**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-K**

 

**(MarkOne)**

| **ý** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------------|

 

**Forthe fiscal year ended December 31, 2003**

 

**Commission File Number: 0-31226**

 

**INVESTOOLS INC.**

(Exact name ofRegistrant as specified in its charter)

 
| **Delaware**                                                    |   | **76-0685039**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                            |   |                                 |
|                                                            |   |                                 |
| **5959 Corporate Drive, Suite LL250  Houston, Texas**           |   | **77036**                            |
| (Address of principal executive offices)                        |   | (Zip Code)                           |
|                                                            |   |                                 |
| Registrant’s telephone number, including  area code:       |
| **(281) 588-9700**                                              |

 

| Securities registered pursuant to Section 12(b) of the Act: |   | **None**                                   |
|------------------------------------------------------------------|--------|--------------------------------------------|
| Securities registered pursuant to Section 12(g) of the Act: |   | **Common Stock, $.01 par value per share** |
|                                                             |   | (Title of Class)                           |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities and ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.
| Yes | ý | No | o |
|-----|--------|----|---|

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes  o    No ý

 

The aggregate market value of voting and non-voting common equity heldby non-affiliates of the Registrant as of June 30, 2003 (the last businessday of the Registrant’s most recently completed second fiscal quarter) based onthe closing price of the common stock on the OTC Bulletin Board of the NASD forsuch date, was $5.2 million.

 

The aggregate market value of the voting and non-voting common equityheld by non-affiliates of the Registrant on March 19, 2004, based upon theclosing price of the common stock on the American Stock Exchange for such date,was approximately $94.6 million.  Thenumber of shares of the Registrant’s common stock converted and outstanding onMarch 19, 2004 was 42,226,633.

 

**DocumentsIncorporated by Reference:**

 

The registrant’s definitive proxy statement filed or to be filed withthe Securities and Exchange Commission pursuant to Regulation 14A involving theelection of directors at the annual meeting of the shareholders of theregistrant scheduled to be held on June 2, 2004 is incorporated byreference in Part III of the Form 10-K.

 

 

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**INVESTOOLS INC.**

**FORM 10-K REPORT INDEX**

 
| **PART I**   |                                                                                        |   |
|--------------|---------------------------------------------------------------------------------------------|--------|
|         |                                                                                        |   |
| ITEM  1.     | BUSINESS                                                                                    |   |
| ITEM 2.      | PROPERTIES                                                                                  |   |
| ITEM 3.      | LEGAL PROCEEDINGS                                                                           |   |
| ITEM 4.      | SUBMISSION  OF MATTERS TO A VOTE OF STOCKHOLDERS                                            |   |
|         |                                                                                        |   |
| **PART II**  |                                                                                        |   |
|         |                                                                                        |   |
| ITEM 5.      | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |   |
| ITEM 6.      | SELECTED FINANCIAL DATA                                                                     |   |
| ITEM 7.      | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
| ITEM 7A.     | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |   |
| ITEM 8.      | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                |   |
| ITEM 9.      | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       |   |
| ITEM 9A.     | CONTROLS AND PROCEDURES                                                                     |   |
|         |                                                                                        |   |
| **PART III** |                                                                                        |   |
|         |                                                                                        |   |
| ITEM 10.     | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                         |   |
| ITEM 11.     | EXECUTIVE COMPENSATION                                                                      |   |
| ITEM 12.     | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                             |   |
| ITEM 13.     | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                             |   |
| ITEM 14.     | PRINCIPAL  ACCOUNTING FEES AND SERVICES                                                     |   |
|         |                                                                                        |   |
| **PART IV**  |                                                                                        |   |
|         |                                                                                        |   |
| ITEM 15.     | EXHIBITS,  FINANCIAL STATEMENTS AND REPORTS ON FORM 10-K                                    |   |

 

2

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**PartI**

 

# **Item 1.**        Business

# ** **

## **OperationsOverview**

## ** **

INVESTools Inc. (the “Company” or “INVESTools,”http://www.investools.com) offers a full range of investor education productsand services that provide lifelong learning and support to self-directedinvestors to help them improve their investment performance.  INVESTools has more than 100,000 graduates,and 34,000 subscribers to its Web sites, and has nearly 700,000 records in itsstudent database.  The Company teachesbasic investing concepts in instructor-led classes, including workbooks andtraining manuals, investor conferences, one-on-one personal coaching and DVDhome-study courses.

 

The Company’s corporate headquarters and principal executive office islocated at 5959 Corporate Drive, Suite LL250, Houston, Texas 77036.  The Company maintains its operationalheadquarters at its Provo, Utah facility, from which marketing, sales, productdevelopment, business development, brand management, student support andproduct fulfillment services are primarily conducted.

 

## **CorporateBackground**

## ** **

The Company was incorporated in Delaware on May 21, 2001 and beganoperations on December 6, 2001, as a result of a merger between ZiaSunTechnologies, Inc., a Nevada corporation (“ZiaSun”), and Telescan, Inc., aDelaware corporation (“Telescan”) (the “Merger”).  Former ZiaSun stockholders acquired an approximate 75% ownershipinterest in the Company.  Telescanstockholders received an approximate 25% ownership interest in theCompany.  The Merger was accounted forunder the purchase method of accounting.

 

ZiaSun and Telescan each became wholly owned subsidiaries of theCompany.

 

•                  ZiaSun owns 100%of Online Investors Advantage, Inc. (“OIA”). OIA owns 100% of Investor Education California, LLC.  OIA also owns 100% of the following dormantcompanies that have no operations: INVESTools Asia Pacific Pte., Limited (“INVESTools Asia”), INVESToolsHong Kong Ltd. (“INVESTools Hong Kong”), Seminar Marketing Group, Inc. (“SMG”)and Memory Improvement Systems, Inc. (“MIS”). ..

 

•                  Telescan owns100% of INVESTools, Inc., a dormant California corporation with no operations(“Investools California”).

 

## **BusinessSegments**

## ** **

The Company’s operations currently consist of a single segment,Investor Education, which seeks to fulfill the lifelong education needs of self-directedinvestors.  During the third quarter of2003, the Company reorganized its management team in support of its coreInvestor Education business.  As theCompany’s former Publishing and Business Services segment had experienced asteady decline in revenue over the past two years, management determined thatsuch segment was, and continues to be, an insignificant part of the Company’soperations.

 

## **BusinessStrategy**

## ** **

The Company’s objective is to empower individual investors to achievetheir goals by establishing the INVESTools Method - a unique integration ofdisciplined processes, Web-based tools, instruction techniques and support — asthe most widely recognized, adopted and endorsed approach to investoreducation.  By leveraging strategicpartnerships to gain market share for the INVESTools Method, growing thelifetime value of the student and creating a culture of execution within theCompany, management believes that the Company’s financial condition willcontinue to be strengthened.

 

***Establish the INVESToolsMethod***

 

Currently the Company has approximately 34,000 subscribers and morethan 100,000 graduates, which indicates that the INVESTools Method is among themost widely adopted investor education systems in the world.  In 2003, the Company continued to penetratethe investor education market using its existing branded and cooperativemarketing partnerships with the BusinessWeek Group of the McGraw-Hill Companies(http://www.toolbox.businessweek.com/); CNBC, which his owned by NationalBroadcasting Corporation (http://www.cnbcu.com); MIT Financial(http://moneyintraining.com); and Peter Lowe International, Inc.(http://www.lifewin.com), among others. Through increased brand involvement in the Company’s marketing andproducts, the Company has been able to reach new students with varieddemographic profiles, extend the delivery formats through which the Company’sproducts are offered and further expand the range of content offered tostudents.  In 2004, the Company plans tocontinue pursuing an increased market share through new partners anddistribution channels with the INVESTools Method formula, as well as streamlineits products across relationships for improved source recognition.

 

3

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***Grow the LifetimeValue of the Student***

 

In 2003, the Company introduced its lifetime value of the studentstrategy.             Thestrategy sought to expand the length of time a student participated inINVESTools’ investor education programs and increase the quantity of productsfor the student while maintaining product excellence.  Through a process that involved: (i) implementing a series offriendly, time-sensitive communications with students throughout their lifecycle with the Company; (ii) taking a more proactive approach to studentretention and (iii) educating staff members in how to empower students forresults, the Company experienced growth in subscription renewals and additionalproduct sales during the year.  Theseresults, combined with more than 100,000 current graduates, prove not only thatthe Company can retain students, but that it can also fulfill their needs foradditional or lifelong learning.  In2004, the Company plans to further increase the average life cycle and averagesales per graduate through a variety of alumni-focused marketing campaigns.

 

***Create a Culture ofExecution***

### *** ***

Since the merger in 2001, the Board of Directors has successfullybrought together diverse corporate cultures and refocused the management teamin order to effectuate the continued growth of the Company.  In 2003, Michael Goldsmith, a managingdirector with Wealth and Tax Advisory Services, Inc., a subsidiary of Hong Kongand Shanghai Banking Corp, and Douglas Tansill, a private investor and financialconsultant with nearly 40 years of investment banking experience, joined theCompany’s Board of Directors.  Inaddition, Andrew Forrester, a founding member of Cove Harbor Partners, and JohnBabcock, Jr., former President and Chief Executive Officer of BPICommunication, Inc., were appointed to the newly created Advisory Committee ofthe Board of Directors.  In 2004, theBoard of Directors will utilize the Advisory Committee to continue to shape theINVESTools Method by periodically reviewing and approving changes to theconcept and the Company’s overall business plan.

 

## **Productand Service Offerings**

## ** **

The Company’s premier product is its proprietary InvestorToolbox Website (<http://www.investortoolbox.com>), which serves as the platform forall of the Company’s investor education programs.  Generally, investors are introduced to the InvestorToolbox Webproduct through a free “Introduction to Online Investing” preview event.  Attendees of the preview event are given aninvitation to attend a more comprehensive instructor-led workshop or purchasean in-depth home study program, both of which include a six-month subscriptionto the InvestorToolbox Web site.

 

The Company seeks to offer investors a full range of investor educationproducts that provide lifelong learning. As such, workshops and home study programs are typically bundled withpersonalized, one-on-one coaching sessions, which are spread out over severalmonths.  Followingcompletion of the personal training sessions, graduates are offered continuingeducation courses to build upon what they have learned.  The Company continues to develop andintroduce additional continuing education courses in order to maintain a broadinvestor education program for the Company’s alumni.  Products are offered under the BusinessWeek, CNBC, SuccessMagazine and INVESTools brands.

 

•                  *InvestorToolbox Web Site* - The Company’sInvestorToolbox Web site gives investors access to the investment tools neededto execute the strategies taught in the Company’s workshop, home study andpersonal training programs.  The sitehas proprietary features that are not accessible on other financial Web sites,including more than 50 pre-built stock searches, comparative reports, marketindicators, market commentary and portfolio tracking features.  An initial six-month subscription to thesite (valued at $299) is included with the purchase price of a workshop or homestudy program.  At the end of theinitial six-month subscription, graduates are offered renewals for a fee, whichdepends on the length of the renewal period and whether additional products arepurchased.  Currently, the Companyoffers six-month, 12 month, 24 month and 36 month renewals.

 

•                  *Preview Event* - INVESTools offers a free event thatintroduces attendees to basic investing concepts and provides a broad overview ofthe financial market.  Depending on thebrand under which the event is marketed, participants may receive a premium for *attending*. Attendees are offered an invitation to attend a more intensive workshopor purchase an in-depth home study program, both of which are typically bundledwith one-on-one coaching sessions with a personal trainer.

 

•                  *Workshops* - The Company offers one and two-day,domestic and international instructor-led investing workshops that cover topicsranging from basic investing principles to advanced strategies, such as cashflow analysis and options strategies. Classes provide investorswith “hands on” experience using the Company’s proprietary InvestorToolbox Website, as well as *future* access to one-on-one coaching sessions with apersonal trainer.  Prices for theCompany’s workshops range from $995 to $3,999.

 

•                  *Home Study Programs* - INVESTools offers several of its courses,including basic investing principles, cash flow strategies and its popularpersonal coaching line of products, in a DVD “at home” study format.  These one and two-day programs are madeavailable to preview attendees who are unable to attend the instructor-ledworkshops, as well as to workshop graduates seeking to expand their investment knowledgebase.  Prices for the Company’s homestudy programs range from $995 to $7,999.

 

4

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•                  *Personal Training System(PTS)* - The Company’s PTSline of products offer investors personalized, one-on-one coaching on a varietyof subjects, including onlineinvesting and cash flow strategies.  TheCompany is currently developing a personalized advanced options course, aswell.  Through these interactivesessions, investors are accountable to a personal trainer, which enables themto learn at their own pace and successfully apply what they are learning.  PTS sessions are typically offered over athree-month period and include unlimited support by phone and email during thesame time period. Prices for the courses range from $999 to $2,499 dependingupon how they are bundled.

 

•                  *Masters**Program*- In 2004, the Company introduced its new Masters Program, which combines homestudy courses and personal training sessions to give the serious studentcomprehensive access to a multitude of the Company’s products at oneprice.  As part of the program, studentsreceive extended personal training sessions for both the online investing andcash flow strategies courses (including telephone and email hotline access), anadvanced options course, 24 month InvestorToolbox access and a 12 monthunlimited workshop VIP pass.  Prices forthe Masters Program range from $4,999 to $7,999.

 

•                  *Continuing Education -*INVESToolscontinuously challenges alumni of the Company’s investor education programs tobuild upon the skills learned through free weekly email newsletters and dailymarket commentary, as well as through advanced home study courseofferings.  Advanced courses currentlyavailable include Advanced Options, Bear Market Game Plan, LEAPS Strategies,Mutual Fund and OEX Strategies and Spread Trading.  Prices for the courses range from $299 to $2,499.

 

## **MarketingStrategy**

 

Revenue is derived from: (i) the initial sale of the Company’s productsand services as a result of marketing efforts across a multitude of studentacquisition mediums, which include, but are not limited to, radio, television,print, email and direct marketing campaigns, as well as telemarketing efforts;and (ii) the additional sale of products and services to graduates as a resultof continued interaction with the Company, including weekly newsletters,periodic email communications and hotline access to personal trainers andinstructors.  In 2003, with theassistance of Service Enhancement Systems, Inc., a California corporationoperating under the assumed name 360 Group (“360 Group”), a direct marketingfirm, the Company continued to refine its student acquisition process and builta new marketing database of nearly 700,000 prospects and students in an effortto increase the student retention rate and expand product cross-sellopportunities.  As a result, the Companyexperienced growth in initial and additional product sales, increased thenumber of subscribers to its platform Web site, InvestorToolbox.com, andachieved increasing Web site renewal rates.

 

In February of 2004, the Company acquired 360 Group for $5.5million in a combination of stock and cash. As a resultof the acquisition, the Company immediately: (i) gained control of acritical strategic asset, thereby providing the Company with the ability tobuild, constantly upgrade and exploit its extensive student database and (ii)acquired 22 talented professionals, including key additions to the executivemanagement team.  Going forward, theCompany will continue to refine its creative development, student analysis andvenue mapping strategies to further reduce student acquisition costs, increaselead flow and increase net income.

 

## **Competition**

## ** **

Technology has generated significant growth in education markets andacceptance of for-profit involvement in the improvement of education is now amainstream concept. However, only recently has the education market begun toemerge as a true industry.  Broadlydefined, the education industry covers a full range of “cradle to grave,”for-profit and non-profit educational products and services that are deliveredthrough both traditional and technology-based channels and includes suchdisparate elements as early childhood education, corporate training andlifelong learning.  The Company believesthat its mission – to fulfill the lifelong education needs of self-directedinvestors – most accurately falls within the confines of the educationindustry.

 

Of the $105 billion for-profit sector, (1) which has grown rapidly formost of the past decade, it is estimated that the nearly $17 billion market forpost-secondary education is expected to be the fastest growing sector in theindustry for the next several years. (2) Related to the market for investor education, since more than half ofall U.S. households, an estimated 53 million, own equity securities, 48% ofwhich were initially purchased inside employer retirement plans, (3) theCompany believes that a significant opportunity exists to educate the publicabout how to make good investment decisions. A recent Harris Interactive / Securities Industry Association survey (4)confirmed the Company’s belief, citing that as more investment relatedinformation has become available to the public through the Internet, and withincreasing cases of corporate accounting fraud and financial mismanagement,investors continue to look to the securities industry to educate them about howto make better investments.

 

Generally, competitive factors within the educational market includethe range and depth of course offerings, the quality of instructors andtrainers, the quality of reference materials provided in connection with coursestudies and the cost of the educational process.  The Company is aware of several companies that provide some levelof investor education in a similar delivery format.  However, the Company believes that the range and depth of itscourse offerings and its exclusive license agreements with BusinessWeek andCNBC for branded investor education offerings, combined with the Company’sdatabase

 

5

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of nearly 700,000 prospects and students, more than 100,000 graduatesand greater than 34,000 subscribers provide the Company with a considerablecompetitive advantage.

 

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(1) KnowledgeQuest Education Group LLC, 2002

(2) School Reform News, August 2002

(3) ICI/SIA Study, Equity Ownership in America, 2002

(4) Harris Interactive Annual SIA Investor Survey, November 2003

 

## **Intellectual Property**

## ** **

The Company has been awarded and seeks to maintain a number of patentsin the United States in order to protect its proprietary base technology.  The Company has also registered and receivedapproval with respect to a number of trademarks in the United States and inforeign countries.  Although managementbelieves that the Company’s patents and trademarks provide adequate protectionfor the proprietary aspects of the Company’s technology and businessoperations, management cannot assure that such patents and trademarks will1)  be of substantial protection orcommercial benefit to the Company; 2) afford the Company adequate protectionfrom competing products; or 3) not be challenged or declared invalid.

 

The Company attempts to protect its trade secrets and other proprietaryinformation with product development partners, employees and consultantsthrough nondisclosure agreements, contract provisions and through copyright,patent, trademark and trade secret laws. With respect to technologies that the Company licenses to third partiesfor use in specific applications or platforms, the Company relies on licensingagreements to ensure additional protection related to the source code of theCompany’s products as a trade secret and as an unpublished copyright work.  Management believes that the Company’sproducts, trademarks and other proprietary rights do not infringe on theproprietary rights of third parties, and management is not aware of any currentinfringement claims against the Company.

 

## **Regulatory Compliance**

## ** **

With the exception of the general requirement that the Company and itssubsidiaries be registered or qualified to do business in the United States andany foreign countries in which the Company operates, the products and servicesprovided through the use of the Company’s technology currently are not subjectto the approval of any government regulatory body.  However, certain foreign countries may require that the Companyregister with their respective securities and investments commission or similarregulatory body prior to conducting investment-related seminars orworkshops.  The Company has registeredwith the Australian Securities and Investments Commission and has a complianceofficer residing in Australia.

 

The Company is subject to numerous federal and state laws andregulations designed to protect consumers, including laws governing consumerprivacy and fraud, the collection and use of consumer data, telemarketing andother forms of solicitation. Noncompliance with these laws and regulations cansubject the Company to fines or various forms of civil or criminal prosecution,any of which could have an adverse effect on its financial condition andresults of operations.

 

## ***Consumer Protectionand Telemarketing Matters***

### *** ***

The telemarketing rules adopted by the Federal CommunicationsCommission pursuant to the Federal Telephone Consumer Protection Act and theFederal Telemarketing Sales Rule issued by the Federal Trade Commission (bothof which were amended in 2003 to establish a National Do Not Call Registry)govern the Company’s telephone sales practices. In addition, many states haveadopted statutes and regulations targeted at direct telephone sales activities.The Company has reviewed its marketing and sales practices and has mademodifications to ensure compliance.  TheCompany will continue to monitor regulatory guidelines to ensure compliance.

 

The CAN-SPAM act of 2003 was signed into law by the President onDecember 16, 2003 and went into effect on January 1, 2004. Otherwiseknown as “The Controlling the Assault of Non-Solicited Pornography andMarketing Act” it requires unsolicited commercial email messages to be labeledand to include opt-out instructions and the sender’s physical address. Itprohibits the use of deceptive subject lines and false headers in suchmessages. The Company has reviewed its email marketing practices and has mademodifications to ensure compliance.  TheCompany will continue to monitor regulatory guidelines to ensure compliance.

 

### ***SEC Filings***

 

The Company files annual, quarterly and special reports, proxystatements and other information with the Securities and Exchange Commission(“SEC”) within established deadlines. Any document the Company files with the SEC may be viewed or copied atthe SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.20549.  Additional information regardingthe Public Reference Room can be obtained by calling the SEC at (800)SEC-0330.  The Company’s SEC filings arealso available to the public through the SEC’s Web site located athttp://www.sec.gov.  The Company willvoluntarily provide electronic or paper copies of its filings free of chargeupon request.

 

The Company maintains a corporate Web site athttp://www.investools.com, on which investors may access free of charge theCompany’s annual report on Form 10-K, quarterly reports on Form 10-Q andamendments to those reports as soon as is reasonably practicable afterfurnishing such material with the SEC.

 

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## **Human Resources**

## ** **

At December 31, 2003, the Company had 287 employees.  There were 275 full time employees in allfunctions of the Company and 12 part time employees, primarily inadministrative and sales functions.  TheCompany also had 19 persons under contract primarily in educational services.  Key Company personnel arecovered by employment and confidentiality agreements.  No persons employed by the Company, either full time or on acontract basis, are covered by a collective bargaining agreement and theCompany has never experienced a work stoppage due to protesting or relatedactivities.  Management considersrelations with the Company’s personnel to be good.

 

# **Item 2.**        Properties

# ** **

The Company’s corporate headquarters are located in Houston,Texas.  In December 2002, theCompany entered into a temporary lease agreement for the Houston facilitybeginning May 1, 2003 that can be terminated by either party with 90 dayswritten notice.

 

The Company’s main operations are located in leased facilities inProvo, Utah and the Company has leased office space in New York, New York andthe San Francisco Bay area.

 

In March 2003, the Company ceasedoperation of its wholly owned subsidiary INVESTools California, vacated itslease, and terminated the remaining employees. The Company also ceased operation of its wholly owned subsidiariesINVESTools Asia and INVESTools Hong Kong, vacated its lease in Singapore andterminated all of the employees.

 

The following table shows the amount of square footage of the Company’sleased facilities and monthly rent as of December 2003:

 
| **City**               |   | **Square  Feet  Rented** |   | **Monthly  Rent  as of  December 2003** |   |
|------------------------|--------|--------------------------|--------|----------------------------------------------|--------|
|                   |   |                     |   |                                         |   |
| Provo (combined)       |   | 39,489                   |   | $                                            | 42,232 |   |
| San Francisco Bay Area |   | 2,155                    |   | 4,852                                        |   |
| Houston                |   | 9,495                    |   | 6,000                                        |   |
| New York               |   | 280                      |   | 6,660                                        |   |
|                   |   | 51,419                   |   | $                                            | 59,744 |   |

 

In December 2003, the Company entered into an agreement tosublease space in Provo, Utah.  Theagreement was for approximately three years and the Company is receiving rentof approximately $11,000 per month.

 

# **Item 3.**        LegalProceedings

# ** **

From time to time the Company is involved in certain legal actionsarising from the ordinary course of business. It is the opinion of management that such litigation will be resolvedwithout a material adverse effect on the Company’s financial position orresults of operations.

 

On March 4, 2003, a foreign national filed a complaint in the SanDiego Superior Court against ZiaSun Technologies, Inc., a wholly-ownedsubsidiary of the Company (“ZiaSun”). The complaint alleges that certain individuals, who are not parties inthe lawsuit, persuaded the plaintiff to purchase shares of ZiaSun common stockand the complaint also alleges a failure to deliver a stock certificate.  ZiaSun does not have any ownership orcontrol of the third party brokerage house from whom plaintiff claims to havepurchased stock.  The plaintiff isseeking unspecified damages for the alleged fraud in the sale of thestock.  The Company believes that it hasgood defenses to the alleged claims and intends to vigorously defend againstthis lawsuit.

 

On July 9, 2003, the Company was served with a lawsuit that wasfiled on June 4, 2003 by Integris/Millennium Joint Venture, LLC in theSuperior Court of California, County of San Mateo.  The lawsuit names INVESTools California, Telescan, and INVESToolsInc. as defendants.  The plaintiffalleges that in April 2003, INVESTools California breached a leaseagreement by abandoning the leasehold premises and failing to pay monthly rentto the plaintiff.  The lawsuit alsoalleges fraudulent transfer and waste against all the defendants.  The plaintiff is seeking damages for rentowed for the remainder of the lease term and for miscellaneous cleanup, repairand storage costs.  The plaintiff isalso seeking the seizure of the alleged fraudulently transferred assets andpunitive damages.  Thetrial court entered judgment in favor of INVESTools Inc., dismissing each ofPlaintiff’s claims against INVESTools Inc., after concluding that INVESToolsInc. is not subject to California’s jurisdiction.  The Company intends to vigorously defend the claims assertedagainst the remaining defendants.  Thematter is set for dispositive motion on April 19, 2004 and the Companyremains confident that the matter will be dismissed prior to trial.

 

The Company is not aware of pending claims or assessments, other thanas described above, which may have a material

 

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adverse impact on the Company’s financial position or results ofoperation.

 

# **Item 4.**        Submission of Matters to a Vote of Stockholders

# ** **

During the fourth quarter of 2003, there were no matters submitted to avote of the stockholders.

 

**PartII**

 

# **Item 5.**        Market for Registrant’s Common Equity and Related Stockholder Matters

# ** **

## **The Company**

## ** **

The Company’s common stock is traded on the American Stock Exchangeunder the symbol “IED.”  The followingtable sets forth, for the periods indicated, the high and low salesprices.  Prior to December 9, 2003,the Company’s common stock traded on the OTC Bulletin Board.

 
|                            |   | **Company  Common Stock** |   |
|---------------------------------|--------|---------------------------|--------|
|                            |   | **High**                  |   | **Low** | ** ** |
| 2003                            |   |                      |   |   |   |
| Quarter ended March 31     |   | $                         | 0.39   |   | $ | 0.17 |   |
| Quarter ended June 30      |   | 0.34                      |   | 0.14 |   |
| Quarter ended September 30 |   | 1.37                      |   | 0.15 |   |
| Quarter ended December 31  |   | 1.80                      |   | 0.59 |   |
|                            |   |                      |   |   |   |
| 2002                            |   |                      |   |   |   |
| Quarter ended March 31     |   | $                         | 0.71   |   | $ | 0.25 |   |
| Quarter ended June 30      |   | 0.51                      |   | 0.25 |   |
| Quarter ended September 30 |   | 0.51                      |   | 0.08 |   |
| Quarter ended December 31  |   | 0.40                      |   | 0.06 |   |

 

On March 19, 2004, the closing price of the Company’s common stockas reported by the American Stock Exchange was $2.24.  As of March 19, 2004, the Company had 884 stockholders ofrecord, and believes it has approximately 9,000 beneficial holders.

 

## **Dividend Policy**

## ** **

The Company has never declared a cash dividend on its commonstock.  The Board of Directors currentlyintends to retain all earnings for use in the Company’s business, andtherefore, does not anticipate paying any cash dividends on its common stock inthe foreseeable future.  The declarationof dividends, if any, in the future would be subject to the discretion of theBoard of Directors, which may consider factors such as the Company’s results ofoperations, financial condition, capital needs and acquisition strategy, amongother things.  See “Item 7 -Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and the Company’s consolidated financial statements and the notesthereto.

 

In accordance with the agreement pursuant to which the stock wasissued, on May 15, 2002, the 120,000 outstanding shares of the Company’s SeriesA Convertible Preferred Stock converted into 1,666,667 shares of Company commonstock.  Accrued dividends of $75,000 wereconverted into 41,667 shares of common stock.

 

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## **Equity Compensation Plan Information**

## ** **

The following table sets forth information as of December 31, 2003with respect to the Company’s equity compensation plans previously approved bystockholders and equity compensation plans not previously approved bystockholders.

 
|                                                        |   | **Equity  Compensation Plans**                                                                      |       |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                           |   | **Number of  securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted  average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of  securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a)** |   |
|                                                        |   | **(a)**                                                                                             |       | **(b)** |   | **(c)** |   |
| Equity compensation plans approved by  stockholders (1)     |   | 3,779,359 - 4,329,359                                                                               |       | $ | 1.47 |   | 2,725,000 - 2,175,000 |   |
| Equity compensation plans not approved by  stockholders (2) |   | 1,882,122                                                                                           |       | — |   | — |   |
| Total                                                       |   | 5,661,481 - 6,211,481                                                                               |       | $ | 1.47 |   | 2,725,000 - 2,175,000 |   |

 

----

(1)This amount includes an option granted by the Company toits Chief Executive Officer in 2002. The vesting of the options is contingent upon an event occurring in thefuture.  Based upon the terms of theoption, the number of shares issuable upon exercise of the option, if any, willbe between 50,000 to 550,000 shares at an exercise price of $0.18 pershare.  The option was granted under theINVESTools 2001 Stock Option Plan, which was approved by stockholders.

 

(2)During 2003, the Company issued a total of 1,093,527shares of common stock to its executive officers as payment in lieu of cashbonuses and a total of 60,000 shares of common stock to directors ascompensation.  The Company also issued15,000 shares of stock to members of the Advisory Board, subject to certainrestrictions.

 

In December 2003, the Company issued 15,000 shares of theCompany’s common stock to the two members of the Company’s Advisory Board and15,000 shares to a Board member pursuant to Section 4(2) of the SecuritiesAct.  The Advisory Board Members areprohibited from selling, transferring or any other disposition of the sharesfor two years from the date of the award.

 

9

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# **Item 6.**        SelectedFinancial Data

# ** **

The following table sets forth selected historical consolidatedfinancial data for the periods indicated. The selected data should be read in conjunction with “Item7-Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and with the Company’s consolidated financial statements and notesthereto.

 

**Statement of Operations**

 
|                                                                                        |   | **Years  Ended December 31,**            |   |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                                        |   | **2003**                                      |   | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
|                                                                                        |   | **(in  thousands, except per share amounts)** |   |
| Revenue                                                                                     |   | $                                             | 73,420 |   | $ | 56,142 |   | $ | 52,691 |   | $ | 54,667 |   | $ | 23,620 |   |
| Write downs of assets and other charges                                                     |   | —                                        |   | — |   | (6,454 | ) | (73,051 | ) | — |   |
| Other income (expense)                                                                      |   | 78                                            |   | (61 | ) | (40 | ) | 367 |   | 17 |   |
| Net income (loss) before income taxes                                                       |   | 30                                            |   | (1,650 | ) | (8,020 | ) | (67,446 | ) | 4,387 |   |
| Net income (loss) from continuing  operations before cumulative effect of accounting change |   | (1,500                                        | )      | (1,456 | ) | (8,020 | ) | (70,547 | ) | 2,632 |   |
| Cumulative effect of accounting change, net  of tax                                         |   | —                                        |   | (28,417 | ) | — |   | — |   | — |   |
| Net income (loss) available to common  stockholders                                         |   | $                                             | (1,500 | ) | $ | (29,918 | ) | $ | (7,913 | ) | $ | (77,226 | ) | $ | 5,964 |   |
| Net income (loss) per common share -  diluted                                               |   |                                          |   |   |   |   |   |   |   |   |   |
| Net income (loss) from continuing  operations before cumulative effect of accounting change |   | $                                             | (0.03  | ) | $ | (0.03 | ) | $ | (0.25 | ) | $ | (2.37 | ) | $ | 0.10 |   |
| Net income (loss) from discontinued  operations                                             |   | $                                             | — |   | $ | — |   | $ | 0.01 |   | $ | (0.23 | ) | $ | 0.13 |   |
| Cumulative effect of accounting change, net  of tax                                         |   | $                                             | — |   | $ | (0.68 | ) | $ | — |   | $ | — |   | $ | — |   |
| Net income (loss) available to common  stockholders                                         |   | $                                             | (0.03  | ) | $ | (0.71 | ) | $ | (0.24 | ) | $ | (2.60 | ) | $ | 0.23 |   |
| Diluted weighted average shares outstanding                                                 |   | 43,692                                        |   | 41,983 |   | 32,684 |   | 29,744 |   | 25,796 |   |

 

**Balance Sheet Data**

 
|                            |   | **December 31,** | ** ** |
|---------------------------------|--------|-----------------------|------------|
|                            |   | **2003**              |       | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| Working capital (deficit)       |   | $                     | 321        |   | $ | (986 | ) | $ | (2,185 | ) | $ | (542 | ) | $ | 6,373 |   |
| Total assets                    |   | 26,551                |       | 25,305 |   | 55,174 |   | 47,713 |   | 19,457 |   |
| Total stockholders’ equity |   | 13,867                |       | 15,166 |   | 44,344 |   | 42,099 |   | 15,736 |   |
| Book value per share            |   | $                     | 0.31       |   | $ | 0.35 |   | $ | 1.09 |   | $ | 1.29 |   | $ | 0.49 |   |

 

# **Item 7.**        Management’s Discussion and Analysis of Financial Condition and Resultsof Operations

# ** **

The following discussion should be read in conjunction with theCompany’s financial statements and related notes, and the preceding “Item 6 -Selected Financial Data.”

 

## **Forward-Looking Information**

## ** **

Certain matters discussed herein may contain forward-looking statementsthat are subject to risks and uncertainties. Such risks and uncertainties include, but are not limited to, thefollowing:

 

•                  the volatilenature of the securities business;

•                  theuncertainties surrounding the rapidly evolving markets in which the Companycompetes;

•                  theuncertainties surrounding technological change and the Company’s dependence oncomputer systems;

•                  the Company’sdependence on its intellectual property rights;

•                  the success ofmarketing efforts by third parties in revenue sharing agreements;

•                  the potential ofincreased governmental regulation of the telecommunications industry and theInternet; and

•                  the changingdemands of students.

 

10

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Should one or more of these risks or uncertainties materialize orshould any of the underlying assumptions prove incorrect, actual results ofcurrent and future operations may vary materially from those anticipated.

 

## **Executive Overview**

## ** **

INVESTools Inc. (“INVESTools” or the “Company”) provides investoreducation primarily to the individual investor using tools and informationavailable on the Company’s Web sites. The Company offers a full range of products and services that providelifelong learning in a variety of delivery formats, including instructor-ledworkshops, “at home” study programs and personal training sessions.  During 2003, the Company saw a 31% increasein revenue resulting from the demand for investor education and the strength ofthe Company’s strategy to work towards increasing the lifetime value to thestudent.  The increase in revenue,combined with efforts to control costs, resulted in a net loss from operationsof $48,000, a 97% improvement over the $1.6 million loss from operations in2002.

 

The Company was formed as the result of a merger between ZiaSunTechnologies, Inc. (“ZiaSun”), a Nevada corporation and Telescan, Inc.(“Telescan”), a Delaware Corporation on December 6, 2001.  The merger was accounted for as a purchase withZiaSun as the acquirer.  Therefore, thefinancial results for 2001 only include 25 days of operations for Telescan.

 

ZiaSun’s wholly owned subsidiary, Online Investor’s Advantage (“OIA”),acquired in April 1999, was a customer of Telescan. ZiaSun built theinvestor education business around Telescan’s sophisticated Web site offinancial and analytical tools through a series of workshops and home studyproducts.  During 2002, the Companybrought in such brand partners as CNBC and BusinessWeek and started offeringmore products and services.

 

 
|                  |   | **For the  year ended December 31,** |       | **% of  Revenue** |       | **2003 vs.  2002** |       | **2002 vs.  2001** |       |
|-----------------------|--------|-------------------------------------------|------------|-------------------|------------|--------------------|------------|--------------------|------------|
| **Operating Results** |   | **2003**                                  | ** ** | **2002**          | ** ** | **2001**           | ** ** | **2003**           | ** ** | **2002** | ** ** | **2001** | ** ** | **Change** |   | **%** |   | **Change** | ** ** | **%** | ** ** |
| Revenue               |   | $                                         | 73,420     |              | $          | 56,142             |       | $                  | 52,691     |   | 100 | % | 100 | % | 100 | % | $ | 17,278 |   | 31 | % | $ | 3,451 |   | 7 | % |
| Cost of revenue       |   | 41,209                                    |       | 25,411            |       | 22,794             |       | 56                 | %          | 45 | % | 43 | % | 15,798 |   | 62 | % | 2,617 |   | 11 | % |
| Selling Expense       |   | 18,482                                    |       | 17,491            |       | 18,429             |       | 25                 | %          | 35 | % | 31 | % | 991 |   | 6 | % | (938 | ) | (5 | )% |
| Contribution margin   |   | 13,729                                    |       | 13,240            |       | 11,468             |       | 19                 | %          | 24 | % | 22 | % | 489 |   | 4 | % | 1,772 |   | 15 | % |
| G & A expense (a) |   | 13,777                                    |       | 14,829            |       | 12,994             | (b)        | 19                 | %          | 26 | % | 25 | % | (1,052 | ) | (7 | )% | 1,835 |   | 14 | % |
| Operating earnings    |   | $                                         | (48        | )                 | $          | (1,589             | )          | $                  | (1,526     | ) | (0 | )% | (3 | )% | (3 | )% | $ | 1,541 |   | (97 | )% | $ | (63 | ) | (4 | )% |

 

----

(a)   Includesdepreciation and amortization expenses.

(b)   Amountexcludes write-down of investment of $6.5 million in 2001.

 

The Company sells investor education courses that teach individuals theINVESTools Method to manage their own investment portfolios and do their owndue diligence and research.  Thiseducation is delivered through instructor-led workshops, home study products,and one-to-one teaching, known as the Personal Training System and includes aToolbox Web site subscription.  TheCompany markets its workshop products through radio/television and print mediaas well as direct mailings or email, or in conjunction with events orconferences conducted by our co-marketing partners.

 

At workshop events satisfied graduates have the opportunity to purchaseadditional products.  This has become asignificant revenue channel and source of increased lifetime value of eachstudent.  Leads generated in themarketing process are additionally pursued through telemarketing effortsselling the entire range of products.

 

In addition to the recurring revenue represented by the sale ofadditional products to INVESTools students, the Company has strategicallyemphasized its efforts to get students to renew their Toolbox Web sitesubscriptions, achieving a 65% renewal rate with an average length of 11 monthsas of December 31, 2003.

 

## **Recent Developments**

## ** **

### ***Acquisition of 360 Group***

### *** ***

In February 2004, the Company announced the acquisition of ServiceEnhancement Systems, Inc., a California corporation operating under the assumedname 360 Group (“360 Group”) for $5.5 million. 360 Group, a San Rafael, California based agency, is a direct marketingcompany that provides services such as custom database development andmanagement, strategic planning, media and list planning and buying, creativeand production services, response management, and analytic services.  As a result of this transaction, alloutstanding shares of 360 Group’s common stock were converted into the right toreceive an aggregate of 829,645 shares of common stock of the Company and approximately$875,000 in cash.  The merger consideration paid at closing may beincreased or decreased after closing for certain indebtedness and net workingcapital adjustments provided for in the merger agreement.  In addition tothe merger consideration paid at closing, the Company will be obligated to payup to an aggregate of 829,644 shares of stock

 

11

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of the Company and approximately $875,000 in cash as additional mergerconsideration in the form of earn out payments if certain future revenuetargets are achieved in 2004 and 2005.  The Company used cash on hand tofund the cash portion of the merger consideration paid at closing.   In connection with the merger, Scott K.Waltz, the former Vice President, Client Services of 360 Group, was namedSenior Vice President, Chief Marketing Officer of the Company, and DonKlabunde, the former Chief Information Officer of 360 Group, was named VicePresident, Chief Information Officer of the Company.

 

360 Group has two core practices.  Its Education Group leveragesexperience with INVESTools, Score Education Centers and the University ofPhoenix.  The Retail Group is anchored by Men’s Wearhouse, and leveragesits experience with clients from Cricket Cellular, Levi’s, The North Face andPeet’s Coffee among others.

 

The Company views the acquisition as a strategic acquisition that workswell financially and bolsters the Company’s management team. The Companybelieves that the 360 Group has been instrumental in increasing total studentacquisition and return on marketing during the past 18 months.  360 Grouphas been managing all student acquisition efforts for the Company as well asbuilding and coordinating the Company’s marketing database to improve studentretention and cross-selling efforts since October 2002. This database is asignificant strategic asset and will be critical to future profitability as theCompany works toward increasing student lifetime value.

 

## **Revenue**

 
|                       |   | **For the  year ended December 31,** |       | **% of  Revenue** |       | **2003 vs.  2002** |       | **2002 vs.  2001** |       |
|----------------------------|--------|-------------------------------------------|------------|-------------------|------------|--------------------|------------|--------------------|------------|
|                       |   | **2003**                                  | ** ** | **2002**          | ** ** | **2001**           | ** ** | **2003**           | ** ** | **2002** | ** ** | **2001** | ** ** | **Change** |   | **%** |   | **Change** | ** ** | **%** | ** ** |
| Workshops                  |   | $                                         | 34,973     |              | $          | 31,720             |       | $                  | 38,711     |   | 48 | % | 56 | % | 73 | % | $ | 3,253 |   | 10 | % | $ | (6,991 | ) | (18 | )% |
| Personal Training          |   | 14,679                                    |       | 2,274             |       | —             |       | 20                 | %          | 4 | % | 0 | % | 12,405 |   | 546 | % | 2,274 |   | — |   |
| Home Study                 |   | 12,841                                    |       | 7,928             |       | 9,248              |       | 17                 | %          | 14 | % | 18 | % | 4,913 |   | 62 | % | (1,320 | ) | (14% | ) |
| Web Site Renewals          |   | 9,912                                     |       | 6,332             |       | 3,913              |       | 14                 | %          | 11 | % | 7 | % | 3,580 |   | 57 | % | 2,419 |   | 62 | % |
| Other online revenues      |   | 3,315                                     |       | 7,358             |       | 700                | (a)        | 5                  | %          | 13 | % | 1 | % | (4,043 | ) | (55 | )% | 6,658 |   | 951 | % |
| Other revenue              |   | 1,545                                     |       | 1,521             |       | 349                |       | 2                  | %          | 3 | % | 1 | % | 24 |   | 2 | % | 1,172 |   | 336 | % |
| Change in deferred revenue |   | (3,845                                    | )          | (991              | )          | (230               | )          | (5                 | )%         | (2 | )% | (0 | )% | (2,854 | ) | (288 | )% | (761 | ) | 331 | % |
| Total revenue              |   | $                                         | 73,420     |              | $          | 56,142             |       | $                  | 52,691     |   | 100 | % | 100 | % | 100 | % | $ | 17,278 |   | 31 | % | $ | 3,451 |   | 7 | % |

 

----

(a)   Representsrevenue for Telescan for only 25 days.

 

The Company’s initial product was workshops that taught people how touse the tools available on the Internet to manage their own investmentportfolios.  The focus was on theCompany’s Investor Toolbox Web site, developed by Telescan, which convenientlyaggregated the tools in one place.  TheWeb site subscription is the foundation to all of the Company’s products.  The products teach people how to managetheir investment portfolios using the tools available on the Web site.  The terrorist attack on the United States inSeptember 2001 combined with the end of a decade long bull market in 2002held revenues flat in that year.  TheCompany mapped out a strategy of increasing the lifetime value of the student,adding products and increasing distribution. This strategy included the introduction of Personal Training System, andincreasing the sales focus on student retention through renewals to the Websites.  As a result of this shift instrategy, total revenues increased 7% in 2002 as compared to 2001 with personaltraining and sales of Web site renewals, both of which are higher marginproducts, increasing to offset the decline in workshop attendance.  This strategy continued to be effective in2003 with total revenues increasing 31%, including a rebound in workshoprevenues of 10% over 2002.

 

In the merger with Telescan, the Company acquired an additional onlinerevenue source related to licensing and hosting Web sites for third parties andvarious subscription products.  In 2001such results from Telescan are included for only 25 days.  These non-core revenues are graduallydiminishing.

 

## **Deferred Revenue**

## ** **

Deferred revenue is the result of a contractual obligation to thestudent that continues after the point of sale and the collection of cash.  The revenue must be recognized as thatobligation is satisfied.  Deferredrevenue for the Company primarily comes from sales of Personal Training Systemsand Web site subscriptions and renewals. Revenue from personal training sessions is recognized into revenue overapproximately four months as the customer completes their personal trainingsessions.  Web site subscriptions andrenewals are recognized over the subscription period, which has increased to anaverage of 11 months as of December 31, 2003.

 

As discussed in the cost of revenue section, many cost elementsassociated with deferred revenues are expensed in the month of sale or sooner,including marketing, revenue share, commissions and credit card fees, leavingonly the ongoing fulfillment

 

12

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cost for these products, primarily labor for Personal Training coachingand Web hosting expense.  Such ongoingfulfillment costs represent a small proportion of the related deferredrevenues.  The net income implicationsare significant, as a substantial portion of deferred revenue that isrecognized in a later period will result in operating income.  However, in a period of deferred revenuegrowth, such as 2003 when net deferred revenue increased by $3.8 million, theimpact is that the greater proportion of costs related to this increase indeferred revenue were expensed in 2003, adversely affecting net income inproportion to such deferred revenue growth.

 

The Company anticipates that the continued success of its sale ofpersonal training and renewals will continue to cause an increase in deferredrevenues, particularly as new products introduced as part of the Company’slifetime value of the student strategy all include bundled coaching products ofup to eighteen sessions and bundled renewals of up to two years.

 

## **Cost of Revenue**

 
|                  |   | **For the  year ended December 31,** |       | **% of  Revenue** |       | **2003 vs.  2002** |       | **2002 vs.  2001** |       |
|-----------------------|--------|-------------------------------------------|------------|-------------------|------------|--------------------|------------|--------------------|------------|
| **Cost of Revenue**   |   | **2003**                                  | ** ** | **2002**          | ** ** | **2001(a)**        | ** ** | **2003**           | ** ** | **2002** | ** ** | **2001** | ** ** | **Change** |   | **%** |   | **Change** | ** ** | **%** | ** ** |
| Revenue               |   | $73,420                                   |       | $56,142           |       | $52,691            |       | 100                | %          | 100 | % | 100 | % |   |   |   |   |   |   |   |   |
| Revenue share         |   | 23,192                                    |       | 11,559            |       | 11,084             |       | 32                 | %          | 21 | % | 21 | % | $11,633 |   | 101 | % | $475 |   | 4 | % |
| Payroll cost          |   | 8,642                                     |       | 4,562             |       | 4,079              |       | 12                 | %          | 8 | % | 8 | % | 4,080 |   | 89 | % | 483 |   | 12 | % |
| Other                 |   | 9,375                                     |       | 9,290             |       | 7,631              |       | 13                 | %          | 17 | % | 14 | % | (85 | ) | 1 | % | 1,659 |   | 22 | % |
| Total cost of revenue |   | $41,209                                   |       | $25,411           |       | $22,794            |       | 56                 | %          | 45 | % | 43 | % | $15,798 |   | 62 | % | $2,617 |   | 11 | % |

 

----

(a)  Includes results forTelescan for only 25 days.

 

The two main components of the Company’s cost of revenue are revenueshare and payroll expense.  Changes inthese components account for most of the change in cost of revenue and are dueto changes in the mix between distribution channels and products.

 

In addition to the INVESTools branded distribution channels, theCompany distributes its products through co-marketing partnerships andco-branding partnerships.  With theco-marketing partnerships, the Company’s partners with groups doing conferencesor events at which the Company is not the only speaker on the agenda.  The partner bears all of the costsassociated with the conference including the marketing and the facilities.  The Company pays a revenue share percentageto the co-marketing partner for sales made to leads sourced from these events.  These events draw significant numbers ofparticipants that the Company would not otherwise have access to and offers theCompany sales opportunities that management believes justifies the costsassociated with them as follow-up workshop, telemarketing and Web site renewalsales will be on higher margin products.

 

The Company’s co-branding partnerships are more traditional brandingrelationships in that the revenue share compensates the branding partner onlyfor the use of the brand.  At December 31, 2003, the Companys principalco-branding partners were BusinessWeek and CNBC.

 

The revenue share percentage is greatest for product sales throughco-marketed relationships in consideration of the risks and costs assumed bysuch partners.  In 2003, the Companyrealized a significant increase in volumes through co-marketed relationship andcompared to 2002 and 2001 and incurred revenue share expense at a higherrate.  The Company continues to increaseits margins with additional product sales through these channels.

 

The increase in payroll cost was due in part to increasingtelemarketing and workshop based sales commissions that are proportional torevenue growth.  The remaining increaserepresented the cost to fulfill the Personal Training System corresponding tothe increment of $12 million of Personal Training System revenues in 2003.

 

Additionally, as more fully explained in deferred revenue, below,Personal Training System revenues and Web site subscription and renewal revenueare deferred and recognized over their periods of delivery.  However, certain corresponding costs ofrevenue elements including revenue share, commissions and credit card feeexpense are expensed as incurred in the month of the sale.  Thus, in a period of substantial growth indeferred revenue, a certain increase in cost of revenues can be attributed torevenues not yet recognized.

 

13

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## **Selling Expense**

 
|                  |   | **For the  year ended December 31,** |       | **% of  Revenue** |       | **2003 vs.  2002** |       | **2002 vs.  2001** |       |
|-----------------------|--------|-------------------------------------------|------------|-------------------|------------|--------------------|------------|--------------------|------------|
| **Selling expense**   |   | **2003**                                  | ** ** | **2002**          | ** ** | **2001(a)**        | ** ** | **2003**           | ** ** | **2002** | ** ** | **2001** | ** ** | **Change** |   | **%** |   | **Change** | ** ** | **%** | ** ** |
| Revenue               |   | $                                         | 73,420     |              | $          | 56,142             |       | $                  | 52,691     |   | 100 | % | 100 | % | 100 | % |   |   |   |   |   |   |   |   |
| Marketing (b)         |   | 9,993                                     |       | 8,889             |       | 9,899              |       | 14                 | %          | 16 | % | 19 | % | $ | 1,104 |   | 12 | % | $ | (1,010 | ) | (10 | )% |
| Other                 |   | 8,489                                     |       | 8,602             |       | 8,530              |       | 12                 | %          | 15 | % | 16 | % | (113 | ) | (1 | )% | 72 |   | 1 | % |
| Total selling expense |   | $                                         | 18,482     |              | $          | 17,491             |       | $                  | 18,429     |   | 25 | % | 31 | % | 35 | % | $ | 991 |   | 6 | % | $ | (938 | ) | (5% | ) |
|                       |        |                                           |            |                   |            |                    |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(a) Includes results forTelescan for only 25 days.

(b) Marketing expense includes the related partyexpense itemized below:

 
| Related party selling expense |   | $ | 501 |   | $ | 4,880 |   | $ | 6,004 |   | 1 | % | 9 | % | 11 | % | $ | (4,379 | ) | (90 | )% | $ | (1,124 | ) | (19 | )% |
|-------------------------------|--------|---|-----|--------|---|-------|--------|---|-------|--------|---|---|---|---|----|---|---|--------|---|-----|----|---|--------|---|-----|----|

 

Selling expense is primarily the cost of marketing the Company’sproducts through direct mail, email, and media buys.  Also included in selling are the costs of workshop previews wherepeople have an opportunity to see a sample of the Company’s workshops in90-minute sessions and register to attend a workshop following thepreview.  Selling expense as apercentage of revenue has been decreasing every year as the Company has beenmoving more towards selling through the co-marketing partners, for which thereis no marketing and limited travel and facility related elements of sellingcost for the Company.  The decrease inselling expense as a percentage of revenue from 2001 to 2003 represents anoffset to the increase in costs of revenues to the extent that revenue volumehas increased through the co-marketed channels.

 

## **The related party expense component of selling expense is GenerationMarketing LLC (“Gen M”).  At one time,five individuals owned Gen M, four of whom were former officers and directorsof the Company.  The officers anddirectors of the Company each owned 16.75% of Gen M for a total of 67%.  Gen M handled a significant portion of theCompany’s marketing needs from direct mail to media buys.  In 2002, the Company hired a secondmarketing agency to handle some of the marketing needs for one of the brands toreduce the Company’s reliance on a related party.  In May 2002 and February 2003, the former officers anddirectors sold their interests in Gen M to an unrelated third party and inFebruary 2003, Scott Elder and Ross Jardine sold their interests in Gen Mto an unrelated third party.  As suchGen M is no longer a related party.**

 

## **General and Administrative Expense**

 
|                    |   | **For the  year ended December 31,** |       | **% of  Revenue** |       | **2003 vs.  2002** |   | **2002 vs.  2001** |       |
|-------------------------|--------|-------------------------------------------|------------|-------------------|------------|--------------------|--------|--------------------|------------|
| **G & A Expense**   |   | **2003**                                  | ** ** | **2002**          | ** ** | **2001(a)**        |   | **2003**           | ** ** | **2002** | ** ** | **2001** | ** ** | **%** | ** ** | **Change** |   | **%** | ** ** | **Change** | ** ** |
| Revenue                 |   | $                                         | 73,420     |              | $          | 56,142             |   | $                  | 52,691     |   | 100 | % | 100 | % | 100 | % |   |   |   |   |   |   |   |   |
| Payroll                 |   | 8,355                                     |       | 8,366             |       | 4,203              |   | 11                 | %          | 15 | % | 8 | % | $ | (11 | ) | (0 | )% | $ | 4,163 |   | 99 | % |
| Other                   |   | 5,422                                     |       | 6,463             |       | 8,791              |   | 7                  | %          | 12 | % | 17 | % | (1,041 | ) | (16 | )% | (2,328 | ) | (26 | )% |
| Total G & A expense |   | $                                         | 13,777     |              | $          | 14,829             |   | $                  | 12,994     |   | 19 | % | 26 | % | 25 | % | $ | (1,052 | ) | (7 | )% | $ | 1,835 |   | 14 | % |

 

----

(a)  Includes results forTelescan for only 25 days.

 

General and administrative expenses continue to fall as the Company’scost control measures take effect, principally in connection with theintegration of the two merged companies since December 2001.  In 2001, general and administrative expensewas unusually high due to amortization of goodwill of $4.5 million that is nolonger required under Statement of Financial Accounting Standards (“SFAS”) No.142, *Goodwill and Other Intangible Assets*.  Offsetting this increase is expense relatedto Telescan which is only included for 25 days.  While the Company does not expect to see general andadministrative expenses continue to decrease it does expect to continue toleverage such expenses against growth in revenues and margins.

 

## **Liquidity**

 

## ***Cash Flows***

 

During 2003, the Company generated $8 million from operations.  The Company received $3.7 million throughfederal and state income tax refunds primarily related to amending prior yeartax returns for the 2001 write down of assets. An additional $3.8 million was generated through the increase in thedeferred revenue balance due to the increase in sales of Personal TrainingSystem, Web site subscriptions and renewals for which the cash was collectedbut the recognition of revenue was deferred.

 

14

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During 2003, the Company began investing cash balances in TreasuryStrips that are earning a 3% average rate of interest and have laddered maturitiesthrough 2007.  The Company has $7.8million in such investments at December 31, 2003.

 

The Company began reinvesting in infrastructure during the fourthquarter of 2003 and expects to continue to do so in 2004, funding suchinvestments from cash on hand and from operations.  The Company’s February 2004 acquisition of 360 Grouprequired $875,000 at closing which was paid from cash on hand and will requireadditional cash payments of $438,000 in each of 2005 and in 2006 assumingcertain performance targets are achieved in 2004 and 2005.

 

Primarily as a result of cash flow from operations, cash plusmarketable securities increased from $5.2 million to $12.3 million during2003.  Working capital increased to$321,000 from ($986,000) at December 31, 2002.  Working capital excluding deferred revenue, which issubstantially a non-cash liability, increased to $8.9 million from $3.8 millionat December 31, 2002.

 

## ***ContractualObligations and Commercial Commitments***

### *** ***

The Company has assumed various financial obligations and commitmentsin the ordinary course of conducting its business.  The Company has contractual obligations requiring future cashpayments under existing contractual arrangements, such as management, consultingand non-competition agreements.  TheCompany also has commercial and contingent obligations which result in cashpayments only if certain contingent events occur requiring the Company’sperformance pursuant to a funding commitment.

 

The following table details the Company’s known future cash payments(on an undiscounted basis) related to various contractual obligations as ofDecember 31, 2003.

 
|                                             |   | **Payments  Due By Period** |       |
|--------------------------------------------------|--------|-----------------------------|------------|
| **(in thousands)**                               |   | **Total**                   | ** ** | **2004** | ** ** | **2005 -  2006** | ** ** | **2007 -  2008** | ** ** | **There-  after** | ** ** |
| Operating leases (1)                             |   | $                           | 1,271      |   | $ | 685 |   | $ | 586 |   | $ | — |   | $ | — |   |
| Data and communications purchase agreements  (2) |   | 960                         |       | 757 |   | 203 |   | — |   | — |   |
| Management employment agreements (3)             |   | —                      |       | — |   | — |   | — |   | — |   |
| Total contractual obligations                    |   | $                           | 2,231      |   | $ | 1,942 |   | $ | 789 |   | $ | — |   | $ | — |   |

 

----

(1) The Company’s operating leases include office space and operatingfacilities.  The terms of the agreementsvary from 2003 until 2006.

 

(2) The Company has supply contracts with various vendors of financialdata and communications services providing for minimum monthlycommitments.  These contracts have termsfrom 2003 to 2004.

 

(3) The Company has entered into an employment agreement with a certainsenior executive which requires the Company to make cash payments over thecontractual period.

 

In March 2004, the employment agreement for the Chief ExecutiveOfficer was extended for three years. Under the terms of the extended agreement the Company will be obligatedto pay $413,000 in 2004, $850,000 in 2005 and 2006 and $71,000 in 2007.

 

In February 2004, as part of the acquisition of the 360 Group, theCompany executed employment agreements with two new executives, Scott Waltz andDon Klabunde that have terms for three years. Under these agreements, the Company will be obligated to pay these twoexecutives $400,000 in 2004, $960,000 in 2005 and 2006 and $80,000 in 2007.

 

## **Critical Accounting Policies**

## ** **

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations is based upon the Consolidated Financial Statements, which havebeen prepared in accordance with GAAP.  The preparation of these financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenue and expenses, and relateddisclosure of contingent assets and liabilities.

 

Management bases its estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions.

 

An accounting policy is deemed to be critical if it requires anaccounting estimate to be made based on assumptions about matters that arehighly uncertain at the time the estimate is made, and if different estimatesthat reasonably could have been used, or changes in the accounting estimatesthat are reasonably likely to occur periodically, could materially impact thefinancial statements.  Management believes the following criticalaccounting policies reflect its more significant estimates and assumptions usedin the preparation of the Consolidated Financial Statements.  For furtherinformation on the critical accounting policies, see Note 1 of the Notes toConsolidated Financial Statements.

 

15

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### ***Income Taxes***

### *** ***

The provision for income taxes is calculated using the asset andliability method. Deferred income taxes reflect the net tax effect of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes. TheCompany provides valuation allowances against the deferred tax assets if, basedon available evidence, it is more likely than not that some portion or all ofthe deferred tax assets will not be realized. Due to the losses incurred during2001, 2002 and for the first two quarters of 2003, the Company increased thevaluation allowance to offset the net deferred tax asset at that time.  In determining the adequacy of the valuationallowance, which totaled $4.0 million as of December 31, 2003, managementassesses the Company’s profitability by taking into account the present andanticipated amounts of domestic and international earnings, as well as theanticipated taxable income as a result of the reversal of future taxabletemporary differences.

 

For financial reporting purposes, the Company generally provides taxesat the rate applicable for the appropriate tax jurisdiction.  Where the Company’s present intention is toreinvest the unremitted earnings of certain of its foreign operations, theCompany does not provide for U.S. income taxes on such unremitted earnings ofthose foreign subsidiaries in foreign ventures.  Management periodically assesses the need to utilize theseunremitted earnings to finance the foreign operations of the Company.  This assessment is based on cash flowprojections that are the result of estimates of future production, commoditypricing and expenditures by tax jurisdiction for the Company’s operations. Suchestimates are inherently imprecise since many assumptions utilized in the cashflow projections are subject to revision in the future.

 

### ***Goodwill and Intangible Assets***

### *** ***

The Company’s net goodwill balance was $12.0 million atDecember 31, 2003 and 2002. Goodwill is not amortized but tested forimpairment at the reporting unit level on an annual basis, and between annualtests whenever events or circumstances indicate that the carrying value of areporting unit’s goodwill may exceed its fair value.

 

A discounted cash flow model is used to estimate the fair value of areporting unit. This model requires the use of long-term planning estimates andassumptions regarding industry-specific economic conditions that are outsidethe control of the Company. The annual test for impairment includes theselection of an appropriate discount rate to value cash flow information. Thebasis of this discount rate calculation is derived from several internal andexternal factors. These factors include, but are not limited to, the averagemarket price of the Company’s stock, the number of shares of stock outstanding,the book value of the Company’s debt, a long-term risk free interest rate, andboth market and size specific risk premiums. The Company’s annual goodwillimpairment testing, performed during the fourth quarter of 2003, indicated thatthe fair value of all reporting units tested exceeded their respective bookvalues and therefore no additional goodwill impairment testing was required.Due to uncertain market conditions, it is possible that estimates used forgoodwill impairment testing may change in the future. Therefore, there can beno assurance that future goodwill impairment tests will not result in a chargeto earnings.

 

The Company has not materially changed its methodology for goodwillimpairment testing for the years presented. There are currently no knowntrends, demands, commitments, events or uncertainties that are reasonablylikely to occur that would materially affect the methodology or assumptionsdescribed above.

 

See Note 3, Goodwill and Other Intangible Assets for additionalinformation on goodwill and other intangible assets.

 

### ***Revenue Recognition***

### *** ***

Revenue is not recognized until it is realized or realizable andearned.  The criteria to meet thisguideline are: 1) persuasive evidence of an arrangement exists, 2) delivery hasoccurred or services have been rendered, 3) the price to the buyer is fixed ordeterminable, and 4) collectibility is reasonably assured.

 

The Company sells its products bundled together in many differentways.  Each sale is broken down into itsspecific element and revenue from each element is recognized according to thefollowing policies:

 
| **Revenue stream**                  |   | **Recognition policy**                                                                      |
|-------------------------------------|--------|---------------------------------------------------------------------------------------------|
| Workshop revenue                    |   | Recognized at the end of the workshop                                                       |
| Home study revenue                  |   | Recognized upon shipping to customer                                                        |
| Personal Training System            |   | Deferred upon receipt and recognized on a straight-line basis over  contract period         |
| Web site subscriptions and renewals |   | Deferred upon receipt and recognized on a straight-line basis over  the subscription period |
| Web site hosting                    |   | Recognized over period of service which is monthly                                          |

 

The revenue for each element is calculated based upon the fair value ofeach separate element, which has been determined by prices paid when eachproduct is sold separately.  From timeto time, the Company offers these products together at a discounted rate.  The discount is allocated pro rata to eachelement of revenue.

 

16

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Deferred revenue arises from subscriptions to the Web sites andpersonal training sessions because the payments are received before thedelivery of service has been rendered. Deferred revenue is recognized into revenue over the period of thecontractual obligation.

 

The Company also sells gift certificates to attend workshops in thefuture.  Revenue from these sales isdeferred until the certificate is used or expires.

 

## **Recently Issued Accounting Standards**

## ** **

In August 2001, the Financial Accounting Standards Board (“FASB”)approved SFAS No. 143, *Accounting for AssetRetirement Obligations* (“SFAS 143”), which will be effectivefor the fiscal year beginning January 1, 2003. SFAS 143 addresses thefinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts. The Company adopted this statement during the first quarter of fiscal2003. The adoption of SFAS 143 did not have a material impact on ourfinancial condition, results of operations or cash flows.

 

In November 2002, the Emerging Issues Task Force reached aconsensus on Issue No. 00-21 (“EITF 00-21”), *RevenueArrangements with Multiple Deliverables*.  EITF 00-21 provides guidance on how to account for arrangementsthat involve the delivery or performance of multiple products, services and/orrights to use assets. The provisions of EITF 00- 21 apply to revenuearrangements entered into in fiscal periods beginning after June 15, 2003.The adoption of this standard had no material impact on the Company’sconsolidated financial statements.

 

In April 2003, the FASB issued SFAS No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities* (“SFAS No. 149”). SFAS No. 149 amends andclarifies accounting for derivative instruments, including certain derivativeinstruments embedded in other contracts, and for hedging activities under SFASNo. 133. In particular, SFAS No. 149 clarifies under what circumstances acontract with an initial net investment meets the characteristics of aderivative and when a derivative contains a financing component that warrantsspecial reporting in the statement of cash flows. SFAS No. 149 is generallyeffective for contracts entered into or modified after June 30, 2003.  The Company adopted this Statement duringthe second quarter of fiscal 2003. The adoption of SFAS No. 149 did not have amaterial impact on the Company’s financial condition, results of operations orcash flows.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity* (“SFAS No. 150”).  SFAS No. 150 establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances). Many of those instruments were previously classifiedas equity. SFAS No. 150 is effective for financial instruments entered into ormodified after May 31, 2003, and otherwise is effective at the beginning of thefirst interim period beginning after September 15, 2003. It is to beimplemented by reporting the cumulative effect of a change in an accountingprinciple for financial instruments created before the issuance date of SFASNo. 150 and still existing at the beginning of the interim period of adoption.Restatement is not permitted. On November 7, 2003, FASB issued FASB StaffPosition No. FAS 150-3 (“FSP 150-3”), *“EffectiveDate, Disclosures, and Transition for Mandatorily Redeemable FinancialInstruments of Certain Nonpublic Entities and Certain Mandatorily RedeemableNoncontrolling Interests under FASB Statement No. 150, Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity.”*FSP 150-3 deferred certain aspects of FAS 150. The Company adopted thisstatement during the second quarter of fiscal 2003. The adoption of SFAS No.150 and FSP 150-3 did not have a material impact on the Company’s financialcondition, results of operations or cash flows.

 

On December 17, 2003, the Staff of the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), *Revenue Recognition*, which supercedes SAB101, *Revenue Recognition in FinancialStatements*. SAB 104’s primary purpose is to rescind accountingguidance contained in SAB 101 related to multiple element revenue arrangements,superceded as a result of the issuance of EITF 00-21, “Accounting for RevenueArrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds theSEC’s Revenue Recognition in Financial Statements Frequently Asked Questionsand Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic13, Revenue Recognition. Selected portions of the FAQ have been incorporatedinto SAB 104. While the wording of SAB 104 has changed to reflect the issuanceof EITF 00-21, the revenue recognition principles of SAB 101 remain largelyunchanged by the issuance of SAB 104. The Company adopted this statement duringthe fourth quarter of fiscal 2003. The adoption of SAB 104 did not have amaterial impact on the Company’s financial condition, results of operations orcash flows.

 

# **Item 7A.**     Quantitative and Qualitative Disclosures About Market Risk

# ** **

The Company is exposed to market risk, which is the potential lossarising from adverse changes in market prices and rates.  During 2003, the Company invested excesscash in marketable securities that are subject to interest rate risk, which isnot considered to be material to the Company. The Company does not enter, or intend to enter, into derivativefinancial instruments for trading or speculative purposes.

 

17

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# **Item 8.**        Financial Statements and Supplementary Data

# ** **

The financial statements are filed pursuant to Item 15(a)1.

 

# **Item 9.**        Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure

# ** **

The Company filed a Form 8-K on July 29, 2002 confirming thedismissal of Arthur Andersen LLP as the Company’s independent auditor andappointing KPMG LLP as the Company’s independent auditors.

 

# **Item 9A.**     Controlsand Procedures

# ** **

As of the end of the period covered by this Annual Report on Form 10-K,the Company carried out an evaluation under the supervision and with theparticipation of the Company’s management, including its Chief ExecutiveOfficer and its Chief Financial Officer (its principal executive officer and principalfinancial officer) of the effectiveness of the Company’s disclosure controlsand procedures as defined in rules 13a – 15(e) of the Securities Exchange Actof 1934, as amended (the “Exchange Act”). Based on that evaluation, the Company’s Chief Executive Officer and itsChief Financial Officer have concluded that these disclosure controls andprocedures are effective in alerting them on a timely basis to materialinformation relating to the Company (including its consolidated subsidiaries)that is required to be included in its periodic filings under the Exchange Act.

 

**PartIII**

 

# **Item 10.**     Directors and Executive Officers of the Registrant

# ** **

This item, including information regarding the Company’s auditcommittee and audit committee financial expert and information relating to theCompany’s code of ethics that applies to its directors, executive officers andsenior financial officers, is omitted because a definitive proxy statementwhich involves the election of directors will be filed with the Securities andExchange Commission not later than 120 days after the close of the fiscal yearpursuant to Regulation 14A.

 

# **Item 11.**     ExecutiveCompensation

# ** **

This item is omitted because a definitive proxy statement whichinvolves the election of directors will be filed with the Securities andExchange Commission not later than 120 days after the close of the fiscal yearpursuant to Regulation 14A.

 

# **Item 12.**     Security Ownership of Certain Beneficial Owners and Management

# ** **

This item is omitted because a definitive proxy statement whichinvolves the election of directors will be filed with the Securities andExchange Commission not later than 120 days after the close of the fiscal yearpursuant to Regulation 14A.

 

# **Item 13.**     Certain Relationships and Related Transactions

# ** **

This item is omitted because a definitive proxy statement whichinvolves the election of directors will be filed with the Securities andExchange Commission not later than 120 days after the close of the fiscal yearpursuant to Regulation 14A.

 

# **Item 14.**     Principal Accounting Fees and Services

# ** **

This item is omitted because a definitive proxy statement whichinvolves the election of directors will be filed with the Securities andExchange Commission not later than 120 days after the close of the fiscal yearpursuant to Regulation 14A.

 

18

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**PartIV**

 

# **Item 15.**     Exhibits, Financial Statements and Reports on Form 10-K

# ** **

The following documents are filed as part of this Form 10-K:

 
| **1.** | **CONSOLIDATED FINANCIAL STATEMENTS**                                                                           |   |
|--------|-----------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                            |   |
|   | Report of Independent Public Accountants                                                                        |   |
|   | Consolidated Balance Sheets as of December 31, 2003 and 2002                                               |   |
|   | Consolidated Statements of Operations for  the Years Ended December 31, 2003, 2002 and 2001                |   |
|   | Consolidated Statements of Stockholders’  Equity for the Years Ended December 31, 2003, 2002 and 2001 |   |
|   | Consolidated Statements of Cash Flows for  the Years Ended December 31, 2003, 2002 and 2001                |   |
|   | Notes to Consolidated Financial Statements                                                                      |   |

 

All other schedules have been omitted since the required information isnot present or is not present in amounts sufficient to require submission ofthe schedule, or because the information required is included in the financialstatements or notes thereto.

 

**2.****             EXHIBITS**

 

 
| 2.1    |   | Second Amended and Restated Agreement and Plan of Merger, dated as of  September 25, 2001, between ZiaSun and Telescan  (Included as Annex I to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)                                                                                                                                                                                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2    |   | Amendment to Agreement between ZiaSun and the former OIA Stockholders  dated May 31, 2000.  (Incorporated by  reference from ZiaSun’s Quarterly Report on Form 10-Q filed on  August 17, 2000.)                                                                                                                                                                                                                                        |
| 2.3    |   | Second Amendment to Acquisition Agreement between ZiaSun and the  former OIA Stockholders, dated as of July 1, 2001.  (Incorporated by reference from ZiaSun’s  Current Report on Form 8-K filed on August 1, 2001.)                                                                                                                                                                                                              |
| 2.4    |   | Share Purchase Agreement between ZiaSun and Ko Jen Wang, dated  October 1, 2001.  (Incorporated  by reference from ZiaSun’s Current Report on Form 8-K filed on  October 3, 2001.)                                                                                                                                                                                                                                                |
| 2.5    |   | Acquisition Agreement and Plan of Reorganization between ZiaSun and  Seminar Marketing Group, Inc., dated September 29, 2000.  (Incorporated by reference from ZiaSun’s  Current Report on Form 8-K filed on October 3, 2000.)                                                                                                                                                                                                    |
| 2.6    |   | Agreement and Plan of Merger dated February 26, 2004, by and  among INVESTools Inc., SES Acquisition Corp., Service Enhancement Systems,  Inc., Ted B. Shuel and Jamie Lynn Speas Shuel, as Trustee of The Shuel Family  Trust, Scott K. Waltz, individually, Ted B. Shuel, individually, and Jamie  Lynn Speas Shuel, individually. (Incorporated by reference from INVESTools’  Current Report on Form 8-K filed on March 10, 2004.) |
| 3.1    |   | Amended and Restated Certificate of Incorporation of INVESTools Inc.  (Included as Annex V to the joint proxy statement/prospectus filed in  Registration No. 333-67454.)                                                                                                                                                                                                                                                                             |
| 3.2    |   | By-laws of INVESTools Inc. (Included as Annex VI to the joint proxy  statement/prospectus filed in Registration No. 333-67454.)                                                                                                                                                                                                                                                                                                                       |
| 10.1   |   | Amended Stock Option Plan of Telescan.  (Incorporated by reference from Telescan’s Post-Effective  Amendment No. 1 to Form S-8 filed February 2, 1994.)                                                                                                                                                                                                                                                                                |
| 10.2   |   | Amended and Restated 1995 Stock Option Plan of Telescan.  (Incorporated by reference from Telescan’s  Registration Statement on Form S-8 filed November 21, 2000.)                                                                                                                                                                                                                                                                     |
| 10.3   |   | 2000 Stock Option Plan of Telescan.   (Incorporated by reference from Telescan’s Registration Statement on  Form S-8 filed November 21, 2000.)                                                                                                                                                                                                                                                                                         |
| 10.4   |   | Amended 1999 Stock Option Plan of ZiaSun.  (Incorporated by reference from ZiaSun’s Post-Effective  Amendment No. 1 to Form S-8 filed June 14, 2000.)                                                                                                                                                                                                                                                                                  |
| 10.5   |   | Non-Qualified Stock Option Agreement between ZiaSun and Allen D.  Hardman.  (Incorporated by reference  from ZiaSun’s Registration Statement on Form 10-SB filed September 16,  1999.)                                                                                                                                                                                                                                                 |
| 10.6   |   | Lease Agreement between EsNET Properties L.C. and OIA, dated May 25,  1999.  (Incorporated by reference from  ZiaSun’s Registration Statement on Form 10-SB filed September 16, 1999.)                                                                                                                                                                                                                                                 |
| 10.7   |   | Lease Agreement between DC Mason Ltd. and OIA, dated October 7,  1998.  (Incorporated by reference from  ZiaSun’s Registration Statement on Form 10-SB filed September 16, 1999.)                                                                                                                                                                                                                                                 |
| 10.8   |   | Lease Agreement between Gordon Jacobson and OIA, dated June 22,  1999.  (Incorporated by reference from  the ZiaSun’s Registration Statement on Form 10-SB filed September 16,  1999.)                                                                                                                                                                                                                                            |
| 10.9   |   | Non-Competition Agreement, dated March 8, 2000, between OIA and  MIT, LLC.  (Incorporated by reference  from ZiaSun’s Current Report on Form 8-K filed on August 1, 2001.)                                                                                                                                                                                                                                                        |
| 10.10* |   | Amended and Restated Employment Agreement by and between INVESTools  Inc. and Lee K. Barba effective as of December 6, 2001. (1)                                                                                                                                                                                                                                                                                                                 |
| 10.11  |   | Termination Agreement and General Release by and between INVESTools  Inc. and Scott Elder dated August 26, 2003. (Incorporated by reference  from INVESTools’ Quarterly Report on Form 10-Q filed November 14, 2003.)  (1)                                                                                                                                                                                                             |

 

19

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| 10.12 |   | Termination Agreement and General Release by and between INVESTools  Inc. and Ross Jardine dated August 26, 2003. (Incorporated by reference  from INVESTools’ Quarterly Report on Form 10-Q filed November 14, 2003.)  (1) |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13 |   | Fifth Amendment to Lease Agreement by and between Telescan, Inc. and  WiredZone Property, L.P., dated April 8, 2002.                                                                                                                  |
| 10.14 |   | Employment Agreement dated February 26, 2004 by and between  Scott K. Waltz and INVESTools Inc. (Incorporated by reference from INVESTools’  Current Report on Form 8-K filed on March 10, 2004.) (1)                       |
| 10.15 |   | Employment Agreement dated February 26, 2004 by and between Don  Klabunde and INVESTools Inc. (Incorporated by reference from INVESTools’  Current Report on Form 8-K filed on March 10, 2004.) (1)                         |
| 21*   |   | Subsidiaries of INVESTools.   (Incorporated by reference from the joint statement/prospectus filed  in Registration No. 333-67454.)                                                                                                   |
| 23.1* |   | Consent of KPMG LLP.                                                                                                                                                                                                                       |
| 23.2  |   | Information Regarding Consent of Arthur Andersen LLP.  (Incorporated by reference from the Annual  Report on Form 10-K filed on March 21, 2003.)                                                                                 |
| 31.1* |   | Section 302 Certification of Chief Executive Officer                                                                                                                                                                                  |
| 31.2* |   | Section 302 Certification of Chief Financial Officer                                                                                                                                                                                  |
| 32.1* |   | Section 906 Certification of Chief Executive Officer                                                                                                                                                                                  |
| 32.2* |   | Section 906 Certification of Chief Financial Officer                                                                                                                                                                                  |

 

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*                                                                                         Indicatesdocuments filed herewith.

 

(1)                                                                                  Managementcontracts or compensation plans or arrangements.

## ** **

## **Reports on Form 8-K**

## ** **

Current report on Form 8-K furnished on November 13, 2003, announcingthe Company’s third quarter earnings.

 

Current report on Form 8-K filed on December 2, 2003, providinginformation related to investor relations activities posted on the Company’sWeb site.

 

Current Report on Form 8-K furnished on February 27, 2004, announcingthe Company’s financial results for the year ended December 31, 2003.

 

Current Report on Form 8-K filed on March 10, 2004, announcing theacquisition of Service Enhancement Systems, Inc., a California corporationoperating under the assumed name 360 Group.

 

20

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**Signatures**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized in the City of Houston,State of Texas, on March 29, 2004.

 

 
|   | INVESTools Inc. |
|--------|-----------------|
|   |            |
|   | By:             |   /s/ LEE K. BARBA |
|   |            |   Lee K. Barba, Chief Executive Officer and Director |

 

Pursuant to the requirements of the Securities Act of 1934, this reporthas been signed below by the following persons in the capacities and on thedate indicated

 
| **Signature**                                 |   | **Title**                                         |   | **Date**       |
|-----------------------------------------------|--------|---------------------------------------------------|--------|----------------|
|                                          |   |                                              |   |           |
| **PRINCIPAL EXECUTIVE OFFICER:**              |   |                                              |   |           |
|                                          |   |                                              |   |           |
| /s/ LEE K. BARBA                              |   | Chief Executive Officer and Chairman of the Board |   | March 29, 2004 |
| Lee K. Barba                                  |   |                                              |   |           |
|                                          |   |                                              |   |           |
|                                          |   |                                              |   |           |
| **PRINCIPAL FINANCIAL / ACCOUNTING OFFICER:** |   |                                              |   |           |
|                                          |   |                                              |   |           |
| /s/ PAUL A. HELBLING                          |   | Chief Financial Officer                           |   | March 29, 2004 |
| Paul A. Helbling                              |   |                                              |   |           |
|                                          |   |                                              |   |           |
|                                          |   |                                              |   |           |
| **DIRECTORS:**                                |   |                                              |   |           |
|                                          |   |                                              |   |           |
| /s/ MICHAEL H. GOLDSMITH                      |   | Director                                          |   | March 29, 2004 |
| Michael H. Goldsmith                          |   |                                              |   |           |
|                                          |   |                                              |   |           |
| /s/ DOUGLAS T. TANSILL                        |   | Director                                          |   | March 29, 2004 |
| Douglas T. Tansill                            |   |                                              |   |           |
|                                          |   |                                              |   |           |
| /s/ HANS VON MEISS                            |   | Director                                          |   | March 29, 2004 |
| Hans von Meiss                                |   |                                              |   |           |
|                                          |   |                                              |   |           |
| /s/ STEPHEN C. WOOD                           |   | Director                                          |   | March 29, 2004 |
| Stephen C. Wood                               |   |                                              |   |           |

 

21

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**INDEPENDENT AUDITOR’S REPORT**

** **

The Board of DirectorsINVESTools Inc.:

 

We have audited the accompanying consolidated balance sheets ofINVESTools Inc. and subsidiaries as of December 31, 2003 and 2002, and therelated consolidated statements of operations, comprehensive income (loss),stockholders’ equity and cash flows for the years then ended. Theseconsolidated financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.  The accompanying 2001consolidated financial statements of INVESTools Inc. and subsidiaries wereaudited by other auditors who have ceased operations. Those auditors expressedan unqualified opinion on those consolidated financial statements in theirreport dated April 12, 2002.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the 2003 and 2002 consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of INVESTools Inc. and subsidiaries as of December 31,2003 and 2002, and the consolidated results of their operations and their cashflows for the years then ended in conformity with accounting principlesgenerally accepted in the United States of America.

 

As discussed in Note 1 to the consolidated financial statements, theCompany changed, effective January 1, 2002, its method of accounting forgoodwill and other intangible assets as required by Statement of FinancialAccounting Standards No. 142, Goodwill and Other Intangible Assets andeffective January 1, 2003, the Company changed its method of accountingfor stock-based compensation by adopting Statement of Financial AccountingStandard No. 123, Accounting for Stock-Based Compensation.

 

As discussed above, the 2001 consolidated financial statements ofINVESTools Inc. and subsidiaries as listed in the accompanying index wereaudited by other auditors who have ceased operations.  As discussed in Note 1, these consolidated financial statementshave been revised to include the transitional disclosures required by Statementof Financial Accounting Standards No. 142. In our opinion, the disclosures for 2001 in Note 1 are appropriate.  However, we were not engaged to audit,review, or apply any procedures to the 2001 consolidated financial statementsof INVESTools Inc. other than with respect to such reclassification adjustmentand the transitional disclosures discussed above and, accordingly, we do notexpress an opinion or any other form of assurance on the 2001 consolidatedfinancial statements taken as a whole.

 

 

KPMG LLP

Houston, Texas

February 26, 2004

 

22

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**REPORT OFINDEPENDENT PUBLIC ACCOUNTANTS**

** **

To The Board of Directors and Stockholders of INVESTools Inc.:

 

We have audited the accompanying consolidated balance sheet ofINVESTools Inc. (a Delaware corporation) and subsidiaries as ofDecember 31, 2001, and the related consolidated statement of operations,comprehensive income, stockholders’ equity, and cash flows for the year thenended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofINVESTools Inc. and subsidiaries as of December 31, 2001, and the resultsof their operations and their cash flows for the year then ended, in conformitywith accounting principles generally accepted in the United States.

 

 

ARTHUR ANDERSEN LLP

 

Houston, Texas

April 12, 2002

 

*NOTE: The report of Arthur Andersen LLPpresented above is a copy of a previously issued Arthur Andersen LLP report.This report has not been reissued by Arthur Andersen LLP nor has ArthurAndersen LLP provided a consent to the inclusion of its report in this Form10-K.*

 

*NOTE: The consolidated financial statementsas of December 31, 2001 and for the year then ended have been revised toinclude the transitional disclosures required by Statement of FinancialAccounting Standards No. 142, Goodwill and Other Intangible Assets (see Note 1under the heading “Goodwill and Intangible Assets”). The report of ArthurAndersen LLP presented above does not extend to these changes.*

 

23

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###### **INVESTOOLS INC. AND SUBSIDIARIES**

###### **CONSOLIDATED BALANCE SHEETS**

(in thousands)

 
|                                                                                                          |   | **December 31,** |   |
|---------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                                          |   | **2003**              |   | **2002** |   |
| **ASSETS**                                                                                                    |   |                  |   |   |   |
| Current assets:                                                                                               |   |                  |   |   |   |
| Cash and cash equivalents                                                                                     |   | $                     | 4,458  |   | $ | 5,160 |   |
| Marketable securities                                                                                         |   | 7,808                 |   | — |   |
| Accounts receivable, net (allowance: $197;  $150)                                                             |   | 319                   |   | 1,236 |   |
| Tax receivable                                                                                                |   | —                |   | 2,379 |   |
| Other current assets                                                                                          |   | 420                   |   | 378 |   |
| **Total current  assets**                                                                                     |   | 13,005                |   | 9,153 |   |
|                                                                                                          |   |                  |   |   |   |
| Due from merchant account vendors                                                                             |   | 357                   |   | 355 |   |
| Goodwill and intangibles, net                                                                                 |   | 12,357                |   | 12,443 |   |
| Deferred tax assets                                                                                           |   | —                |   | 2,763 |   |
| Furniture and equipment, net                                                                                  |   | 832                   |   | 591 |   |
| **Total assets**                                                                                              |   | $                     | 26,551 |   | $ | 25,305 |   |
|                                                                                                          |   |                  |   |   |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                |   |                  |   |   |   |
| Deferred revenue                                                                                              |   | $                     | 8,622  |   | $ | 4,820 |   |
| Accounts payable                                                                                              |   | 1,391                 |   | 2,850 |   |
| Accrued payroll                                                                                               |   | 1,544                 |   | 1,095 |   |
| Accrued tax liabilities                                                                                       |   | 561                   |   | 608 |   |
| Other current liabilities                                                                                     |   | 566                   |   | 766 |   |
| **Total liabilities,  current**                                                                               |   | 12,684                |   | 10,139 |   |
|                                                                                                          |   |                  |   |   |   |
| **Stockholders’  equity:**                                                                               |   |                  |   |   |   |
| Common stock (44,189 and 43,206 shares  issued and outstanding December 31, 2003 and 2002, respectively) |   | 442                   |   | 432 |   |
| Additional paid-in capital                                                                                    |   | 127,058               |   | 126,663 |   |
| Accumulated other comprehensive loss                                                                          |   | (2                    | )      | — |   |
| Deferred stock compensation                                                                                   |   | (293                  | )      | (91 | ) |
| Accumulated deficit                                                                                           |   | (113,338              | )      | (111,838 | ) |
| **Total stockholders’  equity**                                                                          |   | 13,867                |   | 15,166 |   |
|                                                                                                          |   |                  |   |   |   |
| **Total liabilities  and stockholders’ equity**                                                          |   | $                     | 26,551 |   | $ | 25,305 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

24

----

 

###### **INVESTOOLS INC. AND SUBSIDIARIES**

###### **CONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except per share amounts)

 
|                                                                                                            |   | **Years  Ended December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                                            |   | **2003**                           |   | **2002** |   | **2001** |   |
|                                                                                                            |   |                               |   |   |   |   |   |
| **Revenue**                                                                                                     |   | $                                  | 73,420 |   | $ | 56,142 |   | $ | 52,691 |   |
| **Costs and expenses:**                                                                                         |   |                               |   |   |   |   |   |
| Cost of revenue                                                                                                 |   | 41,209                             |   | 25,411 |   | 22,794 |   |
| Selling expense                                                                                                 |   | 17,981                             |   | 12,611 |   | 12,425 |   |
| Related party selling expense                                                                                   |   | 501                                |   | 4,880 |   | 6,004 |   |
| General and administrative expense                                                                              |   | 13,181                             |   | 14,154 |   | 8,458 |   |
| Depreciation and amortization expense                                                                           |   | 596                                |   | 675 |   | 4,536 |   |
| Write down of assets and other charges                                                                          |   | —                             |   | — |   | 6,454 |   |
| Total costs and expenses                                                                                        |   | 73,468                             |   | 57,731 |   | 60,671 |   |
| Net loss from operations                                                                                        |   | (48                                | )      | (1,589 | ) | (7,980 | ) |
| **Other income  (expense):**                                                                                    |   |                               |   |   |   |   |   |
| Gain (loss) on sale of assets                                                                                   |   | 4                                  |   | (2 | ) | (38 | ) |
| Interest income (expense) and other, net                                                                        |   | 74                                 |   | (23 | ) | (13 | ) |
| Minority interest income (expense)                                                                              |   | —                             |   | (36 | ) | 11 |   |
| Total other income (expense)                                                                                    |   | 78                                 |   | (61 | ) | (40 | ) |
| **Net income (loss)  before income taxes, discontinued operations and cumulative effect of  accounting change** |   | 30                                 |   | (1,650 | ) | (8,020 | ) |
| Income tax expense (benefit)                                                                                    |   | 1,530                              |   | (194 | ) | — |   |
| **Net loss from  continuing operations before cumulative effect of accounting change**                          |   | (1,500                             | )      | (1,456 | ) | (8,020 | ) |
| Loss from discontinued operations, net of  tax                                                                  |   | —                             |   | — |   | (132 | ) |
| Gain on disposal of discontinued  operations, net of tax                                                        |   | —                             |   | — |   | 249 |   |
| **Net loss before  cumulative effect of accounting change**                                                     |   | (1,500                             | )      | (1,456 | ) | (7,903 | ) |
| Cumulative effect of accounting change                                                                          |   | —                             |   | (28,417 | ) | — |   |
| **Net loss**                                                                                                    |   | (1,500                             | )      | (29,873 | ) | (7,903 | ) |
| Preferred stock dividend                                                                                        |   | —                             |   | (45 | ) | (10 | ) |
| **Net loss  attributable to common stockholders**                                                               |   | $                                  | (1,500 | ) | $ | (29,918 | ) | $ | (7,913 | ) |
| Net loss per common share – basic and  diluted:                                                            |   |                               |   |   |   |   |   |
| Net loss from continuing operations                                                                             |   | $                                  | (0.03  | ) | $ | (0.03 | ) | $ | (0.25 | ) |
| Net income from discontinued operations                                                                         |   | —                             |   | — |   | 0.01 |   |
| Cumulative effect of accounting change                                                                          |   | —                             |   | (0.68 | ) | — |   |
| **Net loss available  to common stockholders**                                                                  |   | $                                  | (0.03  | ) | $ | (0.71 | ) | $ | (0.24 | ) |
| Basic and diluted weighted average shares  outstanding                                                          |   | 43,692                             |   | 41,983 |   | 32,684 |   |

 

###### **CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)**

(in thousands)

 
|                                       |   | **Years  Ended December 31,** |   |
|--------------------------------------------|--------|------------------------------------|--------|
|                                       |   | **2003**                           |   | **2002** |   | **2001** |   |
| **Net loss**                               |   | $                                  | (1,500 | ) | $ | (29,873 | ) | $ | (7,903 | ) |
| Unrealized losses in marketable securities |   | (2                                 | )      | — |   | — |   |
| Comprehensive loss                         |   | $                                  | (1,502 | ) | $ | (29,873 | ) | $ | (7,903 | ) |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

25

----

 

###### **INVESTOOLS INC. AND SUBSIDIARIES**

###### **CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

(in thousands)

 
|                                                  |   | **Preferred Stock** |       | **Common Stock** |       | **Additional  Paid-In  Capital** |       |
|-------------------------------------------------------|--------|---------------------|------------|------------------|------------|----------------------------------|------------|
|                                                  |   | **Shares**          |       | **Amount**       |       | **Shares**                       |       | **Amount** |   |   |
| **Balance,  December 31, 2000**                  |   | **—**          | ** ** | **$**            | **—** | ** **                       | **32,676** | ** ** | **$** | **33** | ** ** | **$** | **116,909** | ** ** |
| Net loss                                              |   | —              |       | —           |       | —                           |       | — |   | — |   |
| 4% convertible preferred stock dividends              |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Amortization of deferred stock compensation           |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Issuance of common stock for services  rendered       |   | —              |       | —           |       | 48                               |       | — |   | 30 |   |
| Stock received for sale of subsidiaries               |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Retirement of treasury stock                          |   | —              |       | —           |       | (1,087                           | )          | (1 | ) | (1,340 | ) |
| Increase in par value of common stock                 |   | —              |       | —           |       | —                           |       | 284 |   | (284 | ) |
| Issuance of common stock for acquisition of  Telescan |   | 120                 |       | 1                |       | 9,155                            |       | 92 |   | 10,226 |   |
| Reclass to equity of share rescission  liability      |   | —              |       | —           |       | —                           |       | — |   | 314 |   |
| **Balance,  December 31, 2001**                  |   | **120**             | ** ** | **$**            | **1**      | ** **                       | **40,792** | ** ** | **$** | **408** | ** ** | **$** | **125,855** | ** ** |
| Net loss                                              |   | —              |       | —           |       | —                           |       | — |   | — |   |
| 4% convertible preferred stock dividends              |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Amortization of deferred stock compensation           |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Issuance of common stock for bonuses                  |   | —              |       | —           |       | 714                              |       | 7 |   | 221 |   |
| Options granted to officers for bonuses               |   | —              |       | —           |       | —                           |       | — |   | 350 |   |
| Options granted to contractors                        |   | —              |       | —           |       | —                           |       | — |   | 162 |   |
| Expiration of share rescission offer                  |   | —              |       | —           |       | (78                              | )          | (1 | ) | 1 |   |
| Conversion of preferred stock                         |   | (120                | )          | (1               | )          | 1,708                            |       | 17 |   | 59 |   |
| Acquisition of minority interest                      |   | —              |       | —           |       | 70                               |       | 1 |   | 15 |   |
| **Balance,  December 31, 2002**                  |   | **—**          | ** ** | **$**            | **—** | ** **                       | **43,206** | ** ** | **$** | **432** | ** ** | **$** | **126,663** | ** ** |
| Net loss                                              |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Amortization of deferred stock compensation           |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Change in comprehensive income                        |   | —              |       | —           |       | —                           |       | — |   | — |   |
| Repurchase of common stock                            |   | —              |       | —           |       | (268                             | )          | (3 | ) | (198 | ) |
| Issuance of restricted stock                          |   | ——        |       | —           |       | 15                               |       | — |   | 12 |   |
| Issuance of common stock for bonuses                  |   | —              |       | —           |       | 1,154                            |       | 12 |   | 277 |   |
| Options granted under stock option plans              |   | —              |       | —           |       | —                           |       | — |   | 250 |   |
| Stock issued due to option exercise                   |   | —              |       | —           |       | 82                               |       | 1 |   | 54 |   |
| **Balance,  December 31, 2003**                  |   | **—**          | ** ** | **$**            | **—** | ** **                       | **44,189** | ** ** | **$** | **442** | ** ** | **$** | **127,058** | ** ** |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

26

----

 
|                                                  |   | **Treasury  Stock** |       | **Accumulated  Other  Comprehensive  Loss** |       | **Deferred  Stock  Compensation** |       | **Accumulated  Deficit** |       | **Total**  |        |
|-------------------------------------------------------|--------|---------------------|------------|---------------------------------------------|------------|-----------------------------------|------------|--------------------------|------------|------------|-------------|
| **Balance,  December 31, 2000**                  |   | **(800**            | **)**      | **$**                                       | **—** | ** **                        | **$**      | **(36**                  | **)**      | **$**      | **(74,007** | **)** | **$** | **42,099** | ** ** |
| Net loss                                              |   | —              |       | —                                      |       | —                            |       | (7,903                   | )          | (7,903     | )           |
| 4% convertible preferred stock dividends              |   | —              |       | —                                      |       | —                            |       | (10                      | )          | (10        | )           |
| Amortization of deferred stock compensation           |   | —              |       | —                                      |       | 36                                |       | —                   |       | 36         |        |
| Issuance of common stock for services  rendered       |   | —              |       | —                                      |       | —                            |       | —                   |       | 31         |        |
| Stock received for sale of subsidiaries               |   | (541                | )          | —                                      |       | —                            |       | —                   |       | (541       | )           |
| Retirement of treasury stock                          |   | 1,341               |       | —                                      |       | —                            |       | —                   |       | —     |        |
| Increase in par value of common stock                 |   | —              |       | —                                      |       | —                            |       | —                   |       | —     |        |
| Issuance of common stock for acquisition of  Telescan |   | —              |       | —                                      |       | —                            |       | —                   |       | 10,318     |        |
| Reclass to equity of share rescission  liability      |   | —              |       | —                                      |       | —                            |       | —                   |       | 314        |        |
| **Balance,  December 31, 2001**                  |   | **$**               | **—** | ** **                                  | **$**      | **—**                        | ** ** | **$**                    | **—** | ** ** | **$**       | **(81,920** | **)** | **$** | **44,344** | ** ** |
| Net loss                                              |   | —              |       | —                                      |       | —                            |       | (29,873                  | )          | (29,873    | )           |
| 4% convertible preferred stock dividends              |   | —              |       | —                                      |       | —                            |       | (45                      | )          | (45        | )           |
| Amortization of deferred stock compensation           |   | —              |       | —                                      |       | 41                                |       | —                   |       | 41         |        |
| Issuance of common stock for bonuses                  |   | —              |       | —                                      |       | —                            |       | —                   |       | 228        |        |
| Options granted to officers for bonuses               |   | —              |       | —                                      |       | —                            |       | —                   |       | 350        |        |
| Options granted to contractors                        |   | —              |       | —                                      |       | (132                              | )          | —                   |       | 30         |        |
| Expiration of share rescission offer                  |   | —              |       | —                                      |       | —                            |       | —                   |       | —     |        |
| Conversion of preferred stock                         |   | —              |       | —                                      |       | —                            |       | —                   |       | 75         |        |
| Acquisition of minority interest                      |   | —              |       | —                                      |       | —                            |       | —                   |       | 16         |        |
| **Balance,  December 31, 2002**                  |   | **$**               | **—** | ** **                                  | **$**      | **—**                        | ** ** | **$**                    | **(91**    | **)**      | **$**       | **(111,838** | **)** | **$** | **15,166** | ** ** |
| Net loss                                              |   | —              |       | —                                      |       | —                            |       | (1,500                   | )          | (1,500     | )           |
| Amortization of deferred stock compensation           |   | —              |       | —                                      |       | 60                                |       | —                   |       | 60         |        |
| Change in comprehensive income                        |   | —              |       | (2                                          | )          | —                            |       | —                   |       | (2         | )           |
| Repurchase of common stock                            |   | —              |       | —                                      |       | —                            |       | —                   |       | (201       | )           |
| Issuance of restricted stock                          |   | —              |       | —                                      |       | (12                               | )          | —                   |       |       |        |
| Issuance of common stock for bonuses                  |   | —              |       | —                                      |       | —                            |       | —                   |       | 289        |        |
| Options granted under stock option plan               |   | —              |       | —                                      |       | (250                              | )          | —                   |       | —     |        |
| Stock issued due to option exercise                   |   | —              |       | —                                      |       | —                            |       | —                   |       | 55         |        |
| **Balance,  December 31, 2003**                  |   | **$**               | **—** | ** **                                  | **$**      | **(2**                            | **)**      | **$**                    | **(293**   | **)**      | **$**       | **(113,338** | **)** | **$** | **13,867** | ** ** |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

27

----

 

###### **INVESTOOLS INC. AND SUBSIDIARIES**

###### **CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

 
|                                                                             |   | **Years  Ended December 31,** |   |
|----------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                             |   | **2003**                           |   | **2002** |   | **2001** |   |
| **Cash flows from  operating activities:**                                       |   |                               |   |   |   |   |   |
| Net loss                                                                         |   | $                                  | (1,500 | ) | $ | (29,873 | ) | $ | (7,903 | ) |
| Reconciling adjustments:                                                         |   |                               |   |   |   |   |   |
| Deferred tax expense                                                             |   | 2,830                              |   | 2,036 |   | — |   |
| Depreciation and amortization                                                    |   | 596                                |   | 675 |   | 4,536 |   |
| Amortization of discount on marketable  securities                               |   | 30                                 |   | — |   | — |   |
| Cumulative effect of accounting change                                           |   | —                             |   | 28,417 |   | — |   |
| Write off of and loss on equity investment                                       |   | —                             |   | — |   | 5,805 |   |
| Accrued interest on share rescission                                             |   | —                             |   | — |   | 156 |   |
| Discontinued operations                                                          |   | —                             |   | — |   | (117 | ) |
| Changes in operating assets and  liabilities, net of the effects of acquisitions |   |                               |   |   |   |   |   |
| Decrease in accounts receivable                                                  |   | 356                                |   | 885 |   | 282 |   |
| Increase in amounts due from related  parties                                    |   | —                             |   | — |   | (20 | ) |
| (Increase) decrease due from merchant  account vendor                            |   | 561                                |   | (561 | ) | (23 | ) |
| Increase in deferred revenue                                                     |   | 3,802                              |   | 1,204 |   | 282 |   |
| Increase (decrease) in accounts payable                                          |   | (1,679                             | )      | (578 | ) | 975 |   |
| Increase (decrease) in tax liabilities                                           |   | 2,277                              |   | (1,687 | ) | (819 | ) |
| Increase in payroll liabilities                                                  |   | 716                                |   | 704 |   | 515 |   |
| Increase (decrease) in other  receivables/liabilities                            |   | 33                                 |   | (855 | ) | (620 | ) |
| Other                                                                            |   | (27                                | )      | 102 |   | 119 |   |
| Net cash provided by operating activities                                        |   | 7,995                              |   | 469 |   | 3,168 |   |
| **Cash flows from  investing activities:**                                       |   |                               |   |   |   |   |   |
| Investment in marketable securities                                              |   | (8,370                             | )      | — |   | — |   |
| Purchases of furniture and equipment                                             |   | (767                               | )      | (822 | ) | (88 | ) |
| Proceeds of maturity of marketable security                                      |   | 600                                |   | — |   | — |   |
| Acquisition of Telescan, net of cash  acquired of $696                           |   | —                             |   | — |   | (347 | ) |
| Investment in affiliate                                                          |   | —                             |   | — |   | (250 | ) |
| Other                                                                            |   | —                             |   | (7 | ) | 40 |   |
| Net cash used in investing activities                                            |   | (8,537                             | )      | (829 | ) | (645 | ) |
| **Cash flows from  financing activities:**                                       |   |                               |   |   |   |   |   |
| Payments on share rescission liability                                           |   | —                             |   | (366 | ) | (90 | ) |
| Repurchase of common stock                                                       |   | (201                               | )      | — |   | — |   |
| Proceeds from exercise of stock options                                          |   | 55                                 |   | — |   | — |   |
| Other                                                                            |   | (14                                | )      | (44 | ) | (27 | ) |
| Net cash used in financing activities                                            |   | (160                               | )      | (410 | ) | (117 | ) |
| **Increase (decrease)  in cash and cash equivalents:**                           |   | (702                               | )      | (770 | ) | 2,406 |   |
| **Cash and cash equivalents:**                                                   |   |                               |   |   |   |   |   |
| Beginning of year                                                                |   | 5,160                              |   | 5,930 |   | 3,524 |   |
| End of year                                                                      |   | $                                  | 4,458  |   | $ | 5,160 |   | $ | 5,930 |   |
| **Other non-cash  investing and financing activities were as follows:**          |   |                               |   |   |   |   |   |
| Stock issued for bonuses                                                         |   | $                                  | 266    |   | $ | 228 |   | $ | — |   |
| Options issued to employees                                                      |   | 250                                |   | — |   | — |   |
| Options issued for bonuses                                                       |   | 23                                 |   | 350 |   | — |   |
| Conversion of preferred stock                                                    |   | —                             |   | 76 |   | — |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

28

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**INVESTOOLS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                                                              SIGNIFICANTACCOUNTING POLICIES AND RELATED INFORMATION**

 

## **TheCompany**

 

INVESTools Inc. and subsidiaries (the “Company” or “INVESTools”) offersa full range of investor education products and services that provide lifelonglearning and support to self-directed investors, to help them improve theirinvestment performance.  The Companyteaches basic investing concepts in instructor-led classes, including workbooksand training manuals, investor conferences, one-on-one personal coaching andDVD home-study courses.

 

**CorporateBackground**

## ** **

The Company was incorporated in Delaware on May 21, 2001, but did notbegin business operations until December 6, 2001, when the mergertransaction (the “Merger”) pursuant to the Second Amended and RestatedAgreement and Plan of Merger (the “Merger Agreement”), dated September 25,2001, between the Company, ZiaSun Technologies, Inc., a Nevada corporation(“ZiaSun”), and Telescan, Inc. a Delaware corporation (“Telescan”), wasconsummated.

 

As a result of the Merger, ZiaSun and Telescan each became wholly ownedsubsidiaries of the Company.  The stock-for-stock merger transactionresulted in (i) each share of ZiaSun common stock being converted into the rightto receive one share of the Company’s common stock, (ii) each share of Telescancommon stock being converted into the right to receive 0.55531 of a share ofthe Company’s common stock and (iii) each share of Telescan preferred stockbeing converted into one share of the Company’s preferred stock.  Nofractional shares of the Company’s common stock were issued and cash, withoutinterest, was paid in lieu of fractional shares.  Following the close ofthe Merger, former ZiaSun stockholders owned approximately 75% of the Company’scommon stock and former Telescan stockholders owned approximately 25%. The Merger was accounted for under the purchase method of accounting.

 

Following the Merger, ZiaSun was deemed the acquirer for accountingpurposes.  Therefore, all of the historical financial information hereinrepresents the financial results for ZiaSun for the periods prior to theMerger.  Under the purchase method of accounting the results for Telescanare included in the consolidated financial results only for the periodsubsequent to the Merger.

 

ZiaSun and Telescan each own the following companies:

 

•                  ZiaSun owns 100%of Online Investors Advantage, Inc. (“OIA”). OIA owns 100% of Investor Education California, LLC.  OIA also owns 100% of the following dormantcompanies that have no operations: INVESTools Asia Pacific Pte., Limited (“INVESTools Asia”), INVESToolsHong Kong Ltd. (“INVESTools Hong Kong”), Seminar Marketing Group, Inc. (“SMG”)and Memory Improvement Systems, Inc. (“MIS”). ..

 

•                  Telescan owns 100%of INVESTools, Inc., a California company, a dormant company with no operations(“INVESTools California”).

 

## **Principlesof Consolidation**

 

The consolidated financial statements includethe accounts of the Company and its majority-owned subsidiaries for which theCompany exercises control.  Allsignificant intercompany transactions have been eliminated.

 

## **Useof Estimates**

 

Preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, the disclosed amounts of contingent assetsand liabilities and the reported amounts of revenues and expenses.  Management believes the most significantestimates and assumptions are associated with the valuation of intangibles,goodwill and taxes.  If the underlyingestimates and assumptions upon which the financial statements are based changein future periods, actual amounts may differ from those included in theaccompanying consolidated financial statements.

 

## **SegmentReporting**

 

The Company consists of a single segment delivering investor educationwhich provides lifelong learning and support to self-directed investors.  During the third quarter of 2003, the Companyreorganized its management team in further support of its core InvestorEducation business.  The formerPublishing and Business Services segment experienced a steady decline inrevenue over the last two years and was considered non-core business since theCompany’s Merger with ZiaSun and Telescan

 

29

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in 2001.  In management’sopinion, the Publishing and Business Services segment is an insignificant partof the Company’s operation.

 

## **FinancialInstruments**

 

The carrying value of the Company’s financial instruments approximatefair value.  Financial instrumentsconsist primarily of cash and cash equivalents, marketable securities, accountsreceivable, accounts payable and other accrued liabilities.

 

## **Cashand Cash Equivalents**

 

The Company considers all cash and cash investments with an originalmaturity of three months or less to be cash equivalents.  The Company has invested excess as follows(in thousand):

 
|                                          |   | **2003** |   | **2002** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|
| Treasury strips                               |   | $        | 7,808  |     | $      | — |   |
| Money Markets (reported as cash  equivalents) |   | 859      |   | 88       |   |
| **Total**                                     |   | $        | 8,667  |     | $      | 88 |   |

 

The amounts included in the consolidated financial statementsapproximate fair value at the balance sheet date.  The Company maintains deposits in banks, which may exceed theamount of federal deposit insurance available. Management believes the potential risk of loss on these accounts to beminimal.

 

## **MarketableSecurities**

 

During 2003, the Company invested excess cash in marketablesecurities.  The cost of thesesecurities was $7.8 million.  TheCompany has classified these marketable securities as available for sale underSFAS No. 115.  Accordingly, thesecurities are recorded at fair value and any unrealized gains or losses areincluded in accumulated other comprehensive income within stockholders’equity.  As of December 31, 2003the Company had recorded $2,000 in net unrealized losses on the securitieswhich was composed of $3,000 of gross gains offset by $5,000 of gross losses.  The securities were purchased at a discountwhich is being amortized into income over the maturity of the security.  During 2003, the Company recognized $40,000of interest income related to the marketable securities.  In November 2003, one security maturedand the proceeds of $600,000 were reinvested in another Treasury Strip.  The market value of these securities,reflected in the balance sheet at December 31, 2003, was $7.8 million.

 

## **AccountsReceivable**

 

Approximately 90% of the revenue received for workshops, products andWeb site subscriptions are paid by credit cards.  The Company’s experience with chargebacks and refunds is nominaland no allowance for doubtful accounts is provided related to thesereceivables.  Receivables from customersbilled for other services are reserved when collection becomes doubtful.

 

In 2001, in connection with the sale of two companies, the Companyreceived notes receivables from the buyers totaling $150,000 due in two equalinstallments on June 15, 2003 and 2004. No payment was received on June 15, 2003.  Management has determined collection of those receivables to beremote and has fully reserved the balance due at December 31, 2003 and2002, respectively.

 

The Company had $197,000 and $150,000 in allowance for doubtfulaccounts at December 31, 2003 and 2002, respectively.  During the years ended December 31,2003, 2002, and 2001, the Company recorded approximately $116,000, $89,000, and$160,000 in bad debt expense, respectively.

 

## **DueFrom Merchant Account Vendors**

 

The Company uses merchant account vendors to process credit cardtransactions.  Under the terms of theseagreements, the merchant account vendor has the right to withhold credit cardfunds to cover charge backs in the event the Company is unable to honor itscommitments.  Such funds can be held forup to a year after the Company has terminated its relationship with themerchant account vendor.  AtDecember 31, 2003, the Company has $357,000 of funds due from merchantaccount vendors.

 

## **Furnitureand Equipment**

 

Furniture and equipment is stated at cost less accumulateddepreciation.  Depreciation iscalculated on a straight-line method over the estimated useful lives of theassets, which range from two to five years.

 

30

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Depreciation expense was approximately $509,000,  $600,000, and $56,000 for the years endedDecember 31, 2003, 2002 and 2001, respectively.

 

Following is a detail of the balance sheet account (in thousands):

 
|                                             |   | **2003** |   | **2002** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|
| **Furniture and equipment:**                     |   |     |   |     |   |
| Computer and office equipment                    |   | $1,110   |   | $575     |   |
| Furniture                                        |   | 128      |   | 120      |   |
| Leasehold improvements                           |   | 85       |   | 645      |   |
| Total furniture and equipment                    |   | 1,323    |   | 1,340    |   |
| Less: accumulated depreciation and  amortization |   | (491     | )      | (749     | )      |
| **Furniture and  equipment, net**                |   | $832     |   | $591     |   |

 

## **Investments**

 

Periodically, the Company will invest in private companies or jointventures.  When the investment is lessthan 20% of ownership and the Company does not have the ability to exercisesignificant influence over the entity’s operations, the Company accounts forthe investment under the cost method. Under this method, the value of the investment is adjusted only forcapital contributions and distributions and the carrying value is monitored forimpairment by reviewing operating performance and cash flow forecasts.  When the Company has an investment in acompany that is between 20% and 50%, or the Company exercises significantinfluence over the operations, it is accounted for under the equity methodwhere the investment balance is adjusted each period to reflect the proportionatechange in earnings which is included in the income statement.  When the Company owns more than a 50%interest in a company, control is assumed and the entity is consolidated withthe proportionate earnings and investment not controlled by the Companyreflected in the consolidated financial results as minority interest.

 

At December 31, 2002, the minority interest amounts included inthe financial statements represent the share of loss associated with theminority ownership interest in INVESTools Asia and INVESTools Hong Kong throughJuly 31, 2002.  The Companyacquired outstanding minority ownership in August 2002, and theseoperations were wholly owned subsequent to this acquisition.

 

## **Goodwilland Intangible Assets**

 

Goodwill is related to purchase acquisitions and is recorded apart fromintangible assets.  In June 2001, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.142, *Goodwill and Other Intangible Assets*(“SFAS No. 142”).

 

Upon adoption of SFAS No. 142, amortization of existing goodwill ceasedand the remaining book value is tested for impairment at least annually at thereporting unit level using a detailed impairment test.  Provisions of SFASNo. 142 states that any impairment loss identified upon adoption of thisstandard is recognized as a cumulative effect of a change in accountingprinciple.  Any subsequent impairment loss recognized under the provisionsof SFAS No. 142 is recorded as a charge to current period earnings.

 

On January 1, 2002, the Company adopted SFAS No. 142 andestablished its annual review for impairment as of December 31.  TheCompany recognized a write-down of goodwill in the amount of $28.4 million asof January 1, 2002.  Based on theanalysis completed at December 31, 2003 and 2002, the Company’s reviewindicated no further impairment of Goodwill and Other Intangible Assets and noadditional write-off was required.  The Company will review the carryingvalue of its goodwill for impairment on an annual basis or more frequently ifdeemed necessary.  At December 31, 2003 and 2002, the net book valueof goodwill was $12 million.

 

31

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The following unaudited pro forma results of operations data for theyears ended December 31, 2003, 2002 and 2001 are presented as if theprovisions of SFAS No. 142 had been in effect for all periods presented (amountin thousands except per share amounts):

 
|                                                            |   | **Years  Ended December 31,** |   |
|-----------------------------------------------------------------|--------|------------------------------------|--------|
|                                                            |   | **2003**                           |   | **2002** |   | **2001** |   |
|                                                            |   |                               |   |   |   |   |   |
| **Net loss as reported:**                                       |   | $(1,500                            | )      | $(29,873 | ) | $(7,903 | ) |
| Add:   cumulative effect of change in accounting principle |   | —                             |   | 28,417 |   | — |   |
| Add:  goodwill amortization                                |   | —                             |   | — |   | 4,480 |   |
| Adjusted  net loss                                              |   | $(1,500                            | )      | $(1,456 | ) | $(3,423 | ) |
| **Basic and diluted  EPS:**                                     |   |                               |   |   |   |   |   |
| Net loss                                                        |   | $(0.03                             | )      | $(0.71 | ) | $(0.24 | ) |
| Add:   cumulative effect of change in accounting principle |   | —                             |   | 0.68 |   | — |   |
| Add:  goodwill amortization                                |   | —                             |   | — |   | 0.14 |   |
| Adjusted net loss                                               |   | $(0.03                             | )      | $(0.03 | ) | $(0.10 | ) |

 

For further information regarding goodwilland other intangible assets, refer to Note 3.

 

## **LongLived Assets**

 

In accordance with the provisions of SFAS No. 121, the Company reviewslong lived assets and goodwill for impairment. During fiscal 2002, the Company adopted SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets.* Accordingly, the Company reviews long-livedassets, such as property, equipment and definite-lived intangibles subject toamortization, for impairment whenever events or changes in circumstances mayindicate that the carrying value of an asset may not be recoverable. Asrequired by SFAS No. 144, the Company uses an estimate of the futureundiscounted net cash flows of the related asset or group of assets over theirremaining lives in measuring whether the assets are recoverable. If thecarrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized for the amount by which the carrying amountexceeds the estimated fair value of the asset. Impairment of long-lived assetsis assessed at the lowest levels for which there are identifiable cash flowsthat are independent of other groups of assets. Assets to be disposed of arereported at the lower of the carrying amount or fair value, less the estimatedcosts to sell. In addition, depreciation of the asset ceases. Losses onimpaired assets are recorded as a separate component of operating expenses inthe consolidated statements of operations.

 

The Company did not recognize any impairment of long-lived assetsduring the years ended December 31, 2003, 2002 and 2001.

 

## **IncomeTaxes**

 

The provision for income taxes has been determined using the asset andliability approach of accounting for income taxes. Under this approach,deferred income taxes represent the future tax consequences expected to occurwhen the reported amounts of assets and liabilities are recovered or paid. Theprovision for income taxes represents income taxes paid or payable for thecurrent year plus the change in deferred taxes during the year. Deferred incometaxes result from differences between the financial reporting and tax basis ofassets and liabilities and are adjusted for changes in tax rates and tax lawswhen changes are enacted.  Deferred taxassets represent net operating loss carryforwards expected to be utilized tooffset anticipated future earnings of the Company.

 

## **RevenueRecognition**

 

Revenue is not recognized until it is realized or realizable andearned.  The criteria to meet thisguideline are: 1) persuasive evidence of an arrangement exists, 2) delivery hasoccurred or services have been rendered, 3) the price to the buyer is fixed ordeterminable, and 4) collectibility is reasonably assured.

 

32

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The Company sells its products bundled together in many differentways.  Each sale is broken down into itsspecific element and revenue from each element is recognized according to thefollowing policies:

 
| **Revenue stream**                  |   | **Recognition  policy**                                                                     |
|-------------------------------------|--------|---------------------------------------------------------------------------------------------|
| Workshop revenue                    |   | Recognized at the end of the workshop                                                       |
| Home study revenue                  |   | Recognized upon shipping to customer                                                        |
| Personal Training System            |   | Deferred upon receipt and recognized on a straight-line basis over  contract period         |
| Web site subscriptions and renewals |   | Deferred upon receipt and recognized on a straight-line basis over  the subscription period |
| Web site hosting                    |   | Recognized over period of service which is monthly                                          |

 

The revenue for each element is calculatedbased upon the fair value of each separate element, which has been determinedby prices paid when each product is sold separately.  From time to time, the Company offers these products together ata discounted rate.  The discount isallocated pro rata to each element of revenue.

 

## **DeferredRevenue**

## ** **

Deferred revenue arises from subscriptions tothe Web sites and personal training sessions because the payments are receivedbefore the delivery of service has been rendered.  Deferred revenue is recognized into revenue over the period ofthe contractual obligation.

 

The Company also sells gift certificates toattend workshops in the future.  Revenuefrom these sales is deferred until the certificate is used or expires.

 

## **ForeignCurrencies**

## ** **

The Company’s functional currency is the U.S.dollar.  Accordingly, foreign entitiestranslate monetary assets and liabilities at year-end exchange rates, whilenon-monetary items are translated at historical rates.  Income and expense accounts are translatedat the average rates in effect during the year, except for depreciation, whichis translated at historical rates. Gains and losses resulting from the translation of foreign financialstatements and from foreign currency as of and for the years endedDecember 31, 2003, 2002 and 2001 have been immaterial.

 

## **Stock–BasedCompensation**

## ** **

The Company’s long term employee incentiveplans provide for the awarding of stock options to employees anddirectors.  With respect to stockoptions that were granted prior to December 31, 2002, the Companyaccounted for the stock-based compensation under SFAS No. 123, *Accounting for Stock Based Compensation,*whichpermits using either the intrinsic value method or using the fair value method.The Company chose to use the intrinsic value method whereby compensation costis measured as the excess, if any, of the quoted market price of the Company’sstock at the date of grant over the exercise price of the option granted.Compensation cost for stock options, if any, is recognized ratably over thevesting period. The Company’s policy is to grant options with an exercise priceequal to the quoted closing market price of the Company’s stock on the businessday preceding the grant date. Accordingly, no compensation cost has beenrecognized under the Company’s stock option plans for the granting of stockoptions made prior to December 31, 2002.

 

33

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In December 2002, the FASB issued SFAS No. 148, *Accounting for Stock-Based Compensation - Transitionand Disclosure - an Amendment of FASB Statement No. 123*. Thisamendment provides alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation.  In accordance with SFASNo. 148, the following table illustrates the effect on net loss and earningsper share if the fair value method of accounting for stock options had been appliedto all outstanding and unvested stock awards in each reported period as follows(amounts in thousands except per share amounts):

 
|                                                            |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                            |   |     |   |     |   |     |   |
| Net loss as reported                                            |   | $        | (1,500 | )        | $      | (29,918  | )      | $ | (7,913 | ) |
|                                                            |   |     |   |     |   |     |   |
| Add:   Stock-based compensation recorded, net of taxes     |   | 60       |   | —   |   | —   |   |
| Deduct:   Pro forma stock-based compensation, net of taxes |   | (264     | )      | (475     | )      | (741     | )      |
|                                                            |   |     |   |     |   |     |   |
| Pro forma net loss                                              |   | $        | (1,704 | )        | $      | (30,393  | )      | $ | (8,654 | ) |
|                                                            |   |     |   |     |   |     |   |
| Basic and diluted loss per share – as  reported            |   | $        | (0.03  | )        | $      | (0.71    | )      | $ | (0.24 | ) |
| Basic and diluted loss per share – pro  forma              |   | (0.03    | )      | (0.72    | )      | (0.26    | )      |

 

The fair value of options granted were estimated using theBlack-Scholes option pricing model with the following assumptions:

 
|                                            |   | **2003**          |   | **2002** |   | **2001**          |   |
|-------------------------------------------------|--------|-------------------|--------|----------|--------|-------------------|--------|
|                                            |   |              |   |     |   |              |   |
| Risk Free Factors                               |   | 3.40% to 4.30     | %      | 3.10     | %      | 4.88% to 5.14     | %      |
| Volatility factors                              |   | 123.02% to 157.60 | %      | 145.94   | %      | 135.50% to 139.50 | %      |
| Expected lives                                  |   | 7 to 10 years     |   | 5 years  |   | 7 to 10 years     |   |
| Assumed dividend yield                          |   | —            |   | —   |   | —            |   |
| Weighted average fair value of options  granted |   | $                 | 0.24   |     | $      | 0.16              |   | $ | 0.69 |   |
|                                                 |        |                   |        |          |        |                   |        |  |  |  |

 

On January 1, 2003, the Company voluntarily adopted the fair valueexpense recognition method available under SFAS No. 148.  SFAS No. 148 permits recognition on aprospective basis whereby any new options granted after January 1, 2003will be accounted for using the fair value method.  The fair value method requires a calculation of the fair value ofthe option at the date of the grant using the Black-Scholes option pricingmodel and the value of the option is amortized ratably into expense over theappropriate vesting period.

 

## **AdvertisingCosts**

## ** **

Advertising costs are expensed when incurred and are included ingeneral and administrative expenses. Advertising costs for the years ended December 31, 2003, 2002 and2001 were $10.0 million, $8.8 million, and $9.9 million, respectively.

 

## **Costsof Acquisition Opportunities**

## ** **

Internal costs associated with a business combination are expensed asincurred.  Direct and incremental costsrelated to successful negotiations where the Company is the acquiring companyare capitalized as part of the cost of the acquisition.  Costs associated with unsuccessfulnegotiations are expensed when it is probable that the acquisition will notoccur.

 

## **Earnings(Loss) Per Share**

 

Earnings (loss) per share are computed by using the weighted averagenumber of shares of common stock outstanding. At December 31, 2003, 2002 and 2001, there were approximately592,000, 236,000 and 836,000 shares, respectively, of common stock potentiallyissuable with respect to stock options and convertible preferred stock, whichwere excluded from the net earnings (loss) per share calculation because theCompany reported a net loss for those periods.

 

## **RecentlyIssued Accounting Standards**

## ** **

In August 2001, the FASB approved SFASNo. 143, *Accounting for Asset RetirementObligations* (“SFAS 143”), which will be effective for thefiscal year beginning January 1, 2003. SFAS 143 addresses thefinancial accounting and reporting for 

 

34

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obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs. TheCompany adopted this statement during the first quarter of fiscal 2003. Theadoption of SFAS 143 did not have a material impact on our financialcondition, results of operations or cash flows.

 

In November 2002, the Emerging Issues Task Force reached aconsensus on Issue No. 00-21 (“EITF 00-21”), *RevenueArrangements with Multiple Deliverables*.  EITF 00-21 provides guidance on how to account for arrangementsthat involve the delivery or performance of multiple products, services and/orrights to use assets. The provisions of EITF 00- 21 apply to revenuearrangements entered into in fiscal periods beginning after June 15, 2003.The adoption of this standard did not have a material impact on the Company’sfinancial condition, results of operations or cash flows.

 

In April 2003, the FASB issued SFAS No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities* (“SFAS No. 149”). SFAS No. 149 amends andclarifies accounting for derivative instruments, including certain derivativeinstruments embedded in other contracts, and for hedging activities under SFASNo. 133. In particular, SFAS No. 149 clarifies under what circumstances acontract with an initial net investment meets the characteristics of aderivative and when a derivative contains a financing component that warrantsspecial reporting in the statement of cash flows. SFAS No. 149 is generally effectivefor contracts entered into or modified after June 30, 2003 The Companyadopted this Statement during the second quarter of fiscal 2003. The adoptionof SFAS No. 149 did not have a material impact on the Company’s financialcondition, results of operations or cash flows.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity* (“SFAS No. 150”).  SFAS No. 150 establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances). Many of those instruments were previouslyclassified as equity. SFAS No. 150 is effective for financial instrumentsentered into or modified after May 31, 2003, and otherwise is effective at thebeginning of the first interim period beginning after September 15, 2003.It is to be implemented by reporting the cumulative effect of a change in anaccounting principle for financial instruments created before the issuance dateof SFAS No. 150 and still existing at the beginning of the interim period ofadoption. Restatement is not permitted. On November 7, 2003, FASB issuedFASB Staff Position No. FAS 150-3 (“FSP 150-3”), *Effective Date, Disclosures, and Transition for Mandatorily RedeemableFinancial Instruments of Certain Nonpublic Entities and Certain MandatorilyRedeemable Noncontrolling Interests under FASB Statement No. 150, Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity.* FSP 150-3 deferred certain aspects of FAS 150. The Companyadopted this statement during the second quarter of fiscal 2003. The adoptionof SFAS No. 150 and FSP 150-3 did not have a material impact on the Company’sfinancial condition, results of operations or cash flows.

 

On December 17, 2003, the Staff of the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), *Revenue Recognition*, which supercedes SAB101, *Revenue Recognition in FinancialStatements*. SAB 104’s primary purpose is to rescind accountingguidance contained in SAB 101 related to multiple element revenue arrangements,superceded as a result of the issuance of EITF 00-21, “Accounting for RevenueArrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds theSEC’s Revenue Recognition in Financial Statements Frequently Asked Questionsand Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic13, Revenue Recognition. Selected portions of the FAQ have been incorporatedinto SAB 104. While the wording of SAB 104 has changed to reflect the issuanceof EITF 00-21, the revenue recognition principles of SAB 101 remain largelyunchanged by the issuance of SAB 104. The Company adopted this statement duringthe fourth quarter of fiscal 2003. The adoption of SAB 104 did not have amaterial impact on the Company’s financial condition, results of operations orcash flows.

 

## **Reclassifications**

 

Certain prior years’ balances have been reclassified to conform to thecurrent year’s presentation.  Theseinconsequential reclassifications had no impact on operating results.

 

**2.****                                                              ACQUISITIONS**

 

## **2002Acquisition**

 

In August 2002, the Company terminated the joint venture agreementwith Messrs. Hon Leong Chong and Eric Tan and purchased their 25% interest inINVESTools Asia and their ownership of INVESTools Hong Kong, a developmentstage entity, formed in 2001 (see discussion later in this Note).  In consideration for selling their interestin the INVESTools Asia and INVESTools Hong Kong companies, the Companyreimbursed Messrs. Chong and Tan for their original capital contribution to INVESToolsAsia equal to a total of approximately $14,000 and issued a total of 70,000shares of the Company’s common stock to them. Messrs. Chong and Tan remained employed by the Company as directors ofthe Asia and

 

35

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Hong Kong companies.

 

In May 2003, the Company closed the offices in Asia and terminated thecontracts with Messrs. Chong and Tan. The INVESTools Asia customers continue to be serviced out of the Provooffice.

 

## **2001Acquisitions**

 

### ***Telescan***

 

As discussed in Note 1, the Company was formed pursuant to a mergerbetween Telescan and ZiaSun approved on December 6, 2001, by thestockholders of both companies.  ZiaSunstockholders received one share of INVESTools stock for each ZiaSun share theyowned as of the record date, Telescan common stockholders received 0.55531shares of INVESTools common stock for each Telescan common share they owned asof the record date and Telescan preferred stockholders received one share ofINVESTools preferred stock for each Telescan preferred share they owned at therecord date.  At December 31, 2001,40,792,219 shares of INVESTools common stock and 120,000 shares of preferredstock had been issued to the former stockholders of ZiaSun and Telescan.

 

The Merger was accounted for under the purchase method of accounting.  Although ZiaSun and Telescan are bothwholly-owned subsidiaries of INVESTools, ZiaSun was deemed the acquirer ofTelescan for accounting purposes.  Coststhat ZiaSun incurred related to the acquisition totaling $1 million areincluded in the purchase price.  Coststhat Telescan incurred related to the acquisition were expensed on Telescan’sfinancial statements prior to the date of the opening balance sheet.

 

Under the terms of the merger agreement, the Company assumed Telescan’soutstanding options in the Merger resulting in an increase of 596,020 optionsto purchase shares of the Company’s common stock.  The fair value of these options has been included in thedetermination of the purchase price of the Merger.  The Company did not allocate any cost to deferred compensationfor these options, as the portion that had not yet vested had no intrinsicvalue at the opening balance sheet date.

 

Upon the closing of the Merger, certain officers of ZiaSun wereentitled to receive Merger Transition Awards (as defined in the mergeragreement) totaling $3.4 million in cash that vest on the anniversary date ofthe Merger until the third anniversary date of the Merger as long as theseofficers are still employed with the Company. In August, 2002, the total amount of these awards was decreased to$400,000, all of which was expensed in 2002.

 

The purchase price for the acquisition consisted of the following (inthousands):

 
| Value of common stock and options issued |   | $     | 10,318 |   |
|------------------------------------------|--------|-------|--------|--------|
| Transaction costs                        |   | 1,043 |   |
| Total purchase price                     |   | $     | 11,361 |   |

 

The purchase price for the acquisition wasallocated as follows (in thousands):

 
| Current assets                    |   | $      | 1,733  |   |
|-----------------------------------|--------|--------|--------|--------|
| Current liabilities               |   | (4,914 | )      |
| Furniture, fixtures and equipment |   | 125    |   |
| Deferred tax asset                |   | 4,799  |   |
| Intangibles                       |   | 500    |   |
| Goodwill                          |   | 9,118  |   |
| Total purchase price              |   | $      | 11,361 |   |

 

The Company expects to amortize the valueassigned to the intangible assets on a straight-line basis over 5 to 10 years.

 

36

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The following unaudited pro forma results of operations for the yearended December 31, 2001, assumes the acquisition of Telescan occurred onJanuary 1, 2001, and assumes the purchase price has been allocated to theassets purchased and the liabilities assumed based on their values at the dateof acquisition.  Pro forma net lossincludes amortization of the intangible assets and the one time adjustment of$661,000 related to salary adjustments related to the Merger.

 
| **(in thousands, except per share  data)**         |   | **2001** |   |
|----------------------------------------------------|--------|----------|--------|
|                                               |   |     |   |
| Total revenue                                      |   | $        | 69,441 |   |
| Net loss from continuing operations                |   | (18,978  | )      |
| Net loss attributable to common  stockholders      |   | (19,099  | )      |
| Diluted loss per share from continuing  operations |   | (0.54    | )      |
|                                                    |        |          |        |  |

 

The foregoing unaudited pro forma results of operations are presentedfor illustrative purposes only and are not necessarily indicative of theoperating results that would have occurred if the transaction had beenconsummated at the dates indicated. Furthermore, such unaudited pro forma results of operations are notnecessarily indicative of future operating results of the combined companies,due to changes in operating activities following the Merger, and should not beconstrued as representative of the operating results of the combined companiesfor any future dates or periods.

 

### ***Asia***

 

On September 7, 2001, OIA along with two Singapore individualsentered into a Joint Venture Agreement under which the parties formed aSingapore corporation, INVESTools Asia, to expand OIA’s business in the Asianmarketplace, including the performance of marketing services, the distributionof OIA’s materials and conducting workshops initially in Singapore, Malaysia,Brunei and Hong Kong.  Prior to theacquisition discussed above under “2002 Acquisition,” INVESTools Asia was 75%owned by OIA and 25% owned by the individuals.

 

**3.****                                                              GOODWILLAND INTANGIBLE ASSETS**

 

The Company has goodwill related to two acquisitions; the acquisitionof OIA in 1999 and the acquisition of Telescan in 2001.  In accordance with SFAS No. 142, goodwill isno longer amortized, but tested for impairment annually.  In connection with the preparation of thefinancial statements as of December 31, 2003 and 2002, the Companycompared the carrying value of the goodwill to the fair value of the reportingunits and determined that no additional impairment was warranted.

 

The impairment testing is performed in two steps: (i) the determinationof impairment, based upon the fair value of a reporting unit as compared to itscarrying value, and (ii) if there is an impairment, measure the amount ofimpairment loss by comparing the implied fair value of goodwill with thecarrying amount of that goodwill. Using conservative but realistic assumptions,the Company determined that the carrying value of the Investor Educationsegment was greater than the derived fair value, indicating an impairment inthe recorded goodwill. To determine fair value, the Company relied on adiscounted cash flow analysis.  Significant estimates used in themethodology included estimates of future earnings, future growth rates and aweighted average cost of capital.   For goodwill valuation purposesonly, the revised fair value of this segment was allocated to the assets andliabilities of the business unit to arrive at an implied fair value ofgoodwill, based upon known facts and circumstances, as if the acquisitionoccurred currently.

 

The carrying value of goodwill attributable to each reporting unit wasas follows (in thousands):

 
|                                    |   | **Investor  Education** |   | **Publishing  and Business  Services** |   | **Total** |   |
|-----------------------------------------|--------|-------------------------|--------|----------------------------------------|--------|-----------|--------|
| Balance at December 31, 2001       |   | $                       | 40,445 |                                   | $      | —    |   | $ | 40,445 |   |
| Adjustment to purchase price allocation |   | (70                     | )      | —                                 |   | (70       | )      |
| Impairment charge                       |   | (28,417                 | )      | —                                 |   | (28,417   | )      |
| Balance at December 31, 2002       |   | $                       | 11,958 |                                   | $      | —    |   | $ | 11,958 |   |
| Impairment charge                       |   | —                  |   | —                                 |   | —    |   |
| Balance at December 31, 2003       |   | $                       | 11,958 |                                   | $      | —    |   | $ | 11,958 |   |

 

37

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As discussed in Note 1, in connection with the Merger, the Companyreviewed the intangible assets acquired and valued them using an allowablevaluation methodology.  The Companydetermined that its software platforms containing ProSearch and its Orbitmarketing/publishing engine should be capitalized at a value of $250,000 eachand assigned useful lives of 10 and 5 years, respectively.  The useful lives were determined based onthe proprietary nature of the software, absence of equivalent competitiveproducts and the unlikelihood of any being developed, and the useful livesalready realized.

 
| **(in thousands)**                |   | **ProSearch** |   | **Marketing/  Publishing Engine** |   |
|-----------------------------------|--------|---------------|--------|-----------------------------------|--------|
| Balance at December 31, 2001 |   | $             | 248    |                              | $      | 247 |   |
| Additions                         |   | 60            |   | —                            |   |
| Amortization                      |   | (25           | )      | (50                               | )      |
| Balance at December 31, 2002 |   | $             | 283    |                              | $      | 197 |   |
| Additions                         |   | —        |   | —                            |   |
| Amortization                      |   | (31           | )      | (50                               | )      |
| Balance at December 31, 2003 |   | $             | 252    |                              | $      | 147 |   |

 

In 2002, the Company entered into an agreement with a third party toimprove ProSearch with new features for subscribers, thus enhancing the valueof the intangible asset.

 

Amortization of the intangibles for the next five years and thereafteris as follows (in thousands):

 
| **Years Ending December 31,** |   |   |   |
|------------------------------------|--------|--------|--------|
|                               |   |   |   |
| 2004                               |   | $      | 81     |   |
| 2005                               |   | 81     |   |
| 2006                               |   | 78     |   |
| 2007                               |   | 31     |   |
| 2008                               |   | 31     |   |
| Thereafter                         |   | 97     |   |
| Total                              |   | $      | 399    |   |

 

**4.****                                                              INCOMETAXES**

 

The provision for income taxes consists of the following (inthousands):

 
|                               |   | **Years  Ended December 31,** |   |
|------------------------------------|--------|------------------------------------|--------|
|                               |   | **2003**                           |   | **2002** |   | **2001** |   |
| **Current:**                       |   |                               |   |   |   |   |   |
| Federal                            |   | $                                  | (1,198 | ) | $ | (2,391 | ) | $ | — |   |
| State                              |   | (102                               | )      | 161 |   | — |   |
| **Deferred:**                      |   | —                             |   |   |   |   |   |
| Federal                            |   | 2,467                              |   | 2,385 |   | — |   |
| State                              |   | 363                                |   | (349 | ) | — |   |
| Total income tax expense (benefit) |   | $                                  | 1,530  |   | $ | (194 | ) | $ | — |   |

 

During 2003, the Company paid $218,000 in state income taxes and nofederal income taxes.  The Companyreceived cash refunds of  $3.7 millionof state and federal taxes paid in prior years.  The Company paid $696,000 in state and federal income taxes in2001.

 

38

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The following table reconciles the differences between the statutoryFederal income tax rate and the effective tax rate for continuing operations(in thousands):

 
|                                                      |   | **Years  Ended December 31,** |   |
|-----------------------------------------------------------|--------|------------------------------------|--------|
|                                                      |   | **2003**                           |   | **2002** |   | **2001** |   |
| Federal statutory rate                                    |   | $                                  | 10     |   | $ | (561 | ) | $ | (2,727 | ) |
| State income taxes, net of Federal income  tax benefit    |   | 1                                  |   | (124 | ) | — |   |
| Expenses not deductible for tax purposes                  |   | 65                                 |   | (30 | ) | 1,545 |   |
| Disallowed loss on foreign subsidiaries                   |   | —                             |   | — |   | 15 |   |
| Effect of net income not subject to taxing  jurisdictions |   | (77                                | )      | — |   | — |   |
| Adjustment to valuation allowance                         |   | 2,763                              |   | 1,945 |   | 2,376 |   |
| Change in deferred tax rate                               |   | —                             |   | (826 | ) | — |   |
| Federal/State tax refund recognition                      |   | (1,198                             | )      | — |   | — |   |
| Other                                                     |   | (34                                | )      | (598 | ) | (1,209 | ) |
| Total income tax expense (benefit)                        |   | $                                  | 1,530  |   | $ | (194 | ) | $ | — |   |

 

The tax effects of temporary differences that give rise to significantportions of the Federal and state deferred tax assets are comprised of thefollowing (in thousands):

 
|                             |   | **Years  Ended December 31,** |   |
|----------------------------------|--------|------------------------------------|--------|
|                             |   | **2003**                           |   | **2002** |   |
| **Deferred tax liabilities**     |   | $—                            |   | $— |   |
| **Deferred tax  assets:**        |   |                               |   |   |   |
| Allowance for bad debts          |   | 77                                 |   | 59 |   |
| Accrued liabilities              |   | 389                                |   | 480 |   |
| Book/tax depreciation            |   | 154                                |   | 997 |   |
| Net operating loss carry forward |   | 3,353                              |   | 5,548 |   |
| Total deferred tax assets        |   | 3,973                              |   | 7,084 |   |
| Valuation allowance              |   | (3,973                             | )      | (4,321 | ) |
| Net deferred tax assets          |   | $—                            |   | $2,763 |   |

 

At December 31, 2003, the Company had available approximately $8.5million of net operating loss carry forwards for federal income taxpurposes.  This carry forward, which mayprovide future tax benefits, begins to expire in 2021.  Additionally, U.S. Federal income tax lawlimits a corporation’s ability to utilize net operating losses if itexperiences an ownership change of greater than 50% over a three-yearperiod.  The Company’s utilization ofits net operating loss is subject to an annual limitation of $477,000.

 

In assessing the realizability of deferred tax assets atDecember 31, 2003, the Company considered whether it was more likely thannot that some portion or all of the deferred tax assets would not berealized.  The ultimate realization ofdeferred tax assets is dependent upon the generation of future taxable incomeduring the periods in which those temporary differences become deductible.  The Company considers the scheduled reversalof deferred tax liabilities, projected future taxable income and tax planningstrategies in making this assessment. Due to the losses incurred during 2001, 2002 and for the first twoquarters of 2003, the Company increased the valuation allowance to offset thenet deferred tax asset at June 30, 2003. As of December 31, 2003, the valuation allowance was $4.0million.  The net operating losscarryforward of $3.4 million includes $384,000 of net operating losscaryforwards that have been added since the merger and are not subject to anyrestrictions.   Management will continueto evaluate the carrying value of its deferred tax assets and is optimisticthat the Company will generate taxable income in the future that will allow therecognition of these deferred tax assets.

 

**5.****                                                              COMMITMENTSAND CONTINGENCIES**

 

## **Commitments**

 

### ***Interest Paid***

 

The Company paid $3,000, $3,000, and $8,000, for interest during theyears ended December 31, 2003, 2002 and 2001, respectively.

 

39

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### ***Operating Leases***

 

The Company has commitments to lease office space in six locationsthrough 2006.  Two of these leases areon a month-to-month basis and the remaining four are non-cancelableleases.  At December 31, 2002, theCompany had modified its lease in Houston to month-to-month and reduced therent expense to $6,000 per month, beginning in May 2003.  The Company is expanding it operations inProvo, Utah to increase lease space by 2000 square feet to a total of 32,000square feet by April 2004.  Thiswill increase the rent $5,000 per month beginning in April 2004.  This increased rent is included in thefuture minimum payment amounts shown below.

 

The Company also continues to lease space for data center operations ata rate of $13,000 per month for a term running through April 2005.

 

Rent expense for property leases totaled $878,000, $1.1 million, and$371,000, for the years ended December 31, 2003, 2002 and 2001,respectively.

 

Lease expense for operating leases totaled $951,000, and $62,000 forthe years ended December 31, 2002 and 2001, respectively.  By the end of 2002, the Company hadterminated all operating leases covering equipment.

 

Future minimum payments under non-cancelable leases are as follows (inthousands):

 
| **Years Ending December 31,** |   |   |   |
|------------------------------------|--------|--------|--------|
|                               |   |   |   |
| 2004                               |   | $      | 685    |   |
| 2005                               |   | 373    |   |
| 2006                               |   | 213    |   |
| Thereafter                         |   | — |   |
| Total                              |   | $      | 1,271  |   |

 

### ***EmploymentAgreements***

 

The Company has entered into an employment agreement with its ChiefExecutive Officer which requires the Company to make cash payments forcompensation over a three year contractual period.

 

## **Contingencies**

 

From time to time, the Company is involved in certain legal actionsarising from the ordinary course of business. It is the opinion of management that such litigation will be resolvedwithout a material adverse effect on the Company’s financial position orresults of operations.

 

On March 4, 2003, a foreign national filed a complaint in the SanDiego Superior Court against ZiaSun. The complaint alleges that certain individuals, who are not parties inthe lawsuit, persuaded the plaintiff to purchase shares of ZiaSun common stockand the complaint also alleges a failure to deliver a stock certificate.  ZiaSun does not have any ownership or controlof the third party brokerage house from whom plaintiff claims to have purchasedthe stock.  The plaintiff is seekingunspecified damages for the alleged fraud in the sale of the stock.  The Company believes that it has gooddefenses to the alleged claims and intends to vigorously defend against thislawsuit.

 

On July 9, 2003, the Company was served with a lawsuit that wasfiled on June 4, 2003 by Integris/Millennium Joint Venture, LLC in theSuperior Court of California, County of San Mateo.  The lawsuit names INVESTools California, Telescan, and INVESToolsInc. as defendants.  The plaintiffalleges that in April 2003, INVESTools California breached a leaseagreement by abandoning the leasehold premises and failing to pay monthly rentto the plaintiff.  The lawsuit alsoalleges fraudulent transfer and waste against all the defendants.  The plaintiff is seeking damages for rentowed for the remainder of the lease term and for miscellaneous cleanup, repairand storage costs.  The plaintiff isalso seeking the seizure of the alleged fraudulently transferred assets andpunitive damages.   The trial courtentered judgment in favor of INVESTools Inc., dismissing each of Plaintiff’sclaims against INVESTools Inc., after concluding that INVESTools Inc. is notsubject to California’s jurisdiction. The Company intends to vigorously defend the claims asserted against theremaining defendants.  The matter is setfor dispositive motion on April 19, 2004 and the Company remains confidentthat the matter will be dismissed prior to trial.

 

The Company is not aware of pending claims or assessments, other thanas described above, which may have a material adverse impact on the Company’sfinancial position or results of operation.

 

40

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**6.****                                                              STOCKHOLDERS’EQUITY**

 

## **Classesof Capital Stock**

 

The Company has two classes of capital stock: convertible preferredstock and common stock.  The Company isauthorized to issue up to 60 million shares of common stock with a par value of$.01 per share and 1 million shares of convertible preferred stock with a parvalue of $.01 per share.

 

As part of the Merger, holders of Telescan 4% Convertible PreferredStock received 120,000 shares of INVESTools 4% Convertible PreferredStock.  In accordance with the agreementto which the stock was issued, on May 15, 2002 the 120,000 outstanding sharesof the Series A Convertible Preferred Stock converted into 1,666,667 shares ofcommon stock.  Accrued dividends of$75,000 were converted into 41,667 shares of common stock in accordance withthe preferred stock agreement.  AtDecember 31, 2003, there are no shares of preferred stock outstanding.

 

## **CommonStock Activity**

 

### ***2003***

 

In the fourth quarter of 2003, the Company purchased approximately268,000 shares of the Company’s common stock for approximately $200,000.  The shares were subsequently retired.

 

In 2003, the Company compensated officers with approximately 1,094,000shares of common stock in lieu of cash payment for bonuses.  The Company issued 60,000 shares of commonstock to outside members of the Board of Directors as part of theircompensation for service on the Board. The Company recognized $289,000 of expense related to these shareawards, which represented the fair value of the awards.

 

In December 2003, the Company issued 15,000 shares of theCompany’s stock to the two members of the Company’s Advisory Board.  The individuals are prohibited from selling,transferring or any other disposition of the shares for two years from the dateof the award.  The Company recognizedapproximately $12,000 of cost associated with this award and it is beingrecognized into income ratably over the two year term of the agreementsgranting the stock.

 

### ***2002***

 

In 2002, the Company compensated officers with a total of approximately694,000 shares in lieu of cash payment of bonuses.  During the third quarter, the Company also issued to the outsidemembers of the Board of Directors a total of 20,000 shares of common stock aspayment in lieu of cash bonuses.  TheCompany recorded expense of $187,000, the estimated fair value of the stockissued.

 

As part of the compensation to Messrs. Chong and Tan for their minorityinterest in INVESTools Asia and INVESTools Hong Kong, the Company issued eachof them 35,000 shares of common stock in December 2002.  The Company recognized $16,000 of additionalconsideration for the acquisition of the minority interest in connection withthe share issuance.

 

As part of finalizing the share rescission offer to former stockholdersinitiated in 2001, the Company received approximately 78,000 shares fromemployees during the first quarter of 2002. The Company retired these shares upon receipt.  Refer to Note 13 below for more information.

 

### ***2001***

 

In 2001, the Company compensated its Board of Directors members with atotal of 48,000 shares of restricted common stock for their service.  The Company recorded expense of $30,000, theestimated fair value of the stock issued.

 

**7.****                                                              STOCKOPTION PLANS**

 

## **EmployeeStock Option Plans**

 

The Company’s purpose of granting stock options is to attract, retain,motivate and reward officers, directors and employees of the Company.

 

### ***Description ofPlans***

 

#### INVESTools 2001Stock Option Plan

 

This plan is the only plan out of which the Company can grant optionsat this time.  The Company has reserved6 million shares for grant under this plan, which was approved by stockholdersin December 2001, for issuance to 

 

41

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officers, directors and employees. Incentive options are granted at fair market value of the Company’s commonstock at the date of grant, as determined by the Board of Directors, andgenerally expire ten years from the date of grant.

 

#### Telescan StockOption Plans

 

The Company reserved 427,456 shares of its common stock for issuanceunder three stock option plans for the employees and former directors ofTelescan.  No new options are beinggranted under these plans.  Optionsgranted under these plans were granted at fair market value at the date ofgrant and generally expire ten years from the date of grant.

 

#### INVESToolsCalifornia Stock Option Plans

 

The Company reserved 13,139 shares of its common stock for issuanceunder three stock option plans for employees and consultants of INVESToolsCalifornia.  No new options are beinggranted under these plans.  Options grantedunder these plans were granted at fair market value at the date of grant andgenerally expire ten years from the date of grant.

 

#### ZiaSun StockOption Plans

 

The Company reserved 1,296,600 shares of its common stock for issuanceunder one stock option plan for the officers, employees and former directors ofZiaSun.  No new options are beinggranted under this plan.  Optionsgranted under this plan were granted at fair market value at the date of grantand generally expire ten years from the date of grant.  In 2000 one grant from this plan was grantedat a discount and deferred compensation of approximately $50,000 was recordedat the date of grant.  Deferredcompensation expense of $36,000 was recognized into the consolidated statementsof operation in 2001.

 

### ***Employee StockOption Plan Activity***

 

The following is a summary of option activity under these plans:

 
|                                          |   | **Total  Shares  Under Option** |   | **Weighted  Average  Exercise Price** |   |
|-----------------------------------------------|--------|---------------------------------|--------|---------------------------------------|--------|
| Balance December 31, 2000                |   | 325,400                         |   | $                                     | 5.36   |   |
| Grants related to Telescan’s acquisition |   | 596,020                         |   | 10.78                                 |   |
| Granted:                                      |   |                            |   |                                  |   |
| ZiaSun grants                                 |   | 1,366,500                       |   | 0.75                                  |   |
| New INVESTools grants                         |   | 2,050,000                       |   | 0.49                                  |   |
| Cancelled                                     |   | (267,624                        | )      | 3.43                                  |   |
| Balance December 31, 2001                |   | 4,070,296                       |   | 2.28                                  |   |
| Granted                                       |   | 600,000                         |   | 0.18                                  |   |
| Cancelled                                     |   | (283,101                        | )      | 8.85                                  |   |
| Balance December 31, 2002                |   | 4,387,195                       |   | 1.57                                  |   |
| Exercised                                     |   | (81,500                         | )      | 0.67                                  |   |
| Granted                                       |   | 1,029,500                       |   | 0.29                                  |   |
| Cancelled                                     |   | (1,555,836                      | )      | .99                                   |   |
| Balance December 31, 2003                |   | 3,779,359                       |   | $                                     | 1.47   |   |

 

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The following table summarizes information about options outstanding atDecember 31, 2003:

 
|                          |   | **Options  Outstanding** |   | **Options  Exercisable**                                            |   |
|-------------------------------|--------|--------------------------|--------|---------------------------------------------------------------------|--------|
| **Range of Exercise  Prices** |   | **Number  Outstanding**  |   | **Weighted  Average  Remaining  Years of  Contractual********Life** |   | **Weighted  Average  Exercise  Price** |   | **Number****Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
| $0.00 —$2.50             |   | 3,281,054                |   | 7.77                                                                |   | $ | 0.49 |   | 1,201,054 |   | $ | 0.61 |   |
| $2.51 —$5.00             |   | 365,812                  |   | 6.45                                                                |   | 3.60 |   | 296,398 |   | 3.61 |   |
| $5.01 —$7.50             |   | 45,310                   |   | 3.46                                                                |   | 6.35 |   | 45,310 |   | 6.35 |   |
| $7.51 —$10.00            |   | 15,027                   |   | 5.32                                                                |   | 8.91 |   | 15,027 |   | 8.91 |   |
| $10.01 —$50.00           |   | 72,156                   |   | 5.64                                                                |   | 30.59 |   | 72,156 |   | 30.59 |   |
|                          |   | 3,779,359                |   | 7.54                                                                |   | $ | 1.47 |   | 1,629,945 |   | $ | 2.72 |   |

 

**8.****                                                              EMPLOYEEBENEFITS**

 

In the first quarter of 2003, the defined contribution 401(k) ProfitSharing Plans for the employees of OIA and Telescan were consolidated into oneplan, the INVESTools 401(k) Plan.  Theplan provides participants with a mechanism for making contributions forretirement savings.  Each participantmay contribute specified amounts of eligible compensation.  The Company matches participantcontributions up to 1% of salary.

 

**9****.****                                                              RELATEDPARTIES**

 

The related party expense component of selling expense is GenerationMarketing LLC (“Gen M”).  At one time,five individuals owned Gen M, four of whom were former officers and directorsof the Company.  The officers anddirectors of the Company each owned 16.75% of Gen M for a total of 67%.  Gen M handled a significant portion of theCompany’s marketing needs from direct mail to media buys.  In 2002, the Company hired a secondmarketing agency to handle some of the marketing needs for one of the brands toreduce the Company’s reliance on a related party.  In May 2002 and February 2003, the former officers anddirectors sold their interests in Gen M to an unrelated third party and inFebruary 2003, Scott Elder and Ross Jardine sold their interests in Gen Mto an unrelated third party.  As suchGen M is no longer a related party.

 

The Company paid $500,000, $4.9 million and $6 million in marketingexpenses to Generation Marketing for the period January 1, 2003 toFebruary 28, 2003 and for the years ended December 31, 2002 and 2001,respectively.

 

**10.****                                                       SEGMENTREPORTING**

 

The Company consists of a single segment delivering investor education,which provides lifelong learning and support to self-directed investors.  During the third quarter of 2003, theCompany reorganized its management team in further support of its core InvestorEducation business.  The formerPublishing and Business Services segment experienced a steady decline inrevenue and was considered non-core business since the Merger in 2001.  In management’s opinion, the Publishing andBusiness Services segment is an insignificant part of the Company’s operation.

 

**11.****                                                       DISCONTINUEDOPERATIONS**

 

On May 10, 2001, ZiaSun sold its subsidiary Momentum Asia, Inc.(“MAI”).  ZiaSun acquired MAI onOctober 5, 1998 in a stock-for-stock exchange.  Under the terms of the sale agreement, the Company received200,000 shares of ZiaSun common stock that were owned by the purchaser.  In connection with the sale, ZiaSun paid MAI$50,000 to provide MAI with working capital and MAI transferred to ZiaSun130,000 shares of ZiaSun common stock that was owned by MAI.  All the shares acquired as a result of thistransaction, were subsequently canceled. The Company recognized a $564,000 gain on the sale in 2001.

 

On June 29, 2001, ZiaSun sold Asia PrePress Technology, Inc.(“APT”), a wholly-owned subsidiary of ZiaSun acquired on May 22, 2000.  The Company received 100,000 restrictedshares of ZiaSun common stock owned by the purchaser and have been canceled,and for $50,000 note payable in two installments to ZiaSun over a three yearperiod.  Further, APT obtained therelease of ZiaSun’s guaranty of APT’s line of credit with First Union NationalBank.  The Company recognized a $385,000loss on the sale in 2001.

 

43

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On June 29, 2001, ZiaSun sold Asia Internet Services.com, Inc.(“AIS”), a wholly owned subsidiary of ZiaSun acquired on May 22, 2000.  The Company received 150,000 restrictedshares of ZiaSun common stock owned by the purchaser and have been canceled,and for $100,000 note payable in two installments to ZiaSun over a three yearperiod.  The Company recognized a$176,000 gain on the sale in 2001.

 

On October 1, 2001, ZiaSun sold its entire 25% equity interest(5,400,000 restricted shares) in Asia4Sale.com, Inc. in consideration for200,000 shares of ZiaSun common stock and $30,000 in cash payable atclosing.  Following the close of thetransaction in early October 2001, the 200,000 shares of ZiaSun commonstock were canceled.  The Companyrecognized a $106,000 loss on the sale in 2001.

 

**12.****                                                       INVESTMENTS**

 

In July 2000, the Company entered into a venture fund agreementwith the McKenna Group, a third party entity. The name of the newly formed fund is McKenna-ZiaSun (“MKZ” or the“Fund”).  The purpose of the Fund is toinvest in emerging, early-stage technology companies, either through theMcKenna Venture Accelerator, now know as McKenna Capital, LLC (“MVA”), alimited liability company formed in July 2000, or through other means asdetermined by the Investment Board of MKZ. Under the terms of the venture fund agreement, as amended, the Companyshall receive 60% of the distributed profits of MKZ, and the McKenna Group willreceive 40%.  The accounts of MKZ havebeen consolidated with those of the Company and its subsidiaries as ZiaSuncontrols the investment making decisions of the Fund.  The Company recorded operating expense related to MKZ of approximately$649,000 included in the Statement of Operations under the caption “Write downof assets and other charges,” in 2001.

 

Under the original MKZ agreement, the Company agreed to fund MKZ with$15 million.  However, inApril 2001, the Company and McKenna Enterprises, Inc. agreed to limitZiaSun’s commitment to MKZ to $9.2 million, $7.5 million of which had beencontributed to MKZ during the year ended December 31, 2000.  As of December 31, 2000, the Companyhad an outstanding commitment to MKZ in the amount of $1.7 million.  During 2001, the Company contributed$250,000 to MKZ.  By agreement betweenthe McKenna Group, McKenna Enterprises, Inc. and ZiaSun in December 2001,certain assets and liabilities of the Fund were specifically assumed by the partieswith McKenna Enterprises, Inc. taking 100% ownership of certain equityinvestments and assuming responsibility for a $504,000 funding obligation toMVA and ZiaSun taking 100% ownership of the investment in MVA and assumingresponsibility for a $1.4 million funding obligation to MVA.  MKZ had no other assets and liabilities thanthose described herein.

 

The Company has determined that the best use of its liquid assets is tokeep them available to finance its Investor Education segment.  In April 2002, the Company reached anagreement with the other parties that it will contribute its investment in MVAto MVA as in-kind satisfaction of its $1.4 million funding obligation.

 

The Company has certain investments valued at zero, which it acquiredin its merger with Telescan.  All suchinvestments had been earlier written off by Telescan.

 

The Company accounted for its investment in MVA under the equity methodof accounting.  The Company recordedapproximately $1.2 million in 2001, related to equity in losses of MVA.  In conjunction with the agreement toliquidate its investment in MVA, as disclosed above, the Company believes itsinvestment in MVA is impaired.  TheCompany recorded a non-cash charge of approximately $4.6 million related to theimpairment of its investment in MVA. Both the equity in losses and the write down of the investment areincluded in the Statement of Operations under the caption “Write down of assetsand other charges.”

 

**13.****                                                       SHARESSUBJECT TO RESCISSION**

 

In September 2000, the Company acquired all of the issued andoutstanding shares of Seminar Marketing Group, Inc. (“SMG”) for 370,000 sharesof unregistered and restricted shares of the Company’s common stock.  The issuance of these shares was intended tobe issued in a transaction exempt from the registration requirements under theSecurities Act of 1933, as amended (“Securities Act”) pursuant to Rule 506 ofRegulation D. Upon subsequent review of the transaction by the Company’sattorneys, it was determined that the issuance of the shares did not meet thetechnical requirements of the Securities Act. In January 2001, the Company made an offer of rescission to theformer SMG stockholders pursuant to which they would be compensated with a cashamount equal to the consideration paid for the shares originally granted plusthe statutory rate of interest of 12%. The SMG stockholders had until February 6, 2002 to accept or rejectthe offer.  During 2001, the Companypaid approximately $90,000 to SMG stockholders to rescind their shares.  All but six SMG stockholders accepted theoffer to rescind the shares.  Theliability at December 31, 2001 of $366,000 does not include the amountreclassified from the share rescission liability into additional paid incapital related to these six stockholders as the deadline 

 

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for these individuals had passed and the possibility of having any ofthese individuals later exerting their rights to the rescission offer isconsidered very remote.

 

**14.****                                                       SUBSEQUENTEVENTS**

 

## **Acquisitionof 360 Group**

 

In February 2004, the Company announced the acquisition of ServiceEnhancement Systems, Inc., a California corporation operating under the assumedname 360 Group (“360 Group”) for $5.5 million. 360 Group, a San Rafael, California based agency, is a direct marketingcompany that provides services such as custom database development andmanagement, strategic planning, media and list planning and buying, creativeand production services, response management, and analytic services.  As a result of this transaction, alloutstanding shares of 360 Group’s common stock were converted into the right toreceive an aggregate of 829,645 shares of common stock of the Company, $0.01par value per share (the “Company Shares”) and approximately $875,000 incash.  The merger consideration paid at closing may be increased ordecreased after closing for certain indebtedness and net working capitaladjustments provided for in the merger agreement.  In addition to themerger consideration paid at closing, the Company will be obligated to pay upto an aggregate of 829,644 shares of common stock of the Company andapproximately $875,000 in cash as additional merger consideration in the formof earn out payments if certain future revenue targets are achieved in 2004 and2005.  The Company used cash on hand to fund the cash portion of themerger consideration paid at closing.  In connection with the merger, Scott K. Waltz, the former VicePresident, Client Services of 360 Group, was named Senior Vice President, ChiefMarketing Officer of the Company, and Don Klabunde, the former ChiefInformation Officer of 360 Group, was named Vice President, Chief InformationOfficer of the Company.

 

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**15.****                                                       UNAUDITEDSELECTED QUARTERLY RESULTS OF OPERATIONS**

 
|                                           |   | **Quarters Ended** |   |
|------------------------------------------------|--------|--------------------|--------|
| **(in thousands, except per share  data)**     |   | **12/31/03**       |   | **9/30/03** |   | **6/30/03** |   | **3/31/03** |   |
|                                           |   |               |   |   |   |   |   |   |   |
| Revenue                                        |   | $                  | 23,976 |   | $ | 17,437 |   | $ | 18,127 |   | $ | 13,880 |   |
| Net income (loss)                              |   | $                  | 687    |   | $ | 484 |   | $ | (1,744 | ) | $ | (927 | ) |
| Basic earnings per share of stock              |   |               |   |   |   |   |   |   |   |
| Income (loss) from continuing operations       |   | $                  | 0.01   |   | $ | 0.01 |   | $ | (0.04 | ) | $ | (0.02 | ) |
|                                           |   |               |   |   |   |   |   |   |   |
| Net income (loss)                              |   | $                  | 0.01   |   | $ | 0.01 |   | $ | (0.04 | ) | $ | (0.02 | ) |
|                                           |   |               |   |   |   |   |   |   |   |
| Weighted average shares outstanding - basic    |   | 46,063             |   | 43,910 |   | 43,423 |   | 43,206 |   |
|                                           |   |               |   |   |   |   |   |   |   |
| Diluted earnings per share of common stock     |   |               |   |   |   |   |   |   |   |
| Income (loss) from continuing operations       |   | $                  | 0.01   |   | $ | 0.01 |   | $ | (0.04 | ) | $ | (0.02 | ) |
|                                           |   |               |   |   |   |   |   |   |   |
| Net income (loss)                              |   | $                  | 0.01   |   | $ | 0.01 |   | $ | (0.04 | ) | $ | (0.02 | ) |
|                                           |   |               |   |   |   |   |   |   |   |
| Weighted average shares outstanding -  diluted |   | 44,214             |   | 44,407 |   | 43,423 |   | 43,206 |   |

 
|                                                                             |   | **Quarters  Ended** | ** ** |
|----------------------------------------------------------------------------------|--------|---------------------|------------|
|                                                                             |   | **12/31/02**        |       | **9/30/02** | ** ** | **6/30/02** | ** ** | **3/31/02** | ** ** |
|                                                                             |   |                |       |   |   |   |   |   |   |
| Revenue                                                                          |   | $                   | 16,028     |   | $ | 12,228 |   | $ | 14,466 |   | $ | 13,420 |   |
| Income from continuing operations before  cumulative effect of accounting change |   | 603                 |       | (367 | ) | (838 | ) | (854 | ) |
| Cumulative effect of change in accounting  principle                             |   | (243                | )          | 10 |   | — |   | (28,184 | ) |
| Net income (loss)                                                                |   | $                   | 360        |   | $ | (357 | ) | $ | (838 | ) | $ | (29,038 | ) |
| Basic earnings per share of stock                                                |   |                |       |   |   |   |   |   |   |
| Income (loss) from continuing operations                                         |   | $                   | 0.01       |   | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) |
| Cumulative effect of change in accounting  principle                             |   | (0.00               | )          | — |   | — |   | (0.69 | ) |
|                                                                             |   |                |       |   |   |   |   |   |   |
| Net income (loss)                                                                |   | $                   | 0.01       |   | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.71 | ) |
|                                                                             |   |                |       |   |   |   |   |   |   |
| Weighted average shares outstanding - basic                                      |   | 42,893              |       | 42,653 |   | 41,578 |   | 40,778 |   |
|                                                                             |   |                |       |   |   |   |   |   |   |
| Diluted earnings per share of common stock                                       |   |                |       |   |   |   |   |   |   |
| Income (loss) from continuing operations                                         |   | $                   | 0.01       |   | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) |
| Cumulative effect of change in accounting  principle                             |   | $                   | (0.00      | ) | $ | — |   | $ | — |   | $ | (0.69 | ) |
|                                                                             |   |                |       |   |   |   |   |   |   |
| Net income (loss)                                                                |   | $                   | 0.01       |   | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.71 | ) |
|                                                                             |   |                |       |   |   |   |   |   |   |
| Weighted average shares outstanding -  diluted                                   |   | 42,943              |       | 42,653 |   | 41,578 |   | 40,778 |   |

 

Earnings per share are computed independently for each of the quarterspresented.  Therefore, the sum of thequarterly earnings per share may not equal the total for the year.

 

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