UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Transition period from ______ to ______
Commission File Number 0-27280
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 [1] 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, 1998 was 7,488,600.
Total Number of Pages: 15
Exhibit Index is on Page: 14
<PAGE>
META Group, Inc.
INDEX
_____
Page
____
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets:
March 31, 1998 (unaudited) and December 31, 1997 3
Statements of Income (unaudited):
Three months ended March 31, 1998 and 1997 4
Statements of Cash Flows (unaudited):
Three months ended March 31, 1998 and 1997 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 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
<PAGE>
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<CAPITON>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
META Group, Inc.
BALANCE SHEETS
(in thousands)
March 31, December 31,
____________________________________________________________________________
<S> <C> <C>
Assets 1998 1997
______________________________
Current assets: (unaudited)
Cash and cash equivalents $12,120 $12,910
Marketable securities 23,004 23,700
Accounts receivable, net 22,762 26,302
Deferred commissions 1,895 1,351
Deferred tax asset 1,490 1,490
Other current assets 1,833 1,126
------- -------
Total current assets 63,104 66,879
Marketable securities 7,160 4,046
Furniture and equipment, net 3,122 2,765
Deferred tax asset 6,734 7,759
Other assets 8,707 8,004
------- -------
Total assets $88,827 $89,453
======= =======
Liabilities and Stockholders'Equity
Current liabilities:
Accounts payable $ 130 $ 974
Accrued compensation and other expenses 1,305 3,943
Deferred revenues 30,062 29,136
------- -------
Total current liabilities 31,497 34,053
------- -------
Stockholders' equity:
Preferred stock -- --
Common stock 79 78
Paid-in capital 50,264 49,983
Retained earnings 7,307 5,659
Treasury stock, at cost (320) (320)
------- -------
Total stockholders' equity 57,330 55,400
------- ------
Total liabilities and stockholders' equity $88,827 $89,453
======= =======
See notes to financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
META Group, Inc.
STATEMENTS OF INCOME
(in thousands, except per-share data)
(unaudited)
For the three months ended
March 31,
- -----------------------------------------------------------------------------
<C> <C> <C>
1998 1997
-------- -------
Revenues:
Continuous services $12,972 $ 9,172
Other, principally consulting and publications 2,170 1,639
------- -------
Total revenues 15,142 10,811
------- -------
Operating expenses:
Cost of services and fulfillment 7,538 5,532
Selling and marketing 3,446 2,341
General and administrative 1,520 1,158
Depreciation and amortization 447 333
------- -------
Total operating expenses 12,951 9,364
------- -------
Operating income 2,191 1,447
Interest income 605 465
------- -------
Income before provision for income taxes 2,796 1,912
Provision for income taxes 1,148 805
------- -------
Net income $ 1,648 $ 1,107
======= =======
Net income per diluted common share $ .20 $ .14
======= =======
Weighted average number of diluted common
shares outstanding 8,199 7,813
======= =======
Net income per basic common share $ .22 $ .16
======= =======
Weighted average number of basic
common shares outstanding 7,441 6,793
======= =======
See notes to financial statements.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
META Group, Inc.
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the three months ended
March 31,
_____________________________________________________________________________
1998 1997
<S> <C> <C>
Operating activities:
Net income $ 1,648 $ 1,107
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 447 333
Deferred income taxes 1,025 805
Changes in assets and liabilities:
Accounts receivable 3,540 3,967
Deferred commissions (544) (215)
Other current assets (707) (294)
Other assets (687) (115)
Accounts payable (844) (533)
Accrued compensation and other expenses (2,638) (2,893)
Deferred revenues 926 (1,701)
------- -------
Net cash provided by operating activities 2,166 461
------- -------
Investing activities:
Capital expenditures (804) (489)
Investments in marketable securities (2,418) (215)
Investments and advances (16) (506)
------- -------
Net cash used in investing activities (3,238) (1,210)
------- -------
Financing activities:
Proceeds from exercise of stock options 282 227
------- -------
Net cash provided by financing activities 282 227
------- -------
Net decrease in cash and cash equivalents (790) (522)
Cash and cash equivalents, beginning of period 12,910 19,335
------- -------
Cash and cash equivalents, end of period $12,120 $18,813
======= =======
Supplemental information:
Cash paid during the period for income taxes $ 123
=======
See notes to financial statements.
</TABLE>
<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. Accordingly,
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, 1997. 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
_____________________
During the quarter ended March 31, 1998, the Company recorded a tax
provision of $1.1 million, reflecting an effective tax rate of 41%. The
Company's effective tax rate has declined from 42% in the quarter ended
March 31, 1997, due to the continued expansion of business in states with
lower income tax rates. The Company was not required to pay federal income
tax, due to the utilization of net operating loss carryforwards. The total
deferred tax asset, including the current portion, decreased to $8.2 million
at March 31, 1998, from $9.2 million at December 31, 1997, as the Company
utilized its net operating loss carryforwards to offset taxable income.
<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,
principally the Company's Annual Report on Form 10K for the year ended
December 31, 1997.
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 ("IT") industries to IT users and vendors. 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, constituted approximately 86% and
85% of the Company's total revenues for the quarters ended March 31, 1998 and
1997, 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 sequentially and year-over-year every
quarter since the Company's inception and increased 41% to $51.9 million at
March 31, 1998 from $36.7 million at March 31, 1997. At March 31, 1998, the
Company had 3,495 Continuous Services subscribers in approximately 1,475
client organizations worldwide, as compared to 2,820 subscribers in 1,200
organizations at March 31, 1997.
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, and general and administrative
expenses. 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.
<PAGE> 8
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
TOTAL REVENUES Total revenues increased 40% to $15.1 million in the quarter
ended March 31, 1998, from $10.8 million in the quarter ended March 31, 1997.
Revenues from Continuous Services increased 41% to $13.0 million in the
quarter ended March 31, 1998, from $9.2 million in the quarter ended March 31,
1997. The increases in total revenues and revenues from Continuous Services
were primarily due to the recognition of revenue from the three Continuous
Services launched by the Company in the first quarter of 1997, growth in the
Company's more established core research services, expansion of renewable
publications subscriptions, and continued expansion of the Company's
international business. The Company increased Contract Value 41% to $51.9
million at March 31, 1998, from $36.7 million at March 31, 1997. The Company
grew its subscriber client base 24% to 3,495 Continuous Service clients at
March 31, 1998 from 2,820 clients at March 31, 1997.
Other revenues, consisting principally of revenues from consulting and
publications, increased 32% to $2.2 million in the quarter ended March 31,
1998, from $1.6 million in the quarter ended March 31, 1997, and declined as
a percentage of total revenues to 14% from 15%. The increase in other
revenues was primarily attributable to the expansion of META Group Consulting
activities.
Continuous Services revenues attributable to international clients
increased 58% in the quarter ended March 31, 1998, from the quarter ended
March 31, 1997, and increased as a percentage of Continuous Services revenue
to 13% from 12%. The increase was primarily due to the increased demand for
the Company's services in existing international markets. The Company
currently has sales representation in 29 countries. 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
36% to $7.5 million in the quarter ended March 31, 1998, from $5.5 million in
the quarter ended March 31, 1997, principally due to increased staffing for
analyst, consultant, and fulfillment positions and related compensation
expense. Cost of services and fulfillment decreased as a percentage of total
revenues to 50% from 51%. The client/analyst ratio for all Continuous Services
increased to 42-to-1 at March 31, 1998, as compared to a ratio of 40-to-1 at
March 31, 1997, as the three Continuous Services launched in 1997 grew. While
the Company anticipates continuing increases in the amount of costs of
services and fulfillment, it expects that such expenses will continue to
decline slightly as a percentage of total revenue.
SELLING AND MARKETING EXPENSES Selling and marketing expenses increased 47%
to $3.4 million in the quarter ended March 31, 1998, from $2.3 million in the
quarter ended March 31, 1997, and increased as a percentage of total revenues
to 23% from 22%. The increase in expenses was principally due to increased
sales-related compensation and promotion expenses associated with further
development of the direct marketing sales channel, plus the expansion of the
Company's domestic sales force and international sales representation. 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 remain approximately the same.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
increased 31% to $1.5 million in the quarter ended March 31, 1998, from
$1.2 million in the quarter ended March 31, 1997, and decreased as a
percentage of total revenues to 10% from 11%. The increase in expenses was
principally due to increased finance, accounting, human resources, and
corporate IT staffing and expenses required to support the growth of the
<PAGE> 9
Company. The Company anticipates continuing increases over the prior year
in the amount of general and administrative expenses, but expects such
expenses to remain stable as a percentage of total revenues.
DEPRECIATION AND AMORTIZATION Depreciation and amortization expense
increased 34% to $447,000 in the quarter ended March 31, 1998, from $333,000
in the quarter ended March 31, 1997. The increase in depreciation and
amortization expense was principally due to purchases of computer equipment
and office furniture required to support business growth.
INTEREST INCOME Interest income increased to $605,000 in the quarter ended
March 31, 1998, from $465,000 in the quarter ended March 31, 1997, due to an
increase in the Company's cash and marketable securities balances, which
resulted from a positive cash flow from operations in 1997 and the first
quarter of 1998.
PROVISION FOR INCOME TAXES Provision for income taxes of $1.1 million was
recorded for the quarter ended March 31, 1998, as compared to a provision of
$805,000 recorded for the quarter ended March 31, 1997, reflecting an
effective tax rate of 41% and 42%, respectively. The Company's effective
tax rate has declined due to the continued expansion of business in states
with lower income tax rates. 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,
decreased to $8.2 million at March 31, 1998, from $9.2 million at December 31,
1997, as a result of utilizing existing net operating loss carryforwards
to offset taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $2.2 million of cash from operations during the three
months ended March 31, 1998, compared with $.5 million of cash generated
from operations in the three months ended March 31, 1997. The increase in
cash generated from operations in 1998 is primarily due to increased net
income and deferred revenues.
The Company used $804,000 of cash in the three months ended March 31, 1998,
compared with $489,000 in the three months ended March 31, 1997, 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, 1998, the Company had no material commitments for capital
expenditures.
The Company regularly invests excess funds in investment-grade, short-term
commercial paper, debt instruments, 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 sheets.
In addition, the Company invests in longer-term, but callable, higher-yield
US Government Agency marketable debt securities. Generally, these securities
are purchased in denominations of $1 million to $5 million, and held to
maturity.
<PAGE> 10
As of March 31, 1998, the Company had cash and cash equivalents of $12.1
million marketable securities of $30.2 million, and working capital of
$31.6 million. 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 for the foreseeable future.
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 involving 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, understand and anticipate rapidly changing technologies and
market trends so as to keep its analysis focused on the changing needs of its
clients, and deliver products and services of sufficiently high quality
and timeliness to withstand competition from competitors that 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 independent
international sales representative organizations, reliance on sales entities
that 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.
<PAGE> 11
Furthermore, the Company's quarterly operating results may fluctuate
significantly due to various factors. Because 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 acquisition and integration into
the Company of new business, 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> 12
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, 1997, 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, 1998.
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 recomputation of per-share earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company for the
quarter ending March 31, 1998.
<PAGE> 13
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, 1998 By:/s/ Bernard F. Denoyer
_______________________________
Bernard F. Denoyer
Senior Vice President, Finance,
Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial and Accounting Officer)
<PAGE> 14
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
- ------- ---------------------------------------------- -------------
11.1 Statement re computation of per-share earnings 15
27.1 Financial Data Schedule 16
_________________
<PAGE> 15
EXHIBIT 11.1
META Group, Inc.
EXHIBIT TO QUARTERLY REPORT ON FORM 10-Q
Computation of Net Income Per Common Share
For the three months ended
March 31,
____________________________________________________________________________
1998 1997
__________ __________
Net income................................... $1,648,000 $1,107,000
========== ==========
Weighted average number of common and common
equivalent shares outstanding:
Average number of common shares
outstanding during the period............ 7,441,133 6,792,995
Add common share equivalents -- options
to purchase common shares................. 758,332 1,019,722
__________ __________
Total ................................. 8,199,465 7,812,717
========== ==========
Net income per diluted common share........... $.20 $.14
==== ====
Net income per basic common share............. $.22 $.16
==== ====
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<FISCAL-YEAR-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 12,120
<SECURITIES> 23,004
<RECEIVABLES> 23,285
<ALLOWANCES> (523)
<INVENTORY> 0
<CURRENT-ASSETS> 63,104
<PP&E> 5,665
<DEPRECIATION> (2,543)
<TOTAL-ASSETS> 88,827
<CURRENT-LIABILITIES> 31,497
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 57,251
<TOTAL-LIABILITY-AND-EQUITY> 88,827
<SALES> 0
<TOTAL-REVENUES> 15,142
<CGS> 7,538
<TOTAL-COSTS> 7,538
<OTHER-EXPENSES> 5,413
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,796
<INCOME-TAX> 1,148
<INCOME-CONTINUING> 1,648
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,648
<EPS-BASIC> .22
<EPS-DILUTED> .20
</TABLE>
