<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended: September 30, 1997
or
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______.
Commission file number: 0-27680
INTELLIQUEST INFORMATION GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 74-2775377
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1250 Capital of Texas Highway
Austin, Texas 78746
(512) 329-0808
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
_________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes_X_ No___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 1997
Common Stock, $.0001 par value 8,409,707
1
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet
September 30, 1997 (unaudited) and December 31, 1996 3
Condensed Consolidated Statement of Operations (unaudited)
Three months ended September 30, 1997 and 1996 4
Condensed Consolidated Statement of Operations (unaudited)
Nine months ended September 30, 1997 and 1996 5
Condensed Consolidated Statement of Cash Flows (unaudited)
Nine months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements
INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents. . . . . . . . . . . . . . . . . . . . . . . . . $ 2,697 $ 734
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . 48,161 51,152
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . 7,714 6,636
Unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 3,632 2,651
Projects in process . . . . . . . . . . . . . . . . . . . . . . . . . - 98
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . 359 324
------- -------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 62,563 61,595
Furniture and equipment, net. . . . . . . . . . . . . . . . . . . . . 4,047 2,396
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 659 291
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $67,269 $64,282
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,183 $ 1,930
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 2,484 1,795
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 2,367 2,800
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . 32 253
------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 7,066 6,778
Obligations under capital leases and deferred rent. . . . . . . . . . . 105 302
------- -------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 7,171 7,080
------- -------
Common Stockholders' Equity:
Common stock, $.0001 par value, 30,000,000 shares authorized,
8,409,679 and 8,332,000 shares issued and outstanding, respectively. 1 1
Capital in excess of par value. . . . . . . . . . . . . . . . . . . . 58,442 58,362
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . (37) (47)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 25
Accumulated earnings (deficit). . . . . . . . . . . . . . . . . . . . 1,640 (1,139)
------- -------
Total common stockholders' equity . . . . . . . . . . . . . . . . 60,098 57,202
------- -------
Total liabilities and stockholders' equity . . . . . . . . . . . . $ 67,269 $64,282
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
Revenues:
Continuous services . . . . . . . . . $11,401 $8,248
Other services . . . . . . . . . . . 1,126 1,296
------- ------
Total revenues. . . . . . . . . . . . 12,527 9,544
Operating expenses:
Costs of revenues . . . . . . . . . . 7,211 5,223
Sales, general and administrative . . 3,148 2,174
Product development . . . . . . . . . 551 798
Depreciation and amortization . . . . 244 176
------- ------
Total operating expenses. . . . . . . 11,154 8,371
------- ------
Operating income. . . . . . . . . . . . 1,373 1,173
Interest income, net . . . . . . . . . 494 208
------- ------
Income before income taxes. . . . . . . 1,867 1,381
Provision for income taxes. . . . . . . 485 449
------- ------
Net income. . . . . . . . . . . . . . . $ 1,382 $932
------- ------
------- ------
Net income per share. . . . . . . . . . $ .16 $ .12
Weighted average shares outstanding . . 8,587 7,478
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
Revenues:
Continuous services . . . . . . . . . $24,152 $15,809
Other services . . . . . . . . . . . 3,376 3,432
------- -------
Total revenues. . . . . . . . . . . . 27,528 19,241
Operating expenses:
Costs of revenues . . . . . . . . . . 15,218 9,300
Sales, general and administrative . . 7,911 5,517
Product development . . . . . . . . . 1,562 2,491
Depreciation and amortization . . . . 689 501
------- -------
Total operating expenses. . . . . . . 25,380 17,809
------- -------
Operating income. . . . . . . . . . . . 2,148 1,432
Interest income, net . . . . . . . . . 1,404 463
------- -------
Income before income taxes. . . . . . . 3,552 1,895
Provision for income taxes. . . . . . . 773 602
------- -------
Net income. . . . . . . . . . . . . . . $ 2,779 $ 1,293
------- -------
------- -------
Net income per share. . . . . . . . . . $ .32 $ .18
Weighted average shares outstanding . . 8,492 7,325
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . $2,779 $ 1,293
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization . . . 689 545
Bad debt expense. . . . . . . . . . 110 91
Loss on disposal. . . . . . . . . . 30 0
Deferred compensation . . . . . . . 10 10
Net changes in assets and liabilities:
Accounts receivable and unbilled
revenues. . . . . . . . . . . . . . . (2,169) (1,999)
Prepaid expenses and other assets . . (35) (85)
Projects in process . . . . . . . . . 98 (195)
Accounts payable and accrued expenses 942 813
Deferred revenues . . . . . . . . . . (433) 461
Other . . . . . . . . . . . . . . . . (307) (400)
------- -------
Net cash provided by operating
activities. . . . . . . . . . . . . . . 1,714 534
------- -------
Cash flows from investing activities:
Purchases of short-term investments . (130,461) (71,003)
Sales and maturities of short-term
investments . . . . . . . . . . . . . 133,158 45,458
Purchases of equipment and leasehold
improvements . . . . . . . . . . . . (2,369) (1,105)
Other . . . . . . . . . . . . . . . . 0 (106)
------- -------
Net cash provided by (used in)
investing activities. . . . . . . . 328 (26,756)
------- -------
Cash flows from financing activities:
Proceeds from issuance of stock, net. 80 25,901
Borrowings under line of credit . . . 2,265 0
Repayments under line of credit . . . (2,451) 0
Other . . . . . . . . . . . . . . . . 27 12
------- -------
Net cash provided by (used in)
financing activities. . . . . . . . (79) 25,913
------- -------
Net increase (decrease) in cash and
equivalents . . . . . . . . . . . . . 1,963 (309)
Cash and equivalents at the beginning
of the period . . . . . . . . . . . . 734 1,676
------- -------
Cash and equivalents at the end of
the period. . . . . . . . . . . . . . $ 2,697 $ 1,367
------- -------
------- -------
Supplemental cash flow disclosures:
Interest paid . . . . . . . . . . . . 24 13
Property and equipment acquired under
capital leases. . . . . . . . . . . . 0 0
Taxes paid. . . . . . . . . . . . . . 767 571
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited financial statements include the accounts of
IntelliQuest Information Group, Inc., a Delaware corporation, and its
consolidated subsidiaries (collectively, the "Company" or "IntelliQuest").
The Company provides international quantitative marketing information to
technology companies.
In February 1997, the Company acquired Zona Research, Inc. ("Zona"), a
privately held company. See Note 2.
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and, accordingly, do not include all
information and notes required under generally accepted accounting
principles for complete financial statements. In the opinion of
management, the accompanying unaudited interim consolidated financial
statements contain all adjustments consisting of a normal recurring nature
considered necessary for a fair presentation of the financial position of
the Company as of September 30, 1997 and the results of the Company's
operations and its cash flows for the nine-month periods ended September
30, 1997 and 1996. This report on Form 10-Q should be read in conjunction
with the Company's audited consolidated financial statements and related
notes on Form 10-K for the year ended December 31, 1996. During 1997 the
Company made a change in how it reports revenue from certain recurring
conferences (including Brand Tech Forum.) In 1997 revenue from recurring
conferences is included in continuous sources. Brand Tech Forum was
held in the third quarter 1997 and the fourth quarter of 1996. Financial
information from 1996 will be changed to reflect this change in the
classification of revenues. The results of operations for interim periods
are not necessarily indicative of the results of operations to be expected
for the year.
2. ACQUISITIONS
In February 1997, IntelliQuest completed a merger with Zona in which Zona
became a wholly-owned subsidiary of IntelliQuest. A total of 250,000 shares
of IntelliQuest common stock were exchanged for all the outstanding shares
of common stock of Zona. The transaction was accounted for as a pooling of
interests and, therefore, all prior period financial statements have been
restated as if the acquisition took place at the beginning of such periods.
Separate results of operations for the periods prior to the acquisition of
Zona are as follows (in thousands):
<TABLE>
<CAPTION>
For the Year For the Year For the Year For the Three For the Three
Ended Ended Ended Months Ended Months Ended
December 31, December 31, December 31, March 31, 1997 March 31, 1996
1994 1995 1996 (Unaudited) (Unaudited)
------------ ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues
IntelliQuest. . . . $13,989 $19,114 $26,452 $7,035 $4,099
Zona (unaudited). . 579 623 1,936 449 315
------- ------- ------- ------ ------
Combined. . . . . . . $14,568 $19,737 $28,388 $7,484 $4,414
Net Income (loss)
IntelliQuest. . . . $ (289) $ 565 $ 2,579 $ 774 $ 102
Zona (unaudited). . (17) (21) (370) (191) 55
------- ------- ------- ------ ------
Combined. . . . . . . $ (306) $ 544 $ 2,209 $ 583 $ 157
</TABLE>
7
<PAGE>
3. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS No. 128). FAS No.
128 provides new guidance on the computation of earnings per share. The
company will adopt the statement in the fourth quarter of 1997, as
required. The Company does not anticipate that the adoption of FAS No. 128
will have a material effect on earnings per share.
In June 1997, Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" and No. 131, "Disclosures about Segments
of an Enterprise and Related Information" were issued. SFAS No. 130
establishes standards for reporting and disclosure of comprehensive income
and its components in a full set of general-purpose financial statements.
This statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 131 establishes
standards for the way that public business enterprises report information
about operating segments in interim financial reports issued to
shareholders which is currently not required. It also establishes standards
for related disclosures about products and services, geographic areas and
major customers. The Company is required to adopt both new standards in
the first quarter of 1999.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS TREND ANALYSIS AND OTHER FORWARD LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S EXPECTATIONS
REGARDING ITS FUTURE FINANCIAL CONDITION AND OPERATING RESULTS, PRODUCT
DEVELOPMENT, BUSINESS AND GROWTH STRATEGY, MARKET CONDITIONS AND COMPETITIVE
ENVIRONMENT. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS THE RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH UNDER THE SECTION ENTITLED "RISK FACTORS."
OVERVIEW
IntelliQuest Information Group, Inc. (the "Company") is a leading
provider of information, technologies, and analysis services that are
designed to improve the marketing performance of technology companies. The
Company provides timely, objective, accurate and cost-effective information
about technology markets, customers and products on both a subscription basis
and a proprietary project basis. The Company also licenses custom proprietary
software applications and associated services to technology manufacturers for
customer registration.
The Company's continuous services are composed of renewable
subscription-based products as well as renewable proprietary products. The
Company's renewable subscription-based product revenues are substantially
derived from three product families: IntelliTrack IQ, the Computer Industry
Media Study ("CIMS") and Internet-related products. IntelliTrack IQ is a
collection of fifteen distinct product modules covering a variety of
technologies and geographic markets, which targets all relevant customer
segments including non-users as well as users. CIMS is an annual study that
measures the readership and viewership habits of technology purchase
influencers. Internet-related products include a variety of reports and
subscription-based services providing information related to the Internet and
Intranet markets based upon quantitative data and market observations. The
Company's renewable proprietary product revenues typically consist of
revenues from proprietary recurring tracking studies and customer management
products. The proprietary recurring tracking studies provide the customer
with longitudinal information for tracking designated metrics over a
continuous period of time. Revenues from the customer management products
are derived from a variety of sources including proprietary customer
registration products and proprietary customer satisfaction products.
The Company's other revenues are derived from proprietary research and
conferences. Traditional proprietary project research provides customized
information to customers utilizing a variety of proprietary models, research
techniques and data collection methods. The Company hosts various
conferences which provide forums for presentation and discussion of
technology related issues.
In February 1997, the Company acquired Zona Research, Inc. ("Zona"), a
privately held company that provides in-depth analysis and assessment of the
Internet and Intranet markets based upon factual market data and
observations. The transaction was accounted for as a pooling of interests;
thus the Company's results of operations as discussed herein include those of
Zona, and all periods presented have been restated.
9
<PAGE>
RESULTS OF OPERATIONS
TOTAL REVENUES. Total revenues increased from $9.5 million to $12.5
million for the quarters ended September 30, 1996 and 1997, respectively and
from $19.2 million to $27.5 million for the nine months ended September 30,
1996 and 1997, respectively. This growth represents a 31.3% increase for the
three-month period and a 43.1% increase for the nine-month period ended
September 30, 1997 from the comparable 1996 periods.
Revenues from continuous services increased 38.2% from $8.2 million
to $11.4 million for the quarters ended September 30, 1996 and 1997,
respectively and 52.8% from $15.8 million to $24.2 million for the nine
months ended September 30, 1996 and 1997, respectively. This increase
was due primarily to increased volume on customer management products,
an expansion of proprietary recurring products and an increase in the
number of clients purchasing CIMS. Brand Tech Forum was held during the
third quarter of 1997 and the fourth quarter of 1996 which creates a
timing difference favorably impacting the quarter to quarter and year to
date revenue increase at September 30, 1997. Other revenue decreased
13.1% to $1.1 million for the three months ended September 30, 1997 from
$1.3 million for third quarter of 1996. Other revenues decreased 1.6%
from $3.43 million to $3.4 million for the nine months ended September
30, 1996 and 1997, respectively. This decrease reflects a migration of
research to the Company's Technology Panel, which the Company believes
is a more efficient and cost effective method of performing certain
types of research. The Company anticipates further growth of this type
of revenue.
Revenues attributable to international market research increased 4.4%
from $2.3 million to $2.4 million for the quarters ended September 30, 1996
and 1997, respectively and 53.2% from $5.3 million to $8.2 million for the
nine months ended September 30, 1996 and 1997, respectively representing
19.3% and 29.6% of total revenues for the quarter and nine months ended
September 30, 1997. The year to date percentage increase in international
revenues is primarily due to the Company's continued focus on expansion of
its worldwide research capabilities. However, timing issues associated with
certain proprietary tracking and customer management projects during 1997
caused a higher than anticipated quarter to quarter percentage increase in
the second quarter of 1997 and a smaller than anticipated quarter to quarter
percentage increase in the third quarter of 1997.
During the third quarter of 1997 the Company changed the
classification of continuing revenues to include recurring conferences.
The Company hosts various conferences annually which provide a forum for
presentation and discussion of technology issues.
COSTS OF REVENUES. Costs of revenues are primarily composed of data
collection, labor charges, telecommunications charges and other costs
directly attributable to products or projects. Costs of revenues increased
38.1% from $5.2 million to $7.2 million for the quarters ended September 30,
1996 and 1997, respectively and 63.6% from $9.3 million to $15.2 million for
the nine months ended September 30, 1996 and 1997, respectively. Costs of
revenues increased as a percentage of total revenues from 54.7% to 57.6% for
the quarters ended September 30, 1996 and 1997, respectively and from 48.3%
to 55.3% for the nine months ended September 30, 1996 and 1997, respectively.
The increase was due to the proprietary project mix including a higher
percentage of pass through costs offset by increased technology panel
projects which leverage a fixed cost base, revenue less than anticipated in
certain products with fixed cost basis, the timing of conferences, and a
decrease in customer management revenue per transaction. The company
anticipates that the reorganization of sales and marketing and the
restructuring of the customer management product mix will have a positive
impact on the gross margin in the future.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses consist primarily of personnel and other costs
associated with sales, marketing, administration, finance, information
systems, human resources and general management. Sales, general and
administrative expenses increased 44.8% from $2.2 million to $3.1 million for
the quarters ended September 30, 1996 and 1997, respectively and 43.4% from
$5.5 million to $7.9 million for the nine months ended September 30, 1996 and
1997, respectively. As a percentage of total revenues, sales, general and
administrative expenses increased to 25.1% for the third quarter of 1997 from
22.8% for the third quarter of 1996 and decreased to 28.2% for the nine
months ended September 30, 1997 from 28.7% for the nine
10
<PAGE>
months ended September 30, 1996. The quarter to quarter increase is a result
of an increase in the number of employees in 1997 including the hiring of
employees in the third quarter of 1997 for the reorganized sales management
and business development structures. Although the year to date 1997 and 1996
sales, general and administrative expenses as a percentage of total revenues
remained relatively constant, the Company anticipates future increases as a
result of the hiring of personnel during the third quarter of 1997 for the
reorganized sales management and business development structures.
Acquisition costs expensed were $140,000 for the nine months ended September
30, 1997.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses are composed
of resources, primarily labor and data collection charges, dedicated to the
development of several new products. Product development expenses were
$798,000 and $551,000 for the three months ended September 30, 1996 and 1997,
respectively and $2.5 million and $1.6 million for the nine months ended
September 30, 1996 and 1997, respectively. As a percentage of total
revenues, product development expenses represented 8.4% and 4.4% for the
third quarters of 1996 and 1997 and 12.9% and 5.7% for the nine months ended
September 30, 1996 and 1997, respectively. In the quarter and nine months
ended September 30, 1996, the Company's product development charges consisted
primarily of costs to develop Internet-related syndicated products and to a
large extent the Technology Panel. Product development in the first nine
months of 1997 focused on expansion of completed proprietary customer
management and syndicated projects which were less cost intensive than the
Company's 1996 projects.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
38.6% from $176,000 to $244,000 for the quarters ended September 30, 1996 and
1997, respectively and 37.5% from $501,000 to $689,000 for the nine months
ended September 30, 1996 and 1997, respectively. This increase was
principally due to purchases of computer equipment and costs to acquire
advanced data delivery alternatives to improve communications and data
processing systems required to support business growth and international
expansion.
INCOME TAXES. Provision for income taxes as a percentage of income
before income taxes represents 26.0% for the quarter and 21.8% for the nine
months ended September 30, 1997. This rate is below the Company's combined
federal and state income tax rates due to a combination of two factors.
First, the net proceeds from the Company's initial and follow-on public
offerings in 1996 have typically been invested in tax-free investments.
Second, the Company did not record tax expense on earnings which offset prior
period losses for which no tax benefit was recorded.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash of $2.7 million, short
term investments of $48.2 million and working capital of $55.5 million.
During the nine months ended September 30, 1997, the Company generated
$1.7 million from operating activities versus $534,000 during the same period
last year. This increase in cash flow from operations was primarily due to
the Company's increased earnings, offset by typical activity in accounts
receivable, unbilled revenues, accounts payable, and deferred revenues.
Pursuant to billing terms between the Company and its customers, the
Company typically bills customers for products or projects before they have
been delivered. Billed amounts are recorded as deferred revenues on the
Company's financial statements and are recognized as income when earned. As
of September 30, 1996 and 1997 the Company had $2.4 million of deferred
revenues for both periods. In
11
<PAGE>
addition, when work is performed in advance of billing, the Company will
record this work as unbilled revenue. As of September 30, 1996 and 1997, the
Company had $2.0 million and $3.6 million of unbilled revenues, respectively.
Substantially all deferred and unbilled revenues will be earned and billed,
respectively, within 12 months of the respective period ends.
For the nine months ended September 30, 1996, net cash used in investing
activities of $26.8 million primarily represents the Company's investment in
short-term, tax-free securities, in addition to purchases of fixed assets.
For the nine months ended September 30, 1997, net cash provided by short
term investments in the amount of $2.7 million was partially invested in $2.4
million of equipment, furniture and internally developed software.
Financing activities provided cash of $25.9 million in the first nine
months of 1996. The increased cash flow during this period was generated by
net proceeds from the Company's initial public offering that closed in March
1996. During the first nine months of 1997, the Company used a net $79,000 in
financing activities, primarily for repayments of the line of credit and a
note payable to a related party.
The Company maintains a $3 million revolving bank line of credit to
fund cash requirements from time to time. Borrowings under such line of
credit bear interest at a rate per annum equal to the prime rate and are
subject to compliance by the Company with certain financial covenants. At
September 30, 1997, the Company was in compliance with all such covenants and
there was no amount outstanding under such line of credit. The line of
credit matures on November 21, 1997. The Company is currently renegotiating
a one-year extension of the line of credit at similar terms.
The Company believes that the cash flows from operations, together
with existing cash balances, short term investments and the line of credit,
will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. Beyond that time, if cash
flows from operations and available borrowing from the line of credit are not
sufficient to satisfy its financing needs, the Company may seek additional
funding through the sale of its securities, including equity securities.
There can be no assurance that such funding can be obtained on favorable
terms, if at all.
RISK FACTORS
RELIANCE ON KEY CUSTOMERS; TECHNOLOGY INDUSTRY CONSOLIDATION. The
Company has relied on a limited number of key customers for the majority of
its revenues. The Company's two largest customers in 1996, IBM and
Microsoft, each accounted for over 10% of the Company's revenues and together
accounted for 29.8% of revenues. For the nine months ended September 30,
1997, the Company's two largest customers, IBM and Hewlett-Packard, each
accounted for over 10% of the Company's revenues and together accounted for
30.5% of revenues. Substantially all of the Company's subscriptions and
customer contracts are renewable annually at the option of the Company's
customers, although no obligation to renew exists and a customer generally
has no minimum purchase commitments thereunder. In addition, there is
significant consolidation of companies in the technology industries served by
the Company, a trend which the Company believes will continue. Consolidation
among the Company's top customers could adversely affect aggregate customer
budgets for the Company's products and services. No assurances can be given
that the Company will maintain its existing customer base or that it will be
able to attract new customers. The loss of one or more of the Company's large
customers or a significant reduction in business from such customers,
regardless of the reason, would have a material adverse effect on the
Company.
12
<PAGE>
DEPENDENCE ON SUBSCRIPTION AND CONTRACT RENEWALS. In 1996, 84.0% of the
Company's revenues were derived from subscriptions to the Company's renewable
subscription-based products and contracts for renewable proprietary products.
During the nine months ended September 30, 1997 85.2% of the Company's
revenues were derived from subscriptions to the Company's renewable
subscription-based products and contracts for renewable proprietary products.
The Company expects that a material portion of its revenues for the
foreseeable future will continue to be derived from such subscriptions and
contracts. Substantially all such subscriptions and customer contracts are
renewable annually at the option of the Company's customers, although no
obligation to renew exists and a customer generally has no minimum purchase
commitments thereunder. If customers fail to renew or defer their renewals
from the quarter anticipated by the Company, the Company's quarterly results
may be materially adversely affected. The Company's ability to secure
renewals is dependent upon, among other things, its ability to deliver
consistent, high-quality and timely data. In addition, the marketing and
market research activities of the Company's customers are dependent on the
timing of their new product introductions, size of marketing budgets,
operating performance, industry and economic conditions and changes in
management or ownership. As a result of such factors, there can be no
assurance that the Company will be able to maintain its historically high
renewal rates. Any material decline in renewal rates from such levels would
have a material adverse effect on the Company's operating results.
COMPETITION. Overall, the technology-focused market research industry is
highly competitive. The Company has traditionally competed directly with
relatively small, local providers of survey-based technology-focused market
research. The Company also competes directly with third party providers of
customer registration software (such as KAO Infosystems Company) as well as
vendors' own customer registration software. In addition, the Company
competes indirectly with significant providers of (i) analyst-based,
technology-focused market research (such as Gartner Group, Inc., META Group,
Inc. and Forrester Research, Inc.); (ii) survey-based, general market
research (such as A.C. Nielsen Company, NFO Research, Inc., Information
Resources Inc. and The NPD Group, Inc.); and (iii) analyst-based, general
business consulting. Although only a few of these competitors have to date
offered survey-based, technology-focused market research that competes
directly with the Company's products and services, many of these competitors
have substantially greater financial, information gathering and marketing
resources than the Company and could decide to increase their resource
commitments to the Company's market. Moreover, each of these companies
currently competes indirectly, if not directly, for funds available within
aggregate industry-wide market research budgets. There are few barriers to
entry into the Company's market, and the Company expects increased
competition in one or more market segments addressed by the Company, which
could adversely affect the Company's operating results through pricing
pressure, required increased marketing expenditures and loss of market share,
among other factors. There can be no assurance that the Company will continue
to compete successfully against existing or new competitors.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT INTRODUCTION. The Company's
customers compete in markets characterized by rapid, continual technological
change. The Company's success will depend in part upon its ability to
anticipate and keep pace with rapidly changing technology and to add new
products and services which address the increasingly sophisticated, rapidly
changing and demanding needs of its customers and their evolving market
strategies. In particular, the Company is expending significant resources to
develop its proprietary customer registration products to take advantage of
certain market opportunities. However, such software products may contain
defects following customization or when new versions are released; the
Company has in the past discovered software defects in certain of its
products and may experience delays or lost revenue to correct such defects in
the future. In addition, the significant growth in the use of the World Wide
Web has created the opportunity to use the Internet as an information
transmission medium. Accordingly, the Company is expending significant
resources to develop Internet-based information collection tools. There can
be no
13
<PAGE>
assurance, however, that the Company will be successful in developing and
marketing, on a timely basis, these or other new or improved products and
services that adequately and competitively address the needs of the
marketplace. Any failure to continue to provide insightful and timely data in
a manner that meets rapidly changing market needs could materially and
adversely affect the Company's future operating results.
EXPANSION OF DIRECT SALES FORCE. The Company has historically relied on
customer referrals, supplemented by its own sales and marketing efforts, to
generate the majority of its revenue growth. Although the Company has
historically had a small number of dedicated account representatives, it only
recently began to develop a formal sales management structure. As the Company
develops new products and services targeted at broader-based market segments,
it intends to continue to expand its sales force. The Company's plans for
future growth may depend in part on, among other things, its unproven ability
14
<PAGE>
to hire, train, deploy, manage and retain an increasingly large direct sales
force. There can be no assurance that the Company will be able to develop or
manage such a sales force.
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY. The Company's operating
results in any particular fiscal period have fluctuated in the past and will
likely fluctuate significantly in the future due to various factors. The
Company expects that revenues from customer registration products will
continue to increase during the remainder of 1997. However, such revenues
are primarily a function of the timing of customer shipments, which can be
difficult to forecast and over which the Company has no control. Any delay
in customer orders for the Company's customer registration products, or a
decrease in orders due to adoption by customers of custom software
applications, could have a material adverse effect on the Company's future
operating results. Substantially all revenues and expenses attributable to
the Company's CIMS product for a particular year are recognized when the
final study is completed and delivered, usually in the third quarter of that
year. Delay in delivering the final study in any given year could postpone
recognition of such revenues and expenses until the fourth quarter of such
year, which would materially affect operating results for such third and
fourth quarters. Furthermore, all costs related to CIMS are included in cost
of revenues and none are allocated to sales, general and administrative
costs, which tends to reduce the Company's third quarter gross margin below
that of other quarters. Many of the Company's customers operate in industry
segments that are becoming increasingly seasonal as technology vendors have
increased their focus on consumer markets, with sales in the fourth calendar
quarter constituting a growing portion of the annual sales of such customers.
This may translate into seasonal demand for the Company's products,
particularly the customer registration products. In addition, the Company's
operating results may fluctuate as a result of a variety of other factors,
including the timing of orders from customers, the size and timing of orders
for customer registration products, response rates on customer registration
products, delays in development and customer acceptance of custom software
applications, product or panel development expenses, new product or service
introductions or announcements by the Company or its competitors, levels of
market acceptance for new products and services, the hiring and training of
additional staff and customer demand for market research, as well as general
economic conditions. Because a significant portion of the Company's overhead
is fixed in the short term and because spending commitments must be made in
advance of revenue commitments by customers, the Company's results of
operations may be materially adversely affected in any particular quarter if
revenues fall below the Company's expectations. These factors, among others,
make it likely that in some future quarter the Company's operating results
may be below the expectations of securities analysts and investors, which
would have a material adverse effect on the market price of the Company's
common stock.
DATA COLLECTION RISKS. The Company currently collects information both
telephonically and electronically. In addition, certain of the Company's new
products and services involve the use of the Internet and commercial online
services to gather information from end users for processing and sale to
customers of the Company. A number of legislative initiatives exist
domestically and abroad that seek to regulate the telephonic or electronic
collection of data about persons. In addition, an increasing number of court
cases have been brought seeking damages and injunctive relief for actions
allegedly violating so-called "rights of privacy." The law in this area, both
statutory and case law, is highly unsettled. No assurance can be given,
therefore, that the Company will be allowed to continue to pursue existing or
proposed new products and services. In addition, the Company's ability to
provide timely and accurate market research to its customers depends on its
ability to collect large quantities of high quality data through interviews,
customer registrations, product satisfaction questionnaires and certain other
surveys. If receptivity to the Company's customer registration, interview and
survey methods by respondents declines, or for some other reason their
willingness to complete and return surveys, registrations, or other
information declines, or if the Company for any reason cannot rely on the
integrity of the data it receives, it would reduce the quantity and/or
quality of the data the Company seeks to disseminate and would have
15
<PAGE>
a material adverse effect on the Company's ability to market and sell its
market research products and on its results of operations.
RISKS RELATED TO CIMS. CIMS is one of the leading databases of media
readership and viewership habits of both business and household technology
purchase influencers in the United States. Because many advertisers use CIMS
data as a key component in their media buying decisions and because many
media companies use CIMS data to promote their media properties, such data
can have a significant impact on advertiser demand for, and advertising rates
charged by, such media properties. In the past, it has not been unusual for
media companies with properties that have not performed well in the studies
to be dissatisfied with the results of the studies or the manner in which
such results have been used by their competitors. Furthermore, the Company in
1996 revised data from a study that was inaccurate due to software defects,
which it remedied and disclosed to its customers. Although neither media
company dissatisfaction nor the inaccurate study has resulted in litigation
against the Company, there can be no assurance that the Company will not face
future litigation as a result of media company dissatisfaction with CIMS or
the results thereof, and if initiated, that such litigation will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
MANAGEMENT OF GROWTH; POSSIBLE ACQUISITIONS. Since inception, the
Company's growth has placed significant demands on the Company's management,
administrative, operational and financial resources. In order to manage its
growth, the Company will need to continue to implement and improve its
operational, financial and management information systems and continue to
expand, motivate and effectively manage an evolving and expanding workforce.
If the Company's management is unable to effectively manage under such
circumstances, the quality of the Company's products, its ability to retain
key personnel and its results of operations could be materially adversely
affected. Furthermore, there can be no assurance that the Company's business
will continue to expand. The Company's growth could be adversely affected by
reductions in customers' spending on market research or customer registration
products, increased competition, possible pricing pressures and other general
economic trends. Although market research expenditures by technology
companies have increased in recent years as such companies have adopted
certain marketing strategies traditionally utilized by consumer goods
manufacturers, there can be no assurance that this trend will continue or
that technology companies will continue to rely on externally-generated
market research to enhance the marketing of their products.
The Company hopes to achieve a portion of its future revenue growth, if
any, through acquisitions of complementary businesses, products or
technologies, although the Company currently has no commitments or agreements
with respect to any such acquisition. As part of this strategy, the Company
acquired Pipeline Communications, Inc., renamed IntelliQuest Communications,
Inc. ("IntelliQuest Communications"), in May 1996 and Zona Research, Inc.
("Zona") in February 1997. The Company's management has limited experience
dealing with the issues of product, systems, personnel and business strategy
integration posed by acquisitions, and no assurance can be given that the
integration of the IntelliQuest Communications acquisition, the Zona
acquisition, or any possible future acquisitions will be managed without a
material adverse effect on the business of the Company. In addition, there
can be no assurance that any possible future acquisition will not dilute the
Company's earnings per share.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance will
depend to a significant extent upon the efforts and abilities of key
personnel who have expertise in developing, interpreting and selling
survey-based information for technology markets. Although customer
relationships are managed at many levels in the Company, the loss of one or
more of IntelliQuest's corporate officers or senior managers could have an
adverse effect on the Company's business. The Company's success may also
depend on its ability to hire, train and retain skilled personnel in all
areas of its business. Competition for
16
<PAGE>
qualified personnel in the Company's industry is intense, and many of the
companies with which the Company competes for qualified personnel have
substantially greater financial and other resources than the Company.
Furthermore, competition for qualified personnel can be expected to become
more intense as competition in the Company's industry increases. There can be
no assurance that the Company will be able to recruit, retain and motivate a
sufficient number of qualified personnel to compete successfully.
LIMITED PROTECTION OF PROPRIETARY SYSTEMS, SOFTWARE AND PROCEDURES. The
Company's success is in part dependent upon its proprietary software
technology, research methods, data analysis techniques, and internal systems
and procedures that it has developed specifically to serve customers in the
technology industry. The Company has no patents; consequently, it relies on a
combination of copyright, trademark and trade secret laws and employee and
third party non-disclosure agreements to protect its proprietary systems,
software and procedures. There can be no assurance that the steps taken by
the Company to protect its proprietary rights will be adequate to prevent
misappropriation of such rights or that third parties will not independently
develop functionally equivalent or superior systems, software or procedures.
The Company believes that its systems, software and procedures and other
proprietary rights do not infringe upon the proprietary rights of third
parties. There can be no assurance, however, that third parties will not
assert infringement claims against the Company in the future or that any such
claims will not require the Company to enter into costly license arrangements
or result in protracted and costly litigation, regardless of the merits of
such claims.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. Revenues attributable to
international market research represented 20.2%, 28.3% and 27.8%,
respectively, of the Company's revenues for 1994, 1995 and 1996. The Company
expects that revenues from international market research will continue to
account for a significant portion of its revenues and intends to continue to
expand its international market research efforts. However, the Company's
international data collection operations are subject to numerous inherent
challenges and risks, including maintenance of an international data
collection network that adheres to the Company's quality standards,
fluctuations in exchange rates, foreign political and economic conditions,
tariffs and other trade barriers, longer accounts receivable collection
cycles and potentially adverse tax consequences. In addition, demand for the
Company's international market research depends on the international sales
and operations of its customers, which may increase or decrease over time.
The addition of market research coverage in new geographic territories can be
expected to require the commitment of considerable management and financial
resources and may negatively impact the Company's near-term results of
operations. Any material decline in the Company's ability to provide and
market timely, high-quality data that is consistent across international
markets would have a material adverse effect on the Company's results of
operations. Additionally, potential fluctuations in the value of the U.S.
dollar as compared to other various currencies in which the Company operates
facilities could have an adverse affect on results of operations.
VOLATILITY OF STOCK PRICE. The trading price of the Company's Common
Stock has been volatile and is likely to continue to be subject to wide
fluctuations in response to a variety of factors, including quarterly
variations in operating results, the signing of new contracts, new customers,
consolidations in the industry, technological innovations or new products by
the Company or its competitors, developments in patents or other intellectual
property rights, general conditions in the technology-focused market
research industry, revised earnings estimates, comments or recommendations
issued by analysts who follow the Company, its competitors or the
technology-focused, market research industry and general economic and market
conditions. In addition, it is possible that in some future period the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common
Stock could be materially adversely affected. Additionally, the stock market
in general has experienced extreme price volatility in recent years.
Volatility in price and volume has had a substantial effect on the market
prices of many companies for
17
<PAGE>
reasons unrelated or disproportionate to the operating performance of such
companies. These broad market fluctuations could have a significant impact
on the market price of the Company's Common Stock.
18
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement re: computation of per share earnings.
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED November 14, 1997
IntelliQuest Information Group, Inc.
(Registrant)
By: /s/ SUSAN GEORGEN-SAAD
-----------------------------------
Susan Georgen-Saad
Chief Financial Officer
20
<PAGE>
Exhibit 11.1
INTELLIQUEST INFORMATION GROUP, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months
Ended
September 30, 1997
------------------
Net income available to common stockholders. . . . . . . . . . . $ 1,382
-------
Weighted average shares outstanding:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . 8,390
Common stock issuable upon exercise of options and warrants. . 197
-------
Weighted average common shares and equivalents . . . . . . . . . 8,587
Net income per share . . . . . . . . . . . . . . . . . . . . . . $ .16
-------
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 03-1997 10Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,697
<SECURITIES> 48,161
<RECEIVABLES> 7,714
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 62,563
<PP&E> 4,047
<DEPRECIATION> 0
<TOTAL-ASSETS> 67,269
<CURRENT-LIABILITIES> 7,066
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 60,098
<TOTAL-LIABILITY-AND-EQUITY> 67,269
<SALES> 27,528
<TOTAL-REVENUES> 27,528
<CGS> 15,218
<TOTAL-COSTS> 15,218
<OTHER-EXPENSES> 25,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,552
<INCOME-TAX> 773
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,779
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
