<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1997
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 0-27280
META Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-0971675
--------------------- ------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
208 Harbor Drive, Stamford, Connecticut 06912-0061
---------------------------------------------------
(Address of principal executive offices, including Zip Code)
(203) 973-6700
--------------
(Registrant's telephone number, including area code)
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: The number of shares
of the issuer's Common Stock, $.01 par value per share, outstanding as of
April 30, 1997 was 7,307,312.
Total Number of Pages: 14
Exhibit Index is on Page 13
___________________________________________________________________________
<PAGE> 2
META Group, Inc.
INDEX
Page
____
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets:
March 31, 1997 (unaudited) and December 31, 1996 3
Statements of Income (unaudited):
Three months ended March 31, 1997 and 1996 4
Statements of Cash Flows (unaudited):
Three months ended March 31, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
META Group, Inc.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
_________ ___________
<S> <C> <C>
Assets
Current assets: (unaudited)
Cash and cash equivalents $18,813 $19,335
Marketable securities 15,899 15,684
Accounts receivable, net 14,169 18,136
Deferred commissions 1,690 1,475
Deferred tax asset 1,175 1,175
Other current assets 775 481
------- -------
Total current assets 52,521 56,286
Furniture and equipment, net 2,486 2,330
Deferred tax asset 10,308 5,532
Other assets 6,644 6,023
------- ------
Total assets $71,959 $70,171
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 304 $ 837
Accrued compensation and other expenses 895 3,721
Deferred revenues 21,184 22,885
------- -------
Total current liabilities 22,383 27,443
Stockholders' equity:
Preferred stock
Common stock 78 68
Additional paid-in capital 48,819 43,088
Retained earnings (accumulated deficit) 999 (108)
Treasury stock, at cost (320) (320)
------ ------
Total stockholders' equity 49,576 42,728
------- -------
Total liabilities and stockholders' equity $71,959 $70,171
======= =======
See notes to financial statements.
</TABLE>
<PAGE> 4
META Group, Inc.
STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
_____________________________________________________________________________
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Continuous services $ 9,172 $6,707
Other, principally consulting and conferences 1,639 1,431
------ ------
Total revenues 10,811 8,138
Operating expenses:
Cost of services and fulfillment 5,532 4,541
Selling and marketing 2,341 1,792
General and administrative 1,158 802
Depreciation and amortization 333 225
------- ------
Total operating expenses 9,364 7,360
------- ------
Operating income 1,447 778
Interest income 465 464
------- ------
Income before provision for income taxes 1,912 1,242
Provision for income taxes 805 523
------- ------
Net income $ 1,107 $ 719
======= ======
Net income per common and common
equivalent share $ .14 $ .09
======= ======
Weighted average common and common equivalent
shares outstanding 7,964 7,978
======= ======
</TABLE>
See notes to financial statements.
<PAGE> 5
META Group, Inc.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
____________________________________________________________________________
1997 1996
---------- ----------
<S> <C> <C>
Operating activities:
Net income $1,107 $ 719
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 333 225
Deferred income taxes 805 464
Changes in assets and liabilities:
Accounts receivable 3,967 1,338
Deferred commissions (215) (332)
Other current assets (294) (37)
Other assets (115) (32)
Accounts payable (533) (676)
Accrued compensation and other expenses (2,893) (2,277)
Deferred revenues (1,701) 438
------- ------
Net cash provided by (used in) operating activities 461 (170)
------- ------
Investing activities:
Capital expenditures (489) (301)
Investments in marketable securities (215)
Investments and advances (506)
------- ------
Net cash used in investing activities (1,210) (301)
Financing activities:
Proceeds from exercise of stock options 227 118
Costs related to Initial Public Offering (33)
------- ------
Net cash provided by financing activities 227 85
------- ------
Net decrease in cash and cash equivalents (522) (386)
Cash and cash equivalents, beginning of period 19,335 35,525
------- -------
Cash and cash equivalents, end of period $18,813 $35,139
======= =======
</TABLE>
See notes to financial statements.
<PAGE> 6
META Group, Inc.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Interim Financial Statements
______________________________________
The accompanying unaudited interim financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission for reporting on Form 10-Q. Accord-
ingly, certain information and footnote disclosures required for complete
financial statements are not included herein. It is recommended that these
financial statements be read in conjunction with the financial statements
and related notes of META Group, Inc. (the "Company") as reported on the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial position, results of operations and cash flows at the dates and
for the periods presented have been included.
Note 2 - Income Taxes
______________________
The Company recorded a tax provision of $805,000 and $523,000 during
the quarter ended March 31, 1997 and 1996, respectively, reflecting an
effective tax rate of 42%. The Company was not required to pay federal
income tax in either quarter due to the utilization of net operating loss
carryforwards. Total deferred tax asset, including the current portion,
increased to $11.5 million at March 31, 1997 from $6.7 million at
December 31, 1996 as a result of recognition of compensation to employees
for tax purposes from the exercise of non-qualified stock options.
Note 3 - Reclassification
__________________________
Under the terms of the Company's international sales representative
agreements, the Company realizes revenues from the international sales
representative organizations at rates of 40% to 60% of amounts billed to
those clients. Revenues and expenses for the quarter ended March 31, 1996
have been reclassified to conform to the current year presentation of
revenues and expenses attributable to international operations.
<PAGE> 7
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below contains trend analysis and other
forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
factors set forth below under "Certain Factors That May Affect Future
Results" and in the Company's other filings with the Securities and
Exchange Commission.
Overview
META Group is an independent market assessment company providing
research and analysis of developments, trends and organizational issues
relating to the computer hardware, software, communications and related
information technology industries to users and vendors of information
technology ("IT"). IT user organizations utilize META Group's research,
analysis and recommendations to develop and employ cost-effective strategies
for selecting and implementing timely IT solutions and for aligning these
solutions with business priorities. IT vendors use META Group's services
for help in product positioning, marketing and market planning, as well as
for internal IT decision making.
Continuous Services subscriptions, which are annually renewable
contracts and generally payable by clients in advance, comprised
approximately 85% and 82% of the Company's total revenues for the quarters
ended March 31, 1997 and 1996, respectively. Billings attributable to the
Company's Continuous Services are initially recorded as deferred revenues
and then recognized pro rata over the contract term. The Company's other
revenues are derived from project consulting, benchmarking, conferences,
speaker engagement fees and publications. The Company's consulting clients
typically consist of Continuous Services clients seeking additional advice
tailored to their individual IT requirements.
One measure of the volume of the Company's business is its annualized
"Contract Value", which the Company calculates as the aggregate annualized
subscription revenue recognized from all Continuous Services contracts in
effect at a given point in time, without regard to the remaining duration
of such contracts. While Contract Value is not necessarily indicative of
future revenues, Contract Value has grown every quarter since the Company's
inception and increased 37% to $36.7 million at March 31, 1997 from $26.8
million at March 31, 1996. At March 31, 1997, the Company had over 2,820
Continuous Services subscribers in approximately 1,200 client organizations
worldwide.
Continuous Services revenues attributable to international clients are
billed and collected by the Company's international sales representative
organizations. The Company realizes revenues from the international sales
representative organizations at rates of 40% to 60% of amounts billed to
those clients.
The Company's operating expenses consist of cost of services and
fulfillment, selling and marketing expenses, general and administrative
expenses and depreciation and amortization expense. Cost of services and
fulfillment represents the costs associated with production and delivery of
the Company's products and services and includes the costs of research,
development and preparation of periodic reports, analyst telephone
consultations, executive briefings and conferences, publications,
consulting services, new product development and all associated editorial
and support services. Selling and marketing expenses include the costs of
salaries, commissions and related benefits for such personnel, travel and
promotion. General and administrative expenses include the costs of the
finance and accounting departments, legal, human resources, corporate IT
and other administrative functions of the Company.
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
TOTAL REVENUES Total revenues increased 33% to $10.8 million in the quarter
ended March 31, 1997 from $8.1 million in the quarter ended March 31, 1996.
Revenues from Continuous Services increased 37% to $9.2 million in the
quarter ended March 31, 1997 from $6.7 million in the quarter ended
March 31, 1996. The increases in total revenues and revenues from
Continuous Services were primarily due to continued expansion of
<PAGE> 8
the Company's domestic sales force, increases in average selling prices,
and growing worldwide market acceptance of the Company's products. The
Company increased Contract Value 37% to $36.7 million at March 31, 1997
from $26.8 million at March 31, 1996. The Company grew its subscriber
client base 25% to 2,820 Continuous Service clients at March 31, 1997
from 2,250 clients at March 31, 1996.
Other revenues, consisting principally of revenues from consulting,
conferences and publications, increased 15% to $1.6 million in the quarter
ended March 31, 1997 from $1.4 million in the quarter ended March 31, 1996,
and decreased as a percentage of total revenues to 15% from 18%. The
increase in other revenues was primarily attributable to the expansion of
the META Group Consulting practice and the increase in paid attendance at
the Company's major conferences.
Revenues attributable to international clients increased 129% to
$1.1 million in the quarter ended March 31, 1997 from $545,000 in the
quarter ended March 31, 1996, and increased as a percentage of total
Continuous Services revenues to 12% from 8%. The increase was primarily
due to the growth of the Company's products in existing international
markets and, to a lesser extent, the expansion in the total number of
international sales representative organizations. The Company expects that
international revenues will continue to account for a significant portion
of its total revenues.
COST OF SERVICES AND FULFILLMENT Cost of services and fulfillment
increased 22% to $5.5 million in the quarter ended March 31, 1997 from
$4.5 million in the quarter ended March 31, 1996 principally due to
increased analyst staffing and related compensation expense. During the
quarter ended March 31, 1997, the Company launched three new Continuous
Services, while it had no development costs associated with new services
in the quarter ended March 31, 1996. Cost of services and fulfillment
decreased as a percentage of total revenues to 51% from 56%. This decrease
primarily reflects the growth in the Company's increased average selling
prices to $16,000 per Continuous Service subscription in the quarter
ended March 31, 1997 versus $14,400 during the quarter ended March 31, 1996.
Within the seven core Continuous Services, the average client/analyst ratio
decreased to 44-to-1 during the quarter ended March 31, 1997 as compared
to a ratio of 46-to-1 during the quarter ended March 31, 1996, which
increased cost of services as a percent to sales.
SELLING AND MARKETING EXPENSES Selling and marketing expenses increased
31% to $2.3 million in the quarter ended March 31, 1997 from $1.8 million
in the quarter ended March 31, 1996 and remained constant as a percentage
of total revenues at 22%. The increase in expenses was principally due to
increased sales-related compensation expense associated with increased
revenues, as well as higher marketing and promotional expenditures related
to the launch of new services. While the Company anticipates continuing
increases in the amount of selling and marketing expenses, it expects that
such expenses as a percentage of total revenues will increase only slightly.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
increased 44% to $1.2 million in the quarter ended March 31, 1997 from
$802,000 in the quarter ended March 31, 1996 and increased as a percentage
of total revenues to 11% from 10%. The increase in expenses was principally
due to increased finance, accounting and corporate IT staffing and expenses
required to support the Company's continued growth. The Company anticipates
continuing increases over the prior year in the amount of general and
administrative expenses and expects such expenses to decrease slightly as
a percentage of total revenues.
DEPRECIATION AND AMORTIZATION Depreciation and amortization expense
increased 48% to $333,000 in the quarter ended March 31, 1997 from $225,000
in the quarter ended March 31, 1996. The increase in depreciation and
amortization expense was principally due to purchases of computer equipment
and office furniture required to support business growth, and the completion
of leasehold improvements associated with the relocation of the Company's
Reston, Virginia and Waltham, Massachusetts offices during late 1996.
INTEREST INCOME Interest income was $465,000 in the quarter ended
March 31, 1997, compared to $464,000 in the quarter ended March 31, 1996.
Cash balances remained relatively stable from twelve months ago, due to a
positive cash flow from operations during the year ended December 31, 1996,
offset by investments made in several companies during 1996.
PROVISION FOR INCOME TAXES Provision for income taxes of $805,000 was
recorded for the quarter ended March 31, 1997, as compared to a provision
of $523,000 recorded for the quarter ended March 31, 1996, reflecting an
effective tax rate of 42% for both quarters. The Company was not required
to pay federal income tax in either quarter due to the utilization of net
operating loss carryforwards. Total deferred tax asset, including the
current portion, increased to $11.5 million at March 31, 1997 from $6.7
million at December 31, 1996, as a result of the recognition of
non-qualified stock option exercises as compensation to employees for
tax purposes.
<PAGE> 9
EARNINGS PER SHARE EPS increased to $.14 per common share for the first
quarter of 1997 as compared to $.09 for the first quarter of 1996 as a
result of increased net income. The Company's weighted average shares
outstanding remained constant at 7,964,000 versus 7,978,000 shares in the
first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $461,000 of cash from operations during the
quarter ended March 31, 1997 compared with $170,000 of cash used in
operations in the quarter ended March 31, 1996. The increase in cash
generated from operations in 1997 is primarily due to the collection of
accounts receivable as of December 31, 1996, partially offset by payment
of 1996 bonuses in the first quarter of 1997.
The Company used $489,000 of cash in the quarter ended March 31, 1997
and $301,000 in the quarter ended March 31, 1996 for the purchase of
furniture, equipment, computers and related software for use by the
Company's employees. The Company expects that additional purchases of
equipment will be made as the Company's employee base continues to grow.
As of March 31, 1997, the Company had no material commitments for capital
expenditures.
The Company regularly invests excess funds in high quality short-term
investments, such as repurchase agreements, short-term commercial paper and
money market funds. As these investments generally have terms of less than
three months, they are included under the caption "Cash and cash equivalents"
in the balance sheet.
In addition, the Company invests in other short-term (less than one
year maturity), high quality investment grade marketable debt securities.
Generally, these securities are purchased in denominations of $5 million
and held to maturity. No losses have been experienced on such investments.
As of March 31, 1997, the Company had cash and cash equivalents of
$18.8 million, marketable securities of $15.9 million and working capital
of $30.1 million. The Company currently has an unused $1.0 million bank
line of credit. The Company believes that existing cash balances and
anticipated cash flows from operations will be sufficient to meet its
working capital and capital expenditure requirements at least through the
following twelve months.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of the future financial
performance of the Company. However, from time to time, information provided
by the Company or statements made by its employees may contain "forward-
looking" information that involve risks and uncertainties. In particular,
statements contained in this Form 10-Q that are not historical facts
(including, but not limited to, statements concerning international
revenues, anticipated operation expense levels and such expense levels
relative to the Company's total revenues) constitute forward-looking
statements and are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results of
operations and financial condition have varied and may in the future vary
significantly from those stated in any forward-looking statements. Factors
that may cause such differences include, without limitation, the risks,
uncertainties and other information discussed below, as well as the
accuracy of the Company's internal estimates of revenue and operation
expense levels. Each of these factors, and others, are discussed from
time to time in the filings made by the Company with the Securities and
Exchange Commission.
The Company's future operating results are subject to substantial risks
and uncertainties. The Company currently derives most of its revenues from
subscriptions to its Continuous Services. As a result, any decline in the
Company's ability to secure subscription renewals may have a material
adverse effect on the Company's results of operations. The Company's
ability to secure subscription renewals, at favorable average selling
prices, as well as to successfully market and sell its consulting services,
is dependent upon the Company's ability to deliver consistent, high-quality
and timely analysis and advice with respect to issues, developments and
trends that clients view as important. The Company's successful delivery of
such analysis and advice is, in turn, dependent upon many factors,
including, among other things: its ability to recruit and retain highly
talented professionals in a competitive job market, to understand and
anticipate rapidly changing technologies and market trends so as to keep
its analysis focused on the changing needs of its clients, and to deliver
<PAGE> 10
products and services of sufficiently high quality and timeliness to
withstand competition from competitors which may have greater financial,
information gathering and marketing resources than the Company. The
Company's ability to market and sell its products and services could also
be adversely affected by the emergence of new competitors into one or more
of the market segments addressed by the Company's products and services,
which could cause pricing pressure and loss of market share. In addition,
a significant portion of the Company's revenues are attributable to
international clients, which may be adversely affected by factors including
difficulties in developing and managing relationships with international
sales representative organizations, reliance on sales entities which the
Company does not control, greater difficulty in maintaining direct client
contact, fluctuations in exchange rates, adverse political and economic
conditions, tariffs and other trade barriers, longer accounts receivable
collection cycles and adverse tax consequences. The Company's future
financial results also depend in part on the development or acquisition of
new products and services, which may not successfully be achieved due to
the inherent costs and risks associated with development, assimilation and
marketing of a new product or service, as well as the Company's limited
experience in introducing new products and services.
Furthermore, the Company's quarterly operating results may fluctuate
significantly due to various factors. Since a disproportionately large
portion of the Company's Continuous Services contracts expire in the fourth
quarter of each year, the Company incurs operating expenses in the fourth
quarter at a higher level than would otherwise be required by its
sequential growth, and such increased expenses are not normally offset
immediately by higher revenues. In addition, the Company's operating
results may fluctuate as a result of a variety of other factors, including
the level and timing of renewals of subscriptions to Continuous Services,
the timing and amount of business generated by the Company, the mix of
domestic versus international business, the timing of the development,
introduction and marketing of new products and services, the timing of the
hiring of research analysts, changes in the spending patterns of the
Company's target clients, the Company's accounts receivable collection
experience, changes in market demand for IT research and analysis and
competitive conditions in the industry. Due to these factors, the Company
believes period-to-period comparisons of results of operations are not
necessarily meaningful and should not be relied upon as an indication of
future results of operations. The potential fluctuations in the Company's
operating results make it likely that, in some future quarter, the Company's
operating results will be below the expectations of securities analysts and
investors, which would have a material adverse effect on the price of the
Company's Common Stock.
<PAGE> 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
_________________
As disclosed in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, in November, 1995, a complaint was filed in
the Bridgeport Judicial District of the Superior Court of Connecticut by
a former consultant to the Company naming the Company and its Chief
Executive Officer as defendants. There have been no material developments
in this matter during the quarter ended March 31, 1997.
The Company is a party to certain other legal proceedings. However,
the Company believes that none of these proceedings is likely to have a
material adverse effect on the Company's business, results of operations
or financial condition.
Item 6. Exhibits and Reports on Form 8-K.
_________________________________
(a) Exhibits.
_________
Exhibit
Number Description
_______ ____________
11.1 Statement re computation of per-share earnings
(b) Reports on Form 8-K.
____________________
There were no reports on Form 8-K filed by the Company for
the quarter ending March 31, 1997.
<PAGE> 12
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.
META Group, Inc.
Date: May 14, 1997 By:/s/ Bernard F. Denoyer
_________________________________________
Bernard F. Denoyer
Vice President, Finance, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
<PAGE> 13
EXHIBIT INDEX
Exhibit
Number Description
_______ _________________________________________________________
11.1 Statement re computation of per-share earnings
27.1 Financial Data Schedule
___________
<PAGE> 14
EXHIBIT 11.1
META Group, Inc.
EXHIBIT TO ANNUAL REPORT ON FORM 10-Q
Computation of Net Income Per Common Share
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
__________________ __________________
<S> <C> <C>
Net income $1,107,000 $719,000
Weighted average number of common and
common equivalent shares outstanding:
Average number of common shares
outstanding during the period 6,796,922 5,553,282
Add common share equivalents -
options to purchase common shares 1,167,248 2,425,140
---------- ----------
7,964,170 7,978,422
---------- ----------
Net income per common share $.14 $.09
---------- -----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 18,813
<SECURITIES> 15,899
<RECEIVABLES> 14,649
<ALLOWANCES> (480)
<INVENTORY> 0
<CURRENT-ASSETS> 52,521
<PP&E> 4,306
<DEPRECIATION> (1,820)
<TOTAL-ASSETS> 71,959
<CURRENT-LIABILITIES> 22,383
<BONDS> 0
0
0
<COMMON> 78
<OTHER-SE> 49,498
<TOTAL-LIABILITY-AND-EQUITY> 71,959
<SALES> 0
<TOTAL-REVENUES> 10,811
<CGS> 5,532
<TOTAL-COSTS> 5,532
<OTHER-EXPENSES> 3,832
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,912
<INCOME-TAX> 805
<INCOME-CONTINUING> 1,107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,107
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
