<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, 1999
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 SEPTEMBER 30, 1999
Common Stock, $.0001 par value 7,897,244
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations (unaudited)
Three Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Operations (unaudited)
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended September 30, 1999 and 1998 6
Consolidated Statements of Comprehensive Income (unaudited)
Nine Months Ended September 30, 1999 and 1998 7
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 1999 and 1998 8
Notes to Condensed Consolidated Interim Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
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>
2
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................................ $ 4,340 $ 5,611
Short-term investments............................................... 72,868 28,010
Accounts receivable, net............................................. 7,347 10,978
Unbilled revenues.................................................... 7,528 3,532
Projects in process.................................................. 21 153
Prepaid expenses and other assets.................................... 4,829 2,336
-------- --------
Total current assets............................................. 96,933 50,620
Furniture and equipment, net......................................... 2,088 2,850
License agreement, net............................................... - 7,324
Other assets......................................................... 330 1,793
-------- --------
Total assets..................................................... $ 99,351 $ 62,587
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 1,943 $ 3,996
Accrued liabilities.................................................. 16,549 2,826
Deferred revenues.................................................... 6,435 2,145
Total current liabilities........................................ 24,927 8,967
Obligations under capital leases and deferred rent...................... 170 79
-------- --------
Total liabilities................................................ 25,097 9,046
======== ========
Stockholders' equity:
Series A junior participating preferred stock........................ - -
Common stock, $.0001 par value, 30,000,000 shares authorized,
8,617,000 and 8,563,000 shares issued and outstanding, respectively
720,000 and 720,000 shares in treasury, respectively................. 1 1
Capital in excess of par value....................................... 54,169 53,976
Other................................................................ 966 121
Accumulated income (deficit)......................................... 19,118 (557)
-------- --------
Total stockholders' equity....................................... 74,254 53,541
-------- --------
Total liabilities and stockholders' equity....................... $ 99,351 $ 62,587
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
------- --------
<S> <C> <C>
Revenues:
Continuous services...................................... $ 8,148 $ 8,109
------- --------
Other services........................................... 3,059 1,055
Total revenues......................................... 11,207 9,164
Operating expenses:
Costs of revenues........................................ 5,853 5,436
Sales, general and administrative........................ 3,742 2,416
Product development...................................... 341 511
Depreciation and amortization............................ 229 282
------- --------
Total operating expenses............................... 10,165 8,645
------- --------
Operating income............................................ 1,042 519
Income (loss) from discontinued operations (net of tax)... (1,098) 119
Gain on sale of discontinued operations (net of tax)...... 21,196 -
Interest income........................................... 205 318
------- --------
Income before income tax benefit.......................... 21,345 956
Income tax provision on operations........................ 402 255
------- --------
Net income.................................................. $20,943 $ 701
======= ========
Basic earnings per share.................................... $ 2.65 $ .08
Diluted earnings per share.................................. $ 2.52 $ .08
Basic weighted average shares outstanding................... 7,897 8,307
Diluted weighted average shares outstanding................. 8,299 8,353
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
------- -------
<S> <C> <C>
Revenues:
Continuous services................................... $15,829 $17,281
Other services........................................ 6,364 2,804
------- -------
Total revenues...................................... 22,193 20,085
------- -------
Operating expenses:
Costs of revenues..................................... 11,822 11,488
Sales, general and administrative..................... 9,638 8,940
Product development................................... 1,032 2,610
Depreciation and amortization......................... 661 850
------- -------
Total operating expenses............................ 23,153 23,888
------- -------
Operating loss........................................... (960) (3,803)
Loss from discontinued operations (net of tax)......... (1,580) (1,270)
Gain on sale of discontinued operations (net of tax)... 21,196 -
Interest income........................................ 722 1,086
------- -------
Income (loss) before income tax benefit................ 19,378 (3,987)
Income tax benefit..................................... 301 2,052
------- -------
Net income (loss)........................................ $19,679 $(1,935)
======= =======
Basic earnings (loss) per share.......................... $ 2.50 $ (.23)
Diluted earnings (loss) per share........................ $ 2.37 $ (.23)
Basic weighted average shares outstanding................ 7,879 8,413
Diluted weighted average shares outstanding.............. 8,315 8,413
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Net income............................................................. $ 20,943 $ 701
Other comprehensive income, net of tax:
Foreign currency translation adjustments............................ 48 18
Deferred compensation options ...................................... 915 -
Unrealized loss on securities....................................... (18) 37
-------- --------
Other comprehensive income ............................................ 945 55
-------- --------
Comprehensive income................................................... $ 21,888 $ 756
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
6
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<C> <C> <C>
Net income (loss)...................................................... $ 19,679 $ (1,935)
Other comprehensive income, net of tax:
Foreign currency translation adjustments............................ 34 22
Deferred compensation options ...................................... 915 -
Unrealized loss on securities....................................... (82) 23
-------- --------
Other comprehensive income ............................................ 867 45
-------- --------
Comprehensive income (loss)............................................ $ 20,546 $ (1,890)
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
7
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................... $ 19,679 $ (1,935)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization..................................... 8,284 1,187
Provision for doubtful accounts................................... 368 316
Asset impairment and loss on disposal of assets................... 886 2,873
Deferred compensation............................................. 925 10
Net changes in assets and liabilities:
Accounts receivable and unbilled revenues......................... (733) (5,697)
Prepaid expenses and other assets................................. (2,493) (2,687)
Projects in process............................................... 132 2
Accounts payable and accrued expenses............................. 11,666 2,159
Deferred revenues................................................. 4,290 (98)
Other............................................................. 1,463 407
--------- ---------
Net cash provided by (used in) operating activities.................... 44,467 (3,463)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments............................... (83,939) (156,436)
Sales and maturities of short-term investments................... 38,930 163,011
Purchases of equipment and leasehold improvements................... (1,084) (866)
Purchase of Information Technology Forum assets, net of cash
acquired......................................................... - (138)
Purchase of Treasury Stock.......................................... - (2,385)
Other............................................................... 151 144
--------- ---------
Net cash provided by (used in) investing activities............. (45,942) 3,330
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock, net................................ 193 54
Other............................................................... 11 30
--------- ---------
Net cash provided by financing activities....................... 204 84
--------- ---------
Net decrease in cash and equivalents................................... (1,271) (49)
Cash and equivalents at the beginning of the period.................... 5,611 1,785
--------- ---------
Cash and equivalents at the end of the period.......................... $ 4,340 $ 1,736
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
8
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Supplemental cash flow disclosures:
Interest paid....................................................... $ - $ 1
Taxes paid.......................................................... - 49
Schedule of noncash investing and financing 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)
------ -----
Cash paid for Information Technology Forum assets, net
of cash acquired................................................ $ - $ 138
====== =====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
9
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. GENERAL AND BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated 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, and formerly operated under two divisions:
marketing research division and IQ2.net. These divisions focused on
a suite of online and database marketing services, which can greatly
improve the identification and segmentation of customers and
prospects for more effective customer acquisition and retention. The
Company has sold IQ2.net and reported the operations for this
quarter as a discontinued operation.
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission regarding interim financial
statements 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 of a normal recurring nature as considered
necessary for a fair presentation of the financial position of the
Company as of September 30, 1999 and the results of the Company's
operations and its cash flows for the three and nine month period
ended September 30, 1999 and 1998. 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, 1998.
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 pays 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 sufficient
to satisfy the prorated annual target minimum payments under this
agreement.
Of the total license fee of $7.5 million, $5 million is refundable
under certain conditions. Should the license be canceled by the
Company, or canceled due to the acquisition by the Company of a
competitor of the licensor or to the acquisition of the Company by a
competitor of the licensor, or under certain other conditions, the
refundable $5 million portion may not be recoverable by the Company.
The Licensing agreement has been sold as part of the IQ2.net sale.
All rights under the licensing agreement have been relinquished and
assigned to Naviant Technology Solutions Inc.
10
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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 $831,000, as
reported in the Company's Annual Report on Form 10-K for the period.
As the operations of ITF are immaterial to the Company as a whole,
pro forma financial statements are not disclosed.
These assets were part of the IQ2.net division and as a result of the
sale have been purchased by Naviant Technology Solutions Inc.
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. As of September 30,
1999, 720,000 shares have been repurchased.
5. BARTER REVENUE RECOGNITION
During the first quarter of 1999, the Company entered into six
barter agreements with Internet search engine companies. These
agreements allow IntelliQuest access to Internet banner impressions
for soliciting marketing information responses; in return, the
Internet companies receive product-marketing data from this
information. These transactions had associated recognized revenue of
$463,000 and direct expenses of $463,000, being recognized evenly in
the first and third quarters of 1999, resulting in no effect on
results of operations. These types of transactions are common in
this industry. The Company has participated in these types of
transactions in the past, but the associated revenues and expenses
were immaterial.
6. SALE OF IQ2.NET
On July 22, 1999, Naviant Technology Solutions, Inc. and IntelliQuest
Information Group, Inc. signed an agreement to sell the IQ2.net
division, which includes all of the capital stock of IQ2.net and
certain other related assets, for $46.5 million. IntelliQuest and
Naviant completed the transaction on September 15, 1999, resulting
in a gain on sale of $21.2 million. $2.0 million in escrow was
received on October 13, 1999.
11
<PAGE>
INTELLIQUEST INFORMATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
7. SUBSEQUENT EVENTS
INTELLIQUEST, INC. CASH MERGER
On August 12, 1999 , the Company entered into a definitive agreement
with WPP US Finance Corp., a subsidiary of WPP Group, Inc., pursuant
to which, and subject to certain conditions, WPP US Finance Corp,
will acquire the Company in a cash merger transaction for an
aggregate cash price of $42.5 million, plus an amount equal to the
Company's cash on hand at closing. This amount will be subject to
adjustment up or down based on IntelliQuest's meeting certain
financial targets and maintaining a certain level of working
capital. Principal conditions precedent to such acquisition include
approval of the acquisition by the Company's shareholders,
regulatory approvals, and the completion of the sale of the
Company's IQ2.net Inc. operations to Naviant Technology Solutions,
Inc. On November 1, we announced that IntelliQuest shareholders had
approved the merger at a special meeting of shareholders. Subsequent
to that announcement, we determined that our shareholders did not
receive proper notice of that meeting and of their appraisal rights
under Delaware law. As a result, we intend to hold another special
meeting of shareholders to vote upon the merger. IntelliQuest
shareholders will receive notice of that meeting and proxy materials
once we have set the meeting date. The record date for the meeting
is November 15, 1999. Although the Company expects to close the
merger in the fourth quarter of this year, its completion is subject
to several conditions beyond its control.
8. CLASS ACTION SUIT
On November 4, 1999, a purported class action lawsuit was filed by
an alleged stockholder of IntelliQuest against IntelliQuest and WPP
Acquisition in the Delaware Court of Chancery styled William M.
Skeen v. IntelliQuest Information Group, Inc. and WPP Acquisition,
Inc., C.A. No. 17526NC. The complaint sets forth allegations of
violations of 8 Del. C. Sections 251 and 262 due to improper notice
of the November 1, 1999 special meeting of IntelliQuest
stockholders. The plaintiff seeks an order from the Court (i)
declaring that defendants violated and are violating 8 Del. C.
Sections 251 and 262, (ii) declaring the action to be a class
action, (iii) enjoining the consummation of the merger with WPP
Acquisition, (iv) directing defendants to account for damages and
injuries sustained by the stockholder plaintiff, (v) ordering the
payment, in a quasi-appraisal proceeding or otherwise, of the fair
value of shares of IntelliQuest common stock plus damages and
interest, (vi) awarding rescissory damages, (vii) awarding plaintiff
costs, expert witness fees and attorneys' fees and (viii) granting
such other and further relief as may be just and proper. The Company
intends to vigorously defend itself in this lawsuit.
9. SHAREHOLDERS MEETING
As previously announced, IntelliQuest has entered into a merger
agreement pursuant to which an affiliate of WPP Group has agreed to
acquire all of the outstanding shares of IntelliQuest common stock
and IntelliQuest shareholders will receive cash consideration. On
November 1, we announced that IntelliQuest shareholders had approved
the merger at a special meeting of shareholders. Subsequent to that
announcement, we determined that our shareholders did not receive
timely notice of that meeting and of their appraisal rights under
Delaware law. As a result, we intend to hold another special meeting
of shareholders to vote upon the merger. IntelliQuest shareholders
will receive notice of that meeting and proxy materials once we have
set the meeting date. The record date for the meeting is November
15, 1999.
12
<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, CONTEMPLATED DISPOSITIONS,
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; THE COMPANY'S PURSUIT OF
STRATEGIC ALLIANCES; AND RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
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'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. The Company's other services are composed of
non-recurring proprietary research and non-recurring conferences 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 pro rata over the contract terms. Substantially all CIMS revenues
and related costs are deferred and recognized upon delivery of the final
study, which typically 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. Revenue for conferences is
recognized in the period in which the conference takes place.
13
<PAGE>
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 September 30, 1999, there were no outstanding forward contracts in
place.
During the third quarter, the Company sold its IQ2.net operations.
Accordingly, financial results associated with those operations are reflected
as discontinued operations in the Company's financial statements. The
Company's gain on such sale, net of taxes, was approximately $21.1 million.
For the third quarter, the loss from discontinued operations was $1.1
million, compared with income of $119,000 for the same period in 1998; the
loss from discontinued operations for the nine month period in 1999 was $1.6
million, compared with a loss of $1.3 million for the same period in 1998.
RESULTS OF OPERATIONS
TOTAL REVENUES. Total revenues increased from $9.1 million to $11.2
million for the quarters ended September 30, 1998 and 1999, respectively, and
increased from $20.0 million to $22.1 million for the nine months ended
September 30, 1998 and 1999. This represents a 23.1% increase for the
three-month period ended September 30, 1999 from the comparable 1998 period
and an increase of 10.5% for the nine months ended September 30, 1998 and
1999 respectively.
Revenues from continuous services were flat at $8.1 million verses
$8.1 million for the quarters ended September 30, 1998 and 1999,
respectively, and declined 8.4% from $17.2 million to $15.8 million for the
nine months ended September 30, 1998 and 1999. This was due to shifts in the
product lines and divisional sales mix. Other revenue increased 289.9% to
$3.1 million for the three months ended September 30, 1999 from $1.0 million
for first quarter of 1998 and 226.9% from $2.8 million to $6.3 million for
the nine months ended September 30, 1998 and 1999 respectively.
Revenues attributable to international market research increased
200.7% from $519,000 to $1.0 million for the quarters ended September 30,
1998 and 1999, respectively, and increased 74.8% from $(3.8) million loss to
$(960,000) for the nine months ended September 30, 1998 and 1999
respectively. This was due to increased projects associated with our current
customer base.
COSTS OF REVENUES. Costs of revenues are primarily composed of data
collection, labor charges, and other costs directly attributable to products
or projects. Costs of revenues increased from $5.4 million to $5.8 million
for the quarters ended September 30, 1998 and 1999, respectively. Costs of
revenues decreased as a percentage of total revenues from 59% to 52% for the
quarters ended September 30, 1998 and 1999, respectively, and increased 2.9%
from $11.5 million to $11.8 million for the nine months ended September 30,
1998 and 1999 respectively. The dollar increase in third quarter resulted
14
<PAGE>
from an increase in project work, thus requiring more direct costs. The
decrease as a percentage of revenue was due to increased labor efficiencies.
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 54.8% from $2.4 million to $3.7 million for
the quarters ended September 30, 1998 and 1999, respectively, and increased
from $8.9 million to $9.6 million for the nine months ended September 30,
1998 and 1999. As a percentage of total revenues, sales, general and
administrative expenses increased to 33.4% for the third quarter of 1999 from
26.3% for the third quarter of 1998 and decreased from 44.5% to 43.4% for the
nine months ended September 30, 1998 and 1999 respectively. This increase is
due primarily to increased salaries and benefits resulting from under
utilization of the direct labor force in which non-productive time is charged
to S,G&A.
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 $511,000 and $341,000 for the three months ended
September 30, 1998 and 1999, respectively, and decreased 39.5% from $2.6
million to $1.0 million for the nine months ended September 30, 1998 and 1999
respectively. This decrease was a result of a one-time charge in 1998 for
internally developed software that was written off. As a percentage of total
revenues, product development expenses represented 5.6% and 3.0% for the
third quarters of 1998 and 1999, respectively, and 13.0% to 4.6% for the nine
months ended September 30, 1998 and 1999 respectively. The decrease in 1999
is primarily related to the reorganization of the Research product
development.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
decreased 18.8% from $282,000 to $229,000 for the quarters ended September
30, 1998 and 1999, respectively, and 22.2% from 850,000 to 661,000 for the
nine months ended, September 30, 1998 and 1999 respectively. The decrease is
primarily due to full depreciation of booked assets.
INCOME TAXES. Provision for income taxes was 38.6% of income before
income taxes for the quarter ended September 30, 1999 and the income tax
benefit was 48.6% for the nine months ended September 30, 1999. This rate is
higher than the Company's combined federal and state income tax rates due to
significant interest income derived from in tax-free investments, as a
percentage of loss before taxes. As a percentage of operating income before
investment income the rate is 38.3%, as calculated during 1998, which
approximates the Company's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash of $4.3 million and
short-term investments of $72.9 million and working capital of $73.2 million.
During the nine months ended September 30, 1999, the Company
provided $44.4 million for operating activities versus $3.4 million used by
operations during the same period in the prior year. This increase in cash
flow provided by operations was primarily due to sale of IQ2.net division for
$46.5 million, of which $2.0 million was released from escrow on October 13,
1999. Billed amounts are recorded as deferred revenues on the Company's
financial statements and are recognized as income when earned. As of December
31, 1998 and September 30, 1999, the Company had $2.1 million and $6.4
15
<PAGE>
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 December 31, 1998 and September 30, 1999, the Company
had $3.5 million and $7.5 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.
The Company had net outflows of $45.9 million and provided cash from
investing activities of $3.3 million for the nine months ended September 30,
1999 and 1998, respectively.
The Company generated cash from financing activities of $204,000 and
$84,000 for the nine months ended, September 30, 1999 and 1998, respectively.
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 COMPLIANCE
The Year 2000 issue is a result of computer programs that were
written using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date using 00 as the year 1900 rather than the year 2000. To the extent that
the Company's software applications contain operating instructions that are
unable to interpret appropriately the upcoming calendar year 2000 and beyond,
some level of modification or replacement of such applications will be
necessary to avoid system failures and the temporary inability to process
transactions or engage in other normal business activities.
Management has implemented a company-wide program to assess the
computer systems and applications for the year 2000. A team was established
in 1998, headed by the Company's chief operating officer, to coordinate the
Company's Year 2000 compliance efforts. The Year 2000 team is staffed with
representatives of the Company's management information group and the
business units. Consultants and legal counsel are being leveraged as needed.
The chief operating officer reports regularly on the status of the Year 2000
project to the Company's Board of Directors.
This project has followed a systematic approach that consists of the
following tasks:
- - created awareness among staff and management regarding the issues and
the project;
- - ensured that executive management and the board of directors were
actively involved in the project;
- - inventoried hardware, software and other systems as well as vendors,
suppliers, and clients;
- - assessed the risk and prioritized those systems most critical to
business functioning;
- - took corrective action by retiring, upgrading and/or remediating
hardware, software and other equipment;
- - developed and implemented action plans and testing strategies;
- - contingency planning.
16
<PAGE>
The project focus has not been limited to our business. We have
requested that critical vendors supply us with their Year 2000 readiness
statements so that we have sufficient time to install upgrades and complete
testing where appropriate. We have been working with our major suppliers and
customers to assess their Year 2000 readiness. The goal of these efforts is
to ensure that the Year 2000 issue will not impact our ability to provide
services.
We believe IntelliQuest has taken appropriate measures to make our
"mission critical" systems Year 2000 Ready in accordance with our criteria.
"Year 2000 Ready" means that the system will not fail because of problems
handling dates associated with the year change from December 31, 1999 to
January 1, 2000, including leap year calculations, provided that all other
systems (for example, hardware, software and firmware) used with the system,
properly exchange accurate date data with it. We are also putting in place
certain contingency plans to address potential problems caused by the Year
2000 date change. Based on our test results of mission critical systems, we
do not anticipate problems that would cause disruption of normal business
functions. In addition, our review of vendor and supplier readiness has
revealed minimal impact to our ongoing operation. In the event that issues
outside of our control occur, we will make all reasonable efforts to minimize
the impact on our services.
The Company expects to incur costs of approximately $150,000 to $250,000
through 1999 for consulting, administration, hardware, software, and other
expenses associated with Year 2000 compliance. This quarter, the Company has
incurred approximately $41,000 related to the correction and testing phases
of the Year 2000 project. These charges are reported as a component of
selling, general and administrative expenses. The Company plans to expense
maintenance costs as incurred, while costs of updated software and hardware
will be amortized over the respective lives of the assets. The total cost of
the project is being funded through operating cash flows.
The Company does rely on third-party providers for key services such as
telecommunications and database marketing services. Interruption of these
services could, in management's view, have a material impact on the
operations of the Company. Efforts have begun to evaluate the readiness of
these critical suppliers. Management believes that, should the Company or
other third parties, with whom the Company has a significant business
relationship, have a Year 2000-related systems failure, the most significant
impact would likely be the inability to deliver products in a timely fashion
to its clients, to receive certain products from vendors, or to process
electronically certain internal database programs. The impact could be
material to the Company's liquidity or results of operations.
As part of the Year 2000 compliance effort, the team will be
establishing and implementing a contingency plan to provide for viable
alternatives to ensure that the Company's core business operations are able
to continue in the event of a Year 2000-related systems failure.
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 720,000 shares repurchased under the plan.
17
<PAGE>
SALE OF IQ2.NET
On July 22, 1999 Naviant Technology Solutions, Inc. and IntelliQuest
Information Group, Inc. signed an agreement to sell the IQ2.net division,
which includes all of the capital stock of IQ2.net and certain other related
assets, for $46.5 million. This transaction closed on September 15, 1999,
resulting in a gain on sale of $21.2 million. $2.0 million in escrow was
received on October 13, 1999.
INTELLIQUEST, INC. CASH MERGER
On August 12, 1999, the Company entered into a definitive agreement
with WPP Acquisition, pursuant to which, and subject to certain conditions,
WPP Acquisition will acquire the Company in a cash merger transaction for an
aggregate cash price of $42.5 million, plus an amount equal to the Company's
cash on hand at closing. This amount will be subject to an adjustment up or
down based on IntelliQuest's meeting certain financial targets and
maintaining a certain level of working capital. Principal conditions
precedent to such acquisition include approval of the acquisition by the
Company's shareholders, regulatory approvals, and the completion of the sale
of the Company's IQ2.net, Inc. operations to Naviant Technology Solutions,
Inc. On November 1, we announced that IntelliQuest shareholders had approved
the merger at a special meeting of shareholders. Subsequent to that
announcement, we determined that our shareholders did not receive proper
notice of that meeting and of their appraisal rights under Delaware law. As a
result, we intend to hold another special meeting of shareholders to vote
upon the merger. IntelliQuest shareholders will receive notice of that
meeting and proxy materials once we have set the meeting date. The record
date for the meeting is November 15, 1999. Although the Company expects to
close the merger in the fourth quarter of this year, its completion is
subject to several conditions beyond its control. There is no certainty that
a transaction will result from this agreement.
18
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
On November 4, 1999, a purported class action lawsuit was filed by
an alleged stockholder of IntelliQuest against IntelliQuest and WPP
Acquisition in the Delaware Court of Chancery styled William M.
Skeen v. IntelliQuest Information Group, Inc. and WPP Acquisition,
Inc., C.A. No. 17526NC. The complaint sets forth allegations of
violations of 8 Del. C. Sections 251 and 262 due to improper notice
of the November 1, 1999 special meeting of IntelliQuest
stockholders. The plaintiff seeks an order from the Court (i)
declaring that defendants violated and are violating 8 Del. C.
Sections 251 and 262, (ii) declaring the action to be a class
action, (iii) enjoining the consummation of the merger with WPP
Acquisition, (iv) directing defendants to account for damages and
injuries sustained by the stockholder plaintiff, (v) ordering the
payment, in a quasi-appraisal proceeding or otherwise, of the fair
value of shares of IntelliQuest common stock plus damages and
interest, (vi) awarding rescissory damages, (vii) awarding plaintiff
costs, expert witness fees and attorneys' fees and (viii) granting
such other and further relief as may be just and proper. The Company
intends to vigorously defend itself in this lawsuit.
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
8-K for WPP Agreement
8-K for IQ2.net Acquisition
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 October 15, 1999
IntelliQuest Information Group, Inc.
(Registrant)
By: /s/ Francis S Webster III
----------------------------------
Francis S. Webster III
Chief Financial Officer
20
<PAGE>
Exhibit 11.1
INTELLIQUEST INFORMATION GROUP, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months Ended
September 30, 1999
-----------------------------------------------
Weighted
Average
Income/(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ----------
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $20,943 7,897 $ 2.65
==========
Effect of Dilutive Securities
Options 402
------------- -------------
Diluted EPS $20,943 8,299 $ 2.52
============= ============= ==========
For the Three Months Ended
September 30, 1998
-----------------------------------------------
Weighted
Average
Income/(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ----------
Basic EPS
Net income available to common stockholders $ 701 8,307 $ .08
==========
Effect of Dilutive Securities
Options 46
------------- -------------
Diluted EPS $ 701 8,353 $ .08
============= ============= ==========
</TABLE>
21
<PAGE>
Exhibit 11.1
INTELLIQUEST INFORMATION GROUP, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1999
-----------------------------------------------
Weighted
Average
Income/(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ----------
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $19,679 7,879 $ 2.50
==========
Effect of Dilutive Securities
Options 436
------------- -------------
Diluted EPS $19,679 8,315 $ 2.37
============= ============= ==========
For the Nine Months Ended
September 30, 1998
-----------------------------------------------
Weighted
Average
Income/(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ----------
Basic EPS
Net loss available to common stockholders $(1,935) 8,413 $ (.23)
==========
Effect of Dilutive Securities
Options (A)
------------- -------------
Diluted EPS $(1,935) 8,413 $ (.23)
============= ============= ==========
</TABLE>
(A) Due to the net loss in the first quarter of 1998 and 1999, diluted weighted
average shares excludes the effect of dilutive securities.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1999 FORM 10-Q 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,340
<SECURITIES> 72,868
<RECEIVABLES> 7,347
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 96,933
<PP&E> 2,088
<DEPRECIATION> 0
<TOTAL-ASSETS> 99,351
<CURRENT-LIABILITIES> 24,927
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 74,253
<TOTAL-LIABILITY-AND-EQUITY> 99,351
<SALES> 22,193
<TOTAL-REVENUES> 22,193
<CGS> 11,822
<TOTAL-COSTS> 23,153
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (960)
<INCOME-TAX> (301)
<INCOME-CONTINUING> (659)
<DISCONTINUED> 19,616
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,679
<EPS-BASIC> 2.50
<EPS-DILUTED> 2.37
</TABLE>
