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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: March 31, 1998
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 APRIL 30, 1998
Common Stock, $.0001 par value 8,454,055
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INTELLIQUEST INFORMATION GROUP, INC.
INDEX
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet
March 31, 1998 (unaudited) and December 31, 1997 3
Condensed Consolidated Statement of Operations (unaudited)
Three months ended March 31, 1998 and 1997 4
Consolidated Statement of Comprehensive Income (unaudited)
Three months ended March 31, 1998 and 1997 5
Condensed Consolidated Statement of Cash Flows (unaudited)
Three months ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
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
</TABLE>
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Part I. Financial Information
- -------------------------------
Item 1. Condensed Consolidated Financial Statements
INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
MARCH 31, DECEMBER 31,
1998 1997
---- ----
(UNAUDITED)
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ASSETS
Current assets:
Cash and equivalents............................. $ 366 $ 1,785
Short-term investments........................... 38,698 40,752
Accounts receivable, net......................... 7,054 7,904
Unbilled revenues................................ 4,740 2,840
Projects in process.............................. 1,299 127
Prepaid expenses and other assets................ 2,164 593
------- -------
Total current assets.......................... 54,321 54,001
Furniture and equipment, net..................... 2,781 4,436
License agreements, net.......................... 7,482 7,500
Other assets..................................... 1,952 1,470
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Total assets................................ $66,536 $67,407
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------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 2,557 $ 2,474
Accrued liabilities.............................. 2,835 1,918
Deferred revenues................................ 2,181 2,420
Other current liabilities........................ 556 553
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Total current liabilities..................... 8,129 7,365
Obligations under capital leases and deferred rent.. 180 172
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Total liabilities............................. 8,309 7,537
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Common Stockholders' Equity:
Common stock, $.0001 par value, 30,000,000 shares
authorized, 8,484,000 and 8,411,000 shares
issued and outstanding, respectively............ 1 1
Capital in excess of par value................... 59,570 58,834
Deferred compensation............................ (30) (33)
Other............................................ 33 46
Accumulated earnings (deficit)................... (1,382) 1,039
Accumulated other comprehensive income (deficit). 35 (17)
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Total common stockholders' equity............. 58,227 59,870
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Total liabilities and stockholders' equity... $66,536 $67,407
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
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Revenues:
Continuous services........................ $ 8,219 $6,529
Other services............................. 1,740 955
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Total revenues............................. 9,959 7,484
Operating expenses:
Costs of revenues.......................... 5,798 3,957
Sales, general and administrative.......... 6,121 2,717
Product development........................ 2,382 409
Depreciation and amortization.............. 329 213
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Total operating expenses................... 14,630 7,296
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Operating income (loss)....................... (4,671) 188
Interest income, net.......................... 408 463
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Income (loss)before income taxes.............. (4,263) 651
Provision (benefit) for income taxes.......... (1,894) 68
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Net income (loss)............................. $(2,369) $ 583
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Basic earnings (loss) per share............... $ (.28) $ .07
Diluted earnings (loss) per share............. $ (.28) $ .07
Basic weighted average shares outstanding..... 8,484 8,338
Diluted weighted average shares outstanding... 8,484 8,475
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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INTELLIQUEST INFORMATION GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
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Net income (loss)............................ $(2,369) $ 583
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments.. 4 (4)
Unrealized loss on securities............. (13) (23)
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Other comprehensive loss..................... (9) (27)
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Comprehensive income (loss)................. $(2,378) $ 556
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
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Cash flows used in operating activities:
Net income (loss)............................... $ (2,369) $ 583
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization................ 436 213
Bad debt expense............................. 58 25
Asset impairment and loss on disposal of
assets...................................... 2,872 30
Deferred compensation........................ 3 2
Net changes in assets and liabilities:
Accounts receivable and unbilled revenues....... (1,416) (710)
Prepaid expenses and other assets............... (1,926) (207)
Projects in process............................. (1,172) (912)
Accounts payable and accrued expenses........... 910 (98)
Deferred revenues............................... (239) (66)
Other........................................... (20) 160
--------- --------
Net cash used in operating activities.............. (2,863) (980)
--------- --------
Cash flows from investing activities:
Purchases of short-term investments............. (106,916) (76,108)
Sales and maturities of short-term
investments.................................... 108,903 79,164
Purchases of equipment and leasehold
improvements................................... (425) (700)
Purchase of Information Technology Forum
Assets, Net of Cash Acquired .................. (138) -
Other........................................... 32 (42)
--------- --------
Net cash provided by investing activities. 1,456 2,314
--------- --------
Cash flows used in financing activities:
Proceeds from issuance of stock, net............ 3 53
Offering costs.................................. - (124)
Borrowings under line of credit................. - 2,029
Repayments under line of credit................. - (2,216)
Other........................................... (15) (266)
--------- --------
Net cash used in financing activities..... (12) (524)
--------- --------
Net increase (decrease) in cash and equivalents. (1,419) 810
Cash and equivalents at the beginning of the
period......................................... 1,785 734
--------- --------
Cash and equivalents at the end of the period... $ 366 $ 1,544
--------- --------
--------- --------
Supplemental cash flow disclosures:
Interest paid................................... 1 13
Taxes paid...................................... 4 435
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
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Schedule of noncash investing activities:
Purchase of Information Technology Forum assets
Working capital other than cash....................... 43 -
Equipment and leasehold improvements.................. 17 -
Intangibles........................................... 821 -
Capital lease assumed................................. (10) -
Issuance of unregistered common stock................. (733) -
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Cash paid for Information Technology Forum
assets, net of cash acquired......................... 138 -
------ -----
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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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.
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 March 31, 1998 and the results of the Company's
operations and its cash flows for the three-month periods ended March 31,
1998 and 1997. This report on Form 10-Q should be read in conjunction with
the Company's audited consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
2. LICENSE AGREEMENT
On December 22,1997, the Company paid $7.5 million for an exclusive
licensing agreement to market and sell database products to the
high-tech, telecommunications, cable and utility industries. In
conjunction with the agreement, the Company will pay the licensor
royalties and fees on revenue from the sale of data and services.
The contract provides for annual target minimum payments.
Royalties and service fees for the database marketing products were
less than that required to satisfy the prorated annual target minimum
payments under this agreement; therefore, the Company recognized a
liability at March 31, 1998 for the difference.
3. ACQUISITION OF ASSETS/RELATED PARTY TRANSACTION
Effective January 1, 1998, the Company purchased certain assets of
Information Technology Forum, Inc. ("ITF") a company wholly owned by
Charles W. Stryker, who was a Director of the Company at the time of the
acquisition. The assets were purchased with cash and stock and the
transaction was accounted for under the purchase method. The assets
purchased were recorded at fair value at the time of purchase. The excess
of the purchase price over the fair value of amounts assigned to the net
tangible assets purchased has been assigned to goodwill in the amount of
approximately $821,000 versus $721,000 as reported in the Company's Annual
Report on Form 10-K, due to post-closing accounting adjustments. As the
operations of ITF are immaterial to the Company as a whole, pro forma
financial statements are not disclosed.
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4. STOCK REPURCHASE PROGRAM
In January 1998, the Board of Directors approved the repurchase of up to
850,000 shares of the Company's common stock. There were no
repurchases as of the date of this filing.
5. NEW ACCOUNTING PRONOUNCEMENT
In 1997, Statements of Financial Accounting Standard No. 131, "Disclosures
about Segments of an Enterprise and Related Information" was issued. 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
this standard for annual reporting in 1998 and quarterly reporting the
first quarter of 1999.
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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 A RESULT OF CERTAIN FACTORS,
INCLUDING, BUT NOT LIMITED TO RISKS ASSOCIATED WITH DATABASE MARKETING
INFORMATION SERVICES, RELIANCE ON KEY CUSTOMERS/TECHNOLOGY INDUSTRY
CONSOLIDATION; DEPENDENCE ON SUBSCRIPTION AND CONTRACT RENEWALS; FLUCTUATIONS
IN OPERATING RESULTS/SEASONALITY; MANAGEMENT OF GROWTH/POSSIBLE
ACQUISITIONS; COMPETITION; DEPENDENCE ON KEY PERSONNEL; DEVELOPMENT OF DIRECT
SALES FORCE; RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT INTRODUCTION; DATA
COLLECTION RISKS; RISKS RELATED TO CIMS; HISTORY OF NET LOSSES/UNCERTAIN
PROFITABILITY; LIMITED PROTECTION OF PROPRIETARY SYSTEMS, SOFTWARE AND
PROCEDURES; AND RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS, AS FURTHER
DISCUSSED UNDER "RISK FACTORS".
OVERVIEW
IntelliQuest is a leading provider of information, technologies, and
analysis services that are designed to improve the marketing performance of
technology companies. IntelliQuest supplies customers with 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 uses its proprietary databases, software and subscription-based
strategic consulting services to help technology companies track product
performance and customer satisfaction, measure advertising effectiveness,
assess brand strength and competitive position, determine price sensitivity,
and evaluate new products, markets or other business opportunities. The
Company licenses custom proprietary software applications and associated
services to technology manufacturers for customer registration. In December
1997, the Company entered into an exclusive licensing agreement to market and
sell database products to the high-tech, telecommunications, cable and
utility industries.
The Company's continuous services are composed of renewable
subscription-based products, renewable proprietary products, customer
information products sold under contract, and recurring conferences.
The Company's renewable subscription based product revenues are derived
substantially from four product families: IntelliTrack IQ, World Wide
Internet Tracking Study ("WWITS"), the Computer Industry Media Study
(CIMS), and Zona Advisory Services. The Company's renewable
proprietary product revenues typically consist of revenues from
proprietary recurring tracking studies, panel projects, "value-add"
proprietary services, and customer information products. Revenues from
the customer information products are derived from a variety of
sources, including proprietary customer registration products,
proprietary customer satisfaction products and database marketing
services. Renewable customer information revenues include data medium
sales, processing fees and reporting fees. The Company's other services
are composed of non-recurring proprietary research, non-recurring
conferences and database marketing services sold to clients where an
ongoing contractual agreement does not exist.
Renewable subscription products, except for CIMS, are furnished pursuant
to contracts that are generally renewable annually, and revenue is amortized
prorata over contract terms. Substantially all CIMS revenues and related
costs are deferred and recognized upon delivery of the final study, which
typically
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occurs in the third quarter. Renewable proprietary and panel products
are furnished pursuant to contracts that are generally renewable
annually. Revenues for renewable proprietary and panel products are
recognized on a percentage of completion basis. Customer information products
are recognized based on actual units shipped/processed. Revenue for
conferences is recognized in the period in which the conference takes place.
The Company's exposure to foreign currency rate fluctuations has been
relatively low. First, the Company generally requires payment from its
customers in U.S. dollars. Second, the Company controls vendor related
foreign currency risk both through contractual clauses requiring clients to
reimburse the Company for any material losses on contracts caused by exchange
rate fluctuations and by locking in forward currency contracts. The Company's
objective in managing the exposure to foreign currency fluctuations is to
reduce earnings and cash flow volatility associated with foreign exchange
rate changes. Accordingly, the Company utilizes foreign currency option
contracts and forward contracts to hedge a portion of its exposure on
anticipated transactions and firm commitment transactions. The currency
hedged is the British pound. The Company monitors its foreign exchange
exposures to ensure the overall effectiveness of its foreign currency hedge
positions. However, there can be no assurance the Company's foreign currency
hedging activities will substantially reduce the impact of fluctuations in
currency exchange rates on its results of operations and financial position.
As of March 31, 1998, the Company had entered into open forward contracts for
U.S. dollar / British pound sterling transactions with a notional value of
approximately $1.2 million.
RESULTS OF OPERATIONS
TOTAL REVENUES. Total revenues increased from $7.5 million to $10.0
million for the quarters ended March 31, 1997 and 1998, respectively. This
growth represents a 33.1% increase for the three-month period ended March 31,
1998 from the comparable 1997 period.
Revenues from continuous services increased 25.9% from $6.5 million to
$8.2 million for the quarters ended March 31, 1997 and 1998, respectively.
This increase was due primarily to the addition of the database marketing
products, expansion of renewable proprietary products primarily in
the custom panel area, earlier commitment of subscriptions by three large
customers of IntelliTrack IQ, and an increase in value-added proprietary
services related to IntelliTrack IQ. Other revenue increased 82.2% to $1.7
million for the three months ended March 31, 1998 from $1 million for first
quarter of 1998. This increase was due to sales of database marketing
services to customers not under contract. The Company anticipates further
growth of this type of non-continuous revenue.
Revenues attributable to international market research decreased 18.3%
from $2.7 million to $2.2 million for the quarters ended March 31, 1997
and 1998, respectively. During the first quarter of 1997 disk shipments
accounted for $816,000 of international revenues. This was due to a
contract with one company, and the contract is substantially complete.
COSTS OF REVENUES. Costs of revenues are primarily composed of data
collection, labor charges, database marketing service charges, royalties,
telecommunications charges and other costs directly attributable to products
or projects. Costs of revenues increased 46.5% from $4.0 million to $5.8
million for the quarters ended March 31, 1997 and 1998, respectively. Costs
of revenues increased as a percentage of total revenues from 52.9% to 58.2%
for the quarters ended March 31, 1997 and 1998, respectively. The increase
was due to a shift in product mix resulting from more accelerated growth in
the Company's start-up business lines of database marketing and custom panel.
As anticipated, royalties and service fees for the data base marketing
products were less than that required to satisfy the prorated annual target
minimum payments under an exclusive licensing agreement therefore, the
Company recognized an additional expense during the first quarter of 1998.
The increase in cost of revenues was partially offset by a decrease in low
margin disk shipment activity and registration costs. The Company also
wrote-off non-productive assets related to software licensing.
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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 125.3% from $2.7 million to $6.1 million
for the quarters ended March 31, 1997 and 1998, respectively. As a
percentage of total revenues, sales, general and administrative expenses
increased to 61.5% for the first quarter of 1998 from 36.3% for the first
quarter of 1997. The increase is primarily a result of the ramp-up of the
sales force during the last six months of 1997 and reorganization efforts
during the first quarter of 1998. Sales, general and administrative expenses
for the first quarter of 1998 include one-time adjustments totaling $1.5
million in expense related to the aforementioned reorganization. Before the
affect of these one-time charges sales, general and administrative expenses
increased 79.3% from $2.7 million to $4.6 million for the quarters ended March
31, 1997 and 1998, respectively and first quarter 1998 expenses were 46.5% of
revenues. Acquisition costs expensed were $137,000 for the three months
ended March 31, 1997.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses include
costs incurred to develop or design new products, services or processes and
significantly enhance existing products, services, and processes. Product
development expenses were $409,000 and $2.4 million for the three months
ended March 31, 1997 and 1998, respectively. As a percentage of total
revenues, product development expenses represented 5.5% and 23.9% for the
first quarters of 1997 and 1998, respectively. The increase is primarily
related to one-time charges during the first quarter of 1998 to write-off
capitalized software development costs totaling $2.0 million due to an
impairment in foreseeable future benefit. Before the effect of these one-time
charges, product development expenses for the first quarter of 1998 were flat
in absolute dollars versus the prior year and represented 4% of total
revenues for the quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
54.5% from $213,000 to $329,000 for the quarters ended March 31, 1997 and
1998, respectively. This increase was principally due to purchases of
computer equipment and costs associated with the acquisition of advanced data
delivery alternatives to improve communications and data processing systems
required to support business growth and international expansion during 1997.
INCOME TAXES. Benefit for income taxes as a percentage of income before
income taxes represent 44.4% for the quarter ended March 31, 1998. This
rate is higher than the Company's combined federal and state income tax rates
due to significant interest income derived from investments in tax-free
investments as a percentage of income (loss) before taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash of $366,000, short term
investments of $38.7 million and working capital of $46.2 million.
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During the three months ended March 31, 1998, the Company used $2.9
million for operating activities versus $980,000 during the same period in
the prior year. This increase in cash flow used for operations was primarily
due to the Company's net loss before one-time charges combined with a shift
in the timing of client billings. Billed amounts are recorded as deferred
revenues on the Company's financial statements and are recognized as income
when earned. As of March 31, 1997 and 1998 the Company had $2.4 million and
$2.2 million, respectively, of deferred revenues. In addition, when work is
performed in advance of billing, the Company will record this work as
unbilled revenue. As of March 31, 1997 and 1998, the Company had $2.8
million and $4.7 million of unbilled revenues, respectively, further
indicating this shift in client billings. Substantially all deferred and
unbilled revenues will be earned and billed, respectively, within 12 months
of the respective period ends.
For the three months ended March 31, 1997 and 1998, the Company
generated net cash from investing activities of $2.3 million and $1.5
million, respectively, primarily from investments in short-term securities.
The Company used cash for financing activities of $524,000 and $12,000
in the quarters ended March 31, 1997 and 1998, respectively. During the
first three months of 1997, cash was used primarily for repayments under a
line of credit. Use of cash during the first three months of 1998 was
primarily for capital lease obligation payments.
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.
YEAR 2000
The Company has conducted a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is developing
a plan to resolve identified problems. The Company presently believes,
with modification to existing software and the conversion to new software, the
Year 2000 problem will not pose significant operational problems and is not
anticipated to be material to its financial position or results of operations
in any given year.
STOCK REPURCHASE PROGRAM
In January 1998, the Board of Directors approved the repurchase of up to
850,000 shares of the Company's outstanding common stock. As of the date of
this filing there were no repurchases under the plan.
RISK FACTORS
RISKS ASSOCIATED WITH DATABASE MARKETING INFORMATION SERVICES. The
Company hopes to achieve a significant portion of its future revenue growth
through the expansion of its customer registration business and the
development of database marketing products associated with the registration
business.
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The Company has limited experience in the database marketing industry and
there can be no assurance that the Company will be successful in developing
and marketing its new line of database marketing products. The Company also
intends to rely in large part on strategic alliances and the acquisition of
related technologies in order to expand its database marketing offerings. The
Company's management has limited experience dealing with the issues of
product, systems, personnel and business strategy integration posed by such
alliances and acquisitions, and no assurance can be given that such alliances
and acquisitions will be managed without a material adverse effect on the
business of the Company. The Company intends to process its database
marketing solutions through a licensing agreement under which the Company has
a perpetual, but cancelable, contract to receive such services from the
licensor. The Company currently has no other means of providing alternative
methods of processing in the event of a natural catastrophe, cancellation of
the contract, or other unforeseeable event. In addition, a significant amount
of projected database marketing revenues is attributable to this licensing
agreement which is cancelable by either party under certain conditions.
HISTORY OF NET LOSSES; UNCERTAIN PROFITABILITY. The Company incurred
net annual losses in each year from 1991 through 1994 before recording a net
profit in each of 1995 and 1996 and 1997. In view of the Company's prior
operating history and recent reorganization, there can be no assurance that
the Company will be able to maintain profitability on a quarterly or annual
basis or that it will be able to sustain or increase its revenue growth in
future periods.
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 10 largest customers in 1997 generated 55.1%
of the Company's revenues for the year. In 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 27.7% of revenues. The Company
expects that three customers will each account for over 10% of revenues in
1998. Over time key customers will vary depending upon the seasonality or the
nature of the contracts. 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, significant
consolidation of companies in the technology industries served by the
Company is underway, 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.
DEPENDENCE ON SUBSCRIPTION AND CONTRACT RENEWALS. In 1997, 87.0% 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. To the extent that 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.
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
14
<PAGE>
to increase during 1998. 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. In addition,
substantially all revenues and expenses attributable to the Company's CIMS
product for a particular year are deferred and 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 information
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.
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 information
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 certain assets of Information Technology Forum, Inc. ("ITF") in
January 1998. The Company's management has limited experience dealing with
the issues of product, systems, personnel
15
<PAGE>
and business strategy integration posed by acquisitions, and no assurance can
be given that the integration of the ITF acquisition, or any past or 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.
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 information software, such as Leader, Inc., as well as vendors' own
customer information 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 NFO
Research, Inc., Market Facts, Inc., Information Resources, Inc. and The NPD
Group, Inc.); (iii) analyst based, general business consulting and (iv)
database marketing (such as Axciom Corporation and Metromail Corporation).
Most 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.
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 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.
DEVELOPMENT 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. As the Company develops new
products and services targeted at more complex, integrated marketing
solutions, it intends to continue to develop and expand its sales force. The
Company's plans for future growth may depend in part on, among other things,
its unproven ability to hire, train, deploy, manage and retain an
increasingly large and more sophisticated direct sales force. There can be no
assurance that the Company will be able to develop or manage such a sales
force.
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
16
<PAGE>
expending significant resources to develop its proprietary customer
information 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 and data delivery. There can be no 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.
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 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. Although media company
dissatisfaction has not 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.
17
<PAGE>
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 materially adverse 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 28.6% of the Company's revenues
for 1997. 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.
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 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
In connection with the acquisition by the Company of certain assets of
Information Technology Forum, Inc. ("ITF") in January 1998, the Company
issued 67,532 shares of its common stock and paid $150,000 to ITF in exchange
for assets valued at $883,000 including cash accounts of $12,000. No
underwriters were used in connection with the issuance. With respect to the
issuance, the Company relied on the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended.
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 Regarding Computation of Net Income Per Share.
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 May 15, 1998
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)
<TABLE>
For the Three Months Ended
March 31, 1998
-------------------------------------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
<S> <C> <C> <C>
Basic EPS
Net loss available to common stockholders $(2,369) 8,484 (.28)
----
----
Effect of Dilutive Securities
Options (A)
------- -----
Diluted EPS $(2,369) 8,484 (.28)
------- ----- ----
------- ----- ----
For the Three Months Ended
March 31, 1997
-------------------------------------------
Weighted
Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic EPS
Net income available to common
stockholders $ 583 8,338 .07
----
----
Effect of Dilutive Securities
Options 137
------- -----
Diluted EPS $ 583 8,475 .07
------- ----- ----
------- ----- ----
</TABLE>
(A) Due to the net loss in the first quarter of 1998, the diluted weighted
average shares excludes the effect of dilutive securities.
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 366
<SECURITIES> 38,698
<RECEIVABLES> 7,054
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,321
<PP&E> 2,781
<DEPRECIATION> 0
<TOTAL-ASSETS> 66,536
<CURRENT-LIABILITIES> 8,129
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 58,226
<TOTAL-LIABILITY-AND-EQUITY> 66,536
<SALES> 9,959
<TOTAL-REVENUES> 9,959
<CGS> 5,798
<TOTAL-COSTS> 5,798
<OTHER-EXPENSES> 8,832
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,263)
<INCOME-TAX> (1,894)
<INCOME-CONTINUING> (2,369)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,369)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
