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 March 31, 1999
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
COMMISSION FILE NUMBER 0-21529
GIGA INFORMATION GROUP, INC.
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(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. [X] Yes [ ] No
As of May 3, 1999, there were 9,986,311 shares of Common Stock, $.001 par value,
of the registrant outstanding.
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GIGA INFORMATION GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1999 and March 31, 1998
(unaudited) 3.
Condensed Consolidated Balance Sheets at March 31, 1999 (unaudited)
and December 31, 1998 4.
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1999 and March 31,
1998 (unaudited) 5.
Notes to Condensed Consolidated Financial Statements (unaudited) 6.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17.
Item 6. Exhibits and Reports on Form 8-K 18.
SIGNATURE PAGE 19.
INDEX TO EXHIBITS 20.
</TABLE>
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GIGA INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share data)
Three Months Ended
March 31,
1999 1998
----------- -----------
Revenues:
Continuous information services $ 10,354 $ 6,804
Other services 1,586 1,748
----------- -----------
Total revenues 11,940 8,552
Costs and expenses:
Cost of services 5,940 4,462
Sales and marketing 6,782 5,781
Research and development 254 339
General and administrative 2,118 1,352
Depreciation and amortization 379 385
----------- -----------
Total costs and expenses 15,473 12,319
----------- -----------
Loss from operations (3,533) (3,767)
----------- -----------
Interest income 254 37
Interest expense (37) (86)
Foreign exchange gain/(loss) (244) (16)
----------- -----------
Loss from operations before income taxes (3,560) (3,832)
Income tax (benefit)/charge 42 4
----------- -----------
Net Loss (3,602) (3,836)
=========== ===========
Results per common share:
Historical - basic and diluted:
Net loss $ (0.36) $ (1.81)
=========== ===========
Weighted average number of shares 9,955,957 2,115,837
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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GIGA INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- -----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 15,789 $ 14,149
Marketable securities 4,371 6,908
Trade accounts receivable, net of allowance for uncollectible accounts of $407
and $410 at March 31, 1999 and December 31, 1998, respectively 9,296 15,017
Unbilled accounts receivable 3,735 4,606
Prepaid expenses and other current assets 5,642 4,911
-------- --------
Total current assets 38,833 45,591
Property and equipment, net 4,170 3,430
Other assets 191 192
-------- --------
Total assets $ 43,194 $ 49,213
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 1,848 1,989
Deferred revenues 27,978 29,470
Accrued expenses and other current liabilities 6,100 7,443
Debt - other, current portion 481 461
-------- --------
Total current liabilities 36,407 39,363
Long-term debt - other 316 444
-------- --------
Total liabilities 36,723 39,807
Stockholders' equity:
Preferred Stock, $.001 par value; 5,000,000 shares authorized, zero issued and
outstanding at March 31, 1999 and December 31, 1998, respectively: -- --
Common Stock, $.001 par value: 60,000,000 shares authorized, 9,969,436 and 9,943,502
shares issued and outstanding at March 31, 1999 and December 31, 1998, respectively 10 10
Additional paid-in capital 80,489 80,550
Deferred compensation (1,421) (1,614)
Accumulated deficit (73,259) (69,657)
Accumulated other comprehensive income 652 117
-------- --------
Total stockholders' equity 6,471 9,406
-------- --------
Total liabilities and stockholders' equity $ 43,194 $ 49,213
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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GIGA INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,602) $ (3,836)
Adjustments to reconcile net loss to net cash used in continuing operating activities:
Depreciation and amortization 379 385
Provision for doubtful accounts (2) (79)
Interest on long-term debt added to principal -- 13
(Gain) loss on sale of fixed assets 8 (9)
Compensation expense related to stock options 65 29
Other non-cash items -- 8
Change in assets and liabilities:
Decrease (increase) in accounts receivable 6,375 5,321
Decrease (increase) in prepaid expenses and other current assets (1,386) (53)
(Decrease) increase in deferred revenues (1,349) (2,045)
(Decrease) increase in accounts payable and accrued liabilities (188) (1,023)
-------- --------
Net cash provided by (used in) operating activities:
Net cash provided by (used in) continuing operations 300 (1,289)
Net cash used in discontinued operations -- (13)
-------- --------
Net cash provided by (used in) operating activities 300 (1,302)
-------- --------
Cash flows from investing activities:
Acquisitions of equipment and improvements (1,137) (261)
Purchases of marketable securities (4,157) --
Proceeds from maturities of marketable securities 6,694 --
Other, net 4 10
-------- --------
Cash provided by (used in) investing activities 1,404 (251)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock under stock option plans 28 65
Proceeds from issuance of Common Stock due to exercise of warrants 38 --
Repayments of principal to related parties -- (224)
Principal payments on long-term debt, current portion (108) (72)
-------- --------
Cash provided by (used in) financing activities (42) (231)
-------- --------
Effect of exchange rates on cash (22) (2)
Net increase (decrease) in cash and cash equivalents 1,640 (1,786)
Cash and cash equivalents, beginning of period 14,149 3,539
-------- --------
Cash and cash equivalents, end of period $ 15,789 $ 1,753
======== ========
Supplementary cash flow information:
Income taxes paid $ 42 $ 5
Interest paid $ 37 $ 55
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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GIGA INFORMATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Interim Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements of the Company at
March 31, 1999 and for the three months ended March 31, 1999 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 Annual Report on Form 10-K, for the year ended December 31, 1998, as
filed with the Securities and Exchange Commission.
2. Computation of Earnings per Share of Common Stock
Due to the losses incurred by the Company for the three month periods ended
March 31, 1999 and 1998, common equivalent shares resulting from the assumed
exercise of outstanding stock options and warrants and the assumed conversion of
outstanding convertible notes payable at March 31, 1998 have been excluded from
the computation of diluted net loss per share as their effect would be
anti-dilutive. Options and warrants to purchase 2,630,150 and 1,883,598 shares
of Common Stock were outstanding at March 31,1999 and 1998, respectively. Common
equivalent shares resulting from the assumed conversion of outstanding
convertible notes payable at March 31,1999 and 1998 were 0 and 78,910 shares,
respectively.
3. Comprehensive Income (Loss)
The table below sets forth "Comprehensive Income (Loss)" as defined
by SFAS No. 130 (in thousands):
Three Months Ended
March 31,
1999 1998
------- -------
Net loss $(3,602) $(3,836)
Other Comprehensive income (loss), net of tax:
Foreign currency translation adjustment 535 74
------- -------
Comprehensive loss $(3,067) $(3,762)
======= =======
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GIGA INFORMATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Segment Information
Giga has determined that it operates in one reportable segment,
information technology ("IT") advisory services. Revenues from the products and
services within, and in support of, Giga's IT advisory services are presented in
detail in the Company's Condensed Consolidated Statements of Operations.
Giga conducts business principally in the United States and United
Kingdom. Operations in France, Germany and Italy have been aggregated
(collectively "Other International"). Revenues are reflected in the geographic
area in which the sales are made. The table below presents information about the
Company's reported revenues and total assets for the three months ended March
31, 1999 and 1998, respectively (in thousands).
Revenues
March 31,
1999 1998
------- -------
United States $10,762 $ 7,852
United Kingdom 809 514
Other International 369 186
------- -------
subtotal 11,940 8,552
Transfers between areas -- --
------- -------
Consolidated revenue $11,940 $ 8,552
======= =======
Total Assets
March 31,
1999 1998
------- -------
United States $37,669 $12,353
United Kingdom 3,151 1,875
Other International 2,374 1,445
------- -------
Consolidated total assets $43,194 $15,673
======= =======
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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
Statements that are not historical facts may be considered 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 achieve and sustain high renewal rates; the Company's ability to
manage and sustain 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; continued market acceptance and demand for Giga services; 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.
OVERVIEW
Giga is an information technology (IT) research and advisory firm offering
objective analysis and advice to help clients make sound technology-related
decisions. The Company's research focus is on helping companies integrate their
businesses with the Internet; it also covers other issues pertaining to the
computing, telecommunications and related industries. 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.
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 Strategic Decisions, Inc. (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, and (ii) Events and publications and other
services, principally consulting, are aggregated into Other Services. The
Company expects that CIS revenues 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
prorata basis over the term of the contract. Revenues from Other Services are
recognized as follows: events as they occur, publications as they are delivered
and consulting as such services are performed. 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
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revenues are earned. With the consistent application of these accounting
policies as well as growth in CIS contract value and volume, trade accounts
receivable, deferred revenues, unbilled accounts receivable and deferred
commissions are expected to increase.
Essentially all of the Company's current international operations are located in
the European Community and Canada. The Company operates in the European
Community 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 Community 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 Community 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 markets in Israel, Korea and Italy 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" or "AV") 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. Annualized Value at March 31, 1999 increased 54% to $45.5
million from $29.5 million at March 31, 1998, while Annualized Value per client
increased 29% to $47,800 at March 31, 1999 from $37,000 at March 31, 1998. The
year-over-year growth rate of AV declined from 54% for the first quarter of 1999
as compared to 152% for the same period of 1998, due primarily to a decrease in
business from new customers. Price pressure has also increased as the Company's
competitors have adjusted their prices in response to what Giga believes is the
superior value of its services.
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. NAVI for a period can also be derived by subtracting AV at the
beginning of the period from AV at the end of the period. Because of this simple
calculation, the Company does not generally report explicit NAVI data.
A majority of the Company's annual contracts renew automatically unless the
customer cancels the subscription. The Company's experience is that substantial
portions of customers renew expiring contracts for an equal or greater level of
total CIS fees each year. Approximately 26% of contract value up for renewal in
the first quarter of 1999 cancelled, discontinuing all Continuous Information
Services, as compared to 30% for the same period of 1998. These cancellation
rates do not include contracts lost due to mergers, acquisitions and
bankruptcies. The Company believes that a direct comparison of its cancellation
rate and those of its major competitors may not be meaningful due in part to the
Company's limited operating history and its unified Advisory Service model (the
focus of which is an integrated approach with fewer contracts/services per
customer), in contrast to the multiple-service model of the Company's major
competitors.
The Company's operating expenses consist of cost of services, 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, expenses to create, print
and distribute publications and royalties to third party information providers.
Sales and marketing expenses include personnel expenses, promotional expenses,
and sales commissions. Sales commissions are typically
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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 1999 as the Company continues to expand and
develop its services, products and infrastructure.
The Company has incurred substantial tax losses since inception, and
acquired tax losses with its acquisition of BIS. Due to the magnitude of these
existing tax losses, continuing losses anticipated through at least 1999 and the
substantial uncertainties associated with its business, at this time the Company
concludes that it is more likely than not that the deferred tax associated with
these tax losses will not 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.
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RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
condensed consolidated statements of operations as a percentage of revenues for
the periods indicated:
Three Months Ended
March 31,
1999 1998
-------- ---------
Revenues:
Continuous information services 87% 80%
Other services 13% 20%
-------- ---------
Total revenues 100% 100%
-------- ---------
Costs and expenses:
Cost of services 50% 52%
Sales and marketing 57% 68%
Research and development 2% 4%
General and administrative 18% 16%
Depreciation and amortization 3% 4%
-------- ---------
Total costs and expenses 130% 144%
-------- ---------
Loss from operations (30%) (44%)
Interest income 2% -
Interest expense - (1%)
Foreign exchange gain/(loss) (2%) -
-------- ---------
Loss from operations before income taxes (30%) (45%)
Income tax (benefit) charge - -
-------- ---------
Net loss (30%) (45%)
======== =========
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.
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THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
Revenues. Total revenues increased 40% to $11.9 million for the three
months ended March 31,1999 from $8.6 million for the same period in 1998. The
increase in total revenues was due to the increase in revenues from Continuous
Information Services.
Revenues from Continuous Information Services increased 52% to $10.4
million for the three months ended March 31, 1999 from $6.8 million for the same
period in 1998. The increase in revenues was primarily due to growing market
acceptance of Giga's services.
Revenues from Other Services decreased 9% to approximately $1.6 million
for the three months ended March 31, 1999 from approximately $1.7 million for
the same period in 1998. The decrease was primarily due to lower conference
revenues.
Cost of services. Cost of services increased 33% to $5.9 million for
the three months ended March 31, 1999 from $4.5 million for the same period in
1998. The increase in costs was primarily due to the expansion of analyst staff
to support an increased customer base and other expenses associated with
providing Continuous Information Services.
Sales and marketing. Sales and marketing expenses increased 17% to $6.8
million for the three months ended March 31, 1999 from $5.8 million for the same
period in 1998. The increase was principally due to expansion of the Company's
direct sales organization when compared to the first quarter of 1998.
Research and development. Research and development expenses decreased
25% to $254,000 for the three months ended March 31, 1999 from $339,000 for the
same three-month period in 1998. The decrease was primarily due to lower
personnel costs and headcount.
General and administrative. General and administrative expenses
increased 57% to $2.1 million for the three months ended March 31, 1999 from
$1.4 million for the same period in 1998. 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 2% to $379,000 for the three months ended March 31, 1999 from $385,000
for the same period in 1998. The decrease was primarily due to lower costs
resulting from the culmination of leasehold amortization charges partially
offset by increased depreciation costs resulting from computer equipment and
software purchased for new personnel.
Interest income and expense. Interest income increased to $254,000 for
the three months ended March 31, 1999 from $37,000 for the same period in 1998
due to greater cash balances available for investment. Interest expense on
long-term equipment financing decreased to $37,000 in the first quarter of 1999
from $86,000 for the same period in 1998 due to a lower outstanding principal
balance.
Foreign exchange gain/(loss). Foreign exchange losses increased to
$244,000 for the three months ended March 31, 1999 from $16,000 for the same
period in 1998 due primarily to unrealized losses caused by weakening of the
German Mark and the French Franc versus the U.S. Dollar.
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LIQUIDITY AND CAPITAL RESOURCES
Prior to August 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 (net of issuance costs of $81,000) from the private placement of
Series D Convertible Preferred Stock and associated Series D warrants in April
and May 1998. In April 1998, the Company also issued notes in the aggregate
principal amount of $10.0 million (the "Bridge Notes") and warrants to purchase
an aggregate of 166,666 shares of common stock at an exercise price of $3.00 per
share. The notes were issued at a stated interest rate of 12% per annum. The
outstanding principal and interest on the notes became due and payable upon the
consummation of the Company's Offering. Between August 4, 1998 and March 8, 1999
warrants to purchase 60,665 shares of common stock were exercised for cash of
$181,995, 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 for the Bridge Notes.
In August 1998, the Company completed its public offering of 3,000,000
shares of common stock at $12.50 per share (the "Offering"). Net proceeds to the
Company aggregated approximately $33.8 million. The Company used $10.2 million
of the net proceeds to repay obligations for principal and remaining accrued
interest under the Bridge Notes issued in April 1998. Also upon the consummation
of the Offering, all outstanding shares of the Company's Series A, B, C and D
Convertible Preferred Stock automatically converted into 4,686,784 shares of
common stock.
At March 31, 1999, the Company had cash, cash equivalents and
marketable securities of $20.2 million. During the quarter ended March 31,1999,
the Company's capital expenditures totaled approximately $1.1 million, primarily
for computer equipment and applications software. The Company expects that
additional purchases of computer equipment will be made as the Company's
employee base and customer base grows. As of March 31, 1999, 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 provided by continuing operations was approximately $300,000
for the quarter ended March 31, 1999 versus net cash used by continuing
operations of $1.3 million for the same quarter of 1998. This increase in cash
generated by continuing operations was due principally to changes in various
balance sheet accounts, particularly accounts receivable, accounts payable and
accrued expenses.
Net cash provided by investing activities was approximately $1.4
million for the three-month period ended March 31, 1999 versus $251,000 of cash
used in investing activities for the same period of 1998. The increase was
primarily due to the maturity of marketable debt securities offset by purchases
of marketable securities and computer equipment and applications software.
Cash used in financing activities was approximately $42,000 and
$231,000 for the quarter ended March 31, 1999 and 1998, respectively. This
decrease was due primarily to lower repayments of principal on outstanding debt
in 1999.
The Company has spent substantial amounts to date on capital and
operating expenditures, which have contributed to an accumulated deficit of
$73.3 million. 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, 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
expansion of the Company's international operations.
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The Company believes that the remaining net proceeds from the Offering,
together with its existing cash, cash equivalents, and maturing marketable
securities and cash expected to be generated from operations, after the
repayment of debt as it becomes due, will be sufficient to fund the Company's
cash needs until at least the first quarter of 2000.
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. 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 a readiness program 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. Giga is leveraging the knowledge of its research staff to focus the
efforts of its readiness program. The Company's readiness program is an
extension of its ongoing effort to upgrade systems, applications and
infrastructure that have been rendered obsolete due to advances in technology
and the Company's high growth.
Giga's products do not affect its client's internal systems. GigaWeb,
the delivery mechanism for Giga's Advisory Service, is accessible over the
Internet, IntraGiga (an FTP or HTTP download of Giga's Research for use on
internal networks) and GigaNotes, a Lotus Notes database of Giga's Research.
Giga does not provide software to enable clients to access research content.
Giga's products are not directly date dependent. Giga's primary
product, Advisory Service, consists in part of original written research content
created by Giga analysts. While some search or display capabilities of GigaWeb
may be affected, GigaWeb will not cease to function as a result of limitations
in processing date/time data.
GigaWeb uses enhanced database, search engine, and related technology
in order to provide clients with a total delivery solution for Giga research
content. Outlined below are some of the issues Giga is addressing with regard to
the GigaWeb Year 2000 Readiness Program. These are issues that exist in
GigaWeb's present form. An upgrade to GigaWeb, scheduled for release in the fall
of 1999, is expected to resolve these concerns. To the extent that these
improvements contain date dependent technology, they will be developed to be
fully Year 2000 compliant.
o Order Management: All dates used by Giga's order management
system are stored in a format that correctly represents and
enables manipulation of dates in the twentieth and twenty-first
centuries and beyond. Accordingly, we do not anticipate any
problems with passwords that would restrict our user's ability to
access GigaWeb.
o Search Capabilities: Giga uses a third-party search engine, which
is certified to be Y2K compliant by its manufacturer. We do not
anticipate any problems with searching and retrieving GigaWeb
content.
o Third Party Content: We are currently working with third-party
content providers to ensure that the manner in which information
is provided is free from Y2K associated problems.
14
<PAGE>
A few of Giga's IT Practice services incorporate a software component.
These software programs are designed to assist clients in evaluating their
internal IT projects and therefore should not have Y2K implications.
Prior to the commencement of the Company's Y2K readiness initiative,
certain internal business systems critical to the continuing operations of the
Company had been identified for replacement due to advances in technology and
the Company's growth. In addition, as a result of the Company's Y2K readiness
program, internal business systems that may require remediation or replacement
specifically due to the Y2K issue have been identified. In either case, the
systems ranked highest in priority have either been replaced or scheduled for
replacement. The Company estimates that, as of April 30, 1999, the replacement
effort was approximately 90% complete for software applications and
approximately 80% complete for computer hardware. The Company's objective is to
substantially complete the replacement of internal business systems by November
1999. Replacement systems have been developed internally and/or purchased from
third party vendors. Internally developed systems have been tested for
compliance using simulated Y2K conditions including leap year conditions. Newly
purchased systems are or will be verified as Y2K compliant by the vendors.
The Company has completed its review of older computer hardware, mainly
desktop systems, particularly in its European operations and has begun replacing
non-compliant equipment. This equipment is not critical to ongoing business
operations. The costs to replace the equipment will not be material and would
normally be capitalized. In January 1999, the Company spent approximately
$65,000 to replace hardware with possible Y2K issues. The Company estimates that
a total of $150,000 will be spent on this replacement effort.
The Company has identified significant service providers, vendors,
suppliers and customers believed to be most critical to its business operations
and is assessing the extent to which its operations are vulnerable if these
vendors fail to achieve Y2K compliance. For approximately 90% of the vendors
identified, the Company has surveyed their stage of Y2K readiness through
questionnaires, disclosures available from their websites and other available
means. While these vendors have plans and programs underway to become compliant,
there is no guarantee that their systems will be converted on a timely basis.
The Company presently believes that it may experience some disruption
in its business due to the Y2K issue. 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 beyond the Company's
control. The possible consequences of the Company or its key suppliers or
customers not being Y2K compliant include, but are not limited to, (1) delays in
delivery or an inability to deliver its Continuous Information Services, (2)
vendor or supplier delays in delivery or an inability to deliver goods or
services critical to the Company's continuing operation, (3) delays in or an
inability to bill and collect amounts due from customers, and (4) delays in or
an inability to remit on the part of Giga's customers. As a result, the business
and results of operations could be materially adversely affected by a temporary
inability to conduct ordinary business for a period of time after January 1,
2000. However, the Company believes that its actions and plans should
significantly reduce the adverse effects of any disruptions.
Concurrent with its readiness program, the Company is in the process of
developing contingency plans in the event of possible interruptions in business
operations. These plans may include the complete back-up of GigaWeb for quick
restoration at alternate geographic sites, available and compliant replacement
PC hardware and software and the development of internal diagnostic procedures
to quickly identify work-arounds and solutions. Once developed, contingency
plans and their related costs will be continuously evaluated and refined as new
and additional information becomes available.
15
<PAGE>
It is currently estimated that the total cost of the Company's Y2K
efforts will be approximately $415,000, or 4% of the Company's actual and
projected IT costs over the project period. Of these costs $19,000 are costs
incurred for the services of outside consultants and advisors and $396,000 are
primarily payroll costs for the Company's information technology groups,
incurred exclusively in connection with its Y2K efforts. This estimate does not
include costs associated with systems previously scheduled for upgrade or
replacement. As of April 30, 1999, an approximate cumulative total of $225,000
has been spent for its Y2K efforts of which $18,000 are costs incurred for the
services of outside consultants and advisors and $207,000 are primarily payroll
costs for the Company's information technology groups, incurred exclusively in
connection with its Y2K efforts. For the four months ended April 30, 1999,
approximately $92,000 has been spent on the Company's Y2K efforts of which
$6,000 are costs incurred for the services of outside consultants and advisors
and $86,000 are primarily payroll costs for the Company's information technology
groups, incurred exclusively in connection with its Y2K efforts. These costs are
being expensed as incurred and funded through operating cash flow. These cost
estimates do not include the costs associated with contingency plans under
development or the costs for computer hardware and software replacement which
would normally be capitalized, estimated to be less than $150,000. The estimated
costs of the Company's readiness program are subject to change as the program
progresses.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
Set forth below is information regarding the number of shares of
capital stock issued by the Company during the fiscal quarter ended March 31,
1999 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. The shares of capital stock 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.
1. In January 1999, the Company issued 10,000 shares of Common Stock
upon the exercise of warrants at an exercise price of $3.00 per
share for cash proceeds of $30,000. These warrants were
originally issued in April 1998 pursuant to the Loan and Warrant
Purchase Agreement for the Bridge Notes.
2. In March 1999, the Company issued 2,666 shares of Common Stock
upon the exercise of warrants at an exercise price of $3.00 per
share for cash proceeds of $7,998. These warrants were originally
issued in April 1998 pursuant to the Loan and Warrant Purchase
Agreement for the Bridge Notes.
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 and
offering expenses of $1.082 million. 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.
As of April 30, 1999, the Company had used a portion of the $33.8
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 $18.8 million of such net proceeds to the
general funds of the corporation for use as working capital and invested the
remaining $4.8 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.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement of Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated February 19, 1999,
pertaining to a press release announcing the Company's results of
operations for the fiscal year ended December 31, 1998.
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.
May 17, 1999 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
- ------ ------------------------
11 Statement of Computation of Per Share Earnings
27 Financial Data Schedule
20
Exhibit 11
Statement of Computation of Per Share Earnings
NET LOSS PER SHARE
Net loss per share is calculated as follows:
(Unaudited, in thousands)
Three Months Ended
March 31,
1999 1998
--------- -------
Net loss $ (3,602) $(3,836)
========= =======
BASIC:
Weighted average common shares outstanding 9,956 2,116
========= =======
Net loss per common share $ (0.36) $ (1.81)
========= =======
DILUTED:
Weighted average common shares outstanding 9,956 2,116
Effect of dilutive securities:
Convertible notes -- --
Stock options -- --
Warrants -- --
--------- -------
Weighted average common and common
equivalent shares outstanding 9,956 2,116
========= =======
Net loss per common and common
equivalent share $ (0.36) $ (1.81)
========= =======
21
<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 MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> MAR-31-1998 MAR-31-1999
<CASH> 1,753 15,789
<SECURITIES> 0 4,371
<RECEIVABLES> 6,089 9,703
<ALLOWANCES> 405 407
<INVENTORY> 0 0
<CURRENT-ASSETS> 13,754 38,833
<PP&E> 4,354 8,165
<DEPRECIATION> 2,676 3,995
<TOTAL-ASSETS> 15,673 43,194
<CURRENT-LIABILITIES> 27,575 36,407
<BONDS> 0 0
0 0
12 0
<COMMON> 2 10
<OTHER-SE> (12,764) 6,461
<TOTAL-LIABILITY-AND-EQUITY> 15,673 43,194
<SALES> 8,552 11,940
<TOTAL-REVENUES> 8,552 11,940
<CGS> 4,462 5,940
<TOTAL-COSTS> 12,319 15,473
<OTHER-EXPENSES> 16 244
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 49 (217)
<INCOME-PRETAX> (3,832) (3,560)
<INCOME-TAX> 4 42
<INCOME-CONTINUING> (3,836) (3,602)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,836) (3,602)
<EPS-PRIMARY> (1.81) (0.36)
<EPS-DILUTED> (1.81) (0.36)
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