<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1998
REGISTRATION NO. 333-52899
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GIGA INFORMATION GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8732 06-1422860
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATED OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
ONE LONGWATER CIRCLE, NORWELL, MASSACHUSETTS 02061 (781) 982-9500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GIDEON I. GARTNER
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
GIGA INFORMATION GROUP, INC.
ONE LONGWATER CIRCLE
NORWELL, MASSACHUSETTS 02061 (781) 982-9500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
GERALD S. BACKMAN, P.C. ALEXANDER D. LYNCH, ESQ.
WEIL, GOTSHAL & MANGES LLP LUCI STALLER ALTMAN, ESQ.
767 FIFTH AVENUE BROBECK, PHLEGER & HARRISON LLP
NEW YORK, NEW YORK 10153-0119 1633 BROADWAY, 47TH FLOOR
(212) 310-8000 NEW YORK, NEW YORK 10019
(212) 581-1600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JULY 28, 1998
3,000,000 SHARES
[LOGO]
COMMON STOCK
------------------------
All of the 3,000,000 shares of Common Stock, par value $0.001 per share
(the 'Common Stock'), offered hereby are being sold by Giga Information Group,
Inc., a Delaware corporation (together with its subsidiaries, 'Giga' or the
'Company'). Prior to this offering (the 'Offering'), there has been no public
market for the Common Stock. It is currently anticipated that the initial public
offering price will be between $12.00 and $14.00 per share. See 'Underwriting'
for a discussion of the factors to be considered in determining the initial
public offering price.
The Company's Common Stock has been approved for trading on The Nasdaq
National Market under the symbol 'GIGX.'
------------------------
SEE 'RISK FACTORS' ON PAGES 7 THROUGH 14 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share....................... $ $ $
Total(3)........................ $ $ $
</TABLE>
(1) See 'Underwriting' for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters an option exercisable within 30
days of the date hereof, to purchase up to an aggregate of 450,000
additional shares of Common Stock, solely to cover over-allotments, if any.
If the Underwriters exercise such option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See 'Underwriting.'
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made against
payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc.,
Arlington, Virginia, or in book entry form through the book entry facilities of
the Depositary Trust Company, on or about , 1998.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. PRUDENTIAL SECURITIES INCORPORATED
The date of this Prospectus is , 1998
<PAGE>
[PHOTO DEPICTING THE COMPANY'S GIGAWEB USER INTERFACE]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
'UNDERWRITING.'
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Company's
Consolidated Financial Statements (the 'Consolidated Financial Statements') and
notes thereto appearing elsewhere in this Prospectus. Unless the context
otherwise requires, references in this Prospectus to 'Giga' or the 'Company' are
to Giga Information Group, Inc., a Delaware corporation, and its direct and
indirect subsidiaries. Unless otherwise indicated, the information contained in
this Prospectus (i) assumes no exercise of the Underwriters' over-allotment
option, (ii) reflects the automatic conversion of all outstanding shares of the
Company's Series A, Series B, Series C and Series D Preferred Stock (the
'Convertible Preferred Stock') into an aggregate of 4,686,784 shares of Common
Stock upon the closing of the Offering (the 'Preferred Conversion'), (iii)
reflects the repayment (the 'Bridge Repayment') of convertible promissory notes
in the aggregate principal amount of $10.0 million (the 'Bridge Notes') issued
in April 1998, (iv) reflects the filing by the Company, upon the closing of the
Offering, of an amended and restated certificate of incorporation (the 'Restated
Certificate'), (v) reflects a one-for-three reverse stock split of the Common
Stock (the 'Reverse Stock Split') to be effected prior to the closing of this
Offering and (vi) has been adjusted to reflect a four-for-one stock split of the
Common Stock effected as a stock dividend in November 1995 (the 'Stock Split').
THE COMPANY
The Company provides objective analyses and advice relating to developments
and trends in the computing, telecommunications and related industries
(collectively, the 'Information Technology' or 'IT' industries) to assist its
customers in making technology-related decisions. IT is critical to the
competitiveness and long-term viability of a wide range of organizations. The
Company believes information overload, confusion and anxiety exists among IT
decision-makers. As a result, an increasing number of organizations are turning
to Continuous Information Service ('CIS') providers to monitor and analyze IT
developments and to identify trends to support such organization's IT
decision-making needs.
Giga was founded by Gideon I. Gartner, who in 1979 founded Gartner Group,
Inc., a CIS provider. Building on his extensive experience and success in the
CIS industry, Mr. Gartner formed Giga with the objective of creating a new
approach toward addressing the CIS needs of users and vendors of IT products and
services. Giga has developed a range of innovative Continuous Information
Services, as well as an effective, electronic information delivery mechanism,
designed to provide integrated IT analyses and advice.
Foremost among these innovations is the Company's unified advisory service
('Advisory Service') through which IT research and analysis are offered to
customers as a single service intended to encompass the variety of IT coverage
offered by other CIS providers through multiple and fragmented services. This
original research and advice is provided by a staff of experienced industry
analysts. To complement Giga's analysts, the Company provides its Advisory
Service customers with access to an extensive network of external IT
practitioners ('ExperNet'). These practitioners have current experience in
diversified segments of the IT industry, which the Company believes cannot be
efficiently covered by the traditional CIS approach.
The Company also provides 'Continuous Advisory Consulting' services, a
valuable complement to Giga's Advisory Service inquiry process, which enable
customers to request more in-depth analysis targeted at the application of
technology to their specific situation. Continuous Advisory Consulting services,
which are provided on an on-going basis, may include assessments of strategic
technology planning, implementation issues surrounding a major technology
migration or a vendor's marketing plan.
The Company has also introduced its 'IT Practice Services,' which integrate
the results of documented surveys of the successful operating practices and
techniques of IT professionals ('best practices') with strategic consulting, to
allow customers to leverage the proven practices of their peers. Each IT
Practice Service is designed to address issues faced by an executive in a
specific job function within an organization. For example, the Company's 'Year
2000 Practices' is designed for the executive in charge of an organization's
year 2000 activities.
The Company organizes and sponsors a range of events on significant IT
industry issues and trends, and produces publications based on conference topics
or current IT issues (collectively, 'Events and Publications'). For example, the
Company hosts its flagship annual conference, GigaWorld IT Forum, at which
Giga's analysts present and update their most important research findings and
recommendations and meet one-on-one in advisory sessions with clients.
3
<PAGE>
Giga has designed its innovative Advisory Service model to capitalize on
the capabilities of the Internet. Advisory Service research is accessed and
customized through the Company's intelligent, Internet-based information
delivery interface ('GigaWeb'). GigaWeb is designed to make it easy and
efficient for a customer to navigate through the full spectrum of Giga's
original research and third party content, together with access to human
expertise. In addition, the Company maintains an authoring environment and
advanced client interface designed for electronic delivery and encourages
collaboration among analysts and clients, which is facilitated through the
Internet.
Giga's objective is to become the leading third generation CIS provider,
offering a significant price/performance advantage over its competitors. Key
elements of the Company's strategy are to (i) utilize and enhance its
price/performance advantage to increase the range of companies which can afford
CIS products, (ii) leverage its existing customer base by providing non-advisory
additional services such as IT Practice Services and Continuous Advisory
Consulting, (iii) increase the number of Advisory Service subscribers within an
organization and (iv) expand its worldwide distribution both domestically and
internationally.
The Company's executive offices are located at One Longwater Circle,
Norwell, Massachusetts 02061 and its telephone number is (781) 982-9500.
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. These risk factors include, but are not limited to, the following: the
Company's prior losses and anticipation of future losses; the Company's need to
attract and retain qualified personnel; the Company's dependence on sales and
renewals of subscription-based services; the Company's ability to manage growth;
the Company's future capital needs and the risks of working capital deficiency;
the Company's dependence on key personnel; competition; the risks associated
with the development of new services and products; the potential for significant
fluctuations in quarterly operating results; uncertainties relating to
proprietary rights; the Company's dependence on the Internet infrastructure; the
risk of system failure; the risks related to content; and the risks associated
with international operations. For a discussion of these and other risks, see
'Risk Factors' beginning on page 7.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby........................ 3,000,000 shares
Common Stock to be outstanding after the
Offering......................................... 9,871,338 shares(1)
Use of Proceeds.................................... To repay indebtedness, and for capital expenditures,
working capital and other general corporate purposes. See
'Use of Proceeds.'
The Nasdaq National Market symbol....................GIGX
</TABLE>
- ------------------
(1) Based on shares outstanding as of June 30, 1998. Excludes (i) 1,278,977
shares of Common Stock issuable upon exercise of options outstanding as of
June 30, 1998, with a weighted average exercise price of $2.91 per share;
(ii) 856,755 shares of Common Stock reserved for issuance, as of June 30,
1998, under the Company's stock plans; and (iii) 166,666, 35,959, 551,574
and 102,857 shares of Common Stock issuable upon exercise of warrants
outstanding as of June 30, 1998, with exercise prices of $3.00, $13.875,
$13.50 and $13.50 per share, respectively. See 'Management--Executive
Compensation' and 'Description of Capital Stock.'
------------------------
GigaTel(Registered) is a registered trademark of the Company. The Company
uses several trademarks, including the GiGa Giga Information Group (and
design)(Trademark), Giga Advisory Service(Trademark), GigaWeb(Trademark),
Gigabots(Trademark), GigaNotes(Trademark), GigaWorld IT Forum(Trademark),
IntraGiga(Trademark), IdeaBytes(Trademark) and ExperNet(Trademark). All other
trademarks or trade names referred to in this Prospectus are the property of
their respective owners.
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Words such as 'expects,' 'anticipates,' 'intends,' 'plans,' 'believes,' 'seeks,'
'estimates' and variations of such words and similar expressions are intended to
identify such forward-looking statements. These forward-looking statements are
based on current expectations, estimates and projections about the Company's
business, and beliefs and assumptions made by management, all of which involve
risks and uncertainties. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption 'Risk Factors,' which could
cause actual results to differ materially from those indicated by such
forward-looking statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES(1) COMPANY
------------------------ -----------------------------------------------------------------------
YEAR JANUARY 1 MARCH 17 YEAR ENDED THREE MONTHS ENDED
ENDED TO TO DECEMBER 31, MARCH 31,
DECEMBER 31, APRIL 5, DECEMBER 31, -------------------------- ---------------------------
1994 1995 1995 1996 1997 1997 1998
------------ --------- ------------ ------------ ----------- ---------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Continuous information
services.................... $ -- $ -- $ -- $ 3,149 $ 14,600 $ 2,570 $ 6,804
Other services................ 7,366 1,833 5,517 6,043 4,715 1,276 1,693
Publications.................. 800 283 1,442 946 344 180 55
------------ --------- ------------ ------------ ----------- ---------- --------------
Total revenues.............. 8,166 2,116 6,959 10,138 19,659 4,026 8,552
Costs and expenses:
Cost of services.............. 5,143 1,182 4,707 12,336 12,477 3,202 4,391
Cost of publications.......... 446 240 346 790 174 75 71
Sales and marketing........... 1,438 167 1,016 6,706 19,617 4,158 5,781
Research and development...... -- -- 348 1,789 1,975 659 339
General and administrative.... 4,027 1,047 5,760 9,739 6,419 1,061 1,368
Depreciation and
amortization................ 2,943 215 1,387 2,391 2,810 634 385
------------ --------- ------------ ------------ ----------- ---------- --------------
Total costs and expenses.... 13,997 2,851 13,564 33,751 43,472 9,789 12,335
------------ --------- ------------ ------------ ----------- ---------- --------------
Loss from continuing operations,
net of taxes.................. (4,663) (503) (5,366) (22,702) (23,130) (5,689) (3,836)
Income (loss) from discontinued
operations, net of taxes...... (1,870) 651 1,644 (2,688) 1,313 -- --
------------ --------- ------------ ------------ ----------- ---------- --------------
Net income (loss)............... (6,533) 148 (3,722) (25,390) (21,817) (5,689) (3,836)
------------ --------- ------------ ------------ ----------- ---------- --------------
------------ --------- ------------ ------------ ----------- ---------- --------------
Historical results per common
share-basic and diluted:
Loss from continuing
operations.................. (11.16) (1.81)
Income from discontinued
operations.................. -- --
Income from disposal of
discontinued operations..... 0.63 --
----------- --------------
Net loss...................... (10.53) (1.81)
----------- --------------
----------- --------------
Historical weighted average
number of common shares
outstanding:.................. 2,072,837 2,115,837
Pro forma results per common
share-basic and diluted(4):
Loss from continuing
operations.................. (3.42) (0.56)
Income from discontinued
operations.................. -- --
Income from disposal of
discontinued operations..... 0.19 --
----------- --------------
Net loss...................... (3.23) (0.56)
----------- --------------
----------- --------------
Pro forma weighted average
number of common shares
outstanding(4):............... 6,759,621 6,802,621
<CAPTION>
MARCH 31, 1998
-----------------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(2) ADJUSTED(2)(3)
----------- ---------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................................... $ 1,753 $ 3,753 $ 29,148
Working capital (deficit)............................................................... (13,821) (11,821) 13,574
Total assets............................................................................ 15,673 17,673 43,068
Deferred revenues....................................................................... 19,458 19,458 19,458
Long-term debt, less current portion.................................................... 848 848 848
Total stockholders' equity (deficit).................................................... (12,750) (10,750) 24,645
</TABLE>
(Footnotes on next page)
5
<PAGE>
(Footnotes from previous page)
- ------------------
(1) Financial data included herein contains results of certain predecessor
companies acquired by the Company in 1995. For a description of the
predecessor companies and an explanation of the comparative periods
presented herein, see 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Organization of the Company and
Financial Statement Presentation.'
(2) Presented on a pro forma basis to give effect to the Series D Financing (as
defined herein) and the Preferred Conversion. See 'Certain Transactions' and
Note 20 to the Consolidated Financial Statements.
(3) Adjusted to give effect to the sale by the Company of 3,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$13.00 per share and the application of the estimated net proceeds
therefrom. See 'Use of Proceeds' and 'Capitalization.'
(4) The pro forma results per common share and pro forma weighted average common
shares outstanding reflect the conversion of all outstanding shares of
Convertible Preferred Stock into Common Stock upon the closing of the
Offering.
6
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the Common
Stock offered hereby. This Prospectus contains certain statements of a
forward-looking nature all of which involve risks and uncertainties and actual
events or results may differ materially from the results discussed in such
forward-looking statements.
PRIOR LOSSES AND ANTICIPATION OF FUTURE LOSSES
Since its inception, the Company has incurred substantial costs to develop
its Continuous Information Services, establish its GigaWeb system, build a
management team and recruit, employ and train research analysts, sales personnel
and support staff for its business. As a consequence, the Company has incurred
substantial operating losses since its inception and, at March 31, 1998, had an
accumulated deficit of $54.8 million. The Company expects to incur significant
losses through at least fiscal 1998 as the Company expands and develops its
services and products. The magnitude and duration of the Company's losses will
depend on a number of factors both within and outside of the Company's control,
principally the risk factors described below. In addition, the Company has
significantly increased its operating expenses and expects to continue such
increases in the future, primarily to expand its staff of research analysts and
sales and support personnel and to further develop and enhance its services and
its GigaWeb system. As a result, the Company may not be readily able to reduce
or adjust expenses in the event that it does not generate planned revenues or if
its revenues decrease. There can be no assurance when or if the Company will
begin to generate revenue that is sufficient to achieve profitability, to
maintain profitability on a quarterly or annual basis or to sustain or increase
its revenue growth in future periods. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations.'
NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
The Company's success will depend, in part, upon its ability to hire,
train, motivate and retain a significant number of highly-skilled and
experienced employees, particularly management, research analysts and sales
personnel. The Company has experienced in the past, and may experience in the
future, high levels of turnover of its personnel, particularly sales and
marketing personnel. The Company has also experienced, and expects to continue
to experience, intense competition for professional personnel with, among
others, producers of IT services and products, management consulting firms and
systems integrators. Many of these firms have substantially greater financial
resources than the Company to attract and compensate qualified personnel. In
addition, some of the Company's competitors require that their employees enter
into non-competition agreements, the terms of which could prohibit such
individuals for a period of time from working for the Company. There can be no
assurance that the Company will be successful in attracting a sufficient number
of highly-skilled employees in the future, or that it will be successful in
training, motivating and retaining the employees it is able to hire, and any
inability to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON SALES AND RENEWALS OF SUBSCRIPTION-BASED SERVICES; NEED TO
ANTICIPATE CHANGING MARKET NEEDS
The Company offers its Continuous Information Services on a subscription
basis from which the Company derived 74% and 80% of total revenues for the year
ended December 31, 1997 and the three months ended March 31, 1998, respectively.
Accordingly, the Company's prospects will depend on its ability to enter into a
significant number of contracts for subscriptions to its services and to achieve
and sustain high renewal rates, and no assurance can be given that it will be
successful in doing so. The Company's ability to secure subscriptions and
subscription renewals is dependent upon, among other things, its ability to
deliver, through its Continuous Information Services, consistently high quality
and timely analysis and advice with respect to issues, developments and trends
in the IT industry that clients view as important. To deliver valuable analysis
and advice on a sustained basis, the Company must, among other things, recruit
and retain a large and growing number of highly talented professionals in a very
competitive job market, understand and anticipate market trends so as to keep
its analysis focused on the changing needs of its customers, and deliver
services and products of sufficiently high quality on a timely basis to
withstand competition. There can be no assurance that the Company will be able
7
<PAGE>
to achieve and sustain high subscription renewal rates or that the Company's
employees will be able to achieve desired sales productivity levels. Any
material decline in subscriptions and subscription renewal rates or the
inability of the Company's employees to achieve desired sales productivity
levels would have a material adverse effect on the Company's business, financial
condition and results of operations. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations.'
ABILITY TO MANAGE GROWTH
The Company's planned expansion is expected to place a significant strain
on the Company's financial, operational and managerial resources. To manage its
expansion, the Company must continue to implement and improve its operations and
financial systems and to increase, train and manage its personnel. There can be
no assurance that the Company's systems, procedures or controls currently in
place will be adequate to support the Company's operations or that the Company
will be able to implement additional systems successfully and in a timely manner
if required. If the Company continues to grow, it will be required to expand its
research staff, expand its sales and marketing force, recruit additional key
management personnel, improve its operational and financial systems and train,
motivate and manage additional employees. There can be no assurance that the
Company will be able to manage these changes successfully. Any inability of the
Company to manage its growth successfully could have a material adverse effect
on the Company's business, financial condition and results of operations.
SUBSTANTIAL FUTURE CAPITAL NEEDS; RISKS OF WORKING CAPITAL DEFICIENCY
The Company's business has significant fixed costs, primarily attributable
to the costs associated with producing research to implement its single-service
strategy, which provides for coverage of many of the IT sectors and contemplates
broad direct distribution worldwide. The Company has spent substantial amounts
to date on capital and operating expenditures which have contributed to an
accumulated deficit of $54.8 million as of March 31, 1998. Furthermore, the
Company expects capital and operating expenditures to increase due to numerous
factors, including the Company's plans to increase marketing efforts for its
Continuous Information Services, the expected costs to attract and retain
qualified employees, including research and sales personnel, on a timely basis
and the related costs of such efforts, the response of competitors to the
Company's services, the Company's plans to develop and market new services and
products, the further enhancement of the GigaWeb system and the Company's
expansion of its international operations, and the continued acceptance by
customers of annual membership agreements providing for advance payments rather
than equal monthly installments or some other payment model. The Company
anticipates funding its ongoing working capital needs principally through the
net proceeds to the Company from the Offering. The Company believes that the net
proceeds from the Offering (after repayment of the Bridge Notes described
herein), together with the Company's existing cash and cash equivalents and cash
generated from operations, after the repayment of other debt as it becomes due,
will be sufficient to fund the Company's cash needs until at least the end of
1999. However, in the event that the Company encounters difficulties in
collecting accounts receivable, experiences low or reduced subscription renewal
rates or otherwise has revenues that are lower than planned, the Company might
require additional working capital. As of May 31, 1998, the Company had,
excluding the Bridge Notes, approximately $1.2 million of equipment financing
debt and had access to an invoice factoring arrangement with a commercial bank
under which the Company could borrow up to $3,000,000 or 80% of eligible
accounts receivable, whichever is less. If necessary, the Company would consider
various other sources of financing, including, but not limited to, private
placements, the sale of assets and strategic alliances, but there can be no
assurance that such financing would be available to the Company on terms that
are acceptable, if at all. If adequate funds are not available, the Company may
be required to reduce its fixed costs and delay, scale back or eliminate certain
of its services or products, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
DEPENDENCE ON KEY PERSONNEL
The extent of the Company's success will depend in large part upon the
continued services of its executive officers and key employees, including its
founder, Chairman of the Board of Directors and Chief Executive Officer, Gideon
I. Gartner. Mr. Gartner, in particular, is well known in the IT community and
his reputation in
8
<PAGE>
the Continuous Information Services industry and his network of contacts have
been instrumental in establishing and building the Company's business and in
obtaining financing for the Company. The loss of the services of either Mr.
Gartner or one or more of the Company's other key personnel would have a
material adverse effect on the Company. There are no employment contracts
currently in force with key employees. The Company does not maintain key person
insurance for any of its key employees.
SIGNIFICANT COMPETITION
The Company competes in the market for IT services and products directly
with other independent providers of Continuous Information Services, including
Gartner Group, Inc., META Group, Inc. and Forrester Research Inc., and the
internal planning, research and marketing staffs of corporations and IT vendors.
Gartner Group, Inc., one of the Company's competitors, was founded by Gideon I.
Gartner, the Company's Chairman, President and Chief Executive Officer. Although
Mr. Gartner has no current relationship with Gartner Group, Inc., he does
continue to own less than 1% of its outstanding common stock. The Company also
competes with other information providers, including market research firms, 'Big
Five' accounting firms, consulting firms and systems integrators. Many of the
Company's direct and indirect competitors have substantially greater financial,
information gathering and marketing resources than the Company. Some of the
Company's direct and indirect competitors also have established research
organizations with greater market recognition and experience in the IT industry.
There can be no assurance that the Company will be successful in establishing a
competitive research organization. Delays, difficulty in developing and
achieving market acceptance of Giga's Continuous Information Services, or
customer dissatisfaction would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, new
competitors could seek to compete in one or more market segments addressed by
the Company's services and products. There can be no assurance that the
Company's current or potential competitors will not develop services and
products comparable or superior to those developed by the Company or respond
more quickly to new or emerging industry trends or changing customer
requirements. There can be no assurance that the Company will be able to
continue to compete successfully against existing or new competitors. In
addition, any pricing pressures, reduced margins or loss of market share
resulting from increased competition could have a material adverse effect on the
Company's business, financial condition and results of operations. See
'Business--Competition.'
RISKS ASSOCIATED WITH THE DEVELOPMENT OF NEW SERVICES AND PRODUCTS
The Company's future success will depend in part on its ability to
anticipate emerging market trends and to develop or acquire new services,
features and products that address the changing information, analysis and advice
needs of IT users, vendors and investors. The process of internally researching,
developing, launching and gaining client acceptance of a new service or product,
or assimilating and marketing an acquired service or product, is inherently
risky and costly. Delays or failures during development or implementation, or
lack of market acceptance of these services and products, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The future success of the Company's Continuous Information Services
will depend in part on the Company's ability to expand the breadth and depth of
its services through the addition of internal analysts and consultants, content
from third party sources and external practitioners. The Company's continued
ability to differentiate itself through its Internet-based GigaWeb system will
depend on its ability to continue to add features and functionality to GigaWeb.
In addition, the Company has limited internal resources dedicated to its Web
site development and relies on third parties, including consultants and software
developers, for the design, development and testing of its GigaWeb system and
other delivery mechanisms. Any technical or other related problems or
deficiencies in GigaWeb in the areas of reliability, performance and scalability
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company has had limited experience
introducing new services and products and there can be no assurance that its
efforts to introduce new, or to assimilate acquired, services or products, will
be successful. If the Company is unable, for technical or other reasons, to
develop and introduce new services or products or to make enhancements to
existing services and products in a timely manner in response to changing market
conditions or customer requirements, or if its Continuous Information Services
or other service offerings do not achieve market acceptance, the Company's
business, financial condition and results of operations would be materially
adversely affected. See 'Business--Products and Services.'
9
<PAGE>
POTENTIAL FOR SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS;
SEASONALITY
The Company's operating results may fluctuate significantly in the future
due to various factors, including the level and timing of new subscriptions and
renewals of subscriptions to Continuous Information Services, the timing and
amount of new business generated by the Company, the mix of domestic versus
international business, the timing of the development, introduction and
marketing of new services and products, the timing of the hiring of research
analysts and sales people, changes in the spending patterns of the Company's
target clients, the Company's accounts receivable collection experience, changes
in market demand for IT research and analysis, foreign currency exchange rate
fluctuations, competitive conditions in the industry and general economic
conditions. A high percentage of the Company's operating expenses is based
primarily on sales forecasts and the Company may be unable to adjust spending in
a timely manner to compensate for any unexpected shortfalls in revenues. Any
significant shortfall in revenues in relation to the Company's expectations
would have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, a significant portion of the
Company's renewals and subscriptions are placed during the fourth quarter,
particularly the last month of such quarter, due primarily to customers'
purchasing patterns and the timing of certain sales performance quota cutoffs.
Due to the Company's limited operating history, and as a result of its revenue
growth, seasonal trends in the Company's results of operations have not clearly
emerged. However, the Company believes that its future operating results may
follow a pattern of seasonal fluctuation. Accordingly, the Company believes that
period to period comparisons of results of operations are not necessarily
meaningful and should not be relied upon as an indication of future results of
operations. Due to the foregoing factors, it is likely that in future quarters
the Company's operating results will be below the expectations of public market
analysts and investors. Such an event could have a material adverse effect on
the price of the Company's Common Stock. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
UNCERTAINTIES RELATING TO PROPRIETARY RIGHTS
The Company's success and its ability to compete effectively is dependent
in part upon its proprietary rights. The Company relies on a combination of
copyright, trademark and trade secret laws, employee and third-party
nondisclosure agreements and contractual provisions and other methods to protect
its proprietary rights. There can be no assurance that the measures taken by the
Company to protect its proprietary rights will be adequate to enforce its
proprietary rights or prevent misappropriation or that others will not obtain
similar or superior proprietary rights.
The Company believes that its trademarks are important to its success and
its competitive position. The Company has certain common law trademarks, a U.S.
federal trademark registration and several U.S. federal trademark applications
pending, some of which involve a derivation of the first two letters of the name
Gideon Gartner (e.g. GiGa). The word 'Giga' is commonly used in the IT field to
denote 10(9th) power or a very large amount, and as a result, there are numerous
other entities that use the word "Giga" as part of their tradename. The Company
may be unable to obtain registrations for its trademarks in the U.S. or in
other countries for that or other reasons, and its rights to its trademarks may
be narrow in scope or may be lost in view of the rights of these other entities.
Registrations for trademarks in the U.S. provide no protection for such
trademarks in other countries. The Company has received initial Office Actions
from the United States Patent and Trademark Office (the 'PTO') indicating that
certain of its applications for U.S. federal trademark registrations for the
GiGa Giga Information Group (and design)(Trademark) trademark have been refused
based on the PTO's citation of other Giga-formative trademarks covered by
pending Federal applications and a registration held by third parties. The
Company plans to respond to this initial refusal, but there can be no assurance
that it will obtain a favorable decision from the PTO Examiner or that one of
these third parties will not successfully oppose registration or use. The
Company is aware of a Benelux trademark registration for the trademark GIGA
MEDIA, the application for which was filed in the Benelux in advance of the
Company's application to register the GiGa Giga Information Group (and
design)(Trademark) trademark with the PTO and the equivalent office in the
Benelux. The Company is also aware that the owner of the Benelux trademark has
filed a lawsuit in the Netherlands against the Company alleging tradename
infringement, and requesting a court order requiring the Company to use an
alternative tradename to Giga Information Group. There can be no assurance that
the tradename infringement lawsuit pending against the Company will result in a
decision that is favorable to the Company. In addition, there can be no
assurance that other parties (i) do not have superior rights to certain of the
Company's trademarks, (ii) will not
10
<PAGE>
oppose the Company's applications for registrations, (iii) will not seek and
obtain cancellation of any of the Company's trademark registrations and (iv)
will not allege that the Company's use of its trademarks infringes such third
parties' trademarks. Failure by the Company to establish its rights to use its
trademarks, to overcome the PTO or other country's trademark office's refusal of
certain of its applications, or any loss of its rights to use its trademarks,
could result in damages payable to third parties, the loss of its rights to
prohibit others from using confusingly similar trademarks, the loss of its
rights to use the trademarks, including the mark "Giga Information Group," the
need to invest substantial resources in building brand identity for a new
trademark, and the loss of market awareness and revenues to the Company, and
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
DEPENDENCE ON THE INTERNET INFRASTRUCTURE
The Company's success will depend, in large part, upon the continued
operation of the Internet infrastructure, such as a reliable network backbone
with the necessary speed, data capacity and security, for providing reliable
GigaWeb access. To the extent that the Internet continues to experience
increased numbers of users, frequency of use or increased bandwidth requirements
of users, there can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed on it or that the performance
or reliability of the Internet will not be adversely affected. Furthermore, the
Internet has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and such outages and delays could
adversely affect the customer's ability to access GigaWeb. Moreover, critical
issues concerning the commercial use and government regulation of the Internet
(including security, taxation cost, ease of use and access, intellectual
property ownership, data privacy and other legal liability issues) remain
unresolved and could materially and adversely impact both the growth of the
Internet and the Company's business, financial condition and results of
operations.
RISK OF SYSTEM FAILURE
The Company's Internet-based, information delivery interface, GigaWeb,
resides on a computer system located at the Company's headquarters. The
continuing and uninterrupted performance of GigaWeb is critical to the success
of the Company's business. Any system failure or capacity constraint that causes
interruptions in the Company's ability to service its customers could reduce
customer satisfaction and, if sustained or repeated, would reduce the
attractiveness of the Company's products and could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company maintains business interruption insurance. There is no assurance,
however, that this coverage would be sufficient in the event of a major system
failure.
RISKS RELATED TO CONTENT
As a publisher and distributor of original analyses and licensed
third-party content, the Company faces potential liability for defamation,
negligence, copyright and trademark infringement. Third party content includes
information created or provided by information service organizations, ExperNet
practitioners, and consultants retained by the Company and may be delivered in
writing, via the Internet or in print, or verbally to clients. There can be no
assurance that the Company will not be involved in litigation, which can be
expensive and time consuming, as a result of the creation and/or dissemination
of such content. Any such litigation, whether or not resulting in a judgment
requiring the payment of monetary damages, could have a material adverse effect
on the Company's business, financial condition, and results of operations.
IMPACT OF THE YEAR 2000 ISSUE
The Company has commenced efforts to ensure that the computer systems and
applications upon which it relies for internal operations and external
communications with clients and others will function properly beyond 1999. The
Company presently believes that the computer systems and programs upon which it
relies for its internal operations and external communications, and which the
Company presently expects to use following December 31, 1999, are, or will be,
Year 2000 compliant. There can be no assurance, however, that further assessment
of the Company's internal systems and applications will not reveal that
additional efforts to assure Year 2000 compliance are necessary, and such
efforts may be costly and may divert the Company's resources from product
development or infrastructure improvement programs. In addition, there can be no
assurance that
11
<PAGE>
the systems operated by other companies upon which the Company relies will be
Year 2000 compliant on a timely basis. For example, the Company is dependent on
the Internet infrastructure for providing reliable GigaWeb access. GigaWeb is an
Internet based information delivery interface and the primary delivery medium
for the Company's Continuous Information Services. Year 2000 issues could affect
the power grid and communications networks that provide the Internet's
infrastructure. The occurrence of such problems would be out of the Company's
control and could have a material adverse impact on the Company's ability to
deliver its Continuous Information Services. The Company's business, financial
condition or results of operations could be materially adversely affected by the
failure of either the Company's internal systems and applications or other
systems upon which the Company relies to properly operate or manage data beyond
1999.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Essentially all of the Company's current international operations are
located in the European Union and Canada. The Company operates in the European
Union primarily through wholly-owned subsidiaries in the United Kingdom, France
and Germany. These subsidiaries manage direct sales personnel and distributors
in other countries in the European Union as well. In Canada, the Company
utilizes a full-scale field sales force and provides business support to these
salespersons through its operations in the United States. While the Company
anticipates expanding its operations in the European Union in the future, it has
no current plans to do so. The Company believes there are certain risks inherent
in these international operations, including changes in demand resulting from
fluctuations in exchange rates, changes in trade policies, regulatory
requirements, difficulties in staffing and managing foreign sales operations and
higher levels of taxation on foreign income than domestic income. Any expansion
in Europe could require considerable management and financial resources and may
negatively impact the Company's near-term results of operations. Essentially all
of the Company's international revenues from the European Union are expected to
continue to be denominated in foreign currencies, particularly the British
pound, while international revenues from Canada are expected to continue to be
denominated in U.S. dollars. Consequently, a decrease in the value of a relevant
foreign currency in relation to the United States dollar, or an adverse
development in any one of the foregoing factors, could have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company does not currently hedge its exposure to foreign currency
fluctuations. The Company had revenues from international operations of $3.2
million in 1996, $2.4 million in 1997 and $700,000 in the quarter ended March
31, 1998. The Company also has begun marketing in Israel and Korea through
representatives. Revenues from these representatives have been and are expected
to continue to be denominated in U.S. dollars. To date, such revenues have been
insignificant.
CONTROL BY MANAGEMENT
Upon the closing of the Offering, Mr. Gartner will beneficially own
approximately 22.9% of the outstanding Common Stock (21.9% assuming the exercise
of the Underwriters' over-allotment option) and Mr. Gartner, together with the
Company's other executive officers, directors and director nominees, including
entities affiliated with them, will beneficially own approximately 35.8% of the
outstanding Common Stock (34.2% assuming the exercise of the Underwriters'
over-allotment option). As a result, these stockholders will be able to exercise
control over matters requiring stockholder approval, including the election of
directors and the approval of significant corporate matters such as transactions
which may lead to a change of control of the Company. The effects of such
control could be to delay or prevent a change of control of the Company unless
the terms are approved by such stockholders, which could adversely affect the
market price of the Company's Common Stock. See 'Management' and 'Principal
Stockholders.'
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock. There can be no assurance that, following the Offering, an active
trading market for the Common Stock will develop or be sustained or that the
market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price will be determined through
negotiations between the Company and the Representatives of the Underwriters and
will not necessarily reflect the market price of the Common Stock after the
Offering. See 'Underwriting' for a discussion of the factors to be considered in
determining the initial public offering price. The stock market in recent years
has experienced extreme price and volume fluctuations
12
<PAGE>
that have particularly affected market prices of many growth-oriented companies
in industries similar or related to that of the Company and that have often been
unrelated or disproportionate to the operating performance of such companies.
The market price of the Common Stock could also be subject to significant
fluctuations in response to, and may be adversely affected by, variations in
quarterly results, changes in earnings estimates or other actions by analysts
and earnings or other announcements of the Company's customers or competitors as
well as other factors.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of the Common
Stock. Additional dilution will occur upon exercise or conversion of outstanding
stock options or warrants. See 'Dilution' and 'Shares Eligible for Future Sale.'
SHARES ELIGIBLE FOR FUTURE SALE
The 3,000,000 shares offered hereby will be eligible for sale in the public
market immediately following the effective date of the Registration Statement.
There will be approximately 355,292 additional shares eligible for sale in the
public market immediately following the effective date of the Registration
Statement, approximately 59,157 shares eligible for resale in the public market
90 days after the effective date of the Registration Statement, approximately
5,870,390 shares eligible for resale upon expiration of lock-up agreements 180
days after the effective date of the Registration Statement; and approximately
586,499 shares eligible for sale upon expiration of their respective one-year
holding periods, subject to certain limitations on sale pursuant to Rule 144
under the Securities Act ('Rule 144'). Holders of 6,261,451 shares (including
shares issuable upon exercise of warrants) have contractual rights to request to
have their shares registered with the Securities and Exchange Commission (the
'Commission') for resale to the public beginning June 30, 1998. In addition,
promptly following the effective date of the Registration Statement, the Company
intends to file a registration statement covering the shares of Common Stock
issued or reserved for issuance under the Company's 1995 Stock Option/Stock
Issuance Plan, as amended (the '1995 Stock Plan'), 1996 Stock Option Plan (the
'1996 Option Plan') and 1997 Director Option Plan (the 'Director Plan'), and
upon such filing any shares subsequently issued under such plans will be
eligible for sale in the public market, subject to Rule 144 compliance in the
case of affiliates of the Company. See 'Shares Eligible for Future Sale' and
'Description of Capital Stock.'
The Company, its executive officers, directors and certain of its
stockholders have agreed that, subject to certain limited exceptions, for a
period ending 180 days after the consummation of the Offering, without the prior
written consent of Friedman, Billings, Ramsey & Co., Inc., they will not,
directly or indirectly, offer, pledge, sell, offer to sell, contract to sell,
grant any option to purchase or otherwise sell, dispose of, make any short sale
of, loan or grant any rights with respect to any shares of Common Stock or any
options or warrants to purchase any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock.
The stockholders who have agreed to these restrictions will hold in the
aggregate 6,183,606 shares of Common Stock after the consummation of the
Offering. See 'Underwriting' and 'Shares Eligible for Future Sale.'
The sale of a substantial number of shares held by existing stockholders,
whether pursuant to a subsequent public offering or otherwise, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock and could materially impair the Company's future ability to raise
capital through an offering of equity securities. See 'Shares Eligible for
Future Sale' and 'Underwriting.'
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Restated Certificate will be filed upon the closing of the Offering,
pursuant to which the Company's Board of Directors (the 'Board of Directors')
will have the authority to issue up to 5,000,000 shares of Preferred Stock and
to determine the price, rights, conversion ratios, preferences and privileges of
those shares without any further vote or action by the Company's stockholders.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of such Preferred Stock. Any
such issuance, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the
13
<PAGE>
Company and could negatively impact the voting power or other rights of the
holders of Common Stock. In addition, such Preferred Stock may have other
rights, including economic rights senior to the Common Stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value of
the Common Stock. The Restated Certificate will provide for a classified Board
of Directors and will permit a member of the Board of Directors to be removed
for cause only upon the affirmative vote of at least two-thirds of the shares of
capital stock of the Company entitled to vote. Furthermore, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law that prohibit the Company from engaging in a 'business
combination' with an 'interested stockholder' for a period of three years after
the date of the transaction in which the person first becomes an 'interested
stockholder,' unless the business combination is approved in a prescribed
manner. The application of Section 203 could also have the effect of delaying or
preventing a change of control of the Company. Certain other provisions of the
Restated Certificate may have the effect of delaying or preventing changes of
control or management of the Company, which could adversely affect the market
price of the Company's Common Stock. See 'Description of Capital Stock--Delaware
Law and Certain Charter and By-Law Provisions.'
USE OF PROCEEDS
The net proceeds to Giga from the sale of the 3,000,000 shares of Common
Stock offered hereby are estimated to be $35,395,000 ($40,835,500 if the
Underwriters' over-allotment option is exercised in full) after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company and assuming an initial public offering price of $13.00 per
share.
A portion of the net proceeds of the Offering will be used to repay in full
(the 'Bridge Repayment') the Bridge Notes in the aggregate principal amount of
$10.0 millon issued in April 1998, which notes accrue interest at the rate of
12% per annum. The proceeds of the issuance of the Bridge Notes were used for
general corporate purposes, including the repayment in full of the remaining
$1.2 million aggregate principal amount of convertible notes, which notes
accrued interest at a weighted average rate of 5.2% per annum, of which a note
in the principal amount of $200,000 was held by a director and former officer.
See 'Underwriting' and Notes 11 and 20 to the Consolidated Financial Statements.
The balance of the proceeds will be used for general corporate purposes,
including capital expenditures and working capital. Pending such use, the net
proceeds will be invested in short-term, investment-grade, interest-bearing
obligations.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Board of Directors after taking into account various factors including the
Company's financial condition, operating results, current and anticipated cash
needs and plans for expansion.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
to give effect to the Series D Financing and the Preferred Conversion and (iii)
the pro forma capitalization of the Company as adjusted to give effect to (A)
the sale of 3,000,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $13.00 per share after deducting the
underwriting discount and commissions and estimated offering expenses payable by
the Company and (B) the Bridge Repayment. This information should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(1)
-------- ------------ --------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Long term debt, less current portion.................................... $ 848 $ 848 $ 848
-------- ------------ --------------
Stockholders' Equity:
Convertible Preferred Stock........................................... 12 -- --
Preferred Stock, $.001 par value; 0 shares authorized (actual);
0 shares authorized (pro forma); 5,000,000 shares authorized (pro
forma as adjusted); none issued or outstanding on an actual, pro
forma or pro forma as adjusted basis............................... -- -- --
Common Stock, $.001 par value, 50,000,000 shares authorized (actual);
60,000,000 shares authorized (pro forma and pro forma as adjusted);
2,124,142 shares issued and outstanding (actual); 6,810,926 shares
issued and outstanding (pro forma);
9,810,926 shares issued and outstanding (pro forma as adjusted).... 2 7 10
Additional paid-in capital............................................ 43,411 45,418 80,810
Deferred compensation................................................. (2,023) (2,023) (2,023)
Accumulated deficit................................................... (54,765) (54,765) (54,765)
Cumulative translation adjustments.................................... 613 613 613
-------- ------------ --------------
Total stockholders' equity (deficit)............................... (12,750) (10,750) 24,645
-------- ------------ --------------
Total capitalization (deficit)..................................... $(11,902) $ (9,902) $ 25,493
-------- ------------ --------------
-------- ------------ --------------
</TABLE>
- ------------------
(1) Based on shares outstanding as of March 31, 1998. Excludes (i) 1,295,781
shares of Common Stock issuable upon exercise of options outstanding as of
March 31, 1998, with a weighted average exercise price of $2.42 per share;
(ii) 893,691 shares of Common Stock reserved for issuance, as of March 31,
1998, under the Company's stock plans; (iii) 166,666, 35,959 and 551,574
shares of Common Stock issuable upon exercise of warrants outstanding as of
March 31, 1998, with exercise prices of $3.00, $13.875 and $13.50 per share,
respectively; (iv) 102,857 shares of Common Stock issuable upon exercise of
warrants issued by the Company between March 31, 1998 and June 30, 1998; and
(v) 60,407 shares of Common Stock issued by the Company to employees between
March 31, 1998 and June 30, 1998. See 'Management--Executive Compensation'
and 'Description of Capital Stock.'
15
<PAGE>
DILUTION
The pro forma deficit in net tangible book value of the Company at March
31, 1998, was $10,750,000 or $(1.58) per share. Pro forma net tangible book
value per share represents the amount of total assets, excluding intangibles,
less total liabilities as of March 31, 1998, divided by the number of shares of
Common Stock outstanding on a pro forma basis after giving effect to the Series
D Financing and the Preferred Conversion. After giving effect to the receipt of
the net proceeds from the sale of the 3,000,000 shares of Common Stock offered
by the Company hereby and after deducting the estimated underwriting discount
and commissions and offering expenses to be paid by the Company, the pro forma
net tangible book value of the Company at March 31, 1998 would have been
$24,645,000 or $2.51 per share. This represents an immediate increase in net
tangible book value of $4.09 per share of Common Stock to existing stockholders
and an immediate and substantial dilution of approximately $10.49 per share to
new investors purchasing shares in the Offering. The following table illustrates
the per share dilution:
<TABLE>
<S> <C> <C>
Proposed initial public offering price per share........................ $ 13.00
Pro forma net tangible book deficit per share before the Offering..... $(1.58)
Increase per share attributable to new investors...................... 4.09
-------
Pro forma net tangible book value per share after the Offering.......... 2.51
----------
Dilution per share to new investors..................................... $ 10.49
----------
----------
</TABLE>
The following table sets forth on a pro forma basis as of June 30, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price paid per share by the
existing stockholders and by the investors purchasing shares of Common Stock
offered hereby (at an assumed initial public offering price of $13.00 per
share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................... 6,871,338 70.0% $42,478,000 52.2% $ 6.18
New investors....................................... 3,000,000 30.0% $39,000,000 47.8% $ 13.00
--------- ------- ----------- -------
Total.......................................... 9,871,338 100.0% $81,478,000 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>
The foregoing assumes no exercise of any outstanding stock options or
warrants to purchase shares of Common Stock. As of June 30, 1998, there were
outstanding (i) 1,278,977 shares of Common Stock issuable upon exercise of
options at a weighted average exercise price of $2.91 per share, (ii) 166,666,
35,959, 551,574 and 102,857 shares of Common Stock issuable upon exercise of
warrants with exercise prices of $3.00, $13.875, $13.50 and $13.50 per share,
respectively. In addition, as of June 30, 1998, 856,755 shares of Common Stock
were reserved for future issuance pursuant to the Company's stock plans. To the
extent that the outstanding options and warrants are exercised at prices lower
than the initial public offering price, there will be further dilution to new
investors. See 'Management--Executive Compensation,' 'Certain Transactions' and
'Description of Capital Stock.'
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
Consolidated Financial Statements of the Company and the combined financial
statements of BIS Strategic Decisions, Inc. and its five foreign affiliates
(collectively, 'BIS' or the 'Predecessor Companies'). For the period January 1
to December 15, 1993, the operations comprising BIS were those of wholly-owned
subsidiaries of NYNEX Corporation ('NYNEX'). For the period December 16 to
December 31, 1993, the year ended December 31, 1994 and the period January 1 to
April 5, 1995, the operations of BIS were those of wholly-owned subsidiaries of
Friday Holdings, L.P. ('Friday Holdings'). Because of the impact to the
statements of operations of the revaluation of the assets and liabilities in
connection with the acquisitions and the application of different accounting
methods, the results of operations of BIS for the periods under NYNEX and Friday
Holdings ownership are not comparable with each other or with those reported by
the Company.
The Consolidated Financial Statements of the Company as of December 31,
1996 and 1997 and for the period from March 17, 1995 to December 31, 1995 and
the years ended December 31, 1996 and 1997 included elsewhere in this Prospectus
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
consolidated financial statements of the Company as of March 31, 1998 and for
the three months ended March 31, 1997 and 1998 included elsewhere in this
Prospectus are unaudited; however, in the opinion of management, such unaudited
data include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information included therein. The
results of operations for the period March 17, 1995 to December 31, 1995 and the
three months ended March 31, 1997 and 1998 are not necessarily indicative of the
results for an entire fiscal year or any other interim period. The combined
financial statements of the Predecessor Companies for the period January 1, 1995
to April 5, 1995 included elsewhere in this Prospectus have been audited by
PricewaterhouseCoopers LLP. The combined financial statements of BIS as of
December 31, 1993 and 1994 and for the periods January 1, 1993 to December 15,
1993 and December 16, 1993 to December 31, 1993 and for the year ended December
31, 1994 are derived from unaudited combined financial statements not included
in this Prospectus; however, in the opinion of management, such unaudited data
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information included therein. The
selected historical financial data should be read in conjunction with
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Prospectus.
17
<PAGE>
<TABLE>
<CAPTION>
COMPANY
----------------------
PREDECESSOR COMPANIES YEAR
---------------------------------------------------- PRO FORMA ENDED
JANUARY 1 DECEMBER 16 YEAR JANUARY 1 YEAR MARCH 17 DECEMBER
TO TO ENDED TO ENDED TO 31,
DECEMBER 15, DECEMBER 31, DECEMBER 31, APRIL 5, DECEMBER 31, DECEMBER 31, --------
1993 1993 1994 1995 1995(1) 1995 1996
------------ ------------ ------------ ---------- ------------ ------------ --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Continuous information
services...................... $ -- $ -- $ -- $ -- $ -- $ -- $ 3,149
Other services.................. 5,815 91 7,366 1,833 8,543 5,517 6,043
Publications.................... 1,311 51 800 283 1,725 1,442 946
------------ ------------ ------------ ---------- ------------ ------------ --------
Total revenues................ 7,126 142 8,166 2,116 10,268 6,959 10,138
------------ ------------ ------------ ---------- ------------ ------------ --------
Costs and expenses:
Cost of services................ 4,268 267 5,143 1,182 7,172 4,707 12,336
Cost of publications............ 726 64 446 240 586 346 790
Sales and marketing............. 1,448 92 1,438 167 972 1,016 6,706
Research and development........ -- -- -- -- 348 348 1,789
General and administrative...... 3,431 140 4,027 1,047 6,934 5,760 9,739
Depreciation and amortization... 613 32 2,943 215 1,964 1,387 2,391
------------ ------------ ------------ ---------- ------------ ------------ --------
Total costs and expenses...... 10,486 595 13,997 2,851 17,976 13,564 33,751
------------ ------------ ------------ ---------- ------------ ------------ --------
Operating loss.................. (3,360) (453) (5,831) (735) (7,708) (6,605) (23,613)
Interest income................... 100 7 96 23 274 246 515
Interest expense.................. (38) (4) (26) (4) (134) (100) (95)
------------ ------------ ------------ ---------- ------------ ------------ --------
Loss from continuing operations
before income taxes
(benefit)..................... (3,298) (450) (5,761) (716) (7,568) (6,459) (23,193)
Income tax benefit (charge)....... (1,035) -- (1,098) (213) (1,311) (1,093) (491)
------------ ------------ ------------ ---------- ------------ ------------ --------
Loss from continuing
operations.................... (2,263) (450) (4,663) (503) (6,257) (5,366) (22,702)
------------ ------------ ------------ ---------- ------------ ------------ --------
Discontinued operations:
Income (loss) from the
discontinued BIS market
research business (net of tax
effect)....................... 2,972 44 (1,469) 597 2,097 1,490 (79)
Income (loss) from the
discontinued Shrapnel business
(net of tax effect)........... 70 (12) (401) 54 154 154 (134)
Income (loss) on disposal of
discontinued BIS market
research business (net of tax
effect)....................... -- -- -- -- -- -- (2,315)
Income (loss) on disposal of
discontinued Shrapnel business
(net of tax effect)........... -- -- -- -- -- -- (160)
------------ ------------ ------------ ---------- ------------ ------------ --------
Income (loss) from discontinued
operations.................... 3,042 32 (1,870) 651 2,251 1,644 (2,688)
------------ ------------ ------------ ---------- ------------ ------------ --------
Net income (loss)............... $ 779 $ (418) $ (6,533) $ 148 $ (4,006) $ (3,722) $(25,390)
------------ ------------ ------------ ---------- ------------ ------------ --------
------------ ------------ ------------ ---------- ------------ ------------ --------
Historical results per common and
common equivalent share:
Loss from continuing
operations..................
Income (loss) from
discontinued operations.....
Income (loss) from disposal of
discontinued operations.....
Net income (loss).............
Historical weighted average common
and common equivalent shares
outstanding.....................
Pro forma results per common
share(2):
Loss from continuing
operations..................
Income (loss) from
discontinued operations.....
Income (loss) from disposal of
discontinued operations.....
Net income (loss).............
Pro forma weighted average common
shares outstanding(2)...........
<CAPTION>
COMPANY
---------------------------------
YEAR
ENDED THREE MONTHS ENDED
DECEMBER MARCH 31,
31, ----------------------
1997 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Continuous information
services...................... $ 14,600 $ 2,570 $ 6,804
Other services.................. 4,715 1,276 1,693
Publications.................... 344 180 55
---------- ---------- ----------
Total revenues................ 19,659 4,026 8,552
---------- ---------- ----------
Costs and expenses:
Cost of services................ 12,477 3,202 4,391
Cost of publications............ 174 75 71
Sales and marketing............. 19,617 4,158 5,781
Research and development........ 1,975 659 339
General and administrative...... 6,419 1,061 1,368
Depreciation and amortization... 2,810 634 385
---------- ---------- ----------
Total costs and expenses...... 43,472 9,789 12,335
---------- ---------- ----------
Operating loss.................. (23,813) (5,763) (3,783)
Interest income................... 277 98 37
Interest expense.................. (235) (17) (86)
---------- ---------- ----------
Loss from continuing operations
before income taxes
(benefit)..................... (23,771) (5,682) (3,832)
Income tax benefit (charge)....... (641) 7 4
---------- ---------- ----------
Loss from continuing
operations.................... (23,130) (5,689) (3,836)
---------- ---------- ----------
Discontinued operations:
Income (loss) from the
discontinued BIS market
research business (net of tax
effect)....................... -- -- --
Income (loss) from the
discontinued Shrapnel business
(net of tax effect)........... -- -- --
Income (loss) on disposal of
discontinued BIS market
research business (net of tax
effect)....................... 1,101 -- --
Income (loss) on disposal of
discontinued Shrapnel business
(net of tax effect)........... 212 -- --
---------- ---------- ----------
Income (loss) from discontinued
operations.................... 1,313 -- --
---------- ---------- ----------
Net income (loss)............... $ (21,817) $ (5,689) $ (3,836)
---------- ---------- ----------
---------- ---------- ----------
Historical results per common and
common equivalent share:
Loss from continuing
operations.................. (11.16) (1.81)
Income (loss) from
discontinued operations..... -- --
Income (loss) from disposal of
discontinued operations..... 0.63 --
---------- ----------
Net income (loss)............. (10.53) (1.81)
---------- ----------
---------- ----------
Historical weighted average common
and common equivalent shares
outstanding..................... 2,072,837 2,115,837
Pro forma results per common
share(2):
Loss from continuing
operations.................. (3.42) (0.56)
Income (loss) from
discontinued operations..... -- --
Income (loss) from disposal of
discontinued operations..... 0.19 --
---------- ----------
Net income (loss)............. (3.23) (0.56)
---------- ----------
---------- ----------
Pro forma weighted average common
shares outstanding(2)........... 6,759,621 6,802,621
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
-------------------------- ------------------------
DECEMBER 31, DECEMBER 31,
-------------------------- ------------------------
1993 1994 1995 1996
------------ ------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 2,639 $ 1,693 $ 16,876 $8,286
Working capital (deficit).............................................. 1,905 (1,503) 11,549 113
Total assets........................................................... 10,181 7,509 24,833 19,679
Deferred revenues...................................................... 762 1,232 2,201 6,832
Long term debt, less current portion................................... -- -- 1,437 1,511
Total stockholders' equity (deficit)................................... 6,942 2,017 14,972 1,659
<CAPTION>
COMPANY
-------------------------
DECEMBER 31,
------------ MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 3,539 $ 1,753
Working capital (deficit).............................................. (10,196) (13,821)
Total assets........................................................... 23,023 15,673
Deferred revenues...................................................... 20,604 19,458
Long term debt, less current portion................................... 937 848
Total stockholders' equity (deficit)................................... (9,090) (12,750)
</TABLE>
- ------------------
(1) The pro forma results reflect the results of operations as if the
acquisitions of BIS and ExperNet had occurred on January 1, 1995. See Note 3
to the Consolidated Financial Statements.
(2) The pro forma results per common share and pro forma weighted average common
shares outstanding reflect the conversion of all outstanding shares of
Convertible Preferred Stock into Common Stock upon the closing of the
Offering.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ORGANIZATION OF THE COMPANY AND FINANCIAL STATEMENT PRESENTATION
The Company was organized on March 17, 1995. In April 1995, the Company
acquired BIS as part of its strategic plan to accelerate the development of its
Continuous Information Services business and to obtain the marketing, sales and
other corporate infrastructures and certain personnel of BIS. In July 1995, the
Company acquired a majority equity interest in ExperNet Corporation ('ExperNet
Corporation'), which was owned by Gideon I. Gartner and David L. Gilmour, each
at the time a director and officer of the Company, and, in December 1995,
acquired the remaining equity interest.
This Prospectus includes the financial statements of BIS, as the
predecessor to the Company, through the period ended April 5, 1995, the date of
acquisition by the Company. The period January 1, 1993 to December 15, 1993 is
shown separately for the Predecessor Companies because of a prior acquisition by
an unrelated entity on December 16, 1993. The periods covered by the financial
statements of the Company commence on March 17, 1995, the date of its
incorporation, and include the results of operations of BIS from April 5, 1995
and the results of operations of ExperNet Corporation from July 6, 1995, their
respective dates of acquisition. Results of operations of ExperNet Corporation
are not included in results of Predecessor Companies, which are solely the
results of BIS. The acquisition of BIS was accounted for under the purchase
method; accordingly, acquired assets were recorded at their estimated fair
values and related goodwill of approximately $3.1 million was also recorded and
was amortized over two years. The acquisition of ExperNet Corporation was also
accounted for as a purchase with the related goodwill of approximately $1.4
million amortized over five years. During 1997, the unamortized portion of the
goodwill relating to the ExperNet acquisition was written off, resulting in a
charge to amortization expense of $1.0 million.
In June 1996, the Company discontinued the BIS market research business.
Results of operations from the discontinued BIS market research business are
reflected as discontinued operations in the Company's financial statements. The
Company continues to generate revenues from the events businesses acquired as
part of the acquisition of BIS, which are reflected in the statements of
operations as Other Services. As a result of the discontinuance of the BIS
market research business, Giga recorded a charge, net of taxes, of approximately
$2.3 million in the year ended December 31, 1996. The Company entered into
agreements with two unrelated parties which have assumed responsibility for
fulfillment of the Company's obligations to former BIS customers in exchange for
a share of the deferred revenues recorded by Giga with respect to such
customers. In 1997, the Company recorded a gain of approximately $1.1 million
comprised mainly of a reversal of the provision for future lease commitments and
related expenses for two facilities in England and the provision which was
established for refunds to potentially dissatisfied customers. The Company does
not consider the historical results of BIS operations which have been
discontinued to be meaningful or indicative of the Company's future results of
operations.
In December 1996, the Company discontinued its econometric forecasting
business based in Australia, BIS Shrapnel, in anticipation of selling the
business to local management. The Company recorded a provision of $160,000 in
1996 for anticipated operating losses prior to the completion of the sale by the
Company. In July 1997, the operations were sold to local management for
approximately $293,000 in cash, and a gain of approximately $212,000, net of
taxes, was recorded and is reflected in disposal of discontinued operations. All
liabilities and business risks were transferred to the local management of BIS
Shrapnel. Results of operations from the discontinued BIS Shrapnel business are
included among Discontinued Operations in the Company's financial statements.
OVERVIEW
Giga provides objective analyses and advice relating to developments and
trends in the IT industries to assist its customers in making technology-related
decisions. The Company's four principal products and services are (i) Advisory
Service, (ii) IT Practice Services, (iii) Continuous Advisory Consulting and
(iv) Events and Publications. The Company provides its services primarily
through GigaWeb, its intelligent Internet-based information delivery interface.
20
<PAGE>
The Company introduced its Advisory Service and GigaWeb in April 1996. In
July 1996, the Company introduced its IT Practice Services. Advisory Consulting
was introduced in September 1997. The Company's Events and Publications product
line was acquired with the acquisition of BIS in April 1995. For financial
reporting purposes, revenues from (i) Advisory Service, IT Practice Services and
Continuous Advisory Consulting are aggregated into Continuous Information
Services, (ii) Events and other services, principally consulting, are aggregated
into Other Services and (iii) Publications are listed separately. The Company
expects that revenues from its Continuous Information Services will continue to
increase as a percentage of its total revenues.
The Company's Continuous Information Services are typically sold through
annual contracts that generally provide for payment at the commencement of the
contract period. A small number of CIS contracts, however, are billed quarterly.
Amounts received in advance of services provided are reflected in the Company's
financial statements as deferred revenues and are recognized monthly on a pro
rata basis over the term of the contract. Revenues from Other Services are
recognized as follows: events as they occur and consulting as such services are
performed. Revenues from Publications are recognized when publications are
delivered. Unbilled receivables are primarily generated as a result of
contractual quarterly billing terms offered in connection with the Company's
Continuous Information Services. The Company also records the related commission
obligation upon acceptance of a CIS contract and amortizes the corresponding
deferred commission over the contract period in which the related CIS revenues
are earned. Due to these accounting policies, trade accounts receivable,
deferred revenues, unbilled accounts receivable and deferred commissions are
expected to increase as the Company's CIS business grows.
Essentially all of the Company's current international operations are
located in the European Union and Canada. The Company operates in the European
Union primarily through wholly-owned subsidiaries in the United Kingdom, France
and Germany. These subsidiaries manage direct sales personnel and distributors
in other countries in the European Union as well. In Canada, the Company
utilizes a full-scale field sales force and provides business support to these
salespersons through its operations in the United States. Substantially all of
the Company's revenues from the European Union are denominated in foreign
currencies, particularly the British pound, while essentially all of the
Company's revenues from Canada are denominated in U.S. dollars. The Company has
begun marketing in Israel and Korea through representatives. Revenues from these
representatives have been and are expected to continue to be denominated in U.S.
dollars. To date, however, such revenues have been insignificant. As a result of
fluctuations in exchange rates, transactions denominated in foreign currencies
inherently have financial risk. To date, however, the Company's cumulative
translation adjustments have been slightly favorable, although there can be no
assurance that this trend will continue in the future. The Company does not
currently hedge its exposure to foreign currency adjustments.
The Company believes that a leading measure of the volume of its CIS
business is the annualized value ('Annualized Value') of its Continuous
Information Services agreements in effect at a given point in time. The Company
calculates Annualized Value each month as the cumulative annualized subscription
value payable under the agreements without regard to commencement date, duration
or risk of cancellation. The Company also measures its performance on the basis
of Net Annualized Value Increase ('NAVI') which is calculated on the basis of
new agreements plus upgrades, net of downgrades and cancellations. The sum of
all past NAVI equals Annualized Value. Historically, a substantial portion of
NAVI for a given year is generated by the Company in the last two calendar
quarters, and particularly in the last month of the last quarter. The following
table sets forth the Annualized Value and NAVI for the years ended December 31,
1996 and 1997 and the three months ended March 31, 1997 and 1998.
<TABLE>
<CAPTION>
UNAUDITED
---------------------------------------
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------- ------------------
1996 1997 1997 1998
------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning Annualized Value............................................. $ -- $ 9,339 $ 9,339 $26,619
Net Annualized Value Increase.......................................... 9,339 17,280 2,384 2,878
------ ------- ------- -------
Ending Annualized Value................................................ $9,339 $26,619 $11,723 $29,497
------ ------- ------- -------
------ ------- ------- -------
</TABLE>
21
<PAGE>
A majority of the Company's annual contracts renew automatically unless the
customer cancels the subscription. The Company's experience is that a
substantial portion of customers renew expiring contracts for an equal or
greater level of total CIS fees each year. As of March 31, 1998, approximately
66% of Giga's customers had renewed one or more contracts for Giga's services in
the past twelve months. The Company believes that a direct comparison of its
renewal rates and the renewal rates of its major competitors may not be
meaningful due in part to the Company's limited operating history and its
Advisory Service model (the focus of which is a unified, integrated approach
with fewer contracts/services per customer), in contrast to the multiple-service
model of the Company's major competitors.
The Company anticipates that Annualized Value, at a point in time, will be
a reliable indicator of the minimum next twelve months' CIS revenues. However,
the Company's current renewal rate is not necessarily indicative of the rate of
retention of the Company's revenue base, and Annualized Value at any given time
may not be indicative of future revenues or cash flows, especially if the rate
of renewal of existing agreements or the timing of new agreements were to
significantly change during the following 12 months compared to historical
experience. There can be no assurance that the Company will be able to sustain
or increase its current renewal rate or that Annualized Value will continue to
grow.
The Company's operating expenses consist of cost of services, cost of
publications, selling and marketing, research and development, general and
administrative, and depreciation and amortization. Cost of services consists
primarily of the direct costs associated with the delivery of the Company's
\Continuous Information Services and other services including personnel expenses
for analysts and other personnel, direct expenses for events and conferences,
and royalties to third party information providers. Cost of publications
consists of expenses to create, print and distribute publications. Sales and
marketing expenses include personnel expenses, promotional expenses, and sales
commissions. Sales commissions are typically deferred when paid and expensed as
the related revenue is recognized. Research and development expenses consist of
personnel, consulting and other expenses to develop, enhance and operate
GigaWeb. General and administrative expenses are primarily personnel costs and
fees for professional services supporting the administrative functions of the
Company.
Since its inception, the Company has incurred substantial costs to develop
its Continuous Information Services, establish its GigaWeb system, build a
management team and recruit, employ and train research analysts, sales personnel
and support staff for its business. The Company expects to incur significant
losses through at least fiscal 1998 as the Company expands and develops its
services and products.
The Company has incurred substantial tax loss carryforwards since
inception, and acquired tax loss carryforwards with its acquisition of BIS, all
of which totalled approximately $51.8 million in the aggregate at March 31,
1998. Due to the magnitude of these existing tax loss carryforwards, the
continuing anticipated losses through at least 1998 and the substantial
uncertainties associated with its business, the Company is unable to conclude
that it is more likely than not that the deferred tax associated with these tax
loss carryforwards will be realized. Accordingly, this deferred tax asset has
been fully reserved. This valuation allowance will be reduced and the deferred
tax asset will be recognized when and if it becomes more likely than not that
the deferred tax asset will be realized.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
total revenues for the periods indicated.
<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS
------------ YEAR ENDED ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
DECEMBER 31, -------------- -------------
1995 1996 1997 1997 1998
------------ ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Continuous information services .............................. 31% 74% 64% 79%
Other services................................................ 83% 60 24 32 20
Publications.................................................. 17 9 2 4 1
------ ----- ----- ----- ----
Total revenues.............................................. 100 100 100 100 100
------ ----- ----- ----- ----
Costs and expenses:
Cost of services.............................................. 70 122 63 80 51
Cost of publications.......................................... 6 8 1 2 1
Sales and marketing........................................... 9 66 100 103 68
Research and development...................................... 3 18 10 16 4
General and administrative.................................... 68 96 33 26 16
Depreciation and amortization................................. 19 24 14 16 5
------ ----- ----- ----- ----
Total costs and expenses.................................... 175 333 221 243 144
------ ----- ----- ----- ----
Loss from operations.......................................... (75) (233) (121) (143) (44)
Interest income (expense), net.................................. 1 4 0 2 (1)
------ ----- ----- ----- ----
Loss from continuing operations before income taxes........... (74) (229) (121) (141) (45)
Income tax (benefit) charge..................................... (13) (5) (3) 0 0
------ ----- ----- ----- ----
Loss from continuing operations............................... (61) (224) (118) (141) (45)
Income (loss) from discontinued operations.................... 22 (27) 7 -- --
------ ----- ----- ----- ----
Net loss...................................................... (39)% (250)% (111)% (141)% (45)%
------ ----- ----- ----- ----
------ ----- ----- ----- ----
</TABLE>
In general, the decreases in the various operating expenses as a percentage
of total revenues are primarily due to leveraging those expenses over increased
revenues derived from a growing customer base.
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenues. Total revenues increased 112% to $8.6 million for the three
months ended March 31,1998 from $4.0 million for the same period in 1997. The
increase in total revenues was primarily due to the increase in revenues from
Continuous Information Services.
Revenues from Continuous Information Services increased 165% to $6.8
million for the three months ended March 31, 1998 from $2.6 million for the same
period in 1997. This increase in revenues was primarily due to growing market
acceptance of Giga's services and continued expansion of the Company's sales
force.
Revenues from Other Services increased 33% to $1.7 million for the three
months ended March 31, 1998 from $1.3 million for the same period in 1997. The
increase was primarily due to higher revenues from the planned expansion of the
Company's events and conferences activities net of a decrease in consulting
revenues associated with the phase-out of certain consulting activities.
Revenues from Publications decreased 69% to $55,000 for the three months
ended March 31, 1998 from $180,000 for the same period in 1997. The decrease was
due to a de-emphasis on this business activity.
Cost of services. Cost of services increased 37% to $4.4 million for the
three months ended March 31, 1998 from $3.2 million for the same period in 1997.
The increase in costs was primarily due to the expansion of the analyst staff
and other expenses associated with providing Continuous Information Services.
Cost of publications. Cost of publications decreased 5% to $71,000 for the
three months ended March 31, 1998 from $75,000 for the same period in 1997. The
decrease was primarily attributable to a continued reduction in the number of
publications produced.
Sales and marketing. Sales and marketing expenses increased 39% to $5.8
million for the three months ended March 31, 1998 from $4.2 million for the same
period in 1997. The increase was principally due to the
23
<PAGE>
continued expansion of the Company's direct sales organization and higher sales
commission expense from increased revenues.
Research and development. Research and development expenses decreased 49%
to $339,000 for the three months ended March 31, 1998 from $659,000 for the same
three-month period in 1997. The decrease was primarily due to the completion of
the development of the basic functionality of GigaWeb in 1997.
General and administrative. General and administrative expenses increased
29% to $1.4 million for the three months ended March 31, 1998 from $1.1 million
for the same period in 1997. The increase in expense was primarily due to
enhancements to infrastructure such as internal systems, additional personnel
and other items to support the Company's growth.
Depreciation and amortization. Depreciation and amortization expense
decreased 39% to $385,000 for the three months ended March 31, 1998 from
$634,000 for the same period in 1997. The decrease was primarily due to the
Company's practice in 1997 to rent, instead of purchase, computer equipment.
Interest income and expense. Interest income decreased to $37,000 for the
three months ended March 31, 1998 from $98,000 for the same period in 1997 due
to lower cash balances available for investment. Interest expense increased to
$86,000 from $17,000 for the same period in 1997 due to a long-term equipment
financing loan agreement entered into by the Company in June 1997.
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND 1995 (PRO FORMA)
For purposes of the following discussion, the results for the year ended
December 31, 1995 are presented on a pro forma basis to reflect (i) the
operations of the Predecessor Companies from January 1, 1995 to April 5, 1995,
(ii) the operations of the Company from March 17, 1995 to December 31, 1995 and
(iii) the operations of ExperNet and the amortization of goodwill incurred in
connection with the acquisition of the Predecessor Companies as though such
acquisitions occurred on January 1, 1995. The results of the BIS market research
business and the Australian econometric forecasting operation have been shown as
discontinued operations. The Company's activities from March 17, 1995 to April
5, 1995 were principally devoted to the acquisition of the Predecessor
Companies.
Revenues. Total revenues increased 94% to $19.7 million in 1997 from $10.1
million in 1996 and were essentially unchanged in 1996 from $10.3 million in
1995. These changes in total revenues were primarily due to increased revenues
from Continuous Information Services, offset by decreased revenues from Other
Services.
Revenues from Continuous Information Services increased 364% to $14.6
million in 1997 from $3.1 million in 1996. The Company began marketing its
Continuous Information Services in April 1996. The increase in revenues was
primarily due to growing market acceptance of Giga's services and continued
expansion of the Company's sales force.
Revenues from Other Services decreased 22% to $4.7 million in 1997 from
$6.0 million in 1996 and 29% in 1996 from $8.5 million in 1995. The decrease in
such revenues in 1997 was principally due to a planned phase-out of BIS's
consulting business offset by increased revenues from the Company's events and
conferences. The decrease in revenues in 1996 compared to 1995 was primarily due
to the decrease in certain consulting activities.
Revenues from Publications decreased 64% to $344,000 in 1997 from $946,000
in 1996 and 45% in 1996 from $1.7 million in 1995. The decreases were primarily
due to a de-emphasis on this business activity.
Cost of services. Cost of services increased 1% to $12.5 million in 1997
from $12.3 million in 1996 and increased 72% in 1996 from $7.2 million in 1995.
The cost decrease in 1997 was primarily due to decreased expenses for the legacy
BIS consulting business being phased-out, offset by increased expenses to
provide Continuous Information Services to the Company's growing customer base.
The cost increase in 1996 was due to the Company's substantial investment to
build its research organization and retain consultants for the Company's
Continuous Information Services.
Cost of publications. Cost of publications decreased 78% to $174,000 from
$790,000 in 1996 and increased 35% in 1996 from $586,000 in 1995. The decrease
in 1997 was principally due to a planned decrease in the number of publications.
The increase in 1996 was primarily due to a change in the mix of publications
sold.
Sales and marketing. Sales and marketing expenses increased 193% to $19.6
million in 1997 from $6.7 million in 1996 and 590% in 1996 from $972,000 in
1995. The increase in 1997 was primarily due to the
24
<PAGE>
expansion of the Company's sales organization to sell its Continuous Information
Services and higher sales commission expense from increased revenues. The
increase in 1996 was principally attributable to the increased investment in
marketing programs and expansion of the Company's sales force in connection with
the introduction of its Continuous Information Services in April 1996.
Research and development. Research and development increased 10% to $2.0
million in 1997 from $1.8 million in 1996 and 414% in 1996 from $348,000 in
1995. The increase in 1997 was primarily due to the continued enhancement of
GigaWeb to meet evolving market needs. The increase in 1996 was due to the
investment required for the development of GigaWeb and ExperNet.
General and administrative. General and administrative expenses decreased
34% to $6.4 million in 1997 from $9.7 million in 1996 and increased 40% in 1996
from $6.9 million in 1995. The decrease in 1997 from 1996, and the increase in
1996 over 1995, was primarily due to one-time expenses in 1996 for internal
systems, facilities, personnel, and other items to build the infrastructure to
support the expansion of the Company's operations.
Depreciation and amortization. Depreciation and amortization expenses
increased 18% to $2.8 million in 1997 from $2.4 million in 1996 and 22% in 1996
from 2.0 million in 1995. The increase in 1997 was due primarily to the
write-off of the remaining amount of unamortized goodwill associated with the
ExperNet acquisition offset by the Company's practice in 1997 to rent rather
than purchase computer equipment.
Interest income and expense. Interest income was earned on cash balances,
in excess of then current operating needs, from the Company's equity financing
during 1996 and 1997. Interest expense is primarily from long-term debt for
equipment financing and acquisitions and varies with the outstanding balance.
Discontinued operations. In June 1996, the Company discontinued its BIS
market research business and, as a result, recorded a charge of approximately
$2.3 million, net of taxes, in the year ended December 31, 1996. In 1997, the
Company recorded income, net of taxes, of $1.1 million from the settlement of a
liability relating to a long-term, foreign lease and the reversal of a provision
established for refunds to potentially dissatisfied customers that had been part
of the aforementioned charge.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily
through the private placement of equity securities and borrowings under
promissory notes. The Company has received aggregate net proceeds of $42.5
million from the private placement of equity securities and recently borrowed
$10.0 million under the Bridge Notes. At March 31, 1998, the Company had cash
and cash equivalents of $1.8 million. See Notes 11, 13 and 20 to the
Consolidated Financial Statements.
During 1997 and the three months ended March 31, 1998, the Company's
capital expenditures totaled approximately $559,000 and $261,000, respectively,
primarily for computer equipment. The Company expects that additional purchases
of computer equipment will be made as the Company's employee base and customer
base grow. As of March 31, 1998, the Company had no material commitments for
capital expenditures, and the Company does not currently expect the rate of
capital spending to vary significantly through the end of 1999.
Net cash used by continuing operations was approximately $17.7 million and
$14.5 million for the years ended December 31, 1996 and 1997, respectively, and
approximately $1.3 million for the three months ended March 31, 1998. Net cash
used by investing activities of approximately $206,000 for the year ended
December 31, 1997 and approximately $251,000 for the three months ended March
31, 1998 were primarily due to purchases of computer equipment. Cash provided
from financing activities of approximately $17.7 million for the period March
17, 1995 to December 31, 1995 and approximately $11.6 million and $11.7 million
for the years ended December 31, 1996 and 1997, respectively, were primarily
generated by the issuance of the Common Stock and Preferred Stock as previously
described. Cash used by financing activities for the three months ended March
31, 1998 of $231,000 was principally used to repay long-term debt.
In April 1998, the Company issued the Bridge Notes in the aggregate
principal amount of $10.0 million and warrants to purchase an aggregate of
166,666 shares of Common Stock at an exercise price of $3.00 per share. The
Bridge Notes accrue interest at the rate of 12% per annum. The obligations under
the Bridge Notes are collateralized by substantially all of the assets of the
Company. The outstanding principal amount of, and any unpaid accrued interest
on, the Bridge Notes is due and payable upon the consummation of the Offering
and may
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<PAGE>
be prepaid in whole or in part at any time without penalty. In April 1998 and
May 1998, the Company issued an aggregate of $2.0 million of Series D Preferred
Stock. All outstanding shares of the Company's Series D Preferred Stock will
automatically convert into Common Stock upon the consummation of the Offering.
See 'Certain Transactions' and Note 20 to the Consolidated Financial Statements
for additional information concerning these transactions. The Company believes
that the net proceeds from the Offering (after repayment of the Bridge Notes
described herein), together with its existing cash and cash equivalents and cash
generated from operations, after the repayment of other debt as it becomes due,
will be sufficient to fund the Company's cash needs until at least the end of
1999.
The Company has spent substantial amounts to date on capital and operating
expenditures which have contributed to an accumulated deficit of $54.8 million
as of March 31, 1998. Furthermore, the Company expects capital and operating
expenditures to increase due to numerous factors, including the Company's plans
to increase marketing efforts for its Continuous Information Services, the
expected costs to attract and retain qualified employees, including research and
sales personnel, on a timely basis and the related costs of such efforts, the
response of competitors to the Company's services, the Company's plans to
develop and market new services and products, the further enhancement of the
GigaWeb system and the Company's expansion of its international operations, and
the continued acceptance by customers of annual membership agreements providing
for advance payments rather than equal monthly installments or some other
payment model. The Company anticipates funding its ongoing working capital needs
principally through the net proceeds to the Company from the Offering. The
Company believes that the net proceeds from the Offering (after repayment of the
Bridge Notes described herein), together with the Company's existing cash and
cash equivalents and cash generated from operations, after the repayment of
other debt as it becomes due, will be sufficient to fund the Company's cash
needs until at least the end of 1999. However, in the event that the Company
encounters difficulties in collecting accounts receivable, experiences low or
reduced subscription renewal rates or otherwise has revenues that are lower than
planned, the Company might require additional working capital. As of May 31,
1998, the Company had, excluding the Bridge Notes, approximately $1.2 million of
equipment financing debt and had access to an invoice factoring arrangement with
a commercial bank under which the Company could borrow up to $3,000,000 or 80%
of eligible accounts receivable, whichever is less. If necessary, the Company
would consider various other sources of financing, including, but not limited
to, private placements, the sale of assets and strategic alliances, but there
can be no assurance that such financing would be available to the Company on
terms that are acceptable, if at all. If adequate funds are not available, the
Company may be required to reduce its fixed costs and delay, scale back or
eliminate certain of its services, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See 'Risk Factors--Substantial Future Capital Needs; Risks of Working Capital
Deficiency.'
OTHER FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. The Company has
commenced efforts to ensure that the computer systems and applications upon
which it relies for internal operations and external communications, and
presently expects to use following December 31, 1999, are or will be year 2000
compliant. While uncertainty exists concerning the potential effects associated
with such compliance, the Company does not believe that year 2000 compliance
will result in a material adverse effect on its business, financial condition or
results of operations.
26
<PAGE>
BUSINESS
GENERAL
The Company provides objective analyses and advice relating to developments
and trends in the computing, telecommunications and related industries
(collectively, the 'Information Technology' or 'IT' industries) to assist its
customers in making technology-related decisions. IT is critical to the
competitiveness and long-term viability of a wide range of organizations. The
Company believes information overload, confusion, and anxiety exists among IT
decision-makers. As a result, an increasing number of organizations are turning
to Continuous Information Service ('CIS') providers to monitor and analyze IT
developments and to identify trends to support such organizations' IT
decision-making needs. The Company's Continuous Information Services are
available to customers for an annual subcription fee billed and payable in
advance, which entitles members to (i) access all the Company's advisory service
information and analyses, (ii) inquiry privileges and (iii) participate in
briefings, a conference and teleconferences.
CIS MARKET
The CIS industry emerged in the 1960's in response to the complexity and
growth in the IT market. In the early stages of the CIS industry's development,
CIS providers primarily produced quantitative analyses of IT industry trends to
assist vendors with product planning and formulation of marketing and business
strategies. The IT industry continued to rapidly evolve and increasingly became
characterized by short product life cycles, highly complex, distributed
computing and telecommunications architectures and IT systems made up of
hardware and software from a wide variety of vendors. As a result,
decision-making by users of IT products and services became increasingly
complicated, straining the analytic resources within organizations. In response
to this opportunity, a second generation of CIS providers emerged by the 1980's,
offering analytical and decision-support information to users, in addition to
the quantitative information offered to vendors. These second generation
providers continued to be characterized by multiple information service
offerings, each of which focused on a specific aspect of the IT industry, such
as mainframes, personal computers, operating systems, application development
tools or relational databases. Over time, as IT became more complex, the number
of such services proliferated.
In the 1990's, the continuous expansion of technological choices has made
IT operations even more complex and diverse, particularly with the migration
from legacy mainframe systems to distributed client-server and other
architectures and the emergence of the Internet, together with advanced
telecommunications offerings. As a result, organizations are increasingly
turning to outside consultants for support. In addition to users and vendors, an
emerging segment of the CIS market includes business managers, who require
increased awareness of IT issues to heighten sensitivity to systems
opportunities, and small businesses, which are becoming more reliant on
technology.
The Company believes that the multiple-service model is not well positioned
to effectively address the critical and evolving IT needs of modern
organizations. Due to the complexity and interrelationships among the various
aspects of IT, the Company believes organizations require integrated advice that
is not limited to the boundaries of the second generation model. In addition,
since IT solutions also often require practical, hands-on experience, CIS
providers must complement the strategy-oriented consultative skills of many of
today's industry analysts with pragmatic real-world advice. Due to increasing
time and budget pressures, customers must also be able to quickly and
efficiently search through the voluminous resources and published content of CIS
providers to locate the particular analyses and expertise they require.
THE GIGA SOLUTION
Giga was founded by Gideon I. Gartner, who in 1979 founded Gartner Group,
Inc. Building on his extensive experience and success in the CIS industry, Mr.
Gartner formed Giga with the objective of creating a new approach toward
addressing the CIS needs of IT users and vendors. Giga has developed a range of
innovative Continuous Information Services, as well as an effective, electronic
information delivery mechanism, designed to provide integrated IT analyses and
advice.
Foremost among these innovations is the Company's unified Advisory Service,
in which IT research and analysis is offered to customers as a single service
intended to encompass the variety of IT coverage offered by other CIS providers
through multiple and fragmented services. The Company believes that its Advisory
Service
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(i) delivers the comprehensive viewpoint required by customers, (ii) offers a
price/performance advantage over the second generation model since the payment
of one subscription fee provides access to all advisory research and (iii)
becomes increasingly cost effective over time as new advisory research is added
without increased subscription fees.
Giga's service approach was developed in response to the needs of the CIS
market. The Company's unified Advisory Service produces internal benefits which
the Company believes allows it to better service its customers, including (i)
flexibility of resource allocation, (ii) an orientation toward internal
collaboration and (iii) the development of experienced generalists, who are able
to diagnose broad client challenges and communicate effectively with clients.
Flexibility of resource allocation allows the Company to allocate its research
resources to address subjects of the greatest significance to its customers at
any particular time. The Company's orientation toward internal collaboration
eliminates the competition among different advisory areas that the Company
believes is customary at other IT providers. Instead, the Company encourages its
analysts to work together in a multi-disciplinary approach and present a unified
view to its customers. The process is also designed to be objective, by virtue
of several features built into Giga's methodologies, such as a requirement that
analysts articulate balanced opinions. In addition, research is available to
clients on a timely basis through GigaWeb's sophisticated authoring technology.
The customization features permitted by GigaWeb also make Giga's research more
relevant to specific client environments.
As part of its Continuous Advisory Consulting services, the Company also
enters into on-going retainer-based consulting arrangements with its customers
to assess various IT issues, including an organization's strategic technology
plan, a vendor's marketing plan, or the implementation issues surrounding a
major technology migration. Advisory Consulting is a valuable extension of the
Company's client inquiry process, enabling customers to request more in-depth
analysis targeted at the application of technology to their specific situation.
The Company also offers customers its innovative IT Practice Services to
complement its Advisory Service. Giga employs former IT operating executives to
survey leading IT organizations, document the techniques and methods ('best
practices') used by IT managers within these organizations, and deliver the
results to customers, which can be combined with consulting servies. Each of
these services focuses on a distinct job function within an IT organization,
permitting customers to benchmark their IT practices against those of peers and
to obtain new ideas.
The Company's Continuous Information Services are typically sold under
annual contracts that renew automatically unless the customer cancels the
subscription. The Company's experience has been that a substantial portion of
customers renew expiring contracts for an equal or greater level of total CIS
fees each year. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview.' The Company prices its services in a
manner designed to be competitive in the marketplace. A typical Advisory Service
contract currently has an Annualized Value of approximately $36,000 and a
typical IT Practice Services contract currently has an Annualized Value of
approximately $45,000.
GigaWeb, the Company's Internet-based information delivery interface allows
customers to easily and efficiently navigate through the full spectrum of
original research and third-party content available through the Advisory
Service. Through the use of intelligent software agents, the Company is able to
provide customized information to each customer and to allow customers to search
for and select the information that is most relevant to their particular needs.
GigaWeb also enables collaboration with Giga's clients and maintains rich
features which improve the usability of Giga research. In addition, to
complement the Company's research and inquiry access, Advisory Service customers
are provided access to ExperNet, the Company's network of external IT
practitioners who have practical experience in solving real-world IT problems.
GIGA STRATEGY
Giga's objective is to become the leading third generation CIS provider,
offering a significant price/performance advantage over its competitors. The key
elements of Giga's strategy include:
o Utilizing and Enhancing its Price/Performance Advantage. The Company
intends to use its price/performance advantage to increase the range
of companies which can afford CIS products and
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<PAGE>
services and to allow customers to offer Giga's content for a wider
group of employees than has been affordable with competitors'
products.
o Leveraging Existing Customer Base. The Company's services are used
by over 835 customers worldwide. Giga intends to expand its customer
relationships by providing additional non-advisory services, such as
IT Practice Services and Continuous Advisory Consulting. In addition,
the Company is focused on increasing the number of Advisory Service
subscribers within each customer's organization.
o Expanding and Capitalizing on Worldwide Distribution. Giga has
expanded its worldwide sales force from 49 on December 31, 1996 to
123 on June 30, 1998. The Company plans to continue to expand its
sales and marketing organization both domestically and
internationally. The Company has entered into agreements with
distributors located in Spain, Israel and Korea and intends to
develop additional international distribution arrangements.
PRODUCTS AND SERVICES
The Company's four principal product and service lines are (i) Advisory
Service, which includes ExperNet, (ii) IT Practice Services, (iii) Advisory
Consulting and (iv) Events and Publications. The Company's services are designed
to be accessed through GigaWeb, as well as through published reports and
consultation with the Company's analysts and consultants. Set forth below is a
schematic of Giga's principal product and service lines:
Job#17076_rev02.eps-05/15/98--Cycle:12--MAC: AG/BM/PL
Advisory Service
Advisory Service, the principal CIS offering of the Company, is available
to customers for an annual subscription fee billed and payable in advance, which
entitles members to (i) access all of the Company's advisory service information
and analyses, (ii) inquiry privileges and (iii) participate in briefings, one
conference and teleconferences.
Research
Giga employs a structured and consistent research methodology. The goal of
Giga research is to form original judgments and recommendations to support
client decision-making. Research topics are determined in part by examination of
customers' needs, which are identified by analysts through direct discussions
with clients. The Company's methodology enables it to rapidly analyze IT
markets, technologies, vendors, products and user issues. Analysts conduct
informal research by surveying the Company's client base and interviewing
vendors, consultants and other sources. These activities are supplemented with
searches of numerous trade, financial and
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<PAGE>
other third-party source materials compiled by the Company's research center.
The Company believes its analysts form original judgments and recommendations by
applying their professional experiences to their review of these combined
materials. To ensure research quality and consistency, all research is reviewed
on an ongoing basis by the Company's research management team, in conjunction
with several senior analysts who are designated research leaders.
The Company seeks to convey relevant and actionable information and
analyses, as well as practical advice, to its customers through a spectrum of
delivery mechanisms, including:
o IdeaBytes. IdeaBytes are one-page, published analyses that are
intended to provide customers with quick, up-to-date findings and
opinions on current issues that are authored by the Company's
analysts.
o Planning Assumptions. Planning Assumptions are multi-page and highly
formatted reports that provide customers with in-depth analyses of IT
topics and recommendations for action. Planning Assumptions are
designed to be responsive to the current needs of the market.
o Inquiry Support. The Company maintains a 'Knowledge Center,' which
consists of experienced research support associates who track
customer inquiries and direct customers to the appropriate analyst or
source of information. Customers also have direct access to the
Company's analysts or ExperNet practitioners on-line through GigaWeb.
o GigaTels. GigaTels are audio teleconferences run by the Company's
analysts on selected topics and provide an open forum for questions,
exchanges and debate. There were 3,000 participants in the 91
hour-long GigaTels held in 1997.
o Third-Party Content. The Company provides customers with access
through GigaWeb to publications from information partners such as Dow
Jones and Information Access Corporation.
Examples of Giga research topics include 'Network-Centric Enterprise
Architectures,' 'Platforms for Enterprise Computing: The Emerging Role of NT in
the Enterprise' and 'Participating in Electronic Commerce.' Since these topics
are typically interdisciplinary, they are supported by research from multiple
analysts that cover different areas of IT. For example, the topic covering
enterprise platforms requires research contributions from analysts who cover the
mainframe, client-server, wide-area networks, database management systems and
operating systems areas, necessitating the active participation of five or more
analysts. The Company's research culture is designed to encourage collaboration
among analysts.
Although the Company receives fees for its services from some of the
vendors which the Company recommends to its customers, and may purchase products
and services from such vendors, the Company's research function is
organizationally independent from the business units responsible for sales of
the Company's services and purchases of vendors' products and services. Research
objectivity also is maintained through Company policies which reinforce the
independence of the research organization. The Company is not affiliated with
any vendors in the IT industry.
The Company currently employs approximately 60 research professionals and
plans to hire additional research professionals, as needed. The Company's
principal research offices are located in Cambridge, MA, Westport, CT and Santa
Clara, CA. Giga's analysts average 10 years of experience with backgrounds
ranging from consulting to vendor and user professional positions.
ExperNet
To complement the Company's research and inquiry access, customers have
access through GigaWeb to ExperNet, a network of over 1,000 external IT
practitioners. These practitioners have current experience in diversified
segments of the IT industry, which the Company believes cannot be efficiently
covered by the traditional CIS approach, and are available to assist clients in
solving real-world IT problems. Each practitioner responds to customer inquiries
at no additional charge in return for access to Giga information.
GigaWeb and Other Delivery Mechanisms
Advisory Service research is customized in a personalized manner through
GigaWeb, the Company's proprietary, Internet-based information delivery
interface which provides on-line access to the Company's research reports,
third-party content, analysts and ExperNet. GigaWeb makes it possible for
members to obtain
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<PAGE>
both a unified and complete view across all of Giga's advisory content while
matching customers' specific needs as determined by self-administered profiles
and prior inquiries. GigaWeb is designed to make it easy and efficient for a
customer to navigate through the full spectrum of Giga's original research and
third-party content, together with access to human expertise. Subscribers to
Advisory Service are provided with a personalized home page (the 'Virtual
Office') which is accessed through Giga's password-protected Internet site using
a Web browser.
GigaWeb enables customers to search for relevant information using word
searches. Based on the individualized customer profile, GigaWeb automatically
selects the particular subset of Giga research and third-party content most
relevant to the customer and delivers it to the customer's Virtual Office or via
e-mail. In addition, customers who have shared objectives or interests can
interact with each other, as well as with Giga analysts and ExperNet
practitioners, through on-line discussion groups. Advisory Service clients may
provide GigaWeb access to large numbers of their IT professionals via
content-only seats and various site license practices.
The Company also has installed its content as an additional deliverable on
several corporate intranets, and expects the volume of such installations to
increase substantially. This service is called IntraGiga. For those companies
utilizing Lotus Notes, Giga offers access to its research via GigaNotes.
Customers can also request that Giga's research be provided via hard copy.
Continuous Advisory Consulting
The Company's Continuous Advisory Consulting services provide Giga
customers with support such as assessments of an organization's strategic
technology plan, the implementation issues surrounding a major technology
migration or a vendor's marketing plan. Advisory Consulting is a valuable
extension of the Company's client inquiry process, enabling customers to request
more in-depth analysis targeted at the application of technology to their
specific situation. When a customer inquiry requires on-going or periodic
assessments and updates, Giga analysts may construct a scheduled advisory
program.
IT Practice Services
The Company believes that its IT Practice Services enable Giga customers to
be more effective in solving IT problems by leveraging the best practices of
their peers. Senior Giga advisors with strong IT and management expertise
document the successful operating practices and techniques of IT managers in a
concise reference book. The insights gained from these best practices are
interpreted by the advisors and tailored to fit in the context of the customer's
organization. IT Practice Services are designed for specific job functions found
within the IT organization and address the issues that such individuals must
solve. Currently, the Company offers IT Practice Services in three areas: CIO
Practices, Year 2000 Practices and Security Practices. Each IT Practice Service
is available for an annual subscription fee. Each customer receives (i) three
in-depth studies documenting best practices, (ii) on-site consultations to guide
the client in applying the best practices that are most pertinent to the
customer and (iii) inquiry access to IT Practice Service advisors.
Events and Publications
The Company organizes and sponsors a range of events on significant IT
industry issues and trends. At GigaWorld IT Forum, the Company's flagship annual
conference, Giga analysts present and update their most important research
findings and recommendations and meet one-on-one in advisory sessions with
clients. Other conferences include the 'Business OnLine Symposia' and the
'Business and Process Workflow' conference series, both held in the United
States and Europe annually. In 1997, the Company organized and hosted 11 three-
day conferences, and sponsored an additional 9 conferences (hosted by partner
organizations).
The Company produces a series of off-the-shelf publications based on
conference topics or current IT issues which are identified through the Advisory
Service and marketed to IT professionals. The Company produced six publications
and one newsletter in 1997.
SALES AND MARKETING
Since inception, the Company has made substantial investments in sales and
marketing to sell its services, address additional markets and support its
growing customer base. The Company sells its services through a direct sales
force located in the United States, Canada, United Kingdom, France, Germany, the
Netherlands and Denmark. As of June 30, 1998, the Company's North American
direct sales force consisted of 104 field sales
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personnel, an increase from 42 personnel at December 31, 1996. The Company also
had 19 international direct sales personnel serving Europe, an increase from 7
personnel at December 31, 1996. The Company also sells its services through
independent representatives in Spain, Israel and Korea. These repesentatives are
compensated based on the contract value of the contracts generated by them. The
representatives are involved in other activities related to IT technology,
mainly consulting, but they do not represent any products or perform any
services that conflict with the Company's services. To date, revenues from these
representatives have been insignificant. The Company's internal marketing
organization, primarily located in the Company's Norwell, Massachusetts
facility, provides public relations, lead generation, direct mail support and
other related services.
All Giga sales representatives participate in the Company's annual sales
compensation plan. Commissions are paid monthly based upon NAVI attainment
versus established quotas. Additional bonuses and other incentives are paid for
meeting and/or exceeding certain established targets and for special promotions.
The Company has over 835 customers. No single customer accounted for over
3% of the Company's revenues for the year ended December 31, 1997. The Company
serves customers across a broad array of industries, which include:
<TABLE>
<S> <C>
Allstate Harley Davidson
AT&T Wireless Services Heartland Health Systems
Barclays Bank Plc Hewlett-Packard Co.
BASF AG IBM
Blue Cross Blue Shield of Nebraska Microsoft
City of Cincinnati Netherlands Car BV
Deloitte & Touche Netscape
FedEx Corporation Pirelli Informatica S.p.A.
Ford Motor Company SAS Institute, Inc.
The Gillette Company State of North Carolina
Girl Scouts of the USA Taco Bell
Gouvernment du Quebec Conseil du Tresor United Nations International Computing Centre
</TABLE>
COMPETITION
The Company competes in the IT market directly with other independent
providers of Continuous Information Services, including Gartner Group, META
Group, Inc. and Forrester Research Inc., and the internal planning, research and
marketing staffs of corporations and IT vendors. The Company also competes with
other information providers, including market research firms, 'Big Five'
accounting firms, consulting firms and systems integrators. Many of the
Company's direct and indirect competitors have substantially greater financial,
information gathering and marketing resources than the Company. Some of the
Company's direct and indirect competitors also have established research
organizations with greater market recognition and experience in the IT industry.
See 'Risk Factors--Significant Competition.'
EMPLOYEES
As of June 30, 1998, the Company employed 341 persons, including 76 in
research and research support, 29 in events and publications, 180 in sales and
marketing, 10 in research and development and 46 in administration. Of such
employees, 99 are located in the Company's Norwell facility, 73 are located in
the Company's other domestic facilities, 61 are located internationally and 108
work from their homes. None of the Company's employees are represented by a
collective bargaining arrangement and the Company believes its relationship with
its employees is good.
FACILITIES
The Company's headquarters are located in Norwell, Massachusetts and
consist of approximately 27,000 square feet. This facility and the Company's
approximately 8,000 square feet in its Cambridge, Massachusetts facility
together accommodate corporate administration, research and analysis, marketing
and sales and customer support. The lease on the Cambridge facility expires in
November 2000 and the lease on the Norwell facility was recently renewed and
expires in June 2001. The Company also leases office space for its research, and
sales and marketing efforts in three other U.S. and three primary international
locations. The
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Company believes that additional facilities will be available in the future on
commercially reasonable terms to meet future needs. See Note 7 to the
Consolidated Financial Statements for information regarding the Company's annual
rental costs.
LEGAL PROCEEDINGS
Giga Media BV, the owner of a Benelux trademark registration for the
trademark GIGA MEDIA, filed a lawsuit (docket number 81567 AL/98-509HH) on March
12, 1998 against the Company alleging tradename infringement, and requesting a
court order requiring the Company to use an alternative tradename to Giga
Information Group in the Netherlands. The matter is pending before the Cantonal
Judge at Haarlem, the Netherlands. Although the Company is contesting this
lawsuit, there can be no assurance that it will result in a decision that is
favorable to the Company. See 'Risk Factors--Uncertainties Relating to
Proprietary Rights.'
In addition to the proceeding described above, the Company from time to
time is involved in certain other litigation arising in the normal course of its
business. The Company does not believe that any such litigation, alone or in the
aggregate, would have a material adverse effect on the Company's financial
condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages as of
March 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Gideon I. Gartner............................... 63 Chairman, President and Chief Executive Officer
James C. R. Graham.............................. 47 Executive Vice President
Daniel M. Clarke................................ 51 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
Keith R. Belton................................. 37 Senior Vice President, Research
Michael R. Mooradian............................ 40 Senior Vice President, Worldwide Sales
Neill H. Brownstein (1)(2)...................... 54 Director
David L. Gilmour................................ 40 Director
Richard L. Crandall (2)......................... 54 Director
Bernard Goldstein (2)........................... 67 Director
Irwin Lieber (1)................................ 58 Director
Josh S. Weston (3).............................. 69 Director Nominee
</TABLE>
- ------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) To be appointed a director upon closing of the Offering
Mr. Gartner has served as Chairman of the Board of Directors and Chief
Executive Officer of the Company since its inception in March 1995. In October
1997, he was also elected President. From 1993 to 1994, he was a private
investor. From 1991 to 1992, he served as Chairman, and from 1979 to 1991 he
served as President, Chairman and Chief Executive Officer of Gartner Group,
Inc., an information technology company which he founded. From 1972 to 1979, he
served as a technology analyst and subsequently as a partner at Oppenheimer &
Co., an entity engaged in the financial services business. Mr. Gartner received
his B.S. in engineering from Massachusetts Institute of Technology ('MIT') and
received an M.S. in management from MIT's Sloan School of Management.
Mr. Graham has served as Executive Vice President of the Company since
October 1997. Prior to joining Giga, he was Vice President, Information Systems
of United States Fidelity & Guaranty Corporation, an insurance company, from
1994 to October 1997. From 1990 to 1994, he was Vice President, Marketing and
Product Management at Seer Technologies, a software company. From 1987 to 1990,
Mr. Graham was Vice President, Software Engineering Strategies at Gartner Group,
Inc. From 1982 to 1986, he was Executive Vice President of VenturCom, a software
company that he founded. Prior to that he was an Economic Advisor at The
Business Roundtable from 1977 to 1980. From 1976 to 1977, Mr. Graham was the
Special Assistant to the U.S. Secretary of Commerce and, from 1974 to 1976, he
was the Vice President and Executive Secretary of Industrial Energy Users Forum.
Mr. Graham received a B.A. in logic from Georgetown University and an M.S. in
finance and economics from MIT's Sloan School of Management.
Mr. Clarke has served as Senior Vice President, Chief Financial Officer,
Treasurer and Secretary since September 1997. From July 1996 to August 1997, Mr.
Clarke served as Vice President, Finance and Administration and Chief Financial
Officer for Dataware Technologies, Inc., a provider of software for professional
electronic publishing and knowledge management. From January 1995 to June 1996,
Mr. Clarke was an independent financial consultant. From 1990 to December 1995,
Mr. Clarke was an executive officer of Xyvision, Inc., a software and services
company that develops and markets advanced software for document management,
publishing and prepress. He served as Vice President, Chief Financial Officer
and Secretary of
34
<PAGE>
Xyvision until January 1994, and as President and Chief Operating Officer from
February 1994. From 1981 to 1989, Mr. Clarke served in a variety of senior
management positions with BBN Corporation, a diversified high technology
company. Mr. Clarke holds a B.S. Degree from Rensselaer Polytechnic Institute
and an M.B.A. from Harvard Business School.
Mr. Belton joined the Company in October 1997 as Vice President, Research
and was named Senior Vice President, Research in December 1997. From October
1996 to September 1997, Mr. Belton was Vice President, Marketing for Datamedic
Corp., a software company. From July 1994 to September 1996, he was a partner at
Benchmark Partners, a consulting company. From 1990 to 1994, he held various
positions with Kurzweil Applied Intelligence Inc., a software company, including
Director of Product Marketing from 1993 to 1994. From 1985 to 1989, he was the
Director, Manufacturing Automation Planning Service for the Yankee Group, a
consulting company. Mr. Belton holds a B.A. in Economics from Haverford College.
Mr. Mooradian has served as Senior Vice President, Worldwide Sales of the
Company since August 1997. From August 1996 to August 1997, Mr. Mooradian served
as Regional Vice President of Giga's central region. From January 1996 to July
1996, he served as Vice President of Sales, North America for Timeline, Inc., a
developer of client/server, financial management and reporting systems. From
1991 to January 1996, he held several management positions at Comshare, a
decision support software company. From 1989 to 1991, he served as a sales
representative for Ross Systems, Inc., a financial systems integrator. From 1987
to 1989, he served as a sales representative for Corporate Class Software, Inc.,
a software company. From 1985 to 1986, he served as a sales representative for
Information Resources, Inc., a software company, and, from 1984 to 1985, as a
sales representative for Hewlett-Packard. Mr. Mooradian received a B.S. in
Business Administration from DePaul University.
Mr. Brownstein has served as a director of the Company since July 1995.
Since January 1995, he has been a private investor. From 1970 to January 1995,
Mr. Brownstein was associated with Bessemer Securities Corporation and was a
founder and General Partner of three affiliated venture capital funds: Bessemer
Venture Partners L.P., Bessemer Venture Partners III L.P. and Bessemer Venture
Partners II L.P., for which he currently serves as a Special General Partner.
Since 1970, he has been president of Neill H. Brownstein Corporation, an
investment management counseling enterprise. He serves as a director of DSP
Communications, Inc. Mr. Brownstein received a B.A. from Columbia College and an
M.B.A. from the Kellogg School of Management at Northwestern University. Between
1979 and 1988, Mr. Brownstein also served as a director of Gartner Group, Inc.
Mr. Gilmour is a co-founder of the Company with Mr. Gartner. He served as
Senior Vice President and Chief Research Officer of the Company from April 1996
to February 1998 and has served as a director of the Company since July 1995.
Mr. Gilmour continues to be a special advisor to Giga on Research and Technology
and devotes approximately 25% of his time to the Company. From July 1995 to
April 1996, he served as Senior Vice President of Technology of the Company.
From July 1993 to July 1995, he served as Chief Executive Officer and a director
of ExperNet Corporation, an information technology company which he founded with
Mr. Gartner. From October 1992 to April 1993, Mr. Gilmour served as acting
President and Chief Executive Officer, and from April 1991 to October 1992 and
from April 1993 to July 1993, he served as Executive Vice President, Marketing,
of Versant Object Technology Corporation, a computer software company. From 1989
to 1991, he served as Vice President--Database Systems Division, from 1986 to
1989, he served as General Manager--Advanced Products Division, and from 1984 to
1986, he served as Director Product Planning at Lotus Development Corporation, a
software company. Mr. Gilmour received a B.A. in Applied Physics, an M.S. in
engineering, both from Harvard University, and an M.B.A., with distinction, from
Harvard Business School.
Mr. Crandall has served as a director of and consultant to the Company
since August 1995. He was founder of Comshare, Inc., a decision support software
company, serving as its Chief Executive Officer from 1970 until 1994 and
Chairman until April 1997. Mr. Crandall chairs the Enterprise Software
Roundtable, consisting of the CEO's and COO's of the twenty-five largest
enterprise software companies. He currently serves on the Board of Directors of
Comshare, Computer Task Group and Diebold and several privately held technology
companies. He serves on the National Advisory Board to the College of
Engineering of the University of Michigan. Mr. Crandall received a B.S. in
electrical engineering, a B.S. in mathematics and an M.S.E. in industrial
engineering from the University of Michigan.
35
<PAGE>
Mr. Goldstein has served as a director of the Company since April 1997. He
is a Director of Broadview Associates, LLC, which he joined in 1979. He is a
past President of the Information Technology Association of America, the
industry trade association of the computer service industry, and past Chairman
of the Information Technology Foundation. Mr. Goldstein was a director of Apple
Computer Inc. until August 1997, and is currently a Director of Franklin
Electronic Publishers, Inc., Sungard Data Systems, Inc., SPSS, Inc. and several
privately held companies. Mr. Goldstein received a B.S. from the Wharton School
of the University of Pennsylvania and an M.B.A. from Columbia University.
Mr. Lieber has served as a director of the Company since November 1995.
Since 1979, he has served as Chairman and Chief Executive Officer of Geo Capital
Corporation, an investment advisory firm which he founded. Additionally, Mr.
Lieber has served as a corporate officer of InfoMedia Associates Ltd., a general
partner of 21st Century Communications Partners, L.P., an investment fund. In
addition, he is a general partner of Applewood L.P. and Wheatley L.P. LLC.,
investment funds. From 1970 to 1979, Mr. Lieber was a General Partner of First
Manhattan Co., an investment management, brokerage and investment banking firm.
Mr. Lieber is a director of LeaRonal Inc. He received a B.S. degree in
electrical engineering from City College of New York and an M.S. degree in
electrical engineering from Syracuse University.
Mr. Weston is Honorary Chairman of the Board of Automatic Data Processing,
Inc. ('ADP') and served as chairman from 1986 to April 1998. He was Chief
Executive Officer of ADP from 1982 to 1996. Mr. Weston is a director of J. Crew
Group Inc, Olsten Corporation, Public Service Enterprise Group Company, Shared
Medical Systems, Inc. and Vanstar Corporation. Mr. Weston received a B.S. from
City College of New York and an M.S. from the University of New Zealand where he
was a Fulbright Scholar.
Certain of the current directors of the Company were nominated and elected
in accordance with a stockholders voting agreement which will terminate upon the
consummation of the Offering. Each officer serves at the discretion of the Board
of Directors. There are no family relationships among or between any of the
directors and executive officers of the Company.
BOARD COMPENSATION
Each Non-Employee Director of the Company is reimbursed for expenses
incurred in connection with attendance at the meetings of the Board of Directors
and committees thereof and is entitled to receive stock options under the
Company's 1997 Director Option Plan. Directors who are employees of the Company
currently receive no compensation for serving as directors.
1997 Director Option Plan. The Director Plan, adopted in June 1997,
provides for the grant of stock options to directors of the Company who are not
full-time employees of the Company or any subsidiary ('Non-Employee Directors').
Only non-statutory options may be granted under the Director Plan. The maximum
number of shares of Common Stock as to which options may be granted under the
Plan is 50,000. Options are automatically granted to Non-Employee Directors as
follows: (i) on July 1st of each year, commencing July 1, 1997, options to
purchase 2,000 shares of Common Stock and (ii) unless such director was elected
pursuant to a certain stockholder voting agreement (which agreement terminates
upon consummation of the Offering), additional options to purchase 2,000 shares
of Common Stock upon such directors' initial election as a director after
adoption of the Plan. As of June 30, 1998, options to purchase 12,000 shares of
Common Stock at a weighted average price of $3.00 per share were outstanding
under the Director Plan (of which none were then exercisable). As of June 30,
1998, 38,000 shares of Common Stock were available for future grants under the
Director Plan.
The Director Plan is administered by the Board of Directors. The option
exercise price for each option granted under the Director Plan is the fair
market value of the Common Stock as of the date of grant. Options vest in four
equal annual installments beginning on the first anniversary of the date of
grant (subject to acceleration upon a 'change in control' as defined in the
Director Plan), provided the optionee continues to serve as a director. Payment
of the option exercise price is to be made in cash for the full exercise price
of the options. Options are not assignable or transferrable except by will or
the laws of descent and distribution and terminate on the earlier of ten years
after the date of grant or sixty days after the optionee ceases to serve as a
director, except in the event of death or disability.
36
<PAGE>
For a discussion of transactions between the Company and certain directors
of the Company, see 'Certain Transactions.'
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the fiscal year ended
December 31, 1997 of the Company's Chief Executive Officer and the Company's
other most highly compensated executive officers whose annual salary and bonus
compensation exceeded $100,000 (the Chief Executive Officer and such other
executive officers are hereinafter referred to as the 'Named Executive
Officers'):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
---------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($)(1) BONUS($) OPTIONS COMPENSATION($)(2)
- ----------------------------------------- ------------ -------- --------------- ------------------
<S> <C> <C> <C> <C>
Gideon Gartner;
Chairman, CEO and President............ 160,000 30,000 -- --
David Gilmour;
Senior Vice President, Research;
Director(3)............................ 160,000 24,000(4) -- --
Henry Givray;
President and COO(5)................... 144,730(6) 30,000(7) 33,333 shares 125,097(8)
Jacques Bouvard;
Senior Vice President, Technology(9)... 104,167 30,000(10) 20,000 shares 47,668(11)
</TABLE>
- ------------------
<TABLE>
<S> <C>
(1) Includes amounts payable in 1997 and/or 1998 for services rendered by the Named Executive Officers in 1997.
(2) Other compensation in the form of perquisites and other personal benefits have been omitted because it
constitutes the lesser of $50,000 or ten percent of the total annual salary and bonus of each of the Named
Executive Officers in 1997.
(3) Mr. Gilmour became a non-employee consultant effective February 1, 1998 pursuant to a consulting agreement.
See 'Employment-Related Agreements.'
(4) The amount shown does not include $24,000 paid in 1997 for 1996 compensation.
(5) Mr. Givray resigned from the Company on November 5, 1997 pursuant to the Separation Agreement dated January
7, 1998 (the 'Givray Separation Agreement'). See 'Employment-Related Agreements.'
(6) The amount shown reflects salary and $9,205 for unused vacation but does not reflect $77,808 of salary
continuation paid for the period of November 6, 1997 to April 30, 1998.
(7) The amount shown does not reflect $30,000 paid in 1997 for 1996 bonus compensation. The amount reflects
$30,000 paid in 1998 for bonus pursuant to the Givray Separation Agreement.
(8) This amount reflects $77,808 for salary continuation for the period of November 6, 1997 to April 30, 1998,
$5,000 for an additional bonus awarded for signing the Givray Separation Agreement, $30,000 paid in 1997 for
relocation allowance and $12,289 reflecting certain travel and computer expenses. See 'Employment-Related
Agreements.'
(9) Mr. Bouvard's employment with the Company ceased on October 16, 1997 pursuant to the Bouvard Agreement (as
defined herein). See 'Employment-Related Agreements.'
(10) The amount reflects $30,000 for bonus paid in 1998 pursuant to the Bouvard Separation Agreement.
(11) This amount reflects $47,668 for salary continuation for the period of October 16, 1997 to March 15, 1998.
</TABLE>
37
<PAGE>
The following table sets forth certain information regarding options
granted by the Company to each of the Named Executive Officers during the fiscal
year ended December 31, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION
GRANTED FISCAL YEAR(%)(1) SHARE($) DATE
---------- ----------------- ------------ ----------
<S> <C> <C> <C> <C>
Gideon I. Gartner............. -- -- -- --
David L. Gilmour.............. -- -- -- --
Henry Givray.................. 33,333 6.44 3.00 2/11/2007
Jacques Bouvard............... 20,000 3.86 3.00 2/11/2007
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
FOR
OPTION TERM($)(2)
------------------
5% 10%
--------- -------
<S> <C> <C>
Gideon I. Gartner............. -- --
David L. Gilmour.............. -- --
Henry Givray.................. 62,999 159,332
Jacques Bouvard............... 37,800 95,600
</TABLE>
- ------------------
(1) Based on an aggregate of 517,597 options granted to employees in fiscal
1997, including options granted to the Named Executive Officers.
(2) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5% and
10%, computed annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise price,
but do not include deductions for taxes or other expenses associated with
the exercise. Actual gains, if any, on stock option exercises will depend on
the future performance of the Common Stock, the optionholders' continued
employment through the option period and the date on which the options are
exercised.
The following table sets forth certain information concerning stock options
held as of December 31, 1997 by each of the Named Executive Officers:
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING
UNEXERCISED OPTIONS
NUMBER OF AT FISCAL YEAR-END
SHARES ACQUIRED VALUE ----------------------------
NAME ON EXERCISE REALIZED($) EXERCISABLE/ UNEXERCISABLE
- ------------------------- --------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Gideon I. Gartner........ -- -- 220,000 --
David L. Gilmour......... -- -- 24,167 15,833
Henry Givray............. 6,250 1,875 -- 47,083
Jacques Bouvard.......... -- -- 6,667 13,333
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
AT FISCAL YEAR END(1)
---------------------------
NAME EXERCISABLE/ UNEXERCISABLE
- ------------------------------------- -------------
<S> <C> <C>
Gideon I. Gartner....... $ 2,530,000 $ --
David L. Gilmour........ $ 277,921 $ 182,080
Henry Givray............ $ -- $ 474,955
Jacques Bouvard......... $ 66,670 $ 133,330
</TABLE>
- ------------------
(1) Represents the total gain which would be realized if all in-the-money
options held at December 31, 1997 were exercised, determined by multiplying
the number of shares underlying the options by the difference between the
assumed initial public offering price of $13.00 per share and the per share
option exercise price. An option is in-the-money if the fair market value of
the underlying shares exceeds the exercise price of the option.
38
<PAGE>
Employment-Related Agreements
Gideon I. Gartner. The Company has entered into a non-competition
agreement with Mr. Gartner, dated November 13, 1995, pursuant to which Mr.
Gartner has agreed not to compete with the Company, solicit any employee or take
away any customer of the Company either during his employment with the Company
or for so long thereafter as the Company continues to pay Mr. Gartner annual
compensation of at least $120,000 (whether as an employee, consultant or in the
form of severance or post-employment benefits).
Henry Givray. The Company entered into a Separation Agreement with Mr.
Givray, dated January 7, 1998 (the 'Givray Agreement'), under the terms of which
Mr. Givray ceased working for the Company on November 5, 1997 and received
continuation of base salary (at an annualized rate of $160,000) and certain
other benefits through April 30, 1998. Mr. Givray also received $30,000 for 1997
bonus, a $5,000 bonus for signing the Givray Agreement and reimbursement of
certain other items. The Company agreed to allow Mr. Givray to retain 6,250
options shares which were vested as of November 5, 1997. In addition, the Givray
Agreement contains confidentiality and non-competition provisions which
terminate October 31, 1998.
Jacques Bouvard. The Company entered into a Separation Agreement with Mr.
Bouvard, dated October 2, 1997 (the 'Bouvard Agreement'), under the terms of
which Mr. Bouvard ceased working for the Company on October 15, 1997 and
received (i) continuation of base salary (at an annualized rate of $125,000) and
certain other benefits through March 15, 1998 and (ii) an annualized bonus of
$30,000. The Company agreed not to exercise its right to repurchase any shares
of Common Stock acquired by Mr. Bouvard under the 1996 Option Plan. As of March
15, 1998, Mr. Bouvard held 6,667 vested options under the 1996 Plan at an
exercise price of $3.00. In addition, the Bouvard Agreement contains
confidentiality and non-competition provisions which terminate February 15,
1999.
For a discussion of certain current and past consulting arrangements
between the Company and Messrs. Crandall, Brownstein and Gilmour, see 'Certain
Transactions--Consulting Agreements.'
Stock Plans
1995 Stock Option/Stock Issuance Plan. The Company's 1995 Stock Plan was
adopted by the Board of Directors in September 1995 and was approved by the
stockholders in February 1996. Under the terms of the 1995 Stock Plan, the
Company is authorized to make awards of restricted stock and to grant incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the 'Code') ('incentive stock options'), and stock options not
intended to qualify as incentive stock options ('non-statutory stock options'),
to employees, officers and directors of, and consultants and advisors to, the
Company and its subsidiaries. As of June 30, 1998, options to purchase a total
of 343,561 shares of Common Stock at a weighted average exercise price of $2.17
per share were outstanding under the 1995 Stock Plan (of which options to
purchase 156,601
shares were then exercisable). As of June 30, 1998, 490,628
shares of Common Stock were available for future grant under the 1995 Stock
Plan.
The Board of Directors is authorized to select the option recipients and to
determine the kind and terms of each option, including (i) the number of shares
of Common Stock subject to each option, (ii) the option exercise price, (iii)
the vesting schedule of the option, and (iv) the duration of the option. Options
are generally not assignable or transferable except by will or the laws of
descent and distribution.
Restricted stock awards under the 1995 Stock Plan entitle the recipient to
purchase Common Stock from the Company under terms which provide for vesting
over a period of time and a right of repurchase of unvested stock by the Company
when the recipient's relationship with the Company terminates. The Board of
Directors is authorized to select the recipients of restricted stock awards and
to determine the terms of each award, including (i) the dates on which
restricted stock awards are made, (ii) the number of shares of Common Stock
subject to the award, (iii) the purchase price (which can be less than the fair
market value of the Common Stock) of the award, and (iv) the vesting schedule of
the award. The recipients may not sell, transfer or otherwise dispose of shares
subject to a restricted stock award until such shares are vested. Upon
termination of the recipient's relationship
39
<PAGE>
with the Company will be entitled to repurchase those shares which are not
vested on the termination date at a price equal to their original purchase
price.
1996 Stock Option Plan. The Company's 1996 Option Plan was adopted by the
Board of Directors in August 1996 and was approved by the stockholders in
September 1996. The 1996 Option Plan provides for the grant of stock options to
employees, officers and directors of, and consultants or advisors to, the
Company and its subsidiaries. Under the 1996 Option Plan, the Company may grant
incentive stock options or non-statutory stock options. Incentive stock options
may only be granted to employees of the Company. The maximum number of shares
with respect to which options may be granted to any employee under the 1996
Option Plan shall not exceed 33,333 shares of Common Stock during any calendar
year. As of June 30, 1998, options to purchase a total of 663,416 shares of
Common Stock at a weighted average exercise price of $3.84 per share were
outstanding under the 1996 Option Plan (of which options to purchase 55,091
shares were then exercisable). As of March 31, 1998, 328,127 shares of Common
Stock were available for future grant under the 1996 Option Plan.
The 1996 Option Plan is administered by the Compensation Committee of the
Board of Directors. Subject to the provisions of the 1996 Option Plan, the
Compensation Committee has the authority to select option recipients and to
determine the kind and terms of each option, including (i) the number of shares
of Common Stock subject to the option, (ii) the option exercise price, which, in
the case of incentive stock options, must be at least 100% (110% in the case of
incentive stock options granted to a stockholder owning in excess of 10% of the
Company's Common Stock) of the fair market value of the Common Stock as of the
date of grant, (iii) the vesting schedule of the option, and (iv) the duration
of the option (which, in the case of incentive stock options, may not exceed ten
years).
Payment of the option exercise price may be made in cash, shares of Common
Stock, a combination of cash and Common Stock or by any other method (including
delivery of a promissory note payable on terms specified by the Compensation
Committee) approved by the Compensation Committee consistent with Section 422 of
the Code and Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
Options are not assignable or transferable except by will or the laws of descent
and distribution and, in the case of non-statutory options, pursuant to a
'qualified domestic relations order' (as defined in the Code).
401(k) Profit Sharing Plan. The Company maintains a 401(k) Profit Sharing
Plan (the '401(k) Plan'), a tax-qualified plan covering all of its employees who
are at least 21 years of age. Each employee may elect to reduce his or her
current compensation by up to 15% (on a pre-tax basis). All employee and Company
contributions to the 401(k) Plan are fully vested at all times. Upon termination
of employment, an employee may elect a lump sum distribution of all amounts
contributed by him or her under the 401(k) Plan. Early withdrawals from amounts
contributed under the 401(k) Plan are allowed under certain circumstances, such
as disability. In addition, subject to certain restrictions, employees may take
a loan drawn on contributions made by the employee under the 401(k) plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Neill H. Brownstein and Irwin
Lieber, neither of whom is or has been an officer or employee of the Company.
For information concerning certain transactions between the Company and certain
directors and concerning the former consulting relationship between the Company
and certain directors, including Mr. Brownstein, see 'Certain Transactions.'
40
<PAGE>
CERTAIN TRANSACTIONS
EARLY STAGES
In 1995, Mr. Gartner contributed approximately $1.0 million to the capital
of the Company. In consideration for such capital contribution, the Company
issued to Mr. Gartner (i) in March 1995, 1,400,000 shares of Common Stock at a
purchase price of $0.07125 per share, (ii) in July 1995, 60,000 shares of Series
A Preferred Stock (80,000 shares of Common Stock on an as-converted basis) at a
purchase price of $5.00 per share (or $3.75 per share of Common Stock), and
(iii) in October 1995, 400,000 shares of Common Stock at a purchase price of
$1.50 per share. Also during 1995, Mr. Gartner incurred $186,000 of
disbursements on behalf of the Company in connection with operating expenses
prior to the incorporation of the Company, and for items related to the
acquisition of BIS. The Company reimbursed Mr. Gartner for these expenses,
without interest, in August 1995. In addition, Mr. Gartner made loans totalling
$221,000, bearing interest at the rate of 10% per annum, to ExperNet (a
subsidiary of the Company). These loans were repaid, together with unpaid
interest thereon, in December 1995.
EXPERNET ACQUISITION
In July 1995, the Company acquired (the 'ExperNet Acquisition') all of the
ExperNet Corporation shares owned by Mr. Gartner and a majority of the ExperNet
Corporation shares owned by Mr. Gilmour, aggregating 77.8% of ExperNet
Corporation's outstanding common stock, in exchange for (i) 160,000 shares of
Series A Preferred Stock (213,333 shares of Common Stock on an as-converted
basis) of the Company, 80,000 shares (106,667 shares on an as-converted basis)
of which were issued to Mr. Gartner and 80,000 shares (106,667 shares on an
as-converted basis) of which were issued to Mr. Gilmour, and (ii) the issuance
to Mr. Gartner of a fully-vested option to purchase 53,333 shares of Common
Stock at an exercise price of $1.50 per share. In December 1995, the Company
acquired Mr. Gilmour's remaining 22.2% interest in ExperNet Corporation in
exchange for a $400,000 6% Convertible Note due December 31, 2005 (the 'Gilmour
Note'). The Gilmour Note was repaid in full, together with interest thereon, by
the Company; one-half in February 1998 and the remainder in April 1998. See
'--Consulting Agreement--Gilmour Agreement.' In addition, Mr. Gilmour made loans
totalling $101,000 to ExperNet Corporation, which loans were repaid in full,
together with interest thereon, by ExperNet Corporation in December 1995.
FINANCINGS
Series A Preferred Stock Financing
In July 1995 and October 1995, the Company issued and sold (the 'Series A
Financing') an aggregate of 570,000 shares of Series A Preferred Stock (760,001
shares of Common Stock on an as-converted basis) at a purchase price of $5.00
per share (or $3.75 per share of Common Stock) to a limited number of investors,
including 60,000 shares (80,000 shares on an as-converted basis) to Mr.
Brownstein, 15,000 shares (20,000 shares on an as-converted basis) to Mr.
Crandall and 10,000 shares (13,333 shares on an as-converted basis) to James D.
Robinson III, a former director of the Company.
Series B Preferred Stock Financing
In August 1995, the Company entered into a Convertible Promissory Note and
Warrant Purchase Agreement with RRE Giga Investors, L.P. ('RRE Giga'), pursuant
to which the Company borrowed $2.0 million from RRE Giga and issued RRE Giga a
convertible promissory note (the 'RRE Note') in the principal amount of $2.0
million and a warrant (the 'RRE Warrant') to purchase 285,714 shares of Series B
Preferred Stock (95,238 shares of Common Stock on an as-converted basis) at an
exercise price of $2.345 per share (or $7.035 per share of Common Stock). In
November 1995, the RRE Note was converted into 571,428 shares of Series B
Preferred Stock (190,476 shares on an as-converted basis). In September 1996,
RRE Giga made a cashless exercise of the RRE Warrant and received 218,714 shares
of Series B Preferred Stock (72,905 shares on an as-converted basis). Mr.
Robinson, a former director of the Company, is Chairman and Chief Executive
Officer of RRE Investors, L.L.C., the General Partner of RRE Giga.
41
<PAGE>
In November 1995, February 1996 and December 1996, the Company issued and
sold (the 'Series B Financing') an aggregate of 7,354,500 shares of Series B
Preferred Stock (2,451,497 shares of Common Stock on an as-converted basis), at
a purchase price of $3.50 per share (or $10.50 per share of Common Stock), to a
limited number of investors, including 40,000 shares of Series B Preferred Stock
to Mr. Brownstein and certain members of his family for aggregate consideration
of $140,000. The following entities which are affiliates of directors and/or
principal stockholders of the Company also purchased Series B Preferred Stock:
<TABLE>
<CAPTION>
ENTITIES AFFILIATED WITH: NO. OF SHARES AGGREGATE CONSIDERATION PAID
- -------------------------------------------------------------- ------------- ----------------------------
<S> <C> <C>
21st Century Communications Partners, L.P..................... 1,714,286 $6,000,000
S2 Technology Corporation..................................... 1,116,398 3,907,393
RRE Giga Investors, L.P....................................... 1,078,713 3,775,495
Montgomery Asset Management, LLC.............................. 1,024,000 3,584,000
Wanger Asset Management, L.P.................................. 885,714 3,100,000
</TABLE>
Mr. Lieber, a director of the Company, is a corporate officer of InfoMedia
Associates, Ltd., which is a General Partner of 21st Century Communications
Partners, L.P. ('21-CCP'), 21st Century Communications T-E Partners, L.P.
('21-CCTEP') and 21st Century Communications Foreign Partners, L.P. ('21-CCFP').
Mr. Robinson, a former director of the Company, is Chairman and Chief Executive
Officer of RRE Investors, L.L.C., the General Partner of RRE Giga and RRE Giga
Investors II, L.P. ('RRE Giga II').
Series C Preferred Stock Financing
In May and December 1997, the Company issued and sold (the 'Series C
Financing') an aggregate of 2,609,491 shares of Series C Preferred Stock
(1,021,429 shares of Common Stock on an as-converted basis) at a purchase price
of $4.11 per share (or $10.50 per share of Common Stock). The Series C Preferred
Stock entitled investors to receive warrants to purchase up to 54% additional
shares of Series C Preferred Stock based upon the Company's NAVI for fiscal
1997. In January 1998, the Company issued warrants to purchase an aggregate of
an additional 1,409,127 shares of Series C Preferred Stock (551,574 shares of
Common Stock on an as-converted basis) at an exercise price of $5.28 per share
(or $13.50 per share of Common Stock). The following persons and entities who
are executive officers, directors, affiliates of directors and/or principal
stockholders of the Company invested in Series C Preferred Stock:
<TABLE>
<CAPTION>
SHARES OF AGGREGATE
SERIES C SERIES C CONSIDERATION
NAME STOCK WARRANTS PAID
- --------------------------------------------------------------- --------- --------- -------------
<S> <C> <C> <C>
Entities affiliated with Dawson-Samberg Capital Management,
Inc.......................................................... 1,946,473 1,051,095 $ 8,000,000
Gideon I. Gartner.............................................. 60,827 32,847 250,000
Richard Crandall Trust......................................... 30,414 16,424 125,000
Bernard Goldstein.............................................. 24,331 13,139 100,000
Neill H. Brownstein............................................ 60,827 32,847 250,000
Wheatley Partners, L.P......................................... 111,923 60,438 460,000
Wheatley Foreign Partners, L.P................................. 9,732 5,255 40,000
</TABLE>
Series D Preferred Stock Financing
In April and May 1998, the Company issued and sold (the 'Series D
Financing') an aggregate of 285,715 shares of Series D Preferred Stock (190,476
shares of Common Stock on an as-converted basis), at a purchase price of $7.00
per share (or $10.50 per share of Common Stock), and warrants to purchase an
additional 154,285 shares of Series D Preferred Stock (102,857 shares of Common
Stock on an as-converted basis), at an exercise price of $9.00 per share (or
$13.50 per share of Common Stock). Acorn Fund, a series of Acorn Investment
Trust, which is managed by Wanger Asset Management, L.P., purchased 71,429
shares of Series D Preferred Stock and received warrants to purchase an
additional 38,571 shares of Series D Preferred Stock for an aggregate
consideration of approximately $500,000.
42
<PAGE>
CONSULTING AGREEMENTS
Crandall Consulting Agreement
In August 1995, the Company entered into a consulting arrangement with Mr.
Crandall. The arrangement provided for payment to Mr. Crandall of $50,000 per
annum in 1995 and $60,000 per annum in 1996. In lieu of certain payments due to
Mr. Crandall, the Company issued to Mr. Crandall 40,000 shares of Common Stock
at a purchase price of $1.50 per share. The shares are subject to vesting and
certain restrictions on transfer. In July 1996, as compensation for the
consulting services to be rendered by Mr. Crandall to the Company for the
twelve-month period ended June 30, 1997, the Company granted to Mr. Crandall an
option to purchase 6,667 shares of Common Stock at an exercise price of $1.80
per share. Twenty-five percent of the shares subject to the option vested one
year from the date of grant and one forty-eighth of the shares have vested
monthly thereafter. In February 1997, as compensation for the extension of Mr.
Crandall's consulting services through June 1998, and the devotion of one-third
of his time to such matters, the Company granted to Mr. Crandall, effective
January 1, 1997, 16,667 shares of Common Stock and an option to purchase 8,333
shares of Common Stock at an exercise price of $3.00 per share. One sixth of
such shares of Common Stock have vested quarterly since the effective date of
grant. Twenty-five percent of the shares subject to the option vested one year
from the effective date of grant and one thirty-sixth have vested monthly
thereafter.
Brownstein Financing and Consulting Agreement
In October 1995, the Company sold to Mr. Brownstein, a director of the
Company, 26,667 shares of Common Stock at a purchase price of $1.50 per share.
In January 1996, the Company entered into a one-year consulting agreement with
the Neill H. Brownstein Corporation (the 'Brownstein Corporation'), of which the
sole shareholder is Mr. Brownstein, a director of the Company. Pursuant to the
consulting agreement, the Brownstein Corporation received a consulting fee of
$60,000, plus reasonable expenses, payable quarterly. The Brownstein Corporation
agreed that during the term of the agreement and for a period of one year
thereafter, the Brownstein Corporation would not use any of the Company's
proprietary or confidential information or disclose such proprietary and
confidential information to any third party.
Gilmour Agreement
In February 1998, the Company entered into an agreement (the 'Gilmour
Agreement') with Mr. Gilmour, a director and co-founder of the Company, relating
to Mr. Gilmour's continuing relationship with the Company in light of Mr.
Gilmour's desire to establish Tacit Knowledge Systems ('Tacit'), a company to be
engaged in the development and commercialization of various forms of software
related to the automatic capture of knowledge through messaging systems (the
'Software'). The Gilmour Agreement superseded Mr. Gilmour's employment
agreement, dated July 6, 1995, pursuant to which Mr. Gilmour served as Senior
Vice President, Research, was elected a director and received a salary at the
rate of $160,000 per annum commencing September 1, 1995. The Gilmour Agreement
provides that Mr. Gilmour will remain a director of the Company and, for at
least six months, will serve as a consultant to the Company, acting as chief
research officer and devoting approximately 25% of his time to such duties. Mr.
Gilmour will be compensated at the rate of $50,000 per annum for such services.
The Gilmour Agreement also provides that the Company will receive a 7.5%
equity interest in Tacit, will be entitled to participate in future Tacit
financings and will be granted an irrevocable, royalty-free, worldwide license
to use any and all software, products and technologies that Tacit develops
through January 2001. The Company has the option of extending the license for
two additional one-year periods for a fee of $50,000 per annum. The Company also
agreed that the Software shall not constitute 'Development' or 'Proprietary
Information' as such terms are defined in the Invention and Non-Disclosure
Agreement, dated July 6, 1995, between the Company and Mr. Gilmour. In addition,
the Gilmour Agreement contained non-competition and no-raid provisions, which
are to survive for one year following a voluntary termination by Mr. Gilmour of
his consulting relationship with the Company.
The Gilmour Agreement also resolved the status of certain of the Company's
securities held by Mr. Gilmour. The Company agreed not to exercise its rights to
repurchase the Series A Preferred Stock that was
43
<PAGE>
issued to Mr. Gilmour in connection with the ExperNet Acquisition. As of the
date of the Gilmour Agreement, of the options that had been granted to Mr.
Gilmour to purchase 40,000 shares of Common Stock at an exercise price of $1.50
per share, options to purchase 15,000 shares remained unvested. It was agreed
that these unvested options would vest at a revised rate of one ninety-sixth of
the original total number of options per month thereafter. Furthermore, the
Company agreed to redeem the Gilmour Note, including accrued interest thereon,
one-half in February 1998 and the remainder in April 1998.
CERTAIN STOCKHOLDER RIGHTS
For a description of certain other registration rights of, and stock
transfer restrictions imposed on, certain executive officers, directors,
affiliates of directors and/or principal stockholders of the Company, see
'Description of Capital Stock--Registration Rights Agreement' and '--Co-Sale
Agreement.'
CERTAIN EMPLOYMENT-RELATED ARRANGEMENTS
In March 1998, the Company granted options to purchase 100,000, 8,000,
8,000, and 8,000 shares of Common Stock to Messrs. Gartner, Graham, Clarke and
Crandall, respectively. The options were all granted at an exercise price of
$3.00 per share, except for the options granted to Mr. Gartner which were
granted at an exercise price of $3.30 per share. As a result of these option
grants, the Company will recognize compensation expense of $510,000, $43,200,
$43,200 and $43,200, respectively. See Note 15 to the Consolidated Financial
Statements.
For a description of certain other employment-related arrangements between
the Company and certain executive officers and directors of the Company, see
'Management--Executive Compensation' and 'Management--Employment-Related
Agreements.'
------------------------
The Company believes that the securities issued in the transactions
involving the Company described above (other than compensatory arrangements)
were sold by the Company at their then fair market value and that the terms of
the transactions described above were no less favorable than the Company could
have obtained from unaffiliated third parties. The Company has adopted a policy,
effective following the consummation of the Offering, that all material
transactions between the Company and its officers, directors and other
affiliates must (i) be approved by a majority of the members of the Company's
Board of Directors and by a majority of the disinterested members of the
Company's Board of Directors and (ii) other than compensatory arrangements, be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties. In addition, this policy will require that any loans
by the Company to its officers, directors or other affiliates be for bona fide
business purposes only.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of June 30, 1998 (assuming the
conversion of all outstanding shares of Convertible Preferred Stock into Common
Stock after giving effect to the Reverse Stock Split), and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by (i) each
person or entity known to the Company to beneficially own more than 5% of the
Company's Common Stock, (ii) each of the Company's directors and director
nominees, (iii) each of the Named Executive Officers and (iv) all directors,
director nominees and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (2)
NUMBER OF SHARES -----------------------
NAME AND ADDRESS OF BENEFICIALLY OWNED BEFORE AFTER
BENEFICIAL OWNER PRIOR TO OFFERING(1) OFFERING OFFERING
- ------------------------------------------------------------------ -------------------- -------- --------
<S> <C> <C> <C>
21st Century Communications Partners, L.P......................... 571,429(3) 8.3% 5.8%
767 Fifth Avenue, 45th floor
New York, NY 10153
Entities affiliated with S2 Technology Corporation................ 443,897(4) 6.5% 4.5%
515 Madison Avenue, Suite 4200
New York, NY 10022
RRE Giga Investors, L.P........................................... 359,571(5) 5.2% 3.6%
126 East 56th Street, 22nd floor
New York, NY 10022
Funds managed by Wanger Asset Management, L.P..................... 368,570(6) 5.4% 3.7%
227 West Monroe Street, Suite 3000
Chicago, IL 60606
Pequot Private Equity Fund, L.P................................... 1,173,337(7) 17.1% 11.4%
354 Pequot Avenue
Southport, CT 06490-0760
Gideon I. Gartner................................................. 2,256,113(8) 32.8% 22.8%
c/o Giga Information Group, Inc.
One Longwater Circle
Norwell, MA 02061
Neill H. Brownstein............................................... 157,166(9) 2.3% 1.6%
Richard L. Crandall............................................... 103,310(10) 1.5% 1.0%
David L. Gilmour.................................................. 134,584(11) 2.0% 1.4%
Bernard Goldstein................................................. 42,334(12) * *
Irwin Lieber...................................................... 835,738(13) 12.2% 8.5%
Josh S. Weston.................................................... 0 -- --
Henry Givray...................................................... 6,250 * *
Jacques Bouvard................................................... 6,667 -- *
All directors, director nominees and executive officers as a group
(11 persons).................................................... 3,533,430(14) 51.4% 35.7%
</TABLE>
- ------------------
* Less than 1%
(1) Each stockholder possesses sole voting and investment power with respect to
the shares listed, except as otherwise noted. Amounts shown include shares
issuable within the 60-day period following June 30, 1998 pursuant to the
exercise of options or warrants.
(2) On June 30, 1998, there were 6,871,338 shares of Common Stock outstanding,
assuming the conversion of all outstanding shares of all series of Preferred
Stock into Common Stock.
(Footnotes continued on next page)
45
<PAGE>
(Footnotes continued from previous page)
(3) Includes 387,443 shares of Common Stock held by 21-CCP, 131,853 shares of
Common Stock held by 21-CCTEP and 52,133 shares of Common Stock held by
21-CCFP.
(4) S2 Technology Corporation ('S Squared'), an investment manager, is the
General Partner of (i) Sci-Tech Investment Partners L.P., which holds 32,686
shares of Common Stock, (ii) S.G. Partners, L.P., which holds 53,165 shares
of Common Stock, and (iii) Executive Technology, L.P., which holds 22,027
shares of Common Stock. Seymour L. Goldblatt, the President of S Squared, is
the Managing Director of both The Matrix Technology Group N.V., which holds
13,249 shares of Common Stock, and Core Technology Fund, Inc., which holds
87,650 shares of Common Stock. S Squared serves as an investment advisor to
each of the foregoing funds and exercises by agreement investment and voting
power on behalf of each fund. Mr. Goldblatt, as president of S Squared, also
exercises by agreement investment and voting power for the following funds:
(i) Yale University, which holds 174,860 shares of Common Stock, (ii) Yale
University Retirement Plan for Staff Employees, which holds 8,584 shares of
Common Stock, (iii) Montsol Investments N.V., which holds 8,820 shares of
Common Stock, (iv) Alfred University, which holds 6,883 shares of Common
Stock, (v) Foundation Partners, which holds 6,772 shares of Common Stock,
(vi) Tampsco II Partnership, which holds 3,772 shares of Common Stock and
(vii) Hare & Co., which holds 25,429 shares of Common Stock.
(5) Includes 263,381 shares held by RRE Giga Investors, L.P. ('RRE Giga') and
96,190 shares of Common Stock held by RRE Giga Investors II, L.P. ('RRE Giga
II'). James D. Robinson III, a former director of the Company, is the record
owner of 13,333 shares of Common Stock. Mr. Robinson is a General Partner of
RRE Investors, L.L.C., the General Partner of RRE Giga and RRE Giga II. Mr.
Robinson disclaims beneficial ownership of such shares, except to the extent
of his pecuniary interest in such shares. Mr. Robinson shares dispositive
and voting power of such shares with the General Parters of RRE Investors,
L.L.C.
(6) Includes 199,998 shares of Common Stock held by Akkad and 168,572 shares of
Common Stock held by Acorn Fund, a series of Acorn Investment Trust (25,715
shares of which are subject to the exercise of warrants). Wanger Asset
Management, L.P. serves as the investment manager to each of these entities
and possesses investment and voting power with respect to each such entity
but disclaims beneficial ownership. The natural person exercising investment
and voting power over the shares is Ralph Wanger, Chairman of the Board of
Wanger Asset Management, Ltd., the general partner of Wanger Asset
Management, L.P. Mr. Wanger disclaims beneficial ownership of the shares.
(7) Includes 1,041,474 shares of Common Stock held by Pequot Private Equity
Fund, L.P. (365,193 shares of which are subject to the exercise of warrants)
and 131,863 shares of Common Stock held by Pequot Offshore Private Equity
Fund, L.P. (46,238 shares of which are subject to the exercise of warrants).
Dawson-Samberg Capital Management, Inc. serves as the investment manager to
each of these entities and possesses investment and voting power with
respect to each such entity but disclaims beneficial ownership. The natural
person exercising investment and voting power over the shares is Arthur J.
Samberg of Dawson-Samberg Capital Management, Inc. Mr. Samberg disclaims
beneficial ownership of the shares.
(8) Includes options to purchase 220,000 shares of Common Stock and warrants to
purchase 12,857 shares of Common Stock. Also includes 220,335 shares of
Common Stock which are held of record by members of Mr. Gartner's family.
Mr. Gartner disclaims beneficial ownership of shares held by members of his
family.
(9) Includes 8,000 shares of Common Stock held by Mr. Brownstein's children,
5,333 shares of Common Stock held by Mr. Brownstein and his spouse jointly
and 12,857 shares which are subject to the exercise of warrants. Mr.
Brownstein disclaims beneficial ownership of the 6,000 shares of Common
Stock held by his adult children, Adam J. and Todd D. Brownstein, and Will
Gordon, the adult child of his spouse. Mr. Brownstein disclaims beneficial
ownership of the 2,000 shares of Common Stock held by his minor child, Emily
Hamilton; however, Mr. Brownstein exercises investment and voting power over
these shares.
(Footnotes continued on next page)
46
<PAGE>
(Footnotes continued from previous page)
(10) Includes 38,334 shares of Common Stock held by R. Crandall Trust, of which
Mr. Crandall serves as trustee (6,429 shares of which are subject to the
exercise of warrants). Also includes options to purchase 8,312 shares of
Common Stock.
(11) Includes options to purchase 26,094 shares of Common Stock.
(12) Includes warrants to purchase 5,143 shares of Common Stock.
(13) Includes 387,443 shares of Common Stock held by 21-CCP, 131,853 shares of
Common Stock held by 21-CCTEP, 52,133 shares of Common Stock held by
21-CCFP, 246,646 shares of Common Stock held by Wheatley Partners, L.P.
('Wheatley') and 17,163 shares of Common Stock held by Wheatley Foreign
Partners, L.P. ('Wheatley Foreign'). Mr. Lieber, a director of the Company,
is a corporate officer of InfoMedia Associates Ltd., a General Partner of
21-CCP, 21-CCTEP, 21-CCFP and a General Partner of Wheatley LLC, a General
Partner of Wheatley and Wheatley Foreign. Mr. Lieber disclaims beneficial
ownership of such shares, except to the extent of his pecuniary interest in
such shares. Mr. Lieber shares dispositive and voting power of such shares
with the General Partners of the General Partner of Wheatley and Wheatley
Foreign and with the other officers of the General Partner of 21-CCP,
21-CCTEP and 21-CCFP.
(14) Includes 286,840 shares of Common Stock issuable upon exercise of options
and shares of Common Stock issuable upon exercise of warrants held by all
directors, director nominees and executive officers as a group.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
At June 30, 1998, there were outstanding an aggregate of 2,184,554 shares
of Common Stock, 570,000 shares of Series A Preferred Stock, 8,144,642 shares of
Series B Preferred Stock, 2,609,491 shares of Series C Preferred Stock and
285,715 shares of Series D Preferred Stock of the Company. Upon the closing of
the Offering, all of such shares of Convertible Preferred Stock will
automatically be converted into an aggregate of 4,686,784 shares of Common
Stock, resulting in an aggregate of 6,871,338 shares of Common Stock
outstanding. All of the shares of Convertible Preferred Stock that have been
converted will cease to be outstanding and may not be reissued. See
'Capitalization.'
COMMON STOCK
The Restated Certificate, which will become effective upon the closing of
the Offering, will authorize the issuance of up to 60,000,000 shares of Common
Stock, $.001 par value per share. Holders of Common Stock are entitled to one
vote for each share held on all matters submitted to a vote of stockholders and
do not have cumulative voting rights. Accordingly, holders of a majority of the
shares of Common Stock entitled to vote in any election of directors may elect
all of the directors standing for election. Holders of Common Stock are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor. Upon the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive ratably the net assets of the Company available after the
payment of all debts and other liabilities. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Common Stock are, and the shares offered by the Company in the
Offering will be, when issued and paid for, fully paid and nonassessable.
PREFERRED STOCK
Upon the consummation of the Offering, the Restated Certificate will
authorize the issuance of up to 5,000,000 shares of Preferred Stock, $.001 par
value per share. Under the terms of the Restated Certificate, the Board of
Directors is authorized, subject to any limitations prescribed by law, without
stockholder approval, to issue such shares of Preferred Stock in one or more
series. Each such series of Preferred Stock shall have such rights, preferences,
privileges and restrictions, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be determined by the Board of Directors.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any shares of Preferred Stock.
WARRANTS
At June 30, 1998, there were outstanding warrants to purchase (i) 500,000
shares of Common Stock at an exercise price of $1.00 per share (166,666 shares
of Common Stock at an exercise price of $3.00 per share on a post-split basis),
(ii) 107,876 shares of Series B Preferred Stock at an exercise price of $4.625
per share (35,959 shares of Common Stock at an exercise price of $13.875 per
share on a post-split, as-converted basis), (iii) 1,654,724 shares of Series C
Preferred Stock at an exercise price of $5.28 per share (551,574 shares of
Common Stock at an exercise price of $13.50 per share on a post-split,
as-converted basis) and (iv) 308,570 shares of Series D Preferred Stock at an
exercise price of $9.00 per share (102,857 shares of Common Stock at an exercise
price of $13.50 per share on a post-split, as-converted basis). The holders of
such warrants have no rights as stockholders until the exercise thereof.
REGISTRATION RIGHTS AGREEMENT
In connection with its preferred stock financings, the Company entered into
a Registration Rights Agreement, dated November 13, 1995, as amended (the
'Registration Rights Agreement'), with its preferred stockholders (the
'Investors') and Messrs. Gartner and Gilmour (the 'Management Persons'). The
Registration
48
<PAGE>
Rights Agreement provides that, following June 30, 1998, the holders of at least
30% of the Registrable Securities (as defined therein) then outstanding,
excluding shares held by Management Persons, shall have two demand registration
requests (no more than one within a twelve-month period). At such time as the
Company becomes eligible to file a registration statement under the Securities
Act on Form S-3, the holders of at least 20% of the Registrable Securities then
outstanding may make six additional demand registration requests (no more than
one within a six-month period). The Registration Rights Agreement also provides
the holders of Registrable Securities with unlimited piggyback registration
rights in the event the Company proposes to register its Common Stock under the
Securities Act in connection with a public offering. The Company has obtained a
waiver from the holders of Registrable Securities of their piggyback
registration rights in connection with the Offering.
Pursuant to the Registration Rights Agreement, the Company will pay all
expenses (other than underwriting discounts and commissions) incurred in
connection with demand registrations and piggyback registrations. In addition,
the Company has agreed to indemnify each holder of Registrable Securities and
any underwriter for such holder against certain liabilities, including
liabilities under federal or state securities laws. The Registration Rights
Agreement terminates with respect to each holder of Registrable Securities upon
the later of (i) three years following the consummation of a Qualified Public
Offering (as defined therein to include this Offering) or (ii) such time
following an initial public offering of the Company as such holder is entitled
under Rule 144 to dispose of all the Registrable Securities held by such holder
during any 90-day period.
CO-SALE AGREEMENT
In connection with its preferred stock financings, the Company also entered
into a Co-Sale and Stock Restriction Agreement, dated November 13, 1995, as
amended (the 'Co-Sale Agreement') with Mr. Gartner (the 'Founder') and the
holders of the Company's Series B and Series C Preferred Stock (collectively,
the 'Stockholders'). The holders of Series B Preferred Stock include, but are
not limited to, Neill H. Brownstein, Linda Brownstein, Adam J. Brownstein, Todd
D. Brownstein, Will P. Gordon, Emily G. Hamilton, S Squared, Wanger Asset
Management, L.P., RRE Giga, RRE Giga II, 21st Century Communications Partners,
L.P. and Montgomery Small Cap Partners, L.P. The holders of Series C Preferred
Stock include Neill H. Brownstein, R. Crandall Trust, Gideon I. Gartner, Bernard
Goldstein, Pequot Private Equity Fund L.P., Wheatley Partners, L.P., Wheatley
Foreign Partners L.P. and Allen & Company. The Co-Sale Agreement provides that,
except for certain limited sales and sales to the Company, if the Founder
proposes to sell or transfer shares of Common Stock (including shares of Common
Stock issuable upon conversion or exercise of any warrants, options or preferred
stock held by the Founder) ('Stock') in one or more transactions, the Founder
shall promptly give written notice to the Company and the Stockholders and each
Stockholder shall have the right to participate pro-rata in such sale on the
same terms and conditions. In addition, the Co-Sale Agreement provides that each
Stockholder has the right of first offer to purchase such Stockholder's pro-rata
share of all (or any part) of any Stock that the Founder may from time to time
propose to sell. Notwithstanding the foregoing provisions, the Co-Sale Agreement
provides that the Founder may not sell or transfer more than an aggregate of
266,667 shares of Stock during the three-year period ending November 1, 1998,
subject to limited exceptions, including sales to the Company. The Co-Sale
Agreement terminates upon the earlier of (i) two years following the closing of
a qualified public offering (as described therein to include this Offering) or
(ii) the closing of the Company's sale of all or substantially all of its assets
or the acquisition of the Company by another entity by means of merger or
consolidation resulting in the exchange of the outstanding shares of the
Company's capital stock for securities or consideration issued by the acquiring
entity or its subsidiary.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a 'business combination' with an 'interested
stockholder' for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A 'business combination'
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
'interested stockholder' is a person who, together with affiliates and
associates, owns, or within the past three years did own, 15% or more of a
corporation's voting stock.
49
<PAGE>
The Restated Certificate provides for the division of the Board of
Directors into three classes as nearly equal in size as possible with staggered
three-year terms. See 'Management.' In addition, the Restated Certificate
provides that directors may be removed only for cause by the affirmative vote of
the holders of two-thirds of the shares of capital stock of the Company entitled
to vote. Under the Restated Certificate, any vacancy on the Board of Directors,
however occurring, including a vacancy resulting from an enlargement of the
Board, may only be filled by vote of a majority of the directors then in office.
The classification of the Board of Directors and the limitations on the removal
of directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The Restated Certificate also provides that, after the consummation of the
Offering, any action required or permitted to be taken by the stockholders of
the Company at an annual meeting or special meeting of stockholders may only be
taken if it is properly brought before such meeting and may not be undertaken by
written action in lieu of a meeting. The Restated Certificate further provides
that special meetings of the stockholders may only be called by the Chairman of
the Board of Directors, the Chief Executive Officer or, if none, the President
of the Company or by the Board of Directors. Under the Company's Amended and
Restated By-Laws (the 'By-Laws'), which will become effective upon the closing
of the Offering, in order for any matter to be considered 'properly brought'
before a meeting, a stockholder must comply with certain requirements regarding
advance notice to the Company. The foregoing provisions could have the effect of
delaying until the next stockholders' meeting stockholder actions which are
favored by the holders of a majority of the outstanding voting securities of the
Company. These provisions may also discourage another person or entity from
making a tender offer for the Company's Common Stock, because such person or
entity, even if it acquired a majority of the outstanding voting securities of
the Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Restated Certificate and the By-Laws
require the affirmative vote of the holders of at least two-thirds of the shares
of capital stock of the Company issued and outstanding and entitled to vote to
amend or repeal any of the provisions described in the prior two paragraphs.
The Restated Certificate contains certain provisions permitted under the
General Corporation Law of Delaware relating to the liability of directors. The
provisions eliminate a director's liability for monetary damages for a breach of
fiduciary duty, except in certain circumstances involving wrongful acts, such as
the breach of a director's duty of loyalty or acts or omissions which involve
intentional misconduct or a knowing violation of law. Further, the Restated
Certificate contains provisions to indemnify the Company's directors and
officers to the fullest extent permitted by the General Corporation Law of
Delaware. The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be American
Stock Transfer & Trust Company.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, based on the number of shares
outstanding at June 30, 1998, there will be approximately 9,871,338 shares of
Common Stock outstanding. Of these shares, the 3,000,000 shares of Common Stock
sold in the Offering will be freely transferable without restriction under the
Securities Act, except that any shares purchased by 'affiliates' of the Company,
as that term is defined in Rule 144, generally must be sold in compliance with
the limitations of Rule 144 described below. The remaining approximately
6,871,338 shares of Common Stock outstanding will be 'restricted securities' as
that term is defined in Rule 144 (the 'Restricted Shares').
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. Subject
to the lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market (subject in the case of shares held by affiliates to compliance with
certain volume restrictions) as follows: (i) approximately 355,292 shares will
be available for immediate sale in the public market immediately following the
effective date of the Registration Statement; (ii) approximately 59,157 shares
will be eligible for resale 90 days after the effective date of the Registration
Statement; (iii) approximately 5,870,390 shares will be eligible for resale upon
expiration of lock-up agreements 180 days after the effective date of the
Registration Statement; and thereafter (iv) the remaining approximately 586,499
shares will be eligible for sale upon expiration of their respective one-year
holding periods.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year, including persons who may be deemed affiliates of the Company,
would be entitled to sell within any three-month period, subject to meeting
certain manner of sale and notice requirements, a number of shares that does not
exceed the greater of (i) one percent of the number of shares of Common Stock
then issued and outstanding (approximately 98,713 shares upon consummation of
the Offering) and (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 notice of sale
with the Securities and Exchange Commission. A person who is not deemed to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
two years, is entitled to sell such shares under Rule 144(k) without regard to
the volume limitations described above. Affiliates whose shares are not
Restricted Shares must nonetheless comply with the same Rule 144 restrictions
applicable to Restricted Shares with the exception of the one year holding
period requirement.
Rule 701 promulgated under the Securities Act provides that shares of
Common Stock acquired on the exercise of outstanding options may be resold by
persons, other than affiliates, beginning 90 days after the date of this
Prospectus, subject only to the manner of sale provisions of Rule 144, and by
affiliates, beginning 90 days after the date of this Prospectus, subject to all
provisions of Rule 144 except its one-year minimum holding period.
The Company, its executive officers, directors and certain of its
stockholders (who in the aggregate will beneficially own approximately 6,183,606
Restricted Shares, have agreed that, subject to certain limited exceptions, for
a period ending 180 days after the consummation of the Offering, without the
prior written consent of Friedman, Billings, Ramsey & Co., Inc., they will not,
directly or indirectly, offer, pledge, sell, offer to sell, contract to sell,
grant any option to purchase or otherwise sell, dispose of, make any short sale
of, loan or grant any rights with respect to any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock.
See 'Underwriting.'
The Company intends to file registration statements on Form S-8 under the
Securities Act to register all shares of Common Stock issuable under the 1995
Stock Plan, the 1996 Option Plan and the Director Plan. These registration
statements are expected to be filed promptly after the effective date of the
Registration Statement of which this Prospectus is a part and will be effective
upon filing. Shares issued upon the exercise of stock options after the
effective date of the Form S-8 registration statements will be eligible for
resale in the public market without restriction, subject to Rule 144 limitations
applicable to affiliates and the lock-up agreements noted above.
51
<PAGE>
As of June 30, 1998, the holders of 6,261,451 shares of Common Stock and
warrants to purchase 857,056 shares of Common Stock are entitled to certain
demand and/or piggyback registration rights with respect to such shares (the
'Registrable Shares'). See 'Description of Capital Stock--Registration Rights
Agreement.'
Prior to the Offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares for sale
will have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of the Common Stock in the
public market could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among the
Company and the Underwriters (the 'Underwriting Agreement'), the Underwriters
named below, through theirRepresentatives, Friedman, Billings, Ramsey & Co.,
Inc. ('FBR') and Prudential Securities Incorporated ('Prudential Securities
Incorporated') (which is acting as the 'qualified independent underwriter'
pursuant to the National Association of Securities Dealers, Inc. (the 'NASD')
Conduct Rules with respect to the Offering), have severally agreed to purchase
from the Company the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc............................................
Prudential Securities Incorporated...............................................
---------
Total.......................................................................... 3,000,000
---------
---------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased. The offering of Common Stock is made for delivery
when, as and if accepted by the Underwriters and subject to prior sale and to
withdrawal, cancellation or modification of the Offering without notice. The
Underwriters reserve the right to reject an order for the purchase of shares in
whole or in part.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
re-allow a concession not in excess of $ per share to certain other
dealers. The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
After the initial public offering of Common Stock, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters the over-allotment option,
exercisable no later than 30 days after the date of this Prospectus, to purchase
up to 450,000 additional shares of Common Stock at the initial public offering
price, less the underwriting discount, set forth on the cover page of this
Prospectus. To the extent the Underwriters exercise such over-allotment option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the table above bears to the total number of shares of
Common Stock offered hereby. The Company will be obligated, pursuant to the
over-allotment option, to sell shares to the Underwriters to the extent the
over-allotment option is exercised. The Underwriters may exercise the
over-allotment option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof. The
Company will reimburse the Underwriters for their reasonable out-of-pocket
expenses, including legal fees and expenses, not to exceed $100,000 including
FBR's expenses in connection with the Bridge Financing (as described below).
Prior to the Offering, there has been no public market for Common Stock.
The initial public offering price for Common Stock will be determined by
negotiation among the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price are prevailing
market conditions, revenues and earnings of the Company, market valuations of
other companies engaged in activities similar to the Company, estimates of the
business potential and prospects of the Company, the present state of the
Company's business operations, the Company's management and other factors deemed
relevant. The estimated initial public offering price range set forth on the
cover of this Prospectus is subject to change as a result of market conditions
and other factors. There can,
53
<PAGE>
however, be no assurance that the price at which the shares of Common Stock will
sell in the public market after the Offering will not be lower than the price at
which they are sold by the Underwriters.
Until the distribution of the Common Stock is completed, the rules of the
SEC may limit the ability of the Underwriters and certain selling group members
to bid for or purchase Common Stock. As an exception to these rules, the
Representatives are permitted to engage in certain transactions that stabilize
the price of shares of Common Stock. Such transactions may consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of shares
Common Stock.
If the Underwriters create a short position in shares of Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing shares of Common Stock in the open
market. The Representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of shares of Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold such shares of Common Stock as part of the Offering.
In general, purchases of securities for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of shares of Common Stock. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Company, its directors, officers and certain securityholders have each
agreed that it or they will not, without the prior written consent of FBR,
directly or indirectly, offer, pledge, sell, offer to sell, contract to sell,
grant any option to purchase or otherwise sell, dispose of, make any short sale
of, loan or grant any rights with respect to any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock for
the period ending 180 days after the consummation of the Offering, except that
the Company may grant additional options and issue additional stock under its
stock plans and repurchase shares thereunder.
Up to 5% of the shares of Common Stock offered hereby may be reserved for
sale to certain employees and directors of the Company at a price equal to the
initial public offering price per share. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same terms as the other shares offered
hereby.
In April 1998, the Company engaged FBR to act as its financial advisor and
lead underwriter in connection with the Offering and to provide certain other
investment banking services to the Company for customary fees.
In April 1998, the Company entered into a Loan and Warrant Purchase
Agreement (the 'Loan Agreement') with certain affiliates of FBR (the 'Lenders'),
pursuant to which the Company borrowed $10.0 million from the Lenders (the
'Bridge Financing') (on which the Lenders received a $200,000 origination fee)
and issued the Lenders the Bridge Notes in the aggregate principal amount of
$10.0 million and warrants (the 'Bridge Warrants') to purchase an aggregate of
166,666 shares of Common Stock at an exercise price of $3.00 per share. The
Bridge Notes accrue interest at the rate of 12% per annum on the principal
amount thereof outstanding during the period beginning on the date of issuance
and ending on the Maturity Date (as defined below). The obligations under the
Bridge Notes are collateralized by substantially all of the assets of the
Company. The outstanding principal amount of, and any unpaid accrued interest
on, the Bridge Notes is due and payable on the consummation of the Offering (the
'Maturity Date') and may be prepaid in whole or in part at any time without
penalty.
In July 1998, Prudential Securities Incorporated became a customer of the
Company.
54
<PAGE>
Under the Conduct Rules of the NASD, due to the ownership interest in the
Company of FBR, the Company may be deemed to be an affiliate of FBR.
Accordingly, the public offering price can be no higher than that recommended by
a 'qualified independent underwriter' meeting certain standards. In accordance
with the requirement, Prudential Securities Incorporated has agreed to serve in
such role and to recommend a price in compliance with the requirements of the
Conduct Rules. Prudential Securities Incorporated, in its role as qualified
independent underwriter, has performed a due diligence investigation and has
reviewed and participated in the preparation of this Prospectus and the
registration statement of which this Prospectus forms a part. In accordance with
the NASD Conduct Rules, no NASD member participating in the distribution is
permitted to confirm sales to accounts over which it exercises discretionary
authority without prior specific written consent.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Weil, Gotshal & Manges LLP, New York, New
York. Certain legal matters in connection with this Offering will be passed upon
for the Underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the consolidated statements of operations, changes in stockholders'
equity and cash flows for the period March 17, 1995 (the date of inception) to
December 31, 1995 and each of the years ended December 31, 1996 and 1997 and the
combined statements of operations and cash flows of BIS Strategic Decisions for
the period January 1, 1995 to April 5, 1995 included in this Prospectus have
been included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission'), Washington, D.C. 20549, a Registration Statement (which term
shall include all amendments, exhibits and schedules thereto) on Form S-1 under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission, to which Registration Statement reference is hereby made.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In
addition, the Company is required to file electronic versions of these documents
with the Commission through the Commission's Electronic Data Gathering, Analysis
and Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
55
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
----------------
<S> <C>
GIGA INFORMATION GROUP, INC.:
Report of Independent Accountants.................................................................. F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 and March 31, 1998 (unaudited)........... F-3
Consolidated Statements of Operations for the period March 17, 1995 (date of inception) to December
31, 1995; the years ended December 31, 1996 and 1997 and the three months ended March 31, 1997
and 1998 (unaudited)............................................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the period March 17, 1995 (date of
inception) to December 31, 1995; the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1997 and 1998 (unaudited)........................................................ F-5
Consolidated Statements of Cash Flows for the period March 17, 1995 (date of inception) to December
31, 1995; the years ended December 31, 1996 and 1997 and the three months ended March 31, 1997
and 1998 (unaudited)............................................................................. F-6
Notes to Consolidated Financial Statements......................................................... F-7 - F-25
BIS STRATEGIC DECISIONS:
Report of Independent Accountants.................................................................. F-26
Combined Statement of Operations for the period January 1, 1995 to April 5, 1995................... F-27
Combined Statement of Cash Flows for the period January 1, 1995 to April 5, 1995................... F-28
Notes to Combined Financial Statements............................................................. F-29 - F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Giga Information Group, Inc.:
We have audited the accompanying consolidated balance sheets of Giga Information
Group, Inc. as of December 31, 1996 and 1997 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the period March 17, 1995 (date of inception) to December 31, 1995 and the years
ended December 31, 1996 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Giga Information
Group, Inc. as of December 31, 1996 and 1997 and the results of its operations
and its cash flows for the period March 17, 1995 (date of inception) to December
31, 1995 and the years ended December 31, 1996 and 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 17, 1998, except for the information
in the final two paragraphs of Note 20, as to
which the date is May 11, 1998.
F-2
<PAGE>
GIGA INFORMATION GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 8,286 $ 3,539 $ 1,753
Trade accounts receivable, net of allowance for uncollectible accounts of $536,
$483 and $405 at December 31, 1996 and 1997 and March 31, 1998,
respectively................................................................. 3,391 8,961 5,684
Unbilled accounts receivable................................................... 1,885 4,727 2,652
Prepaid expenses and other current assets...................................... 1,753 3,753 3,665
------- ------- -----------
Total current assets........................................................... 15,315 20,980 13,754
Property and equipment, net...................................................... 2,397 1,695 1,678
Leasehold intangible (Note 3).................................................... 603 177 71
Goodwill, net of accumulated amortization of $1,507, $2,692 and $2,692 at
December 31, 1996 and 1997 and March 31, 1998, respectively.................... 1,186 -- --
Note receivable.................................................................. 159 -- --
Other assets..................................................................... 19 171 170
------- ------- -----------
Total assets................................................................. $19,679 $23,023 $15,673
------- ------- -----------
------- ------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 1,319 $ 2,213 $ 1,304
Deferred revenues.............................................................. 6,832 20,604 19,458
Accrued expenses and other current liabilities................................. 5,557 6,385 5,033
Debt--other, current portion................................................... -- 1,526 1,556
Debt--related party, current portion........................................... -- 448 224
Net liabilities of discontinued operations, current portion.................... 1,494 -- --
------- ------- -----------
Total current liabilities...................................................... 15,202 31,176 27,575
Long-term debt--related party.................................................... 424 -- --
Long-term debt--other............................................................ 1,087 937 848
Net liabilities of discontinued operations, less current portion................. 1,307 -- --
------- ------- -----------
Total liabilities............................................................ 18,020 32,113 28,423
Commitments and other contingent liabilities (Note 12)
Stockholders' equity (deficit):
Preferred Stock, $.001 par value; 12,000,000, 16,500,000 and 16,500,000 shares
authorized at December 31, 1996 and 1997 and March 31, 1998, respectively:
650,000 shares designated as Series A Convertible Preferred Stock, 570,000
shares issued and outstanding (liquidation preference of $2,850,000)....... 1 1 1
9,000,000 shares designated as Series B Convertible Preferred Stock,
8,144,642 shares issued and outstanding (liquidation preference of
$28,506,000)............................................................... 8 8 8
4,500,000 shares designated as Series C Convertible Preferred Stock, 0,
2,609,491 and 2,609,491 shares issued and outstanding at December 31, 1996
and 1997 and March 31, 1998, respectively (liquidation preference of
$10,725,000)............................................................... -- 3 3
Common Stock, $.001 par value; 50,000,000 shares authorized, 2,026,738,
2,093,107 and 2,124,142 shares issued and outstanding at December 31, 1996
and 1997 and March 31, 1998, respectively.................................... 2 2 2
Additional paid-in capital....................................................... 30,642 41,286 43,411
Stock subscriptions receivable................................................... (25) -- --
Deferred Compensation............................................................ -- -- (2,023)
Accumulated deficit.............................................................. (29,112) (50,929) (54,765)
Cumulative translation adjustments............................................... 143 539 613
------- ------- -----------
Total stockholders' equity (deficit)............................................. 1,659 (9,090) (12,750)
------- ------- -----------
Total liabilities and stockholders' equity (deficit)......................... $19,679 $23,023 $15,673
------- ------- -----------
------- ------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
GIGA INFORMATION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
MARCH 17 TO 31, MARCH 31,
DECEMBER 31, ---------------------- --------------------
1995 1996 1997 1997 1998
------------ -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Continuous information services................... $ 3,149 $ 14,600 $ 2,570 $ 6,804
Other services.................................... $ 5,517 6,043 4,715 1,276 1,693
Publications...................................... 1,442 946 344 180 55
------------ -------- -------- ------- -------
Total revenues.................................... 6,959 10,138 19,659 4,026 8,552
Costs and expenses:
Cost of services.................................. 4,707 12,336 12,477 3,202 4,391
Cost of publications.............................. 346 790 174 75 71
Sales and marketing............................... 1,016 6,706 19,617 4,158 5,781
Research and development.......................... 348 1,789 1,975 659 339
General and administrative........................ 5,760 9,739 6,419 1,061 1,368
Depreciation and amortization..................... 1,387 2,391 2,810 634 385
------------ -------- -------- ------- -------
Total costs and expenses.......................... 13,564 33,751 43,472 9,789 12,335
------------ -------- -------- ------- -------
Loss from operations................................ (6,605) (23,613) (23,813) (5,763) (3,783)
------------ -------- -------- ------- -------
Interest income..................................... 246 515 277 98 37
Interest expense.................................... (100) (95) (235) (17) (86)
------------ -------- -------- ------- -------
Loss from continuing operations before income
taxes........................................... (6,459) (23,193) (23,771) (5,682) (3,832)
Income tax (benefit) charge......................... (1,093) (491) (641) 7 4
------------ -------- -------- ------- -------
Loss from continuing operations................... (5,366) (22,702) (23,130) (5,689) (3,836)
------------ -------- -------- ------- -------
Discontinued operations:
Income (loss) from the discontinued BIS market
research business, less applicable income taxes
of $1,497 and $114 for the period March 17 to
December 31, 1995 and the year ended December
31, 1996........................................ 1,490 (79) -- -- --
Income (loss) from the discontinued BIS Shrapnel
business, less applicable income taxes of $0.... 154 (134) -- -- --
Income (loss) on disposal of discontinued BIS
market research business, less applicable income
taxes of $158 and $568 for the years ended
December 31, 1996 and 1997, respectively........ -- (2,315) 1,101 -- --
Income (loss) on disposal of discontinued BIS
Shrapnel business, less applicable income taxes
of $0 and $109 for the years ended December 31,
1996 and 1997, respectively..................... -- (160) 212 -- --
------------ -------- -------- ------- -------
Income (loss) from discontinued operations........ 1,644 (2,688) 1,313 -- --
------------ -------- -------- ------- -------
Net loss............................................ $ (3,722) $(25,390) $(21,817) $(5,689) $(3,836)
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
Results per common share (Note 2):
Historical--basic and diluted:
Loss from continuing operations................. $ (11.16) $ (1.81)
-------- -------
-------- -------
Net loss........................................ $ (10.53) $ (1.81)
-------- -------
-------- -------
Weighted average number of shares............... 2,072,837 2,115,837
-------- -------
-------- -------
Pro forma--basic and diluted (unaudited):
Loss from continuing operations................. $ (3.42) $ (0.56)
-------- -------
-------- -------
Net loss........................................ $ (3.23) $ (0.56)
-------- -------
-------- -------
Weighted average number of shares .............. 6,759,621 6,802,621
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
GIGA INFORMATION GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD MARCH 17, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995, THE
YEARS ENDED
DECEMBER 31, 1996 AND 1997 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE ADDITIONAL STOCK
PREFERRED PREFERRED PREFERRED COMMON PAID-IN SUBSCRIPTION
STOCK STOCK STOCK STOCK CAPITAL RECEIVABLE
----------- ----------- ----------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 2,036,002 shares of Common
Stock...................................... $ 2 $ 1,058 $ (350)
Issuance of 160,000 shares of Series A
Convertible Preferred Stock and convertible
note for acquisition of ExperNet
Corporation................................ 800
Issuance of 410,000 shares of Series A
Convertible Preferred Stock, net of
expenses................................... $ 1 2,049 (25)
Issuance of 4,026,772 shares of Series B
Convertible Preferred stock, net of
expenses................................... $ 4 13,212
Conversion of bridge financing to 571,428
shares of Series B Convertible Preferred
Stock...................................... 1,980
Net loss....................................
Translation adjustments.....................
----------- ----------- ----------- ------ ---------- -----
Balance at December 31, 1995................ 1 4 2 19,099 (375)
----------- ----------- ----------- ------ ---------- -----
Payment of stock subscription receivable.... 300
Issuance of 3,327,728 shares of Series B
Convertible Preferred Stock, net of
expenses................................... 4 11,546
Issuance of 36,458 shares of Common Stock... 70
Repurchase of 12,389 shares of Common
Stock...................................... (23)
Cancellation of 33,333 shares of Common
Stock issued............................... (50) 50
Exercise of warrant for 218,714 shares of
Series B Convertible Preferred Stock.......
Net loss....................................
Translation adjustments.....................
----------- ----------- ----------- ------ ---------- -----
Balance at December 31, 1996................ 1 8 2 30,642 (25)
----------- ----------- ----------- ------ ---------- -----
Issuance of 72,479 shares of Common Stock... 148
Repurchase of 6,110 shares of Common
Stock...................................... (38)
Issuance of 2,609,491 shares of Series C
Convertible Preferred Stock, net of
expenses................................... $ 3 10,534
Payment of stock subscription receivable.... 25
Net loss....................................
Translation adjustments.....................
----------- ----------- ----------- ------ ---------- -----
Balance at December 31, 1997................ 1 8 3 2 41,286 --
----------- ----------- ----------- ------ ---------- -----
Issuance of 31,035 shares of Common Stock... 73
Deferred compensation....................... 2,052
Deferred compensation expense...............
Net loss....................................
Translation adjustments.....................
----------- ----------- ----------- ------ ---------- -----
Balance at March 31, 1998 (unaudited)....... $ 1 $ 8 $ 3 $ 2 $ 43,411 --
----------- ----------- ----------- ------ ---------- -----
----------- ----------- ----------- ------ ---------- -----
<CAPTION>
CUMULATIVE TOTAL
DEFERRED TRANSLATION ACCUMULATED STOCKHOLDERS'
COMPENSATION ADJUSTMENTS DEFICIT EQUITY
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Issuance of 2,036,002 shares of Common
Stock...................................... $ 710
Issuance of 160,000 shares of Series A
Convertible Preferred Stock and convertible
note for acquisition of ExperNet
Corporation................................ 800
Issuance of 410,000 shares of Series A
Convertible Preferred Stock, net of
expenses................................... 2,025
Issuance of 4,026,772 shares of Series B
Convertible Preferred stock, net of
expenses................................... 13,216
Conversion of bridge financing to 571,428
shares of Series B Convertible Preferred
Stock...................................... 1,980
Net loss.................................... $ (3,722) (3,722)
Translation adjustments..................... $ (37) (37)
------ --- ----------- -------------
Balance at December 31, 1995................ (37) (3,722) 14,972
------ --- ----------- -------------
Payment of stock subscription receivable.... 300
Issuance of 3,327,728 shares of Series B
Convertible Preferred Stock, net of
expenses................................... 11,550
Issuance of 36,458 shares of Common Stock... 70
Repurchase of 12,389 shares of Common
Stock...................................... (23)
Cancellation of 33,333 shares of Common
Stock issued............................... --
Exercise of warrant for 218,714 shares of
Series B Convertible Preferred Stock....... --
Net loss.................................... (25,390) (25,390)
Translation adjustments..................... 180 180
------ --- ----------- -------------
Balance at December 31, 1996................ 143 (29,112) 1,659
------ --- ----------- -------------
Issuance of 72,479 shares of Common Stock... 148
Repurchase of 6,110 shares of Common
Stock...................................... (38)
Issuance of 2,609,491 shares of Series C
Convertible Preferred Stock, net of
expenses................................... 10,537
Payment of stock subscription receivable.... 25
Net loss.................................... (21,817) (21,817)
Translation adjustments..................... 396 396
------ --- ----------- -------------
Balance at December 31, 1997................ 539 (50,929) (9,090)
------ --- ----------- -------------
Issuance of 31,035 shares of Common Stock... 73
Deferred compensation....................... (2,052) --
Deferred compensation expense............... 29 29
Net loss.................................... (3,836) (3,836)
Translation adjustments..................... 74 74
------ --- ----------- -------------
Balance at March 31, 1998 (unaudited)....... $ (2,023) $ 613 $ (54,765) $ (12,750)
------ --- ----------- -------------
------ --- ----------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
GIGA INFORMATION GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
MARCH 17 TO DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------- ------------------
1995 1996 1997 1997 1998
------------ -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (3,722) $(25,390) $(21,817) $(5,689) $(3,836)
Adjustments to reconcile net loss to net cash used in
continuing operating activities:
(Income) loss from discontinued operations............. (1,644) 213 -- -- --
(Income) loss on disposal of discontinued operations... -- 2,475 (1,313) -- --
Depreciation and amortization.......................... 1,387 2,391 2,810 634 385
Net loss on write-down of investments.................. -- 200 179 -- --
Provision for doubtful accounts........................ 20 395 27 59 (79)
Decrease in deferred taxes............................. 50 61 -- -- --
Interest on long-term debt added to principal.......... 37 74 74 18 13
Interest on note receivable added to principal......... -- (9) (5) (3) --
Gain on sale of fixed assets........................... (3) (11) (2) (7) (9)
Deferred compensation expense.......................... -- -- -- -- 29
Other non-cash items................................... -- -- 87 8 8
Change in assets and liabilities net of effects of
acquisitions:
Decrease (increase) in accounts receivable............. 1,489 (4,092) (8,405) 563 5,321
Increase in prepaid expenses and other current
assets............................................... (1,509) (536) (1,755) (853) (53)
Increase (decrease) in accounts payable and accrued
liabilities.......................................... 1,988 1,928 1,894 (458) (2,045)
Increase (decrease) in deferred revenues............... 551 4,582 13,696 2,137 (1,023)
------------ -------- -------- ------- -------
Net cash provided by (used in) operating activities:
Net cash used in continuing operations................... (1,356) (17,719) (14,530) (3,591) (1,289)
Net cash provided by (used in) discontinued operations... 335 (571) (1,667) (145) (13)
------------ -------- -------- ------- -------
Net cash used in operating activities.................. (1,021) (18,290) (16,197) (3,736) (1,302)
------------ -------- -------- ------- -------
Cash flows from investing activities:
Acquisition of equipment and improvements................ (961) (1,799) (559) (151) (261)
Net cash acquired in BIS acquisition..................... 1,013 -- -- -- --
Net cash acquired in ExperNet acquisition................ 61 -- -- -- --
Issuance of note receivable.............................. -- (150) -- -- --
Proceeds from sale of Shrapnel........................... -- -- 293 -- --
Other, net............................................... 76 40 60 24 10
------------ -------- -------- ------- -------
Cash provided by (used in) investing activities........ 189 (1,909) (206) (127) (251)
------------ -------- -------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of Common Stock................... 710 70 61 8 65
Repurchase of common stock............................... -- (23) (38) -- --
Proceeds from issuance of Series A Convertible Preferred
Stock.................................................. 2,025 -- -- -- --
Proceeds from bridge financing, net of issuance costs
of $20................................................. 1,980 -- -- -- --
Proceeds from issuance of Series B Convertible
Preferred Stock, net of issuance costs of $90 and
$878................................................. 13,216 11,557 -- -- --
Proceeds from issuance of Series C Convertible
Preferred Stock, net of issuance costs of $188......... -- -- 10,537 -- --
Repayments of principal to related parties............... (321) -- -- -- (224)
Proceeds from stock subscriptions receivable............. -- 300 25 -- --
Net increase (decrease) in short-term borrowings......... 234 (294) (193) 56 --
Proceeds from long-term debt............................. -- -- 1,465 -- --
Principal payments on long-term debt..................... (97) (11) (139) -- (72)
------------ -------- -------- ------- -------
Cash provided by (used in) financing activities........ 17,747 11,599 11,718 64 (231)
------------ -------- -------- ------- -------
Effect of exchange rates on cash......................... (39) 10 (62) (28) (2)
Net increase (decrease) in cash and cash equivalents..... 16,876 (8,590) (4,747) (3,827) (1,786)
Cash and cash equivalents, beginning of period........... -- 16,876 8,286 8,286 3,539
------------ -------- -------- ------- -------
Cash and cash equivalents, end of period............... $ 16,876 $ 8,286 $ 3,539 $ 4,459 $ 1,753
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
Supplementary cash flow information:
Income taxes paid...................................... $ 39 $ 30 $ 15 $ 5 $ 5
Interest paid.......................................... $ 58 $ 22 $ 121 $ 0 $ 55
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
1. THE COMPANY:
Giga Information Group, Inc. ('Giga' or the 'Company') was incorporated on
March 17, 1995 (date of inception) in the State of Delaware. The Company's
principal business activity is to provide information, analysis and advice
relating to developments and trends in the computing, telecommunications and
related industries (collectively, the information technology or 'IT' industry)
primarily through subscription-based products. The Company derives its revenues
primarily from three sources; Continuous Information Services, which include its
Giga Advisory Service and IT Practices; Other Services, which include events and
consulting; and Publications. Continuous Information Services consist of
monitoring, research and analysis of IT developments and trends to support
customers' IT decisions, distributed through a variety of electronic and print
media, as well as inquiry access to analysts and practitioners and participation
in briefings and conferences, packaged into an annually renewable
subscription-based product. On April 5, 1995, the Company acquired BIS Strategic
Decisions, Inc. and its five foreign affiliates (collectively, 'BIS'). On July
6, 1995 Giga acquired a 77.8% equity interest in ExperNet Corporation
('ExperNet') which was owned by Gideon I. Gartner, Chairman of the Board of
Directors and Chief Executive Officer of the Company, and David L. Gilmour, then
a director and officer of the Company, and, on December 29, 1995, acquired the
remaining 22.2% interest.
The Company is subject to a number of risks similar to other companies in
its industry including a dependence on sales and renewals of subscription-based
services, uncertainty of market acceptance of its services, competition from
other companies including those with greater resources than the Company,
dependence on key individuals, the development of new services and products, the
need to obtain additional financing, protection of proprietary information and
technology and the risks associated with international operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. Certain prior year amounts have
been reclassified to conform to the current year's presentation.
Pursuant to the purchase method of accounting, acquired assets and
liabilities were revalued to their fair market value. The excess of the purchase
price over the fair market value of the net assets acquired was recorded as
goodwill.
Interim Financial Information
The consolidated financial statements of the Company at March 31, 1998 and
for the three months ended March 31, 1997 and 1998 are unaudited. All
adjustments (consisting only of normal recurring adjustments) have been made
which, in the opinion of management, are necessary for a fair presentation.
Results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for any future
period.
Cash and Cash Equivalents
Cash equivalents consist primarily of liquid investments, with original
maturities of 90 days or less, in money market funds which are convertible to a
known amount of cash and bear an insignificant risk of change in value.
F-7
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
Foreign Currency Translation
The accounts of foreign subsidiaries are translated using exchange rates in
effect at period-end for assets and liabilities and at average exchange rates
during the period for results of operations. The local currency for all foreign
subsidiaries is the functional currency. The related translation adjustments are
reported as a separate component of stockholders' equity (deficit). Gains
(losses) resulting from foreign currency transactions are included in other
income (expense) and are immaterial for all periods presented.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments in
money market funds and trade accounts receivable. The Company places its
temporary cash investments with high credit quality financial institutions in
accordance with its investment policy as approved by its board of directors.
Trade receivables result from contracts with various customers. Giga generally
does not require collateral or other security from these customers. The Company
performs ongoing credit evaluations of its customers and maintains reserves for
potential credit losses. Such losses have historically been within management's
expectations.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the Company's
consolidated financial statements. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using currently enacted tax
rates for the year in which the differences are expected to reverse. The Company
records a valuation allowance against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
Revenue and Commission Expense Recognition
Subscription revenues from Continuous Information Services are deferred and
recognized on a pro rata basis over the contract period, generally one year. The
Company's policy is to record a receivable and related deferred revenues for the
full amount of the contract on the date it is signed. Contracts are generally
billable upon signing. The Company also records the related commission
obligation upon the signing of these contracts and amortizes the corresponding
deferred commission expense over the contract period in which the related
Continuous Information Services revenues are earned. In the event the contract
is canceled by the customer, the commission is refundable with respect to the
portion related to the revenue which will not be recognized.
Revenues from (i) Advisory Service, IT Practice Services and Continuous
Advisory Consulting are aggregated into Continuous Information Services, (ii)
Events and other services, principally consulting, are aggregated into Other
Services and (iii) Publications are listed separately. Revenues from Other
Services are recognized as follows: events as they occur and consulting as such
services are performed. Revenues from Publications are recognized when
publications are delivered.
Unbilled accounts receivable pertain to the portion of a customer's service
period not yet invoiced in accordance with contractual quarterly billing terms
offered in conjunction with the Continuous Information Services.
F-8
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
Property and Equipment
Property and equipment are stated at cost for items acquired after the
initial acquisition of the respective entities and at estimated fair market
value for those assets in existence at date of acquisition. Expenditures for
maintenance and repairs are charged to expense; expenditures for additions,
renewals and betterments are capitalized.
Depreciation is computed for financial reporting purposes principally by
use of the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Computers and related equipment..................... 3 years
Furniture and fixtures.............................. 5 years
Motor vehicles...................................... 4 years
Leaseholds and related improvements................. Shorter of economic life or remaining lease term
</TABLE>
Upon retirement or sale, the cost of assets disposed of and the related
accumulated depreciation are eliminated from the balance sheet and the resulting
gains or losses reflected in income.
Long-Lived Assets
The Company regularly reviews long-lived assets for impairment. Any
write-downs are treated as permanent reductions in the carrying amount of the
assets. Management's policy regarding long-lived assets is to evaluate the
recoverability of its assets when the facts and circumstances suggest that these
assets may be impaired. The test of such recoverability is a comparison of the
asset value to its expected undiscounted future cash flows over the remaining
life of the asset. This analysis relies on a number of factors including
operating results, business plans, budgets, economic projections and changes in
management's strategic direction or market emphasis.
Goodwill
Goodwill represents the excess of the purchase price of entities acquired
over the fair values of amounts assigned to the net tangible and intangible
assets acquired and liabilities assumed. Amortization is recorded using the
straight-line method over two years for the BIS acquisition and five years for
the ExperNet acquisition. The carrying value of goodwill is included in
management's evaluation of the recoverability of its long-lived assets. During
1996, approximately $666,000 of goodwill identifiable with the discontinuance of
the BIS market research business was written off to amortization expense in
connection with the disposition of this business. In 1997, the Company's
assessment of the recoverability of goodwill associated with the ExperNet
acquisition indicated a de-minimis level of future cash flows associated with
this business. As such, the Company wrote-off the remaining unamortized portion
of the goodwill resulting in a charge to amortization expense of $1,025,000.
Total amortization expense related to goodwill was approximately $578,000,
$929,000, $1,186,000, $231,000 and $0 for the period from March 17, 1995 to
December 31, 1995, the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1997 and 1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and liabilities, (ii)
disclosure of contingent assets and liabilities at the dates of the financial
statements and (iii) the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
F-9
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
Historical Net Loss per Common Share
The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standard ('SFAS') No. 128, 'Earnings Per
Share.' Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Common equivalent shares have been
excluded from the computation of diluted loss per share as their effect would be
anti-dilutive. Common equivalent shares result from the assumed exercise of
outstanding stock options and warrants, the proceeds of which are then assumed
to have been used to repurchase outstanding common stock using the treasury
stock method, and the conversion of convertible notes into Common Stock. As a
result, options and warrants to purchase 1,638,825 and 1,903,730 shares of
Common Stock and convertible notes convertible into 93,196 and 78,910 shares of
Common Stock outstanding during the year ended December 31, 1997 and the three
months ended March 31, 1998, respectively, were excluded from the calculation of
diluted net loss per common share.
Pro Forma Net Loss Per Common Share (unaudited)
The pro forma basic and diluted net loss per common share is computed based
upon the weighted average number of common shares outstanding in accordance with
SFAS No. 128. In addition, all outstanding shares of convertible preferred
stock, which convert to Common Stock upon the closing of an initial public
offering of Common Stock at a price of at least $15.75 per share and having
aggregate proceeds of at least $15,000,000, are treated as if converted to
Common Stock (see Note 13).
Comprehensive Income (Loss)
The Company has adopted SFAS No. 130, 'Reporting Comprehensive Income,'
which establishes standards for the reporting and display of comprehensive
income and its components in general purpose financial statements for the year
ended December 31, 1998 and interim periods. The table below sets forth
'Comprehensive income (loss)' as defined by SFAS No. 130 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
MARCH 17 TO DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ------------------- -----------------
1995 1996 1997 1997 1998
------------ -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net loss...................................................... $ (3,722) $(25,390) $(22,075) $(5,689) $(3,836)
Other Comprehensive income (loss), net of tax:
Foreign currency translation adjustment.................. (37) 180 396 99 74
------------ -------- -------- ------- -------
Comprehensive loss............................................ $ (3,759) $(25,210) $(21,679) $(5,590) $(3,762)
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
</TABLE>
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
'Disclosures about Segments of an Enterprise and Related Information.' This
statement supersedes SFAS No. 14, 'Financial Reporting for Segments of a
Business Enterprise.' SFAS No. 131 includes requirements to report selected
segment information quarterly and entity-wide disclosures about products and
services, major customers, and the material countries in which the entity holds
assets and reports revenues. The statement will be effective for annual periods
beginning after December 15, 1997 and the Company will adopt its provisions in
the year ended December 31, 1998. Reclassification for earlier periods is
required, unless impracticable, for comparative purposes. The Company is
currently evaluating the impact this statement will have on its financial
statements; however, because the statement requires only additional disclosure,
the Company does not expect the statement to have a material impact on its
financial position or results of operations.
F-10
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
3. ACQUISITIONS:
BIS Strategic Decisions, Inc. and Affiliates
On April 5, 1995, the Company acquired 100% of the stock of BIS for
$200,000 in cash and a $1,000,000 convertible promissory note (see Note 11). BIS
was engaged in compiling and providing data intensive market research to vendors
for use primarily in planning their product operating and marketing programs.
The acquisition was accounted for as a purchase and, accordingly, the cost
(including acquisition costs of $204,000) was assigned to the tangible and
identifiable intangible assets acquired, including a leasehold for one of the
facilities, and liabilities assumed based upon their estimated fair values at
the date of acquisition. As part of the transaction, an intangible asset
(leasehold) of approximately $1,300,000 was recorded representing the fair value
of payments being made through May 1998 by a former owner of BIS. In addition
the Company acquired current assets of approximately $8,700,000 and furniture
and equipment of approximately $2,000,000 offset by current liabilities assumed
of approximately $12,600,000 (of which approximately $9,100,000 were deferred
revenues), a note payable of $192,000 and a tax provision of approximately
$1,000,000. The excess of the purchase price over the net assets acquired of
approximately $3,059,000 was recorded as goodwill. The Company's statements of
operations include the results of operations of BIS from April 5, 1995.
ExperNet
On July 6, 1995, the Company acquired a majority interest in ExperNet in
exchange for (i) 160,000 shares of Series A Preferred Stock (213,333 shares of
Common Stock on an as-converted basis), 80,000 shares (106,667 shares of Common
Stock on an as-converted basis) of which were issued to Mr. Gartner and 80,000
shares (106,667 shares of Common Stock on an as-converted basis) of which were
issued to Mr. Gilmour and (ii) the issuance to Mr. Gartner of an option to
purchase 53,333 shares of Common Stock at an exercise price of $1.50 per share
which vested immediately. On December 29, 1995 the Company acquired Mr.
Gilmour's remaining interest in ExperNet in exchange for a $400,000, 6%
convertible note (the 'Note') due December 31, 2005 (see Note 11). ExperNet is
comprised of a network of external IT practitioners, and the related interactive
software, which respond to specific customer inquiries. In the transaction, the
Company acquired current assets of approximately $148,000 and furniture and
equipment of approximately $126,000, offset by current liabilities assumed of
approximately $96,000 and long-term debt of approximately $386,000. The
acquisition was accounted for as a purchase; accordingly, the excess of the
purchase price over the net assets acquired of approximately $1,408,000 has been
recorded as goodwill. The Company's statements of operations include the results
of operations of ExperNet from July 6, 1995.
4. RELATED PARTIES:
During the period from March 17, 1995 to December 31, 1995, the Company
reimbursed Mr. Gartner $186,000 for disbursements made by him for items related
to the acquisition of BIS and for other operational expenses prior to the
incorporation of the Company.
In addition, following the initial closing of the sale of Series B
Convertible Preferred Stock by the Company in November 1995, ExperNet repaid a
loan in the principal amount of approximately $221,000 plus accrued interest at
a rate of 10%, or a total of approximately $248,000, to Mr. Gartner and a loan
in the principal amount of approximately $101,000 plus accrued interest at a
rate of 10%, or a total of approximately $113,000, to Mr. Gilmour.
During 1997, the Company awarded 17,778 shares of Common Stock at a fair
value of $3.00 per share to Mr. Gartner in lieu of a payment of cash for
services rendered during 1996 as Chief Executive Officer. The Company recorded
as compensation expense in 1996 the fair value of the Common Stock awarded to
Mr. Gartner.
F-11
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
In February 1998, the Company entered into an agreement with Mr. Gilmour, a
director and co-founder of the Company, relating to Mr. Gilmour's continuing
relationship with the Company. As part of this agreement, the Company agreed to
early prepayment of a note issued by the Company to Mr. Gilmour in December 1995
in connection with the acquisition by the Company of Mr. Gilmour's remaining
interest in ExperNet (see Note 3). In addition, the agreement also provided that
the Company would receive a 7.5% equity interest in a company newly formed by
Mr. Gilmour and would be granted an irrevocable, royalty-free, worldwide license
to use any software, products or technologies the new company develops during a
three year period commencing on February 1, 1998.
Certain of the Company's existing investors have represented that they
will, to the extent necessary, fund the Company through May 1999 on terms to be
mutually agreed upon.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------ ------ ---------
<S> <C> <C> <C>
Prepaid compensation..................................................... $1,126 $2,559 $ 2,422
Other.................................................................... 627 1,194 1,243
------ ------ ---------
Total.................................................................. $1,753 $3,753 $ 3,665
------ ------ ---------
------ ------ ---------
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment at cost, less accumulated depreciation and
amortization, consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------ ------ ---------
<S> <C> <C> <C>
Computer and related equipment........................................... $2,849 $3,202 $ 3,463
Furniture and fixtures................................................... 781 827 771
Motor vehicles........................................................... 108 27 1
Leasehold improvements................................................... 119 119 119
------ ------ ---------
3,857 4,175 4,354
Less accumulated depreciation and amortization........................... 1,460 2,480 2,676
------ ------ ---------
Property and equipment, net.............................................. $2,397 $1,695 $ 1,678
------ ------ ---------
------ ------ ---------
</TABLE>
Depreciation and amortization expense was $525,000, $1,020,000, $1,190,000,
$293,000 and $278,000 for the period March 17, 1995 to December 31, 1995, the
years ended December 31, 1996 and 1997, and the three months ended March 31,
1997 and 1998, respectively.
F-12
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
7. LEASE COMMITMENTS
The Company leases certain office space and equipment under operating lease
agreements. Future minimum rental commitments under all operating leases with
remaining noncancelable terms of one year or more are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
April 1 through December 31, 1998.................................................. $ 685
1999............................................................................... 910
2000............................................................................... 590
2001............................................................................... 137
2002............................................................................... 80
Thereafter......................................................................... 39
---------
Total............................................................................ $ 2,441
---------
---------
</TABLE>
Rent expense, net of sublease income of approximately $60,000, $78,000,
$54,000, $11,000 and $6,000 was $482,000, $701,000, $725,000, $232,000 and
$189,000 for the period March 17, 1995 to December 31, 1995, the years ended
December 31, 1996 and 1997, and the three months ended March 31, 1997 and 1998,
respectively.
An agreement was entered into by and among the Company and two prior owners
of BIS providing for one of the prior owners, who had guaranteed all payments
under a lease, to pay an aggregate of $1,500,000 to the landlord for rent under
the lease, payable monthly in an amount of $36,722. The guaranteed payments end
at May 30, 1998.
8. INCOME TAXES:
The Company has deferred tax assets of approximately $11,148,000,
$20,216,000 and $21,862,000 at December 31, 1996 and 1997 and March 31, 1998,
respectively. For financial reporting purposes, valuation allowances of
$11,148,000, $20,216,000 and $21,862,000, respectively, have been recognized to
offset these deferred tax assets until the Company can conclude that it is more
likely than not that these deferred tax assets will be realized. During the
years ended December 31, 1996 and 1997, and the three months ended March 31,
1998, the valuation allowance increased by approximately $8,529,000, $9,068,000
and $1,646,000, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the corresponding amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Deferred revenue.................................................... $ 742
Net operating loss carryforwards.................................... 9,112 $19,119 $20,604
Discontinued operations............................................. 474 24 --
Other--net.......................................................... 820 1,073 1,258
------- ------- ---------
Total deferred tax assets........................................ 11,148 20,216 21,862
Valuation allowance for deferred tax assets........................... 11,148 20,216 21,862
------- ------- ---------
Net deferred tax assets............................................... -- -- --
------- ------- ---------
------- ------- ---------
</TABLE>
F-13
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
For financial reporting purposes, income before income taxes includes the
following components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
MARCH 17 TO DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------- ------------------
1995 1996 1997 1997 1998
------------ -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Pretax loss for continuing operations:
United States............................. $ (5,068) $(20,688) $(21,006) $(5,120) $(3,034)
Non-United States......................... (1,391) (2,505) (2,765) (562) (798)
------------ -------- -------- ------- -------
Consolidated................................ $ (6,459) $(23,193) $(23,771) $(5,682) $(3,832)
------------ -------- -------- ------- -------
------------ -------- -------- ------- -------
</TABLE>
The income tax expense(benefit) of the loss from continuing operations,
substantially all of which is deferred, consists of the following components (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 17 TO DECEMBER 31, THREE MONTHS ENDED MARCH 31,
DECEMBER 31, -------------- ----------------------------------
1995 1996 1997 1997 1998
------------ ----- ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
U.S. Federal....................................... $ (754) $(239) $(554) $ 7 $ 4
Foreign............................................ (339) (252) (87) -- --
-- --
------------ ----- -----
$ (1,093) $(491) $(641) $ 7 $ 4
------------ ----- ----- -- --
------------ ----- ----- -- --
</TABLE>
The income tax benefit of the loss from continuing operations differs from
the amount of income tax benefit determined by applying the applicable U.S.
statutory income tax rate to pretax loss from continuing operations as a result
of the following differences:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
MARCH 17 TO DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ---------------- ----------------
1995 1996 1997 1997 1998
------------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Income tax at the statutory rate................... (34.0)% (34.0)% (34.0)% (34.0)% (34.0)%
Foreign subsidiary losses with no benefit
recognized....................................... 3.5 1.7 4.0 3.4 7.1
Foreign income taxed at different rates............ (1.4) 0.9 0.4 (0.2) (0.4)
Nondeductible goodwill............................. 3.1 1.4 1.7 -- --
U.S. losses with no benefit recognized............. 12.3 27.8 24.9 30.5 26.9
Other items (net).................................. (0.4) 0.1 0.3 0.4 0.5
------------ ----- ----- ----- -----
(16.9)% (2.1)% (2.7)% 0.1% 0.1%
------------ ----- ----- ----- -----
------------ ----- ----- ----- -----
</TABLE>
The Company has available net operating loss carryforwards of approximately
$47,988,000 and $51,791,000 at December 31, 1997 and March 31, 1998 which may be
used to reduce future taxable income. Of this amount, at December 31, 1997 U.S.
carryforwards of approximately $43,081,000 expire in various years through 2012,
certain non-U.S. carryforwards of approximately $2,367,000 expire in various
years through 2002 and the balance may be carried forward indefinitely. If
losses of acquired companies are used to reduce future taxable income,
associated tax benefits will first reduce acquired goodwill and other noncurrent
intangible assets before being recognized as a reduction of income tax expense
in the period the benefits are realized. Utilization of the net operating loss
carryforwards may be limited pursuant to the provisions of Section 382 of the
Internal Revenue Code of 1986, as amended.
F-14
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
9. JOINT VENTURE AGREEMENT:
In 1991, BIS entered into a joint venture agreement with a Japanese company
(the 'Joint Venture') to provide additional market penetration in Japan for the
Company's products and services. BIS's initial equity ownership was 40%.
Pursuant to the terms of the agreement, the Company was required to purchase an
additional 10% interest in the Joint Venture from its partner in March 1996 for
approximately $85,000. In April 1996, the Company and its partner each increased
their investment in the joint venture by approximately $24,000. In December
1996, the Company notified its partner, pursuant to the terms of the agreement,
of its desire to dissolve the Joint Venture. The Company does not expect any
proceeds from the dissolution and, as such, wrote off to expense its investment
of approximately $125,000. The net earnings of the joint venture to date have
been de minimis. At December 31, 1996 and 1997 and March 31, 1998 the Company
had accounts receivable due from the Joint Venture of $125,000, $0 and $0,
respectively.
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------ ------ ---------
<S> <C> <C> <C>
Accrued compensation and benefits........................................ $1,675 $2,260 $ 1,101
Sales tax payable........................................................ 1,110 1,198 1,026
Other.................................................................... 2,772 2,927 2,906
------ ------ ---------
Total.................................................................. $5,557 $6,385 $ 5,033
------ ------ ---------
------ ------ ---------
</TABLE>
11. BORROWINGS AND LONG-TERM DEBT:
In connection with the Company's acquisition of BIS, the seller received a
$1,000,000, 5% convertible note due April 5, 1998. The note was convertible into
185,298 shares of Common Stock. The note plus accrued interest was fully repaid
on April 17, 1998.
In connection with the Company's acquisition of ExperNet, the Company
issued a $400,000, 6% convertible note to Mr. Gilmour (see also Note 3). The
note plus accrued interest was repaid in two installments, the last of which was
in April 1998.
In June 1997, the Company entered into a loan agreement with a lending
institution collateralized by certain equipment, machinery and fixtures. Under
this agreement the Company received a $1,465,000 loan due in June 2000 with an
effective interest rate of 17.133%. Principal payments required on this loan in
the years 1998 through 2000 are $389,000, $461,000 and $444,000.
The weighted average interest rates of outstanding short-term borrowings
were 7.3%, 6.9%, 7.1%, 0% and 8.1% for the period March 17, 1995 to December 31,
1995, the years ended December 31, 1996 and 1997 and the three months ended
March 31, 1997 and 1998, respectively.
12. COMMITMENTS AND CONTINGENT LIABILITIES:
In October 1997, the Company entered into an invoice factoring arrangement
with a commercial bank under which the Company could borrow up to $1,250,000.
Under the arrangement, the bank charges an administrative fee of 0.5% of each
factored invoice and a monthly factoring management fee of 1.25% of the gross
average monthly factored invoices. Borrowings under the arrangement are
collateralized by all the Company's assets. Upon the initial utilization of the
factoring arrangement, the bank will receive warrants equal to the value of
$125,000 for a class of stock to be determined and at a price to be determined.
As of March 31, 1998, no invoices have been factored under the arrangement.
F-15
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
13. PREFERRED STOCK:
The authorized capital stock of the Company includes 16,500,000 shares of
Preferred Stock. Of the Preferred Stock, 650,000, 9,000,000 and 4,500,000 shares
have been designated as Series A, Series B and Series C Convertible Preferred
Stock. The remaining 2,350,000 shares of Preferred Stock have not been
designated.
Series A Convertible Preferred Stock ('Series A')
During 1995, the Company issued 410,000 shares of Series A (546,668 shares
of Common Stock on an as-converted basis) for consideration of $2,050,000 which
consisted of $2,025,000 cash and a $25,000 non-recourse note from an employee in
connection with his acceptance of employment with the Company. In addition,
160,000 shares of Series A (213,333 shares of Common Stock on an as-converted
basis) were issued in connection with the acquisition of ExperNet as described
in Note 3.
Series B Convertible Preferred Stock ('Series B')
During 1995, the Company issued 4,026,772 shares of Series B for cash
consideration of $13,216,000, net of issuance costs of $878,000. In addition,
bridge financing in the principal amount of $2,000,000 was automatically
converted into 571,428 shares of Series B at the first closing of the Series B
Stock financing in November 1995. During 1996 the Company issued an additional
3,327,728 shares of Series B, in two separate financings, for cash consideration
of $11,550,000, net of issuance costs of $97,000. In addition, a warrant issued
to the lender in connection with the Series B bridge financing in August 1995
was exercised on a cashless basis for 218,714 shares in September 1996 (see Note
15).
Series C Convertible Preferred Stock ('Series C')
During 1997, the Company issued 2,609,491 shares of Series C, in two
separate financings, for cash consideration of $10,537,000, net of issuance
costs of $188,000.
In connection with this issuance the Company issued warrants to purchase-up
to 1,409,127 shares of Series C at an exercise price of $4.50 per share (see
Note 15).
Conversion
Each share of Series A, Series B and Series C is convertible, at the
holder's option, into that number of shares of Common Stock as is determined by
dividing the initial purchase price of such shares by the conversion price in
effect at the time of conversion. The conversion price of each share of Series
A, Series B and Series C is subject to adjustment upon the occurrence of certain
events. At March 31, 1998 each share of Series A, Series B and Series C is
convertible into four-thirds (4/3), one-third (1/3) and 0.39143 shares of Common
Stock, respectively.
The Series A, Series B and Series C Shares will automatically convert into
Common Stock at the then effective conversion price upon the closing of a firmly
underwritten public offering of Common Stock at a price of at least $15.75 per
share (as adjusted for splits, combinations and share dividends), and generating
gross proceeds of at least $15,000,000. In addition, the Series A, Series B and
Series C Shares will convert into Common Stock at the then effective conversion
price upon the consent of the holders of at least two-thirds (2/3) of the then
outstanding Series A, Series B and Series C Shares.
Liquidation
Upon (i) the liquidation, dissolution, or winding up of the Company (either
voluntary or involuntary) or (ii) the merger or consolidation of the Company
with another corporation or the sale or other transfer of all or substantially
all of the assets of the Company which is not agreed to by the holders of not
less than a majority of
F-16
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
the Convertible Preferred Stock, voting together as a single class, and in which
the stockholders of the Company immediately prior to such transaction do not own
more than a 50% interest in the surviving entity, (i) holders of the Series A,
Series B and Series C Shares are entitled to receive out of the assets of the
Company available for distribution to its stockholders, an amount equal to
$5.00, $3.50 and $4.11 per share, respectively, plus any declared but unpaid
dividends, prior to any distribution to the holders of the Company's Common
Stock. Following distribution of such preferential amounts, holders of Series A,
Series B and Series C Shares shall not participate in any further distribution.
Voting
Except as provided by law or in the Company's Amended and Restated
Certificate of Incorporation, the holders of the Series A, Series B and Series C
Shares vote with holders of the Company's Common Stock on an as converted basis
and not as a separate class or series. In addition, so long as at least
1,000,000 shares of Series A, Series B and Series C Shares are outstanding, the
Company may not, without the approval of at least a majority of the outstanding
shares of the Series A, Series B and Series C Shares, take certain actions as
described in the Certificate of Incorporation.
14. COMMON STOCK:
In November 1995, the Company amended its Certificate of Incorporation to
increase the authorized number of shares of Common Stock from 10,000,000 to
28,000,000. In December 1996, the Company amended its Certificate of
Incorporation to increase the authorized number of Common Stock from 28,000,000
to 50,000,000.
During March 1995, the Company sold to Mr. Gartner 1,400,000 shares of
Common Stock at a purchase price of $0.07125 per share. During the remainder of
1995, the Company sold 636,000 shares of Common Stock to employees, consultants
and directors at a purchase price of $1.50 per share.
15. STOCK OPTIONS AND WARRANTS:
Stock Options
In June 1995, the Company adopted the 1995 Stock Plan (the 'Prior Stock
Plan'). The Prior Stock Plan was superseded in October 1995 by the 1995 Stock
Option/Stock Issuance Plan (the '1995 Stock Plan'). On August 28, 1996 the Board
of Directors adopted the 1996 Stock Option Plan (the '1996 Stock Plan') to
effectively supersede the 1995 Stock Plan. The 1995 Stock Plan provided for the
granting of options to purchase and for direct purchases of up to 1,033,333
shares of Common Stock. The 1996 Stock Plan provides for the granting of options
to purchase up to 1,000,000 shares of Common Stock.
Both the 1995 Stock Plan and the 1996 Stock Plan provide for the grants of
non-qualified and incentive options to purchase shares of the Company's Common
Stock to employees (including officers and directors who are employed by the
Company) of, and consultants to, the Company generally at the fair market value
determined by the Board on the date of the grant. The 1995 Stock Plan also
provided for direct purchases of Common Stock. The Board may determine the date
on which these shares vest and become exercisable. Shares purchased as the
result of the exercise of these options or direct purchases under the 1995 Stock
Plan are subject to the Company's right to repurchase such shares upon the
occurrence of certain events and at a price equal to the fair market value as
defined on the date of repurchase.
Options granted under the 1995 and 1996 stock plans have variable vesting
periods. No options granted under these plans have a term in excess of 10 years
after the date of grant.
In January and March, 1998 the Board voted to grant 66,535 and 319,008
options, respectively, to certain employees at exercise prices ranging from
$3.00 to $3.30 per share. The estimated fair market value of the
F-17
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
Company's Common Stock at the date of grant was determined to be $8.40 per
share. Accordingly, such grants were deemed to be compensatory options in
accordance with Accounting Principles Board Opinion No. 25, 'Accounting for
Stock Issued to Employees' ('APB No. 25'). Total option-related compensation
expense recognized for the three months ended March 31, 1998 was approximately
$29,000.
In June 1997, the Company adopted the 1997 Director Stock Option Plan (the
'Director Plan') which provides for the granting of non-qualifying stock options
to purchase-up to 50,000 shares of common stock. Under the Director Plan,
non-employee directors are entitled to receive options to purchase 2,000 shares
of common stock on July 1 of each year commencing in 1997. In addition, each
eligible non-employee director would receive an option to purchase 2,000 shares
of common stock upon the initial election to the Board of Directors. The
exercise price of the options, which vest in four equal installments starting
from the date of the grant, will equal the fair market value on the date of the
grant. Each option shall expire 10 years after the date of the grant.
A summary of stock option activity through March 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding at March 17, 1995
Granted........................................................ 1,023,718 $ 1.50
Exercised...................................................... (53,332) 1.50
Forfeited/canceled............................................. (20,000) 1.50
---------- ------
Outstanding at December 31, 1995................................. 950,386 1.50
Granted........................................................ 444,554 2.07
Exercised...................................................... (24,792) 1.50
Forfeited/canceled............................................. (450,028) 1.61
---------- ------
Outstanding at December 31, 1996................................. 920,120 1.72
Granted........................................................ 517,597 3.00
Exercised...................................................... (38,035) 1.64
Forfeited/canceled............................................. (349,475) 2.30
---------- ------
Outstanding at December 31, 1997................................. 1,050,207 2.16
Granted........................................................ 385,543 3.08
Exercised...................................................... (37,702) 1.71
Forfeited/canceled............................................. (102,267) 2.48
---------- ------
Outstanding at March 31, 1998.................................... 1,295,781 2.42
---------- ------
---------- ------
</TABLE>
Options vested and exercisable at December 31, 1996 and 1997 and March 31,
1998 were 384,005, 488,763, and 487,893, respectively.
In July and October 1995 the Company granted options to purchase a total of
260,000 shares of Common Stock other than pursuant to the 1995 Stock Plan at an
exercise price of $1.50 per share.
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies APB No. 25 and related Interpretations in accounting for options.
Accordingly, no compensation expense has been recognized for the issuance of
options. Pursuant to the required pro forma disclosure under the fair value
method of estimating compensation cost, the Company has estimated the fair value
of its stock options by applying a present value approach which does not
consider expected volatility of the underlying stock ('minimum value method')
using risk free interest rates based on zero coupon Treasury instruments with
maturities similar to the estimated option term and assuming no dividends.
F-18
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards in 1995, 1996 and 1997
consistent with the provisions of SFAS No. 123, the Company's net loss to common
stockholders and net loss per share to common stockholders would have been
increased to the SFAS No. 123 pro forma amounts indicated below in thousands
except per share amounts:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
1996 1997 MARCH 31, 1998
-------- -------- ---------------
<S> <C> <C> <C>
Net loss to common stockholders--as reported..................... $(25,390) $(21,817) $ (3,836)
Net loss to common stockholders--SFAS No. 123
pro forma...................................................... (25,427) (21,941) (3,874)
Net loss per share to common stockholders--as reported........... $ (10.53) $ (1.81)
Net loss per share to common stockholders--SFAS No. 123 pro
forma.......................................................... (10.59) (1.83)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of the effects on reported net income for future years. SFAS No. 123
does not apply to awards prior to 1996 and additional awards in future years are
anticipated.
The weighted average fair value per share at date of grant for stock
options granted during the years December 31, 1996 and 1997 and the three months
ended March 31, 1998 was $0.22, $0.38 and $2.14, respectively. The fair value of
each option granted during the years ended December 31, 1996 and 1997 is
estimated on the date of grant using the Black-Scholes option pricing model with
a zero expected volatility, a dividend yield of 0%, weighted average expected
lives of 6.3 and 8.0 years, respectively, and weighted average risk free
interest rates of 6.0% and 6.2%, respectively.
The following table summarizes the status of the Company's stock options
outstanding and exercisable at March 31, 1998:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------- ----------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
- --------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.50 to $1.80 528,788 5.4 years $ 1.54 422,941 $ 1.53
$2.70 to $3.30 766,993 9.6 years $ 3.03 64,952 $ 2.94
--------- ---------
Total 1,295,781 487,893
--------- ---------
--------- ---------
</TABLE>
Warrants
In connection with its engagement of a private placement agent for the sale
by the Company of the Series B Preferred Stock, the Company agreed in June 1995
to issue the placement agent a warrant to purchase 107,876 shares of Series B at
an exercise price of $4.625 per share. In connection with the Series B bridge
financing, the Company agreed in August 1995 to issue the lender a warrant to
purchase 285,714 shares of Series B at an exercise price of $2.345 per share,
which warrant was exercised on a cashless basis in September 1996 for 218,714
shares. Both of these warrants are for a term of five years, subject to earlier
expiration upon the occurrence of certain events. The Company believes the fair
market value of each warrant was nominal.
In connection with the issuance of Series C, the Company issued warrants to
purchase up to 1,409,127 shares of Series C at an exercise price of $4.50 per
share. These warrants are for a term of five years, subject to earlier
expiration upon the occurrence of certain events.
F-19
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
16. STOCK PURCHASE PLANS/AGREEMENTS:
In the period from inception to December 31, 1995, the Company sold 139,999
shares of Common Stock to certain employees of the Company at $1.50 per share
under the provisions of the 1995 Stock Plan or separate stock purchase
agreements. Employees vest in these shares over four years from their respective
dates of purchase, with 25% vesting on the first anniversary of the purchase and
pro rata thereafter over the remaining 36 months. If an employee who purchased
stock under either the 1995 Stock Plan or separate agreements ceases to be
employed by the Company, the Company at its option may elect to repurchase the
employee's unvested shares at the original cost paid by the employee for such
stock and vested shares at a price equal to the fair market value as determined
on the date of repurchase.
In October 1995, the Company sold 40,000 shares of Common Stock to a
director who also serves as a consultant to the Company for $1.50 per share of
which $10,000 was paid in cash and $50,000 was paid in the form of a nonrecourse
interest bearing note due March 31, 1996. In June 1996, the Company canceled the
promissory note plus interest accrued thereunder (totaling approximately
$52,000), in lieu of payment to the director for services rendered to the
Company in 1995 (for which the director was entitled to receive $25,000) and the
first six months of 1996 (for which the director was entitled to receive
$30,000) plus interest. These shares are also subject to certain repurchase
rights by the Company in the event that the director ceases to be either a
director of, or consultant to, the Company.
Pursuant to an agreement entered into in February 1997, the Company issued
to a director of the Company for services rendered 16,667 shares of Common Stock
which vest over six quarterly periods contingent upon services being provided
during the period. The Company recorded as compensation expense $50,000
representing the fair value of the Common Stock over the period during which the
services are rendered. Under the agreement, the Company also granted to the
director 8,333 non-qualified stock options with an exercise price at the fair
market value on the date of grant which vest over four years. In addition, the
Company reimbursed him $18,000 for operational expenses.
17. EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS:
In the United States, the Company maintains a Savings and Retirement Plan
(the '401 (k) Plan') under Section 401 of the Internal Revenue Code. In 1997,
the Company amended its 401(k) Plan specifying that employees can enter the plan
on the date of hire or the first day of the month. Employees must have attained
the age of 21. In prior years, employees were eligible to participate in the
401(k) Plan who worked a minimum of one year and had attained the age of 21. The
Company matched by 25% that portion representing the first 3% of an employee's
base salary and by 50% that portion representing the next 3% of an employee's
base salary. Effective in 1997, the employer contributions are discretionary
after considering business results at the conclusion of each plan year. The
Company has made mandatory contributions to the 401(k) Plan of $47,000 and
$63,000 during the period March 17 to December 31, 1995 and the year ended
December 31, 1996, respectively, and made no discretionary contributions during
the year ended December 31, 1997 and the three months ended March 31, 1997 and
1998.
In the United Kingdom, the Company maintains a defined contribution plan.
All permanent employees who have attained the age of 20, and are not
contributing to a personal pension plan, are eligible to participate. The
Company matches a percentage of employee contributions which are invested at
each participant's discretion in a choice of three funds. The employer matching
percentage is determined within defined age ranges. During the period March 17
to December 31, 1995, the years ended December 31, 1996 and 1997, and the three
months ended March 31, 1997 and 1998, the Company's match totaled $2,000,
$2,000, $2,000, $500 and $500, respectively.
F-20
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
18. DISCONTINUED OPERATIONS:
On June 25, 1996, the Company announced the discontinuation of the BIS
market research business. In connection with the discontinuance of such
operations, the Company terminated the personnel employed in developing and
compiling the data-intensive BIS market research products, ceased operations at
two of its licensed facilities in England and entered into contracts with two
independent IT service providers engaged to fulfill the Company's obligations to
customers of BIS under certain existing subscription agreements, all of which
expired by June 1997. The contracts with the service providers required that
Giga pay a percentage of the remaining contract value in exchange for their
fulfillment of Giga's obligations. In 1996, a total of approximately $623,000
was paid to the service providers to fulfill the obligations remaining under the
discontinued operations. A provision of approximately $1,187,000 was established
for probable refunds in connection with dissatisfied clients. At December 31,
1996 a total of approximately $720,000 remained in the provision for refunds.
The contracts with the providers also require the service providers to pay
royalties to Giga upon the renewal of contracts by them. Through December 31,
1997, no royalties had been earned or received. The results of these operations
prior to June 25, 1996 have been classified as discontinued operations and prior
year financial statements have been restated to reflect the discontinuance. A
charge of approximately $2,315,000 (net of taxes of approximately $158,000) was
recorded in 1996 for the loss on disposition of the operations consisting
primarily of rent and compensation. Included within the charge was a provision
related to the operations at two facilities in England which, based on the
market for subleased properties at the time, approximates the present value of
the expected expenses of these facilities for two and one-half years plus fifty
percent of the expected expenses over the remaining life of the leases and a
provision for the severance benefits payable to the terminated employees.
A gain of approximately $1,101,000 was recorded in 1997, mainly comprised
of a reversal of the provision for future lease commitments and related expenses
for two facilities in England and the provision which was established for
refunds to dissatisfied customers.
The net liabilities of the discontinued operations of the BIS business have
been segregated in the consolidated balance sheets and as of December 31, 1996
consist primarily of accounts receivable ($404,000), amounts payable related to
rent and facilities expenses ($2,245,000), customer refunds ($720,000),
liability to providers ($206,000) and salaries and related severance costs
($56,000). The operating results of the BIS business are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
MARCH 17, TO
DECEMBER 31, YEAR ENDED
1995 DECEMBER 31, 1996
------------ -----------------
<S> <C> <C>
Revenues.................................................... $ 11,329 $ 3,557
Pre-tax income.............................................. 2,987 35
Provision for income taxes.................................. 1,497 114
Net income (loss)........................................... 1,490 (79)
</TABLE>
On December 20, 1996 the Company elected to discontinue its Australian
econometric forecasting business, BIS Shrapnel, and commenced discussions with
the management team for the purchase of the entire business. A charge of
approximately $160,000 was recorded at the time for the loss on disposition of
the operations consisting primarily of estimated losses to be incurred in the
operation of the business through the anticipated disposal date. The entire
business was sold in July 1997 to the management team for AU$407,500, or
approximately $293,000 at the time of sale. A gain of approximately $212,000 was
recognized on the disposition after giving effect to transaction costs.
The net assets of the discontinued BIS Shrapnel business have been
segregated in the consolidated balance sheets and as of December 31, 1996
consist primarily of accounts receivable ($438,000), prepaid expenses
F-21
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
($394,000), property, plant and equipment, net ($404,000), deferred revenue
($496,000), reserve for loss on disposal ($162,000) and provision for long-term
service ($258,000).
The results of BIS Shrapnel operations prior to December 20, 1996 have been
classified as discontinued operations and prior year financial statements have
been restated to reflect the discontinuance. The operating results of BIS
Shrapnel operations are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 17, TO
DECEMBER 31, YEAR ENDED
1995 DECEMBER 31, 1996
------------ -----------------
<S> <C> <C>
Revenues.................................................... $ 3,747 $ 4,437
Pre-tax income.............................................. 154 (134)
Provision for income taxes.................................. -- --
Net income (loss)........................................... 154 (134)
</TABLE>
F-22
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
19. GEOGRAPHICAL MARKET INFORMATION:
The Company operates in one continuing business segment and in the
geographical markets indicated in the table below. Sales for continuing
operations are reflected in the segment from which the sales are made. The Other
International segment includes France, Italy, Germany and Korea.
<TABLE>
<CAPTION>
UNITED UNITED OTHER
STATES KINGDOM INTERNATIONAL TOTAL
-------- ------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
March 17, 1995 to December 31, 1995:
Revenues:
Total revenues.............................................. $ 3,755 $2,051 $ 1,270 $ 7,076
Transfers between areas..................................... -- (55 ) (62) (117)
-------- ------- ------------- --------
Unaffiliated revenues....................................... $ 3,755 $1,996 $ 1,208 $ 6,959
-------- ------- ------------- --------
-------- ------- ------------- --------
Loss from operations........................................... $ (5,183) $ (857 ) $ (565) $ (6,605)
Total assets................................................... 21,534 2,077 1,222 24,833
January 1, 1996 to December 31, 1996:
Revenues:
Total revenues.............................................. $ 6,961 $2,314 $ 948 $ 10,223
Transfers between areas..................................... -- (35 ) (50) (85)
-------- ------- ------------- --------
Unaffiliated revenues....................................... $ 6,961 $2,279 $ 898 $ 10,138
-------- ------- ------------- --------
-------- ------- ------------- --------
Loss from operations........................................... $(21,073) $(1,386) $(1,154) $(23,613)
Total assets................................................... 17,928 1,019 732 19,679
January 1, 1997 to December 31, 1997:
Revenues:
Total revenues.............................................. $ 17,249 $2,014 $ 396 $ 19,659
Transfers between areas..................................... -- -- -- --
-------- ------- ------------- --------
Unaffiliated revenues....................................... $ 17,249 $2,014 $ 396 $ 19,659
-------- ------- ------------- --------
-------- ------- ------------- --------
Loss from operations........................................... $(21,031) $(1,064) $(1,718) $(23,813)
Total assets................................................... 20,114 1,690 1,219 23,023
January 1, 1997 to March 31, 1997:
Revenues:
Total revenues.............................................. $ 3,432 $ 506 $ 88 $ 4,026
Transfers between areas..................................... -- -- -- --
-------- ------- ------------- --------
Unaffiliated revenues....................................... $ 3,432 $ 506 $ 88 $ 4,026
-------- ------- ------------- --------
-------- ------- ------------- --------
Loss from operations........................................... $ (5,193) $ (168 ) $ (401) $ (5,762)
Total assets................................................... 13,485 1,189 964 15,638
January 1, 1998 to March 31, 1998:
Revenues:
Total revenues.............................................. $ 7,852 $ 514 $ 186 $ 8,552
Transfers between areas..................................... -- -- -- --
-------- ------- ------------- --------
Unaffiliated revenues....................................... $ 7,852 $ 514 $ 186 $ 8,552
-------- ------- ------------- --------
-------- ------- ------------- --------
Loss from operations........................................... $ (2,977) $ (404 ) $ (402) $ (3,783)
Total assets................................................... 12,353 1,875 1,445 15,673
</TABLE>
F-23
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
Export Sales
The information below summarizes export sales by geographic area for the
United States operations of Giga (in thousands):
<TABLE>
<CAPTION>
TOTAL
EXPORT
EUROPE FAR EAST OTHER SALES
------ -------- ----- ------
<S> <C> <C> <C> <C>
March 17 to December 31, 1995............................ $191 $251 $105 $ 547
1996..................................................... 124 101 11 236
1997..................................................... 924 87 8 1,019
January 1 to March 31, 1997.............................. 153 41 2 196
January 1 to March 31, 1998.............................. 443 11 1 455
</TABLE>
20. SUBSEQUENT EVENTS:
In April 1998, the Company designated 2,000,000 shares of Preferred Stock
as Series D Convertible Preferred Stock ('Series D') and, for cash proceeds of
$1,500,000, issued 214,286 shares of Series D and warrants to purchase 115,714
shares of Series D at $9.00 per share. The warrants expire on April 5, 2003.
Each share of Series D is convertible, at the holder's option, into that
number of shares of Common Stock as determined by dividing the original purchase
price by the conversion price in effect at the time of conversion. Each share of
Series D is currently convertible into two-thirds of a share of Common Stock.
The Series D will automatically convert into Common Stock at the then
effective conversion price upon the earlier of (a) the approval by the holders
of at least two-thirds (2/3) of the then outstanding Series D shares, (b)
immediately prior to the closing of a firmly underwritten public offering of
Common Stock at a price of at least $15.75 per share (as adjusted for splits,
combinations and share dividends), and having aggregate cash proceeds of at
least $15,000,000 and (c) immediately prior to the closing of a firmly
underwritten public offering of Common Stock at a price of at least $12.00 per
share and having aggregate cash proceeds of at least $30,000,000 and which
closes on or prior to January 31, 1999.
In the event of liquidation, dissolution or winding up of the Company
(either voluntary or involuntary) or the merger or consolidation of the Company
with another corporation or the sale or transfer of all or substantially all of
the assets of the Company which is not agreed to by the holders of not less than
a majority of the Preferred Stock, voting together as a single class, and in
which the stockholders of the Company immediately prior to the such transaction
do not own more than 50% interest in the surviving entity, holders of Series D
will be entitled to receive out of the assets of the Company, prior and in
preference to any distribution of any of the assets of the Company to the
holders of Common Stock, but after payment of any liquidation preference which
may be provided for any other series of Preferred Stock, the original purchase
price for each outstanding share of Series D held (as adjusted for splits and
combinations), plus all declared and unpaid dividends prior to any distribution
to the holders of the Company's Common Stock. Following distribution of such
preferential amounts, holders of Series D shall not participate in any further
distribution.
Except as provided by law or in the Company's Amended and Restated
Certificate of Incorporation, the holders of Series D vote with the holders of
the Company's Common Stock on an as converted basis. In addition, as described
in the Certificate of Incorporation, the company may not take certain actions as
long as at least 1,000,000 shares of Series A, Series B, Series C and Series D
are outstanding, and without the approval of the holders of at least a majority
of the outstanding shares of Series A, Series B, Series C and Series D generally
voting together as a class.
Also in April 1998, the Company entered into a Loan and Warrant Purchase
Agreement whereby the Company issued convertible promissory notes with a face
value of $10,000,000 and warrants to purchase up to
F-24
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS TO MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
166,666 shares of Common Stock in exchange for cash proceeds of $10,000,000. The
notes bear interest at an annual interest rate of 12% payable in quarterly
installments. The warrants are exercisable at $3.00 per share for a period of
ten years from the date of the grant. The fair market value of the warrants was
recorded as a discount of $1,182,158 to the Notes and such Notes will be
recorded at $8,817,842. Accordingly $1,182,158 of accretion will be charged to
interest expense, in addition to the stated interest rates, over the term of the
notes.
The outstanding principal amount of the notes and warrants will be
automatically converted on February 1, 1999 into 1,428,571 shares of Series D
with warrants to purchase up to a maximum of 514,286 shares of Common Stock at
an exercise price of $13.50 per share unless the Company completes prior to that
date a public offering of Common Stock generating proceeds of at least
$30,000,000 at an offering price of at least $12.00 per share.
In May 1998, the Company issued an additional 71,429 shares of Series D and
warrants to purchase 38,571 shares of Series D for consideration of $500,000.
In May 1998, pursuant to a vote of the board of directors, the board
approved, subject to shareholder approval, a 1 for 3 reverse stock split of the
Common Stock effective on or prior to the closing of an initial public offering.
All share and per share data presented herein have been restated to reflect the
Common Stock split.
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Giga Information Group, Inc.:
We have audited the accompanying combined statements of operations and cash
flows of BIS Strategic Decisions for the period from January 1, 1995 to April 5,
1995. These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 1 to the combined financial statements, BIS Strategic
Decisions was acquired by Giga Information Group, Inc. on April 5, 1995 and has
been operated by the management of Giga since that date. The transaction
involved the payment of $200,000 cash and a convertible note in the principal
amount of $1,000,000 for all the outstanding shares of BIS Strategic Decisions.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined results of BIS Strategic Decisions'
operations and its cash flows for the period from January 1, 1995 to April 5,
1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 17, 1998
F-26
<PAGE>
BIS STRATEGIC DECISIONS
COMBINED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1 TO APRIL 5, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Information service revenues............................................................................. $ 2,116
Cost and expenses:
Cost of services and product development............................................................... 1,422
Sales and marketing.................................................................................... 167
General and administrative............................................................................. 1,047
Depreciation and amortization.......................................................................... 215
---------
Total costs and expenses....................................................................... 2,851
---------
Operating loss........................................................................................... (735)
Interest income, net..................................................................................... 19
---------
Loss from continuing operations before income taxes............................................ (716)
---------
Income tax benefit....................................................................................... (213)
---------
Loss from continuing operations................................................................ (503)
---------
Discontinued operations:
Income from the discontinued BIS market research business, net of tax effect........................... 597
Income from the discontinued Shrapnel business, net of tax effect...................................... 54
---------
Income from discontinued operations............................................................ 651
---------
Net income..................................................................................... $ 148
---------
---------
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-27
<PAGE>
BIS STRATEGIC DECISIONS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE PERIOD JANUARY 1 TO APRIL 5, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income............................................................................................. $ 148
Adjustments to reconcile net income to net cash used in continuing operating activities:
Net income from discontinued operations........................................................... (651)
Depreciation...................................................................................... 191
Amortization and write-down of goodwill........................................................... 24
Provision for deferred income taxes............................................................... 58
Allowance for doubtful accounts................................................................... 7
Changes in certain operating assets and liabilities:
Increase in accounts receivable................................................................... (383)
Decrease in unbilled services..................................................................... 183
Increase in prepaid expenses and other current assets............................................. (310)
Decrease in accounts payable and accrued expenses................................................. (531)
Increase in deferred revenue...................................................................... 370
---------
Net cash provided by (used in) operating activities of:
Continuing operations.................................................................................. (894)
Discontinued operations................................................................................ 681
---------
Net cash used in operating activities.................................................................... (213)
Cash flows from investing activities:
Purchase of fixed assets............................................................................... (83)
Proceeds from sale of equipment........................................................................ 32
---------
Net cash used in investing activities.................................................................... (51)
Cash flows from financing activities:
Proceeds from borrowings............................................................................... 22
Principal payments on borrowings....................................................................... (157)
Principal payments on capital lease obligations........................................................ (19)
---------
Net cash used in financing activities.................................................................... (154)
Effect of exchange rate changes on cash.................................................................. 219
---------
Net decrease in cash and cash equivalents................................................................ (199)
Cash and cash equivalents at beginning of period......................................................... 1,809
---------
Cash and cash equivalents at end of period............................................................... $ 1,610
---------
---------
Supplemental cash flow information:
Income taxes paid...................................................................................... $ 7
Interest paid.......................................................................................... $ 2
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-28
<PAGE>
BIS STRATEGIC DECISIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BACKGROUND:
BIS Strategic Decision, Inc. and its five foreign affiliates (collectively
'BIS Strategic Decisions' or 'BIS') were wholly-owned subsidiaries of Friday
Holdings, L.P. ('FHLP'). On April 5, 1995, Giga Information Group, Inc. ('Giga')
acquired 100% of the common stock outstanding of each of the BIS companies from
FHLP for $200,000 in cash and a $1,000,000 convertible promissory note. The
acquisition of BIS by Giga was accounted for as a purchase. As part of the
transaction, a $1,300,000 intangible asset was recorded representing the fair
value of payments being made on a property lease through May 1998 by a former
owner of BIS.
On June 25, 1996, Giga elected to discontinue the BIS market research
business. In connection with the discontinuance of such operations, Giga
terminated the personnel employed in developing and compiling the BIS market
research products, ceased operations at two of the licensed facilities in
England and entered into contracts with two independent IT service providers
engaged to fulfill Giga's obligations to customers of BIS under certain existing
subscription agreements, all of which expired on or before June 1997.
On December 20, 1996, Giga elected to discontinue its economic forecasting
business in Australia, BIS Shrapnel PTY Ltd. ('BIS Shrapnel'). In connection
with the discontinuance of such business, in July 1997 Giga sold the stock of
BIS Shrapnel to the management team in exchange for AU$407,500, or approximately
$293,000 at the time of sale.
The continuing operations reflected in the financial statements represent
revenues and expenses associated with BIS Information Service revenues which
include events, publications and consulting. The results of the BIS market
research business and BIS Shrapnel have been shown as discontinued operations.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The combined financial statements of BIS Strategic Decision include the
accounts of BIS Strategic Decisions, Inc., BIS Strategic Decisions, Ltd., BIS
Shrapnel, BIS Strategic Decisions, GmbH, BIS Strategic Decisions, Srl and BIS
Strategic Decisions, Sarl. All intercompany accounts and transactions have been
eliminated in combination.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that effect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
For international operations, the local currency is used as the functional
currency. Income statement items are translated at the average rates of exchange
for the year. Realized and unrealized exchange gains or losses arising from
transaction adjustments are reflected in operations and are not material.
F-29
<PAGE>
BIS STRATEGIC DECISIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of
three months or less at date of purchase.
Revenue Recognition
Revenues from events, publications and consulting are recognized as
follows:
Events--revenues and associated expenses are recognized during the
month that the conference is held.
Publications--revenues from general and research reports are
recognized when the report is published. Newsletter revenues are recognized
over the subscription period.
Consulting Services--revenues are recognized based on the percentage
of the service that has been performed.
Income Taxes
The Predecessor Companies recognize deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
Predecessor Companies' consolidated financial statements. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
currently enacted tax rates for the year in which the differences are expected
to reverse. The Predecessor Companies record a valuation allowance against net
deferred tax assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized.
The BIS companies filed separate tax returns.
Property and Equipment
Property and equipment are depreciated over the estimated useful lives of
the related assets using the straight-line method. Computers and related
equipment are depreciated over three years, furniture and fixtures are
depreciated over five years and motor vehicles are depreciated over four years.
Leasehold improvements are amortized over the lesser of the noncancelable term
of the related lease or their estimated economic lives. Maintenance and repairs
are charged to expense as incurred.
3. PROPERTY AND EQUIPMENT:
Depreciation expense and amortization of leasehold improvements was
$191,000 for the period from January 1, 1995 to April 5, 1995.
4. CREDIT ARRANGEMENTS:
One of the combined affiliates of the Company has a working capital line of
credit agreement with a bank under which it may borrow amounts up to $750,000.
The line of credit bears interest at the bank's base rate plus 1.5% and is
secured by all assets owned or leased by the affiliate. The agreement contains
operational covenants and expired on December 31, 1994; however, the bank has
allowed the affiliate to extend the line pending resolution of the sale of the
affiliate. As of April 5, 1995, no amounts were outstanding under the line.
The weighted average interest rate of outstanding borrowings was 7.5% for
the period January 1, 1995 to April 5, 1995.
F-30
<PAGE>
BIS STRATEGIC DECISIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES:
For financial reporting purposes, the income tax benefit from continuing
operations was based on the following components:
<TABLE>
<S> <C>
Pretax loss from continuing operations:
United States................................................... $(497)
Foreign......................................................... (219)
-----
Total pretax loss from continuing operations............ $(716)
-----
-----
</TABLE>
The results of continuing operations include a foreign tax benefit of
$3,000.
6. PENSION PLANS:
BIS has established the CAP International Savings and Retirement Plan (the
401(k) Plan), a profit sharing plan under Section 401 of the Internal Revenue
Code. Employees are eligible to participate in the 401(k) Plan by meeting
certain requirements, including length of service and minimum age. BIS matches
the first 3% of an employee's contribution by 25% and the next 3% of an
employee's contribution by 50%. BIS may also make additional contributions to
the plan at the discretion of the Board of Directors. BIS has not made any
discretionary contributions to the profit sharing plan. For the period January 1
to April 5, 1995, BIS contributed $23,000 to the plan.
7. LEASE COMMITMENTS:
BIS leases certain office space and equipment under operating lease
agreements. Rent expense was $232,000 for the period January 1 to April 5, 1995.
8. JOINT VENTURE AGREEMENT:
On October 18, 1991, BIS entered into a joint venture agreement with a
Japanese company. The purpose of the joint venture was to provide additional
market penetration in Japan for its products and services. Under the terms of
the joint venture agreement, the Predecessor Companies may be required to pay
its Japanese partner approximately $75,000 if cumulative sales under the joint
venture do not meet certain agreed upon levels by December 31, 1995. In
addition, on or prior to April 1, 1996, the Predecessor Companies may be
required to increase its investment in the joint venture by approximately
$23,000.
9. GEOGRAPHIC MARKETS:
BIS operates in one business segment and in the geographical markets
indicated in the table below. Revenues from continuing operations are reflected
in the market from which the sales are made. The Other International market
includes France, Italy and Germany.
JANUARY 1, 1995 TO APRIL 5, 1995 (IN THOUSANDS):
<TABLE>
<CAPTION>
NORTH UNITED OTHER
AMERICA KINGDOM INTERNATIONAL TOTAL
------- ------- ------------- ------
<S> <C> <C> <C> <C>
Revenues:
Total revenues........................................... $1,113 $ 499 $ 586 $2,198
Transfers between areas.................................. -- (19) (63) (82)
------- ------- ------ ------
Unaffiliated revenues.................................... $1,113 $ 480 $ 523 $2,116
------- ------- ------ ------
------- ------- ------ ------
Loss from continuing operations............................ $ (537 ) $ (22) $(176) $ (735)
</TABLE>
F-31
<PAGE>
BIS STRATEGIC DECISIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Export sales by geographic area for the U.S. operations of BIS totaled
$163,000 for the period January 1 to April 5, 1995 and were comprised of $57,000
to Europe, $75,000 to the Far East and $31,000 to other areas.
10. DISCONTINUED OPERATIONS:
On June 25, 1996, Giga decided to discontinue the BIS Market Research
business. The results of these operations have been classified as discontinued
operations and the financial statements have been restated to reflect the
discontinuance. The operating results of the business for the period from
January 1 to April 5, 1995 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Revenues......................................................... $3,994
Pre-tax income................................................... 876
Provision for income taxes....................................... 279
Net income....................................................... 597
</TABLE>
On December 20, 1996, Giga decided to discontinue its Australian
econometric forecasting business. The results of these operations have been
classified as discontinued operations and the financial statements have been
restated to reflect the discontinuance. The operating results of the business
for the period from January 1 to April 5, 1995 are summarized as follows (in
thousands):
<TABLE>
<S> <C>
Revenues......................................................... $1,121
Pre-tax income................................................... 54
Provision for income taxes....................................... --
Net income....................................................... 54
</TABLE>
F-32
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Consolidated Financial Data........... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 20
Business....................................... 27
Management..................................... 34
Certain Transactions........................... 41
Principal Stockholders......................... 45
Description of Capital Stock................... 48
Shares Eligible for Future Sale................ 51
Underwriting................................... 53
Legal Matters.................................. 55
Experts........................................ 55
Additional Information......................... 55
Index to Consolidated Financial
Statements................................... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
3,000,000 SHARES
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
PRUDENTIAL SECURITIES INCORPORATED
, 1998
================================================================================
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the Securities and Exchange Commission registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................................................ $ 13,570
NASD Filing Fee............................................................................. 5,100
Nasdaq Listing Fee.......................................................................... 74,625
Blue Sky Fees and Expenses.................................................................. 30,000
Transfer Agent and Registrar Fees........................................................... 3,500
Accounting Fees and Expenses................................................................ 200,000
Legal Fees and Expenses..................................................................... 250,000
Printing, Engraving and Mailing Expenses.................................................... 180,000
Premium for directors and officers insurance................................................ --
Miscellaneous............................................................................... 150,000
--------
Total.................................................................................. $906,795
--------
</TABLE>
- ------------------
* To be completed by Amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Seven of the Registrant's Amended and Restated Certificate of
Incorporation (the 'Restated Certificate') provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach of
fiduciary duty as a director, except to the extent that the Delaware General
Corporation Law (the 'DGCL') prohibits the elimination or limitation of
liability of directors for breach of fiduciary duty.
Article Eight of the Restated Certificate provides that a director or
officer of the Registrant (a) shall be indemnified by the Registrant against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement incurred in connection with any litigation or other legal proceeding
(other than an action by or in the right of the Registrant) brought against him
by virtue of his position as a director or officer of the Registrant if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Registrant, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful and (b) shall be indemnified by the Registrant against all expenses
(including attorneys' fees) and amounts paid in settlement incurred in
connection with any action by or in the right of the Registrant brought against
him by virtue of his position as a director or officer of the Registrant if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Registrant, except that no indemnification
shall be made with respect to any matter as to which such person shall have been
adjudged to be liable to the Registrant, unless a court determines that, despite
such adjudication but in view of all of the circumstances, he is entitled to
indemnification of such expenses. Notwithstanding the foregoing, to the extent
that a director or officer has been successful, on the merits or otherwise,
including, without limitation, the dismissal of an action without prejudice, he
is required to be indemnified by the Registrant against all expenses (including
attorneys' fees) incurred in connection therewith. Expenses shall be advanced to
a director or officer at his request, provided that he undertakes to repay the
amount advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or
II-1
<PAGE>
officer must give the Registrant notice of the action for which indemnity is
sought and the Registrant has the right to participate in such action or assume
the defense thereof.
Section 145 of the DGCL provides that a corporation has the power to
indemnify a director, officer, employee or agent of the corporation and certain
other persons serving at the request of the corporation in related capacities
against amounts paid and expenses incurred in connection with an action or
proceeding to which he is or is threatened to be made a party by reason of such
position, if such person shall have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, in any criminal proceeding, if such person had no reasonable
cause to believe his conduct was unlawful; provided that, in the case of actions
brought by or in the right of the corporation, no indemnification shall be made
with respect to any matter as to which such person shall have been adjudged to
be liable to the corporation unless and only to the extent that the adjudicating
court determines that such indemnification is proper under the circumstances.
The Board of Directors on April 26, 1996 approved, in accordance with
Section 145 of the DGCL, a Directors and Officers Indemnification Agreement to
be entered into between the Registrant and each of Registrant's directors and
officers. Pursuant to the terms of the agreement, the Registrant agrees to hold
any director or officer harmless against any and all expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by such director
or officer in connection with any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative
(including an action by or in the right of the Registrant), to which the
director or officer becomes a party at any time or is threatened to be made a
party, by reason of the fact that the director or officer is a director,
officer, employee or agent of the Registrant, or serves at the request of the
Registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
and otherwise to the fullest extent as may be provided to the director or
officer by the Registrant under the non-exclusivity provisions of Article V of
the Bylaws of the Registrant and the Delaware General Corporation Law. The
agreement also obligates the Registrant under certain circumstances to advance
amounts and contribute to any amounts paid out by a director or officer as a
result of his or her role as a director or officer of the Registrant in cases
where indemnification by the Registrant is not available. This agreement is also
intended to indemnify special advisors of the Registrant.
Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed as
Exhibit 1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock and other securities issued by the Registrant since
the Registrant's inception in March 1995. Further included is the consideration,
if any, received by the Registrant for such shares of capital stock and other
securities and information relating to the section of the Securities Act, or
rule of the Commission under which exemption from registration was claimed. All
awards of options did not involve any sale under the Securities Act and none of
these securities was registered under the Securities Act.
1. Since March 1995, the Registrant has issued options to purchase an
aggregate of 2,464,957 shares of Common Stock at a weighted average exercise
price of $2.51 per share. During this same time period, the Registrant has
issued a total of 207,601 shares of Common Stock pursuant to the exercise of
options previously granted.
2. In March 1995, the Registrant sold to its Chairman of the Board of
Directors and Chief Executive Officer 1,400,000 shares of Common Stock at a
purchase price of $0.07125 per share.
3. In April 1995, the Registrant issued to Friday Holdings, L.P. a 5%
$1.0 million principal amount convertible promissory note in connection with the
Registrant's acquisition of BIS Strategic Decisions, Inc. and its five foreign
affiliates.
4. In June 1995, the Registrant issued a warrant to purchase 107,876
shares of Series B Preferred Stock, $.001 par value ('Series B Preferred
Stock'), to Montgomery Securities in consideration for certain placement agent
services at an exercise price of $4.625 per share.
II-2
<PAGE>
5. In July 1995 and October 1995, the Registrant issued and sold an
aggregate of 570,000 shares of Series A Preferred Stock, $.001 par value
('Series A Preferred Stock') to a group of investors, including certain
employees and directors, at a purchase price of $5.00 per share.
6. In July 1995, the Registrant issued 160,000 shares of Series A
Preferred Stock to its Chairman of the Board of Directors and Chief Executive
Officer and to its Senior Vice President, Research & Technology in connection
with the Registrant's acquisition of a majority of the shares of ExperNet
Corporation ('ExperNet') and in December 1995, the Registrant issued to its
Senior Vice President, Research & Technology, in connection with the
Registrant's acquisition of the remaining shares of ExperNet, a 6% $400,000
convertible promissory note.
7. In August 1995, the Company issued to Mr. Crandall 40,000 shares of
Common Stock at a purchase price of $1.50 per share.
8. In August 1995, the Registrant issued a warrant to purchase 285,714
shares of Series B Preferred Stock to an investor at an exercise price of $2.345
per share. In September 1996, the investor made a cashless exercise of the
warrant and received 218,714 shares of the Company's Series B Preferred Stock.
9. Throughout 1995, the Registrant issued 528,620 shares of Common Stock
to a group of employees, consultants and directors at a purchase price of $1.50
per share.
10. In November 1995, bridge financing in the principal amount of
$2,000,000 was automatically converted into 571,428 shares of Series B Preferred
Stock.
11. In November 1995, February 1996 and December 1996, the Registrant
issued and sold an aggregate of 7,354,500 shares of Series B Preferred Stock, to
a group of investors at a purchase price of $3.50 per share.
12. In August 1996, the Registrant issued 8,333 shares of Common Stock to
an employee in connection with the acquisition of his business.
13. In May and December 1997, the Company issued and sold an aggregate of
2,609,491 shares of Series C Preferred Stock, $.001 par value ('Series C
Preferred Stock'), at a purchase price of $4.11 per share to a limited number of
investors (the 'Series C Investors').
14. In January 1998, the Company issued warrants to purchase an aggregate
of 1,409,127 shares of Series C Preferred Stock at an exercise price of $5.28
per share to the Series C Investors.
15. In April 1998, the Company issued convertible promissory notes in the
aggregate principal amount of $10.0 million and warrants to purchase an
aggregate of 166,666 shares of Common Stock at an exercise price of $3.00 per
share to certain affiliates of Friedman, Billings, Ramsey & Co., Inc. ('FBR').
16. In April and May 1998, the Company issued and sold an aggregate of
285,715 shares of Series D Preferred Stock, par value $.001 per share ('Series D
Preferred Stock'), at a purchase price of $7.00 per share and warrants to
purchase an additional 154,285 shares of Series D Preferred Stock at an exercise
price of $9.00 per share.
The shares of capital stock and other securities issued in the above
transactions were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Securities Act or Regulation D or Rule
701 promulgated under the Securities Act, relative to sales by an issuer not
involving any public offering or as not constituting sales under Section 2(3) of
the Securities Act.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 ** -- Form of Underwriting Agreement.
3.1* -- Fourth Amended and Restated Certificate of Incorporation of the Registrant.
3.2** -- Form of Certificate of Amendment to Amended and Restated Certificate of Incorporation of the
Registrant (to be filed with the State of Delaware prior to the closing of the Offering to which this
Registration Statement relates).
3.3* -- Certificate of Designations of Series D Preferred Stock of the Registrant.
3.4* -- Form of Fifth Amended and Restated Certificate of Incorporation of the Registrant (to be filed with
the State of Delaware simultaneous with the closing of the Offering to which this Registration
Statement relates).
3.5* -- By-Laws of the Registrant.
3.6* -- Form of Amended and Restated Bylaws of the Registrant (to become effective upon the closing of the
Offering to which this Registration Statement relates).
4.1* -- Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant.
5** -- Opinion of Weil, Gotshal & Manges LLP with respect to the validity of the securities being offered.
10.1* -- Series B Preferred Stock Purchase Agreement dated November 13, 1995, as amended, between the
Registrant and the Investors named on Exhibit A thereto.
10.2* -- Form of Series B Preferred Stock Purchase Warrant dated February 28, 1996 registered in the name of
Montgomery Securities.
10.3 -- *(a) Series C Preferred Stock and Warrant Purchase Agreement dated May 9, 1997, between the
Registrant and the Investors named in Exhibit A thereto.
-- *(b) Amendment No. 1 to Series C Preferred Stock and Warrant Purchase Agreement.
-- *(c) Letter Agreement re: Purchase of Series C Stock, between the Company and the Investors named on
the signature page thereto.
10.4* -- Form of Series C Preferred Stock Purchase Warrant dated January 2, 1998 and issued to the Investors
in the Series C Financing.
10.5* -- Series D Preferred Stock and Warrant Purchase Agreement dated April 6, 1998 between the Registrant
and the Investors named in Exhibit A thereto.
10.6 -- *(a) Registration Rights Agreement dated November 13, 1995, among the Registrant, the Investors named
on Exhibit A thereto, Gideon I. Gartner and David L. Gilmour.
-- *(b) Amendment No. 1 to Registration Rights Agreement.
-- *(c) Amendment No. 2 to Registration Rights Agreement.
-- *(d) Amendment No. 3 to Registration Rights Agreement.
-- *(e) Amendment No. 4 to Registration Rights Agreement.
10.7 -- *(a) Co-Sale and Stock Restriction Agreement dated November 13, 1995, among the Registrant, Gideon I.
Gartner and the stockholders named on the signature pages thereto.
-- *(b) Amendment No. 1 to Co-Sale Agreement.
-- *(c) Amendment No. 2 to Co-Sale Agreement.
-- *(d) Amendment No. 3 to Co-Sale Agreement.
10.8* -- Form of Series D Preferred Stock Purchase Warrant dated April 7, 1998 and issued to the Investors in
the Series D Financing.
10.9* -- Loan and Warrant Purchase Agreement dated April 7, 1998 between the Registrant and the Lenders named
in Schedule A thereto.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.10* -- Form of Convertible Promissory Note dated April 7, 1998 issued to certain affiliates of Friedman,
Billings, Ramsey & Co., Inc.
10.11* -- Form of Common Stock Purchase Warrant dated April 7, 1998 issued to certain affiliates of Friedman,
Billings, Ramsey & Co., Inc.
10.12* -- Security Agreement dated as of April 7, 1998 between the Registrant and an affiliate of Friedman,
Billings, Ramsey & Co., Inc. as agent for the Lenders.
10.13* -- Consulting Agreement dated February 1, 1998 between the Registrant and David Gilmour.
10.14* -- Separation Agreement dated January 7, 1998 between the Registrant and Henry S. Givray.
10.15* -- Separation Agreement dated October 2, 1997 between the Registrant and Jacques Bouvard.
10.16* -- Non-competition Agreement dated November 13, 1995 between the Registrant and Gideon I. Gartner.
10.17 -- *(a) Letter Agreement dated July 12, 1996 between the Registrant and Richard L. Crandall.
-- *(b) Letter Agreement dated February 11, 1997 between the Registrant and Richard L. Crandall.
10.18* -- Lease dated October 31, 1995 between the Registrant and Cambridge 1400 Limited Partnership.
10.19 -- *(a) Lease dated October 6, 1987, as amended, between BIS Strategic Decisions, Inc. and Charles A.
Pesko, Jr., as Trustee of Longwater Circle Trust.
-- **(b) Lease dated May 29, 1998 between the Registrant and Trinet Property Partners, L.P.
10.20* -- 1995 Stock Option/Stock Issuance Plan.
10.21* -- 1996 Stock Option Plan.
10.22* -- 1997 Director Option Plan.
21* -- Subsidiaries of the Registrant.
23.1** -- Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5).
23.2** -- Consent of PricewaterhouseCoopers LLP.
24* -- Powers of Attorney (included on page II-7).
27* -- Financial Data Schedule.
99.1** -- Consent of Josh S. Weston.
</TABLE>
- ------------------
* Previously filed.
** Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Registrant and the laws of
the State of Delaware, or otherwise, the Registrant has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser. The undersigned Registrant hereby
undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(l) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CAMBRIDGE,
COMMONWEALTH OF MASSACHUSETTS, ON THIS 28TH DAY OF JULY, 1998.
GIGA INFORMATION GROUP, INC.
By: /s/ GIDEON I. GARTNER
------------------------------------
Gideon I. Gartner
Chairman of the Board,
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE APPEARS BELOW
HEREBY CONSTITUTES GIDEON I. GARTNER AND DANIEL M. CLARKE, AND EACH OF THEM
SINGLY, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, EACH WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION (UNTIL REVOKED IN WRITING) TO SIGN FOR SUCH
PERSON AND IN SUCH PERSON'S NAME AND CAPACITY INDICTAED BELOW, ANY AND ALL
AMENDMENTS TO THIS REGISTRATION STATEMENT AND ANY OTHER REGISTRATION STATEMENT
FILED IN CONNECTION WITH THE SAME OFFERING PURSUANT TO RULE 462(B) UNDER THE
SECURITIES ACT, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER
DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION,
HEREBY RATIFYING AND CONFIRMING SUCH PERSON'S SIGNATURE AS IT MAY BE SIGNED BY
SUCH ATTORNEYS TO ANY AND ALL SUCH AMENDMENTS AND ADDITIONAL REGISTRATION
STATEMENTS.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------------------------- -------------
<S> <C> <C>
/s/ Gideon I. Gartner Chairman of the Board of Directors, President July 28, 1998
- --------------------------------------------- and Chief Executive Officer (Principal
Gideon I. Gartner Executive Officer)
* Senior Vice President and Chief Financial July 28, 1998
- ---------------------------------------------
Daniel M. Clarke Officer, Treasurer and Secretary (Principal
Financial and Accounting Officer)
* Director July 28, 1998
- ---------------------------------------------
David L. Gilmour
* Director July 28, 1998
- ---------------------------------------------
Neill H. Brownstein
* Director July 28, 1998
- ---------------------------------------------
Richard L. Crandall
* Director July 28, 1998
- ---------------------------------------------
Irwin Lieber
* Director July 28, 1998
- ---------------------------------------------
Bernard Goldstein
By: /s/ Gideon I. Gartner
------------------------------------------
Gideon I. Gartner
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ---------- --------------------------------------------------------------------------------------------- --------
<S> <C> <C> <C>
1 ** -- Form of Underwriting Agreement
3.1* -- Fourth Amended and Restated Certificate of Incorporation of the Registrant
3.2** -- Form of Certificate of Amendment to Amended and Restated Certificate of Incorporation
of the Registrant (to be filed with the State of Delaware prior to the closing of the
Offering to which this Registration Statement relates)
3.3* -- Certificate of Designations of Series D Preferred Stock of the Registrant
3.4* -- Form of Fifth Amended and Restated Certificate of Incorporation of the Registrant (to
be filed with the State of Delaware simultaneous with the closing of the Offering to
which this Registration Statement relates)
3.5* -- By-Laws of the Registrant
3.6* -- Form of Amended and Restated Bylaws of the Registrant (to become effective upon the
closing of the Offering to which this Registration Statement relates)
4.1* -- Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant
5** -- Opinion of Weil, Gotshal & Manges LLP with respect to the validity of the securities
being offered.
10.1* -- Series B Preferred Stock Purchase Agreement dated November 13, 1995, as amended,
between the Registrant and the Investors named on Exhibit A thereto
10.2* -- Form of Series B Preferred Stock Purchase Warrant dated February 28, 1996 registered in
the name of Montgomery Securities
10.3 -- *(a) Series C Preferred Stock and Warrant Purchase Agreement dated May 9, 1997, between
the Registrant and the Investors named in Exhibit A thereto
-- *(b) Amendment No. 1 to Series C Preferred Stock and Warrant Purchase Agreement
-- *(c) Letter Agreement re: Purchase of Series C Stock, between the Company and the
Investors named on the signature page thereto
10.4* -- Form of Series C Preferred Stock Purchase Warrant dated January 2, 1998 and issued to
the Investors in the Series C Financing
10.5* -- Series D Preferred Stock and Warrant Purchase Agreement dated April 6, 1998 between the
Registrant and the Investors named in Exhibit A thereto
10.6 -- *(a) Registration Rights Agreement dated November 13, 1995, among the Registrant, the
Investors named on Exhibit A thereto, Gideon I. Gartner and David L. Gilmour
-- *(b) Amendment No. 1 to Registration Rights Agreement
-- *(c) Amendment No. 2 to Registration Rights Agreement
-- *(d) Amendment No. 3 to Registration Rights Agreement
-- *(e) Amendment No. 4 to Registration Rights Agreement
10.7 -- *(a) Co-Sale and Stock Restriction Agreement dated November 13, 1995, among the
Registrant, Gideon I. Gartner and the stockholders named on the signature pages thereto
-- *(b) Amendment No. 1 to Co-Sale Agreement
-- *(c) Amendment No. 2 to Co-Sale Agreement
-- *(d) Amendment No. 3 to Co-Sale Agreement
10.8* -- Form of Series D Preferred Stock Purchase Warrant dated April 7, 1998 and issued to the
Investors in the Series D Financing
10.9* -- Loan and Warrant Purchase Agreement dated April 7, 1998 between the Registrant and the
Lenders named in Schedule A thereto
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ---------- --------------------------------------------------------------------------------------------- --------
<S> <C> <C> <C>
10.10* -- Form of Convertible Promissory Note dated April 7, 1998 issued to certain affiliates of
Friedman, Billings, Ramsey & Co., Inc.
10.11* -- Form of Common Stock Purchase Warrant dated April 7, 1998 issued to certain affiliates
of Friedman, Billings, Ramsey & Co., Inc.
10.12* -- Security Agreement dated as of April 7, 1998 between the Registrant and an affiliate of
Friedman, Billings, Ramsey & Co., Inc. as agent for the Lenders
10.13* -- Consulting Agreement dated February 1, 1998 between the Registrant and David Gilmour
10.14* -- Separation Agreement dated January 7, 1998 between the Registrant and Henry S. Givray
10.15* -- Separation Agreement dated October 2, 1997 between the Registrant and Jacques Bouvard
10.16* -- Non-competition Agreement dated November 13, 1995 between the Registrant and Gideon I.
Gartner
10.17 -- *(a) Letter Agreement dated July 12, 1996 between the Registrant and Richard L.
Crandall
-- *(b) Letter Agreement dated February 11, 1997 between the Registrant and Richard L.
Crandall
10.18* -- Lease dated October 31, 1995 between the Registrant and Cambridge 1400 Limited
Partnership
10.19 -- *(a) Lease dated October 6, 1987, as amended, between BIS Strategic Decisions, Inc. and
Charles A. Pesko, Jr., as Trustee of Longwater Circle Trust
-- **(b) Lease dated May 29, 1998 between the Registrant and Trinet Property Partners,
L.P.
10.20* -- 1995 Stock Option/Stock Issuance Plan
10.21* -- 1996 Stock Option Plan
10.22* -- 1997 Director Option Plan
21* -- Subsidiaries of the Registrant
23.1** -- Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5)
23.2** -- Consent of PricewaterhouseCoopers LLP
24* -- Powers of Attorney (included on page II-7)
27* -- Financial Data Schedule
99.1** -- Consent of Josh S. Weston
</TABLE>
- ------------------
* Previously filed.
** Filed herewith.
<PAGE>
REGISTRATION NO. 333-52899
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
FILED WITH
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GIGA INFORMATION GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 1.1
GIGA INFORMATION GROUP, INC.
3,000,000 Shares1
Common Stock
UNDERWRITING AGREEMENT
_______ ___, 1998
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
PRUDENTIAL SECURITIES INCORPORATED as Representatives
of the Several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Ladies and Gentlemen:
Giga Information Group, Inc., a Delaware corporation (the
"Company"), hereby confirms its agreement with the several underwriters named
in Schedule I hereto (the "Underwriters"), for whom you have been duly
authorized to act as representatives (in such capacity, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.
1. Securities. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell to the several Underwriters
an aggregate of __________ shares (the "Firm Securities") of the Company's
common stock, par value $.01 per share (the "Common Stock"). The Company also
proposes to grant to the several Underwriters an option to purchase up to
_________ additional shares of Common Stock (the "Option Securities" and
collectively with the Firm Securities, the "Securities") if requested by the
Representatives as provided in Section 3 of this Agreement. The Common Stock
is more fully described in the Registration Statement and the Prospectus
hereinafter mentioned.
2. Representations, Warranties and Agreements of the Company.
The Company hereby represents and warrants to, and agrees
with, each of the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-52899)
with respect to the Securities, including a prospectus subject to completion,
has been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations thereunder) and has been filed with the Securities and Exchange
Commission (the "Commission"), and one or more amendments to such registration
statement have been so filed, if applicable. Copies of such registration
statement and of each amendment thereto, if any, including the related
preliminary prospectus (meeting the requirements of
- --------
1 Plus an option to purchase from the Company up to 450,000 additional
shares to cover over-allotments, if any.
<PAGE>
Rule 430A under the Act) heretofore filed by the Company with the Commission
have been delivered to you. After the execution of this Agreement, the Company
will file with the Commission either (i) if such registration statement, as it
may have been amended, has been declared by the Commission to be effective
under the Act, either (A) if the Company relies on Rule 434 under the Act, a
Term Sheet (as hereinafter defined) relating to the Securities, that shall
identify the Preliminary Prospectus (as hereinafter defined) that it
supplements containing such information as is required or permitted by Rules
434, 430A and 424(b) under the Act, or (B) if the Company does not rely on
Rule 434 under the Act, a prospectus in the form most recently included in an
amendment to such registration statement (or, if no such amendment shall have
been filed, in such registration statement), with such changes or insertions
as are required by Rule 430A under the Act or permitted by Rule 424(b) under
the Act, and in the case of either clause (i)(A) or (i)(B) of this sentence,
as have been provided to and approved by the Representatives prior to the
execution of this Agreement, or (ii) if such registration statement, as it may
have been amended, has not been declared by the Commission to be effective
under the Act, an amendment to such registration statement, including a form
of prospectus, a copy of which amendment has been furnished to and approved by
the Representatives prior to the execution of this Agreement. The Company may
also file a related abbreviated registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering certain
additional Securities, which registration statement shall be effective upon
filing with the Commission. If the Company has elected to rely on Rule 462(b)
under the Act, the Company (i) has filed a Rule 462(b) Registration Statement
in compliance with the Act and the rules and regulations of the Commission
promulgated thereunder, which Rule 462(b) Registration Statement is effective
upon filing pursuant to Rule 462(b) under the Act, and has received
confirmation of its receipt and (ii) has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee. As
used in this Agreement, the term "Original Registration Statement" means the
registration statement initially filed relating to the Securities, as amended
at the time when it was or is declared effective, including all financial
statement schedules and exhibits thereto and including any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus
(as hereinafter defined); the term "Rule 462(b) Registration Statement" means
any abbreviated registration statement filed with the Commission pursuant to
Rule 462(b) under the Act (including the Registration Statement and any
Preliminary Prospectus or Prospectus incorporated therein at the time such
Registration Statement becomes effective); the term "Registration Statement"
includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each
prospectus subject to completion filed with such registration statement or any
amendment thereto (including the prospectus subject to completion, if any,
included in the Registration Statement or any amendment thereto at the time it
was or is declared effective); the term "Prospectus" means (A) if the Company
relies on Rule 434 under the Act, the Term Sheet relating to the Securities
that is first filed pursuant to Rule 424(b)(7) under the Act, together with
the Preliminary Prospectus identified therein that such Term Sheet
supplements, (B) if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule 424(b) under the
Act, or (C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the Act, the
prospectus included in the Registration Statement; and the term "Term Sheet"
means any term sheet that satisfies the requirements of Rule 434 under the
Act. Any reference herein to the "date" of a Prospectus that includes a Term
Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
such purpose. When any Preliminary Prospectus was filed with the Commission,
it (A) contained all statements required to be stated therein in accordance
with, and complied in all material respects with the requirements of, the Act
and the rules and regulations of the Commission promulgated thereunder, and
(B) did not include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading. When the
Registration Statement or any amendment thereto was or is declared effective,
it (A) contained all statements required to be stated therein in accordance
with, and complied in all material respects with the requirements of, the Act
and the rules and regulations of the Commission promulgated thereunder, and
(B) did not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. When the Prospectus or any Term Sheet that
is a part thereof or any amendment or supplement to the Prospectus is filed
with the Commission pursuant to Rule 424(b) (or, if the Prospectus or any part
thereof or such amendment or supplement is not required to be so
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<PAGE>
filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared effective)
and on the Firm Closing Date and any Option Closing Date (both as hereinafter
defined), the Prospectus or any Term Sheet, if applicable, as amended or
supplemented at any such time, (A) contained all statements required to be
stated therein in accordance with, and complied in all material respects with
the requirements of, the Act and the rules and regulations of the Commission
promulgated thereunder and (B) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph (b) do
not apply to statements contained in, or omissions from, any Preliminary
Prospectus, the Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by or on behalf
of the Underwriters specifically for use therein.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing and in good standing under the laws of
the jurisdiction of its incorporation and is duly qualified to transact
business as a foreign corporation and is in good standing under the laws of
all other jurisdictions where the ownership or leasing of its properties or
the conduct of its businesses requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, properties, business prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.
(d) Each of the Company and its subsidiaries has full power
(corporate and other) and authority to own, lease and operate its properties
and conduct its businesses as described in the Registration Statement and
Prospectus.
(e) All issued and outstanding shares of capital stock of each
of the Company's subsidiaries have been duly authorized and validly issued,
are fully paid and nonassessable, and have not been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right and are owned by the Company free and
clear of any pledge, security interests, liens, encumbrances, claims or
equitable interests. The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
subsidiaries listed on Schedule A hereto.
(f) The authorized and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization"
and conforms to the description thereof and the statements relating thereto
contained in the Registration Statement and the Prospectus (and such
statements correctly state the substance of the instruments defining the
capitalization of the Company to the extent required by the Act and the rules
and regulations promulgated thereunder). All of the issued and outstanding
shares of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, have been issued in compliance
with all federal and state securities laws, and have not been issued in
violation of any preemptive rights or other rights to subscribe for or
purchase securities. The Securities have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement, and at the Firm Closing
Date or the related Option Closing Date (as the case may be), when issued and
delivered by the Company against payment therefor in accordance herewith, will
be duly and validly issued, fully paid and nonassessable, and will be sold
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest; and no preemptive right, co-sale right, registration
right, right of first refusal or other similar right of stockholders exists
with respect to any of the Firm Securities or Option Securities to be
purchased from the Company hereunder or, except with respect to the co-sale
rights set forth in the Prospectus, any of the Common Stock issued and
outstanding on the date hereof other than those that have been expressly
waived prior to the date hereof and those that will automatically expire upon
and will not apply to the consummation of the transactions contemplated on the
Closing Date. No further approval or authorization of any stockholder, the
Board of Directors of the Company or others is required for the issuance and
sale or transfer of the Securities except as may be required under the Act or
state securities or Blue Sky laws.
(g) Except as disclosed in the Prospectus, there are no
outstanding (i) securities or obligations of the Company or its subsidiaries
convertible into or exchangeable for any capital stock or ownership interests
of the Company or its subsidiaries, (ii) warrants, rights or options to
subscribe for or purchase from the Company or its subsidiaries any such
capital stock or ownership interest or any such convertible or exchangeable
securities or
3
<PAGE>
obligations, or (iii) obligations of the Company or its subsidiaries to issue
any shares of capital stock or any ownership interests, any such convertible
or exchangeable securities or obligations, or any such warrants, rights or
options. The description of the Company's stock option plans, and the options
or other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with
respect to such plans, arrangements, options and rights.
(h) The audited consolidated financial statements of the
Company and its subsidiaries, together with the related schedules and notes,
and the unaudited consolidated financial information, included in the
Registration Statement and the Prospectus present fairly the financial
position, results of operations and changes in financial condition of the
Company and its subsidiaries as of the dates and periods therein specified.
Such audited consolidated financial statements of the Company, together with
the related schedules and notes, and the unaudited consolidated financial
information have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
(except as may be otherwise noted therein). The selected and summary financial
and statistical data included in the Registration Statement present fairly the
information included therein and have been compiled on a basis consistent with
the audited consolidated financial statements and unaudited consolidated
financial information presented therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(i) PricewaterhouseCoopers LLP are independent accountants
within the meaning of the Act and the applicable rules and regulations
thereunder.
(j) The Company has full legal right, power (corporate and
other) and authority to enter into this Agreement and to perform the
transactions contemplated hereby. This Agreement has been duly authorized,
executed and delivered by the Company and is a valid and binding agreement of
the Company, enforceable against it in accordance with its terms, except as
rights to indemnification and contribution hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally, or by general
equitable principles.
(k) No legal or governmental action, suit, claim or other
proceeding is pending or, to the best of the Company's knowledge, threatened,
to which the Company, any of its subsidiaries, or any of their respective
officers or directors is a party or to which the property, assets or rights of
the Company or any of its subsidiaries is subject that (i) might have a
material adverse effect on the business, properties, business prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, or (ii) might prevent consummation of the
transactions contemplated hereby, or (iii) is required to be described in the
Registration Statement or the Prospectus and is not so described; and no
agreement, contract, lease or other document of the Company or any of its
subsidiaries is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein or filed as required and any such description of such
agreements, contracts, leases or other documents of the Company or any of its
subsidiaries conforms in all material respects to the terms of such
agreements, contracts, leases or other documents.
(l) Neither the Company nor any of its subsidiaries is (i) in
violation of its respective charter or bylaws, or (ii) in default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any bond, debenture, note, security agreement or other evidence
of indebtedness, which default would have a material adverse effect on the
business, properties, business prospects, financial condition or results of
operations of the Company or any of its subsidiaries, taken as a whole, or
(iii) in default in the performance or observance of any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or any of its
properties are bound, which default would have a material adverse effect on
the business, properties, business prospects, financial condition or results
of operations of the Company or any of its subsidiaries, taken as a whole, or
(iv) in violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties.
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<PAGE>
(m) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance and
performance by the Company or any of its subsidiaries with the other
provisions of this Agreement and the consummation of the other transactions
herein contemplated do not and will not (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, domestic or foreign, except such as have been obtained, or such as
may be required under the Act, the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or under state securities or blue sky laws, all of which
requirements have been satisfied, or (ii) result in a breach or violation of
any of the terms and provisions of, or constitute a default under the charter
or bylaws of the Company or any of its subsidiaries, or (iii) result in a
breach or violation of any of the terms and provisions of, or constitute a
default under any obligation, agreement, covenant or condition contained in
any bond, debenture, note, security agreement or other evidence of
indebtedness which default would have a material adverse effect on the
business, properties, business prospects, financial condition or results of
operations of the Company or any of its subsidiaries, taken as a whole, or
(iv) result in a breach or violation of any of the terms and provisions of, or
constitute a default under any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which the Company or
any of its subsidiaries or any of its properties are bound, which default
would have a material adverse effect on the business, properties, business
prospects, financial condition or results of operations of the Company or any
of its subsidiaries, taken as a whole, or (v) result in a breach or violation
of any of the terms and provisions of, or constitute a default under any law,
order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body to which the Company or any of its
subsidiaries are subject.
(n) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except as
specifically set forth therein, there has not been (i) any material adverse
change in the business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole,
(ii) any transaction that is material to the Company and its subsidiaries,
taken as a whole, except transactions entered into in the ordinary course of
business, (iii) any obligation, direct or contingent, that is material to the
Company and its subsidiaries, taken as a whole, incurred by the Company or any
of its subsidiaries, except obligations incurred in the ordinary course of
business, (iv) any change in the capital stock or outstanding indebtedness of
the Company that is material to the Company or any of its subsidiaries, (v)
any dividend or distribution of any kind declared, paid or made on the capital
stock of the Company or any of its subsidiaries, or (vi) any loss or damage
(whether or not insured) to the property of the Company which has been
sustained or will have been sustained which has a material adverse effect on
the business, properties, business prospects, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole.
(o) The Company has not taken and will not take, directly or
indirectly, (i) any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities, or (ii) since the filing of
the Registration Statement (A) other than amounts to be paid to the
Underwriters pursuant to the terms hereof, sold, bid for, purchased, or paid
anyone any compensation for soliciting purchases of, the Securities or (B)
paid or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
(p) Neither the Company nor any of its subsidiaries have at
any time since the Company's inception (i) made any unlawful contribution to
any candidate for foreign office or failed to disclose fully any contribution
in violation of law, (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar public
or quasi-public duties, other than payments required or permitted by the laws
of the United States or any jurisdiction thereof, or (iii) made any payment of
funds of the Company or received or retained any funds in violation of any
law, rule or regulation or of a character required to be disclosed in the
Prospectus.
(q) (i) The Company and its subsidiaries possess all
certificates, authorizations, licenses, consents, orders, franchises and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to own, lease and operate their respective properties
and to conduct their respective businesses described in the Prospectus, all of
which are valid and in full force and effect, except where the failure would
not have a
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material adverse effect on the business, properties, business prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, and (ii) neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the revocation
or modification of any such certificate, authorization, license, consent,
order, franchise or permit, except as described in the Prospectus. Except as
described in the Prospectus, none of the Company's or its subsidiaries'
certificates, authorizations, licenses, consents, orders, franchises or
permits contain any restrictions that would result in any material adverse
effect on the business, properties, business prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(r) The Company is familiar with the Investment Company Act of
1940, as amended (the "Investment Company Act"), and the rules and regulations
thereunder, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not become an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act and such
rules and regulations.
(s) The Company and its subsidiaries have timely filed all
foreign, federal, state, local and franchise tax returns that are required to
be filed and have paid all taxes and assessments required to be paid by them
and there is no tax deficiency that has been or, to the best of the Company's
knowledge, might be asserted against the Company or any of its subsidiaries
that might have a material adverse effect on the business, properties,
business prospects, financial condition or results of operations of the
Company or any of its subsidiaries, taken as a whole; and all material tax
liabilities are adequately provided for on the books of the Company and its
subsidiaries.
(t) Except for the shares of its subsidiaries owned by the
Company, neither the Company nor any of its subsidiaries owns any shares of
stock or any other equity securities of any corporation and has no equity
interest in any firm, partnership, association or other entity, except as
disclosed on Schedule B.
(u) The Company and its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that:
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(v) Except as described in the Registration Statement and the
Prospectus, (i) the agreements to which the Company or any of its subsidiaries
is a party described in the Registration Statement and Prospectus are valid
agreements, enforceable by the Company and its subsidiaries (as applicable),
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles and
the other contracting party or parties thereto are not in breach or default
under any of such agreements, and (ii) no default exists, and no event has
occurred which, with notice or lapse of time or both, would constitute a
default, in the due performance and observance of any term, covenant or
condition of any indenture, mortgage, deed of trust, lease, contract, loan
agreement, joint venture or other agreement or instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their respective properties is bound or may be
affected, in any respect which would result in any material adverse effect on
the business, properties, business prospects, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole.
(w) The Company has not distributed and will not distribute,
prior to the later of (i) the Firm Closing Date, or any date on which the
Option Securities are to be purchased, as the case may be, and (ii) the
completion of the distribution of the Securities, any offering material in
connection with the offering and sale of the Securities other than any
Preliminary Prospectus, the Prospectus, the Registration Statement or Term
Sheet or any amendment or supplement thereto, or other materials, if any,
permitted by the Act.
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(x) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its subsidiaries has good and
marketable title to all properties and assets described in the Registration
Statement and Prospectus as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest, (ii) each of the
Company and its subsidiaries has valid and enforceable leases for all
properties described in the Registration Statement and Prospectus as leased by
it, except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles.
Except as set forth in the Registration Statement and Prospectus, the Company
and its subsidiaries owns or leases all such properties as are necessary to
their operations as now conducted or as proposed to be conducted.
(y) No labor dispute or disturbance with the employees of the
Company or its subsidiaries exists or, to the Company's knowledge, is
threatened or imminent except as described in the Prospectus; and the Company
has no actual knowledge of any existing or imminent labor disturbance by the
employees of any of its principal suppliers or distributors that might be
expected to result in any material adverse change in the business, properties,
business prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole. No collective bargaining
agreement exists with any of the Company's or its subsidiaries' employees and
no such agreement is imminent.
(z) Except as described in the Prospectus, (i) each of the
Company and its subsidiaries owns or possesses adequate rights to use all
patents, patent rights, licenses, inventions, trade secrets, copyrights,
know-how (including unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade names
(the "IP Rights") which are necessary to conduct their business as described
in the Registration Statement and Prospectus and has no knowledge of any
infringement or misappropriation of the IP Rights of the Company or its
subsidiaries by any third party; (ii) the loss or expiration of any of the IP
Rights, or an unfavorable decision, ruling or finding granting superior rights
to a third party would not have a material adverse effect on the business,
properties, business prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole; and (iii) neither the
Company nor its subsidiaries has received any notice of infringement of or
conflict with rights of any third party with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a material adverse change in the business,
properties, business prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.
(aa) The Company and its subsidiaries maintain insurance with
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which
the Company and its subsidiaries are engaged, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, errors and omissions, business
interruption, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect; neither the
Company nor any of its subsidiaries has been refused any insurance coverage
sought or applied for; and neither the Company nor any of its subsidiaries has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would result in any material adverse change in the business, properties,
business prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole, except as described in the
Prospectus.
(ab) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to each Underwriter
as to the matters covered thereby.
(ac) The Securities to be issued and sold by the Company have
been approved for quotation on the Nasdaq National Market, subject to official
notice of issuance.
(ad) Except as set forth in the Registration Statement and
Prospectus, (i) the Company and its subsidiaries are in compliance with all
rules, laws and regulations relating to the use, treatment, storage and
disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to
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their respective businesses, (ii) the Company and its subsidiaries have
received no notice from any governmental authority or third party of an
asserted claim under Environmental Laws, which claim is required to be
disclosed in the Registration Statement and the Prospectus, (iii) the Company
and its subsidiaries will not be required to make future material capital
expenditures to comply with Environmental Laws and (iv) no property which is
owned, leased or occupied by the Company or any of its subsidiaries has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. ss. 9601, et
seq.), or otherwise designated as a contaminated site under applicable state
or local law.
(ae) The Company has complied with all provisions of Section
517.075, Florida Statutes, relating to doing business with the Government of
Cuba or with any person or affiliate located in Cuba.
(af) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of the
officers or directors of the Company or any of the members of the families of
any of them, except as disclosed in the Registration Statement and the
Prospectus.
(ag) Each officer, director, and director nominee and certain
beneficial owners of Common Stock of the Company have entered into agreements
(collectively, the "Lock-up Agreements") to the effect that such person will
not, during the period ending 180 days after the consummation of the sale of
the Firm Securities, directly or indirectly, without the prior written consent
of Friedman, Billings, Ramsey & Co., Inc. (i) offer, pledge, sell, offer to
sell, contract to sell, grant any option to purchase or otherwise sell,
dispose of, make any short sale of, loan or grant any rights with respect to
(or announce any offer, pledge, sale, offer of sale, contract of sale, grant
of an option to purchase or other sale, disposition of, short sale of, loan or
grant of any rights with respect to) any shares of Common Stock, any options
or warrants to purchase any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock
or (ii) enter into any swap or any other agreement or any transactions that
transfers, in whole or part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise; except that certain
transfers and certain repurchases may be made. Furthermore, each such person
has also agreed and consented to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities held by
such person except in compliance with this restriction. The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements. The
Company hereby represents and warrants that it will not release any of its
officers, directors, director nominees or other stockholders from any such
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of Friedman, Billings, Ramsey & Co., Inc.
(ah) The Preliminary Prospectus was, and the Prospectus
delivered to the Underwriters for use in connection with this offering will
be, identical to the versions of the Preliminary Prospectus and Prospectus
created to be transmitted to the Commission for filing via the Electronic Data
Gathering Analysis and Retrieval System ("EDGAR"), except to the extent
permitted or required by Regulation S-T.
(ai) The Company has not incurred any liability for any
finder's fees or similar payments in connection with the transactions herein
contemplated, except as described in the Prospectus.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company agrees to sell to each of the
Underwriters, and each of the Underwriters, severally and not jointly, agrees
to purchase from the Company, at a purchase price of $_____ per share, the
number of Firm Securities set forth opposite the name of such Underwriter in
Schedule I hereto.
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One or more certificates in definitive form for the Firm
Securities that the several Underwriters have agreed to purchase hereunder,
and in such denomination or denominations and registered in such name or names
as the Representatives request upon notice to the Company at least 48 hours
prior to the Firm Closing Date, shall be delivered by or on behalf of the
Company to the Representatives for the respective accounts of the
Underwriters, against payment by or on behalf of the Underwriters of the
aggregate purchase price therefor by wire transfer in same day funds to the
account of the Company. Such delivery of and payment for the Firm Securities
shall be made at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue,
New York, New York 10153 at 10:00 a.m., New York City time on _____ __, 1998,
or at such other place, time or date as the Representatives and the Company
may agree upon or as the Representatives may determine pursuant to Section 9
hereof, such time and date of delivery against payment being herein referred
to as the "Firm Closing Date;" provided, however, that if the Company has not
made available to the Representatives copies of the Prospectus within the time
provided in Section 5(e) hereof, the Representatives may, in their sole
discretion, postpone the Firm Closing Date until no later than two (2) full
business days following delivery of copies of the Prospectus to the
Representatives. The Company will make such certificate or certificates for
the Firm Securities available for checking and packaging by the
Representatives at the offices in New York, New York of the Company's transfer
agent or registrar at least 24 hours prior to the Firm Closing Date. If the
Representatives so elect, delivery of the Firm Securities may be made by
credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives.
(b) Solely, for the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Securities as
contemplated by the Prospectus, the Company hereby grants to the several
Underwriters an option to purchase, severally and not jointly, the Option
Securities. The purchase price to be paid for any Option Securities shall be
the same price per share as the price per share for the Firm Securities set
forth above in paragraph (a) of this Section 3. The option granted hereby may
be exercised as to all or any part of the Option Securities from time to time
within thirty days after the date of the Prospectus (or, if such 30th day
shall be a Saturday or Sunday or a holiday, on the next business day
thereafter when the Nasdaq National Market is open for trading). The
Underwriters shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Representatives may from
time to time exercise the option granted hereby by giving notice in writing or
by telephone (confirmed in writing) to the Company setting forth the aggregate
number of Option Securities as to which the several Underwriters are then
exercising the option and the date and time for delivery of and payment for
such Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two (2) business days or later
than five (5) business days after such exercise of the option and, in any
event, shall not be earlier than the Firm Closing Date. The time and date set
forth in such notice, or such other time on such other date as the
Representatives and the Company may agree upon or as the Representatives may
determine pursuant to Section 9 hereof, is herein called the "Option Closing
Date" with respect to such Option Securities. Upon exercise of the option as
provided herein, the Company shall become obligated to sell to each of the
several Underwriters, and, subject to the terms and conditions herein set
forth, each of the Underwriters (severally and not jointly) shall become
obligated to purchase from the Company, the same percentage of the total
number of the Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Securities, as adjusted by the Representatives in
such manner as they deem advisable to avoid fractional shares. If the option
is exercised as to all or any portion of the Option Securities, one or more
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (a) of this Section
3, except that reference therein to the Firm Securities and the Firm Closing
Date shall be deemed, for purposes of this paragraph 3(b), to refer to such
Option Securities and Option Closing Date, respectively.
(c) It is understood that you, individually and not as the
Representatives, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such
Underwriter or Underwriters from any of its or their obligations hereunder.
(d) The Company hereby acknowledges that the wire transfer by
or on behalf of the Underwriters of the purchase price for any Securities does
not constitute closing of a purchase and sale of the Securities. Only
execution and delivery of a receipt for the Securities by the Underwriters
indicates completion of
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the closing of a purchase of the Securities from the Company. Furthermore, in
the event that the Underwriters wire funds to the Company prior to the
completion of the closing of a purchase of Securities, the Company hereby
acknowledges that until the Underwriters execute and deliver a receipt for the
Securities, by facsimile or otherwise, the Company will not be entitled to the
wired funds and shall return the wired funds to the Underwriters as soon as
practicable (by wire transfer of same-day funds) upon demand. In the event
that the closing of a purchase of Securities is not completed and the wire
funds are not returned by the Company to the Underwriters on the same day the
wired funds were received by the Company, the Company agrees to pay to the
Underwriters in respect of each day the wire funds are not returned by it, in
same-day funds, interest on the amount of such wire funds in an amount
representing the Underwriters' cost of financing as reasonably determined by
the Representatives.
4. Offering by the Underwriters. Upon your authorization of the
release of the Firm Securities, the several Underwriters propose to offer the
Firm Securities for sale to the public upon the terms set forth in the
Prospectus. The Underwriters may from time to time change the public offering
price after the closing of the initial public offering and increase or
decrease the concessions and discounts to dealers as they may determine.
5. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto,
to become effective as promptly as possible. The Company will file the
Prospectus or any Term Sheet and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rules 424(b)
and 434 under the Act. During any time when a prospectus relating to the
Securities is required to be delivered under the Act, the Company (i) will
comply with all requirements imposed upon it by the Act and the rules and
regulations of the Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and of the Prospectus, as then amended or supplemented, and
(ii) will not file with the Commission the Prospectus, Term Sheet or the
amendment referred to in the second sentence of Section 2(a) hereof, any
amendment or supplement to such Prospectus, Term Sheet or any amendment to the
Registration Statement or any Rule 462(b) Registration Statement of which the
Representatives shall not previously have been advised and furnished with a
copy for a reasonable period of time prior to the proposed filing and as to
which filing the Representatives shall not have given their consent. The
Company will prepare and file with the Commission, in accordance with the
rules and regulations of the Commission, promptly upon request by the
Representatives or counsel for the Underwriters, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be reasonably necessary or advisable in connection with the distribution of
the Securities by the several Underwriters, and will use its best efforts to
cause any such amendment to the Registration Statement to be declared
effective by the Commission as promptly as possible. The Company will advise
the Representatives, promptly after receiving notice thereof, of the time when
the Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide to the Representatives copies of each such filing.
(b) The Company will advise the Representatives, promptly
after receiving notice or obtaining knowledge thereof, of (i) the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, (iii) the institution, threatening or
contemplation of any proceeding for any such purpose, or (iv) any request made
by the Commission for amending the Original Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing the Prospectus or
for additional information. The Company will use its reasonable best efforts
to prevent the issuance of any such stop order and, if any such stop order is
issued, to obtain the withdrawal thereof as promptly as possible.
(c) The Company will cooperate with you and your counsel to
qualify or register the Securities for offering and sale under the securities
or blue sky laws of such jurisdictions as the Representatives may designate
and will continue such qualifications in effect for as long as may be
necessary to complete the distribution
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of the Securities; provided, however, that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction where it is not now
so qualified or required to file such consent. In each jurisdiction in which
the Securities shall have been qualified as provided above, the Company will
prepare and file such statements and reports in each year as are or may be
required by the laws of such jurisdiction.
(d) If, at any time prior to the later of (i) the final date
when a prospectus relating to the Securities is required to be delivered under
the Act, or (ii) the Option Closing Date, any event occurs as a result of
which the Prospectus, as then amended or supplemented, would include any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if for any other reason it is
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the rules or regulations of the Commission thereunder, the Company will
promptly notify the Representatives thereof and, subject to Section 5(a)
hereof, will prepare and file with the Commission, at the Company's expense,
an amendment to the Registration Statement or an amendment or supplement to
the Prospectus that corrects such statement or omission or effects such
compliance.
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a signed copy of the
Original Registration Statement filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) and any Rule
462(b) Registration Statement, (ii) to each other Underwriter, a conformed
copy of such registration statement and any Rule 462(b) Registration Statement
and each amendment thereto (in each case without exhibits thereto) and (iii)
so long as a prospectus relating to the Securities is required to be delivered
under the Act, as many copies of each Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto as the Representatives may reasonably
request; without limiting the application of clause (iii) of this sentence,
the Company, not later than (A) 6:00 p.m., New York City time, on the date of
determination of the initial public offering price, if such determination
occurred at or prior to 10:00 a.m., New York City time, on such date or (B)
12:00 noon, New York City time, on the business day following the date of
determination of the initial public offering price, if such determination
occurred after 10:00 a.m., New York City time, on such date, will deliver to
the Underwriters, without charge, as many copies of the Prospectus and any
amendment or supplement thereto as the Representatives may reasonably request
for purposes of confirming orders that are expected to settle on the Firm
Closing Date.
(f) If the Company elects to rely on Rule 462(b), the Company
shall both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay or give direction to pay the applicable
fees in accordance with Rule 111 promulgated under the Act by the earlier of
(i) 10:00 p.m., New York City time, on the date of this Agreement and (ii) the
time confirmations are sent or given, as specified by Rule 462(b)(2).
(g) The Company will make timely generally available to its
securityholders and to the Representatives a consolidated earnings statement
of the Company and its subsidiaries that satisfies the provisions of Section
11(a) of the Act and Rule 158 thereunder.
(h) During a period of three (3) years after the date hereof,
the Company, within the periods prescribed by applicable law, will furnish to
its stockholders annual reports (including consolidated financial statements
audited by independent certified public accountants) and will furnish to its
stockholders unaudited quarterly reports of operations for each of the first
three quarters of the fiscal year as required of companies with a class of
securities registered under the Exchange Act, and will furnish to you (i)
concurrently with making such reports available to its stockholders,
statements of operations of the Company for each of the first three quarters
in the form made available to the Company's stockholders; (ii) concurrently
with the furnishing thereof to its stockholders, a balance sheet of the
Company as of the end of such fiscal year, together with statements of
operations, of stockholders' equity and of cash flow of the Company for such
fiscal year, accompanied by a copy of the certificate or report thereon of
nationally recognized independent certified public accountants; (iii)
concurrently with the furnishing of such reports to its stockholders, copies
of all reports (financial or other) mailed to stockholders; (iv) as soon as
they are available, copies of all reports and financial statements furnished
to or filed by the Company with the Commission, any securities exchange, the
Nasdaq National Market or the National
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Association of Securities Dealers, Inc. ("NASD") (except for documents for
which confidential treatment is requested); (v) every material press release
in respect of the Company or its affairs which was generally released to
stockholders or prepared for general release by the Company; and (vi) any
additional publicly available information concerning the Company or its
businesses which you may reasonably request. During such three (3) year
period, the foregoing financial statements shall be accompanied by similar
financial statements for any significant subsidiary that is not consolidated.
(i) The Company will apply the net proceeds from the sale of
the Securities as set forth under "Use of Proceeds" in the Prospectus.
(j) The Company will not, during the period ending 180 days
after consummation of the sale of the Firm Securities, directly or indirectly,
without the prior written consent of Friedman, Billings, Ramsey & Co., Inc.
(i) offer, pledge, sell, offer to sell, contract to sell, grant any option to
purchase or otherwise sell, dispose of, make any short sale of, loan, or grant
any rights with respect to (or announce any offer, pledge, sale, offer of
sale, contract of sale, grant of an option to purchase or other sale,
disposition of, short sale of, loan or grant any rights with respect to) any
shares of Common Stock, any options or warrants to purchase any shares of
Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock or (ii) enter into any swap or any
other agreement or any transactions that transfers, in whole or part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is
to be settled by delivery of Common Stock or such other securities, in cash or
otherwise, except pursuant to this Agreement and except for issuances pursuant
to the exercise of warrants or employee stock options outstanding on the date
hereof, or pursuant to the terms of convertible securities of the Company
outstanding on the date hereof or upon the issuance of options or Common Stock
under the Company's presently authorized 1995 Stock Option/Stock Issuance
Plan, 1996 Stock Option Plan and 1997 Director Option Plan (the "Equity
Plans"), or pursuant to an acquisition or a merger.
(k) The Company will not, directly or indirectly, (i) take
any action designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale
of the Securities in contravention of Regulation M promulgated under the
Exchange Act, or (ii) (A) sell, bid for, purchase, or pay anyone any
compensation for soliciting purchases of, the Securities or (B) pay or agree
to pay to any person any compensation for soliciting another to purchase any
other securities of the Company.
(l) The Company will cause the Securities to be duly
included for quotation on the Nasdaq National Market prior to the Firm Closing
Date. The Company will use its reasonable best efforts to ensure that the
Securities remain included for quotation on the Nasdaq National Market
following the Firm Closing Date.
(m) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(n) The Company is familiar with the Investment Company Act,
and the rules and regulations thereunder, and for at least one year after the
date hereof will conduct its affairs in such a manner to ensure that the
Company will not be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act and such
rules and regulations. If after one year from the date hereof the Company
cannot, using its best efforts, conduct its affairs in such a manner so as to
ensure that the Company will not be an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act and such rules and regulations, the Company will take all steps
necessary to register as an "investment company" under such act or otherwise
comply with such act.
(o) The Company will pay on the Firm Closing Date the
outstanding principal amount and any unpaid accrued interest due and payable
to each of Friedman, Billings, Ramsey Group, Inc. and Friedman, Billings,
Ramsey Investment Management, Inc. (or their respective affiliates and
assigns) pursuant to the Convertible
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Promissory Notes dated April 7, 1998 in the principal amount of $2,000,000 and
$8,000,000, respectively (the "Convertible Promissory Notes").
6. Independent Underwriter. (a) The Company hereby confirms its
engagement, without compensation, of the services of Prudential Securities
Incorporated as, and Prudential Securities Incorporated hereby confirms its
agreement with the Company to render services as, a "qualified independent
underwriter" (in such capacity, the "Independent Underwriter") within the
meaning of Rule 2720 of the Conduct Rules ("Rule 2720") of the NASD with
respect to the offering and sale of the Securities.
(b) The Independent Underwriter hereby represents and warrants
to, and agrees with, the Company, Friedman, Billings, Ramsey & Co., Inc., and
the other Underwriters that with respect to the offering and sale of
Securities as described in the Prospectus:
(i) the Independent Underwriter is a "qualified
independent underwriter" within the meaning of Rule 2720;
(ii) the Independent Underwriter has participated in the
preparation of the Registration Statement and the Prospectus and has
exercised the usual standards of "due diligence" with respect thereto;
(iii) the Independent Underwriter has undertaken the
legal responsibilities and liabilities of an underwriter under the Act,
including those contained in Section 11 thereof, subject to the
limitations on such liabilities set forth herein (including without
limitation, the nature of Prudential Securities Incorporated's
underwriting commitment as several and not joint). It is specifically
understood, however, that Prudential Securities Incorporated will bear
such legal responsibilities only to the extent, if any, that a court of
competent jurisdiction rules in a judgment which has become final, and
not subject to further appeal, that Prudential Securities Incorporated,
as Independent Underwriter, bears the legal responsibilities and
liabilities of an "underwriter";
(iv) based upon, among other factors, the information set
forth in the Preliminary Prospectus and its reviews of such other
documents and the taking of such other actions as the Independent
Underwriter, in its sole discretion, has deemed necessary or appropriate
for the purposes of delivering its recommendation hereunder, the
Independent Underwriter recommends, as of the date of the execution and
delivery of this Agreement, that the public offering price for the
Securities not exceed the amount of $_____ per share, which price should
in no way be considered or relied upon except as set froth therein and in
the letter referred to in clause (v) below; and
(v) the Independent Underwriter will furnish to the other
Underwriters on the date hereof a letter, dated the date hereof,
substantially to the effect set forth in Schedule C hereto.
(c) The Company, the Independent Underwriter and the other
Underwriters agree to comply in all material respects with all of the
requirements of Rule 2720 applicable to them in connection with the offering
and sale of the Securities. The Company agrees to cooperate with Underwriters
to enable the Underwriters to comply with Rule 2720 and the Independent
Underwriter to perform the services contemplated by this Agreement.
(d) The Independent Underwriter hereby consents to the
references to it as set forth under the caption "Underwriting" in the
Prospectus.
7. Expenses. The Company will pay and bear all costs and expenses
incident to the performance of its obligations under this Agreement, whether
or not the transactions contemplated herein are consummated or this Agreement
is terminated pursuant to Section 12 hereof, including all costs and expenses
incident to (i) the printing or other production of documents with respect to
the transactions, including any costs of printing the Registration Statement
originally filed with respect to the Securities and any amendment thereto, any
Rule 462(b) Registration Statement, any Preliminary Prospectus and the
Prospectus and any amendment or supplement thereto, this
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Agreement, any blue sky memoranda and the quantity of prospectuses or offering
circulars as determined by the Representatives, (ii) all arrangements relating
to the delivery to the Underwriters of copies of the foregoing documents,
(iii) the fees and disbursements of its counsel, the accountants and any other
experts or advisors retained by the Company, (iv) the fees and disbursements
of the Underwriters' counsel, which amount shall not exceed $100,000 in the
aggregate, provided that such fees and disbursements shall not exceed $50,000
if the transactions contemplated herein are not consummated because the
Underwriters cannot complete such transactions, (v) the preparation, issuance
and delivery to the Underwriters of any certificates evidencing the
Securities, including transfer agent's and registrar's fees, (vi) NASD filing
fees and the cost of qualifying the Securities under state securities and blue
sky laws, including filing fees and reasonable fees and disbursements of
counsel for the Underwriters relating thereto, (vii) the filing fees of the
Commission relating to the Securities, (viii) the filing and other fees of
securing quotation of the Securities on the Nasdaq National Market, (ix) any
meetings with prospective investors in the Securities (other than as shall
have been specifically approved by the Representatives to be paid for by the
Underwriters), (x) advertising relating to the offering of the Securities
(other than as shall have been specifically approved by the Representatives to
be paid for by the Underwriters), (xi) certain costs and expenses incurred by
the Underwriters and the Company in connection with the road show, and (xii)
all other expenses directly incurred by the Company in connection with the
performance of its obligations hereunder. If the sale of the Securities
provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 8 hereof is not
satisfied, because this Agreement is terminated pursuant to Section 12 hereof
or because of any failure, refusal or inability on the part of the Company to
perform all obligations and satisfy all conditions on its part to be performed
or satisfied hereunder other than by reason of a default by any of the
Underwriters, the Company will reimburse the Underwriters severally upon
demand for all reasonable out-of-pocket expenses (including counsel fees and
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. The Company shall not in any
event be liable to any of the Underwriters for the loss of anticipated profits
from the transactions covered by this Agreement.
8. Conditions of the Underwriters' Obligations. The obligations of
the several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company contained herein as of the date
hereof and as of the Firm Closing Date, as if made on and as of the Firm
Closing Date, to the accuracy of the statements of the Company's officers made
pursuant to the provisions hereof, to the performance by the Company of its
covenants and agreements hereunder and to the following additional conditions:
(a) If the Original Registration Statement or any amendment
thereto filed prior to the Firm Closing Date has not been declared effective
as of the time of execution hereof, the Registration Statement or such
amendment, and if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement, shall have been declared effective not later
than the earlier of: (i) 10:00 a.m., New York City time, on the date on which
the amendment to the Registration Statement originally filed with respect to
the Securities or to the Registration Statement, as the case may be,
containing information regarding the initial public offering price of the
Securities has been filed with the Commission, and (ii) the time confirmations
are sent or given as specified by Rule 462(b) or, with respect to the Original
Registration Statement, such later time and date as shall have been consented
to by the Representatives; if required, the Prospectus or any Term Sheet that
constitutes a part thereof and any amendment or supplement thereto shall have
been filed with the Commission in the manner and within the time period
required by Rules 434 and 424(b) under the Act; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto shall
have been issued, and no proceedings for that purpose shall have been
instituted or threatened or, to the knowledge of the Company, shall be
contemplated by the Commission; and the Company shall have complied to the
reasonable satisfaction of Underwriters' counsel with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(b) Subsequent to the execution and delivery of this Agreement
and prior to the Firm Closing Date, or any later date on which Option
Securities are to be purchased, as the case may be, there shall not have been
any change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company from that set forth in the
Registration Statement or Prospectus, which, in your reasonable judgment, is
material and adverse and that makes it, in your reasonable judgment,
impracticable or inadvisable to proceed with the public offering of the
Securities as contemplated by the Prospectus.
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(c) The Representatives shall have received an opinion, dated
the Firm Closing Date, of Weil, Gotshal & Manges LLP, counsel for the Company,
to the effect that:
(i) the Company has been duly incorporated and is validly
existing and in good standing under the laws of its jurisdiction of
incorporation and is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of [list
jurisdictions];
(ii) the Company has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
businesses as described in the Registration Statement and the Prospectus;
(iii) the authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" and conforms to the description thereof and the
statements relating thereto contained in the Registration Statement and
the Prospectus (and such statements correctly state the substance in all
material respects of the instruments defining the capitalization of the
Company to the extent required by the Act and the rules and regulations
promulgated thereunder). All of the issued and outstanding shares of
capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, and, to such counsel's knowledge,
have been issued in compliance with all federal and state securities
laws, and have not been issued in violation of or subject to any
preemptive rights. The Securities have been duly authorized for issuance
and sale to the Underwriters pursuant to this Agreement, and at the Firm
Closing Date or related Option Closing Date (as the case may be), when
issued and delivered by the Company after payment therefor in accordance
herewith, will be duly and validly issued, fully paid and nonassessable;
and no preemptive right pursuant to law or contained in the Company's
Certificate of Incorporation, nor, to such counsel's knowledge, any
co-sale right, registration right, right of first refusal, or other
similar right of stockholders exists with respect to any of the Common
Stock issued hereunder or the sale thereof other than those that have
been expressly waived prior to the date hereof and those that will
automatically expire upon the consummations of the transactions
contemplated by this Agreement. No further approval or authorization of
any stockholder, the Board of Directors of the Company or others is
required for the issuance of the Company Firm Securities or the Option
Securities except as may be required under the Act or state securities or
Blue Sky laws;
(iv) to such counsel's knowledge, except as set forth in
the Registration Statement and Prospectus, no holders of Common Stock or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company having
rights known to such counsel to registration of such shares of Common
Stock or other securities, because of the filing of the Registration
Statement by the Company have, with respect to the offering contemplated
thereby, waived such right or such rights have expired by reason of lapse
of time following notification of the Company's intent to file the
Registration Statement;
(v) the statements set forth under the heading
"Description of Capital Stock" in the Prospectus, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein, provide a fair summary of such
provisions in all material respects; the statements set forth under the
headings "Management -- 1997 Director Option Plan" and "- Stock Plans,"
"Shares Eligible for Future Sale" and "Certain Transactions" in the
Prospectus, insofar as such statements constitute a summary of the legal
matters, documents or proceedings referred to therein, provide a fair
summary of such legal matters, documents and proceedings in all material
respects; the description in the Registration Statement and the
Prospectus of the certificate of incorporation and bylaws of the Company
is accurate and fairly presents the information required to be presented
by the Act and the applicable rules and regulations thereunder in all
material respects and the description in the Registration Statement and
the Prospectus of statutes fairly presents the information required to be
presented by the Act and the applicable rules and regulations thereunder
in all material respects;
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(vi) except as disclosed in the Prospectus, to such
counsel's knowledge, there are no outstanding (i) securities or
obligations of the Company convertible into or exchangeable for any
capital stock or ownership interests of the Company, (ii) warrants,
rights or options to subscribe for or purchase from the Company any such
capital stock or ownership interest or any such convertible or
exchangeable securities or obligations, or (iii) obligations of the
Company to issue any shares of capital stock or any ownership interests,
any such convertible or exchangeable securities or obligations, or any
such warrants, rights or options. The description of the Company's stock
option plans, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans,
arrangements, options and rights in all material respects.
(vii) the Company has all requisite corporate power and
authority to execute and deliver this Agreement and to perform its
obligations hereunder; the execution and delivery of this Agreement have
been duly authorized by all necessary corporate action on the part of the
Company and this Agreement has been duly executed and delivered by the
Company and, assuming due authorization, execution and delivery by you,
is a valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as rights to indemnification
and contribution hereunder may be limited by applicable law, and except
as the enforcement hereof may be limited by applicable bankruptcy,
insolvency, fraudulent convenyance, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights and remedies
generally, or by general principles of equity including principles of
commercial reasonableness, good faith and fair dealing (regardless of
whether enforement is sought in a proceeding at law or in equity);
(viii) to the best of such counsel's knowledge, there are
no legal or governmental actions, suits, claims or other proceedings
pending or, threatened against or affecting the Company, Giga Information
Group Investment Corporation, Giga Information Group Ltd., Giga
Information Group GmbH, BIS Italy, SRL and Giga Information Group
S.A.R.L., each a "Subsidiary" of the Company and, collectively, the
"Subsidiaries" or any of their properties, which are required,
individually or in the aggregate, to be disclosed in the Registration
Statement or the Prospectus, other than those disclosed therein;
(ix) to the best of such counsel's knowledge, there are
no contracts, indentures, mortgages, agreements, notes, leases or other
instruments required to be described or referred to in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement other than those described or referred to therein
or filed as exhibits thereto, and any description of or reference to any
such instrument in the Registration Statement or the Prospectus conforms
in all material respects to the terms of such instrument;
(x) the issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement, the
compliance and performance by the Company with the other provisions of
this Agreement and the consummation of the other transactions herein
contemplated do not and will not (A) require the consent, approval,
authorization, registration or qualification of or with any New York,
Delaware corporate or federal governmental authority, except such as have
been obtained, or such as may be required under the Act or the Exchange
Act, all of which requirements have been satisfied, and except such as
may be required under state securities or Blue Sky laws, as to which such
counsel expresses no opinion, or (B) result in a breach or violation of
any of the terms and provisions of, or constitute a default under the
certificate of incorporation or bylaws of the Company, or (C) result in a
breach or violation of any of the terms and provisions of, or constitute
a default under any material document, agreement, or other instrument to
which the Company or any of its Subsidiaries is a party or by which they
are bound, which breach or default would have a material adverse effect
on the business, properties, business prospects, financial condition or
results of operations of the Company and its Subsidiaries, taken as a
whole, or (D) result in a breach or violation of any of the terms and
provisions of, or cause a default under any New York, Delaware corporate
or federal law or regulation (other than federal and state securities or
Blue Sky laws, as to which such counsel expresses no opinion), or (E)
result in a breach or violation of any of the terms and provisions of, or
constitute a default under any order, rule,
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writ, injunction, judgment or decree of any court or governmental
authority binding on the Company of which such counsel is aware;
(xi) the Registration Statement is effective under the
Act; any required filing of the Prospectus, or any Term Sheet that
constitutes a part thereof, pursuant to Rules 424(b) and 434 has been
made in the manner and within the time period required by Rules 424(b)
and 434; and to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto has
been issued, and no proceedings for that purpose have been instituted or
to the best of such counsel's knowledge, threatened by the Commission;
(xii) the Registration Statement originally filed with
respect to the Securities and each amendment thereto, any Rule 462(b)
Registration Statement and the Prospectus (in each case, other than the
financial statements and the notes thereto and the other financial and
statistical information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
applicable requirements of the Act and the rules and regulations of the
Commission thereunder;
(xiii) if the Company elects to rely on Rule 434, the
Prospectus is not "materially different," as such term is used in Rule
434, from the prospectus included in the Registration Statement at the
time of its effectiveness or an effective post-effective amendment
thereto (including such information that is permitted to be omitted
pursuant to Rule 430A);
(xiv) the Securities have been approved for quotation on
the Nasdaq National Market, upon issuance as contemplated hereby;
(xv) the Company is not, and the transactions
contemplated by this Agreement will not cause the Company to become, an
investment company subject to registration under the Investment Company
Act of 1940, as amended; and
(xvi) the specimen stock certificate of the Company filed
as an exhibit to the Registration Statement is in due and proper form to
evidence shares of Common Stock, has been duly authorized and approved by
the Board of Directors of the Company and complies with all legal
requirements applicable under the corporate laws of the State of
Delaware.
In addition, such counsel shall state that such counsel has
participated in conferences with directors, officers and other representatives
of the Company, the Representatives, Underwriters' Counsel and the
representatives of the independent certified public accountants of the
Company, at which such conferences the contents of the Registration Statement
and Prospectus and related matters were discussed, and although, except as
enumerated above, such counsel has not independently verified and are not
passing upon and assume no responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus except to the extent specified in the foregoing opinion, no facts
have come to the attention of such counsel which leads them to believe that
the Registration Statement, on the effective date thereof, contained an untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements contained therein not
misleading, or the Prospectus, on the date thereof or on the date of this
opinion, contained or contains an untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements contained therein, in the light of the
circumstances under which they were made, not misleading (it being understood
that such counsel expresses no view with respect to the financial statements
and related notes, the financial statement schedules, and the other financial,
statistical and accounting data included in the Registration Statement or
Prospectus).
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem(s) proper, on certificates of
responsible officers of the Company and public officials.
References to the Registration Statement and the Prospectus in
this paragraph (c) shall include any amendment or supplement thereto at the
date of such opinion.
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(d) The Representatives shall have received an opinion, dated
the Firm Closing Date, of Lanklaters & Paines, local counsel for Giga
Information Group Ltd. ("U.K. Subsidiary"), to the effect that:
(i) the U.K. Subsidiary has been duly incorporated and is
validly existing and in good standing under the laws of its jurisdiction
of incorporation; and is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or the
conduct of its businesses requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on
the business, properties, business prospects, financial condition or
results of operations of such Subsidiary; and
(ii) the U.K. Subsidiary has the full corporate power and
authority to own, lease and operate its properties and to conduct its
businesses as described in the Registration Statement and the Prospectus.
(iii) the issued and outstanding shares of the U.K.
Subsidiary have been duly authorized and validly issued, are fully paid
and nonassessable, and, to such counsel's knowledge, have not been issued
in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right; and
are owned by the Company free and clear of any pledge, security
interests, liens, encumbrances, claims or equitable interests.
(iv) Except as disclosed in the Prospectus, to such
counsel's knowledge, there are no outstanding (i) securities or
obligations of the U.K. Subsidiary convertible into or exchangeable for
any capital stock or ownership interests of the U.K. Subsidiary, (ii)
warrants, rights or options to subscribe for or purchase from the U.K.
Subsidiary any such capital stock or ownership interest or any such
convertible or exchangeable securities or obligations, or (iii)
obligations of the U.K. Subsidiary to issue any shares of capital stock
or any ownership interests, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options. The
description of the U.K. Subsidiary's stock option plans, and the options
or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights in all
material respects.
(e) The Representatives shall have received from
PricewaterhouseCoopers LLP a letter or letters, addressed to the Underwriters,
dated, respectively, the date hereof and the Firm Closing Date, in form and
substance satisfactory to the Representatives, to the effect that:
(i) they are independent certified public accountants
with respect to the Company and its consolidated subsidiaries within the
meaning of the Act and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements, together with the related schedules and notes, examined by
them and included in the Registration Statement and the Prospectus comply
in form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations;
(iii) on the basis of carrying out certain specified
procedures (which do not constitute an examination made in accordance
with generally accepted auditing standards) that would not necessarily
reveal matters of significance with respect to the comments set forth in
this paragraph (iii), a reading of the minute books of the stockholders,
the Board of Directors and any committees thereof of the Company and its
consolidated subsidiaries, and inquiries of certain officials of the
Company and its consolidated subsidiaries who have responsibility for
financial and accounting matters, nothing came to their attention that
caused them to believe that at a specific date not more than five
business days prior to the date of such letter, there were any changes in
the capital stock or long-term debt of the Company and its consolidated
subsidiaries or any decreases in net current assets or stockholders'
equity of the Company and its consolidated subsidiaries, in each case
compared with amounts shown on the March 31, 1998 balance sheet
18
<PAGE>
included in the Registration Statement and the Prospectus, or for the
period from April 1, 1998 to such specified date there are any decreases,
as compared to total revenues, net income or pro forma net income per
share, respectively, of the Company and its consolidated subsidiaries,
except in all instances for changes, decreases or increases set forth in
such letter;
(iv) they have performed the procedures set out in
Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial statements for the quarters ended March 31, 1997 and March 31,
1998 (the "Quarterly Financial Statements") and in the course of such
review, nothing came to their attention that leads them to believe that
any material modifications need to be made to any of the Quarterly
Financial Statements in order for them to be in compliance with generally
accepted accounting principles consistently applied across the periods
presented; and
(v) they carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting
records of the Company and its consolidated subsidiaries and are included
in the Registration Statement and the Prospectus, including, without
limitation, the amounts and financial information in "Selected Financial
Data," and have compared such amounts, percentages and financial
information with such records of the Company and its consolidated
subsidiaries and with information derived from such records and have
found them to be in agreement, excluding any questions of legal
interpretation.
In addition, such letter or letters will address other matters agreed upon by
PricewaterhouseCoopers LLP and you.
In the event that the letters referred to above set forth any
such changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by
a written explanation of the Company as to the significance thereof, unless
the Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives,
make it impractical or inadvisable to proceed with the purchase and delivery
of the Securities as contemplated by the Registration Statement, as amended as
of the date hereof.
References to the Registration Statement and the Prospectus in
this paragraph (e) with respect to either letter referred to above shall
include any amendment or supplement thereto at the date of such letter.
(f) The Representatives shall have received a certificate,
dated the Firm Closing Date, of the principal executive officer and the
principal financial or accounting officer, respectively, of the Company to the
effect that:
(i) the representations and warranties of the Company in
this Agreement are true and correct as if made on and as of the Firm
Closing Date and the Company has performed all covenants and agreements
and satisfied all conditions on its part to be performed or satisfied at
or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to
the best of the Company's knowledge, are contemplated by the Commission;
(iii) when the Registration Statement or any amendment
thereto was declared effective, and at all times subsequent thereto up to
the delivery of such certificate, the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained all
statements required to be stated therein in accordance with, and complied
in all material respects with the requirements of, the Act and the rules
and regulations of the Commission promulgated thereunder, the
Registration Statement, and any amendment or supplement thereto, did not
and does not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto, did
not and does not include any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements
19
<PAGE>
therein, in the light of the circumstances under which they were made,
not misleading, and since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth; and
(iv) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
there has not been (A) any material adverse change in the business,
properties, business prospects, financial condition or results of
operations of the Company and its Subsidiaries, taken as a whole, (B) any
transaction that is material to the Company and its subsidiaries, taken
as a whole, except transactions entered into in the ordinary course of
business, (C) any obligation, direct or contingent, that is material to
the Company and its subsidiaries, taken as a whole, incurred by the
Company or its subsidiaries, except obligations incurred in the ordinary
course of business, (D) any change in the capital stock or outstanding
indebtedness of the Company that is material to the Company and its
subsidiaries, taken as a whole, (E) any dividend or distribution of any
kind declared, paid or made on the capital stock of the Company or its
subsidiaries, or (F) any loss or damage (whether or not insured) to the
property of the Company or its subsidiaries which has been sustained or
will have been sustained which has a material adverse effect on the
business, properties, business prospects, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole.
(g) On or prior to date of this Agreement, the Company shall
have obtained and delivered to you the Lock-up Agreements.
(h) The Representatives and counsel for the Underwriters shall
have received such further certificates, documents or other information as
they may have reasonably requested from the Company.
(i) Prior to the commencement of the offering of the
Securities, the Securities shall have been approved for quotation on the
Nasdaq National Market, subject to official notice of issuance.
(j) The Representatives shall have received an opinion, dated
the Firm Closing Date, of Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters, with respect to the issuance and sale of the Firm Securities,
the Registration Statement and Prospectus, and such other related matters as
the Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they may reasonably request for
the purpose of enabling them to pass upon such matters.
(k) On or prior to the Firm Closing Date, the Company shall
have obtained a director and officer insurance policy with a minimum coverage
amount reasonably acceptable to the Representatives and provide evidence
thereof reasonably acceptable to counsel for the Underwriters.
(l) On or prior to the Firm Closing Date, the Company shall
have paid the outstanding principal amounts and any unpaid accrued interest
due and payable under the Convertible Promissory Notes to the holders thereof.
All opinions, certificates, letters and documents delivered
pursuant to this Agreement will comply with the provisions hereof only if they
are reasonably satisfactory in all material respects to the Representatives
and counsel for the Underwriters. The Company shall furnish to the
Representatives such conformed copies of such opinions, certificates, letters
and documents in such quantities as the Representatives and counsel for the
Underwriters shall reasonably request.
The respective obligations of the several Underwriters to
purchase and pay for any Option Securities shall be subject, in their
discretion, to each of the foregoing conditions to purchase the Firm
Securities, except that all references to the Firm Securities and the Firm
Closing Date shall be deemed to refer to such Option Securities and the
related Option Closing Date, respectively.
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<PAGE>
9. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Act and
the Exchange Act, or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made
by the Company in Section 2 or Section 5 of this Agreement;
(ii) any untrue statement or alleged untrue statement of
any material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto and including any Rule 462(b)
Registration Statement, or (B) any application or other document, or any
amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Securities under the securities or
blue sky laws thereof or filed with the Commission or any securities
association or securities exchange (each an "Application");
(iii) the omission or alleged omission to state in (a)
the Registration Statement or any amendment thereto, a material fact
required to be stated therein or necessary to make the statements therein
not misleading, or (b) any Preliminary Prospectus or the Prospectus or
any amendment or supplement thereto, or any Application a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; or
(iv) any untrue statement or alleged untrue statement of
any material fact or omission or alleged omission of a material fact
contained in any audio or visual materials used by the Company in
connection with the marketing of the Securities, including without
limitation, slides, videos, films, tape recordings,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or any other proceeding in connection with any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such Registration Statement
or any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or any Application in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representatives specifically for use therein; and
provided, further, the Company will not be liable to any Underwriter or any
person controlling such Underwriter with respect to any such untrue statement
or omission made in any Preliminary Prospectus that is corrected in the
Prospectus (or any amendment or supplement thereto) if the person asserting
any such loss, claim, damage or liability purchased Securities from such
Underwriter but was not sent or given a copy of the Prospectus (as amended or
supplemented) at or prior to the written confirmation of the sale of such
Securities to such person in any case where such delivery of the Prospectus
(as amended or supplemented) is required by the Act, unless such failure to
deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with this Agreement. This indemnity agreement
will be in addition to any liability which the Company may otherwise have. The
Company will not, without the prior written consent of the Underwriter or
Underwriters purchasing, in the aggregate, more than 50% of the Securities,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such Underwriter
or any person who controls any such Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding), unless such settlement, compromise or consent
includes an unconditional release of all of the Underwriters and such
controlling persons from all liability arising out of such claim, action, suit
or proceeding.
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(b) The Company also agrees to indemnify and hold harmless
Prudential Securities Incorporated and each person, if any, who controls
Prudential Securities Incorporated within the meaning of either Section 15 of
the Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages or liabilities incurred as a result of Prudential
Securities Incorporated's participation as a "qualified independent
underwriter" within the meaning of Rule 2720 in connection with the offering
of the Securities, except for any losses, claims, damages or liabilities
resulting from Prudential Securities Incorporated's, or such controlling
person's, willful misconduct or gross negligence.
(c) Each Underwriter, severally and not jointly, will
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any losses, claims, damages or liabilities to
which the Company or any such director, officer of the Company or controlling
person of the Company may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment thereto, or any Application, (ii) the omission or the alleged
omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application or
necessary to make the statements therein not misleading, or (iii) the omission
or the alleged omission to state therein a material fact required to be stated
in any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representative specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or any
action in respect thereof.
(d) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 9, notify the indemnifying party of the commencement
thereof, but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise
than under this Section 9. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and,
to the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available
to the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or
parties and such indemnified party or parties shall have the right to select
separate counsel to defend such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and approval by such indemnified
party of counsel appointed to defend such action, the indemnifying party will
not be liable to such indemnified party under this Section 9 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified party in connection with the defense thereof,
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying
party shall not be liable for the expenses of more than one separate counsel
(in addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 9, representing the indemnified parties under
such paragraph (a) who are parties to such action or actions or (ii) the
indemnifying party does not promptly retain counsel reasonably satisfactory to
the indemnified party or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. The indemnifying party will not be liable for the costs
and expenses of any
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<PAGE>
settlement of such action effected by such indemnified party without the
consent of the indemnifying party, provided that such consent shall not be
unreasonably withheld.
(e) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this Section 9 is unavailable or
insufficient, for any reason, to hold harmless an indemnified party in respect
of any losses, claims, damages or liabilities (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect (i) the relative benefits received by the indemnifying party or
parties on the one hand and the indemnified party on the other from the
offering of the Securities or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative benefits
but also the relative fault of the indemnifying party or parties on the one
hand and the indemnified party on the other in connection with the statements
or omissions or alleged statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to
be in the same proportion as the total proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault of
the parties shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Underwriters, the parties' relative intents, knowledge,
access to information and opportunity to correct or prevent such statement or
omission, and any other equitable considerations appropriate in the
circumstances. The Company and the Underwriters agree that it would not be
equitable if the amount of such contribution were determined by pro rata or
per capita allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take into
account the equitable considerations referred to above in this paragraph (d).
Notwithstanding any other provision of this paragraph (d), no Underwriter
shall be obligated to make contributions hereunder that in the aggregate
exceed the total public offering price of the Securities purchased by such
Underwriter under this Agreement, less the aggregate amount of any damages
that such Underwriter has otherwise been required to pay in respect of the
same or any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the
provisions of the Representatives's Master Agreement Among Underwriters. For
the purposes of this paragraph 9(e), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter,
and each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
shall have the same rights to contribution as the Company.
(f) The parties of this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation,
the provisions of this Section 9, and are fully informed regarding said
provisions. They further acknowledge that the provisions of this Section 9
fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure the adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Act and the Exchange Act.
10. Default of Underwriters. If one or more Underwriters default
in their obligations to purchase Firm Securities or Option Securities
hereunder and the aggregate number of such Securities that such defaulting
Underwriter or Underwriters agreed but failed to purchase is ten percent or
less of the aggregate number of Firm Securities or Option Securities to be
purchased by all of the Underwriters at such time hereunder, then the other
Underwriters may make arrangements satisfactory to the Representatives for the
purchase of such Securities by other persons (who may include one or more of
the non-defaulting Underwriters, including the Representatives), but if no
such arrangements are made by the Firm Closing Date or the related Option
Closing Date, as the case may be, the other Underwriters shall be obligated
severally in proportion to their respective commitments hereunder to purchase
the Firm Securities or Option Securities that such defaulting Underwriter or
Underwriters agreed but failed
23
<PAGE>
to purchase. If one or more Underwriters so default with respect to an
aggregate number of Securities that is more than ten percent of the aggregate
number of Firm Securities or Option Securities, as the case may be, to be
purchased by all of the Underwriters at such time hereunder, and if
arrangements satisfactory to the Representatives are not made within
twenty-four (24) hours after such default for the purchase by other persons
(who may include one or more of the non-defaulting Underwriters, including the
Representatives) of the Securities with respect to which such default occurs,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company other than as provided in Section 11
hereof. In the event of any default by one or more Underwriters as described
in this Section 10, the Representatives shall have the right to postpone the
Firm Closing Date or the Option Closing Date, as the case may be, established
as provided in Section 3 hereof for not more than seven business days in order
that any necessary changes may be made in the arrangements or documents for
the purchase and delivery of the Firm Securities or Option Securities, as the
case may be. As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 9. Nothing herein
shall relieve any defaulting Underwriter from liability for its default.
11. Survival. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers, and the several Underwriters set forth in this Agreement or made by
or on behalf of them, respectively, pursuant to this Agreement shall remain in
full force and effect, regardless of (i) any investigation made by or on
behalf of the Company, any of its officers or directors, any Underwriter or
any controlling person referred to in Section 9 hereof and (ii) delivery of
and payment for the Securities. The respective agreements, covenants,
indemnities and other statements set forth in Sections 7 and 9 hereof shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement.
12. Termination.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date
or the related Option Closing Date, respectively, in the event that the
Company shall have failed, refused or been unable to perform all obligations
and satisfy all conditions on its part to be performed or satisfied hereunder
at or prior thereto or, if at or prior to the Firm Closing Date or, with
respect to the Company, such Option Closing Date, respectively:
(i) the Company or any of its subsidiaries shall have, in
the reasonable judgment of the Representatives, sustained any material
loss or interference with their respective businesses or properties from
fire, flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any legal or
governmental proceeding or there shall have been any material adverse
change, or any development involving a prospective material adverse
change (including without limitation a material change in management or
control of the Company or the death or disability of Gideon I. Gartner
which would not allow him to carry out his duties as President and Chief
Executive Officer of the Company), in the business, properties, business
prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole, except in each case as described
in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(ii) trading in the Common Stock shall have been
suspended by the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq
National Market shall have been suspended or materially limited, or
limitations on prices for trading (other than limitations on hours or
numbers of days of trading) have been fixed, or maximum ranges for prices
for securities have been required, by such exchange or the NASD or the
Nasdaq National Market or by order of the Commission or any other
governmental authority.
(iii) a banking moratorium shall have been declared by
New York or United States authorities;
(iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
24
<PAGE>
legislative body, agency or other government authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company;
or
(v) there shall have been (A) an outbreak or escalation
of hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
reasonable judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended as
of the date hereof.
(b) Termination of this Agreement pursuant to this Section 12
shall be without liability of any party to any other party except as provided
in Sections 9 and 11 hereof.
(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 12, you
shall promptly notify the Company by telephone, telecopy or telegram, in each
case confirmed by letter. If the Company shall elect to prevent this Agreement
from becoming effective, the Company shall promptly notify you by telephone,
telecopy or telegram, in each case, confirmed by letter.
13. Information Supplied by Underwriters. The statements set forth
in (i) the last paragraph on the front cover page, (ii) under the heading
"Underwriting and Plan of Distribution" in any Preliminary Prospectus or the
Prospectus and (iii) on page 2 in any Preliminary Prospectus or the Prospectus
pertaining to stabilization (to the extent such statements relate to the
Underwriters) constitute the only information furnished by or on behalf of the
Underwriters to the Company for the purposes of Sections 2(b) and 9 hereof.
The Underwriters confirm that such statements (to such extent) are correct.
14. Notices. All notices or communications hereunder shall be in
writing and, if sent to any of the Underwriters, shall be delivered or sent by
mail, telex or facsimile transmission and confirmed in writing to Friedman,
Billings, Ramsey & Co., Inc., Potomac Tower, 1001 Nineteenth Street North,
Arlington, Virginia 22209, Attention: Ms. Suzanne Richardson, with a copy to
Brobeck, Phleger & Harrison LLP, 1633 Broadway, 47th Floor, New York, New York
10019, Attention: Alexander D. Lynch, Esq.; and if sent to the Company, shall
be delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to the Company at One Longwater Circle, Norwell, Massachusetts 02061,
Attention: Chief Executive Officer with a copy to Weil, Gotshal & Manges LLP,
767 Fifth Avenue, New York, New York 10153, Attention: Gerald S. Backman, P.C.
15. Successors. This Agreement shall inure to the benefit of and
shall be binding upon the several Underwriters, the Company and their
respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
other person any legal or equitable right, remedy or claim under or in respect
of this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of such persons and for the benefit of no other person
except that (i) the indemnities of the Company contained in Section 8 of this
Agreement shall also be for the benefit of any person or persons who control
any Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act and (ii) the indemnities of the Underwriters contained in
Section 8 of this Agreement shall also be for the benefit of the directors of
the Company, the officers of the Company who have signed the Registration
Statement and any person or persons who control the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of
Securities from any Underwriter shall be deemed a successor because of such
purchase.
16. Applicable Law. The validity and interpretation of this
Agreement, and the terms and conditions set forth herein, shall be governed by
and construed in accordance with the laws of the State of New York, without
giving effect to any provisions relating to conflicts of laws.
25
<PAGE>
17. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the Commonwealth of
Virginia, and by execution and delivery of this Agreement, the Company accepts
for itself and in connection with its properties, generally and
unconditionally, the nonexclusive jurisdiction of the aforesaid courts and
waives any defense of forum non conveniens and irrevocably agree to be bound
by any judgment rendered thereby in connection with this Agreement. The
Company designates and appoints Gideon I. Gartner and such other persons as
may hereafter be selected by the Company irrevocably agreeing in writing to so
serve, as its agent to receive on its behalf service of all process in any
such proceedings in any such court, such service being hereby acknowledged by
the Company to be effective and binding service in every respect. A copy of
any such process so served shall be mailed by registered mail to the Company
at its address provided in Section 13 hereof; provided, however, that, unless
otherwise provided by applicable law, any failure to mail such copy shall not
affect the validity of service of such process. If any agent appointed by the
Company refuses to accept service, the Company hereby agrees that service of
process sufficient for personal jurisdiction in any action against the Company
in the Commonwealth of Virginia may be made by registered or certified mail,
return receipt requested, to the Company as applicable, at its address
provided in Section 14 hereof, and the Company hereby acknowledges that such
service shall be effective and binding in every respect. Nothing herein shall
affect the right to serve process in any other manner permitted by law or
shall limit the right of any Underwriter to bring proceedings against the
Company in the courts of any other jurisdiction.
18. Entire Agreement. This Agreement constitutes the entire
Agreement between the parties and supersedes and cancels any and all prior or
contemporaneous arrangements, understanding agreements, written or oral,
between them relating to the subject matter hereof.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
26
<PAGE>
If the foregoing correctly sets forth our understanding please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and
each of the several Underwriters.
Very truly yours,
GIGA INFORMATION GROUP, INC.
By
-------------------------------------------
Gideon I. Gartner
President and Chief Executive Officer
The foregoing Agreement is hereby confirmed
nd accepted as of the date first above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
By:
------------------------------------
Name:
Title:
For itself and as the Representatives.
27
<PAGE>
Schedule I
UNDERWRITERS
Number of Firm Securities
Underwriting to be Purchased
Friedman, Billings, Ramsey & Co., Inc.............. [ ]
Prudential Securities Incorporated................. [ ]
28
<PAGE>
Schedule A
Giga Information Group Investment Corporation
Giga Information Group Ltd.
Giga Information Group GmbH
BIS Italy SRL
Giga Information Group S.A.R.L.
29
<PAGE>
Schedule B
30
<PAGE>
Schedule C
Form of Pricing Opinion
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Giga Information Group, Inc.
One Longwater Circle
Norwell, Massachusetts 02061
Pricing Opinion
---------------
Ladies and Gentlemen:
Giga Information Group, Inc., a Delaware corporation (the "Corporation"), has
filed with the Securities and Exchange Commission a registration statement on
Form S-1 (Reg. No. 333-52899) relating to the offering of 3,000,000 shares of
common stock (plus up to 450,000 shares of common stock subject to the
underwriters' over-allotment option), par value $.001 per share (the "Common
Stock").
Prudential Securities Incorporated is acting as one of the several
underwriters of the offering to the public of the Common Stock (the
"Offering"). Friedman, Billings, Ramsey & Co., Inc. ("FBR"), directly and
through affiliates, in the aggregate beneficially owns more than 10% of the
outstanding subordinated debt of the Corporation, pursuant to the Loan and
Warrant Purchase Agreement between the Corporation and certain affiliates of
FBR dated April 7, 1998. The debt shall automatically convert into shares of
the Corporation's Series D Preferred Stock and a warrant to purchase shares of
Series D Preferred Stock on February 1, 1999 (which based on the current
capitalization of the Corporation shall be greater than 10% of the
Corporation's Preferred Stock) unless repaid prior thereto on the occurrence
of an initial public offering of the Corporation's Common Stock.
Under the Conduct Rules of the National Association of Securities Dealers,
Inc. ("NASD"), due to the ownership interest in the Corporation of FBR, the
Corporation may be deemed to be an affiliate of FBR. Accordingly, the public
offering price can be no higher than that recommended by a "qualified
independent underwriter" meeting certain standards.
We have been retained as a Qualified Independent Underwriter to recommend to
you the maximum offering price for the Common Stock as required by the NASD
Conduct Rules.
We have participated in the preparation of the Registration Statement and the
Prospectus (as such terms are defined in the Agreement) and have exercised the
usual standards of "due diligence" with respect thereto. Assuming that the
Offering is commenced on __________ ___, 1998, we recommend that the offering
price of the Common Stock be no higher than $_____, which price should in no
event be considered or relied upon as an indication of the actual value of the
Common Stock.
Our recommendations are based on economic, market, financial and other
conditions as they exist at the date hereof and on other conditions and
circumstances relating to the Corporation as described in the Registration
Statement. Changes in the conditions and circumstances relating to the
Corporation from those described in the Registration Statement and events
occurring after the date hereof, including changes in the markets in which the
Corporation operates, could materially affect the conclusions stated in this
letter. We shall not be obligated or required to
31
<PAGE>
reaffirm or revise these recommendations or otherwise to comment on any events
occurring after the date hereof or on any change to the conditions or
circumstances relating to the Corporation from those so described.
Very truly yours,
PRUDENTIAL SECURITIES INCORPORATED
By:
-----------------------------
Name:
Title:
32
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT TO AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION OF
GIGA INFORMATION GROUP, INC.
Pursuant to Sections 242
of the General Corporation Law
of the State of Delaware
GIGA INFORMATION GROUP, INC. (hereinafter called the "Corporation"),
a corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "General Corporation Law"),
hereby certifies as follows:
FIRST: The Board of Directors of the Corporation has duly adopted a
resolution, pursuant to Section 242 of the General Corporation Law, setting
forth an amendment to the Amended and Restated Certificate of Incorporation of
the Corporation and declaring said amendment to be advisable. The resolution
setting forth the amendment is as follows:
RESOLVED: That the Board of Directors hereby deems it advisable and
in the best interests of the Corporation to amend the
Corporation's Amended and Restated Certificate of
Incorporation by including the following provision:
Upon the filing of this Certificate of Amendment to the
Amended and Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware (the
"Effective Time"), each share of the Common Stock, par
value $0.001 per share, of the Corporation issued and
outstanding immediately prior to the Effective Time (the
"Old Common Stock") shall, automatically by operation of
law and without any further action on the part of the
Corporation or any holders of shares of capital stock of
the Corporation, be converted into and reclassified as 1/3
of a validly issued, fully paid and non-assessable share
of the Common Stock of the Corporation, par value $0.001
per share, (the "New Common Stock"), with the number of
shares of New Common Stock to be issued to a Stockholder
rounded to the nearest whole number of shares, authorized
for issuance pursuant to this Certificate of Amendment to
the Amended and Restated Certificate of Incorporation.
<PAGE>
SECOND: This Certificate of Amendment has been duly adopted and
approved by the written consent of the stockholders of the Corporation in
accordance with the provisions of Sections 228 and 242 of the General
Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to
be affixed hereto and this Certificate of Amendment to be signed by its
President and Chief Operating Officer this ____ day of July, 1998.
GIGA INFORMATION GROUP, INC.
By:
-------------------------------
Gideon I. Gartner
President and Chief Operating
Officer
2
<PAGE>
Exhibit 5
July 28, 1998
Giga Information Group, Inc.
One Longwater Circle
Norwell, MA 02061
Ladies and Gentlemen:
We have acted as counsel to Giga Information Group, Inc., a
Delaware corporation (the "Company"), in connection with the preparation and
filing by the Company with the Securities and Exchange Commission of the
Registration Statement on Form S-1 (Registration No. 333-52899) (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the proposed public offering (the "Offering")
of 3,000,000 shares of common stock, par value $0.001 per share, of the
Company (the "Shares") to be issued by the Company. Capitalized terms defined
in the Registration Statement and used but not otherwise defined herein are
used herein as so defined.
In so acting, we have reviewed the Registration Statement,
including the Prospectus contained therein, and the Certificate of
Incorporation and the Bylaws of the Company. In addition, we have examined
originals or copies, certified or otherwise identified to our satisfaction, of
such corporate records, agreements, documents and other instruments, and such
certificates or comparable documents of public officials and of officers and
representatives of the Company, and have made such inquiries of such officers
and representatives, as we have deemed relevant and necessary as a basis for
the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as certified, conformed or photostatic copies
and the authenticity of the originals of such latter documents. As to all
questions of fact material to this opinion that have not been
<PAGE>
Giga Information Group, Inc.
July 15, 1998
Page 2
independently established, we have relied upon certificates or comparable
documents of officers and representatives of the Company.
Based on the foregoing, and subject to the qualifications
stated herein, we are of the opinion that:
The Shares to be sold by the Company have been duly authorized
and, when issued and delivered against payment therefor in accordance with the
terms of the Underwriting Agreement, will be validly issued, fully paid and
nonassessable.
The opinions expressed herein are limited to the corporate
laws of the State of Delaware and the federal laws of the United States, and
we express no opinion as to the effect on the matters covered by this letter
of the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as Exhibit 5.1
to the Registration Statement and to the reference to our firm under the
caption "Legal Matters" in the Prospectus, without admitting that we are
"experts" under the Securities Act or the rules and regulations promulgated
thereunder with respect to any part of the Registration Statement or
Prospectus contained therein.
Very truly yours,
\s\ Weil, Gotshal & Manges LLP
<PAGE>
Exhibit 10.19(b)
LEASE
THIS LEASE (this "Lease") is made as of the 29th day of May, 1998, by
and between TRINET PROPERTY PARTNERS, L.P., a Delaware limited partnership
d/b/a TriNet Property Partners Limited Partnership, having a business address
c/o Keller/Davis Company, LLC, 101 Derby Street, Hingham, 02043 ("Landlord"),
and GIGA INFORMATION GROUP, INC., a Delaware corporation having a business
address at One Longwater Circle, Norwell, Massachusetts 02061 ("Tenant").
Landlord hereby leases to Tenant and Tenant hereby rents and leases
from Landlord all of Landlord's rights and interests in and to the following
(collectively, the "Leased Property"):
(a) the real property described in Exhibit A attached hereto
(the "Land");
(b) all buildings, structures, Fixtures (as hereinafter
defined) and other improvements of every kind including, but not
limited to, sidewalks, utility pipes, conduits and lines, and parking
areas and roadways appurtenant to such buildings and structures
presently or hereafter situated upon the Land (collectively, the
"Leased Improvements");
(c) all easements, rights and appurtenances of every nature
and description now or hereafter to or benefiting any or all of the
Land and the Leased Improvements; and
(d) all equipment, machinery, building fixtures, and other
items of property (whether realty, personalty or mixed), including
all components thereof, now or hereafter located in, on or used in
connection with, and permanently affixed to or incorporated into the
Leased Improvements, including, without limitation, all furnaces,
boilers, heaters, electrical equipment, heating, plumbing, lighting,
ventilating, refrigerating, incineration, air and water pollution
control, waste disposal, air-cooling and air-conditioning systems and
apparatus, sprinkler systems and fire and theft protection equipment,
all of which, to the greatest extent permitted by law, are hereby
deemed by the parties hereto to constitute real estate, together with
all replacements, modifications, alterations and additions thereto,
but specifically excluding all items included within the category' of
Tangible Personal Property (as
1
<PAGE>
hereinafter defined) which are not permanently affixed to or
incorporated in the Leased Property (collectively, the "Fixtures").
1. REFERENCE DATA.
Each of the following capitalized terms used in this Lease shall have
the meaning set forth opposite such term below:
Broker: None.
Commencement Date: June 1, 1998 or at 12:00 PM on the expiration day
of the existing Cap International, Inc. lease,
whichever is earlier.
Governmental
Authorities: Collectively, all agencies, authorities, bodies,
boards, commissions, courts, instrumentalities,
legislatures, and offices of any nature whatsoever
of any government, quasi-government unit or
political subdivision, whether with a federal,
state, county, district, municipal, city or
otherwise and whether now or hereinafter in
existence.
Fair Market Rental Value: As determined in accordance with Exhibit B hereof
Impositions: All real estate taxes, charges, and assessments,
extraordinary as well as ordinary, levied, imposed
or assessed (accrued and due and payable) for a
particular fiscal year during the Term of this
Lease by Governmental Authorities upon or
attributable to all or any part of the Leased
Property.
Landlord's Mailing
Address: c/o Ronald A. Davis
Keller/Davis Company, LLC
101 Derby Street
Hingham, Massachusetts 02043
2
<PAGE>
with a copy to:
TriNet Corporate Realty Trust, Inc.
6465 East Johns Crossing, Suite 400
Atlanta, GA 30097
Attn: Jo Ann Chirtty
Senior Vice President, Asset Management
Lease Year: A period of twelve (12) consecutive calendar months
commencing on the Commencement Date or the first
day of the month in which the Commencement Date
occurs if the Commencement Date is any day other
than the first day of a month, and then each
consecutive twelve (12) month period occurring
thereafter during the Term of this Lease.
Legal
Requirements: Collectively, all statutes, ordinances, by-laws,
codes, rules, regulations, restrictions, orders,
judgments, decrees and injunctions (including,
without limitation, all applicable building, health
code, zoning, subdivision, and other land use
statutes, ordinances, by-laws, codes, rules and
regulations), whether now or hereafter enacted,
promulgated or issued by any Governmental
Authority, affecting the Tenant, or the Leased
Property or the ownership, construction,
development, maintenance, management, repair, use,
occupancy, possession or operation thereof or the
operation of any programs or services in connection
with the Leased Property, including, without
limitation, any of the foregoing which
may (i) require repairs, modifications or
alterations in or to the Leased Property, (ii) in
any way affect (adversely or otherwise) the use and
enjoyment of the Leased Property or (iii) require
the assessment, monitoring, clean-up, containment,
removal, remediation or other treatment of any
3
<PAGE>
hazardous substances on, under or from the Leased
Property.
Permitted Use: The use of the Leased Property is for General
Office Purposes.
Rent: Collectively, the Base Rent, the Additional Rent
Charges and all other sums payable under this
Lease.
Security Deposit: Thirty Thousand Dollars ($30,000).
Tenant's
Mailing Address: GIGA Information Group, Inc.
One Longwater Circle
Norwell, Massachusetts 02061
2. LEASE TERM; EXTENSIONS.
The term of this Lease shall be for a period of three (3) years
commencing on the Commencement Date and ending on the last day of the month
immediately prior to the month in which the third (3rd) anniversary of the
Commencement Date occurs (the "Term").
3. RENT.
3.1 Base Rent. Tenant shall pay to Landlord rent ("Base Rent") equal
to Three Hundred Ninety-Two Thousand and Nine Hundred Fifty Dollars
($392,950.00) per year payable in advance on the first day of each calendar
month during the Term in equal monthly installments of Thirty Two Thousand
Seven Hundred Forty-Six Dollars ($32,746.00).
3.2 Method of Payment. Payments of Base Rent shall be made by Tenant
in equal monthly installments on the Commencement Date and thereafter on the
first day of each month during the Term in advance, without offset, deduction,
demand, or abatement whatsoever, except as otherwise expressly and
specifically provided herein, in lawful money of the United States. The Base
Rent payment for any fractional
4
<PAGE>
month at the commencement, termination or expiration of the Term will be
prorated accordingly.
4. EXTENSION RIGHTS.
Provided there is not then an Event of Default hereunder or at the
commencement of the relevant Option Term, Tenant shall have the right to
extend the Term for Two Three (3) year extension periods (collectively, the
"Option Terms" and individually, an "Option Term") upon the following terms
and conditions:
4.1 Notice. Tenant must notify Landlord of its election to extend the
Term for each of the Option Terms on or before one year prior to the date on
which the then Current Term expires.
4.2 Rent During Option Terms. The annual Base Rent for the first
Option Term will be Four Hundred Twenty Thousand Fifty Dollars ($420,050.00)
and the Annual Base Rent for the second Option Term will be Four Hundred
Forty-Seven Thousand One Hundred Fifty Dollars ($447,150.00).
4.3 Lease in Effect. All provisions of this Lease shall remain in
effect during each of the Option Terms except the right to extend as set forth
in this Section 4.3, it being agreed that there are no further rights of
extension after the second Option Term. Unless expressly stated herein to the
contrary, all references in this Lease to the "Term" shall include the Option
Terms when and if Landlord receives Tenant's notice of election to extend the
Term as herein provided.
4.4 Extension Rights Not Assignable. Notwithstanding any other
provision of this Lease to the contrary, the extension rights of Tenant
contained in this Section 4 may be exercised only by GIGA Information Group,
Inc. or an entity controlling, controlled by or under common control with GIGA
Information Group, Inc. (a "GIGA Entity"). If at any time Tenant assigns this
Lease to any person or entity that is not a GIGA Entity, then the extension
rights contained in this Section 4, including but not limited to the right to
occupy the Leased Property during the Option Terms, shall immediately and
automatically terminate, and such rights may not be revived by any subsequent
reassignment of this Lease to a GIGA Entity.
5
<PAGE>
5. ADDITIONAL CHARGES.
5.1 Additional Charges. In addition to Base Rent, Tenant will also
pay and discharge as and when due and payable: (a) all Impositions before any
fine, penalty interest or cost may be added for non-payment, such payments to
be made directly to the taxing authority where feasible; (b) all charges for
electricity, power, gas, oil, water, telephone and other utilities used in the
Leased Property during the Term; and (c) all other reasonable costs and
expenses associated with the repair, restoration, maintenance, insurance or
operation of the Leased Property unless some other provision of this Lease
expressly states that Landlord will pay such cost or expense.
Notwithstanding anything herein to the contrary, any costs and
expenses associated with the repair, restoration, maintenance or operation of
the Leased Property which would be treated as capital expenses under generally
accepted accounting principles shall be treated as follows: The cost of any
such expense shall be amortized over the useful life of the improvement, in
accordance with generally accepted accounting principles, at an interest rate
equal to 1 percent (1%) plus the prime rate then in effect (as published in
the Wall Street Journal). The annual amortization charges shall be an
additional charge payable by Tenant.
5.2 Installment Election. If any such Imposition may, at the option
of the taxpayer, lawfully be paid in installments (whether or not interest
shall accrue on the unpaid balance of such Imposition), Tenant may exercise
the option to pay the same (and any accrued interest on the unpaid balance of
such Imposition) in installments and, in such event, shall pay such
installments during the Term hereof as the same respectively become due and
before any fine, penalty. premium, future interest or cost may be added
thereto.
5.3 Refunds. Any refund due from any taxing authority in respect of
any Imposition paid by Tenant shall be paid over to or retained by Tenant.
5.4 Notice of Impositions. The Landlord shall give prompt notice to
the Tenant of all Impositions payable by the Tenant hereunder of the Landlord
at any time has knowledge, but the Landlord's failure to give any such notice
shall in no way diminish the Tenant's obligation hereunder to pay such
Impositions, except that Landlord shall be responsible for penalties and
charges if Landlord fails to give notice at least ten (10) days in advance or
within two (2) business days of receipt, whichever is later.
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5.5 Net Lease. Except as provided herein, the Rent shall be paid
absolutely net to the Landlord, so that this Lease shall yield to the Landlord
the full amount of the installments of Base Rent and the payments of
Additional Charges throughout the Term.
6. WARRANTIES AND COVENANTS.
6.1 Landlord Warranties. Landlord represents and warrants the
following to Tenant as of the date hereof and as of the Commencement Date:
(a) Landlord is duly organized and validly existing as a
limited partnership organized under the laws of the State of
Delaware. Landlord has full power and authority to execute and
deliver this Lease, and to carry on its business as presently
conducted.
(b) Landlord has the complete and unrestricted power to
enter into this Lease and perform its obligations hereunder. The
Lease when executed and delivered by Landlord, constitutes the valid
and legally binding obligation of Landlord, enforceable against
Landlord in accordance with its term; subject to (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other laws
affecting the rights of creditors generally and (ii) the exercise of
judicial discretion in accordance with general principles of equity.
(c) Landlord is not a party to any litigation, proceeding or
controversy pending before any court or administrative agency or, to
Landlord's knowledge, threatened against Landlord, nor is Landlord in
receipt of any inquiry, notice, citation, investigation or complaint
from any governmental agency or department, which might materially
adversely affect Landlord's ability to enter into and/or perform its
obligations under this Lease.
(d) Landlord is not a party to, subject to or bound by, any
agreement, judgment, order, writ, injunction or decree of any court
or Governmental Authority which could prevent the consummation of the
transactions' contemplated herein.
(e) To the best of Landlord's knowledge, this lease does not
cause the leased property to violate any statutes or regulations.
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(f) To the best of Landlord's knowledge, there are no
encumbrances on title adversely limiting Tenant's use of the leased
property.
6.2 [Intentionally deleted].
6.3 Tenant's Warranties. Tenant hereby represents and warrants to
Landlord as of the date hereof and as of the Commencement Date the following:
(a) Tenant is a duly organized and validly existing
Corporation in the State of Delaware. Tenant has full power and
authority to execute and deliver this Lease and to carry on the
business contemplated by this Lease.
(b) Tenant has the complete and unrestricted authority and
power to enter into this Lease and perform its obligations hereunder.
The Lease, when executed and delivered by Tenant, constitutes the
valid and legally binding obligation of Tenant, enforceable against
Tenant in accordance with its terms; subject to (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other laws
affecting the rights of creditors generally and (ii) the exercise of
judicial discretion in accordance with general principles of equity.
(c) Neither the execution or delivery, nor performance of
this Lease or the other agreements contemplated herein in accordance
with their respective terms, does nor will, after the giving of
notice, the lapse of time or otherwise, conflict with, result in a
breach of or constitute a default under, the charter or by-laws of
Tenant or to the knowledge of Tenant constitute a default under any
contract or other agreement to which Tenant is a party (except those
for which consent has been or will be obtained by the Commencement
Date) or by which Tenant is bound, or of any federal or state law,
statute, ordinance, rule or regulation, or of any court or
administrative order or process.
(d) Tenant is not a party to, subject to or bound by, any
agreement, judgment, order, writ, injunction or decree of any court
or governmental body which could prevent the consummation of the
transactions contemplated herein.
7. SECURITY DEPOSIT.
7.1 Handling of Security Deposit. Upon the execution of this Lease,
Tenant shall pay to Landlord the Security Deposit in the amount specified in
Section 1 above, which shall be held as security for Tenant's performance of
Tenant's
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obligations under this Lease (and may be applied by Landlord against any
default by Tenant hereunder). Upon the expiration of the Term of this Lease,
the Security Deposit shall be refunded to Tenant, subject to Tenant's
satisfactory compliance with the conditions and obligations of this Lease, and
the Landlord shall retain any surplus. Landlord may co-mingle the Security
Deposit with Landlord's other funds, and shall have no obligation to pay any
interest with respect to the Security Deposit. Further, Landlord shall have
the right to turn over the Security Deposit to any grantee of Landlord's
interest hereunder in the event Landlord conveys the Leased Property; and if
so turned over, Tenant agrees to look solely to such grantee for proper
allocation of the Security Deposit.
7.2 Restoration of Security Deposit. In the event Landlord reasonably
uses any portion of the Security Deposit to cure any default hereunder, Tenant
shall immediately make payment to Landlord of the amount necessary to restore
the Security Deposit to the full dollar amount set forth in Section 1.
8. UTILITIES; TRASH REMOVAL.
8.1 Tenant's Direct Payment to Utility Providers. Tenant shall pay
directly to the relevant provider, as they become due, all bills for utilities
(whether they are used for furnishing heat or other purposes) that are
furnished directly to the Leased Property.
8.2 Tenant's Obligations Regarding Additional Utilities. Landlord
warrants and represents to Tenant that the following utilities are presently
available to the Leased Property: water, septic, gas, electricity, and
telephone. Landlord shall have no obligation to provide utilities or equipment
other than the utilities and equipment within the Leased Property as of the
Commencement Date of this Lease. In the event Tenant requires additional
utilities or equipment or utilities of greater capacity the installation and
maintenance thereof shall be Tenant's sole obligation and shall be performed
at Tenant's sole cost and expense, provided that such installation shall be
subject to the prior written consent of Landlord.
8.3 Trash Removal. Trash generated in the ordinary course of business
by Tenant shall be deposited in dumpster(s) and Tenant shall bear the cost of
this dumpster(s) and removal of trash from the dumpster(s). It shall be the
sole responsibility of Tenant to segregate any and all hazardous and/or
medical waste from the trash deposited in such dumpster and to have such
hazardous and/or medical waste also removed at its own cost and expense from
the Leased Property by a licensed
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contractor in accordance with all applicable laws as more fully detailed in
Section 9.5 below.
9. BROKERAGE.
Tenant warrants that it has dealt with no broker in connection with
this Lease other than the Broker or Brokers named in Section 1 above and
agrees to defend and indemnify Landlord against any claim, loss, damage, cost
or expense (including, without limitation, reasonable attorney's fees)
incurred by Landlord on account of any breach of such warranty. Landlord
warrants that it has dealt with no broker in connection with the consummation
of this Lease except the Broker or Brokers named in Section 1 above, and
agrees to indemnify Tenant against any claim, loss damage, cost or expense
(including, without limitation, reasonable attorney's fees) incurred by Tenant
on account of any breach of such warranty.
10. USE OF LEASED PROPERTY; COMPLIANCE WITH LAWS AND
FIRE, INSURANCE REQUIREMENTS; HAZARDOUS MATERIALS.
10.1 Use of Leased Property. Tenant acknowledges that no trade or
occupation shall be conducted in the Leased Property or use made thereof other
than the Permitted Use.
10.2 Compliance with Laws. Tenant, at its sole expense, shall comply
with all Legal Requirements affecting the Leased Property. The Tenant shall be
responsible for complying with legal requirements only to the extent that such
legal requirements arose after March 17, 1995, with the Landlord being
responsible for compliance with all Legal Requirements arising after such
date. Furthermore, to the extent that compliance by the Tenant involves
capital expenditures, the cost thereof shall be allocated in the manner set
forth in Insert 5.1, except where required by the specific use or alterations
by Tenant.
10.3 No Nuisance or Other Harmful or Disruptive Activity. Tenant
shall not perform any acts or carry on any practices which may injure any part
of the Leased Property or common areas, violate any certificate of occupancy
affecting the same, constitute a public or private nuisance or a menace to
other tenants on the Property, produce undue noise, create obnoxious fumes or
other odors.
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10.4 Compliance with Fire Insurance Requirements. Tenant shall not
permit any use of the Leased Property which will make voidable any customary
insurance on the Leased Property or which shall be contrary to any law.
10.5 Hazardous Materials. Tenant shall not permit the emission,
release, threat of release or other escape of any Hazardous Materials from the
Leased Property so as to adversely affect in any manner, even temporarily, any
element or part of the Leased Property. Tenant shall not use, generate, store
or dispose of Hazardous Materials in, on or about the Leased Property, or
dump, flush or in any way introduce Hazardous Materials into the septic system
or other waste disposal systems serving the Leased Property (nor shall Tenant
permit or suffer any of the foregoing), in any manner not in full compliance
with all applicable federal, state and local statutes, laws, codes,
ordinances, by-laws, rules and regulations for the use, generation, storage
and disposal of Hazardous Materials.
Tenant will indemnify, defend and hold Landlord harmless from and
against all claims, loss, costs and expenses (including, without limitation,
reasonable attorneys' fees and disbursements, diminution in the value of the
Leased Property, costs incurred in connection with any investigation of site
conditions or any clean-up or remedial work required by any federal, state or
local Governmental agency) incurred as a result of any breach of Tenant's
covenants in the first paragraph of this Section 10.5 by Tenant or Tenant's
contractors, licensees, invitees, agents, servants or employees. Without
limiting the foregoing, if the presence of any Hazardous Materials in, on or
under the Leased Property caused or permitted by Tenant results in any
contamination of the Leased Property or the Property, Tenant shall promptly
take all actions at its sole expense as are necessary to return the Leased
Property to the condition existing prior to the introduction of any such
Hazardous Material by Tenant, provided that Landlord's approval of such action
shall first be obtained, which approval shall not be unreasonably withheld so
long as such actions would not potentially have any material adverse long-term
or short-term effect on the Leased Property.
Landlord will indemnify, defend and hold harmless Tenant from and
against all claims, loss, cost and expenses (including, without limitation,
reasonable attorneys fees and disbursements) incurred by Tenant as a result of
Hazardous Materials existing in, on or under the Leased Property prior to
March 17, 1995.
The obligations of Tenant and Landlord in this Section shall survive
the expiration or earlier termination of this Lease and any transfer of title
to the Leased Property, whether by sale, foreclosure, deed in lieu of
foreclosure or otherwise.
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For purposes of this Lease, "Hazardous Materials" means,
collectively, any animal wastes, medical waste, blood, biohazardous materials,
hazardous waste, hazardous substances, pollutants or contaminants, oils,
radioactive materials, asbestos in any form or condition, or any pollutant or
contaminant or hazardous, dangerous or toxic chemicals, materials or
substances within the meaning of any applicable federal, state or local law,
regulation, ordinance or requirement relating to or imposing liability or
standards of conduct concerning any such substances or materials on account of
their biological, chemical, radioactive, hazardous or toxic nature, all as now
in effect or hereafter from time to time enacted or amended.
11. MAINTENANCE; REPAIRS.
11.1 Tenant's Obligations. Except as provided in Section 11.2, Tenant
shall, at Tenant's sole cost and expense, (a) maintain and keep the Leased
Property in good repair, good working order and free of litter and refuse and
make any and all repairs and replacements thereto as and when required,
ordinary or extraordinary, foreseeable or unforeseeable, but specifically
excluding any repairs or replacements required by damage from fire or other
casualty (except that Tenant shall be fully liable and responsible to Landlord
for the deductible amount of any insurance if such damage is caused by Tenant
or Tenant's agents, employees or contractors); and (b) periodically repaint
and redecorate the Leased Property as and when required to maintain a clean
and fresh appearance.
11.2 Landlord's Obligations. Landlord agrees to maintain the
structural elements and the roof and the septic system of the Leased Property
in good working order and repair, reasonable wear and tear, damage by fire and
other casualty only excepted. Tenant must regularly service pumps and drains
on the septic system and have the septic tanks pumped on a regular basis.
Further, if such maintenance is required because of the negligent act or
omission of Tenant or those for whose conduct Tenant is legally responsible
and such maintenance is not covered by insurance, then Tenant shall be
responsible for such maintenance, and if such maintenance is covered by
insurance, then Tenant shall be fully liable and responsible to Landlord for
the deductible amount of any such insurance.
11.3 Removal of Snow and Ice. Removal of snow and ice from the
sidewalks, driveways and parking areas of the Leased Property shall be the
responsibility of Tenant.
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11.4 Tenant's Failure to Make Repairs. If repairs are required to be
made by Tenant pursuant to the terms hereof, Landlord may demand that Tenant
make the same forthwith, and if Tenant refuses or neglects to commence such
repairs and complete the same with reasonable dispatch, after such demand,
Landlord may (but shall not be required to do so) make or cause such repairs
to be made (the provisions of Section 19.4 being applicable to the costs
thereof).
11.5 Compliance with Americans with Disabilities Act. During the term
of this Lease, Tenant shall comply at Tenant's sole cost and expense with all
provisions of the ADA as they apply to Tenant's use and occupancy of the
Leased Property on and after March 17, 1995, and the operation of Tenant's
business therein and shall be fully responsible for any modifications or
alterations to the Leased Property or the common areas of the Property
necessary to meet requirements of the ADA which have become applicable to the
Leased Property or the Property as a result of Tenant's operation of its
business within the Leased Property.
12. ALTERATIONS.
12.1 Alterations or Additions by Tenant. Tenant shall not make
structural alterations or additions to the Leased Property, but may make
non-structural alterations provided that, in cases involving an expenditure in
excess of ($10,000.00), Landlord gives its prior written consent thereto,
which consent shall not be unreasonably withheld or delayed. All such allowed
alterations shall be at Tenant's sole cost and expense. Tenant shall not
permit any mechanics' liens, or similar liens, to remain upon the Leased
Property for labor and material furnished to Tenant or claimed to have been
furnished to Tenant in connection with work of any character performed or
claimed to have been performed at the direction of Tenant and shall cause any
such lien to be released of record forthwith without cost to Landlord. Any
alterations or improvements made by Tenant shall become the property of the
Landlord at the expiration or earlier termination of the Term. Notwithstanding
any provision to the contrary, Tenant shall have the right to remove and
retain all semi- attached equipment, specifically including any generators,
network equipment, and communications equipment. All alterations or additions
made by Tenant shall be performed in a good and workmanlike manner and in
compliance with all the applicable laws, ordinances, orders, rules,
regulations and requirements applicable thereto and shall be performed only by
contractors or mechanics approved by Landlord. All such contractors and
mechanics shall carry adequate liability insurance (which shall name Landlord
and Tenant as an additional insured) and workmen's compensation insurance and
Landlord shall be presented with certificates of same prior to the
commencement of any work.
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12.2 Alterations or Additions by Landlord. Landlord hereby reserves
the right at any time to enter upon the Property or the Leased Property and
make alterations or additions thereto, or to any or all of the common
facilities, improvements or personalty comprising a part thereof, provided
such alterations or additions do not unreasonably or materially interfere with
Tenant's use of the Leased Property.
13. ASSIGNMENT; SUBLEASING.
Tenant shall not assign this Lease or sublet the whole or any part of
the Leased Property without Landlord's prior written consent, which consent
shall not be unreasonably withheld or delayed; it being agreed, however, that
Landlord will give its consent to any sublease or assignment of all or any
portion of the Leased Property to a GIGA Entity for the Permitted Use or to a
successor entity by reason of merger or acquisition of substantially all of
Tenant's stock or assets. Notwithstanding such consent, Tenant shall remain
liable to Landlord for the payment of all Base Rent, Additional Charges, any
other charges due hereunder, and for the full performance of the covenants and
conditions of this Lease. Landlord's consent to any such transfer, assignment
or sublease will not be deemed a consent to any subsequent transfer,
assignment or sublease. In the event of any such transfer, assignment or
subletting, Tenant shall pay to Landlord as additional rent hereunder one
hundred percent (100%) of all sums or other economic consideration that Tenant
receives as a result of such transfer, assignment or subletting, which exceed
in the aggregate the total sums which Tenant is obligated to pay Landlord
under this Lease (in the case of a sublease, prorated to reflect obligations
allocable to that portion of the Leased Property). In the event of a default
under the terms of this Lease, if the Leased Property or any part thereof are
then assigned or sublet, Landlord, in addition to any other remedies herein
provided or provided by law, may at its option collect directly from assignee
or subtenant all rents becoming due to Tenant under such assignment or
sublease and apply such rent against any sums due it by Tenant hereunder, and
no such collection shall be construed to constitute a novation or a release of
Tenant from the further performance of its obligations hereunder.
14. SUBORDINATION TO MORTGAGES; ESTOPPEL CERTIFICATES.
14.1 Subordination. This Lease shall he subject and subordinate to
any and all mortgages, deeds of trust and other instruments in the nature of a
mortgage, easements or rights-of-way (provided no such easement or right of
way shall unreasonably interfere with Tenant's use of the Leased Property) now
or at a time hereafter, constituting a lien or encumbrance on the Property and
Tenant shall, when
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requested, promptly execute and deliver such written instruments as shall be
necessary to show the subordination of this Lease to such mortgages, deeds of
trust or other such instruments. Failure to execute any such instruments
within twenty (20) days after request shall constitute a default hereunder. It
is the understanding of the parties hereto that Landlord shall obtain and
deliver a non-disturbance agreement from the current mortgagee if any, of the
Leased Property as of the date of this Lease and shall use its best efforts to
secure a non-disturbance agreement with any and all subsequent lenders
requiring such subordination from Tenant or grantees under such other
instruments, but the effectiveness of the other provisions of this Section
14.1 shall not be conditioned in any manner upon the actual receipt of a
non-disturbance agreement from such subsequent lenders.
14.2 Estoppel Certificate; Financial Data.
(a) At any time and from time to time, Tenant shall, within ten (10)
days after written request by Landlord, execute, acknowledge and deliver to
Landlord and any mortgage lender or prospective purchaser a certificate
certifying: (i) that this Lease is unmodified and in full force and effect as
modifications, that this Lease is unmodified and in full force and effect (or,
if there have been modification, that this Lease is in full force and effect
as modified, and stating the date and nature of each modification); (ii) the
Commencement Date and the Expiration Date determined in accordance with
paragraph 3 and the date, if any, to which all rent and other sums payable
hereunder have been paid; (iii) that no notice has been received by Tenant of
any default by Tenant hereunder which has not been cured, except as to
defaults specified in such certificate; (iv) that Landlord is not in default
under this Lease, except as to defaults specified in such certificate; and (v)
such other matters as may be reasonably requested by Landlord or any actual or
prospective purchaser or mortgage lender. Any such certificate may be relied
upon by Landlord and any actual or prospective purchaser or mortgage lender of
the Leased Property or any part thereof.
(b) Tenant shall deliver to Landlord and to any lender or purchaser
designated by Landlord the following information; within 120 days after the
end of each fiscal year of Tenant, and audited balance sheet of Tenant and its
consolidated subsidiaries as at the end of such year, an audited statement of
profits and losses of Tenant and its consolidated subsidiaries for such year,
and an audited statement of cash flows of Tenant and its consolidated
subsidiaries for such year, setting forth in each case, in comparative form,
the corresponding figures for the preceding fiscal year in reasonable detail
and scope and certified by independent certified public accountants of
recognized national independent certified public accountants of recognized
national
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standing selected by Tenant; and within 60 days after the end of each of the
first three fiscal quarters of Tenant a balance sheet of Tenant and its
consolidated subsidiaries as at the end of such quarter statements of profits
and losses of Tenant and its consolidated subsidiaries for such quarter and a
statement of cash flows of Tenant and its consolidated subsidiaries for such
quarter, setting forth in each case, in comparative form, the corresponding
figures for the similar quarter of the preceding year, in reasonable detail
and scope, and certified to be true and complete by a financial officer of
Tenant having knowledge thereof; the foregoing financial statement all being
prepared in accordance with the generally accepted accounting principles,
consistently applied.
(c) Upon ten (10) days' prior notice, Tenant will permit Landlord and
its professional representatives to visit Tenant's offices, and discuss
Tenant's affairs and finances (insofar as they relate to the Leased Property
or this Lease) with appropriate officers, and will make available such
information as Landlord may reasonably request bearing on the Tenant, Leased
Property or this Lease, provided that Tenant shall not be required to disclose
information in violation of federal securities laws.
(d) Landlord agrees that it shall hold all financial information
provided to Landlord under Section 14.1(b) or (c) in strict confidence and
shall not disclose any of such information to any third party other than
Landlord's attorneys, accountants or internal staff members unless Landlord
either obtains Tenant's written consent to such disclosure or such third party
agrees to keep such information confidential.
15. LANDLORD'S ACCESS.
Landlord or agents of Landlord may, upon forty-eight (48) hours prior
notice to Tenant (or at any time with regard to (a) and (b) herein without
notice in the case of emergency), enter the Leased Property to (a) inspect the
same, (b) make alterations as provided in Section 12.2 above or repairs, (c)
show the Leased Property to prospective lenders at any time and to prospective
tenants within one year prior to the then-scheduled expiration of the Term,
and (d) at any time within six (6) months before the expiration of the Term,
affix to any suitable part of the Leased Property a notice that the Leased
Property are available for lease and keep the same so affixed without
hindrance or molestation. Landlord shall be allowed to place antenna, dishes
or other equipment upon roof of the building so long as it does not interfere
with Tenant's use of the leased property.
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16. INSURANCE, HOLD HARMLESS AND INDEMNIFICATION:
(a) Landlord shall not be liable to Tenant for any damage to or loss
or theft of any property or for any bodily or personal injury, illness or
death of any person in, or about the Leased Property arising at any time and
from any cause whatsoever, except to the extent caused by the gross negligence
or willful misconduct of Landlord or arising from a default by Landlord in its
obligations hereunder which default goes unremedied for five days after
Landlord receives written notice thereof. Tenant waives all claims against
Landlord arising from any liability described in this paragraph 16(a), except
to the extent caused by the gross negligence or willful misconduct of
Landlord.
(b) Tenant hereby agrees to indemnify and defend Landlord against and
hold Landlord harmless from all claims, demands, liabilities, damages, losses,
costs and expenses, including reasonable attorneys' fees and disbursements,
arising from or related to any use or occupancy of the Leased Property, or any
condition of the Leased Property for which Tenant is responsible, or any
default in the performance of Tenant's obligations, or any damage to any
property (including property of employees and invitees of Tenant) or any
bodily or personal injury, illness or death of any person (including employees
and invitees of Tenant) occurring in, on or about the Leased Property or any
part thereof or any part of the building or the land constituting a part of
the Leased Property arising at any time and from any cause whatsoever (except
to the extent caused by the gross negligence or willful misconduct of
Landlord). This paragraph 16(b) shall survive the termination of this Lease
with respect to any damage, bodily or personal injury, illness or death
occurring prior to such termination.
(c) Tenant shall, at all times and during the term of this Lease and
at Tenant's sole cost and expense, obtain and keep in force comprehensive
general liability insurance, including general contractual liability, fire,
legal liability, and premises operations, all on an "occurrence" policy form,
with a minimum combined single limit in the amount of $5,000,000 per
occurrence for bodily or personal injury to, illness or, or death of persons
and damage to property occurring in, on or about the Leased Property, and such
insurance shall name the Landlord and any other parties designated by Landlord
as additional insureds. Tenant shall, at Tenant's sole cost and expense, be
responsible for insuring Tenant's furniture, equipment, fixtures, computers,
office machines and personal property.
(d) Tenant shall, at all times during the term of this Lease and at
Tenant's sole cost and expense, obtain and keep in force worker's compensation
and employer's liability insurance in all states in which the Leased Property
and any other operations of the Tenant are located and any other state in
which the Tenant or its contractors or
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subcontractors may be subject to any statutory or other liability arising in
any manner whatsoever out of the actual or alleged employment of others. The
total limits of the employer's liability coverage required hereunder shall not
be less than the amounts specified in paragraph 16(c).
(e) At all times during the term of this Lease, Landlord shall obtain
and keep in force the following types of insurance, and Tenant shall reimburse
Landlord for the costs thereof: (a) insurance against loss (including
earthquake and flood) or damage to the Leased Property by fire and all other
risks of physical loss (including earthquake and flood) covered by insurance
of the type now known as "all risk", with difference in conditions coverage,
in an amount not less than the full replacement cost of the Leased Property
(without deduction for depreciation), including the cost of debris removal and
such endorsements as Landlord may reasonably require, and containing the
"Replacement Cost Endorsement"; (b) boiler and machinery insurance covering
pressure vessels, air tanks, boilers, machinery, pressure piping, heating,
ventilation and air conditioning equipment, and elevator and escalator
equipment, provided the Leased Property contains equipment of such nature and
insurance against loss of occupancy or use arising from any breakdown of any
such items, in such amounts as Landlord may reasonably determine; (c) plate
glass insurance in such amounts as Landlord may reasonably determine if the
Leased Property contain plate glass; (d) business interruption insurance
insuring that the Fixed Rent will be paid to Landlord for up to one year if
the Leased Property is destroyed or rendered untenantable by a cause insured
against (it being understood that the existence of such insurance does not
reduce Tenant's obligation to pay Fixed Rent without diminution); and (e)
insurance in amounts and against such other risks as Landlord or Mortgages may
reasonably require and against such risks as are customarily insured against
by operators of similar properties.
(f) All insurance required to be maintained by Tenant under this
paragraph 16 and all renewals thereof shall be issued by good and responsible
companies qualified to do and doing business in the state of where the Leased
Property is located and having a rating in Best's Insurance Guide of at least
A:X and a Standard and Poor's Corporation claims paying ability rating of at
least "A". Each policy to be maintained by Tenant shall expressly provide that
the policy shall not be canceled or altered without thirty (30) days' prior
written notice to Landlord and shall remain in effect notwithstanding any such
cancellation or alteration until such notice shall have been given to Landlord
and such period of thirty (30) days shall have expired. All insurance under
this paragraph 10 to be maintained by Tenant shall name Landlord and any other
parties designated by Landlord as an additional insured, shall be primary
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and noncontributing with any insurance which may be carried by Landlord, shall
afford coverage for all claims based on any act, omission, event or condition
that occurred or arose (or the onset of which occurred or arose) during the
policy period. Upon the issuance of each such policy to be maintained by
Tenant, Tenant shall deliver each such policy or a certified copy and a
certificate thereof (Acord 27 form) to Landlord for retention by Landlord. If
Tenant fails to insure or fails to furnish to Landlord upon notice to do so
any policy to be maintained by Tenant or certified copy and certificate
thereof as required, Landlord shall have the right from time to time to effect
such insurance for the benefit of Tenant or Landlord or both of them and all
premiums paid by Landlord shall be payable by Tenant as Additional Rent on
demand. Tenant shall pay to Landlord immediately upon demand all costs
incurred by Landlord as a result of Tenant's failure to obtain and maintain in
effect the policies of insurance required under this paragraph 16.
(g) Tenant waives on behalf of all insurers under all policies of
property, liability and other insurance (excluding workers' compensation) now
or hereafter carried by Tenant insuring or covering the Leased Property, or
any portion or any contents thereof, or any operations therein, all rights of
subrogation which any insurer might otherwise, if at all have to any claims of
Tenant against Landlord. Landlord waives on behalf of all insurers under all
policies of property, liability and other insurance (excluding workers'
compensation) now or hereafter carried by Landlord insuring or covering the
Leased Property or any portion or any contents thereof, or any operations,
therein, all rights of subrogation which any insurer might otherwise, if at
all, have to any claims of Landlord against Tenant. Tenant shall, prior to or
immediately after the date of this Lease, procure from each of the insurers
under all policies of property, liability and other insurance (excluding
workers' compensation) now or hereafter carried by Tenant insuring or covering
the Leased Property, or any portion or any contents thereof, or any operations
therein, a waiver of all rights of subrogation which the insurer might
otherwise, if at all, have to any claims of Tenant against Landlord as
required by this paragraph 16(g).
17. FIRE; CASUALTY; EMINENT DOMAIN.
17.1 Damage by Casualty. Should a substantial portion of the Leased
Property, or of the Property, be substantially damaged by fire or other
casualty, Landlord or Tenant may elect to terminate this Lease, and where such
fire or casualty renders the Leased Property reasonably unsuitable for its
intended use, a just and proportionate abatement of rent shall be made.
Further, within thirty (30) days after such fire or other casualty, Landlord
shall give written notice to Tenant with respect to
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whether or not Landlord will restore the Leased Property and the estimated
time to complete such repair. Tenant may elect to terminate this Lease if
either (a) Landlord notifies Tenant in writing that Landlord has elected not
to restore the Leased Property, (b) Landlord elects to restore but fails to
restore the Leased Property to a condition reasonably suitable for its
intended use within one hundred twenty (120) days after such fire or casualty,
or (c) Landlord fails to make reasonable, good faith efforts to commence
restoring the Leased Property within one hundred twenty (120) days after such
fire or casualty. However, Tenant's failure to give such notice of termination
within ten (10) days after the date on which the right to terminate ripens
under either (a), (b), or (c) above shall constitute a waiver of such right by
Tenant. Landlord will seek to have the first mortgagee of the Leased Property,
if any, provide for application of hazard insurance loss proceeds to the
repair or reconstruction of the Leased Property upon any hazard loss. Subject
to the mortgagee (if any) of the Leased Property making the hazard loss
insurance proceeds available for such restoration and to Landlord's receipt of
such proceeds for that purpose, if Landlord elects, to repair, reconstruct, or
cause to be repaired or reconstructed, such damage or destruction, Landlord
shall not be required to expend, in connection with such repair or
reconstruction, any amount exceeding the amount of casualty insurance proceeds
actually received by Landlord. Notwithstanding the foregoing, in the event
such mortgagee shall not make the insurance loss proceeds available for repair
or restoration, Landlord shall not be required to repair or reconstruct the
Leased Property and shall notify Tenant within thirty (30) days next following
such hazard loss, of its election in this respect and thereupon, Tenant shall
have the termination rights described above in this Section.
17.2 "Complete" Taking of Leased Property. If, prior to the
Commencement Date or otherwise, the Leased Property shall be taken in its
entirety under any condemnation or eminent domain proceedings (each such
occurrence being hereinafter referred to as a "Taking") by any government
authority (the "Taking Authority") during the Term hereof, or in the event
twenty-five (25%) percent or more of the floor area or parking area of the
Leased Property is taken in any such proceedings and the remaining portion
shall not be suitable or adequate (in the reasonable opinion of Tenant
exercised in good faith) for the uses described in this Lease, and Tenant
notifies Landlord of such determination within thirty (30) days next following
the taking of physical possession of such portion of the Leased Property by
the Taking Authority or the date upon which Tenant receives written notice
that title has vested in the Taking Authority, whichever is first to occur,
then in any such event this Lease and the Term hereof shall terminate as of
the date physical possession of the Property (or a portion thereof) is taken
by the Taking Authority, and Tenant shall
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be liable for the payment of Base Rent, Additional Charges and all other
charges due from Tenant hereunder, and performance of the other terms and
conditions of this Lease on Tenant's part to be performed only up to date of
such termination, and any Base Rent paid in advance for periods following such
date shall be apportioned and promptly refunded to Tenant.
17.3 "Partial" Taking of Leased Property. In the event of a Taking
that is not a "complete" Taking as described in Section 18.2 above, and either
(a) the mortgagee of the Leased Property shall not make the proceeds of any
awards or damages payable as to the Taking available for restoration and
repair of the Leased Property, or (b) Landlord shall determine in its
reasonable discretion that the restoration and repair of the Leased Property
shall be impracticable, or (c) the Taking occurs within the last eighteen (18)
months of the initial Term (or of a renewal term, if any), Landlord or Tenant
shall be entitled to terminate this Lease without liability by reason of such
Taking. If Landlord or Tenant does not so terminate this Lease, this Lease
shall continue in effect and Landlord shall rebuild and restore the Leased
Property as nearly as possible to the condition existing next preceding such
Taking, with due allowance for the portion so taken. Further, Tenant shall
promptly restore or repair any improvement made by it in the Leased Property
to the extent proceeds from such awards are made available to Tenant for such
purpose or return such areas to their original condition prior to any
improvements by Tenant and this Lease shall be and remain in full force and
effect and be unaffected by, the Taking, except that from the date possession
of the taken portion of the Leased Property is acquired by the Taking
Authority, the Base Rent payable under this Lease shall be diminished by the
Fair Market Rental Value of the portion of the Leased Property so taken. The
restoration or repair work to be done by Tenant shall be done subject to any
and all terms and conditions elsewhere set forth in this Lease governing
alterations or work on Tenant's part to be performed.
17.4 Miscellaneous Provisions Regarding Casualty or Taking.
17.4.1 In the event this Lease is terminated or terminates
by reason of a Taking or a Casualty, the provisions of the Lease applicable
upon expiration of the Lease shall govern the parties.
17.4.2 Landlord will seek to have any mortgagee of the
Leased Property provide for application of the proceeds of any Taking awards
to restoration, repair, and reconstruction of the portion of such property
remaining after the Taking. Notwithstanding the amount of land, building, or
improvements taken by
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condemnation or eminent domain or the termination or continuance of this Lease
with respect thereto, Tenant shall not participate or share in any recovery,
award, or damages payable or paid as to such Taking, nor have or assert any
right, claim, or cause of action against Landlord, the fee owner, or mortgagee
of the Leased Property or, except as expressly provided in Section 18.4.3
below, the Taking Authority whether for the loss of, or diminution in value
of, the unexpired Term of this Lease, or as to the Taking of any such land,
building, and/or improvements or otherwise; and Tenant for itself and its
successors and assigns hereby waives, surrenders, and releases to Landlord any
and all claims or rights to claim or receive all or any portion of any and all
recovery, awards, and/or damages as to such Taking.
17.4.3 If permitted by statute, Tenant may assert a separate
and independent claim for and recover from the Taking Authority, but not from
Landlord, any compensation as may be separately awarded or recoverable by
Tenant in its own name and right for any damage to Tenant's portable fixtures
and equipment, or on account of any expenses which it shall incur in removing
its merchandise, furnishings, and equipment from the Leased Property, but in
no event shall any such claims or recoveries be claims or asserted in the
event the same would, may, or shall diminish, offset, or bar any damages,
recovery, or award to Landlord or the fee owner of the Leased Property, except
to the extent such damages recovery or award is based on injury to Tenant or
the interest of Tenant hereunder.
18. DEFAULT; REMEDIES; BANKRUPTCY.
18.1 Events of Default. Each of the following shall be an event of
default ("Event of Default") under this Lease:
18.1.1 Tenant shall default in the payment of any
installment of rent or other sum herein specified by the first day of the
month when due and such default shall continue for five (5) days after written
notice thereof; provided, however, that Landlord shall not be required to give
more than two (2) such notices during any consecutive twelve (12) month period
with regard to defaults in the payment of installments of Base Rent, or any
other sums due under this Lease, and in the event that Landlord has already
given two (2) such notices during any consecutive twelve (12) month period,
any subsequent failure of Tenant during such twelve (12) month period to make
any payment due hereunder shall immediately constitute a default even though
no notice has been given;
18.1.2 Tenant shall fail to maintain insurance as required by
this Lease;
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18.1.3 Tenant shall default in the observance or performance
of any other of Tenant's covenants, agreements, or obligations hereunder and
such default shall not be cured within thirty (30) days after written notice
thereof, or if such default is of a nature that it cannot be reasonably cured
within such thirty (30) day period, Tenant shall not have commenced to cure
such default within said thirty (30) day period and diligently proceed to
completion of said cure, provided such extended period without a completed
cure will not have a material adverse effect on the value of the Leased
Property or expose Landlord to any liability; provided, however, that Landlord
shall not be required to give more than two (2) notices during any consecutive
twelve (12) month period with regard to Tenant's failure to perform its
obligations under a particular Section of this Lease (a "Previously Defaulted
Provision") and in the event that Landlord has already given two (2) such
notices during any consecutive twelve (12) month period, any subsequent
failure of Tenant during such twelve (12) month period to fully and punctually
observe such Previously Defaulted Provision shall immediately constitute a
default even though no notice has been given; or
18.1.4 Tenant or any other party shall file a petition or
application under any state or federal bankruptcy, insolvency or debtor's
relief law relating to Tenant or Tenant shall consent to an assignment or
composition for the benefit of Tenant's creditors or consent to the
appointment of a receiver for any of Tenant's property; provided, however,
that if such petition, application or receivership proceedings are instituted
against Tenant by a third patty, there shall be no default hereunder unless
the same shall remain undischarged for a period of greater than sixty (60)
days from the filing of such petition or application or the commencement of
the receivership proceedings, as the case may be.
18.2 Landlord's Remedies. Upon the occurrence of an event of
default, Landlord shall have the following rights and remedies:
18.2.1 Landlord shall have the right at its election, at any
time while such event of default continues, to give Tenant written notice of
Landlord's election to terminate this Lease on a date specified in such
notice. Upon the giving of such notice, this Lease and the estate hereby
granted shall expire and terminate on such date as fully and completely and
with the same effect as if such date were the date herein before fixed for the
expiration of the Term, and all rights of Tenant hereunder shall expire and
terminate, but Tenant shall remain liable as hereinafter provided.
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18.2.2 Landlord shall have the immediate right to re-enter
and repossess the Leased Property or any part thereof by summary proceedings,
ejectment or otherwise and the right to remove all persons and property
therefrom. Landlord shall be under no liability for or by reason of any such
entry, repossession or removal. No such re-entry or taking of possession of
the Leased Property by Landlord shall be deemed to waive or prejudice any
remedies provided to Landlord hereunder, nor be construed as an election on
Landlord's part to terminate this Lease unless a written notice of such
election be given to Tenant pursuant to Sections 19.2.1 and 20 or unless the
termination of this Lease he decreed by a court of competent jurisdiction.
18.2.3 Landlord may relet the Leased Property or any part
thereof for the account of Tenant, in the name of Tenant or Landlord or
otherwise, without notice to Tenant, for such term or terms (which may be
greater or less than the period which would otherwise have constituted the
balance of the Term) and on such conditions (which may include free rent and
any other concessions) and for such uses as Landlord, in its reasonable
discretion, may determine; and Landlord may collect and receive any rents
payable by reason of such reletting. Landlord shall not be responsible or
liable for any failure to relet or to collect any rent due upon such
reletting.
18.2.4 In the event of any termination of this Lease by
reason of the occurrence of an Event of Default, Tenant will pay to Landlord
the Base Rent, and any Additional Charges and other sums required to be paid
by Tenant for the period to and including the date of such termination.
18.2.5 Landlord shall be entitled to recover from Tenant,
and Tenant will pay to Landlord on demand, as and for liquidated and agreed
final damages for Tenant's default and in lieu of all current damages beyond
the date of termination (it being agreed that it would be impracticable or
extremely difficult to fix the actual damages), an amount equal to the excess,
if any, of the present value of the excess of (a) the total of (i) the Base
Rent, any Additional Charges and other sums which would be payable under this
Lease from the date of such termination for what would be the then unexpired
Term in the absence of such termination plus (ii) the aggregate of all
reasonable expenses relating to Landlord's reletting the Leased Property,
including, without limitation, brokerage fees and the cost of any alterations
needed to relet, over (b) the then net fair rental value of the Leased
Property for the same period (after deducting from such fair rental value the
time needed to relet the Leased Property in the amount and concessions which
would normally be given to a new tenant). Fair rental value shall be
established by reference to the terms and conditions upon which
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Landlord relets the Leased Property if such reletting is accomplished within a
reasonable period of time after such termination and otherwise established on
the basis of Landlord's reasonable estimates and assumptions of fact regarding
market and other relevant circumstances, which shall govern unless shown to be
clearly erroneous.
18.3 Landlord's Cure Rights. If Tenant shall default in the
observance or performance of any conditions or covenants on Tenant's part to
be observed or performed under or by virtue of any of the provisions of this
Lease after the applicable notice and cure period, Landlord, without being
under any obligation to do so and without thereby waiving such default, may
remedy such default for the account and at the expense of Tenant.
18.4 Tenant's Obligation to Reimburse Landlord. If Landlord makes any
expenditures (pursuant to Section 17.3 above or otherwise) or incurs any
obligations for the payment of money in connection with any failure of Tenant
to perform fully all of its obligations under this Lease after the applicable
notice and cure period, such sums paid or obligations incurred (including but
not limited to, reasonable attorney's fees and court costs in instituting,
prosecuting or defending any action or proceeding), with interest at the rate
of one and one half percent (1-1/2%) per month and costs, shall upon demand be
paid to Landlord by Tenant as an Additional Charge.
18.5 No Waiver. Neither party's failure to take action against the
other with respect to any default in Tenant's performance of its obligations
hereunder shall not, under any circumstances constitute a waiver of any of
such party's rights under this Lease and, further, no waiver of any of the
provisions of this Lease shall be effective unless given in writing nor shall
any waiver be construed as a waiver of any of the other provisions hereof or
as a waiver of the same provisions for any subsequent time.
18.6 Acceptance of Late Payments. No payment by Tenant, or acceptance
by Landlord, of a lesser amount than then due from Tenant to Landlord shall be
treated otherwise than as a payment on account regardless of any letter
accompanying such check or legend entered upon such check. Further, no
acceptance of any payment by Landlord from Tenant shall in any way constitute
a waiver of any default then existing or which would exist with the proper
giving of notice.
18.7 Interest on Late Payments. If Tenant shall fail to pay, when the
same is due and payable, any Base Rent, Additional Rent, Additional Charges or
any other charges or payments required hereunder (excluding the payments
described in Section 19.4 above), such unpaid amounts shall bear interest from
the due date thereof to the
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date of payment at the annual rate of interest of eighteen percent (18%) per
annum, but in no event higher than the maximum rate permitted by law; and, in
addition, Tenant shall pay Landlord a late charge for any Base Rent,
Additional Rent, Additional Charges or any other charges or payments due
hereunder which is paid after its due date equal to five percent (5%) of such
payment.
18.8 Remedies Cumulative. Any and all remedies set forth in this
Lease (a) shall be in addition to any and all other remedies Landlord may have
at law or in equity, (b) shall be cumulative, and (c) may be pursued
successively or concurrently as Landlord may elect. The exercise of any remedy
by Landlord shall not be deemed an election of remedies or preclude Landlord
from exercising any other remedies in the future.
18.9 Landlord's Rights in Tenant's Bankruptcy. If this Lease is
assigned to any person or entity pursuant to the provisions of the Bankruptcy
Code, 11 U.S.C. 101 seq. as now existing or hereafter amended (the "Bankruptcy
Code"), any and all monies or other considerations payable or otherwise to be
delivered in connection with such assignment shall be paid and delivered to
Landlord, shall be and remain the exclusive property of Landlord and shall not
constitute property of Tenant or of the estate of Tenant within the meaning of
the Bankruptcy Code. Any and all monies or other considerations constituting
Landlord's property under the preceding sentence not paid or delivered to
Landlord shall be held in trust for the benefit of Landlord and be promptly
paid to or turned over to the Landlord. Notwithstanding anything in this Lease
to the contrary, all amounts payable by Tenant to or on behalf of Landlord
under this Lease, whether or not expressly denominated as rent, including,
without limitation, the Base Rent and Additional Rent specified herein, shall
constitute rent for the purpose of Section 502(b)(7) of the Bankruptcy Code.
If Tenant assumes this Lease and proposes to assign the same pursuant
to the provisions of the Bankruptcy Code to any person or entity who shall
have made a bona fide offer to accept an assignment of this Lease on terms
acceptable to Tenant, then notice of such proposed assignment, setting forth
(a) the name and address of such person; (b) all of the terms and conditions
of such offer, and (c) the adequate assurance to be provided Landlord to
assure such person's future performance under the Lease, including without
limitation, the assurance referred to in Section 365(b)(3) of the Bankruptcy
Code, shall be given to Landlord by the Tenant no later than twenty (20) days
after receipt by the Tenant, but in any event no later than ten (10) days
prior to the date that the Tenant shall make application to a court of
competent jurisdiction for authority and application to enter into such
assignment and assumption, and
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Landlord shall thereupon have the prior right and option, to be exercised by
notice to the Tenant given at any time prior to the effective date of such
proposed assignment, to accept an assignment of this Lease upon the same terms
and conditions and for the same consideration, if any, as the bona fide offer
made by such person, less any brokerage commissions which may be payable out
of the consideration to be paid by such person for the assignment of this
Lease. Any person or entity to which this Lease is assigned pursuant to the
provisions of the Bankruptcy Code shall be deemed without further act or deed
to have assumed on and after the date of such assignment all of the
obligations arising under this Lease. Any such assignee shall upon demand
execute and deliver to Landlord an instrument confirming such assumption.
19. NOTICES.
Any and all notices, demands, consents or approvals required
hereunder shall be given in writing in accordance with this Section 20. Any
notice from Landlord to Tenant shall be deemed duly served, if left at the
Leased Property addressed to Tenant or mailed to Tenant's Mailing Address (as
defined in Section 1 above) by overnight courier, or by registered or
certified mail, return receipt requested, postage prepaid. Any notice from
Tenant to Landlord shall be deemed duly served, if mailed to Landlord by
overnight courier, or by registered or certified mail, return receipt
requested, postage prepaid, addressed to Landlord at Landlord's Mailing
Address (as defined in Section I above) or at such other address as Landlord
may from time to time advise in writing. All Rent shall be paid and sent to
Landlord at Landlord's Mailing Address.
20. SURRENDER; HOLDING OVER.
20.1 Surrender of Leased Property. Tenant shall, at the expiration or
other termination of the Term, (a) remove all of Tenant's goods and effects
from the Leased Property (including, without hereby limiting the generality of
the foregoing, all signs and lettering affixed or painted by Tenant either
inside or outside the Leased Property), and (b) deliver to Landlord the Leased
Property, in broom clean condition, and otherwise in the same condition as
existed as of the Commencement Date (normal wear and tear and Tenant's
permitted alterations hereunder and damage by fire or other casualty
excepted), all keys, locks thereto, other fixtures connected therewith and all
alterations and additions made to or upon the Leased Property. Upon Tenant's
failure to comply with the preceding sentence, Landlord is hereby authorized,
without liability to Tenant for loss or damage thereto, and at the sole risk
of Tenant, to remove and store any of such property at Tenant's expense, or to
retain same under Landlord's
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control or to sell, at public or private sale, without notice, any or all of
such property not so removed and to apply the net proceeds of such sale to the
payment of any sum due hereunder, or to destroy such property.
20.2 Holding Over. If Tenant remains in Possession of the Leased
Property or any part thereof after the expiration or earlier termination of
the Term of this Lease, Tenant shall be deemed to be in use and Occupancy of
the Leased Property as a month-to-month tenant at a rate of monthly rent one
and one-half (1-1/2) times the rate of the total monthly installment of Base
Rent then in effect upon the date of expiration or termination of this Lease
and subject to the same terms and conditions (including, without limitation,
provisions concerning the payment of all other charges hereunder) as those set
forth in this Lease other than as to the length of Term. However, nothing in
this Lease provision shall be deemed to extend the Term beyond that set forth
in Section 2, hereof nor grant any right to Tenant or any other person to use,
occupy, or remain in Possession of all or any part of the Leased Property
beyond the expiration or earlier termination of the Term of this Lease.
21. LANDLORD'S LIABILITY.
21.1 No Consequential Damage. In no event shall either Landlord or
Tenant ever be liable to the other for any loss of business or any other
indirect or consequential damages suffered by such other party as a result, of
the defaulting party's breach of its obligations under this Lease.
21.2 Liability after Conveyance of Property. The term "Landlord," as
used herein, shall mean and refer to the owner of the fee estate in the Leased
Property whosoever such owner may be from time to time or to the person or
entity named as Landlord above or its successors or assigns, as the case may
be; and upon any conveyance or transfer of the interest of such person or
entity as Landlord and the assumption of the Landlord's obligations by the
transferee, such person or entity shall be thereupon released and discharged
from any and all liability under this Lease or otherwise to Tenant and any and
all others whomsoever except for breaches of this Lease occurring prior to
such transfer.
22. MISCELLANEOUS
22.1 Governing Law. This Lease shall be governed by the law of the
State of Massachusetts and shall be deemed to have been made, executed,
delivered and accepted by the respective parties in that state.
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22.2 Partial Invalidity. If any term or provision of this Lease, or
the application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected thereby, and
each term and provision of this Lease shall be valid and be enforced to the
fullest extent permitted by law. It is the intention of the parties hereto
that if any provision of this Lease is capable of two constructions, one of
which would render the provision valid, then the provision shall have the
meaning which renders it valid.
22.3 Captions. The captions of this Lease are for convenience and
reference only and shall not be deemed or construed to bind, modify, increase,
or decrease the terms and conditions of this Lease, or any interpretation or
construction thereof.
22.4 Successors and Assigns. The terms and conditions in this Lease
shall apply to and be binding upon the parties herein and their respective
successors and assigns, except as expressly otherwise provided.
22.5 Recording of Lease. Tenant shall not record this Lease. However,
at the request of either party, Landlord and Tenant shall execute,
acknowledge, deliver, exchange, and record at the requester's expense a Notice
of Lease or other short-form instrument permitted under applicable state law
and prepared by Tenant.
22.6 Entire Agreement. This Lease and any and all exhibits and riders
attached hereto and made a part of this Lease constitute the entire agreement
of the parties concerning this Lease, and any and all other or prior
agreements, representations, or warranties are hereby terminated, canceled,
and agreed to be void and of no force or effect.
22.7 Amendments. No change, amendment, deletion, or addition to this
Lease shall be effective unless in writing and signed by the parties.
22.8 Quiet Enjoyment. So long as Tenant is not in default of any of
its obligations under this Lease, beyond any applicable grace period, Tenant
shall peaceably and quietly have, hold and enjoy the Leased Property free of
any claims by, through or under Landlord.
22.9 No Partnership. Nothing in this Lease shall create or be
construed to create a partnership between Tenant and Landlord, or make them
joint venturers, or
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bind or make Landlord in any way liable or responsible for any acts,
omissions, negligence, debts or obligations of Tenant.
22.10 Time of Essence. Time is of the essence in this Lease.
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IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed and delivered as a sealed instrument by their respective duly
authorized officers as of the day and year first written above.
TRINET PROPERTY PARTNERS, L.P.
A Delaware limited partnership
d/b/a TriNet Property Partners Limited Partnership
By: TRINET REALTY INVESTORS I, INC.
Its General Partner
By:
--------------------------------------
Name:
Title:
GIGA INFORMATION GROUP, INC.
By:
--------------------------------------
Name:
Title:
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EXHIBIT A
Legal Description
One Longwater Circle
Norwell, Plymouth County, MA
97-0328
Legal Description
Lot 88
Beginning at a point on the southerly sideline of Longwater circle in the Town
of Norwell, Plymouth County, Massachusetts, said point being the northwest
corner of the herein described parcel;
thence running along the southerly sideline of Longwater
Circle N 80(degree) 03' 45" E, 435.00 feet to a point;
thence turning and running by land now or formerly of
Longwater Drive Realty Trust III, S 09(degree) 56' 15" E,
320.00 feet to a point;
thence turning and running S 80(degree) 03' 45" W, 246.50 feet to a point;
thence turning and running N 09(degree) 56' 15" W, 75.00 feet to a point;
thence turning and running S 80(degree) 03' 45" W, 355.50 feet to a point;
thence turning and running N 09(degree) 56' 15" W, 180.00 feet to a point;
thence turning and running N 80(degree) 03' 45" E, 167.00 feet to a point;
thence turning and running N 09(degree) 56' 15" W, 65.00
feet to the point of beginning.
The previous six courses being by land now or formerly of Assinippi Park
Associates.
The above described parcel is shown as Lot 88 on plan #1065 of 1987 at the
Plymouth County Registry of Deeds.
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Being the same premises described in a deed by Assinippi Park Associates,
dated October 1, 1987, recorded at Book 8046, Page 18, as confirmed in Book
8061, Page 35.
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EXHIBIT B
Calculation of Fair Market Rental Value
For purposes of this Lease, "Fair Market Rental Value" shall be as
reasonably determined by Landlord to be the annual rental charge on a
so-called "triple net" basis (including without limitation Base Rent,
Additional Rent and other charges) as of the commencement date of each Option
Period, for new leases then being negotiated or executed for comparable office
space in the area surrounding Massachusetts for terms commencing on or about
the date of commencement of the Option Period. In determining Fair Market
Rental Value, Landlord shall take into consideration the size of the premises,
location of the premises, lease term, condition and location of the applicable
office building, services provided by the landlord, rental concessions and
other comparable factors). Bona fide written offers to lease comparable space
received by Landlord from third parties (at arm's length) may be used by
Landlord as an indication of the Fair Market Rental Value.
Landlord shall notify Tenant of its determination of Fair Market
Rental Value within ten (10) days after Landlord's receipt of Tenant's notice
exercising its option to extend and Landlord shall furnish data in support of
such determination. If the Landlord does not receive written notice from
Tenant of Tenant's disagreement with landlord's determination of the Fair
Market Rental Value within ten (10) days after Tenant's receipt of said
determination, Tenant shall be deemed to have accepted said determination by
Landlord. If Tenant disagrees with Landlord's determination of the Fair Market
Rental Value, Tenant shall have the right, by written notice given to Landlord
within thirty (30) days after Tenant has received notice of Landlord's
determination, to request that such Fair Market Value be determined by
appraisal in accordance with the provisions of this Exhibit B. In such event,
the Fair Market Rental Value shall be determined by impartial MAI appraisers,
one to be chosen by Landlord, one to be chosen by Tenant (the "Initial
Appraisers"), and, if necessary, a third to be selected as provided below.
Landlord and Tenant shall each notify the other of its selected appraiser
within ten days following giving of Tenant's request for appraisal as provided
above. Each appraiser shall be independent, have at least five (5) years
experience with commercial properties in the area, and be familiar with office
parks and leases and rents in Massachusetts and experienced in making real
estate appraisals. The cost of each Initial Appraiser shall be paid by the
party selecting such Appraiser. The appraisers shall render their written
appraisal of the Fair Market Rental Value for the Option Period within thirty
(30) days following the
34
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appointment of both such appraisers. If the appraisals determined by each of
the Initial Appraisers are less than five percent (5%) apart (the higher
appraisal is less than 105% of the lower appraisal), then the Fair Market
Rental Value shall be determined by taking the average of the two appraisals.
In the event Appraisers are five percent (5%) or more apart, the Initial
Appraisers shall promptly select a third appraiser who meets the same criteria
as required of the Initial Appraisers ("Third Appraiser"). The Third Appraiser
shall submit to Landlord and Tenant, within twenty-one (21) days after its
appointment, its written appraisal of the Fair Market Rental Value with
respect to the Leased Property as of the applicable commencement date, which
appraisal shall be binding upon Landlord and Tenant. The cost of the Third
Appraiser shall be borne equally by Landlord and Tenant.
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Exhibit 23.2
[PRICEWATERHOUSECOOPERS STATIONARY & LOGO]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 to
register 3,000,000 shares of Common Stock of our report dated April 17, 1998,
except for the information in the final two paragraphs of Note 20, as to which
the date is May 11, 1998, on our audits of the consolidated financial
statements of Giga Information Group, Inc.
We also consent to the inclusion in this registration statement of our report
dated April 17, 1998 on our audit of the combined statements of operations and
cash flows of BIS Strategic Decisions for the period January 1, 1995 to April
5, 1995.
We also consent to the references to our firm under the captions "Selected
Financial Data" and "Experts."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 28, 1998
<PAGE>
EXHIBIT 99.1
CONSENT
The undersigned hereby consents to the inclusion of his name
as a director nominee in the Registration Statement on Form S-1 (333-52899) of
Giga Information Group, Inc.
\s\ Josh S. Weston
Josh S. Weston
July 22, 1998
