers all cash and cash
investments with an original maturity of three months or less to be cash
equivalents. The Company typically invests excess cash in a money market
account which is at a financial institution which management believes has a
strong credit rating.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation on owned assets is provided using the straight-line method over
the following estimated useful lives: satellite, computer and communications
equipment: 3 to 5 years; furniture, fixtures and leasehold improvements: 5 to
10 years. Leasehold improvements are amortized over the lesser of the
estimated useful lives or the terms of the respective leases.
F-9
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Maintenance and repair costs are charged to earnings as incurred. Costs of
improvements are capitalized. Upon retirement or disposition, the cost and
related accumulated depreciation and amortization are removed from the
accounts and any gain or loss is included in the statements of operations.
SOFTWARE DEVELOPMENT COSTS: Costs associated with the planning and designing
phase of software development, including coding and testing activities
necessary to establish technological feasibility of computer software
products to be sold, leased or otherwise marketed, are charged to research
and development as incurred. Once technological feasibility has been
determined, costs incurred in the construction phase of software development
including coding, testing, and product quality assurance are capitalized.
Amortization commences at the time of capitalization or, in the case of a new
product or service offering, at the time the product or service becomes
available for use. 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.
PC Quote, Inc.'s policy is to amortize capitalized software costs by the
greater of (a) the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product
or (b) the straight line method over the remaining estimated economic life of
the product including the period being reported on, principally three to five
years. The Company assesses the recoverability of its software development
costs against estimated future undiscounted cash flows. Given the highly
competitive environment and technological changes it is reasonably possible
that those estimates of anticipated future gross revenues, the remaining
estimated economic life of the product, or both may be reduced significantly.
FINANCIAL INSTRUMENTS: The Company has no financial instruments for which
the carrying value materially differs from fair value.
INCOME TAXES: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
REVENUE RECOGNITION: Revenues from service contracts are recognized as the
contracted services are rendered. The Company bills for services one month in
advance; billings are due within 30 days. The unearned revenue has been
reflected net of the related receivables on the balance sheet. Customers'
deposits or prepayments are classified as unearned revenue. Customers'
deposits on contracts greater than one year are classified as long-term
unearned revenue.
F-10
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTATION OF NET INCOME (LOSS) PER SHARE: In the fourth quarter of 1997, the
Company adopted SFAS No. 128, "Earnings Per Share," which established new
methods for computing and presenting earnings per share ("EPS") and replaced
the presentation of primary and fully-diluted EPS with basic ("Basic") and
diluted EPS. Basic earnings per share is based on the weighted average number
of shares outstanding and excludes the dilutive effect of unexercised common
stock equivalents. Diluted earnings per share includes the dilutive effect of
unexercised common stock equivalents.
RECLASSIFICATION: Certain 1996 balances have been reclassified to conform to
the 1997 presentation.
NOTE 2. NOTE PAYABLE
The Company has a $1,500,000 term loan with a bank, payable in monthly
installments of $25,000 plus interest at prime (prime was 8.5% at December
31, 1997). The loan is collateralized by substantially all assets of the
Company. At December 31, 1997 and 1996, the outstanding balance was
$1,099,634 and $1,400,000, respectively.
NOTE 3. FINANCING AND RELATED PARTY TRANSACTIONS
On November 14, 1996, the Company entered into an agreement (the "Debenture
Agreement") with Physicians Insurance Company of Ohio, ("PICO"), which then
owned approximately 30% of the Company's outstanding shares of Common Stock.
Pursuant to the Debenture Agreement, PICO invested $2.5 million in the
Company in exchange for a Subordinated Convertible Debenture (the
"Debenture") in the principal amount of $2.5 million with interest at 1% over
prime. Interest is payable semiannually, beginning January 1, 1998. PICO made
the investment and the Debenture was issued on December 2, 1996. The
Debenture was to mature on December 31, 2001 and was convertible at any time
by PICO into 1.25 million shares of Common Stock of the Company (subject to
adjustment in certain cases). Using the Black-Scholes option-pricing model, a
value of $1,650,000 was assigned by the Company to the subordinated
debenture's beneficial conversion feature and recognized as additional paid
in capital and unamortized discount upon issuance in 1996.
On May 5, 1997, the Company and PICO Holdings, Inc. ("Holdings") entered into
a Loan and Security Agreement (the "Loan Agreement"), under which Holdings
agreed to make a secured loan to the Company in an aggregate principal amount
of up to $1.0 million at a fixed rate equal to 14% per annum. Unless
otherwise extended, the entire principal balance and all accrued interest due
under the Loan Agreement was payable on September 30, 1997. All advances
under the Loan Agreement are secured by a pledge of substantially all of the
assets of the Company. These liens are subject to the prior lien of the
Company's primary lender, Lakeside Bank. Holdings was also entitled to be
paid a "facility fee" of $40,000 on the maturity date of the loan
contemplated by the Loan Agreement.
In connection with the Loan Agreement, the Company and PICO entered into a
First Amendment to the Debenture and Debenture Agreement (the "Debenture
Amendment"), pursuant to which the terms of the Debenture were restructured
as follows: (a) the maturity date of the Debenture is now April 30, 1999
instead of December 31, 2001; (b) the Debenture may not be prepaid or
redeemed without the consent of PICO; (c) the conversion rate on the
Debenture has been changed from $2.00 per share to the lower of (i) the mean
of the closing bid price per share for the 20 trading days preceding exercise
of the Debenture or (ii) $1.5625 per share (the market price of the Company's
Common Stock on the date of the Debenture Amendment); (d) certain negative
covenants were added to the Debenture Agreement; and (e) the rights offering
contemplated by the Debenture Agreement will be at such time as determined by
the Company and at a price as determined by PICO. Interest under the
Debenture will continue to be payable in cash or, at the option of PICO, in
shares of the Company's Common Stock at the market value of such shares at
the time of payment.
F-11
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3. FINANCING AND RELATED PARTY TRANSACTIONS (CONTINUED)
Also on May 5, 1997, in consideration of the loan by Holdings to the Company,
the Company issued a Common Stock Purchase Warrant (the "Warrant") to
Holdings entitling Holdings to purchase a minimum of 640,000 shares of the
Company's Common Stock at a price per share (the "Warrant Price") equal to
the lesser of (a) the mean of the closing bid price per share for the 20
trading days preceding exercise of the Warrant or (b) $1.5625 per share (the
market value of the Company's Common Stock on the date the Warrant was
issued). The Warrant expires on April 30, 2000. In lieu of exercising the
Warrant for cash, Holdings may elect to receive shares of the Company's
Common Stock equal to the "value" of the Warrant determined in accordance
with a formula specified in the Warrant (the "Conversion Value"). The number
of shares of the Company's Common Stock subject to the Warrant and the
Warrant Price will be adjusted to reflect stock dividends; reclassifications
or changes of outstanding securities of the Company; any consolidation,
merger or reorganization of the Company; stock splits; issuances of rights,
options or warrants to all holders of shares of the Company's Common Stock
exercisable at less than the current market price per share; and other
distributions to all holders of shares of the Company's Common Stock. In the
event of any sale, license or other disposition of all or substantially all
of the assets of the Company or any reorganization, consolidation or merger
involving the Company in which the holders of the Company's securities before
the transaction beneficially own less than 50% of the outstanding voting
securities of the surviving entity (an "Acquisition"), if the successor
entity does not assume the obligations of the Warrant and Holdings has not
fully exercised the Warrant, the unexercised portion of the Warrant will be
deemed automatically converted into shares of the Company's Common Stock at
the Conversion Value. Alternatively, Holdings may elect to cause the Company
to purchase the exercised portion of the Warrant for cash upon the closing of
any Acquisition for an amount equal to (a) the fair market value of any
consideration that would have been received had Holdings exercised the
unexercised portion of the Warrant immediately before the record date for
determining stockholders entitled to participate in the proceeds of the
Acquisition, less (b) the aggregate Warrant Price. The Warrant also provides
for certain piggyback registration rights and a one-time demand registration
right.
In connection with the May 5 transactions, using the Black-Scholes
option-pricing model, an aggregate value of $572,192 was assigned to the
value of the Debenture Amendment and Warrant and recorded as additional
paid-in-capital and discounts on the Debenture and Loan.
In August 1997, the Company and Holdings agreed to amend the Loan Agreement
and related documents to increase the amount of the secured loan from
Holdings to the Company from $1.0 million up to $2.0 million. The terms of
the Loan Agreement otherwise remained substantially the same, except that the
"facility fee" of $40,000 was eliminated for new advances. In connection with
the increase of the loan amount pursuant to such amendment, the Company
granted Holdings an additional Common Stock Purchase Warrant for a minimum of
500,000 shares of the Company's Common Stock. The terms of the additional
warrant are substantially the same as those contained in the Warrant, except
that the conversion price is the lesser of (a) $2.00 per share or (b) the
mean of the closing bid price per share for the 20 trading days preceding
exercise of the additional warrant. The additional warrant also provides for
certain piggyback registration rights and a one-time demand registration
right. Using the Black-Scholes option-pricing model, a value of $428,640 was
assigned to the value of the additional warrants issued and recorded as
paid-in-capital and discount on the loan.
F-12
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3. FINANCING AND RELATED PARTY TRANSACTIONS (CONTINUED)
On September 22, 1997 the Company and Holdings executed a second amendment to
the Loan Agreement to further increase the amount of the secured loan from
Holdings to the Company from $2.0 million to $2.25 million. The terms of the
Loan Agreement otherwise remained substantially the same, except that the
maturity date was extended to December 31, 1997. In consideration of the
amendment to the Loan Agreement, the Company granted Holdings another Common
Stock Purchase Warrant for up to 129,032 shares of Common Stock. The terms of
such warrant are substantially the same as contained in the Warrant, except
that the conversion price is the lesser of (a) $1.9375 per share or (b) the
mean of the closing bid price per share for the 20 trading days preceding
exercise of this warrant. This warrant also provides for certain piggyback
registration rights and a one-time demand registration right. Using the
Black-Scholes option-pricing model, a value of $99,659 was assigned to the
value of the additional warrants issued and recorded as paid-in-capital and
discount on the loan.
On December 30, 1997 the Company and Holdings executed a third amendment to
the Loan Agreement extending the maturity date of the loan to January 31,
1998. Total borrowings outstanding at December 31, 1997, including the
$40,000 facility fee, remained at $2,290,000. No further warrants were issued
in connection with the third amendment to the loan agreement. (See also Note
15.)
In October 1997 Imprimis Investors LLC and Wexford Spectrum Investors LLC
(collectively, the "Wexford Affiliates") purchased five million shares of
Common Stock and warrants to purchase five hundred thousand shares of Common
Stock at an exercise price of $2.00 per share, exercisable at any time prior
to October 15, 2002 (the "Initial Warrants"), in exchange for $5.0 million.
The Wexford Affiliates acquired the Common Stock and the Warrants for
investment purposes pursuant to a certain Stock and Warrant Purchase
Agreement dated October 15, 1997, between PC Quote and the Wexford Affiliates
(the "Purchase Agreement"). Up to four million of the shares of Common Stock
purchased by the Wexford Affiliates are subject to repurchase by PC Quote at
a purchase price of $1.00 per share pursuant to the terms of the Purchase
Agreement (the "Repurchase"). Pursuant to the terms of the Purchase
Agreement, PC Quote was required to use its best efforts to consummate the
Repurchase from the proceeds of a rights offering. In the event that the
rights offering is not completed on or prior to January 24, 1998, the Wexford
Affiliates will be entitled to receive, out of escrow, warrants to purchase
an additional 250,000 shares of Common Stock with the same terms as the
Initial Warrants and, in the event the Rights Offering is not completed on or
prior to February 28, 1998, the Wexford Affiliates will be entitled to
receive, out of escrow, warrants to purchase an additional 250,000 shares of
Common Stock with the same terms as the Initial Warrants. (See Note 15.)
On October 31, 1997 the Company filed a Form S-2 Registration Statement with
the Securities and Exchange Commission in contemplation of the rights
offering. The Registration Statement was amended on November 20, 1997 and
became effective on November 21, 1997. The Company distributed 7,402,246
transferable subscription rights to shareholders of record as of the close
of business on November 21, 1997, entitling them to purchase one additional
share of Common Stock for each right at a price of $1.00 per share. The
initial expiration date of the rights, December 19, 1997, was extended by the
Company to January 15, 1998. (See Note 15.)
F-13
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3. FINANCING AND RELATED PARTY TRANSACTIONS (CONTINUED)
As a result of the foregoing, in connection with the Company's financing and
related party transactions, during 1997, the Company issued the following
warrants for purchase of shares of common stock, all of which were
outstanding at December 31, 1997.
Number Remaining Life in Years
of Expiration Exercise at
Shares Date Price December 31, 1997
------ ---- ----- -----------------
640,000 04/30/2000 (1) 2.33
500,000 04/30/2000 (2) 2.33
129,032 04/30/2000 (3) 2.33
500,000 (4) 10/15/2002 $2.00 4.79
(1) lesser of the mean of the closing bid price per share for the 20 trading
days preceding exercise of the warrant or $1.5625 per share.
(2) lesser of the mean of the closing bid price per share for the 20 trading
days preceding exercise of the warrant or $2.00 per share.
(3) lesser of the mean of the closing bid price per share for the 20 trading
days preceding exercise of the warrant or $1.9375 per share.
(4) warrants to purchase up to an additional 500,000 shares of common stock
at $2.00 per share expiring on October 15, 2002 were also issued, but
held in escrow pending the timing of completion of the rights offering.
(See Note 15.)
F-14
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. EMPLOYEE STOCK OPTIONS AND WARRANTS
The Company has an Employees' Combined Incentive and Non-Statutory Stock
Option Plan. The Plan provides that at all times optional shares outstanding
plus shares available for grant equal 2,000,000 shares. Generally, these
options may be granted to key employees of the Company at a purchase price
equal to the fair value of the Company's common stock at date of grant and
are generally exercisable for a period of up to five years from the date of
grant.
Other information with respect to the plan is as follows:
Number Weighed
of Average Price
Shares Per Share
----------------- ---------------------
Balance, December 31, 1994 393,513 1.30
Granted 261,435 4.57
Exercised (166,282) (1.06)
Canceled (29,000) (1.50)
-----------
Balance, December 31, 1995 459,666 3.70
Granted 130,000 4.94
Exercised (89,663) (1.41)
Canceled (60,000) (3.88)
-----------
Balance, December 31, 1996 440,003 4.51
Granted 636,612 1.61
Exercised (18,833) (0.90)
Canceled (283,917) (4.64)
-----------
Balanced, December 31, 1997 773,865 2.16
-----------
-----------
Shares
Exercisable Available
Shares for Grant
---------------- ------------------
December 31, 1997 592,113 1,226,135
December 31, 1996 157,338 559,997
December 31, 1995 145,001 540,334
Options granted under the plan generally become exercisable at an annual
cumulative rate of one-third of the total number of options granted. The price
for options outstanding at December 31, 1997, ranged from $1.00 to $6.375 per
share.
F-15
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. STOCK OPTIONS AND WARRANTS (CONTINUED)
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and provide pro forma net income and pro forma net income per
share disclosures as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123. Had the Company determined compensation cost based on the fair value at
the grant date for its stock-based compensation plans under SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been
for the years ended December 31, 1997, 1996 and 1995 the pro forma amounts
indicated below:
Basic and Basic and Basic and
Diluted Loss Diluted Loss Diluted Earnings
1997 per Share 1996 per Share 1995 per Share
---------------------------------------------------------------------------------------------
Net income (loss) ($11,141,416) ($ 1.33) ($3,255,969) ($ 0.45) $1,521,239 $0.21
Compensation expense related
to stock options granted (523,646) ( 0.06) (628,141) ( 0.09) (83,589) (0.01)
---------------------------------------------------------------------------------------------
Adjusted net income (loss) ($11,665,062) ($ 1.39) ($3,884,110) ($ 0.54) $1,428,650 $0.20
------------- -------- ------------ -------- ---------- -----
------------- -------- ------------ -------- ---------- -----
The fair value of each grant is estimated using the Black-Scholes
option-pricing model with the following assumptions for 1997: an expected
life of three to ten years, dividend rate of 0%, risk-free interest rate of
5.8% to 6.65%, turnover rates of 0% to 33% and volatility factors of 120% to
126%. Assumptions for 1996 and 1995, respectively, were: an expected life of
three years, dividend rate of 0%, risk-free interest rate of 6.0% for both
years, turnover rates of 23% and 27% and a volatility factors of 81% and 99%.
A further summary about options outstanding at December 31, 1997, is as
follows:
Weighted
Average
Remaining
Number Contractual Number
Exercise Price Outstanding Life Exercisable
- --------------------- ---------------- ----------------- --------------
1.0000 100,009 3.09 100,009
1.3750 274,802 7.18 149,802
1.4375 72,503 2.02 70,836
1.5000 31,000 4.64 10,000
1.7500 6,000 4.67 -
2.0000 180,301 8.01 180,301
5.3750 25,000 3.58 25,000
6.3750 84,250 2.81 56,165
------- --------
773,865 5.65 592,113
------- --------
------- --------
F-16
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. INCOME TAXES
The deferred tax assets and liabilities consist of the following components
as of December 31, 1997 and 1996:
1997 1996
--------------------------------
Deferred tax assets:
Unearned revenue $ 377,380 $ 384,300
Receivable allowances 121,100 79,700
Property and equipment 196,800 98,800
Accrued expenses 40,231 45,900
Net operating loss carryforwards 8,114,160 4,100,060
Research and development credit carryforward 106,000 106,000
--------------------------------
8,955,671 4,814,760
Valuation allowance 6,753,591 2,846,260
--------------------------------
2,202,080 1,968,500
Deferred tax liabilities:
Software capitalization 2,202,080 1,968,500
- ------------------------------------
Net current deferred tax asset $ - $ -
------------------------------------
------------------------------------
Income tax expense (credit) for the years ended December 31, 1997, 1996, and
1995, consists of the following:
1997 1996 1995
--------------------------------------------------
Current:
State and local 5,762 6,264 22,358
Deferred 158,000 (158,000)
--------------------------------------------------
$ 5,762 $164,264 ($135,642)
--------------------------------------------------
--------------------------------------------------
F-17
NOTE 5. INCOME TAXES (CONTINUED)
Reconciliations of income tax expense computed at the statutory federal
income tax rate to the Company's income tax expense for the years ended
December 31, 1997, 1996 and 1995, are as follows:
1997 1996 1995
--------------------------------------------------------
Statutory rate provision ($ 3,899,496) ($1,051,200) $ 468,000
Increase (decrease) resulting from:
Nondeductible expenses 8,468 26,000 11,000
State income taxes (net of federal benefit) 3,745 4,100 14,800
Change in valuation allowance 3,907,331 1,200,460 (551,100)
Other (14,286) (15,096) (78,442)
--------------------------------------------------------
$ 5,762 $ 164,264 $ (135,642)
--------------------------------------------------------
--------------------------------------------------------
At December 31, 1997, the Company had federal income tax net operating loss
carryforwards of approximately $23,183,315 for federal income tax purposes
and approximately $20,387,000 for the alternative minimum tax. Approximately
$1,058,000 of these net operating losses relates to exercise of incentive
employee stock options and will be credited directly to stockholders' equity
when realized. The Company also had research and development credits of
$106,000 which will expire in years 2010 to 2011 if not previously utilized.
The future utilization of these net operating losses and research and
development credits will be limited due to changes in Company ownership. The
net operating loss carryforwards will expire, if not previously utilized, as
follows: 1999 $546,000; 2000 $1,370,000; 2001, $1,539,000; 2002 $560,000;
2003 $79,000, 2004 $576,000; and thereafter $18,513,315.
F-18
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. LEASE COMMITMENTS
The Company is obligated as lessee under certain noncancelable operating
leases for equipment and office space, and is also obligated to pay
insurance, maintenance and other executory costs associated with the leases.
On September 1, 1994, the Company entered into a new lease agreement in
conjunction with the move of its corporate headquarters, which is subject to
escalating base rent as well as adjustments for changes in real estate taxes
and other operating expenses. Expense under the lease is being recognized on
a straight-line basis.
Future minimum lease payments for the Company as lessee are as follows as of
December 31, 1997:
Operating
Leases
-----------
Years ending December 31:
1998 2,696,343
1999 1,093,192
2000 321,553
2001 191,663
2002 and Thereafter 342,881
-----------
Total minimum lease payments $4,645,632
-----------
-----------
Assets under capital leases, included as property and equipment, are as
follows at December 31:
1996
-------------
Equipment:
Satellite receiving $ 273,600
Communication 1,907,626
Computer 3,576,736
Furniture and fixtures 156,944
----------
5,914,906
Accumulated amortization 5,209,342
----------
$ 705,564
----------
----------
All capital leases expired prior to December 31, 1997 at which time the
Company exercised its rights under bargain purchase options and acquired the
assets.
Rent expensed under operating leases amounted to $3,314,402, $2,408,879 and
$662,947 for the years ended December 31, 1997, 1996 and 1995, respectively.
F-19
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. OTHER COMMITMENTS
Under a Satellite Network Service agreement, which expired in November 1997,
the Company was required to pay an annual base fee of approximately $456,000
plus related service fees. The Company expensed $272,950, $653,083 and $478,480
in 1997, 1996 and 1995, respectively, for the base fee plus related service
fees.
Under an agreement for satellite transmission services, including "FM(3)"
satellite transmissions, the Company is required to pay a monthly base fee of
$52,888 through January 2006 plus related service fees. The Company expensed
$677,347, $618,648 and $457,650 for the years ended December 31, 1997, 1996 and
1995, respectively, for these services.
NOTE 8. MAJOR CUSTOMERS
On January 25, 1995, the Company entered into an agreement with Global
Financial Services, (formerly Bridge Information Systems) ("Global"), whereby
the Company would provide domestic data to Global for $2,100,000(1996) and
$450,000 through March 31, 1997. For the remainder of the contract term,
amounts will be charged on a per-site basis at December 31, 1996. In September
1996, the Company agreed to accelerate the termination date of this agreement
to January 1, 1997. For the fiscal year ending December 31, 1996 and 1995,
Global accounted for revenues approximating $3,414,000 and $3,920,000,
respectively.
In December 1996, the Company discontinued providing services to
Charles Schwab and Company that accounted for net revenues of approximately
$1,693,000 and $557,000 in 1996 and 1995, respectively.
NOTE 9. DEFINED CONTRIBUTION PLAN
In 1993, the Company established a 401(k) retirement savings plan for employees
meeting certain eligibility requirements. Under the Plan, the Company is
required to match employee contributions at 25% of the first 5% contributed by
an employee. The Company recorded expenses related to its matching of
contributions of approximately $36,200, $30,000 and $22,300 for the years ended
December 31, 1997, 1996 and 1995, respectively.
NOTE 10. EMPLOYEE STOCK PURCHASE PLAN
In 1995, the Company established an employee stock purchase plan and reserved
100,000 shares, increased to 200,000 shares in 1997, of its common stock. The
Plan allows employees to have up to 10% of their annual salary withheld to
purchase common stock of PC Quote, Inc. on the final day of each quarter at
85% of the market price on either the first or last day of the quarter,
whichever is lower. Shares sold to employees totaled 60,610, 30,228 and
13,376 for the years ended December 31, 1997, 1996 and 1995, respectively.
F-20
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11. LITIGATION
On December 31, 1996, a lawsuit was filed against the Company, by a former
officer, alleging breach of various verbal and written agreements by failing to
pay certain commissions, bonuses and severance pay and failing to provide him
with certain stock options. The lawsuit seeks monetary damages of approximately
$680,000. The Company's legal counsel has indicated that the outcome of the
lawsuit cannot be determined at this time. Management believes the claim is
without merit; accordingly, no provision has been made in the financial
statements for any loss that may result from litigation.
NOTE 12. RESTRUCTURING
In June 1997, the Company underwent a significant management reorganization and
restructuring of operations and, as a result, recognized restructuring expense
of $1.1 million. The Company wrote off approximately $572,000 of unamortized
software development costs for previously capitalized software projects that
were discontinued. The management reorganization resulted in the Company
incurring employment related termination costs of $425,000 and $150,000 was
paid to terminate a contractual arrangement related to unprofitable operations.
NOTE 13. FOURTH QUARTER ADJUSTMENTS
Based on its periodic review of the software capitalization, the Company
determined in the fourth quarter of 1997, 1996 and 1995 that certain
adjustments were appropriate to properly reflect the capitalization of
development costs relating to products which had reached technological
feasibility during 1997, 1996 and 1995. In addition, during the fourth
quarters, the Company determined that adjustments to certain other accounts
were necessary. The net effect of these fourth quarter adjustments did not
materially effect the operating results of the first three quarters.
NOTE 14. MANAGEMENT'S PLANS AND INTENTIONS FOR CONTINUING OPERATIONS
The Company incurred a loss of approximately $11.1 million for the year ended
December 31, 1997, and as of December 31, 1997, had an accumulated deficit of
approximately $20.1 million and deficit working capital of $5.0 million. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management is in discussions with parties to effect actions to
address these circumstances.
The Company is exploring multiple alternatives which may be available to the
Company with the purpose of enhancing shareholder value. Such alternatives
might include refinancing of existing debt, a merger, a spin-off or sale of
part of the Company's business, a strategic relationship or joint venture
with another technology or financial services firm or other financing to
further fund the Company's business. There can be no assurances, however,
that the Company will be successful in concluding a transaction, or that if a
transaction is concluded that such transaction will result in alleviating the
Company's present financial situation.
F-21
PC QUOTE
NOTES TO FINANCIAL STATEMENTS
NOTE 15. SUBSEQUENT EVENTS
On January 23, 1998, the Company completed the rights offering initiated in
1997. The Company received approximately $3.0 million in gross proceeds from
the sale of shares underlying exercised rights. Pursuant to the Purchase
Agreement, the entire proceeds were used to fulfill the Company's obligation to
repurchase shares from the Wexford Affiliates, and the Additional Warrants
reverted back to the Company (See Note 3.)
The Loan Agreement with PICO Holdings, Inc. was amended on February 5, 1998 and
March 10, 1998 extending the due date for borrowings by the Company, plus
accrued interest, until February 28, 1998 and April 30, 1998, respectively
(See Note 3.)
F-22
PC QUOTE, INC.
SUPPLEMENTAL SCHEDULE II OF FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To the Board of Directors
PC Quote, Inc.
Chicago, Illinois
Under date of March 24, 1998, we reported on the balance sheet of PC Quote,
Inc. as of December 31, 1997 and the related statement of operations,
stockholders' equity and cash flows for the year then ended. In connection
with our audit of the aforementioned financial statements, we also audited
the related financial statement schedule for the year ended December 31,
1997. This financial schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the schedule based
on our audit.
In our opinion, such financial statement schedule for the year ended December
31, 1997, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the 1997 information
set forth therein.
/S/ KPMG Peat Marwick LLP
Chicago, Illinois
March 24, 1998
F-23
PC QUOTE, INC.
SUPPLEMENTAL SCHEDULE II OF FINANCIAL STATEMENTS, CONTINUED
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To the Board of Directors
PC Quote, Inc.
Chicago, Illinois
Our audit of the financial statements of PC Quote, Inc. as of and for the years
ended December 31, 1996 and 1995 included the 1996 and 1995 information on
Schedule II contained herein. Such schedule is presented for purposes of
complying with the Security and Exchange Commission's rule and is not a
required part of the basic financial statements. In our opinion, such schedule
presents fairly the 1996 and 1995 information set forth therein in conformity
with generally accepted accounting principles.
/S/ McGLADREY & PULLEN, LLP
Schaumburg, Illinois
March 7, 1997
F-24
March 17, 1997
PC QUOTE, INC.
SUPPLEMENTAL SCHEDULE II TO THE FINANCIAL STATEMENTS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
- -----------------------------------------------------------------------------------------------------
Balance at
- -----------------------------------------------------------------------------------------------------
Beginning of Charged to Deductions Balance at
- -----------------------------------------------------------------------------------------------------
Description Period Operations From Reserves End of Period
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Allowance for doubtful
- -----------------------------------------------------------------------------------------------------
Accounts/trade
- -----------------------------------------------------------------------------------------------------
Receivable in the
- -----------------------------------------------------------------------------------------------------
Balance sheets
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
1997 234,000 683,639 (571,639) 346,000
- -----------------------------------------------------------------------------------------------------
1996 95,000 734,346 (595,346) 234,000
- -----------------------------------------------------------------------------------------------------
1995 100,000 361,369 (366,369) 95,000
- -----------------------------------------------------------------------------------------------------
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On July 9, 1997, McGladrey & Pullen LLP declined to stand for re-election as
the independent auditors for the Company. At a meeting held August 19, 1997,
the Company's Board of Directors unanimously approved the appointment of KPMG
Peat Marwick LLP to be the independent auditors for the year ending December
31, 1997.
The reports of McGladrey & Pullen LLP on the financial statements for the two
fiscal years ending December 31, 1996 and 1995 contained no adverse opinions
or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle, except for a going concern
phrase that was included in the report relating to the Company's audited
financial statements for the year ended December 31, 1996 as follows: "The
accompanying financial statements have been prepared assuming that PC Quote,
Inc. will continue as a going concern. As more fully described in Note 14,
the Company has experienced significant operating losses, which adversely
affected the Company's current results of operations and liquidity. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 14. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty."
In connection with its audits for the years ended December 31, 1996 and 1995
and through July 9, 1997, there were no disagreements with McGladrey & Pullen
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of McGladrey & Pullen LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
F-25