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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, 1998
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 36-313\1704
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. [ ]
1
As of March 8, 1999, 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 approximately $50,325,000.
As of March 8, 1999, there were 14,496,094 shares of Common Stock and 47,866
shares of Preferred 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
1999 are incorporated by reference into Part III hereof.
2
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
3
PC QUOTE, INC.
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
In December 1998 the Company converted $6.7 million of current debt into
preferred equity and raised an additional $1.0 million in capital through a
private placement of Common Stock and warrants. Altogether, the Company
raised $9.2 million in capital in 1998 through the debt conversion, private
placement, exercise of warrants and other sales of Common Stock. These
transactions significantly improved the financial condition of the Company.
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. 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. We
are a premier provider of securities market data. We collect securities market
activity and financial news directly from stock, options and commodities
exchanges and other sources. We use the information to create a real-time
database of last sale, bid/ask and historical prices of more than 325,000
issues. The database includes all North American equities, the most
comprehensive options data, 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. We process the database into a
single digital data-feed, "HyperFeed(TM)", at our primary processing plant
located at our executive offices in Chicago, Illinois. We disseminate HyperFeed
to our customers by satellite, digital data landlines and over the Internet.
Software applications on our customers' computers access HyperFeed to allow the
user to monitor securities activity on an on-going real-time basis. The
applications also create a complete database of trading symbols, continuously
updated by the data feed. This database gives our customer instant access to
security prices. HyperFeed is used to create an equivalent database on our
computers, accessible to our Internet customers.
We derive our revenue from license fees charged for access to HyperFeed and from
license fees charged for a packaged HyperFeed plus analytical software service.
Our customer base consists primarily of professional investors, securities
brokers, dealers and traders, portfolio managers, brokerage firms, other
financial institutions, Internet web-sites, application developers and
redistributors of financial market data. Our Internet service is utilized by
individual and professional investors alike. Our Internet division, PCQuote.com,
sells advertising space on our web-site, www.pcquote.com, in addition to
subscriptions for delayed and real time market data. Its principal customers are
financial web-site advertisers, other Internet web-sites, individuals, and
businesses. Our customers are located primarily in the United States and North
America.
The following is a description of the principal services that we provide.
4
PART I-ITEM 1. BUSINESS
PRODUCTS AND SERVICES
HYPERFEED(TM)
HyperFeed, the cornerstone of the services provided by PC Quote, is our digital
real-time market data feed. We use multiple redundant, high-speed data circuits
to gather information from securities exchanges and other sources. At our
production center in Chicago, these feeds are directed into multiple real-time
databases from which HyperFeed is generated. Data is broadcast to our customers
over dedicated digital data circuits at 1024 kilobytes per second and by
satellite at 112 kilobytes per second. HyperFeed contains all North American
stock, options, and commodity exchange issues including:
- 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); and
- Multiple levels of fundamental data.
HyperFeed underlies all of our other services, which capitalize on HyperFeed to
access, view and utilize data in a variety of ways.
An industry standard PC at our customer's site receives HyperFeed data and
creates real-time databases of securities activity, financial news and
fundamental information. Software applications supplied by us, by third parties,
or by our customer utilize our high-performance application program interfaces,
or APIs, to access the data. The data can then be used for virtually any
purpose, including third-party order execution systems, analytical modeling,
internal risk management, order matching or redistribution via the Internet or
wide area networks. Our customers pay monthly HyperFeed licensing fees and
per-user or per-unit charges.
We also provide access to HyperFeed via the Internet. Our Internet services,
like our satellite and landline services, support applications developed by us,
by third parties or by our customers, using Internet-enabled versions of our
APIs. We, and our customers, are able to benefit from the Internet's
substantially lower costs for service and communications, its ease of access and
its worldwide availability.
SOFTWARE APPLICATIONS AND SERVICES MARKETED BY REGISTRANT
To complement the HyperFeed database, we have high-end applications and
programming tools that we license to HyperFeed subscribers.
PC Quote 6.0 for Windows is a comprehensive suite of real-time professional
securities 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
for Windows is available with our satellite, landline, and Internet services.
Our "Quote Tools" are 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.
5
PART I-ITEM 1. BUSINESS
PRODUCTS AND SERVICES, CONTINUED
In 1995 we established an Internet web-site, www.pcquote.com, offering free
delayed quotes and other information to all visitors. We generate revenue by
selling advertising on our web-site's free quote pages, selling subscriptions to
real-time quote information, providing market information for other web-sites,
and offering development tools for Internet-based applications. Our web-site
also offers corporate profiles, financial news and press releases, and
information about our services.
PC Quote's Internet Business Services provide custom and template web-site
services and software development services to software vendors, financial
institutions, corporations, and Internet content providers. All of our 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.
We are a quote service for the major office applications companies. In Microsoft
Excel's new 1997 version, Web Query technology features the ability to access
our data. In February 1997 Lotus Development Corporation also featured PC
Quote's data as the "in-the-box" feature for its SmartSuite application.
PATENTS, TRADEMARKS AND LICENSES
We do not have patent protection for our proprietary software. Although
applicable software is readily duplicated illegally by anyone having access
to appropriate hardware, we attempt to protect our proprietary software
through license agreements with our customers and common law trade secret
protection and non-disclosure contract provisions in our agreements with our
employees. We use security measures, including a hardware key, which
restricts access to our services unless proper password identification from a
PC Quote user is provided. As an additional safeguard, we provide only the
object code on our diskette and retain the source code.
HyperFeed(TM) is a service mark of PC Quote.
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 we provide includes a large number of
competitors and is subject to rapid change. We believe our primary competitors
include Bloomberg, Bridge Information Systems, the Comstock unit of Standard &
Poors, the ILX unit of Thomson Corporation, Reuters, Quote.com and Data
Broadcasting Corporation. Many of these competitors have significantly greater
financial, technical and marketing resources and greater name recognition than
we do.
SEASONALITY
We have not experienced any material seasonal fluctuations in our business.
Barring any prolonged period of investor inactivity in trading securities, we do
not believe that seasonality is material to our business activities.
6
PART I ITEM 1. BUSINESS
RESEARCH AND DEVELOPMENT
Our 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. Our investment in software development
consists primarily of:
- enhancements to our existing Windows-based private network and
Internet services;
- development of new data analysis software and programmer tools; and
- application of new technology to increase the data volume and delivery
speed of our distribution system.
During the fiscal years ended December 31, 1998, 1997 and 1996, we expensed
$634,884, $873,579, and $706,618, respectively, for research and development.
ENVIRONMENT
Compliance with federal, state, and local provisions with respect to the
environment has not had a material adverse effect on our capital expenditures,
earnings, or competitive position.
EMPLOYEES
As of December 31, 1998, we employed 119 people, none of whom are represented by
a collective bargaining unit. We believe we have a satisfactory relationship
with our employees. From time to time we use the services of outside consultants
on an hourly basis.
GOVERNMENT CONTRACTS
We have no material contracts with the Government.
BACKLOGS
Due to the nature of our business, backlogs are not a typical occurrence in our
industry.
MAJOR CUSTOMERS
We did not have any customers that accounted for 10% or more of total revenue in
either 1998 or 1997. For information concerning 1996 major customers, see Note 8
of the Notes to Financial Statements.
7
PART I-ITEM 1. BUSINESS
ITEM 2. PROPERTIES
Our executive offices and primary 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.)
We also lease 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. (See Note 6 of
the Notes to Financial Statements.)
ITEM 3. LEGAL PROCEEDINGS
Richard F. Chappetto, a former officer of PC Quote, filed a complaint against us
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 PC Quote ceased on November 1, 1996.
Mr. Chappetto's complaint alleges that we 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 sought monetary
damages of approximately $680,000. We filed a Motion to Dismiss a major portion
of the complaint which was granted in 1998. The remaining portion of the
complaint seeks monetary damages of approximately $70,000. We are vigorously
contesting the remaining matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matter was submitted to a vote of shareholders and approved at a
Special Meeting on December 17, 1998.
1. To consider and vote upon a proposal to approve the conversion of $6.7
million of debt owed to PICO Holdings, Inc. and Physicians Insurance
Company of Ohio into equity in the form of convertible preferred stock
of PC Quote, Inc. which would be convertible into a minimum of 4.8
million shares of common stock of PC Quote, Inc. and a warrant to
purchase a minimum of 3.1 million common shares, which together
represent 59% of the current shares outstanding and 37% of the shares
outstanding after conversion and exercise, and approve the Securities
Purchase Agreement made as of the 23rd day of September, 1998, by and
among PC Quote, Inc., PICO Holdings, Inc. and Physicians Insurance
Company of Ohio and the transactions contemplated thereunder.
The results of the shareholder vote was as follows:
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
For Against Abstain Not Voted Total Voted
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
Proposal #1 Shares 6,717,769 112,907 69,223 6,899,899
Pct of O/S 50.39% 0.85% 0.52% 51.76%
Pct of Voted 97.36% 1.64% 1.00% 100.00%
- ------------------ ---------------- ---------------- --------------- ---------------- ---------------- ---------------
8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our shares of common stock are traded on the American Stock Exchange under the
symbol "PQT." The following tables show for 1998 and 1997 the high and low sales
prices of our Common Stock for the periods indicated, as reported by the
American Stock Exchange.
1998 QUARTERLY INFORMATION HIGH LOW
- -------------------------- ---- ---
First 1-1/8 11/16
Second 4-15/16 11/16
Third 3-1/4 7/8
Fourth 3-3/4 1
1997 QUARTERLY INFORMATION HIGH LOW
- -------------------------- ---- ---
First 3-11/16 2-1/4
Second 2-1/2 1-1/8
Third 2-9/16 1-1/2
Fourth 2-1/4 7/8
As of February 28, 1999, we had 459 stockholders of record of our Common Stock.
DIVIDEND POLICY
We have not paid dividends on our Common Stock and do not currently plan to do
so in the near future. In December 1998, we issued preferred stock that has a
dividend rate of 5%. Preferred dividends are payable if, and when, we declare a
dividend payment. We have not, and currently do not plan in the near future, to
declare any preferred dividend payments. Preferred dividends are cumulative and
the entire accumulated dividend must be paid prior to the payment of any
dividends to common stockholders.
ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
INCOME DATA:
Net revenue $ 23,045,533 $ 17,119,372 $ 17,032,164 $ 13,391,982 $ 12,903,645
Operating income (loss) ($ 4,699,426) ($ 8,920,726) ($ 2,957,830) $ 1,559,995 $ 528,769
Income (loss) before income
taxes ($ 6,445,595) ($ 11,135,654) ($ 3,091,705) $ 1,376,597 $ 312,410
Net income (loss) ($ 6,449,208) ($ 11,141,416) ($ 3,255,969) $ 1,512,239 $ 305,410
Net income (loss) available
for common stockholders ($ 7,468,146) ($ 11,141,416) ($ 3,255,969) $ 1,512,239 $ 305,410
BALANCE SHEET DATA:
Total assets $ 10,053,367 $ 10,536,448 $ 11,554,070 $ 10,522,840 $ 9,071,731
Long term obligations $ 921,781 $ 2,833,734 $ 2,291,178 $ 712,904 $ 1,292,989
Stockholders' equity $ 2,915,271 $ 66,329 $ 5,331,577 $ 6,611,278 $ 4,830,369
PER SHARE DATA:
Basic net income (loss) ($0.57) ($1.33) ($0.45) $ 0.21 $ 0.04
Diluted net income (loss) ($0.57) ($1.33) ($0.45) $ 0.21 $ 0.04
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION - SAFE HARBOR DISCLOSURE
The following discussion and analysis contains historical information. It also
contains forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, particularly
in reference to statements regarding our expectations, plans and objectives. You
can generally identify-forward-looking statements by the use of the words "may,"
"will," "expect," "intend," "estimate," "anticipate," "believe," or "continue,"
or similar language. Forward-looking statements involve substantial risks and
uncertainties. You should give careful consideration to cautionary statements
made in this discussion and analysis. We base our statements on our current
expectations. Forward-looking statements may be impacted by a number of factors,
risks and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. Our filings with the
Securities and Exchange Commission identify factors that could cause material
differences. Among these factors are our ability to:
(i) fund our current and future business strategies as a going-concern
either through continuing operations or external financing (see Note
14 of the Notes to Financial Statements);
(ii) attract and retain key employees;
(iii) compete successfully against competitive products and services;
(iv) maintain relationships with key suppliers and providers of market
data; and
(v) respond to the effect of economic and business conditions generally.
RECENT BUSINESS DEVELOPMENTS
NEW INTERNET DIVISION.
In December, 1998 we formed an internal Internet division, PCQuote.com. An
outgrowth of our financial content web site, www.pcquote.com, the new division's
objective is to provide a comprehensive array of investment tools to empower the
growing sophistication of the individual investor.
Continued growth in page views, increasing attractive demographics and
subsequent increase in advertising revenue led to our decision to segregate the
web site into its own business unit. As a distinct business unit, the new
division will afford us more flexibility in considering opportunities that are
available solely to the Internet web site business.
JB OXFORD.
In October, 1998, we entered into an agreement with JB Oxford & Co. (NASDAQ:
JBOH) to private-label our PC Quote 6.0 for Windows. With the addition of the
private-labeled version of PC Quote 6.0 for Windows, JB Oxford customers will
have instant access to a wider variety of investment tools, including real-time
streaming quotes, intra-day charting, time and sales and technical analysis. PC
Quote will be paid a monthly fee determined by the number of JB Oxford's clients
that subscribe to the service.
DOUBLECLICK DART.
In December, 1998, we selected DoubleClick's DART technology as our new ad
serving solution for our web site, www.pcquote.com. DART, or Dynamic Advertising
Recording and Targeting, will provide us with drastically increased efficiency
in ad inventory management and the ability to dynamically target advertisements
to visitors to our website.
We believe DoubleClick's DART provides us with the functionality to realize the
full value of every page impression not only on our own web site, but also on
each page we co-brand for partners. New productivity gained through the
implementation of the DART system will allow www.pcquote.com to drastically
increase total web site space available for advertising.
10
PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS FOR 1998 COMPARED TO 1997
Total revenue increased 34.6% in 1998 to $23.0 million from $17.1 million in
1997. Our HyperFeed and LAN services and Internet services both posted increases
in 1998 over 1997. HyperFeed and LAN service revenue increased $700,000, or
5.9%, from $12.1 million in 1997 to $12.8 million in 1998. Revenue growth was
experienced through increased service offerings. Revenue from our Internet
services increased $5.2 million, or 104%, to $10.2 million in 1998 from $5.0
million in 1997. The growth is principally due to our PC Quote 6.0 Internet
service where the number of subscribers grew from 2,500 at the end of 1997 to
4,300 at the end of 1998.
Direct costs of services increased approximately 17.6% to $17.0 million in 1998
from $14.5 million in 1997. Principal components of the increase were royalties,
leased equipment, communication costs, and compensation directly attributable to
Internet services and PC Quote 6.0 subscriber growth, and payments to providers
of market data. Amortization of software development costs decreased from $1.9
million in 1997 to $1.8 million in 1998 due to certain 1998 projects not planned
for release until 1999.
Direct costs associated with HyperFeed and LAN services increased from $9.9
million in 1997 to $10.4 million in 1998. Increases in license and exchange fees
and the cost of customer support were offset to a degree by efficiencies in
data-feed operations and a decrease in amortization of software development
costs. The resulting gross margin increased slightly to $2.4 million in 1998
from $2.2 million in 1997.
Direct costs associated with Internet services increased to $6.6 million from
$4.6 million in 1997. The significant growth we experienced caused us to incur
increases in license and exchange fees, customer support and operations devoted
to these services. Software amortization also increased as more resources were
diverted to this portion of our business. The gross margin on Internet services
increased from $419,000 in 1997 to $3.6 million in 1998, as we were able to
leverage our infrastructure and support operations.
Total operating expenses declined $840,000, or 7.2%, as a result of the
restructuring in 1997 and subsequent cost containment efforts. Decreases from
restructuring charges and in general and administrative expenses were offset to
a degree by increases in sales expense and product and market development.
Sales costs increased 23.1% to $4.5 million in 1998 as compared to $3.7 million
in 1997. The increase was due to additional sales personnel added at the end of
1997 and early 1998, increased advertising expenditures and higher total
commission expense as a result of increased sales of our PC Quote 6.0 Internet
service offering.
General and administrative expenses decreased 16.2% to $3.3 million in 1998 from
$4.0 million in 1997. The decrease was principally due to reductions in
compensation and related employee costs, lower utilization of consultants and
external professionals and a decrease in bad debt expense as compared to the
prior year.
Product and market development costs increased 7.2% to $1.7 million in 1998 from
$1.6 million in 1997. The increase was due to an increase in the number of
personnel devoted to these efforts, in addition to costs of maintaining and
enhancing previously developed products and services.
Depreciation and amortization remained unchanged at $1.2 million year to year.
There were no restructuring charges recognized in 1998 like the $1.1 million
reported for 1997.
Interest expense was $1.8 million for 1998, a decrease of 21.6% from the $2.3
million recognized in 1997. The decrease reflects the absence of non-cash
amortization of $979,097 recognized in 1997 for the value of common stock
purchase warrants that were issued to PICO Holdings, Inc. This was offset by an
increase in interest expense amortization to $1,096,402 in 1998 from $674,992 in
1997 for the value of the $2.5 million convertible subordinated debenture's
beneficial conversion feature. Also included is interest on our bank term loan,
the convertible subordinated debenture and borrowings from PICO Holdings, Inc.
(See Note 2 and Note 3 of the Notes to Financial Statements.)
11
PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, RESULTS OF OPERATIONS FOR 1998 COMPARED TO 1997,
CONTINUED
In December 1998 we converted current debt into convertible preferred stock. The
maximum conversion rates for the two series of preferred issued were set at and
above the closing market price of our common at the time the conversion was
approved by our Board in September 1998. Stockholder approval, obtained in
December, was a condition to closing the debt conversion transactions. The
market price of our common stock on the closing date was slightly higher than
the maximum conversion price agreed to in September. Accounting and SEC
pronouncements require this differential to be treated as non-cash preferred
dividends. Preferred dividends of $1,018,938 were recognized in 1998 with a
corresponding increase in additional paid-in-capital from the preferred
issuance. (See Note 3 of the Notes to Financial Statements.)
RESULTS OF OPERATIONS FOR 1997 COMPARED TO 1996
Total 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 that used our
traditional direct data-feed service. (See Note 8 of the Notes to Financial
Statements.) The lost revenue from the two customers, $4.9 million, was offset
by an increase of approximately $900,000 in net new data-feed service revenue
and a $4.1 million increase in our Internet services revenue. Our Internet
services, launched in 1996, grew from $937,000 in 1996 to $5.0 million in 1997,
a 435% increase. The increase reflects professional and individual investors'
acceptance of the Internet as a medium for receiving delayed and real-time
market data.
Direct costs of services increased 31.4% to $14.5 million in 1997 from $11.0
million in 1996. Principal components of the increase were royalties, leased
equipment, communication costs, and compensation directly attributable to
Internet operations and sales of PC Quote 6.0, and payments to providers of
market data. Amortization of software development costs increased 53% to $1.9
million in 1997 from $1.2 million in 1996. The increase is the result of our
continued investment in our Internet and direct data feed services and delivery
mechanisms. Also contributing to the increase was our determination that our
1997 software projects should be amortized over a three-year period. We also
assessed the estimated future undiscounted cash flows for software projects
capitalized in earlier years with a five-year amortization period. Based on our
assessment, no adjustment to their net realizable value was necessary.
Direct costs associated with HyperFeed and LAN services increased from $9.7
million in 1996 to $9.9 million in 1997. Increases in license and exchange fees
and amortization of software development costs were offset to a degree by
decreases in the cost of customer support and data-feed operations related to
the two lost customers. Principally due to the lost customers, the resulting
gross margin decreased significantly from $6.4 million in 1996 to $2.2 million
in 1997.
Direct costs associated with Internet services increased to $4.6 million from
$1.3 million in 1996. The significant growth we experienced caused us to incur
increases in license and exchange fees, customer support and operations devoted
to these services. Software amortization also increased as more resources were
employed to develop this portion of our business. The resulting gross margin
increased from a negative $384,000 to a positive $419,000.
Total operating expenses increased $2.6 million, or 28.9%, as a result of the
restructuring in 1997 and increases in sales, general and administrative, and
product and market development incurred to improve operations and generate
replacement revenue growth.
Sales costs increased 16.8% to $3.6 million in 1997 as compared to $3.1 million
in 1996. The increase was mainly due to higher commission incentives and
increased sales of our PC Quote 6.0 Internet service offering.
General and administrative expenses increased 13.3% to $4.0 million from $3.5
million in 1996. The increase was principally due to higher utilization of
consultants and external professionals as compared to the prior year. The higher
utilization resulted from financing alternatives pursued by us during 1997, in
addition to professionals employed by us to assist in improving our operations.
12
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
Product and market development costs increased 39.3% to $1.6 million in 1997
from $1.1 million in 1996. We incurred additional personnel and related costs in
1997 in order to develop, market and brand our Internet service offerings.
Depreciation and amortization was unchanged at $1.2 million for 1997 and 1996.
We had a significant management reorganization and restructuring of operations
in June 1997. We wrote off approximately $572,000 of unamortized software
development costs related to previously capitalized software projects that were
discontinued. The management reorganization resulted in employment related
termination costs of $425,000. We also paid $150,000 to terminate a contractual
arrangement related to unprofitable operations. As a result, we recognized
restructuring expense of $1.1 million. (See Note 12 of the Notes to Financial
Statements.)
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.)
LIQUIDITY AND CAPITAL RESOURCES
Net cash and cash equivalents were essentially unchanged at $1.1 million at
the end of 1998 and 1997. Expenditures for new equipment were 22% less in
1998 versus 1997 as a result of lower prices for computer equipment and
increased efficiencies implemented in our operations. Capitalized software
costs were 9.9% higher in 1998 than 1997 due to an increase in development
resources devoted to coding, testing and quality assurance of new service
offerings.
In December 1998 we converted $6.7 million of current debt into preferred
equity. The converted debt was comprised of:
- $2,500,000 convertible subordinated debenture principal balance;
- accrued interest on the convertible subordinated debenture in the amount
of $480,000;
- $3,250,000, including $1,000,000 borrowed in 1998, principal balance on
the loan facility with PICO Holdings, Inc.;
- $40,000 facility fee on the loan facility; and
- accrued interest on loan facility borrowings in the amount of $489,000.
We incurred approximately $27,000 in legal and associated costs to affect the
debt conversion. Interest expense related to the converted debt accounted for
approximately $1.7 million of the loss reported for 1998.
In January 1998 we completed a rights offering receiving approximately $3.0
million in gross proceeds from the sale of shares underlying exercised rights.
The entire proceeds were used to fulfill our obligation to repurchase shares.
13
PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
We also received approximately $2.4 million in net proceeds from other sales
of common stock through:
- the exercise of previously issued warrants;
- the exercise of employee options;
- purchases under the employee stock purchase plan;
- issuance of shares to the Chairman and CEO in lieu of cash salary
payments;
- and o a $1.0 million private placement of common stock.
See Note 3 of the Notes to Financial Statements for additional details regarding
the debt conversion and financing transactions.
We reported a net loss of approximately $6.4 million and a net loss available
to common stockholders of approximately $7.5 million for the year ended
December 31, 1998. As of December 31, 1998, we had an accumulated deficit of
approximately $27.6 million and deficit working capital of $3.5 million.
These conditions raise doubt about our ability to continue as a going
concern. We have addressed, and continue to address, this doubt.
Total revenue in 1998 increased 34.6% to $23.0 million over 1997, while
direct costs of services increased only 17.6% to $17.0 million versus $14.5
million in 1997. The resulting gross margin increased 127% from $2.7 million
in 1997 to $6.0 million in 1998. The increase in revenue was principally due
to the growth in subscriptions to our Internet version of PC Quote 6.0 and
other Internet services. This together with operating cost containment
contributed to our gross margin improvement. We expect continued revenue
growth and gross margin improvement due to continued increases in
subscriptions to our current Internet services, new service offerings planned
for release in 1999 and planned reductions in expenses related to leased
equipment. We believe the anticipated revenue growth and improved margins
will result in our operations turning cash flow positive by the end of 1999.
Although we believe our gross margins will continue to improve, there can be
no assurances that generated cash flow will be sufficient to fund operations.
If generated cash flow is not sufficient to fund operations, we may have to
raise additional capital externally. We raised a substantial amount of
capital in 1998 through the debt conversion and exercise of warrants and
other sales of common stock. These transactions significantly improved our
financial condition. In order to minimize dilution to existing stockholders,
our objective is to raise the minimal amount of capital for operations, if
and when necessary. We believe we have the ability to raise external capital.
However, any capital raised could be costly to us and/or dilutive to
stockholders.
Additionally, we have explored, and continue to explore multiple alternatives
that may be available for the purpose of enhancing stockholder value. These
alternatives include a merger, a spin-off or sale of part of our business, a
strategic relationship or joint venture with another technology or financial
services firm and future equity financing to further fund our business. There
can be no assurances, however, that we will conclude a transaction. (See Note
14 of the Notes to Financial Statements.)
14
PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
YEAR 2000 ISSUES
1. Overview
PC Quote does not have or use mainframe computers in its internal operations.
Consequently, we do not have the extent of Y2K issues other companies have that
depend on what is commonly known as "legacy" systems. We use PC's and "server
class" computers in our operations. Our end-user applications also run on the
same type of hardware. These systems still may have Y2K issues. We have
implemented a plan to attempt to assess, remediate, and correct any year 2000
critical issues. A "Year 2000" problem will occur where date-sensitive software
uses two digit year date fields, sorting the year 2000 ("00") before the year
1999 ("99"). The Year 2000 problem may result in data corruption and processing
errors occurring where software, technology equipment, or any other equipment or
process uses date-dependent software.
Our plan has been structured to address the following areas:
A. Processing Plant and Communications Network
B. PC Quote Retail Applications
C. Operational Infrastructure
2. State of Readiness
We have approached each of the above areas in four phases: assessment,
remediation, testing, and contingency planning. "Assessment" summarizes the
process of issue identification. "Remediation" refers to the process of taking
corrective action to best mitigate identified Year 2000 risks. "Testing" is the
process of validating a specific PC Quote remediation effort or confirming a
third party capability or certification of Year 2000 compliance. "Contingency
planning" means the process by which we identify an alternate course of action
and/or procedure in the event we cannot or fail to remediate or mitigate a known
Year 2000 risk. We may or may not engage in contingency planning for individual
subproject components where successful Year 2000 remediation has been validated
through the testing process or other methods.
PC Quote is preparing to participate in the full "end-to-end" Year 2000 scenario
test sponsored by the Financial Information Forum in conjunction with the
Securities Industry Association. This is an industry-wide test to provide
securities, options and futures exchanges and market data providers with the
ability to test their systems under simulated Year 2000 conditions. Time will
essentially be moved forward into the Year 2000. We are in preliminary testing
that uses test data from participating exchanges to identify non-compliant
components that will need to be replaced prior to the full test. This full
"end-to-end" test, from the exchanges through market data vendors to the
end-user software application, is scheduled for May 1, 1999.
The following is a status report on our state of readiness.
A. Processing Plant and Communications Network
Assessment phase has been completed. A full inventory has been taken of
the processing plant, our data-feed input, consolidation and output
process, and communications areas. We are currently in the remediation
and testing phases. This includes verifying Y2K compliance of outside
vendors and suppliers and testing all mission critical items. Testing
also includes all PC's, routers, modems, phone lines, Internet service
providers (ISP's), and production computers, known as servers, used
internally in the communications room. We are also checking our
outbound satellite, phone companies and ISP's distribution network, in
addition to some ISP's that our customers may use.
15
PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, YEAR
2000 ISSUES, CONTINUED
The Testing completion status as of 3/1/99 is as follows.
--------------------------------- ----------------------- --------------------
AREAS EQUIPMENT/SYSTEMS COMPLIANT
--------------------------------- ----------------------- --------------------
Processing Plant 301 164
--------------------------------- ----------------------- --------------------
Communications Network 35 14
--------------------------------- ----------------------- --------------------
Testing is scheduled to be completed by 6/30/99.
B. PC Quote Retail Applications
Our retail applications include proprietary and 3rd party software
applications, licensed to our customers for use only with our
data-feed. These applications include Internet web-site and
browser-based applications, local area network (LAN) based
applications, and Windows NT client/server applications. One OS/2 based
application will become obsolete in 2000. Customers using this
application will be converted to a compliant application.
--------------------------------- ---------------------- ---------------------
APPLICATIONS COMPLIANT
--------------------------------- ---------------------- ---------------------
PC Quote Customer Apps 14 12
--------------------------------- ---------------------- ---------------------
3rd Party Customer Apps 5 3
--------------------------------- ---------------------- ---------------------
C. Operational Infrastructure
We are assessing our main facility and field offices for compliance in
the security systems, HVAC systems, pagers, phone system, utility
providers and other mission critical systems. We have started to
upgrade, at minimal cost, non-compliant equipment.
Based on our current assessment, we believe we will be able to meet
our Y2K compliance goals.
3. Costs
As part of the ordinary course of our business, we continually develop major
enhancements to our operating systems and applications. For instance, we spent
three years developing the first 100% Windows NT-based processing plant that was
put into production in 1998. In addition to many other benefits, it is fully Y2K
compliant. We have not in the past separately tracked the cost of Y2K
remediation, as these efforts were incorporated into our on-going maintenance
and equipment replacement program. We have started to track costs in 1999 and
have spent approximately $27,000 so far this year on the cost of Year 2000. This
includes internal personnel resources, hardware, software and equipment
replacement and upgrades necessary to be Y2K compliant. We will be upgrading
various administrative systems that use commercial third party software for
accounting, billing and customer management. The total remaining cost of
software, replacement equipment, and internal resources for remediation and
testing to become Y2K compliant is not expected to exceed $500,000.
Based upon currently available information, we do not believe that the cost of
Y2K compliance will have a material impact on our financial condition, results
of operations or liquidity.
16
PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, YEAR 2000 ISSUES, CONTINUED
4. Risks
Achieving Y2K compliance depends on many factors. Some factors may be beyond our
control because we use services of others. Should our internal systems or the
internal system of one of our critical vendors fail to achieve Y2K compliance
and fail in the year 2000, our business and results of operations could be
adversely affected. For example:
A piece of communications equipment has an internal clock that is not
Y2K compliant. Although end-to-end testing is done, if for some reason,
we or a vendor of ours fail to detect the non-compliance. Y2K comes and
the clock shuts down, causing an inability to transmit over that
channel. Our customers on that channel do not receive our service. We
or our vendor have the cost of finding and fixing the problem. Our
customer could make a claim against us for the lost service. Many of
our customers have back-up systems in place with us which could
mitigate any damage caused by the disruption. In the event that there
are claims for damages, our contracts with our customers limit our
liability in such instances. However, if there were a large number of
customers affected for a prolonged period of time, we could be put in a
position of either granting credits or risk losing the customers and
our reputation could be adversely effected.
We have customers that use our Quote Tools to access our data-feed for
software applications. Quote Tools is a set of programmer tools known
as application programming interfaces or APIs for short. Our Quote
Tools are written and tested to be Y2K compliant. If for some reason
Y2K came and our Quote Tools did not function properly because of the
date change, we would have to spend money and resources to fix the bug.
If the bug could not be fixed, and we had no alternative solution, for
our customers using the service, we could lose the customers and
related revenue. Our contracts with our customers generally limit our
liability to total fees paid over the preceding year, which in 1998 was
under $200,000 for Quote Tools' customers.
5. Contingency Plans
All testing, including internal infrastructure, is scheduled to be completed by
6/30/99. We have not started extensive contingency planning because we are
concentrating our efforts on remediation and testing. We believe effective
contingency planning should not begin until after these phases are complete. We
expect to begin comprehensive contingency planning at the start of the third
quarter of 1999.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We will implement the provisions of Statement of Financial Accounting Standards
No. 133, ("Statement 133") "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted for financial statements issued for
the fiscal year ending December 31, 2000. Statement 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring us to recognize those items as assets
or liabilities in the statement of financial position and measure them at fair
value. We believe that adoption of Statement 133 will not have a material impact
on our financial statements.
In March 1998 the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
SOP provides guidance on accounting for the costs of computer software
developed or obtained for internal use and provides guidance for determining
whether computer software is for internal use. We will adopt the provisions
of SOP 98-1 effective January 1, 1999. We are currently reviewing our
software capitalization policies and evaluating the impact of this Statement
on our results of operations and financial position.
17
PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
OTHER
We do not believe general inflation materially impacts our sales and operating
results. We do not expect that current tax legislation will significantly affect
our future financial position, liquidity or operating results.
At December 31, 1998, we had federal income tax net operating loss carryforwards
of approximately $26,005,000 for federal income tax purposes and approximately
$24,843,000 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; 2005: $1,557,000 and thereafter $19,778,414. (See Note 5 of the
Notes to Financial Statements.)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have a bank term loan that has an interest rate equal to the bank's prime
rate. We are exposed to market risk as the prime rate is subject to
fluctuations in the market. We do not believe the market risk is material to
our financial statements. At December 31, 1998 we had excess cash invested in
a money market account. We do not expect any material loss, if at all, on
this investment.
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" that appears elsewhere in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants that would
require disclosure in this Report.
18
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information about PC Quote directors and executive officers will be included in
our proxy statement for our 1999 annual meeting of stockholders. This
information is incorporated by reference to that proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
Information about PC Quote executive compensation will be included in our proxy
statement for our 1999 annual meeting of stockholders. This information is
incorporated by reference to that proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information about security ownership of certain beneficial owners and management
will be included in our proxy statement for our 1999 annual meeting of
stockholders. This information is incorporated by reference to that proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information about certain relationships and related transactions will be
included in our proxy statement for our 1999 annual meeting of stockholders.
This information is incorporated by reference to that proxy statement.
19
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Our financial statements 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:
In the fourth quarter of the period covered by this report, we filed a Report on
Form 8-K dated October 6, 1998 reporting, in Item 5. Other Events, the
Securities Purchase Agreement between PC Quote and PICO Holdings, Inc.
and Physicians Insurance Company of Ohio.
(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.
3(d) Certificate of Amendment, dated as of December 18, 1998, to
Company's Certificate of Incorporation, located after the
Financial Statements of this report.
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.
20
PART IV - ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
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.
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.
21
PART IV - ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
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.
4(v) Form of Third Amendment to Loan and Security Agreement dated as of
December 30, 1997 between the Company and PICO Holdings, Inc.,
incorporated by reference to Exhibit 4(v) to Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
4(w) Form of Fourth Amendment to Loan and Security Agreement dated as
of February 5, 1998 between the Company and PICO Holdings, Inc.,
incorporated by reference to Exhibit 4(w) to Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
4(x) Form of Fifth Amendment to Loan and Security Agreement dated as of
March 10, 1998 between the Company and PICO Holdings, Inc.,
incorporated by reference to Exhibit 4(x) to Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
4(y) Form of First Amendment to the Amendment of the Convertible
Subordinated Debenture Agreement, dated as of March 30, 1998,
incorporated by reference to Exhibit 4(a) of the Company's Report
on Form 10-Q for the quarter ended March 31, 1998.
4(z) Form of Sixth Amendment to Loan and Security Agreement dated as of
May 5, 1998 between the Company and PICO Holdings, Inc.,
incorporated by reference to Exhibit 4(b) of the Company's Report
on Form 10-Q for the quarter ended March 31, 1998.
4(aa) Form of Amendment No. 2 to the Amendment of the Convertible
Subordinated Debenture Agreement, dated as of May 11, 1998,
incorporated by reference to Exhibit 4(c) of the Company's Report
on Form 10-Q for the quarter ended March 31, 1998.
4(ab) Form of Seventh Amendment to Loan and Security Agreement dated as
of June 1, 1998 between the Company and PICO Holdings, Inc.,
incorporated by reference to Exhibit 4(a) of the Company's Report
on Form 10-Q for the quarter ended June 30, 1998.
4(ac) Form of Amendment No. 3 to the Amendment of the Convertible
Subordinated Debenture Agreement, dated as of July 16, 1998,
incorporated by reference to Exhibit 4(b) of the Company's Report
on Form 10-Q for the quarter ended June 30, 1998.
4(ad) Form of Eighth Amendment to Loan and Security Agreement dated as
of July 24, 1998 between the Company and PICO Holdings, Inc.,
incorporated by reference to Exhibit 4(c) of the Company's Report
on Form 10-Q for the quarter ended June 30, 1998.
4(ae) Form of Amendment No. 4 to the Amendment of the Convertible
Subordinated Debenture Agreement, dated as of July 24, 1998,
incorporated by reference to Exhibit 4(d) of the Company's Report
on Form 10-Q for the quarter ended June 30, 1998.
4(af) Form of Ninth Amendment to Loan and Security Agreement dated as of
July 31, 1998 between the Company and PICO Holdings, Inc.,
incorporated by reference to Exhibit 4(e) of the Company's Report
on Form 10-Q for the quarter ended June 30, 1998.
4(ag) Securities Purchase Agreement between PC Quote, Inc. and PICO
Holdings, Inc. and Physicians Insurance Company of Ohio dated as
of September 23, 1998, incorporated by reference to Exhibit 4.1 of
the Company's Report on Form 8-K dated October 6, 1998.
22
PART IV - ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
4(ah) Form of Registration Rights Agreement between PC Quote, Inc. and
PICO Holdings, Inc. and Physicians Insurance Company of Ohio,
incorporated by reference to Exhibit 4.3 of the Company's Report
on Form 8-K dated October 6, 1998.
4(ai) Form of Common Stock Purchase Warrant issued to PICO Holdings,
Inc., incorporated by reference to Exhibit 4.4 of the Company's
Report on Form 8-K dated October 6, 1998.
4(aj) Form of First Amendment to Common Stock Purchase Warrant dated May
5, 1997, incorporated by reference to Exhibit 4.5 of the Company's
Report on Form 8-K dated October 6, 1998.
4(ak) Form of First Amendment to Common Stock Purchase Warrant dated
August 8, 1997, incorporated by reference to Exhibit 4.6 of the
Company's Report on Form 8-K dated October 6, 1998.
4(al) Form of First Amendment to Common Stock Purchase Warrant dated
September 22, 1997, incorporated by reference to Exhibit 4.7 of
the Company's Report on Form 8-K dated October 6, 1998.
4(am) Form of Second Amendment to Convertible Subordinated Debenture
dated as of September 23, 1998, incorporated by reference to
Exhibit 4(h) of the Company's Report on Form 10-Q for the quarter
ended September 30, 1998.
4(an) Form of Stock and Warrant Purchase Agreement between PC Quote,
Inc. and Howard Todd Horberg dated December 29, 1998, located
after the Financial Statements of this report.
4(ao) Form of Common Stock Purchase Warrant for 120,000 shares issued to
Howard Todd Horberg, located after the Financial Statements of
this report.
4(ap) Form of Stock and Warrant Purchase Agreement between PC Quote,
Inc. and Steve Levy dated December 29, 1998, located after the
Financial Statements of this report.
4(aq) Form of Common Stock Purchase Warrant for 120,000 shares issued to
Steve Levy, located after the Financial Statements of this report.
4(ar) Form of Stock and Warrant Purchase Agreement between PC Quote,
Inc. and Cranshire Capital, LP dated December 29, 1998, located
after the Financial Statements of this report.
4(as) Form of Common Stock Purchase Warrant for 80,000 shares issued to
Cranshire Capital, LP, 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.
23
PART IV - ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
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.
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.
24
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
March 30, 1999
By:
/s/ JOHN E. JUSKA
--------------------------------------------
John E. Juska, Chief Financial Officer and
Principal Accounting Officer
March, 30, 1999
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 30, 1999
/s/ JOHN R. HART
- ---------------------------------------------
John R. Hart, Director
March 30, 1999
/s/ TIMOTHY K. KRAUSKOPF
- ---------------------------------------------
Timothy K. Krauskopf, Director
March 30, 1999
/s/ RONALD LANGLEY
- ---------------------------------------------
Ronald Langley, Director
March 30, 1999
/s/ LOUIS J. MORGAN
- ---------------------------------------------
Louis J. Morgan, Director
March 30, 1999
/s/ KENNETH J. SLEPICKA
- ---------------------------------------------
Kenneth J. Slepicka, Director
March 30, 1999
25
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-9-24
Auditors' reports on Schedule II F-25-26
Supplemental Schedule II F-27
- --------------------------------------------------------------------------------
26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
PC Quote, Inc.:
We have audited the accompanying balance sheets of PC Quote, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years 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 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, 1998 and 1997, and the results of its operations and its cash
flows for the years 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 LLP
Chicago, Illinois
March 12, 1999
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PC Quote, Inc.
Chicago, Illinois
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of PC Quote, Inc. for the year 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 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 results of operations and cash flows of PC Quote,
Inc. for the year 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, 1998 AND 1997
ASSETS 1998 1997
---- ----
Current Assets
Cash and cash equivalents $ 1,139,785 $ 1,113,130
Accounts receivable, less allowance for doubtful
accounts of: 1998: $443,037; 1997: $346,000 1,490,139 1,435,450
Prepaid expenses and other current assets 114,011 61,981
------------ ------------
TOTAL CURRENT ASSETS 2,743,935 2,610,561
------------ ------------
Property and equipment
Satellite receiving equipment 525,730 895,126
Computer equipment 4,260,589 7,266,576
Communication equipment 1,254,010 2,716,415
Furniture and fixtures 252,050 293,240
Leasehold improvements 402,692 366,325
------------ ------------
6,695,071 11,537,682
Less: Accumulated depreciation and amortization 4,613,526 9,035,571
------------ ------------
2,081,545 2,502,111
------------ ------------
Software development costs, net of accumulated
amortization of: 1998: $4,442,673; 1997: $5,045,080 5,012,971 5,126,473
------------ ------------
Deposits and other assets 214,916 297,303
------------ ------------
TOTAL ASSETS $ 10,053,367 $ 10,536,448
------------ ------------
------------ ------------
See Notes to Financial Statements.
F-3
PC QUOTE, INC.
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
---- ----
Current Liabilities
Note payable, bank, current $ 300,000 $ 300,000
Note payable, credit facility --- 2,250,000
Accounts payable 4,138,517 2,834,460
Accrued expenses 218,866 604,916
Accrued compensation 313,838 618,289
Accrued interest --- 388,253
Income taxes payable 3,161 5,192
Unearned revenue, current 1,241,933 635,275
------------ ------------
TOTAL CURRENT LIABILITIES 6,216,315 7,636,385
------------ ------------
Note payable, bank, noncurrent 499,634 799,634
Convertible subordinated debenture payable, net of
unamortized discount of $1,096,402 --- 1,403,598
Unearned revenue, noncurrent 261,027 442,953
Accrued expenses, noncurrent 161,120 187,549
------------ ------------
TOTAL NONCURRENT LIABILITIES 921,781 2,833,734
------------ ------------
TOTAL LIABILITIES 7,138,096 10,470,119
------------ ------------
Stockholders' Equity
Preferred Stock, $.001 par value; authorized 5,000,000; issued
and outstanding:
Series A 5% convertible: 19,075 at December 31, 1998 19 ---
Series B 5% convertible: 28,791 at December 31, 1998 29 ---
Common stock, $.001 par value; authorized 50,000,000 shares; issued
and outstanding 14,183,183 at December 31, 1998 and 12,436,800 at
December 31, 1997 14,183 12,437
Additional paid-in capital - Series A 5% convertible preferred stock 3,086,013 ---
Additional paid-in capital - Series B 5% convertible preferred stock 4,664,891 ---
Additional paid-in capital - common stock 19,950,981 17,386,591
Additional paid-in capital - convertible subordinated
debenture and warrants 2,750,491 2,750,491
Accumulated deficit (27,551,336) (20,083,190)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,915,271 66,329
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,053,367 $ 10,536,448
------------ ------------
------------ ------------
See Notes to Financial Statements.
F-4
PC QUOTE, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
REVENUE
HyperFeed and LAN Services $ 12,826,038 $ 12,110,998 $ 16,095,285
Internet Services 10,219,495 5,008,374 936,879
------------ ------------ ------------
TOTAL REVENUE 23,045,533 17,119,372 17,032,164
------------ ------------ ------------
DIRECT COST OF SERVICES
HyperFeed and LAN Services 10,413,295 9,865,330 9,680,978
Internet Services 6,586,139 4,589,736 1,320,830
------------ ------------ ------------
TOTAL DIRECT COST OF SERVICES 16,999,434 14,455,066 11,001,808
------------ ------------ ------------
GROSS MARGIN 6,046,099 2,664,306 6,030,356
------------ ------------ ------------
OPERATING EXPENSES
Sales 4,500,367 3,655,119 3,128,777
General and administrative 3,310,843 3,951,437 3,488,606
Product and market development 1,703,192 1,588,077 1,139,994
Depreciation and amortization 1,231,123 1,243,722 1,230,809
Restructuring charges --- 1,146,677 ---
------------ ------------ ------------
TOTAL OPERATING EXPENSE 10,745,525 11,585,032 8,988,186
------------ ------------ ------------
LOSS FROM OPERATIONS (4,699,426) (8,920,726) (2,957,830)
------------ ------------ ------------
INTEREST INCOME (EXPENSE)
Interest income 19,279 37,873 9,743
Interest expense (1,765,448) (2,252,801) (143,618)
------------ ------------ ------------
NET INTEREST EXPENSE (1,746,169) (2,214,928) (133,875)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (6,445,595) (11,135,654) (3,091,705)
INCOME TAXES 3,613 5,762 164,264
------------ ------------ ------------
NET LOSS (6,449,208) (11,141,416) (3,255,969)
Preferred dividends 1,018,938 --- ---
------------ ------------ ------------
NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS ($ 7,468,146) ($11,141,416) ($ 3,255,969)
------------ ------------ ------------
------------ ------------ ------------
Basic net loss per share ($0.57) ($1.33) ($0.45)
Diluted net loss per share ($0.57) ($1.33) ($0.45)
Weighted-average common shares outstanding 13,001,058 8,353,400 7,248,000
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
F-5
PC QUOTE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------
Series A Series B Series A Series B
5% 5% 5% 5%
Convertible Convertible Convertible Convertible
Preferred Preferred Preferred Preferred Common Common
Stock Stock Stock Stock Stock Stock
Shares Shares Amount Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Balances
- ------------------------------------------------------------------------------------------------------------------
12/31/95 --- --- $ --- $ --- 7,185,732 $ 7,186
- ------------------------------------------------------------------------------------------------------------------
Net loss --- --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------
Issuance of common stock --- --- --- --- 169,889 170
- ------------------------------------------------------------------------------------------------------------------
Value assigned to
conversion feature of
convertible debentures --- --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
12/31/96 --- --- --- --- 7,355,621 7,356
- ------------------------------------------------------------------------------------------------------------------
Net loss --- --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------
Issuance of common stock --- --- --- --- 5,081,179 5,081
- ------------------------------------------------------------------------------------------------------------------
Value assigned to
amendment of convertible
debenture and warrants
issued --- --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------
Value assigned to
employee stock options
issued --- --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
12/31/97 --- --- --- --- 12,436,800 12,437
- ------------------------------------------------------------------------------------------------------------------
Net loss --- --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------
Issuance of preferred
stock 19,075 28,791 19 29 --- ---
- ------------------------------------------------------------------------------------------------------------------
Issuance of common stock --- --- --- --- 4,735,332 4,735
- ------------------------------------------------------------------------------------------------------------------
Purchase and retirement of
common stock --- --- --- --- (2,988,949) (2,989)
- ------------------------------------------------------------------------------------------------------------------
Value assigned to
beneficial conversion
feature of Series B
convertible preferred
stock --- --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------
Value assigned to
employee stock options
issued --- --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
12/31/98 19,075 28,791 $ 19 $ 29 14,183,183 $ 14,183
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Additional Additional Additional
Paid-In Paid-In Paid-In
Capital Capital Additional Capital
Series A Series B Paid-In Convertible
Convertible Convertible Capital Debenture Accumulated
Preferred Preferred Common and Warrants Deficit Total
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Balances
- -------------------------------------------------------------------------------------------------------------------------
12/31/95 $ --- $ --- $ 12,289,897 $ --- ($5,685,805) $ 6,611,278
- -------------------------------------------------------------------------------------------------------------------------
Net loss --- --- --- --- (3,255,969) (3,255,969)
- -------------------------------------------------------------------------------------------------------------------------
Issuance of common stock --- --- 326,098 --- --- 326,268
- -------------------------------------------------------------------------------------------------------------------------
Value assigned to
conversion feature of
convertible debentures --- --- --- 1,650,000 --- 1,650,000
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
12/31/96 --- --- 12,615,995 1,650,000 (8,941,774) 5,331,577
- -------------------------------------------------------------------------------------------------------------------------
Net loss --- --- --- --- (11,141,416) (11,141,416)
- -------------------------------------------------------------------------------------------------------------------------
Issuance of common stock --- --- 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 --- --- 17,386,591 2,750,491 (20,083,190) 66,329
- -------------------------------------------------------------------------------------------------------------------------
Net loss --- --- --- --- (6,449,208) (6,449,208)
- -------------------------------------------------------------------------------------------------------------------------
Issuance of preferred
stock 2,966,794 3,765,172 --- --- --- 6,732,014
- -------------------------------------------------------------------------------------------------------------------------
Issuance of common stock --- --- 5,432,571 --- --- 5,437,306
- ------------------------------------------------------------------------------------------------------------------------
Purchase and retirement of
common stock --- --- (2,985,960) --- --- (2,988,949)
- -------------------------------------------------------------------------------------------------------------------------
Value assigned to
beneficial conversion
feature of Series B
convertible preferred
stock 119,219 899,719 --- --- (1,018,938) ---
- -------------------------------------------------------------------------------------------------------------------------
Value assigned to
employee stock options
issued --- --- 117,779 --- --- 117,779
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
12/31/98 $ 3,086,013 $ 4,664,891 $ 19,950,981 $ 2,750,491 ($27,551,336) $ 2,915,271
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
F-6
PC QUOTE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
Cash Flows From Operating Activities:
Net loss ($6,449,208) ($11,141,416) ($3,255,969)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment 1,231,123 1,243,722 1,230,809
Provision for doubtful accounts 397,873 683,639 734,346
Amortization of software development costs 1,810,553 1,909,652 1,244,522
Amortization of deferred discount on convertible
subordinated debenture 1,096,402 674,992 ---
Amortization of deferred debt on warrants --- 979,097 ---
Interest on converted debt, net of conversion costs 553,761 --- ---
Common stock issued in lieu of cash compensation 91,522 --- ---
Common stock issued in lieu of cash payments for professional fees 163,725 --- ---
Write-off of capitalized software development costs 300,401 571,647 ---
Compensation value assigned to employee stock options granted 117,779 19,076 ---
Deferred income taxes --- --- 158,000
(Gain) on disposal of equipment --- --- (52,206)
Changes in assets and liabilities:
Accounts receivable (452,562) (1,018,836) (514,091)
Income tax refunds receivable --- 40,000 ---
Prepaid expenses and other current assets (52,030) 123,090 109,465
Deposits and other assets 82,387 55,879 (77,489)
Accounts payable 1,304,057 1,060,070 157,986
Accrued expenses (1,105,183) 880,089 345,727
Accrued interest and facility fee on converted debt 428,253 --- ---
Unearned revenue 424,732 (52,008) 329,176
Income taxes payable (2,031) (1,072) 6,264
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (58,446) (3,972,379) 416,540
----------- ----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (810,557) (1,037,569) (914,898)
Proceeds from sale of equipment --- 55,943 190,498
Software development costs capitalized (1,997,452) (1,817,927) (2,862,152)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,808,009) (2,799,553) (3,586,552)
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 5,182,059 4,756,601 326,268
Purchase and retirement of common stock (2,988,949) --- ---
Proceeds from notes payable --- --- 2,500,000
Proceeds from issuance of convertible subordinated debenture --- --- 2,500,000
Borrowings under credit facility 1,000,000 2,250,000 ---
Principal payments under capital lease obligations --- (142,685) (578,222)
Principal payments on note payable, bank (300,000) (300,366) (1,300,000)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,983,110 6,563,550 3,448,046
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 26,655 (208,382) 278,034
Cash and cash equivalents:
Beginning of year 1,113,130 1,321,512 1,043,478
----------- ----------- -----------
End of year $ 1,139,785 $ 1,113,130 $ 1,321,512
----------- ----------- -----------
----------- ----------- -----------
See Notes to Financial Statements.
F-7
PC QUOTE, INC
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
- --------------------------------------------------------------------------------------------------------------
Interest paid $ 83,925 $ 218,531 $ 143,618
- --------------------------------------------------------------------------------------------------------------
Income taxes paid $ 3,517 $ 6,834 $ 1,000
- --------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Noncash Investing and
Financing Activities
- --------------------------------------------------------------------------------------------------------------
Additional paid-in-capital from issuance of convertible
subordinated debenture $ 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 $ 117,779 $ 19,076
- --------------------------------------------------------------------------------------------------------------
Series A preferred stock issued for converted debt $ 19
- --------------------------------------------------------------------------------------------------------------
Additional paid-in-capital - Series A preferred stock from
conversion of convertible subordinated debenture principal,
plus accrued interest, net of conversion costs $ 2,966,794
- --------------------------------------------------------------------------------------------------------------
Additional paid-in-capital - Series A preferred stock -
value assigned to beneficial conversion feature of
preferred stock $ 119,219
- --------------------------------------------------------------------------------------------------------------
Series B preferred stock issued for converted debt $ 29
- --------------------------------------------------------------------------------------------------------------
Additional paid-in-capital - Series B preferred stock -
from conversion of credit facility borrowings, plus facility
fee and accrued interest, net of conversion costs $ 3,765,172
- --------------------------------------------------------------------------------------------------------------
Additional paid-in-capital - Series B preferred stock -
value assigned to beneficial conversion feature of
preferred stock $ 899,719
- --------------------------------------------------------------------------------------------------------------
Convertible subordinated debenture principal balance
converted into Series A convertible preferred stock ($ 2,500,000)
- --------------------------------------------------------------------------------------------------------------
Credit facility borrowings converted into Series B
convertible preferred stock ($ 3,250,000)
- --------------------------------------------------------------------------------------------------------------
Common stock issued in lieu of cash compensation $ 91,522
- --------------------------------------------------------------------------------------------------------------
Common stock issued in lieu of cash payments for
professional fees $ 163,725
- --------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
F-8
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
PC Quote, Inc. (PC Quote or the "Company") is a premier provider of
securities market data. We collect securities market activity and financial
news directly from stock, options and commodities exchanges and other
sources. We use the information to create a real-time database of last sale
and bid/ask prices of more than 325,000 issues. The database includes all
North American equities, the most comprehensive options data, 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. We then process the database into a single data-feed,
"HyperFeed(TM)", at our primary processing plant located at our executive
offices in Chicago, Illinois. We disseminate HyperFeed to our customers by
satellite, digital data lines or over the Internet.
Software applications on our customers' computers access HyperFeed to allow
the user to monitor securities activity on an on-going real-time basis. The
applications also create a complete database of trading symbols, continuously
updated by the data feed. This database gives our customer instant access to
security prices. HyperFeed is used to create an equivalent database on our
computers, accessible to our Internet customers.
Our customer base consists primarily of professional investors, securities
brokers, dealers and traders, portfolio managers, brokerage firms, other
financial institutions, Internet web-sites, application developers and
redistributors of financial market data. Our Internet service is used by
individual and professional investors alike.
Our Internet division, PCQuote.com, maintains our web-site, www.pcquote.com,
which is a premier Internet financial web-site offering financial news and
delayed and real-time market data. Its principal customers are financial
web-site advertisers, other Internet web-sites, individuals, and businesses.
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 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 receiving, 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.
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.
F-9
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS: The Company's continuing investment in software
development consists primarily of enhancements to its existing Windows-based
private network and Internet services, development of new data analysis
software and programmer tools designed to afford easy access to its data-feed
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.
Costs associated with the planning and design phase of software development,
including coding and testing activities necessary to establish technological
feasibility of computer software products to be licensed 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
service offering, at the time the 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 revenue for a product bear to the
total of current and anticipated future gross revenue 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 revenue, 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.
F-10
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION: The Company principally derives its revenue from service
contracts for the provision of market data only ("HyperFeed license fees"),
service contracts for the provision of market data together with analytical
software ("PC Quote 6.0 license fees"), and the sale of advertising on its
web-site www.pcquote.com. Revenue from service contracts is recognized using
the percentage-of-completion method, ratably over the contract term as the
contracted services are rendered. Revenue from the sale of advertising is
recognized as the advertising is displayed on the web-site. HyperFeed license
fees and PC Quote 6.0 license fees for satellite and landline services are
generally billed one month in advance with 30-day payment terms. License fees
for PC Quote 6.0 on the Internet are generally paid by credit card within
five days prior to the month of service. These and other payments received
prior to services being rendered are classified as unearned revenue on the
balance sheet. Revenue and the related receivable for advance billings are
not reflected in the financial statements. Customers' deposits on service
contracts are classified as either current unearned revenue, if the contract
expires in one year or less, or non-current unearned revenue, if the contract
expiration date is greater than one year.
The Company adopted the provisions of Statement of Position (SOP) 97-2,
Software Revenue Recognition, on January 1, 1998. SOP 97-2 specifies the
following four criteria that must be met prior to recognizing revenue: (1)
persuasive evidence of the existence of an arrangement, (2) delivery, (3)
fixed or determinable fee, and (4) probable collection. In addition, revenue
earned on software arrangements involving multiple elements is allocated to
each element based on the relative fair value of the elements. When
applicable, revenue allocated to the Company's software products (including
specified upgrades/enhancements) is recognized upon delivery of the products.
Revenue allocated to post contract customer support is recognized ratably
over the term of the support and revenue allocated to service elements (such
as training and installation) is recognized as the services are performed.
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. The Company has equity securities that,
if exercised, would have had a dilutive effect on EPS had the Company
generated income during 1998. The dilutive effect of such securities would
have been an additional 225,500 average shares outstanding during the year
ended December 31, 1998.
RECLASSIFICATION: Certain 1997 and 1996 balances have been reclassified to
conform to the 1998 presentation. During 1998, the Company examined the
components of its direct cost of services and other operating expenses in
connection with the establishment of a separate Internet services group. As a
result of its review, the Company identified costs which appear to be more
appropriately classified in other expense categories within the statements of
operations for the years ended December 31, 1997 and 1996. The
reclassification related primarily to the inclusion of the amortization of
software development costs within direct cost of services, depreciation and
amortization expenses being included in operating expenses from direct cost
of services, and selling, marketing and administrative costs being included
in operating expenses from direct cost of services. The result of the
reclassifications did not impact the Company's reported revenue or loss from
operations for any period presented.
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 7.75% and 8.5% at
December 31, 1998 and 1997, respectively). The loan is collateralized by
substantially all assets of the Company. At December 31, 1998 and 1997, the
outstanding balance was $799,634 and $1,099,634, respectively.
F-11
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
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, ("Physicians"), a
wholly-owned subsidiary of PICO Holdings, Inc. ("PICO"), which then owned
approximately 30% of the Company's outstanding shares of Common Stock.
Pursuant to the Debenture Agreement, Physicians 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 was payable semiannually, beginning January 1, 1998.
Physicians 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 Physicians 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 entered into a Loan and Security
Agreement (the "Loan Agreement"), under which PICO 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 were
secured by a pledge of substantially all of the assets of the Company. These
liens were subject to the prior lien of the Company's primary lender,
Lakeside Bank. PICO 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 Physicians 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 was changed
to April 30, 1999 instead of December 31, 2001; (b) the Debenture could not
be prepaid or redeemed without the consent of Physicians; (c) the conversion
rate on the Debenture was 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 would be at such time as
determined by the Company and at a price as determined by Physicians.
Interest under the Debenture would continue to be payable in cash or, at the
option of Physicians, in shares of the Company's Common Stock at the market
value of such shares at the time of payment.
Also on May 5, 1997, in consideration of the loan by PICO to the Company, the
Company issued a Common Stock Purchase Warrant (the "Warrant") to PICO
entitling PICO 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 was to expire on April 30, 2000. In lieu of exercising the Warrant
for cash, PICO 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
F-12
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. FINANCING AND RELATED PARTY TRANSACTIONS (CONTINUED)
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 PICO 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, PICO may elect to cause the Company
to purchase the unexercised 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 PICO 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 the Loan.
In August 1997 the Company and PICO agreed to amend the Loan Agreement and
related documents to increase the amount of the secured loan from PICO 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 PICO 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.
On September 22, 1997 the Company and PICO executed a second amendment to the
Loan Agreement to further increase the amount of the secured loan from PICO
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 PICO 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, February 5, 1998, March 10, 1998, May 5, 1998, June 1,
1998, and July 24, 1998, the Company and PICO executed the third, fourth,
fifth, sixth, seventh, and eighth amendments to the Loan Agreement,
respectively, extending the due date for borrowings by the Company, plus
accrued interest, to January 31, 1998, February 28, 1998, April 30, 1998, May
31, 1998, August 31, 1998, and December 31, 1998, respectively. No further
warrants were issued in connection with the third, fourth, fifth, sixth,
seventh, or eighth amendments to the loan agreement.
On May 19, 1998 PICO exercised a portion of one of their warrants and
purchased 320,000 shares of Common Stock of the Company for $500,000.
F-13
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. FINANCING AND RELATED PARTY TRANSACTIONS (CONTINUED)
On July 31, 1998 the Company and PICO executed the ninth amendment to the Loan
Agreement to further increase the amount of the secured loan from PICO to the
Company from $2.25 million to $3.25 million. No further warrants were issued in
connection with the ninth amendment.
On September 23, 1998 the Company entered into a Securities Purchase Agreement
(the "Securities Agreement"), subject to shareholder approval, with PICO and
Physicians. Under the terms of the Securities Agreement, the Company and
Physicians, as the holder of the Debenture in the principal amount of
$2,500,000, plus accrued interest in the amount of $423,123 as of September 23,
1998, plus interest accruing at the rate of $651 per day thereafter (such
principal and all accrued interest through the Closing Date, the "Debenture
Balance"), and PICO, to whom the Company was indebted in the principal amount of
$3,290,000, plus accrued interest in the amount of $377,742 as of September 23,
1998, plus interest accruing at the rate of $1,262 per day thereafter (such
principal and all accrued interest through the Closing Date, the "PICO
Indebtedness") provided for the purchase of Series A 5% Convertible Preferred
Stock by Physicians through the conversion of the Debenture Balance and for the
purchase of Series B 5% Convertible Preferred Stock by PICO in consideration for
the cancellation of the PICO Indebtedness.
Concurrently with the execution of the Securities Agreement, the Company and
Physicians entered into the Second Amendment to the Debenture and Debenture
Agreement to revise the conversion language therein in order to make it
consistent with the Securities Agreement.
Shareholder approval of the terms and conditions of the Securities Agreement for
the debt conversion and the transactions contemplated by the Securities
Agreement was obtained on December 17, 1998. The closing date for the Securities
Agreement transactions was December 18, 1998.
Subject to the terms and conditions of the Securities Agreement, Physicians
purchased and the Company issued to Physicians 19,075 shares of Series A 5%
Convertible Preferred Stock determined by dividing the Debenture Balance by one
hundred times $1.5625 (the Debenture conversion rate on the date of the
Securities Agreement). The Series A 5% Convertible Preferred Stock was deemed to
have a beneficial conversion feature because the fair market value of the
Company's common stock was in excess of its per share conversion price at the
date of issuance. The value of the beneficial conversion feature of $119,219 was
recorded in 1998 as an increase in additional paid in capital Series A preferred
stock and a decrease to retained earnings (preferred dividend)
Subject to the terms and conditions of the Securities Agreement, PICO purchased
and the Company issued to PICO on December 18, 1998, 28,791 shares of Series B
5% Convertible Preferred Stock determined by dividing the PICO Indebtedness by
one hundred times $1.3125 (the market price of the Company's Common Stock on
September 21, 1998, the date the Securities Agreement was approved by the
Company's Board of Directors). The Series B 5% Convertible Preferred Stock was
deemed to have a beneficial conversion feature because the fair market value of
the Company's common stock was in excess of its per share conversion price at
the date of issuance. The value of the beneficial conversion feature of $899,719
was recorded in 1998 as an increase in additional paid in capital Series B
preferred stock and a decrease to retained earnings (preferred dividend).
A holder of Series A Preferred is entitled to receive cash dividends, when and
as declared by the Board out of funds legally available for such purpose, in the
annual amount of 5% of the per share purchase price, payable quarterly on the
15th day of September, December, March and June, in each year. A holder of
Series B Preferred is entitled to receive cash dividends, when and as declared
by the Board out of funds legally available for such purpose, in the annual
amount of 5% of the per share purchase price, payable quarterly on the 15th day
of September, December, March and June, in each year. Dividends payable for any
period less than a full quarter shall be computed on and paid for the actual
number of days elapsed. Dividends shall accrue on each share of Preferred Stock
from the date of issue of such share of stock (the "Issuance Date").
F-14
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. FINANCING AND RELATED PARTY TRANSACTIONS (CONTINUED)
No dividends shall be declared on any other series or class or classes of stock
unless there shall be or have been declared on all shares of Preferred Stock
then outstanding the dividends for all quarter-yearly periods coinciding with or
ending before such quarter-yearly period. Dividends shall be cumulative. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment which is in arrears. If in any quarter-yearly dividend
period, dividends in the annual amount have not been declared and paid or set
apart for payment for such quarter-yearly dividend period and all preceding such
periods from the first day from which dividends are cumulative, then, until the
aggregate deficiency is declared and fully paid or set apart for payment, the
Company shall not (i) declare or pay or set apart for payment any dividends or
make any other distribution on any other capital stock or securities having an
equity interest in the Company ranking junior to or on a parity with the
Preferred Stock with respect to the payment of dividends or distribution of
assets on liquidation, dissolution or winding up of the Company (the "Secondary
Stock") (other than dividends or distributions paid in shares of, or options,
warrants or rights to subscribe for or purchase Secondary Stock) or (ii) make
any payment on account of the purchase, redemption, other retirement or
acquisition of any Secondary Stock with respect to the payment of dividends or
distribution of assets on liquidation, dissolution or winding up of the Company.
At any time or times on or after the Issuance Date, any holder of Preferred
Stock shall be entitled to convert any whole number of shares of Preferred Stock
into fully paid and nonassessable shares (rounded to the nearest whole share).
The number of shares of Common Stock issuable upon conversion of the Preferred
Stock shall be determined by multiplying the product of one hundred (100) and
the number of shares of Preferred Stock to be converted into Common Stock by:
(i) in the case of Series A Preferred, $1.5625 and then adding the
amount of any accrued but unpaid dividends attributable to such
Preferred Stock, and then dividing by the lower of (X) $1.5625, (Y) the
average Closing Sale Price of the Common Stock over the twenty-day
period immediately prior to the day the Series A Preferred is to be
converted into Common Stock; or (Z) the Closing Sale Price one day
prior to the day the Series A Preferred is to be converted into Common
Stock (the "Series A Conversion Rate").
(ii) in the case of Series B Preferred, $1.3125 and then adding the
amount of any accrued but unpaid dividends attributable to such
Preferred Stock, and then dividing by the lower of (X) $1.3125, (Y) the
average Closing Sale Price of the Common Stock over the twenty-day
period immediately prior to the day the Series B Preferred is to be
converted into Common Stock; or (Z) the Closing Sale Price one day
prior to the day the Series B Preferred is to be converted into Common
Stock (the "Series B Conversion Rate").
In order to prevent dilution of the rights granted, the Series A and Series B
Conversion Rates will be subject to adjustment for issuance of additional
securities of the Company, including common stock, options or convertible
securities, and reclassifications or changes of outstanding securities (by any
stock split, reverse stock split, combination, stock dividend, recapitalization
or otherwise).
If any Preferred Stock remains outstanding on the fifth anniversary after the
Issuance Date, then such Preferred Stock shall automatically convert to Common
Stock on such fifth anniversary.
The holders of Series A or Series B Preferred Stock shall be entitled to notice
of any shareholders' meeting and to vote upon any matter submitted to the
shareholders for a vote on the following basis. Each Holder of Preferred Stock
shall have the number of votes equal to the number of shares of Common Stock
into which the Preferred Stock then held by such holder is convertible, as
adjusted from time to time.
F-15
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. FINANCING AND RELATED PARTY TRANSACTIONS (CONTINUED)
Subject to the terms and conditions of the Securities Agreement, the Company
issued to PICO a warrant to purchase 3,106,163 shares of Common Stock of the
Company at an exercise price of $1.575 per share (120% of the Series B Closing
Price), and an expiration date of April 30, 2005. In lieu of exercising the
warrant for cash, the holder 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 exercise 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 the holder 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, the holder may elect to cause the Company to purchase the
unexercised 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 the holder 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
exercise price.
Subject to the terms and conditions of the Securities Agreement, the Company and
PICO, as the holder of three Common Stock Purchase Warrants to purchase an
aggregate of 949,032 shares of Common Stock of the Company (the "Existing
Warrants"), each of which was to expire on April 30, 2000, entered into
Amendments of the Existing Warrants to extend the term of the Existing Warrants
until April 30, 2005.
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 were 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 was not completed on or prior to January 24, 1998, the
Wexford Affiliates would have been 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 was
not completed on or prior to February 28, 1998, the Wexford Affiliates would
have been 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.
On October 31, 1997 the Company filed a Form S-2 Registration Statement with the
Securities and Exchange Commission for 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.
F-16
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3. FINANCING AND RELATED PARTY TRANSACTIONS (CONTINUED)
On January 23, 1998, the Company completed the rights offering. 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.
During the second quarter of 1998, the Wexford Affiliates exercised a portion of
their warrants and purchased 143,300 shares of Common Stock of the Company for
$286,600. During the third quarter of 1998, the Wexford Affiliates exercised a
portion of their warrants and purchased 89,500 shares of Common Stock of the
Company for $179,000. (See Note 15.)
On December 29, 1998 the Company entered into Stock and Warrant Purchase
Agreements with three third-party investors. On December 30, 1998 the investors
purchased 640,000 shares of Common Stock and warrants to purchase 320,000 shares
of Common Stock at an exercise price of $1.875 per share, exercisable at any
time on or prior to December 30, 2001, in exchange for $1.0 million. The
investors acquired the Common Stock and warrants for investment purposes.
As a result of the foregoing, in connection with the Company's financing and
related party transactions, the Company has the following warrants for purchase
of shares of common stock, issued and outstanding at December 31, 1998.
Number
of Expiration Exercise Remaining Life in Years at
Shares Date Price December 31, 1998
------ ---- ----- -----------------
320,000 04/30/2005 (1) 6.33
500,000 04/30/2005 (2) 6.33
129,032 04/30/2005 (3) 6.33
3,106,163 04/30/2005 $1.575 6.33
320,000 12/30/2001 $1.875 3.00
267,200 10/15/2002 $2.00 3.79
(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.
F-17
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"). 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 Weighted-
of Average Price
Shares Per Share
--------------- ------------------
- ---------------------------------------------------------------------------
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)
--------
Balance, December 31, 1997 773,865 2.16
Granted 1,192,200 1.52
Exercised (95,015) (1.19)
Canceled (76,751) (2.39)
---------
Balance, December 31, 1998 1,794,299 1.78
---------
- ---------------------------------------------------------------------------
Shares
Exercisable Available
Shares for Grant
--------------- ------------------
- ---------------------------------------------------------------------------
December 31, 1998 1,457,466 205,701
December 31, 1997 592,113 1,226,135
December 31, 1996 157,338 559,997
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, 1998 ranged from $0.9375 to $6.375 per
share.
F-18
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4. EMPLOYEE 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 loss and net loss per
share would have been for the years ended December 31, 1998, 1997 and 1996 the
pro forma amounts indicated below:
- ---------------------------------------------------------------------------------------------------------------------
Basic and Basic and Basic and
Diluted Diluted Diluted
Loss per Loss per Loss per
1998 Share 1997 Share 1996 Share
---- ---- ---- ----- ---- -----
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Net loss available for common
stockholders ($7,468,146) ($0.57) ($11,141,416) ($ 1.33) ($3,255,969) ($ 0.45)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Compensation expense related
to stock options granted (1,254,336) ( 0.10) (523,646) ( 0.06) (628,141) (0.09)
----------- ------ ----------- ------- ----------- -------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Pro forma net loss available
for common stockholders ($8,722,482) ($0.67) ($11,665,062) ($ 1.39) ($3,884,110) ($ 0.54)
------------ ------ ------------ ------- ----------- -------
------------ ------ ------------ ------- ----------- -------
- ---------------------------------------------------------------------------------------------------------------------
The fair value of each grant is estimated using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
- ---------------------------------------------------------------------------------------------------------------------
Expected life 7.18 years 6.83 years 3 years
- ---------------------------------------------------------------------------------------------------------------------
Dividend rate 0% 0% 0%
- ---------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 5.16% 6.11% 6.0%
- ---------------------------------------------------------------------------------------------------------------------
Volatility factors 134% 123% 81%
- ---------------------------------------------------------------------------------------------------------------------
The weighted-average exercise price and weighted-average fair value of options
granted during 1998, 1997 and 1996 where the market price equals, exceeds or is
less than the exercise price at the time of grant is as follows:
- ---------------------------------------------------------------------------------------------------------------------
Stock Price ______ Exercise Price
- ------------------------------------------------------------------------------------- -------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Is Less Is Less Is Less
Equals Exceeds Than Equals Exceeds Than Equals Exceeds Than
------ ------- ---- ------ ------- ---- ------ ------- ----
- ---------------------------------------------------------------------------------------------------------------------
Exercise price $1.29 $1.59 $1.75 $1.53 $1.69 $1.70 $4.94 --- ---
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Fair value of option $1.09 $2.01 $1.10 $1.29 $2.00 $0.96 $3.39 --- ---
- ---------------------------------------------------------------------------------------------------------------------
F-19
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4. EMPLOYEE STOCK OPTIONS AND WARRANTS (CONTINUED)
Compensation expense from stock-based compensation awards recognized in the
Statement of Operations for 1998 and 1997 was $117,779 and $19,076,
respectively.
A further summary about options outstanding at December 31, 1998, is as follows:
Weighted-Average
Remaining
Number Contractual Number
Exercise Price Outstanding Life Exercisable
----------------- ------------ ----------- -----------
$ 0.9375 25,000 4.11 ---
$ 1.0000 34,328 2.09 34,328
$ 1.1250 215,000 4.69 33,333
$ 1.3750 587,902 7.60 521,236
$ 1.4375 301,168 3.85 266,668
$ 1.5000 41,000 3.90 17,000
$ 2.0000 487,901 8.45 487,901
$ 2.9375 5,000 4.38 ---
$ 5.3750 25,000 2.58 25,000
$ 6.3750 72,000 1.82 72,000
--------- ---------
1,794,299 6.30 1,457,466
--------- ---------
--------- ---------
NOTE 5. INCOME TAXES
The deferred tax assets and liabilities consist of the following components as
of December 31, 1998 and 1997:
- ---------------------------------------------------------------------------------------------------------
1998 1997
---- ----
- ---------------------------------------------------------------------------------------------------------
Deferred tax assets:
- ---------------------------------------------------------------------------------------------------------
Unearned revenue $ 526,036 $ 377,380
- ---------------------------------------------------------------------------------------------------------
Receivable allowances 155,063 121,100
- ---------------------------------------------------------------------------------------------------------
Property and equipment 266,800 196,800
- ---------------------------------------------------------------------------------------------------------
Accrued expenses 54,231 40,231
- ---------------------------------------------------------------------------------------------------------
Net operating loss carryforwards 9,101,895 8,114,160
- ---------------------------------------------------------------------------------------------------------
Research and development credit carryforward 106,000 106,000
---------- ----------
- ---------------------------------------------------------------------------------------------------------
10,210,025 8,955,671
- ---------------------------------------------------------------------------------------------------------
Valuation allowance (8,455,486) (6,753,591)
---------- ----------
- ---------------------------------------------------------------------------------------------------------
1,754,539 2,202,080
- ---------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
- ---------------------------------------------------------------------------------------------------------
Software capitalization (1,754,539) (2,202,080)
---------- ----------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net current deferred tax asset --- ---
---------- ----------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
F-20
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5. INCOME TAXES (CONTINUED)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion, or all, of the deferred
tax assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the scheduled
reversal of the caplitalized software, management believes it is more likely
than not that the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31, 1998.
Income tax expense for the years ended December 31, 1998, 1997, and 1996,
consists of the following:
- -------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
- -------------------------------------------------------------------------------------------------------
Current:
- -------------------------------------------------------------------------------------------------------
State and local $ 3,613 $ 5,762 $ 6,264
- -------------------------------------------------------------------------------------------------------
Deferred --- --- 158,000
------- ------- --------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Total income tax expense $ 3,613 $ 5,762 $164,264
------- ------- --------
- -------------------------------------------------------------------------------------------------------
Reconciliations of income tax expense computed at the statutory federal income
tax rate to the Company's income tax expense for the years ended December 31,
1998, 1997 and 1996, are as follows:
- -----------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
- -----------------------------------------------------------------------------------------------------------------
Statutory rate provision ($ 2,257,223) ($ 3,899,496) ($1,051,200)
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) resulting from:
- -----------------------------------------------------------------------------------------------------------------
Nondeductible expenses 393,613 8,468 26,000
- -----------------------------------------------------------------------------------------------------------------
State income taxes (net of federal benefit) 2,348 3,745 4,100
- -----------------------------------------------------------------------------------------------------------------
Change in valuation allowance 1,701,895 3,907,331 1,200,460
- -----------------------------------------------------------------------------------------------------------------
Other 162,980 (14,286) (15,096)
------------ ------------ -----------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
$ 3,613 $ 5,762 $ 164,264
------------ ------------ -----------
- -----------------------------------------------------------------------------------------------------------------
At December 31, 1998, the Company had federal income tax net operating loss
carryforwards of approximately $26,005,000 for federal income tax purposes and
approximately $24,843,000 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; 2005: $1,557,000 and thereafter $19,778,414.
F-21
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. LEASE COMMITMENTS
The Company is obligated, as lessee under certain noncancelable operating
leases, for lease payments for equipment and office space, as well as insurance,
maintenance and other executory costs associated with the leases. On September
1, 1994, the Company entered into a 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 recognized on a straight-line basis.
Future minimum lease payments for the Company as lessee as of December 31, 1998
are as follows:
Operating
Leases
------
Years ending December 31:
1999 $ 1,361,851
2000 321,553
2001 191,653
2002 153,514
2003 94,684
2004 and Thereafter 94,684
--------------
Total minimum lease payments $ 2,217,939
--------------
--------------
Rental expense for operating leases was $3,187,945, $3,314,402 and $2,408,879
for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 7. OTHER COMMITMENTS
Under an agreement for satellite transmission services, including "FM(3)"
satellite transmissions, the Company was required to pay a monthly base fee of
$52,888, plus related service fees, through the earlier of January 2006, the
original estimated end-of-life of the satellite, or the actual end-of-life of
the satellite. The Company expensed $679,680, $677,347 and $618,648 for the
years ended December 31, 1998, 1997 and 1996, respectively, for these services.
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 and $653,083 in 1997 and
1996, respectively, for the base fee plus related service fees.
NOTE 8. MAJOR CUSTOMERS
The Company did not have any customers that accounted for 10% or more of total
revenue in either 1998 or 1997.
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 would 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, Global accounted for revenue approximating
$3,414,000. In December 1996, the Company discontinued providing services to
Charles Schwab and Company that accounted for net revenue of approximately
$1,693,000 in 1996.
F-22
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
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 $49,205, $36,200 and $30,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
NOTE 10. EMPLOYEE STOCK PURCHASE PLAN
In 1995, the Company established an employee stock purchase plan. 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.
The Company has reserved 500,000 shares of common stock for issuance pursuant to
the terms of the plan. Shares sold to employees totaled 288,513, 60,610 and
30,228 for the years ended December 31, 1998, 1997 and 1996, respectively.
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 sought monetary damages of approximately
$680,000. The Company filed a Motion to Dismiss a major portion of the complaint
which was granted in 1998. The remaining portion of the complaint seeks monetary
damages of approximately $70,000. The Company is vigorously contesting the
matter, but its 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 Board of Directors of the Company approved a plan to
restucture the operations of the Company. The plan provided for the exiting
of certain activities and the termination of three senior executive's
employment agreements. The activities exited by the Company resulted in a
write off approximately $572,000 of unamortized software development costs
for previously capitalized software projects that were discontinued and a
payment of $150,000 for early termination of a contractual arrangement. The
management reorganization resulted in the Company incurring employment
related termination costs of $425,000. Management classified these costs as
"restructuring expense," as the costs at the time of recognition: 1) were not
associated with or did not benefit activities that would be continued, 2)
were not associated with or incurred to generate future revenue, and 3)
represented amounts to be incurred by the Company under a contractual
arrangement. Total restructuring costs recognized by the Company in 1997, as
a result of its reorganization plan, was $1.1 million. There was $97,195 of
restructuring costs included in accrued expenses at December 31, 1997, and
subsequently paid in 1998.
NOTE 13. RESEARCH AND DEVELOPMENT
During the fiscal years ended December 31, 1998,1997 and 1996, we expensed
$634,884, $873,579 and $709,618, respectively, for research and development.
These expenses are included in product and market development costs in the
statements of operations.
F-23
PC QUOTE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14. MANAGEMENT'S PLANS AND INTENTIONS FOR CONTINUING OPERATIONS
The Company incurred a net loss of approximately $6.4 million and reported a
net loss available to common stockholders of approximately $7.3 million for
the year ended December 31, 1998. As of December 31, 1998, the Company had an
accumulated deficit of approximately $27.6 million and deficit working
capital of $3.5 million. These conditions raise doubt about the Company's
ability to continue as a going concern. The Company has addressed, and
continues to address, this doubt.
The Company has significantly improved its gross margins through a
combination of revenue growth and operating cost containment. Management
expects this trend to continue in 1999, in part due to new service offerings
planned for release in 1999 that they believe will result in additional
revenue and increased margins. Although management believes the Company's
gross margins will continue to improve, there can be no assurances that
generated cash flow will be sufficient to fund operations. If generated cash
flow is not sufficient to fund operations, the Company may have to raise
additional capital externally. In December 1998 the Company converted $6.7
million of current debt into preferred equity and raised an additional $1.0
million in capital through a private placement of Common Stock. Interest
expense related to the converted debt accounted for approximately $1.7
million of the loss reported for 1998. Altogether, the Company raised $9.2
million in capital in 1998 through the debt conversion, private placement,
exercise of warrants and other sales of common stock. These transactions
significantly improved the financial condition of the Company. Management's
objective is to raise, if and when necessary, the minimal amount of capital
for operations in order to minimize dilution to existing stockholders.
Management believes it has the ability to raise additional capital, if
necessary. However, any capital raised could be costly to the Company and/or
dilutive to stockholders.
The Company has explored, and continues to explore multiple alternatives that
may be available to the Company for the purpose of enhancing shareholder value.
Such alternatives include 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 and 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.
NOTE 15. SUBSEQUENT EVENTS
In February 1999 the Wexford Affiliates exercised the remaining potion of
their warrants and the Company issued 267,200 shares of common stock to them in
exchange for $534,400.
F-24
PC QUOTE, INC.
SUPPLEMENTAL SCHEDULE II OF FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To the Board of Directors
PC Quote, Inc.:
Under date of March 12, 1999, we reported on the balance sheets of PC Quote,
Inc. as of December 31, 1998 and 1997 and the related statements of operations,
stockholders' equity and cash flows for the years then ended. In connection with
our audits of the aforementioned financial statements, we also audited the
related financial statement schedule of valuation and qualifying accounts for
the years ended December 31, 1998 and 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 audits.
In our opinion, such financial statement schedule for the years ended December
31, 1998 and 1997, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the 1998 and 1997
information set forth therein.
KPMG LLP
Chicago, Illinois
March 12, 1999
F-25
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
Our audit of the financial statements of PC Quote, Inc. as of and for the year
ended December 31, 1996 included the 1996 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 information
set forth therein in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Schaumburg, Illinois
March 7, 1997
F-26
PC QUOTE, INC.
SUPPLEMENTAL SCHEDULE II TO THE FINANCIAL STATEMENTS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1997 and 1996
- ----------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
1998 $346,000 $397,873 ($300,836) $443,037
- ----------------------------------------------------------------------------------------------------
1997 234,000 683,639 (571,639) 346,000
- ----------------------------------------------------------------------------------------------------
1996 95,000 734,346 (595,346) 234,000
- ----------------------------------------------------------------------------------------------------
F-27