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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 September 30, 2000
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.)
139 MAIN STREET
CAMBRIDGE, MA 02142
(617) 949-4900
-------------------------------------------
(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 November 8, 2000, there were 10,447,765 shares of Common Stock, $.001
par value, of the registrant outstanding.
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47954.0001
<PAGE>
GIGA INFORMATION GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000
(unaudited) and September 30, 1999 (unaudited) 3.
Condensed Consolidated Balance Sheets at September 30, 2000 (unaudited)
and December 31, 1999 4.
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 (unaudited)
and September 30, 1999 (unaudited) 5.
Notes to Condensed Consolidated Financial Statements (unaudited) 6.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11.
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 21.
Item 6. Exhibits and Reports on Form 8-K 21.
SIGNATURE PAGE 22.
INDEX TO EXHIBITS 23.
</TABLE>
2
<PAGE>
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Research, advisory and consulting $ 15,918 $ 11,819 $ 46,327 $ 33,186
Other, principally events 1,771 643 5,659 4,106
---------------- ----------------- ---------------- -----------------
Total revenues 17,689 12,462 51,986 37,292
---------------- ----------------- ---------------- -----------------
Costs and expenses:
Cost of services 7,896 5,715 23,789 19,858
Sales and marketing 8,048 7,665 24,269 22,289
Research and development 631 801 1,940 1,452
General and administrative 2,605 2,266 7,242 6,508
Depreciation and amortization 732 490 2,035 1,309
---------------- ----------------- ---------------- -----------------
Total costs and expenses 19,912 16,937 59,275 51,416
---------------- ----------------- ---------------- -----------------
Loss from operations (2,223) (4,475) (7,289) (14,124)
---------------- ----------------- ---------------- -----------------
Interest income 40 143 224 607
Interest expense (97) 28 (57) 98
Foreign exchange gain/(loss) 58 (64) (272) (480)
---------------- ----------------- ---------------- -----------------
Loss from operations before income taxes (2,028) (4,424) (7,280) (14,095)
Income tax provision/(benefit) 1 10 (25) 62
---------------- ----------------- ---------------- -----------------
Net loss $ (2,029) $ (4,434) $ (7,255) $ (14,157)
================ ================= ================ =================
Results per common share:
Historical - basic and diluted:
Net loss $ (0.20) $ (0.44) $ (0.71) $ (1.42)
================ ================= ================ =================
Weighted average number of shares used to
compute results per common share 10,357,186 10,017,712 10,214,317 9,987,621
================ ================= ================ =================
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE>
GIGA INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------ -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,692 $ 5,381
Marketable securities - 801
Trade accounts receivable, net of allowance for uncollectible accounts of
$415 and $473 at September 30, 2000 (unaudited) and December 31, 1999,
respectively 13,496 21,199
Unbilled accounts receivable 7,258 4,974
Prepaid expenses and other current assets 4,529 5,174
------------------ -------------------
Total current assets 26,975 37,529
Property and equipment, net 5,896 6,188
Other assets 1,281 478
------------------ -------------------
Total assets $ 34,152 $ 44,195
================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,846 $ 3,471
Deferred revenues 33,173 37,817
Accrued expenses and other current liabilities 8,342 8,197
Current portion of long-term debt - 527
------------------ -------------------
Total current liabilities 44,361 50,012
Deferred revenues 395 569
------------------ -------------------
Total liabilities 44,756 50,581
Stockholders' deficit:
Preferred Stock, $.001 par value; 5,000,000 shares authorized, no shares
issued and outstanding at September 30, 2000 (unaudited) and December
31, 1999 - -
Common Stock, $.001 par value: 60,000,000 shares authorized, 10,385,873
and 10,043,401 shares issued and outstanding at September 30, 2000
(unaudited) and December 31, 1999, respectively 10 10
Additional paid-in capital 82,726 80,664
Deferred compensation (633) (983)
Accumulated deficit (94,240) (86,985)
Accumulated other comprehensive income 1,533 908
------------------ -------------------
Total stockholders' deficit (10,604) (6,386)
------------------ -------------------
Total liabilities and stockholders' deficit $ 34,152 $ 44,195
================== ===================
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE>
GIGA INFORMATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,255) $ (14,157)
Adjustments to reconcile net loss to net cash used in operating activities,
net of the effect of divestitures:
Depreciation and amortization 2,035 1,309
Amortization of deferred financing costs 41 -
Provision for doubtful accounts (27) (29)
(Gain)/loss on sale of fixed assets (4) 42
Compensation expense related to stock options 410 337
Credit to interest expense for accelerated payment on equipment lease (101) -
Change in assets and liabilities:
Decrease in accounts receivable 3,933 2,042
Decrease in prepaid expenses and other current assets 629 1,294
Decrease/(increase) in other assets 7 (115)
Decrease in deferred revenues (3,613) (68)
Increase in accounts payable and accrued liabilities 749 896
------------- --------------
Net cash used in operating activities (3,196) (8,449)
------------- --------------
Cash flows from investing activities:
Acquisition of equipment and improvements (1,807) (3,556)
Cash transferred to GigaGroup S.A. (284) -
Purchases of marketable securities - (7,467)
Proceeds from maturities of marketable securities 801 12,571
Other, net (50) 9
------------- --------------
Net cash (used in) provided by investing activities (1,340) 1,557
------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock under option plans 508 167
Proceeds from issuance of common stock due to exercise of warrants 126 38
Proceeds from issuance of common stock under employee stock purchase plan 484 -
Principal payments on long-term debt (426) (339)
Other, net 3 -
------------- --------------
Net cash provided by (used in) financing activities 695 (134)
------------- --------------
Effect of exchange rates on cash 152 (99)
------------- --------------
Net decrease in cash and cash equivalents (3,689) (7,125)
Cash and cash equivalents, beginning of period 5,381 14,149
------------- --------------
Cash and cash equivalents, end of period $ 1,692 $ 7,024
============= ==============
Supplementary cash flow information:
Income taxes paid $ - $ 62
Interest paid $ 44 $ 98
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements of Giga
Information Group, Inc. ("Giga") at September 30, 2000 and for the three and
nine months ended September 30, 2000 and 1999 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 Giga's audited consolidated financial
statements included in its Annual Report on Form 10-K, for the period ended
December 31, 1999, as filed with the Securities and Exchange Commission.
2. Sale of Stock by Former Subsidiary
On September 6, 2000, Giga Information Group S.A., Giga's former
wholly-owned subsidiary in Paris, France that sells and markets research,
advisory and consulting services in France, Belgium, Luxembourg and Switzerland,
issued 482,484 shares of its common stock to new investing parties for 4,467,802
Euros or 9.26 Euros per share. As a result, Giga's ownership percentage of Giga
Information Group S.A. decreased from 100% to 19.9%. As Giga no longer exercises
significant influence over the entity, now called GigaGroup S.A., its accounts
are no longer included in the consolidated financial results of Giga.
Giga records gains and losses arising from issuances of stock by its
subsidiaries directly to additional paid-in capital in accordance with the
provisions of Staff Accounting Bulletin ("SAB") No. 51, "Accounting for Sales of
Stock of a Subsidiary." Accordingly, Giga adjusted the carrying value of its
investment in GigaGroup S.A. and additional paid-in capital by $809,000,
representing the difference between the carrying value of Giga's investment in
GigaGroup S.A. prior to the transaction and the fair value of the investment as
determined by the transaction.
3. Historical Net Loss per Common Share
Giga computes basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Common equivalent shares have been
excluded from the computation of diluted loss per share as their effect would be
anti-dilutive. Common equivalent shares result from the assumed exercise of
outstanding stock options and warrants, the proceeds of which are then assumed
to have been used to repurchase outstanding common stock using the treasury
stock method, and the conversion of convertible notes into common stock. As a
result, options and warrants to purchase shares of common stock in the amount of
4,188,785 shares at September 30, 2000 and 3,289,434 shares at September 30,
1999 were excluded from the calculation of diluted net loss per common share. At
September 30, 2000, options and warrants for 2,976,422 shares of common stock
had an exercise price that was below the average market value per share of
Giga's common stock during the fiscal quarter.
6
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Comprehensive Income (Loss)
Giga 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. Comprehensive
income is comprised of net income and other comprehensive income. Other
comprehensive income includes certain changes in equity that are excluded from
net income. At September 30, 2000 and 1999, accumulated other comprehensive
income was comprised solely of cumulative foreign currency translation
adjustments, which is reflected in the table below (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss $ (2,029) $ (4,434) $ (7,255) $ (14,157)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 351 (365) 625 367
-------------- --------------- -------------- --------------
Comprehensive loss $ (1,678) $ (4,799) $ (6,630) $ (13,790)
============== =============== ============== ==============
</TABLE>
5. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement was amended by the issuance of SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133," which changed the
effective date of SFAS No. 133 to all fiscal years beginning after June 15, 2000
(fiscal year 2001 for Giga ). 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
Giga anticipates that, due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a significant effect on its financial
position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in
Financial Statements." This statement was amended by the issuance of SAB 101B,
"Second Amendment: Revenue Recognition in Financial Statements," which delayed
the implementation date of SAB 101 until the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. SAB 101 summarizes the SEC's views in
applying generally accepted accounting principles to selected revenue
recognition issues in financial statements. Giga anticipates that the adoption
of SAB 101 will not have a significant effect on its financial position or
results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the
application of APB Opinion No. 25 and among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 became
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. Giga's
adoption of FIN 44 did not have a material impact on its financial position or
results of operations.
7
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In March 2000, the Emerging Issues Task Force reached a final
consensus on Issue No. 00-02, "Accounting for Web Site Development Costs" ("EITF
00-02"), which addresses how an entity should account for costs incurred to
develop a web site. In their final consensus, the Task Force concluded that the
costs incurred during the planning stage should be expensed; the costs incurred
for activities during the web application and infrastructure development stage
should be capitalized; and generally the costs incurred during the operation
stage should be expensed. With respect to graphics costs, the Task Force
concluded the costs incurred to create the initial graphics for the web site
would be capitalized and that any subsequent updates would be expensed as
incurred, unless the updates added functionality. EITF 00-02 is effective for
web site development costs incurred for fiscal quarters beginning after June 30,
2000 (including costs incurred for projects in process as of the beginning of
the quarter.) Giga anticipates that the adoption of EITF 00-02 will not have a
significant effect on its financial position or its results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No. 140 addresses
certain issues not previously addressed in SFAS No. 125; however, it carries
forward most of the provisions of SFAS No. 125 without reconsideration. SFAS No.
140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This Statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. Giga anticipates that the adoption of SFAS No. 140 will
not have a significant effect on its financial position or its results of
operations.
6. Stockholder Rights Plan
On February 18, 2000, Giga's Board of Directors adopted a Stockholder
Rights Plan ("Plan") designed to protect Giga stockholders in the event of
takeover activity that would deny them the full value of their investment.
Terms of the Plan provide for a dividend distribution of one right
for each share of Giga common stock to holders of record at the close of
business on March 3, 2000. The rights will become exercisable only in the event,
with certain exceptions, a person or group of affiliated or associated persons
accumulates 15 percent or more of Giga's voting stock, or if a person or group
announces an offer to acquire 15 percent or more. A stockholder who owns 15
percent or more of Giga's voting stock as of February 18, 2000 will not trigger
this provision unless the stockholder thereafter acquires an additional one
percent or more of the outstanding stock. The rights will expire on February 18,
2010.
Each right will entitle the holder to buy one one-hundredth of a
share of a new series of preferred stock at a price of $95. In addition, upon
the occurrence of certain events, holders of the rights would be entitled to
purchase either Giga stock or shares in an "acquiring entity" at half of market
value. Further, at any time after a person or group acquires 15% or more (but
less than 50%) of Giga's outstanding voting stock, subject to certain
exceptions, the Board of Directors may, at its option, exchange part or all of
the rights (other than rights held by the acquiring person or group, which would
become void) for shares of Giga's common stock, initially on a four-for-one
basis.
Giga generally will be entitled to redeem the rights at $.01 per
right at any time prior to the time there has been a public announcement of the
acquisition of a 15 percent position in its voting stock, subject to certain
exceptions.
8
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Restructuring and Exit Costs
In February 2000, Giga commenced plans to restructure its events and
conferences business. As a result, a total of 4 positions will be eliminated by
Giga in the fourth quarter of fiscal 2000. Approximately $70,000 of incremental
salaries and benefits cost was charged to cost of services for the nine months
ended September 30, 2000 in association with this restructuring. As of September
30, 2000 no amounts have been paid or charged against this liability.
Also in February 2000, Giga commenced a plan to consolidate
operations in its Watford, U.K. and Windsor, U.K. locations into one common
facility in the Windsor area. The relocation will be completed in the first
quarter of fiscal 2001. As a result, Giga estimates 7 employees from its finance
and its conferences groups will not relocate to the Windsor area. For the nine
months ended September 30, 2000, approximately $98,000 of additional rent
expense and lease cancellation fees, $101,000 of incremental salaries and
benefits cost and $31,000 of incremental real estate and legal fees were charged
to expense. Of the total charges, $124,000 was recorded as cost of services,
$56,000 was recorded as sales and marketing expense and $50,000 was recorded as
general and administrative expenses. As of September 30, 2000 no amounts have
been paid or charged against these liabilities.
8. Line of Credit
In April 2000, Giga established a one-year Accounts Receivable
Financing Agreement (the "Agreement") with a bank, under which it can borrow up
to the lesser of $5.0 million or 80% of the eligible accounts receivable, as
defined by the Agreement. Upon execution of the Agreement, Giga paid fees
totaling $30,000. Loans under the Agreement bear interest at the bank's prime
rate plus 1.5 percent. A monthly collateral handling fee of 0.375 percent is
charged on the average daily financed receivable balance outstanding.
As of September 30, 2000, there were no borrowings under this facility.
On November 1, 2000, Giga pledged approximately $1.2 million of
accounts receivable as collateral, and received proceeds of approximately
$922,000, pursuant to the Agreement. Giga repaid approximately $320,000, leaving
an outstanding balance of approximately $602,000 as of November 13, 2000. Giga
is subject to various covenants under the Agreement, the most restrictive of
which requires total revenues to increase on a quarterly basis. Giga anticipates
that it will be in compliance with this covenant at December 31, 2000.
9. Warrants
In connection with the Agreement discussed in Note 8, Giga issued
warrants to purchase 24,000 shares of Giga common stock. The warrants are
exercisable immediately at $5.00 per share and are scheduled to expire on May
25, 2005. As of September 30, 2000, none of these warrants have been exercised.
The estimated fair value of the warrants is approximately $82,000, which has
been recorded as deferred financing costs. As of September 30, 2000, Giga
recognized charges of approximately $41,000 for the amortization of the
financing costs.
In April 1998, Giga entered into a Loan and Warrant Purchase
Agreement whereby Giga issued convertible promissory notes with a face value of
$10,000,000, 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 $10,000,000. On August 2, 2000, warrants to purchase 3,333 shares of
common stock, originally issued pursuant to the Loan and Warrant Purchase
Agreement for the Bridge Notes, were exercised for cash of $9,999 at an exercise
price of $3.00 per share.
9
<PAGE>
GIGA INFORMATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Listing on the Nasdaq National Market
On September 29, 2000, Giga was notified that it was no longer in
compliance with the minimum $50,000,000 market capitalization requirement for
continued listing on the Nasdaq National Market under Maintenance Standard 2 as
set forth in Marketplace Rules 4450(b)(1)(A) and 4450(b)(1)(B). Giga's request
that it continue to be listed on the Nasdaq National Market will be considered
at a hearing scheduled for December 8, 2000. Should the outcome of this hearing
result in a formal decision to discontinue listing on the Nasdaq National
Market, Giga would apply for listing on the Nasdaq SmallCap Market.
11. Segment Information
Giga has determined that it operates in one reportable segment,
advisory services. This determination is based on Giga's method of internal
reporting and the similarities among its products and services. Giga's products
and services are similar with regard to financial performance and business risk,
targeted customer market, the methods used to market, sell and provide its
products and services to customers and their purpose which is to provide
customers with objective analyses and advice on developments and trends in
information technology and e-Business. Revenues from the products and services
within, and in support of, Giga's research, advisory and consulting services are
presented in detail in Giga's Condensed Consolidated Statements of Operations.
Giga conducts business principally in the United States and United
Kingdom. Operations in France (through August 31, 2000), 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 Giga's reported revenues and total assets for the three and
nine months ended September 30, 2000 and 1999, respectively (in thousands).
<TABLE>
<CAPTION>
REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
United States $ 14,777 $ 11,004 $ 42,457 $ 33,237
United Kingdom 2,004 1,000 6,718 2,829
Other International 908 458 2,811 1,226
--------------- -------------- --------------- ---------------
Consolidated revenue $ 17,689 $ 12,462 $ 51,986 $ 37,292
=============== ============== =============== ===============
TOTAL ASSETS
SEPTEMBER 30,
2000 1999
--------------- ---------------
United States $ 29,010 $ 31,670
United Kingdom 3,918 2,705
Other International 1,224 1,962
--------------- ---------------
Consolidated total assets $ 34,152 $ 36,337
=============== ===============
</TABLE>
10
<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
INFORMATION IN THIS QUARTERLY REPORT ON FORM 10-Q MAY CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS ARE NOT STATEMENTS OF
HISTORICAL FACTS, BUT RATHER REFLECT GIGA'S CURRENT EXPECTATIONS CONCERNING
FUTURE EVENTS AND RESULTS. GIGA GENERALLY USES THE WORDS "BELIEVES," "EXPECTS,"
"INTENDS," "PLANS," "ANTICIPATES," "LIKELY," "WILL" AND SIMILAR EXPRESSIONS TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH FORWARD LOOKING STATEMENTS, INCLUDING
THOSE CONCERNING GIGA'S EXPECTATIONS, INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS, SOME OF WHICH ARE BEYOND GIGA'S CONTROL, WHICH
MAY CAUSE GIGA'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS, 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 GIGA, SPECIFIC
CONSIDERATION SHOULD BE GIVEN TO VARIOUS FACTORS INCLUDING THE FOLLOWING: GIGA'S
PRIOR LOSSES AND ANTICIPATION OF FUTURE LOSSES; GIGA'S NEED TO ATTRACT AND
RETAIN QUALIFIED PERSONNEL; GIGA'S DEPENDENCE ON SALES AND RENEWALS OF
SUBSCRIPTION-BASED SERVICES; GIGA'S ABILITY TO ACHIEVE AND SUSTAIN HIGH RENEWAL
RATES; GIGA'S ABILITY TO MANAGE AND SUSTAIN GROWTH; GIGA'S FUTURE CAPITAL NEEDS
AND THE RISKS OF WORKING CAPITAL DEFICIENCY; GIGA'S DEPENDENCE ON KEY PERSONNEL;
COMPETITION FROM OTHER COMPANIES INCLUDING THOSE WITH GREATER RESOURCES THAN
GIGA; THE RISKS ASSOCIATED WITH THE DEVELOPMENT OF NEW SERVICES AND PRODUCTS;
THE POTENTIAL FOR SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS;
CONTINUED MARKET ACCEPTANCE OF AND DEMAND FOR GIGA SERVICES; UNCERTAINTIES
RELATING TO PROPRIETARY RIGHTS; GIGA'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 provides objective research, advice and continuous coaching on
technology for e-Business. Giga's integrated suite of offerings helps clients
make strategic decisions about the technologies, people and processes needed to
excel in the new digital economy. Emphasizing close interaction among analysts
and clients, Giga delivers support with the speed and scope necessary for
e-Business. Giga's four principal products and services are (i) Advisory
Service, which includes ExperNet and Advisory Consulting, (ii) ePractices
(formerly IT Practice Services), (iii) Events and Conferences, and (iv) Web Site
ScoreCard. Giga's services are designed to be accessed through GigaWeb, partner
Web sites and consultation with Giga's analysts and advisors.
Giga introduced its Advisory Service and GigaWeb in April 1996. In
July 1996, Giga introduced its ePractices services. Advisory Consulting was
introduced in September 1997. Giga's Events and Conferences product line was
acquired with the acquisition of BIS Strategic Decisions ("BIS") in April 1995.
Giga's Web Site ScoreCard offering was launched in the third quarter of 1999.
For financial reporting purposes, revenues from (i) Advisory Service, ePractices
services, Advisory Consulting and Web Site ScoreCard are aggregated into
Research, Advisory and Consulting and (ii) Events and Other services are
aggregated into Other.
Giga's principal products, Advisory Service and ePractices services,
are typically sold through annual contracts that generally provide for payment
at the commencement of the contract period. A portion of these contracts,
however, is billed quarterly or monthly. Amounts received in advance of services
provided are reflected in Giga'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 and
consulting and Web Site ScoreCard as such services are performed. Unbilled
receivables are primarily generated as a result of contractual extended billing
terms offered in connection with Giga's annual contracts. Giga also records the
related commission obligation upon acceptance of a contract and amortizes the
corresponding deferred commission over the contract period in which the related
revenues are earned. With the consistent application of these accounting
policies as well as growth in contract value and volume, trade accounts
receivable, deferred revenues, unbilled accounts receivable and deferred
commissions are expected to increase.
11
<PAGE>
Essentially all of Giga's current international operations are
located in the European Community and Canada. Giga operates in the European
Community primarily through wholly-owned subsidiaries in the United Kingdom and
Germany. These subsidiaries manage direct sales personnel and resellers in other
countries in the European Community as well. In Canada, Giga utilizes a
full-scale sales force and provides business support to these salespersons
through its operations in the United States. In France, Giga resells its
services through GigaGroup S.A., an entity which was formerly a wholly-owned
subsidiary of Giga. Substantially all of Giga's revenues from the European
Community are denominated in foreign currencies, particularly the British pound,
while essentially all of Giga's revenues from Canada are denominated in U.S.
dollars. Giga markets its products in Israel, Korea, Italy, Argentina and Brazil
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 have inherent financial risk. To
date, however, Giga's cumulative translation adjustments have been slightly
favorable, although there can be no assurance that this trend will continue in
the future. Giga does not currently hedge its exposure to foreign currency
adjustments.
Giga believes that a leading measure of its business volume is
revenue run rate ("Revenue Run Rate"). Revenue Run Rate is defined as the
cumulative annualized subscription value of Giga's Advisory Services and
ePractices contracts in effect at a given point in time ("Annualized Value" or
"AV"), plus the previous 12 months' revenues from services not included in AV.
At September 30, 2000, Revenue Run Rate increased 29% to $74.8 million versus
$57.9 million at the end of the third quarter of 1999. Annualized Value at
September 30, 2000 increased 30% to $65.2 million from $50.3 million at
September 30, 1999.
A majority of Giga's contracts renew automatically unless the
customer cancels the subscription. Giga's experience is that substantial
portions of customers renew expiring contracts for an equal or greater level of
total fees each year. Approximately 17% of contract value up for renewal in the
quarter ended September 30, 2000 cancelled, discontinuing all services, as
compared to 12% for the comparable period in 1999. These cancellation rates do
not include contracts lost due to mergers, acquisitions and bankruptcies. Giga
believes that a direct comparison of its cancellation rate and those of its
major competitors may not be meaningful. This is due in part to Giga'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 Giga's major competitors.
Giga's operating expenses consist of cost of services, 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 Giga's research, advisory and consulting,
and other services. These direct costs include personnel expenses for analysts
and other personnel, direct expenses for events and conferences, royalties to
third party information providers and costs to design, print and distribute
conference brochures and course materials. 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 operational and administrative functions of
Giga.
In February 2000, Giga commenced plans to restructure its events and
conferences business and to consolidate operations in its Watford, U. K. and
Windsor, U. K. locations into one common facility. Approximately $70,000 of cost
was charged to cost of services for the nine months ended September 30, 2000 in
association with the restructuring of Giga's events and conferences business.
Approximately $124,000 was recorded as cost of services, $56,000 was recorded as
sales and marketing expense and $50,000 was recorded as general and
administrative expenses for the nine months ended September 30, 2000 in
association with the consolidation of locations in the United Kingdom. As of
September 30, 2000 no amounts have been paid or charged against these
liabilities. See Note 7 to the Condensed Consolidated Financial Statements.
On September 6, 2000, Giga Information Group S.A., Giga's former
wholly-owned subsidiary in Paris, France that sells and markets research,
advisory and consulting services in France, Belgium, Luxembourg and Switzerland,
12
<PAGE>
issued 482,484 shares of common stock to new investing parties for 4,467,802
Euros or 9.26 Euros per share. As a result of this transaction, Giga will no
longer consolidate the results of GigaGroup S.A., as it is now known, in its
consolidated financial statements.
Since its inception, Giga has incurred substantial costs to develop
its products and services, establish its GigaWeb delivery system, build a
management team and recruit, employ and train research analysts, sales personnel
and support staff for its business. Giga will continue its programs to
strengthen, expand and develop existing and new services, products and
infrastructure. Currently, Giga expects to be near the break-even point for the
fourth quarter of fiscal 2000, while incurring significant losses for the full
fiscal year.
Giga has incurred substantial tax loss carryforwards since its
inception, and acquired tax loss carryforwards with its acquisition of BIS. Due
to the magnitude of these existing tax loss carryforwards, anticipated losses
into the year 2000, and substantial uncertainties associated with its business,
Giga 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.
13
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Research, advisory and consulting 90% 95% 89% 89%
Other, principally events 10% 5% 11% 11%
-------------- -------------- --------------- --------------
Total revenues 100% 100% 100% 100%
============== ============== =============== ==============
Costs and expenses:
Cost of services 45% 46% 46% 53%
Sales and marketing 45% 62% 46% 60%
Research and development 3% 6% 4% 4%
General and administrative 15% 18% 14% 17%
Depreciation and amortization 4% 4% 4% 4%
-------------- -------------- --------------- --------------
Total costs and expenses 112% 136% 114% 138%
-------------- -------------- --------------- --------------
Loss from operations (12%) (36%) (14%) (38%)
-------------- -------------- --------------- --------------
Interest income - 1% 1% 1%
Interest expense (1%) - - -
Foreign exchange gain/(loss) - (1%) (1%) (1%)
-------------- -------------- --------------- --------------
Loss from operations before income taxes (11%) (36%) (14%) (38%)
Income tax provision/(benefit) - - - -
-------------- -------------- --------------- --------------
Net loss (11%) (36%) (14%) (38%)
============== ============== =============== ==============
</TABLE>
Generally, the year-on-year decreases in Giga's operating expenses,
expressed as a percentage of total revenues in the table above, are primarily
due to leveraging those expenses over increased revenues derived from a growing
customer base.
14
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues. Total revenues increased 42% to $17.7 million for the three
months ended September 30, 2000 from $12.5 million for the same three-month
period in 1999. The increase in total revenues was primarily due to the increase
in Research, Advisory and Consulting revenues.
Revenues from Research, Advisory and Consulting increased 35% to
$15.9 million for the three months ended September 30, 2000 from $11.8 million
for the same three-month period in 1999. The increase in revenues was primarily
due to growing market acceptance of Giga's services.
Other revenues, primarily events registrations and sponsorships,
increased 175% to $1.8 million for the three months ended September 30, 2000
from $643,000 for the same three-month period in 1999. The increase was
primarily due to an increased number of events held in the third quarter of
2000.
Cost of services. Cost of services increased 38% to $7.9 million for
the three months ended September 30, 2000 from $5.7 million for the same
three-month period in 1999. The increase in costs was primarily due to expanding
Giga's staff of analysts to support Giga's increased customer base and Giga's
recently introduced Web Site ScoreCard product.
Sales and marketing. Sales and marketing expenses increased 5% to
$8.0 million for the three months ended September 30, 2000 from $7.7 million for
the same period in 1999. The increase was principally due to higher commission
costs for the sales force and costs for dedicated client care and content
partnering groups, which were established in late 1999. Sales and marketing
expenses as a percentage of revenues declined to 45% for the three months ended
September 30, 2000 compared to 62% of revenues for the same period of 1999. This
area benefited principally from programs introduced at the end of 1999 to
control expenses.
Research and development. Research and development expenses decreased
21% to $631,000 for the three months ended September 30, 2000 from $801,000 for
the same three-month period in 1999. The decrease was primarily due to lower
consulting costs due to completing development of Gigaweb 3.0 in the first
quarter of 2000.
General and administrative. General and administrative expenses
increased 15% to $2.6 million for the three months ended September 30, 2000 from
$2.3 million for the same three-month period in 1999. The increase was primarily
due to higher outside consulting fees.
Depreciation and amortization. Depreciation and amortization expense
increased 49% to $732,000 for the three months ended September 30, 2000 from
$490,000 for the same three-month period in 1999. The increase was primarily due
to increased amortization costs for CRM and financial systems deployed in the
fourth quarter of 1999.
Interest income and expense. Interest income decreased to $40,000 for
the three months ended September 30, 2000 from $143,000 for the same three-month
period in 1999 due to lower cash balances available for investment. During the
third quarter of 2000, Giga accelerated final payments due on an equipment
lease, which resulted in a credit to interest expense of $101,000. This credit
net of interest charges prior to making the final payment resulted in a net
credit to interest expense of $97,000 for the three-month period ended September
30, 2000. Interest expense of $28,000 for equipment leases was recorded in the
same three-month period in 1999.
Foreign exchange gain/(loss). Foreign exchange gains recorded for the
three months ended September 30, 2000 were $58,000 compared to losses of $64,000
for the same three-month period in 1999 due primarily to realized and unrealized
gains upon payment of foreign currency denominated transactions.
15
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenues. Total revenues increased 39% to $52.0 million for the nine
months ended September 30, 2000 from $37.3 million for the same nine-month
period in 1999. The increase in total revenues was primarily due to the increase
in Research, Advisory and Consulting revenues.
Revenues from Research, Advisory and Consulting increased 40% to
$46.3 million for the nine months ended September 30, 2000 from $33.2 million
for the same nine-month period in 1999. The increase in revenues was primarily
due to growing market acceptance of Giga's services.
Other revenues increased 38% to $5.7 million for the nine months
ended September 30, 2000 from $4.1 million for the same nine-month period in
1999. The increase was generally due to increased revenues for events
sponsorships.
Cost of services. Cost of services increased 20% to $23.8 million for
the nine months ended September 30, 2000 from $19.9 million for the same
nine-month period in 1999. The increase in costs was primarily due to expanding
Giga's staff of analysts to support Giga's increased customer base and Giga's
Web Site ScoreCard product introduced in late 1999. These increased costs were
partially offset by lower costs to produce events and conferences. Cost of
services as a percentage of revenues declined to 46% for the nine months ended
September 30, 2000 compared to 53% for the same period of 1999 principally as a
result of programs to control expenses.
Sales and marketing. Sales and marketing expenses increased 9% to
$24.3 million for the nine months ended September 30, 2000 from $22.3 million
for the same period in 1999. The increase was principally due to higher training
and commission costs for the sales force and costs for dedicated client care and
content partnering groups, which were established late in 1999. Sales and
marketing as a percentage of revenues declined to 46% for the nine months ended
September 30, 2000 compared to 60% for the same period of 1999 principally due
to programs introduced in late 1999 to control expenses.
Research and development. Research and development expenses increased
34% to $1.9 million for the nine months ended September 30, 2000 from $1.5
million for the same nine-month period in 1999. The increase was primarily due
to increased personnel costs.
General and administrative. General and administrative expenses
increased 11% to $7.2 million for the nine months ended September 30, 2000 from
$6.5 million for the same nine-month period in 1999. The increase in expenses
was primarily due to higher personnel costs offset by lower general corporate
expenses.
Depreciation and amortization. Depreciation and amortization expense
increased 55% to $2.0 million for the nine months ended September 30, 2000 from
$1.3 million for the same nine-month period in 1999. The increase was primarily
due to increased amortization costs for CRM and financial systems deployed in
the fourth quarter of 1999. Depreciation costs also increased due to purchases
of computer equipment for new hires and to upgrade equipment for existing staff.
Interest income and expense. Interest income decreased to $224,000
for the nine months ended September 30, 2000 from $607,000 for the same
nine-month period in 1999 due to lower cash balances available for investment.
During the third quarter of 2000, Giga accelerated final payments due on an
equipment lease, which resulted in a credit to interest expense of approximately
$101,000. This credit net of interest charges prior to making the final payment
resulted in a net credit to interest expense of $57,000 for the nine months
ended September 30, 2000. Interest expense of $98,000 for equipment leases was
recorded for the same nine-month period in 1999.
Foreign exchange loss. Foreign exchange losses recorded for the nine
months ended September 30, 2000 were $272,000 compared to losses of $480,000 for
the same nine-month period in 1999 due primarily to weakening in the major
European currencies.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to August 1998, Giga funded its operations primarily through
the private placement of equity securities and borrowings under promissory
notes. Giga received aggregate net proceeds of $42.4 million from the private
placement of equity securities since its inception. In April 1998, Giga 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 Giga's initial public
offering of 3,000,000 shares of common stock at $12.50 per share (the
"Offering") on August 4, 1998. Between August 4, 1998 and August 2, 2000
warrants to purchase 102,664 shares of common stock were exercised for cash of
$307,992, 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.
Net proceeds to Giga from the Offering were approximately $33.8
million. Giga used $10.2 million of the net proceeds to repay obligations for
principal and interest under the Bridge Notes issued in April 1998. As of
November 8, 1999, the remaining proceeds of the Offering had been added to the
general funds of the corporation for use as working capital. Also upon the
consummation of the Offering, all outstanding shares of Giga's Series A, B, C
and D Convertible Preferred Stock automatically converted into 4,686,784 shares
of common stock.
At September 30, 2000, Giga had cash and cash equivalents of
approximately $1.7 million. During the nine months ended September 30, 2000,
Giga's capital expenditures totaled approximately $1.8 million, primarily for
computer equipment, new and enhanced software applications and associated
implementation costs and office furniture and equipment. Giga expects that
additional purchases of computer equipment, software and office furniture will
be made and placed into service as Giga enhances its infrastructure and as its
employee base and customer base grows. As of September 30, 2000, Giga had no
material commitments for capital expenditures, and Giga does not currently
expect the rate of capital spending to vary significantly through the end of
2000.
Net cash used in operating activities was approximately $3.2 million
for the nine months ended September 30, 2000 compared to $8.4 million for the
same nine-month period of 1999. The decrease in net cash used in operating
activities was due principally to a decrease in the net loss, an increase in
depreciation and amortization, and to changes in various balance sheet accounts,
particularly accounts receivable and deferred revenue.
Net cash used in investing activities was approximately $1.3 million
for the nine-month period ended September 30, 2000 compared to net cash provided
by investing activities of $1.6 million for the same nine-month period of 1999.
The net cash used in investing activities was primarily due to purchases of
capital items and lower proceeds from maturities of marketable debt securities.
In addition, $284,000 of cash was transferred to GigaGroup S.A. due to the
reduction of Giga's ownership interest in this entity to 19.9% and the resultant
deconsolidation of its financial results.
Net cash provided by financing activities was approximately $695,000
for the nine months ended September 30, 2000, compared to net cash used by
financing activities of approximately $134,000 for the same nine-month period of
1999. This favorable change is primarily due to $1.1 million of proceeds from
exercises of stock options and warrants and issuance of Employee Stock Purchase
Plan shares in the first nine months of 2000.
To date, Giga has spent substantial amounts on capital and operating
expenditures, which have contributed to an accumulated deficit of $94.2 million
as of September 30, 2000. Capital and operating expenditures outpaced revenues
due to numerous factors, such as increased marketing efforts for Giga's
services, the high cost to attract and retain qualified employees, efforts to
develop and market new services and products, and enhancements to the GigaWeb
delivery system and internal infrastructure. Beginning in the third quarter of
17
<PAGE>
1999, Giga undertook several initiatives to reduce specific expense items and to
reduce overall expense growth. These efforts will remain in force for the
balance of fiscal year 2000. As a result, Giga believes that its existing cash
and cash equivalents, cash expected to be generated from operations, net of the
repayment of debt as it becomes due, and its available credit facility will be
sufficient to fund Giga's cash needs until at least the third quarter of 2001.
However, in the event that Giga encounters difficulties in collecting
accounts receivable, experiences low or reduced subscription renewal rates or
otherwise has revenues that are lower than planned, or expenses that are higher
than planned, Giga might require additional working capital. In April 2000, Giga
established a one-year Accounts Receivable Financing Agreement (the "Agreement")
with a bank, under which Giga can borrow up to the lesser of $5.0 million or 80%
of the eligible accounts receivable, as defined by the Agreement. Upon execution
of the Agreement, Giga paid fees totaling $30,000. Loans under the Agreement
bear interest at the bank's prime rate plus 1.5 percent. A monthly collateral
handling fee of 0.375 percent is charged on the average daily financed
receivable balance outstanding. As of September 30, 2000, there were no
borrowings under this facility. However, on November 1, 2000, Giga pledged
approximately $1.2 million of accounts receivable as collateral and received
proceeds of approximately $922,000 pursuant to the Agreement. Giga repaid
approximately $320,000, leaving an outstanding balance of approximately $602,000
as of November 13, 2000. Giga is subject to various covenants under the
Agreement, the most restrictive of which requires total revenues to increase on
a quarterly basis. Giga anticipates that it will be in compliance with this
covenant at December 31, 2000. In connection with the Agreement, Giga issued
warrants to purchase 24,000 shares of Giga common stock. The warrants are
exercisable immediately at $5.00 per share and are scheduled to expire on May
25, 2005. As of September 30, 2000, none of these warrants have been exercised.
The estimated fair value of the warrants is approximately $82,000, which has
been recorded as deferred financing costs. As of September 30, 2000, Giga
recognized charges of approximately $41,000 for the amortization of the
financing costs.
On September 29, 2000, Giga was notified that it was no longer in
compliance with the minimum $50,000,000 market capitalization requirement for
continued listing on the Nasdaq National Market under its Maintenance Standards.
Giga's request that it continue to be listed on the Nasdaq National Market will
be considered at a hearing scheduled for December 8, 2000. Should the outcome of
this hearing result in a formal decision to discontinue listing on the Nasdaq
National Market, Giga would apply for listing on the Nasdaq SmallCap Market.
Although Giga believes that it will qualify for listing on the Nasdaq SmallCap
Market, there can be no assurance that delisting from the Nasdaq National Market
would not have an adverse effect on the market price or liquidity of Giga's
common stock.
18
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
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." This statement was amended
by the issuance of SFAS No. 137, "Deferral of the Effective Date of FASB
Statement No. 133," which changed the effective date of SFAS No. 133 to all
fiscal years beginning after June 15, 2000 (fiscal year 2001 for Giga ). 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 Giga anticipates that, due to its
limited use of derivative instruments, the adoption of SFAS No. 133 will not
have a significant effect on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in
Financial Statements." This statement was amended by the issuance of SAB 101B,
"Second Amendment: Revenue Recognition in Financial Statements," which delayed
the implementation date of SAB 101 until the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. SAB 101 summarizes the SEC's views in
applying generally accepted accounting principles to selected revenue
recognition issues in financial statements. Giga anticipates that the adoption
of SAB 101 will not have a significant effect on its financial position or
results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation - an
interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the
application of APB Opinion No. 25 and among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 became
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. Giga's
adoption of FIN 44 did not have a material impact on its financial position or
results of operations.
In March 2000, the Emerging Issues Task Force reached a final
consensus on Issue No. 00-02, "Accounting for Web Site Development Costs" ("EITF
00-02"), which addresses how an entity should account for costs incurred to
develop a web site. In their final consensus, the Task Force concluded that the
costs incurred during the planning stage should be expensed; the costs incurred
for activities during the web application and infrastructure development stage
should be capitalized; and generally the costs incurred during the operation
stage should be expensed. With respect to graphics costs, the Task Force
concluded the costs incurred to create the initial graphics for the web site
would be capitalized and that any subsequent updates would be expensed as
incurred, unless the updates added functionality. EITF 00-02 is effective for
web site development costs incurred for fiscal quarters beginning after June 30,
2000 (including costs incurred for projects in process as of the beginning of
the quarter.) Giga anticipates that the adoption of EITF 00-02 will not have a
significant effect on its financial position or its results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No. 140 addresses
certain issues not previously addressed in SFAS No. 125; however, it carries
forward most of the provisions of SFAS No. 125 without reconsideration. SFAS No.
140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This Statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. Giga anticipates that the adoption of SFAS No. 140 will
not have a significant effect on its financial position or its results of
operations.
19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Exposure
Based on Giga's overall interest exposure at September 30, 2000,
including all interest rate sensitive instruments, a near-term change in
interest rates would not materially affect Giga's consolidated results of
operations or financial position.
Currency Rate Exposure
Foreign currency fluctuations have not had a significant impact on
the comparison of the results of operations for the periods presented. The costs
and expenses of Giga's international subsidiaries are generally denominated in
currencies other than the United States dollar. However, since the functional
currency of Giga's international subsidiaries is the local currency, foreign
currency translation adjustments do not impact operating results, but instead
are reflected as a component of stockholders' equity. To the extent Giga expands
its international operations or changes its pricing practices to denominate
prices in foreign currencies, Giga will be exposed to increased risk of currency
fluctuation.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
In August 2000, Giga issued 3,333 shares of Common Stock upon the
exercise of warrants at an exercise price of $3.00 per share for cash proceeds
of $9,999. These warrants were originally issued in April 1998 pursuant to the
Loan and Warrant Purchase Agreement for the Bridge Notes. The shares of capital
stock issued were offered and sold in reliance upon the exemption from
registration under Section 4 (2) of the Securities Act of 1933, as amended or
Regulation D thereunder relative to sales by an issuer not involving any public
offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
11 Statement of Computation of Per Share Earnings
10.1 Amendment No. 2 to 1996 Stock Option Plan
10.2 Amendment No. 2 to 1999 Share Incentive Plan
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
Giga filed a Current Report on Form 8-K, dated July 20, 2000,
pertaining to a press release announcing Giga's results of operations
for the three months ended June 30, 2000.
21
<PAGE>
SIGNATURE
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.
November 14, 2000 By: /s/ Daniel M. Clarke
-------------------------------
Daniel M. Clarke
Senior Vice President.
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
22
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------ ------------------------
11 Statement of Computation of Per Share Earnings
10.1 Amendment No. 2 to 1996 Stock Option Plan
10.2 Amendment No. 2 to 1999 Share Incentive Plan
27 Financial Data Schedule
23
