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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1998
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
COMMISSION FILE NUMBER 0-21529
GIGA INFORMATION GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1422860
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE LONGWATER CIRCLE
NORWELL, MA 02061
(781) 982-9500
-------------------------------------------
(Address, including zip code, and telephone
number, including area code, of principal
executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ ] Yes [X] No
As of September 9, 1998, there were 9,924,468 shares of Common Stock, $.001 par
value, of the registrant outstanding.
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<PAGE>
GIGA INFORMATION GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Operations for the three and six
months ended June 30, 1998 and June 30, 1997
(unaudited) 3.
Consolidated Balance Sheets at June 30, 1998 and December 31, 1997
(unaudited) 4.
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and June 30, 1997
(unaudited) 5.
Notes to Consolidated Financial Statements (unaudited) 6.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17.
Item 2. Changes in Securities and Use of Proceeds 17.
Item 3. Defaults Upon Senior Securities 18.
Item 4. Submission of Matters to a Vote of Security Holders 18.
Item 5. Other Information 18.
Item 6. Exhibits and Reports on Form 8-K 18.
SIGNATURE PAGE 19.
INDEX TO EXHIBITS 20.
</TABLE>
2.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GIGA INFORMATION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Continuous information services+B37 $ 7,604 $ 3,234 $ 14,408 $ 5,804
Other services 1,475 1,029 3,168 2,305
Publications 33 81 88 261
----------- ----------- ------------ -----------
Total revenues 9,112 4,344 17,664 8,370
Costs and expenses:
Cost of services 5,148 3,433 9,539 6,635
Cost of publications 83 (44) 154 31
Sales and marketing 6,538 5,295 12,319 9,453
Research and development 299 588 638 1,247
General and administrative 1,678 1,461 3,046 2,522
Depreciation and amortization 414 471 799 1,105
----------- ----------- ------------ -----------
Total costs and expenses 14,160 11,204 26,495 20,993
----------- ----------- ------------ -----------
Loss from operations (5,048) (6,860) (8,831) (12,623)
----------- ----------- ------------ -----------
Interest income 122 77 159 175
Interest expense (694) (24) (780) (41)
----------- ----------- ------------ -----------
Loss from operations before income taxes (5,620) (6,807) (9,452) (12,489)
----------- ----------- ------------ -----------
Income tax (benefit) charge (4) 4 - 11
----------- ----------- ------------ -----------
Net Loss $ (5,616) $ (6,811) $ (9,452) $ (12,500)
=========== =========== ============ ===========
Results per common share:
Historical - basic and diluted $ (2.60) $ (3.28) $ (4.42) $ (6.06)
=========== =========== ============ ===========
Weighted average number of shares 2,161,542 2,075,628 2,138,815 2,063,457
=========== =========== ============ ===========
Pro forma - basic and diluted $ (0.82) $ (1.01) $ (1.38) $ (1.85)
=========== =========== ============ ===========
Weighted average number of shares 6,848,326 6,762,412 6,825,599 6,750,241
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3.
<PAGE>
GIGA INFORMATION GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,713 $ 3,539
Trade accounts receivable, net of allowance for uncollectible accounts of $404
and $483 at June 30, 1998 and December 31, 1997, respectively 6,687 8,961
Unbilled accounts receivable 2,942 4,727
Prepaid expenses and other current assets 3,642 3,753
----------- -----------
Total current assets 19,984 20,980
Property and equipment, net 2,102 1,695
Leasehold intangible - 177
Other assets 169 171
----------- -----------
Total assets $ 22,255 $ 23,023
=========== ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable 763 2,213
Deferred revenues 20,180 20,604
Accrued expenses and other current liabilities 6,245 6,385
Debt - other, current portion 9,579 1,526
Debt - related party, current portion - 448
----------- -----------
Total current liabilities 36,767 31,176
Long-term debt - other 690 937
----------- -----------
Total liabilities 37,457 32,113
Stockholders' equity (deficit):
Preferred Stock, $.001 par value; 16,500,000 shares authorized:
650,000 shares designated as Series A Convertible Preferred Stock, 570,000
shares issued and outstanding (liquidation preference of $2,850,000) 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
4,500,000 shares designated as Series C Convertible Preferred Stock, 2,609,491
shares issued and outstanding (liquidation preference of $10,725,000) 3 3
2,000,000 shares designated as Series D Convertible Preferred Stock, 285,715
and 0 shares issued and outstanding at June 30, 1998 and December 31, 1997,
respectively (liquidation preference of $2,000,000) - -
Common Stock, $.001 par value: 50,000,000 shares authorized, 2,184,345 and 2,093,107
shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively 3 2
Additional paid-in capital 46,687 41,286
Deferred compensation (1,979) -
Accumulated deficit (60,381) (50,929)
Cumulative translation adjustments 456 539
----------- -----------
Total stockholders' deficit (15,202) (9,090)
----------- -----------
Total liabilities and stockholders' deficit $ 22,255 $ 23,023
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4.
<PAGE>
GIGA INFORMATION GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,452) $(12,500)
Adjustments to reconcile net loss to net cash used in continuing operating
activities:
Depreciation and amortization 799 1,105
Amortization of discount on note payable 337 -
Provision for doubtful accounts (80) (15)
Interest on long-term debt added to principal - 37
Interest on note receivable added to principal - (5)
(Gain) loss on sale of fixed assets 1 (5)
Deferred compensation expense 140 -
Other non-cash items 18 50
Change in assets and liabilities:
Decrease (increase) in accounts receivable 4,046 (101)
Decrease (increase) in prepaid expenses and other current assets 218 (590)
(Decrease) increase in deferred revenues (311) 3,025
(Decrease) increase in accounts payable and accrued liabilities (1,429) 110
---------- ----------
Net cash used in operating activities:
Net cash used in continuing operations (5,713) (8,889)
Net cash used in discontinued operations (288) (245)
---------- ----------
Net cash used in operating activities (6,001) (9,134)
---------- ----------
Cash flows from investing activities:
Acquisition of equipment and improvements (1,028) (349)
Other, net - 24
---------- ----------
Cash used in investing activities (1,028) (325)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 163 33
Repurchase of Common Stock - (33)
Proceeds from issuance of Series C Convertible Preferred Stock, net of
issuance costs of $126 - 7,372
Proceeds from issuance of Series D Convertible Preferred Stock, net of
issuance costs of $80 1,920 -
Repayments of principal to related parties (400) -
Proceeds from stock subscriptions receivable - 25
Net decrease in short-term borrowings - (188)
Proceeds from issuance of note payable, net of origination fee of $200 9,800 -
Principal payments on long-term debt, current portion (1,211) -
---------- ----------
Cash provided by financing activities 10,272 7,209
---------- ----------
Effect of exchange rates on cash (69) (38)
Net increase (decrease) in cash and cash equivalents 3,174 (2,288)
Cash and cash equivalents, beginning of period 3,539 8,286
---------- ----------
Cash and cash equivalents, end of period $ 6,713 $ 5,998
========== ==========
Supplementary cash flow information:
Income taxes paid $ 8 $ 11
Interest paid $ 512 $ 8
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5.
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company at
June 30, 1998 and for the three and six months ended June 30, 1997 and 1998 are
unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. All adjustments
(consisting only of normal recurring adjustments) have been made which, in the
opinion of management, are necessary for a fair presentation. The results of
operations for the periods presented are not necessarily indicative of the
results that may be expected for any future period. For further information,
refer to the Company's audited consolidated financial statements included in the
Company's Registration Statement on Form S-1, File No. 333-52899, declared
effective by the Securities and Exchange Commission on July 29, 1998.
Management's 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.
Stock Split
The Company effected a 1 for 3 reverse stock split of its Common Stock,
par value $.001 per share (the "Common Stock"), effective July 29, 1998. All
share and per share data presented herein have been restated to reflect the
Common Stock split.
Net Loss Per Share and Pro Forma Net Loss Per Share
The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic loss per share is based upon the weighted average number of common
shares outstanding during the period. Diluted loss per share is based upon the
weighted average number of common shares outstanding during the period and
dilutive potential common shares outstanding. Due to the losses incurred by the
Company for the three and six months ended June 30, 1997 and 1998, common
equivalent shares resulting from the assumed conversion of outstanding
convertible notes payable and the assumed exercise of outstanding stock options
and warrants have been excluded from the computation of diluted net loss per
share as their effect would be anti-dilutive. Common equivalent shares resulting
from the assumed conversion of outstanding convertible notes payable at June
30,1998 and 1997 were 0 and 87,479, respectively. Options to purchase 1,278,977
and 1,129,815 shares of Common Stock and warrants to purchase 857,056 and 35,959
shares of Common Stock were outstanding at June 30,1998 and 1997, respectively.
Pro-forma net loss per share for the three and the six months ended
June 30, 1997 and 1998 is computed assuming the conversion of all outstanding
shares of convertible preferred stock into 4,686,784 shares of Common Stock.
This conversion occurred upon the completion of the Company's
6.
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Initial Public Offering of 3,000,000 shares of its Common Stock (the "Offering")
in August 1998. (See Note 4.)
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>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (5,616) $ (6,811) $ (9,452) $(12,500)
Other Comprehensive income (loss), net of tax:
Foreign currency translation adjustment (157) 98 (83) 342
---------- ---------- ---------- ----------
Comprehensive loss $ (5,773) $ (6,713) $ (9,535) $(12,158)
========== ========== ========== ==========
</TABLE>
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement supercedes
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 countries in which the company holds material assets and reports material
revenues. The statement will be effective for the annual periods beginning after
December 15, 1997 and the Company will adopt its provisions for the year ended
December 31, 1998. Reclassification for earlier periods is required, unless
impraticable, 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.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The Company
will adopt the new standard as of January 1, 2000. SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Management of the Company anticipates that, due to its limited use
of derivative instruments, the adoption of SFAS 133 will not have a significant
effect on the Company's results of operations or its financial position.
7.
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. Series D Convertible Preferred Stock
In April 1998, the Company designated 2,000,000 shares of Preferred
Stock as Series D Convertible Preferred Stock ('Series D') and issued and sold
for aggregate consideration of $1.5 million, 214,286 shares of Series D and
warrants to purchase 115,714 shares of Series D at an exercise price of $9.00
per share.
In May 1998, the Company issued and sold an additional 71,429 shares of
Series D and warrants to purchase 38,571 shares of Series D for aggregate
consideration of $500,000.
All of the outstanding shares of the Company's Series D were converted
into 190,476 shares of Common Stock upon the consummation of the Offering in
August 1998.
3. Loan and Warrant Purchase Agreement
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 $10.0 million, at an annual interest rate of 12% (the "Bridge Notes"),
and warrants to purchase up to 166,666 shares of Common Stock in exchange for
cash proceeds of $10.0 million. 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 Bridge Notes and
such Bridge Notes were 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 Bridge Notes.
In August 1998, upon completion of the Offering, a portion of the net
proceeds of the Offering was used to repay in full the Bridge Notes in the
aggregate amount of $10.0 million plus accrued interest thereon.
4. Subsequent Events
Completion of Initial Public Offering
On August 4, 1998, the Company consummated the Offering of 3,000,000
shares of its Common Stock at $12.50 per share. Aggregate net proceeds to the
Company were approximately $33.9 million after deducting underwriting discounts
and offering expenses payable by the Company. A portion of the net proceeds of
the Offering was used to repay in full the Bridge Notes in the aggregate
principal amount of $10.0 million, plus accrued interest thereon (see Note 3.).
Concurrent with the closing of the Offering, all shares of the Company's Series
A, B, C and D Convertible Preferred Stock were converted into an aggregate of
4,686,784 shares of Common Stock (see Notes 1. and 2.).
On August 4, 1998, warrants to purchase 47,999 shares of Common Stock
were exercised for cash of $143,997, at an exercise price of $3.00 per share.
These warrants were originally issued in April 1998 pursuant to the Loan and
Warrant Purchase Agreement (see Note 3.).
8.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED BELOW CONTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD LOOKING
STATEMENTS, INCLUDING THOSE CONCERNING THE COMPANY'S EXPECTATIONS, INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE, OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD LOOKING STATEMENTS. IN EVALUATING SUCH
STATEMENTS AS WELL AS THE FUTURE PROSPECTS OF THE COMPANY, SPECIFIC
CONSIDERATION SHOULD BE GIVEN TO VARIOUS FACTORS INCLUDING 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 FURTHER INFORMATION, REFER TO THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-52899), INCLUDING THE MATTERS
SET FORTH UNDER THE CAPTION "RISK FACTORS."
OVERVIEW
Giga sells knowledge which supports enterprise decision making in the field
of Information Technology ("IT") with a focus on computing, telecommunications
and related industries. The Company's four principal products and services are
(i) Unified Advisory Service ("Advisory Service"), (ii) "IT Practice Services,"
(iii) "Continuous Advisory Consulting" and (iv) organizing and sponsoring a
range of events on significant IT industry issues and trends and producing
publications based on conference topics or current IT issues (collectively,
"Events and Publications"). The Company provides its services primarily through
GigaWeb, its intelligent Internet-based information delivery interface.
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 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 ("CIS") 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
9.
<PAGE>
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.
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 three and six month
periods ending June 30, 1997 and 1998.
<TABLE>
<CAPTION>
Unaudited (in thousands)
-----------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning Annualized Value $ 29,497 $ 11,723 $ 26,619 $ 9,339
Net Annualized Value Increase 3,757 2,865 6,635 5,249
---------- ---------- ---------- ----------
Ending Annualized Value $ 33,254 $ 14,588 $ 33,254 $ 14,588
========== ========== ========== ==========
</TABLE>
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. 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.
10.
<PAGE>
The Company's operating expenses consist of cost of services, cost of
publications, sales 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 and acquired substantial tax loss carryforwards
since its inception. 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.
11.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Continuous information services 84% 74% 82% 69%
Other services 16% 24% 18% 28%
Publications - 2% - 3%
-------- -------- -------- --------
Total revenues 100% 100% 100% 100%
-------- -------- -------- --------
Costs and expenses:
Cost of services 56% 79% 54% 79%
Cost of publications 1% (1%) 1% 1%
Sales and marketing 72% 122% 70% 113%
Research and development 3% 13% 4% 15%
General and administrative 18% 34% 17% 30%
Depreciation and amortization 5% 11% 4% 13%
-------- -------- -------- --------
Total costs and expenses 155% 258% 150% 251%
-------- -------- -------- --------
Loss from operations (55%) (158%) (50%) (151%)
Interest income 1% 2% 1% 2%
Interest expense (8%) (1%) (4%) -
-------- -------- -------- --------
Loss from operations before income taxes (62%) (157%) (53%) (149%)
Income tax (benefit) charge - - - -
-------- -------- -------- --------
Net Loss (62%) (157%) (53%) (149%)
======== ======== ======== ========
</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.
12.
<PAGE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues. Total revenues increased 110% to $9.1 million for the three months
ended June 30,1998 from $4.3 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 135% to $7.6 million
for the three months ended June 30, 1998 from $3.2 million for the same period
in 1997. 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 increased 43% to $1.5 million for the three
months ended June 30, 1998 from $1.0 million for the same period in 1997. The
increase was primarily due to higher revenues generated from the planned
expansion of the Company's events and conferences activities and increased
attendance at the Company's premier conference, GigaWorld IT Forum, partially
offset by a decrease in consulting revenues associated with the phase-out of
certain consulting services.
Revenues from Publications decreased 59% to $33,000 for the three months
ended June 30, 1998 from $81,000 for the same period in 1997. The decrease was
due to a de-emphasis on this business activity and the discontinuance of two
publications in the second quarter of 1997.
Cost of services. Cost of services increased 50% to $5.1 million for the
three months ended June 30, 1998 from $3.4 million for the same period in 1997.
The increase in costs was primarily due to the expansion of analyst staff and
additional staff hired for newly created field analyst positions to support an
increased customer base, increased costs in support of expanded offerings of
events and conferences, and other expenses associated with providing Continuous
Information Services.
Cost of publications. Cost of publications increased 289% to $83,000 for
the three months ended June 30, 1998 from ($44,000) for the same period in 1997.
The increase in expense was primarily attributable to non-recurring gains
recorded in the second quarter of 1997 resulting from the disposition of two
publications.
Sales and marketing. Sales and marketing expenses increased 24% to $6.5
million for the three months ended June 30, 1998 from $5.3 million for the same
period in 1997. The increase was principally due to the continued expansion of
the Company's direct sales organization, higher sales commission expense
resulting from increased revenues, and increased emphasis on performing
briefings and other lead generating activities.
Research and development. Research and development expenses decreased 49%
to $299,000 for the three months ended June 30, 1998 from $588,000 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
15% to $1.7 million for the three months ended June 30, 1998 from $1.5 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 12% to $414,000 for the three months ended June 30, 1998 from $471,000
for the same period in 1997. The decrease was primarily due to lower goodwill
and leasehold amortization charges partially offset by increased depreciation
costs resulting from computer equipment purchases for new personnel.
13.
<PAGE>
Interest income and expense. Interest income increased to $122,000 for the
three months ended June 30, 1998 from $77,000 for the same period in 1997 due to
greater cash balances available for investment. Interest expense increased to
$694,000 from $24,000 for the same period in 1997 due to long-term equipment
financing entered into by the Company in June 1997, interest accrued and paid
pursuant to the Bridge Notes with a face value of $10.0 million issued in April
1998 and bearing interest at a stated rate of 12%, and accretion of the discount
recorded to the Bridge Notes in conjunction with the fair market valuation of
associated Common Stock warrants.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues. Total revenues increased 111% to $17.7 million for the six months
ended June 30,1998 from $8.4 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 148% to $14.4
million for the six months ended June 30, 1998 from $5.8 million for the same
period in 1997. 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 increased 37% to $3.2 million for the six
months ended June 30, 1998 from $2.3 million for the same period in 1997. The
increase was primarily due to higher revenues generated from the planned
expansion of the Company's events and conferences activities and increased
attendance at the Company's premier conference, GigaWorld IT Forum, partially
offset by a decrease in consulting revenues associated with the phase-out of
certain consulting services.
Revenues from Publications decreased 66% to $88,000 for the six months
ended June 30, 1998 from $261,000 for the same period in 1997. The decrease was
due to a de-emphasis on this business activity and the discontinuance of two
publications in the second quarter of 1997.
Cost of services. Cost of services increased 44% to $9.5 million for the
six months ended June 30, 1998 from $6.6 million for the same period in 1997.
The increase in costs was primarily due to the expansion of analyst staff and
additional staff hired for newly created field analyst positions to support an
increased customer base, increased costs in support of expanded offerings of
events and conferences, and other expenses associated with providing Continuous
Information Services.
Cost of publications. Cost of publications increased 397% to $154,000 for
the six months ended June 30, 1998 from $31,000 for the same period in 1997. The
increase in expense was primarily attributable to non-recurring gains recorded
in the second quarter of 1997 resulting from the disposition of two
publications.
Sales and marketing. Sales and marketing expenses increased 30% to $12.3
million for the six months ended June 30, 1998 from $9.5 million for the same
period in 1997. The increase was principally due to the continued expansion of
the Company's direct sales organization, higher sales commission expense
resulting from increased revenues, and increased emphasis on performing
briefings and other lead generation activities.
Research and development. Research and development expenses decreased 49%
to $638,000 for the six months ended June 30, 1998 from $1.2 million for the
same six-month period in 1997. The decrease was primarily due to the completion
of the development of the basic functionality of GigaWeb in 1997.
14.
<PAGE>
General and administrative. General and administrative expenses increased
21% to $3.0 million for the six months ended June 30, 1998 from $2.5 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 28% to $799,000 for the six months ended June 30, 1998 from $1.1
million for the same period in 1997. The decrease was primarily due to lower
goodwill and leasehold amortization charges partially offset by increased
depreciation costs resulting from computer equipment purchases for new
personnel.
Interest income and expense. Interest income decreased to $159,000 for the
six months ended June 30, 1998 from $175,000 for the same period in 1997 due to
lower average cash balances available for investment. Interest expense increased
to $780,000 from $41,000 for the same period in 1997 due to long-term equipment
financing entered into by the Company in June 1997, interest accrued and paid
pursuant to the Bridge Notes with a face value of $10.0 million issued in April
1998 and bearing interest at a stated rate of 12%, and accretion of the discount
recorded to the Bridge Notes in conjunction with the fair market valuation of
associated Common Stock warrants.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company funded its operations primarily through the
private placement of equity securities and borrowings under promissory notes.
The Company received aggregate net proceeds of $42.4 million from the private
placement of equity securities since its inception, including $1.9 million from
the private placement of Series D Convertible Preferred Stock in April and May
1998. The Company also issued the Bridge Notes in April 1998 whereby the Company
borrowed $10.0 million at a stated interest rate of 12%. At June 30, 1998, the
Company had cash and cash equivalents of $6.7 million.
During the six months ended June 30, 1998, the Company's capital
expenditures totaled approximately $1.0 million, 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 grows. As of June
30, 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 $5.7 million for
the six months ended June 30, 1998, resulting primarily from a net loss of $9.5
million and decreases in accounts payable and accrued liabilities of $1.4
million, partially offset by decreases in accounts receivable of $4.0 million.
Net cash used in investing activities of approximately $1.0 million for the six
months ended June 30, 1998 was primarily due to purchases of computer equipment.
Cash provided by financing activities, of approximately $10.3 million for the
six months ended June 30, 1998, was primarily generated by issuance of the
Bridge Notes, Common Stock warrants, Series D Convertible Preferred Stock,
Series D Preferred Stock warrants and Common Stock pursuant to stock option
exercises, partially offset by repayments of 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 accrued interest at the rate of 12% per annum. The outstanding
principal amount of, and any unpaid accrued interest on, the Bridge Notes became
due and payable upon the consummation of the Offering. In April and May 1998,
the Company also issued an aggregate of $2.0 million of Series D Convertible
Preferred Stock and associated Series D warrants.
15.
<PAGE>
In August 1998, the Company completed its Offering of 3,000,000 shares of
Common Stock at $12.50 per share. Net proceeds to the Company aggregated
approximately $33.9 million. The Company used $10.2 million of the net proceeds
to repay obligations for principal and interest under the Bridge Notes. All
outstanding shares of the Company's Series A, B, C and D Convertible Preferred
Stock automatically converted into Common Stock upon the consummation of the
Offering. The Company believes that the remaining proceeds from the Offering
together with 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.
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. The Company has access to an invoice factoring arrangement with
a commercial bank under which the Company could borrow up to $3.0 million 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.
YEAR 2000 COMPLIANCE
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 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. While uncertainty exists concerning the potential
effects associated with Year 2000 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.
16.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
As previously reported in the Company's Registration Statement on Form S-1
(Registration No. 333-52899), as amended, set forth below is information
regarding the number of shares of capital stock and other equity securities
issued by the Company during the fiscal quarter ended June 30, 1998 which were
not registered under the Securities Act of 1933, as amended (the "Securities
Act") . Further included is the consideration, if any, received by the Company
for such shares of capital stock and other equity securities. The shares of
capital stock and other equity securities issued in the following transactions
were offered and sold in reliance upon the exemption from registration under
Section 4 (2) of the Securities Act or Regulation D relative to sales by an
issuer not involving any public offering, or Rule 701 promulgated under the
Securities Act.
1. During the fiscal quarter ended June 30, 1998, the Company issued a
total of 53,740 shares of Common Stock pursuant to the exercise of options
previously granted to employees at a weighted average exercise price of
$1.88 per share.
2. In April and May 1998, the Company issued and sold to two accredited
investors an aggregate of 285,715 shares of Series D Convertible Preferred
Stock at a purchase price of $7.00 per share and warrants to purchase an
additional 154,285 shares of Series D Convertible Preferred Stock at an
exercise price of $9.00 per share.
3. In April 1998, the Company issued the Bridge Notes (convertible under
certain circumstances into Series D Convertible Preferred Stock) 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.
For information with respect to equity securities issued after June 30,
1998, see Note 1. and Note 4. to the Company's Consolidated Financial
Statements.
Use of Proceeds
The Company's Registration Statement on Form S-1 (Registration No.
333-52899), (the "Registration Statement"), relating to the Offering was
declared effective by the Securities and Exchange Commission on July 29, 1998.
The sale of 3,000,000 shares of the Company's Common Stock, $0.001 par value, at
$12.50 per share commenced on July 30, 1998 and has been completed. The managing
underwriters for the Offering were Friedman, Billings, Ramsey & Co., Inc. and
Prudential Securities Incorporated. The total price to the public was $37.5
million before underwriting discounts and commissions of $2.625 million.
Offering expenses are estimated at $950,000. All such expenses are direct or
indirect payments to others. None of such expenses were paid directly or
indirectly to any director or officer of the Company or their associates,
persons owning ten percent or more of any class of equity securities of the
Company, or an affiliate of the Company.
17.
<PAGE>
As of September 9, 1998, the Company had used a portion of the $33.925
million net proceeds from the Offering to repay the Bridge Notes aggregating to
$10.0 million of principal plus $210,000 of accrued interest thereon.
Furthermore, the Company had added $7.715 million of such net proceeds to the
general funds of the corporation for use as working capital and invested the
remaining $16.0 million of the net proceeds in short-term, investment-grade
interest-bearing obligations. None of the net proceeds of the Offering were paid
directly or indirectly to any director or officer of the Company or their
associates, persons owning ten percent or more of any class of equity securities
of the Company or an affiliate of the Company except to the extent that a
portion of the working capital was used for (i) salaries and expenses of
officers and expenses of directors and (ii) to meet working capital needs of the
Company's subsidiaries, both in the normal course of business.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company
as filed with the Secretary of State of the State of Delaware on
August 4, 1998.
11 Statement of Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
18.
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
GIGA INFORMATION GROUP, INC.
September 11, 1998 By: /s/ Daniel M. Clarke
----------------------------------
Daniel M. Clarke
Senior Vice President.
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
19.
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------ ------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company as
filed with the Secretary of State of the State of Delaware on August
4, 1998.
11 Statement of Computation of Per Share Earnings
27 Financial Data Schedule
20.
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
GIGA INFORMATION GROUP, INC.
Pursuant to Sections 242 and 245
of the General Corporation Law
of the State of Delaware
GIGA INFORMATION GROUP, INC. (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:
1. The name of the corporation is Giga Information Group, Inc. Giga
Information Group, Inc., was originally incorporated under the name Giga
Strategic Decisions, Inc., and the original Certificate of Incorporation was
filed with the Secretary of State of Delaware on March 17, 1995.
2. This Restated Certificate of Incorporation restates and
integrates and further amends the Amended and Restated Certificate of
Incorporation of the Corporation, was duly adopted in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law, and was
approved by written consent of the stockholders of the Corporation given in
accordance with the provisions of Section 228 of the General Corporation Law
(prompt notice of such action having been given to those stockholders who did
not consent in writing). The resolution setting forth the Restated Certificate
of Incorporation is as follows:
RESOLVED: That the Amended and Restated Certificate of Incorporation
of the Corporation, as amended, be and hereby is amended and restated in its
entirety so that the same shall read as follows:
FIRST. The name of this Corporation is:
Giga Information Group, Inc.
SECOND. The address of the Corporation's registered office in the
State of Delaware is National Corporate Research, Ltd., 9 East Loockerman
Street, County
NYFS07...:\54\47954\0009\2041\EXH5018U.450
<PAGE>
of Kent, Dover 19901. The name of its registered agent at such address is
National Corporate Research, Ltd.
THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
FOURTH. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 65,000,000 shares, consisting of
(i) 60,000,000 shares of Common Stock, $.001 par value per share ("Common
Stock"), and (ii) 5,000,000 shares of Preferred Stock, $.001 par value per share
("Preferred Stock").
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
1. General. The voting, dividend and liquidation rights of the
holders of the Common Stock are subject to and qualified by the rights of the
holders of the Preferred Stock of any series as may be designated by the Board
of Directors upon any issuance of the Preferred Stock of any series.
2. Voting. The holders of the Common Stock are entitled to one vote
for each share held at all meetings of stockholders (and written actions in lieu
of meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
3. Dividends. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
2
<PAGE>
4. Liquidation. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
Preferred Stock may be issued from time to time in one or more
series, each of such series to have such terms as stated or expressed herein and
in the resolution or resolutions providing for the issue of such series adopted
by the Board of Directors of the Corporation as hereinafter provided. Any shares
of Preferred Stock which may be redeemed, purchased or acquired by the
Corporation may be reissued except as otherwise provided by law or this
Certificate of Incorporation. Different series of Preferred Stock shall not be
construed to constitute different classes of shares for the purposes of voting
by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, conversion rights, redemption privileges
and liquidation preferences, as shall be stated and expressed in such
resolutions, all to the full extent now or hereafter permitted by the General
Corporation Law of Delaware. Without limiting the generality of the foregoing,
the resolutions providing for issuance of any series of Preferred Stock may
provide that such series shall be superior or rank equally or be junior to the
Preferred Stock of any other series to the extent permitted by law and this
Certificate of Incorporation. Except as otherwise provided in this Certificate
of Incorporation, no vote of the holders of the Preferred Stock or Common Stock
shall be a prerequisite to the designation or issuance of any shares of any
series of the Preferred Stock authorized by and complying with the conditions of
this Certificate of Incorporation, the right to have such vote being expressly
3
<PAGE>
waived by all present and future holders of the capital stock of the
Corporation.
FIFTH. The Corporation shall have a perpetual existence.
SIXTH. In furtherance of and not in limitation of powers conferred
by statute, it is further provided:
1. Election of directors need not be by written ballot.
2. The Board of Directors is expressly authorized to adopt, amend or
repeal the Bylaws of the Corporation.
SEVENTH. Except to the extent that the General Corporation Law of
the State of Delaware prohibits the elimination or limitation of liability of
directors for breaches of fiduciary duty, no director of the Corporation shall
be personally liable to the Corporation or its stockholders for monetary damages
for any breach of fiduciary duty as a director, notwithstanding any provision of
law imposing such liability. No amendment to or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment.
EIGHTH. 1. Action, Suits and Proceedings Other than by or in the
Right of the Corporation. The Corporation shall indemnify each person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees) judgment, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed
4
<PAGE>
to be in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful. Notwithstanding anything to the contrary in this Article, except
as set forth in Section 6 below, the Corporation shall not indemnify an
Indemnitee seeking indemnification in connection with a proceeding (or part
thereof) initiated by the Indemnitee unless the initiation thereof was approved
by the Board of Directors of the Corporation.
2. Actions or Suits by or in the Right of the Corporation. The
Corporation shall indemnify any indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, 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 Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of such liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses (including attorneys' fees)
which the Court of Chancery of Delaware or such other court shall deem proper.
5
<PAGE>
3. Indemnification for Expenses of Successful Party. Notwithstanding
the other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
4. Notification and Defense of Claim. As a condition precedent to
his right to be indemnified, the Indemnitee must notify the Corporation in
writing as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such claim,
other than as provided below in this Section 4. The Indemnitee shall have the
right to employ his own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
6
<PAGE>
between the Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation, except
as otherwise expressly provided by this Article.
The Corporation shall not be entitled, without the consent of the
Indemnitee, to assume the defense of any claim brought by or in the right of the
Corporation or as to which counsel for the Indemnitee shall have reasonably made
the conclusion provided for in clause (ii) above.
5. Advance of Expenses. Subject to the provisions of Section 6
below, in the event that the Corporation does not assume the defense pursuant to
Section 4 of this Article of any action, suit, proceeding or investigation of
which the Corporation receives notice under this Article, any expenses
(including attorneys' fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom shall
be paid by the Corporation in advance of the final disposition of such matter;
provided, however, that the payment of such expense incurred by an Indemnitee in
advance of the final disposition of such matter shall be made only upon receipt
of an undertaking by or on behalf of the Indemnitee to repay all amounts so
advanced in the event that it shall ultimately be determined that the Indemnitee
is not entitled to be indemnified by the Corporation as authorized in this
Article. Such undertaking may be accepted without reference to the financial
ability of the Indemnitee to make such repayment.
6. Procedure for Indemnification. In order to obtain indemnification
or advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written request
of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines, by clear and convincing evidence, within such 60-day
period that the Indemnitee did not meet the applicable standard of conduct
7
<PAGE>
set forth in Section 1 or 2, as the case may be. Such determination shall be
made in each instance by (a) a majority vote of a quorum of the directors of the
Corporation consisting of persons who are not at that time parties to the
action, suit or proceeding in question ("disinterested directors"), (b) if no
such quorum is obtainable, a majority vote of a committee of two or more
disinterested directors, (c) a majority vote of a quorum of the outstanding
shares of stock of all classes entitled to vote for directors, voting as a
single class, which quorum shall consist of stockholders who are not at that
time parties to the action, suit or proceeding in question, (d) independent
legal counsel (who may be regular legal counsel to the Corporation), or (e) a
court of competent jurisdiction.
7. Remedies. The right to indemnification or advances as granted by
this Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise provided by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advance of expenses under this
Article shall be on the Corporation. Neither the failure of the Corporation to
have made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct, nor an actual determination by the
Corporation pursuant to Section 6 that the Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the Indemnitee has not met the applicable standard of conduct.
The Indemnitee's expenses (including attorneys' fees) incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.
8. Subsequent Amendment. No amendment, termination or repeal of this
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee to indemnification under the provisions hereof with respect to
any action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the final adoption of such
amendment, termination or repeal.
8
<PAGE>
9. Other Rights. The indemnification and advancement of expenses
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
Corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, the Corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Article.
10. Partial Indemnification. If an Indemnitee is entitled under any
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal,
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. Insurance. The Corporation may purchase and maintain insurance,
at its expense, to protect itself and any director, officer, employee or agent
of the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation law of Delaware.
9
<PAGE>
12. Merger or Consolidation. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. Savings Clause. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees) judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
14. Definitions. Terms used herein and defined in Section 145(h) and
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
15. Subsequent Legislation. If the General Corporation Law of
Delaware is amended after adoption of this Article to expand further the
indemnification permitted to Indemnitees, then the Corporation shall indemnify
such persons to the fullest extent permitted by the General Corporation Law of
Delaware, as so amended.
NINTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation, in
the manner now or hereafter prescribed by statute and this Restated Certificate
of Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
TENTH. This Article is inserted for the management of the business
and for the conduct of the affairs of the Corporation.
1. Number of Directors. The number of directors shall be fixed from
time to time by, or in the manner provided in, the Corporation's Bylaws.
10
<PAGE>
2. Classes of Directors. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III.
3. Election of Directors. Elections of directors need not be by
written ballot except as and to the extent provided in the Bylaws of the
Corporation.
4. Terms of Office. Each director shall serve for a term ending on
the date of the third annual meeting following the annual meeting at which such
director was elected and until his successor is duly elected and qualified;
provided, that each initial director in Class I shall serve for a term ending on
the date of the annual meeting of stockholders in 1999 and until his successor
is duly elected and qualified; each initial director in Class II shall serve for
a term ending on the date of the annual meeting of stockholders in 2000 and
until his successor is duly elected and qualified; and each initial director in
Class III shall serve for a term ending on the date of the annual meeting of
stockholders in 2001 and until his successor is duly elected and qualified; and
provided further, that the term of each director shall be subject to his earlier
death, resignation or removal.
5. Allocation of Directors Among Classes in the Event of Increases
or Decreases in the Number of Directors. In the event of any increase or
decrease in the authorized number of directors, (i) each director then serving
as such shall nevertheless continue as a director of the class of which he is a
member and (ii) the newly created or eliminated directorships resulting from
such increase or decrease shall be apportioned by the Board of Directors among
the three classes of directors so as to ensure that no one class has more than
one director more than any other class. To the extent possible, consistent with
the foregoing rule, any newly created directorships shall be added to those
classes whose terms of office are to expire at the latest dates following such
allocation, and any newly eliminated directorships shall be subtracted from
those classes whose terms of offices are to expire at the earliest dates
following such allocation, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.
6. Quorum; Action at Meeting. A majority of the directors at any
time in office shall constitute a quorum for the transaction of business. In the
event one or more of the directors shall be disqualified to vote at any
11
<PAGE>
meeting, then the required quorum shall be reduced by one for each director so
disqualified, provided that in no case shall less than one-third of the number
of directors fixed pursuant to Section 1 above constitute a quorum. If at any
meeting of the Board of Directors there shall be less than such a quorum, a
majority of those present may adjourn the meeting from time to time. Every act
or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as the act of the Board
of Directors unless a greater number is required by law, by the Bylaws of the
Corporation or by this Restated Certificate of Incorporation.
7. Removal. Directors of the Corporation may be removed only for
cause by the affirmative vote of the holders of at least two-thirds of the
shares of the capital stock of the Corporation issued and outstanding and
entitled to vote.
8. Vacancies. Any vacancy in the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the board, shall
be filled only by a vote of a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. A director elected to fill
a vacancy shall be elected to hold office until the next election of the class
for which such director shall have been chosen, subject to the election and
qualification of his successor and to his earlier death, resignation or removal.
9. Stockholder Nominations and Introduction of Business, Etc.
Advance notice of stockholder nominations for election of directors and other
business to be brought by stockholders before a meeting of stockholders shall be
given in the manner provided by the Bylaws of the Corporation.
10. Amendments to Article. Notwithstanding any other provisions of
law, this Restated Certificate of Incorporation or the Bylaws of the
Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least two-thirds of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote shall be required to amend or repeal, or to
adopt any provision inconsistent with, this Article TENTH.
ELEVENTH. Stockholders of the Corporation may not take any action by
written consent in lieu of a meeting.
12
<PAGE>
Notwithstanding any other provisions of law, the Restated Certificate of
Incorporation or the Bylaws of the Corporation, each as amended, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least two-thirds of the shares of capital
stock of the Corporation issued and outstanding and entitled to vote shall be
required to amend or repeal, or to adopt any provision inconsistent with, this
Article ELEVENTH.
TWELFTH. Special meetings of stockholders may be called at any time
by only the Chairman of the Board of Directors, the Chief Executive Officer (or
if there is no Chief Executive Officer, the President) or the Board of
Directors. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting. Notwithstanding any other provision of law, this Restated Certificate
of Incorporation or the Bylaws of the Corporation, each as amended, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least two-thirds of the shares of capital
stock of the Corporation issued and outstanding and entitled to vote shall be
required to amend or repeal, or to adopt any provision inconsistent with, this
Article TWELFTH.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to
be affixed hereto and this Restated Certificate of Incorporation to be signed by
its President and Chief Operating Officer this 4th day August, 1998.
GIGA INFORMATION GROUP, INC.
By: /s/ GIDEON I. GARTNER
------------------------------------------
Gideon I. Gartner
President and Chief Operating Officer
13
Exhibit 11 Statement of Computation of Per Share Earnings
NET LOSS PER SHARE
Net loss per share is calculated as follows:
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss $ (5,616) $ (6,811) $ (9,452) $(12,500)
========== ========== ========== ==========
BASIC:
Weighted average common shares outstanding 2,162 2,076 2,139 2,064
========== ========== ========== ==========
Net loss per common share $ (2.60) $ (3.28) $ (4.42) $ (6.06)
========== ========== ========== ==========
DILUTED:
Weighted average common shares outstanding 2,162 2,076 2,139 2,064
Effect of dilutive securities:
Convertible notes - - - -
Stock options - - - -
Warrants - - - -
---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding 2,162 2,076 2,139 2,064
========== ========== ========== ==========
Net loss per common and common
equivalent share $ (2.60) $ (3.28) $ (4.42) $ (6.06)
========== ========== ========== ==========
PRO FORMA BASIC AND DILUTED:
Weighted average common shares outstanding 2,162 2,076 2,139 2,064
Conversion of Convertible Preferred Stock:
Series A 760 760 760 760
Series B 2,715 2,715 2,715 2,715
Series C 1,021 1,021 1,021 1,021
Series D 190 190 190 190
---------- ---------- ---------- ----------
Weighted average pro forma common
shares outstanding 6,848 6,762 6,825 6,750
========== ========== ========== ==========
Pro forma net loss per common share $ (0.82) $ (1.01) $ (1.38) $ (1.85)
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GIGA INFORMATION GROUP, INC. FOR THE
QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED INITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> JUN-30-1997 JUN-30-1998
<CASH> 5,998 6,713
<SECURITIES> 0 0
<RECEIVABLES> 4,162 7,091
<ALLOWANCES> 441 404
<INVENTORY> 0 0
<CURRENT-ASSETS> 13,938 19,984
<PP&E> 4,117 5,125
<DEPRECIATION> 1,990 3,023
<TOTAL-ASSETS> 17,515 22,255
<CURRENT-LIABILITIES> 18,769 36,767
<BONDS> 0 0
0 0
11 12
<COMMON> 2 3
<OTHER-SE> (3,003) (15,217)
<TOTAL-LIABILITY-AND-EQUITY> 17,515 22,255
<SALES> 4,344 9,112
<TOTAL-REVENUES> 4,344 9,112
<CGS> 3,389 5,231
<TOTAL-COSTS> 11,204 14,160
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 24 694
<INCOME-PRETAX> (6,807) (5,620)
<INCOME-TAX> 4 (4)
<INCOME-CONTINUING> (6,811) (5,616)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,811) (5,616)
<EPS-PRIMARY> (3.28) (2.60)
<EPS-DILUTED> (3.28) (2.60)
</TABLE>
