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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
( X) Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934.
For the Fiscal Year Ended: December 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
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META Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-0971675
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
208 Harbor Drive, Stamford, Connecticut 06912-0061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 973-6700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K . ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 22, 1999 (based on the closing price as quoted by Nasdaq
National Market as of such date) was $178,871,524.
As of March 22, 1999, 11,930,846 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement relating to the Company's Annual
Meeting of Stockholders to be held on May 20, 1999 are incorporated by reference
into Part III hereof.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
General
META Group, Inc. ("META Group") and its subsidiary, The Sentry Group,
Inc. ("Sentry"), collectively, the "Company" 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 and revenue enhancing
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.
META Group offers clients annual subscriptions to 14 different research
services ("Continuous Services") as part of its INsights product family. These
services are focused on specific areas of IT, IT issues related to a specific
vertical market, or specific needs of those within the IT organization.
Recommendations to clients are based on projections and analyses of important
industry trends, experiences of other companies, events and announcements, key
issues and business practices, as well as new technologies, products and
services.
The Company offers consulting services through its META Group
Consulting division ("MGC") as part of its INitiatives product family.
A significant portion of MGC clients are also Continuous Services subscribers.
The acquisition by the Company of Sentry in October 1998 significantly expanded
MGC's business value consulting practice, and compliments the existing sourcing,
benchmarking, technology application, e-commerce and other consulting practices
within MGC. The Company also offers a variety of targeted publications as part
of its INforum product family. See "Business - Products and Services -
INitiatives: META Group Consulting" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Factors That May Affect
Future Results - Risk of Failure to Integrate Recent Acquisition and Risks
Associated with Potential Acquisitions."
META Group targets as its clients substantial commercial and
governmental users of IT, as well as IT vendors. As of December 31, 1998, the
Company had over 4,000 subscribers in approximately 1,750 client organizations,
including 42% of the Fortune 500 companies, 67% of the top 100 Fortune 500
companies and 93% of the top 15 Fortune 500 companies. During each of 1998, 1997
and 1996, approximately 75% of META Group's clients renewed one or more
subscriptions.
From time to time, information provided by the Company or statements
made by its employees may contain "forward-looking" information which involve
risks and uncertainties. In particular, the statements set forth under the
heading "The META Group Solution" below regarding the Company's objectives to
expand the range of clients it serves, further penetrate its existing client
base, extend its product line and broaden the scope of its services are "forward
looking" statements. The Company's actual results may vary significantly from
<PAGE> 3
those stated in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, difficulties in the timely
adjustment and/or expansion of the Company's product offerings to encompass new
technologies and market demands, difficulties in developing, acquiring and/or
integrating new product offerings, difficulties in attracting and retaining
qualified personnel, competition, changes in the mix between the Continuous
Services business and the Consulting Services business, changes in the mix
between domestic and international business, changes in the rates of customer
renewals, difficulties in gaining entry into new markets for the Company's
products and services and limitations on financial and other resources required
to engage in product development and sales and marketing activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness Disclosure" and "--Certain Factors That May
Affect Future Results" for a discussion of certain factors which may cause
actual results to vary significantly from those stated in any forward-looking
statement.
Specific comparative financial information may be found in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the notes to the consolidated financial statements.
META GROUP(R) is a registered trademark of the Company. The META GROUP
logo(TM), META(TM), META DELTAS(TM), META FAX(TM), META FLASH(TM), and META
TRENDS(TM) are trademarks of the Company. This report also includes trademarks
and trade names of companies other than META Group.
Industry Background
Businesses and other organizations remain dependent on IT for
competitive success, which has led to sustained growth in IT-related
expenditures. This market growth is being driven by many factors, including
intensified domestic and global competition, the Internet and electronic
commerce, large-scale migration from legacy mainframe systems to distributed
architectures, the accelerating pace of technological change, shortened product
life-cycles, outsourcing and widespread business process re-engineering and
corporate downsizing.
At the same time, the decision-making process involved in the planning,
selection and implementation of IT solutions is growing more complex. Prior to
the emergence of open systems and distributed computing, organizations faced
easier technology choices. Traditionally, IT managers would simply purchase a
vertically integrated solution (hardware, operating system, applications and
services) from one of the large systems vendors. Today, IT decision-makers must
evaluate a variety of new and rapidly evolving products from multiple vendors
and consider the interoperability of these products with one another and with
existing legacy systems.
As IT has become more entwined with day-to-day business operations and
strategic planning, a wider range of individuals are participating in the IT
decision-making process. With the shift to distributed computing, IT decision
making has spread to individual business units. Furthermore, as IT supports more
business-critical functions and businesses increasingly interact with
customer/suppliers through the Internet/World Wide Web, IT decision-makers at
all levels are becoming key participants in the planning and implementation of
<PAGE> 4
business decisions and are often being called upon to be strategic drivers of
business and technology innovation. As IT assumes a more business-critical role,
senior executives of organizations are compelled to take a more active role in
IT planning and decision making.
As a result of these trends, there is an increasing need for a level of
IT guidance that often cannot be effectively supported by the internal resources
of a single organization. Organizations are more frequently turning to outside
sources for help with strategic and tactical advice in planning, selecting and
implementing IT; however, historically, available solutions have had significant
limitations. Software and equipment vendors generally offer advice biased toward
their own products or services, while often understating interoperability
issues. Many professional service firms and implementation companies provide
technical advice, but they have incentives to promote solutions that require
their services and often have purchasing and cooperative relationships with
particular hardware and software vendors. Some independent market research firms
provide vendor-neutral advice, but most target technology vendors rather than
the user community. Those market research firms that do target users typically
do not offer advice over a full range of technology offerings. As a result,
there is a need for vendor-neutral, user-focused, broad-based IT market
research, coupled with personalized advice within the specific context of an
organization's business environment and IT requirements.
The META Group Solution
The Company addresses the growing demand for user-focused guidance by
providing vendor-neutral IT research, analysis and advice to substantial
commercial and governmental users of IT. META Group services are also utilized
by IT vendors for help in product positioning, marketing and market planning as
well as for internal IT decision making. META Group Continuous Services assist
clients in making more informed, timely and cost-effective decisions in the
context of the clients' business and technology environments. Each Continuous
Service is highly focused on enhancing the client's ability to reduce and/or
contain the cost of IT, reduce risk, assess vendor business practices and
strategies, evaluate products and technologies, negotiate with vendors, develop
financial strategies and formulate IT architectures and strategic plans.
META Group differentiates its services from those offered by most other
IT research firms by delivering IT industry coverage through more comprehensive
and integrated service segments, a higher level of personal service and a
greater emphasis on client/analyst interaction. To provide this level of
service, the Company maintains a client/analyst ratio no higher than 50-to-1 in
each of its service segments.
The Company's research is designed to alert clients to the sometimes
subtle and unforeseen opportunities and risks inherent in complex IT business
decisions. Although META Group research contains concrete conclusions and
recommendations, a client seeking to understand the complex IT issues addressed
in written research often requires further explanation and analysis in the
context of the client's unique business environment and IT requirements.
Accordingly, all META Group Continuous Service clients have direct access to the
Company's analysts, who adapt the Company's published conclusions and
recommendations to the client's specific IT environment. META Group analysts are
available to clients through direct telephone consultations, customized on-site
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and regional executive briefings and in-depth quarterly and annual conferences,
as well as teleconferences addressing significant current IT developments.
META Group believes its proactive involvement in clients' specific IT
problem solving situations enables it to provide actionable advice. META Group
analysts have real-time access to a broad base of current user experience
spanning vertical industries and related technologies. This first-hand practical
knowledge is disseminated throughout the Company at weekly meetings of META
Group's entire research staff. As a result of this interaction and broad
knowledge base, META Group analysts deliver more informed conclusions and
recommendations. META Group believes that its interactive approach provides
significant value to senior management and IT decision-makers by enhancing their
ability to make sound, practical and cost-effective decisions.
META Group's objective is to leverage its reputation, comprehensive
research model, knowledge base, customer relationships and domestic and
international sales network to expand the range of clients it serves, further
penetrate its existing client base, extend its product line and broaden the
scope of its services.
Products and Services
META Group's services and products are designed to complement each
other and provide flexible access to the industry's foremost market assessment
and analytical expertise in the following categories:
o CONTINUOUS SERVICES (marketed under the product name INsights)
o CONSULTING (marketed under the product name INitiatives)
o PUBLICATIONS (marketed under the product name INforum)
INsights: Continuous Services
INsights is META Group's product family of Continuous Services offering
actionable research, unlimited analyst interaction, and on-site consultation
with META Group analysts when clients need to further understand industry
trends, vendor assessments, and the business application of technology solutions
- - applying analyst insight and research to their specific set of decision-making
opportunities. These services have been developed to meet the varied needs of
client organizations: technology-focused services (infrastructure, architecture,
and applications); industry-focused services (specific to industries such as
energy, insurance, and healthcare); and senior executive-focused services (such
as META Group's Executive Directions service).
META Group believes its Continuous Services provide comprehensive
coverage of virtually all relevant IT and business related issues faced by its
clients. META Group applies a consistent approach to all Continuous Services by
offering a high level of personal service with an emphasis on client/analyst
interaction. All META Group Continuous Services clients have direct access to
the Company's analysts as advisors to adapt the Company's published conclusions
and recommendations to the client's specific IT requirements. Proactively
contacting clients on a regular basis, META Group analysts apply their knowledge
<PAGE> 6
base of product information and user experience to respond to the unique IT
situation of each client with incontext, definitive advice and recommendations.
The list prices for the Company's Continuous Services range from
$23,000 to $50,000, and are subject to discounts based on a number of factors,
including the number of Continuous Services subscribed to by a client. The
Company's average selling price for a Continuous Service was $17,600, $16,600,
and $15,400 for the years ended December 31, 1998, 1997, and 1996, respectively.
The following deliverables, which involve the direct participation of
META Group research analysts, typically are provided to subscribers to META
Group's Continuous Services as an integral part of such services:
o Telephone Consultations afford each subscriber the unlimited
opportunity to discuss specific issues with META Group analysts.
o Half-day Briefings are held at META Group headquarters or at client
sites and address client-specific issues.
o Strategic Plan Reviews provide META Group analysis and evaluation
of clients' strategic plans.
o Regional Executive Briefings are conducted by each service.
These half-day user roundtables focus on key issues and are
held in major cities throughout the year.
o META Trend Teleconferences are held quarterly by each service
to provide an in-depth analysis of between two and four of
that service's annual "META Trends" (that is, long-term
projections of major industry issues and directions that META
Group believes will impact users, vendors and the IT market).
o Key Event Teleconferences enable clients to participate in
discussions with META Group analysts and are generally held
following key industry events, such as major announcements or
trade shows.
o META Group Conferences address a broad range of tactical and
strategic issues relevant to each service. At least one
conference per service is conducted annually. A conference
covering industry-wide issues is also held annually.
o Written Research: Each subscriber to a META Group Continuous Service
receives one or more of the following written materials:
o META Deltas consist of three to four analytical briefs,
published monthly, that deliver analysis of major events,
issues, vendor products and strategies, technology and other
pertinent matters.
o META Faxes are concise faxed summaries of META
Group's weekly research meeting, at which industry
events are reviewed and analyzed.
<PAGE>7
o META Trends is an annual publication featuring three
to five year projections of significant issues and
developments that will affect IT users and vendors.
o META Flash is a faxed bulletin containing analysis of
key industry events or announcements which META Group
deems to be of extraordinary importance.
META Group research is available in print, as well as in the media
below. A rolling three years of research can be searched by service, topic, or
keyword.
o Extranet or Intranet
o Internet
o Lotus Notes
o CD-ROM
The following is a description of META Group's Continuous Services:
Application Delivery Strategies (ADS) assists organizations in aligning
IT resources with business initiatives through the use of advanced software
technologies. Primary areas of focus include client/server application packages,
enterprise and departmental application infrastructures, systems integrators,
data warehousing, DSS/OLAP, development tools, and process improvement
strategies. Practical examples include integrating customer management processes
across the enterprise, revitalizing core business practices, integrating legacy
applications with data warehousing and Internet topologies, and supporting
market-driven applications within cost-effective IT frameworks.
Electronic Business Strategies (EBS) provides early identification of
high-impact technologies that support business transformation strategies. It
encompasses a wide range of both IT and business issues. Service offerings are
focused on electronic commerce, objects (emphasizing business-process risk and
object oriented infrastructure), collaborative technologies, workflow products
and "new" media, including documents, images and multimedia. Analysts also
assist in creating cross-functional, customer-focused organizations; guiding
organizations through required business transformations; and assessing external
resources such as management consultants, systems integrators and providers of
change-management services.
Enterprise Architecture Strategies (EAS) focuses on the needs of senior
level IT professionals and the fundamentals of planning, designing and
implementing an IT architecture that supports the company's growth strategy
while allowing for a quick response to industry changes and advancements. By
<PAGE>8
identifying the core issues that link business function to IT strategy, EAS
helps clients to build an adaptive IT foundation that sustains a company's
competitive advantage.
Enterprise Data Center Strategies (EDCS) delivers guidance critical for
integrating heterogeneous vendors, platforms and applications into a cohesive,
cost-effective enterprise data center. Clients benefit from in-depth analysis
and insight into the management, organization, operational and technical factors
behind evolving enterprise architectures, logical data centers, high-volume
transaction processing and database systems, hardware and software asset
management. Particular areas of focus include migration and implementation
strategies, parallel sysplex, Year 2000 compliance, vendor analysis and business
practices, and negotiation strategies.
Global Networking Strategies (GNS) addresses the management and
technical issues raised by changes in corporate network architectures. Analysts
provide insight into emerging trends in technology, regulation and network-based
applications. Primary areas of concentration include corporate network
architectures and services, bandwidth management, connectivity beyond the
enterprise, integrated network and systems management, voice switching and
processing, worldwide regulatory environments, wireless communications, and
network security. Client benefits include enhanced strategic planning, improved
network performance, better network outsourcing decisions and more effective
vendor evaluation.
Executive Directions (ED) provides a forum for senior IT and business
executives to discuss operational and organizational challenges and experiences
on IT related topics. Membership-directed research topics are discussed at
regional and national meetings and published in monthly research papers.
Customized on-site briefings and one-day planning sessions are also provided to
focus on client and industry issues.
Open Computing & Server Strategies (OCSS) represents a valuable
resource for organizations seeking to support business-critical applications
with scaleable, high-performance open servers. Research provides interactive,
ongoing assistance with the entire spectrum of issues associated with
establishing and maintaining open system - architecture planning, rightsizing,
data warehousing, relational database management systems, storage subsystems,
and identification and evaluation of key vendor partners.
IT Performance Engineering & Measurement Strategies (PEMS) offers
detailed benchmarking in combination with ongoing software analysis required to
quantify the value of client IT investment and capitalize on specific
opportunities for improvement.
Service Management Strategies (SMS) delivers research and analysis
focused on the management of shared computing infrastructures and applications.
Primary areas of coverage include networked systems management, customer-support
operations and outsourcing (including feasibility studies, vendor negotiation,
implementation schedules and management of service providers). In all cases,
analysts pay particular attention to the organizational, financial, and
management implications of IT's increasing role as an internal vendor of
services.
Workgroup Computing Strategies (WCS) provides research and analysis to
assist organizations in deploying client/server and intranet-related
<PAGE> 9
technologies and applications. Areas of focus include network computing and
Web-based applications, groupware and collaborative computing, mobile and
telecommunting, and total cost of ownership. Additional coverage includes PC
hardware and system software (client, network and server), Web development and
management, and IT organizational issues. Emphasis is given to the impact of
end-user and departmental requirements on systems developed and deployed by IT.
INfusion:
Supplementing the foregoing, during 1998 the Company introduced
INfusion, a program that combines offerings across META Group's Continuous
Services to meet the dynamic needs of an enterprise through focused, topical
programs and workshops. These programs have developed as a result of
organizations' collective need to rapidly understand how to implement complex
technology-based solutions, while meeting the demands of diverse business
units that are evolving at a rapid pace.
META Group's INfusion programs benefit organizations that are
challenged with such issues as defining a flexible architecture, building an
adaptive infrastructure, and measuring the business performance of an IT
organization as it supports both the corporate technology infrastructure and
applications, as well as meeting business unit requirements. These programs
build on the business-focused analysis from the INsights services by also
offering interactive workshops that focus on methodology and skill-based
training to successfully manage a specific business-critical topic.
Continuous Services for Vertical Industries:
o Insurance Information Strategies (IIS) delivers guidance critical for
managing IT and information in the insurance industry, with particular
emphasis on the challenges faced by insurance companies as they
transition from traditional underwriters analyzing risk management into
full financial services providers requiring superior IT systems to
handle increased customer expectations and competition.
o Healthcare Information Technology Strategies (HITS) delivers targeted
research and insight to help IT healthcare professionals successfully
implement long-term IT strategies in a changing regulatory environment.
Specific areas of research include: legacy system transition,
decision support, communications services and other supporting
technologies.
o Energy Information Strategies (EIS) focuses on the IT requirements of
energy industry participants preparing to compete in a de-regulated
environment of customer choice where the efficient purchase,
production, transmission and management of energy requires the use and
understanding of complex technology systems.
o Retail & Distribution Information Strategies (RDIS) provides research
and analysis related to the business issues and technology trends most
relevant to business and IT executives within the retail industry.
<PAGE>10
INitiatives: META Group Consulting
INitiatives is META Group's product family providing strategic
consulting through a customized approach to each client's business and
technology issues. MGC clients use INitiatives offerings when they need
assistance in confronting such issues as sourcing strategies, customer
management, infrastructure vendor assessments, application portfolio assessment,
and the impact that the effective use of business intelligence has on an
enterprise, priced on a per project basis. MGC also provides benchmarking and
best practices analyses of technology operations environments.
As organizations continue to evaluate core competencies and look for
cost savings through the selective use of outsourcing, IT organizations are
increasingly being positioned as internal service entities satisfying
line-of-business ("LOB") "clients." As a result, today's IT executive is under
pressure to plan a flexible and cost-effective IT architecture addressing
tomorrow's business environment, while remaining responsive to changing LOB
requirements. MGC combines technological expertise and extensive research
resources to assist companies in developing and implementing strategic IT
architectures. MGC leverages META Group's Continuous Service research and client
relationships to understand user issues and technology trends, drawing on the
expertise of META Group analysts in all Continuous Services areas. MGC services
include planning foundation analysis, business and technology requirements
analysis, strategy development, outsourcing strategies, Year 2000 compliance,
data warehouse migration planning, application procurement strategies, and data
center benchmarking.
The acquisition by the Company of Sentry in October 1998 significantly
expanded the Company's business value consulting practice, and complimented the
existing sourcing, benchmarking, technology application, e-commerce and other
consulting practices within MGC. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Factors That May Affect
Future Results Risk of Failure to Integrate Recent Acquisition and Risks
Associated with Potential Acquisitions."
The acquisition by the Company of certain assets of The Verity Group,
Inc. in late 1997 has enabled the Company to offer a Customer Management
Strategies practice to offer helpdesk and callcenter consulting and benchmarking
services to its clients.
In 1997, the Company formed a joint venture with SRI International to
deliver thought-leading research, methods, metrics and tools to senior
management of global 2000 companies planning for the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
INforum: Publications
INforum is META Group's product family of publications offering
in-depth analysis of such issues as human capital management, electronic
<PAGE> 11
commerce, data warehousing and Year 2000. These publications help clients gain a
more thorough understanding of a single business or IT issue by providing
information-based research.
In February 1996, the Company entered into an exclusive distribution
agreement with Computerwire (formerly known as APT Data Group, plc), a London
based publisher of magazines, newsletters, and product review bulletins for
users and suppliers of information technology. Under the agreement, the Company
has the exclusive right to co-market and distribute four of Computerwire's
Software Tools Bulletins in the United States, Canada, and Latin America. These
bulletins provide monthly product and category reviews in the areas of
client/server development, data warehousing, distributed systems management, and
object oriented development.
In April 1996, the Company entered into an exclusive distribution
agreement with CXP International, S.A., a Paris based company specialized in
gathering, analyzing, publishing, marketing and selling technical evaluations
regarding computer and telecommunication software. Under the agreement, the
Company acts as CXP's distributor to translate to English, promote, market and
sell CXP's proprietary publications, Software Product Expertise (SPEX) in the
United States, Canada and Mexico. These publications provide comprehensive
software evaluations with side-by-side product comparisons to assist in the
software product decision making process.
The successful assimilation, marketing and sale of new products are
subject to certain risks and uncertainties. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Factors That
May Affect Future Results - Risks Associated With New Product Development."
Research and Analysis
The Company employs a consistent, disciplined research and analysis
methodology across the Company's Continuous Services. Each Continuous Service
has a Service Director who is responsible for implementing the Company's
research and analysis methodology in that service. The development methodology
consists of an iterative process of research, analysis, hypothesis and testing.
Analysts conduct extensive primary research, working with the Company's user
client base, surveying vendors and contacting other sources. These activities
are supplemented with searches of numerous trade, financial and other
third-party source materials compiled in the Company's resource center. A
meeting of the entire META Group research staff is held weekly, at which
findings are presented and scrutinized. From this research, analysts identify
significant patterns and trends, develop assumptions, test hypotheses and arrive
at concrete recommendations and conclusions to provide to clients. META Group
analyst compensation is based in part on meeting monthly publishing deadlines,
as well as proactive client contact.
The knowledge and experience of the Company's analysts is critical to
the quality of the Company's products and services. To ensure consistency of
positions and analysis across service disciplines, all META Group research is
reviewed by the Company's Co-Research Directors. While varying opinions and
<PAGE> 12
philosophical contention among services and research disciplines are encouraged,
final positions and conclusions are consistent. This practice ensures that the
analytical structure and recommendations presented in the Company's research
better enable the various elements of client organizations to formulate
integrated strategies based on coherent information and analysis.
Sales and Marketing
META Group uses a direct sales force domestically and a network of
local independent sales representative organizations internationally to market
and sell its Continuous Services under the INsights and INfusion product family
names. The Company's domestic direct sales force is comprised of 62 field sales
personnel located throughout the United States. The Company's publication
products are sold domestically by a separate Inside Sales channel totaling 22
tele-sales professionals. Internationally, the Company currently utilizes
independent sales representative organizations selling Continuous Services,
Consulting and Publication products in Canada, Europe, Far East, Middle East,
South America and South Africa. Under the terms of the Company's international
sales representative agreements, sales representative organizations are assigned
exclusive territories and annual quotas. These international sales
representative organizations also perform selected client service functions, and
bill and collect revenues attributable to international clients. The
Company realizes revenues from the international sales representative
organizations at rates of 40% to 60% of amounts billed to those clients. See
"Management Discussion and Analysis of Financial Condition and Results of
Operations - Certain Factors That May Affect Future Results - Risk Associated
With International Operations" and Note 1 of notes to the consolidated financial
statements.
As of December 31, 1998, the Company had over 4,000 subscribers in
approximately 1,750 client organizations worldwide, and no single client
accounted for more than 2% of the Company's revenues for the year ended December
31, 1998. The Company does not believe it is the exclusive provider of IT
research and advisory services to its clients.
In March 1995, META Group entered into an exclusive strategic alliance
agreement with First Albany Corporation ("First Albany"), a financial services
firm. The agreement provides for the distribution of the Company's written
research and analysis, in its original form or as customized and expanded by
First Albany, to First Albany's financial services customers, which include many
institutional investors. The agreement restricts the Company from marketing its
services to any broker dealer or sell-side firm offering services similar to
those offered by First Albany. The Company is permitted to market and sell
Continuous Services to First Albany buy-side customers. This agreement is
annually renewable by First Albany, subject to attainment of specified minimum
revenue targets. The Company recognized $750,000, $616,500, and $425,000 in
revenues from this arrangement in the years ended December 31, 1998, 1997, and
1996, respectively. George C. McNamee, a director of the Company, is also
Chairman and Co-Chief Executive Officer of First Albany. See Note 11 of notes to
consolidated financial statements.
<PAGE> 13
Client Support
META Group is committed to providing a high level of client service as
defined by response time, clarity of advice and quality of communication. META
Group analysts respond to clients' inquiries and concerns as they arise, and
analyst compensation is based in part on client inquiry response times.
Analysts' regular contact with clients through telephone consultations,
briefings and conferences also provides the Company with feedback which is used
in the enhancement of its services. In addition, the META Group research library
frequently performs supporting client-specific topical searches on particular IT
issues. The Company maintains a key issues database that identifies areas of
particular concern to clients and regularly uses customer satisfaction surveys
to refine and enhance the quality of the services it provides.
The Company sells Continuous Services pursuant to renewable one-year
subscription agreements, which are generally paid in full at the start of the
subscription period. During each of 1998, 1997 and 1996, approximately 75% of
the Company's client organizations renewed one or more subscriptions. However,
there can be no assurance that the Company will be able to sustain its client
retention rates at historical levels. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Competition
The Company experiences competition in the market for IT research and
analysis products and services from other independent providers of similar
services, as well as the internal planning and marketing staffs of the Company's
current and prospective clients. The Company's principal direct competitor,
Gartner Group, Inc., has a substantially longer operating history, is
significantly larger and has considerably greater financial resources and market
share than the Company. The Company also competes indirectly against other
information providers, including electronic and print media companies and
consulting firms. The Company's indirect competitors could choose to compete
directly against the Company in the future. Many of the Company's direct and
indirect competitors have substantially greater financial, information gathering
and marketing resources than the Company. In addition, although the Company
believes that it has established a significant market presence, there are few
barriers to entry into the Company's market, and new competitors could readily
seek to compete against the Company in one or more market segments addressed by
the Company's Continuous Services. Increased competition could adversely affect
the Company's operating results through pricing pressure and loss of market
share. There can be no assurance that the Company will be able to continue to
compete successfully against existing or new competitors.
The Company believes that the principal competitive factors in its
industry are quality of research and analysis applied in context of client IT
environments, timely delivery of relevant information, client support and
responsiveness, the ability to offer products that meet changing market needs
for information and analysis, and price. The Company believes it competes
favorably with respect to each of these factors.
<PAGE> 14
Employees
As of December 31, 1998, the Company employed 426 people, including 218
research analysis and fulfillment personnel (including 159 analysts and
consultants), 125 sales and marketing personnel and 83 administrative personnel.
Of these employees, 197 are located at the Company's headquarters in Stamford,
Connecticut, 208 are located at other domestic facilities and 20 are located
overseas. None of the Company's employees is represented by a collective
bargaining arrangement, and the Company has experienced no work stoppages. The
Company considers its relations with its employees to be good. All employees are
granted stock options upon hiring.
The Company's future success depends in large part on the ability to
continue to motivate and retain highly qualified employees, including management
personnel, and to attract and retain a significant number of additional
qualified personnel, including research analysts, consultants, sales personnel
and product development and operations staff. Competition for qualified
personnel in the Company's industry is intense, and many of the companies with
which META Group competes for qualified personnel, including Gartner Group, have
substantially greater financial and other resources than the Company.
Furthermore, competition for qualified personnel can be expected to become more
intense as competition in the Company's industry increases. There can be no
assurance that the Company will be able to recruit, retain and motivate a
sufficient number of qualified personnel to compete successfully. The loss of
any of the Company's senior management personnel, particularly Dale Kutnick,
President, Chief Executive Officer and Co-Research director of the Company or
any material failure to recruit, retain and motivate a sufficient number of
qualified personnel would have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Factors That May Affect Future Results - Dependence on
Ability to Attract and Retain Qualified Personnel" and "- Dependence on Key
Personnel."
ITEM 2. PROPERTIES
The Company's headquarters are located in approximately 78,000 square
feet of office space in Stamford, Connecticut. This facility accommodates
research, marketing, sales, customer support and corporate administration. The
lease on this facility expires in 2001. The Company also leases office space in
nine other locations to support its research, sales and other administrative
functions including Reston, VA, Burlingame, CA, and Westborough, MA. The Company
believes that its existing facilities are adequate for its current needs and
that additional facilities are available for lease to meet future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to certain legal proceedings arising in the
ordinary course of business. 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.
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of 1998.
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National
Market under the symbol "METG" since its initial public offering (the
"Offering") at $12.00 per share on December 1, 1995. Prior to the Offering,
there was no established public trading market for the Company's shares.
On March 22, 1999, the closing price of the Company's Common Stock was
$18.50, as reported by the Nasdaq National Market. On that date, there were
approximately 156 holders of record of the Company's Common Stock and at least
1,300 beneficial holders, based on information obtained from the Company's
transfer agent.
The Company has never paid cash dividends on its Common Stock. Any
future declaration and payment of dividends will be subject to the discretion of
the Company's Board of Directors, will be subject to applicable law and will
depend upon the Company's results of operations, earnings, financial condition,
contractual limitations, cash requirements, future prospects and other factors
deemed relevant by the Company's Board of Directors.
On April 27, 1998, the Board of Directors of the Company declared a
three for two stock split effected through the issuance of a fifty percent stock
dividend payable on June 11, 1998 to shareholders of record on May 22, 1998. All
share and per share amounts affected by this split that are contained in this
annual report on Form 10-K have been retroactively adjusted for all periods
presented.
The following table reflects the range of high and low bid quotations,
as reported on the Nasdaq National Market, for META Group Common Stock for each
quarter of the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
High Low
----- ------
<S> <C> <C>
1998
- ----
Fourth Quarter $32.63 $19.00
Third Quarter $33.75 $19.62
Second Quarter $25.66 $20.31
First Quarter $23.66 $14.91
1997:
- -----
Fourth Quarter $19.50 $12.83
Third Quarter $16.75 $11.83
Second Quarter $16.16 $10.33
First Quarter $18.00 $10.83
</TABLE>
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below are derived from the
consolidated financial statements of the Company, and should be read in
connection with those statements, which are included herein. All share and per
share amounts have been retroactively adjusted to reflect the three for two
split.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Continuous services $56,086 $41,805 $30,769 $22,334 $16,160
Other, principally consulting
and publications 16,699 9,390 6,197 3,001 1,255
------- ------- ------- ------- --------
Total revenues 72,785 51,195 36,966 25,335 17,415
------- ------- ------- ------- --------
Operating expenses:
Cost of services and fulfillment 35,098 24,602 18,908 14,515 11,073
Selling and marketing 16,702 12,477 8,797 6,329 6,680
General and administrative 6,753 5,006 3,728 2,180 1,949
Depreciation and amortization 1,894 1,501 1,086 676 441
------- ------- -------- ------- --------
Total operating expenses 60,447 43,586 32,519 23,700 20,143
------- ------- ------- ------- --------
Operating income (loss) 12,338 7,609 4,447 1,635 (2,728)
------- ------- ------- ------- --------
Other income (expense):
Gain on sale of investment 250
Interest income 2,621 2,138 1,909 217 16
Interest expense (19) (66)
------- ------- ------- ------- -------
Total other income (expense) 2,621 2,138 1,909 448 (50)
------- ------- -------- ------- -------
Income (loss) before provision
(benefit) for income tax 14,959 9,747 6,356 2,083 (2,778)
Provision (benefit) for income tax 6,174 3,980 2,730 (1,547)
------- ------- ------- ------- -------
Net income (loss) $ 8,785 $ 5,767 $ 3,626 $ 3,630 $(2,778)
======= ======= ======= ======= =======
Net income (loss) per diluted common
share $ .70 $ .48 $ .32 $ .45 $ (.87)
======= ======= ======= ======= =======
Weighted average number of diluted
common shares outstanding $12,596 11,937 11,502 8,121 3,177
======= ======= ======= ======= =======
Net income (loss) per basic
common share $ .78 $ .53 $ .41 $ .75 $ (.87)
======= ======= ======= ======= =======
Weighted average number of basic
common shares outstanding 11,326 10,821 8,925 4,815 3,177
======= ======= ======== ======= =======
December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------ ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 9,945 $12,910 $19,335 $35,525 $ 301
Marketable securities 36,881 27,746 15,684
Working capital (deficit) 34,923 32,826 28,843 27,676 (7,102)
Total assets 112,187 89,453 70,171 52,356 11,385
Deferred revenues 31,276 29,136 22,885 16,557 13,484
Total debt 250
Redeemable convertible preferred stock 1,500
Total stockholders' equity (deficiency) 72,690 55,400 42,728 31,868 (7,226)
</TABLE>
<PAGE>18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 IT users and vendors. IT user organizations utilize
META Group's research, analysis and recommendations to develop and employ
cost-effective and revenue enhancing 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
77% and 82% of the Company's total revenues for the years ended December 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. During each of 1998, 1997, and 1996, approximately
75% of the Company's clients renewed one or more subscriptions; however, this
client retention rate is not necessarily indicative of the rate of retention of
the Company's revenue base. The Company's other revenues are derived from
project consulting, benchmarking, conferences, speaker engagement fees and
publications. A significant portion of MGC clients are also Continuous Services
subscribers.
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 30% to $62.6 million at December 31, 1998 from $48.3 million at
December 31, 1997. At December 31, 1998, the Company had over 4,000 Continuous
Services subscribers in approximately 1,750 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 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
<PAGE> 19
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. See "Segment Reporting" in Note 12 to
the consolidated financial statements for information regarding the Company's
operating segments.
Results of Operations
The following table sets forth certain financial data as a percentage
of total revenues for the periods indicated:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Continuous services 77% 82% 83%
Other revenues, principally consulting and publications 23 18 17
--- --- ---
Total revenues 100 100 100
--- --- ---
Operating expenses:
Cost of services and fulfillment 48 48 51
Selling and marketing 23 24 24
General and administrative 9 10 10
Depreciation and amortization 3 3 3
--- --- ---
Total operating expenses 83 85 88
--- --- ---
Operating income 17 15 12
--- --- ---
Interest income 4 4 5
--- --- ---
Income before provision for income tax 21 19 17
--- --- ---
Provision for income tax 9 8 7
--- --- ---
Net income 12% 11% 10%
--- --- ---
</TABLE>
Years Ended December 31, 1998 and December 31, 1997
Total Revenues. Total revenues increased 42% to $72.8 million in the
year ended December 31, 1998 from $51.2 million in the year ended December 31,
1997. The increases in total revenues were primarily due to continued expansion
of the Company's domestic sales force, increases in the Company's consulting
business (including the Sentry acquisition), recognition of new revenue from the
launch of three new Continuous Services in early 1997, the increase in sales
volume of subscription publications, as well as growing international market
acceptance of the Company's products. During 1998, the Company experienced a
shift in business demand by clients towards more focused, client specific
services. As a result, the Company experienced a slight decline in the growth
rate of Continuous Services revenue from the year ago period, and an increase in
the growth rate of consulting, publications, and other revenue from the
year ago period. The Company currently expects this trend to continue for the
foreseeable future.
Revenues from Continuous Services increased 34% to $56.1 million in the
year ended December 31, 1998 from $41.8 million in the year ended December 31,
1997. The increases in Continuous Services revenues were primarily due to
continued expansion of the Company's domestic sales force, recognition of new
revenue from the launch of three new Continuous Services in early 1997, the
<PAGE> 20
increase in sales volume of subscription publications, as well as growing
international market acceptance of the Company's products. The Company increased
average selling prices 6% to $17,600 in 1998 from $16,600 in 1997 by continuing
to broaden research coverage within its existing Continuous Services. The
Company grew its subscriber client base 17% to 4,000 Continuous Service
subscribers at December 31, 1998 from 3,410 clients at December 31, 1997. The
Company currently expects Continuous Services revenue to continue to grow;
however, it expects the rate of growth to decline in 1999 versus 1998.
Other revenues, consisting principally of revenues from consulting and
non-subscription publications, increased 78% to $16.7 million in the year ended
December 31, 1998 from $9.4 million in the year ended December 31, 1997, and
increased as a percentage of total revenues to 23% from 18%. The increase in
other revenues was primarily attributable to a shift in business to include more
leveraged consulting services, both from MGC and analyst consulting/speaking
engagements. Also significant to the growth of other revenues was the October
1998 acquisition of Sentry, and, to a lesser extent, the increase in sales
volume of the Company's non-subscription publications. The Company currently
expects a continued acceleration of the growth rate of revenue from consulting
and non-subscription publications as a result of the shift in business demand
by clients toward more focused, client specific services and the Sentry
acquisition discussed above.
Revenues attributable to international clients increased 41% in the
year ended December 31, 1998 from the year ended December 31, 1997, and
increased as a percentage of total Continuous Services revenues to 14% from 13%.
The increase was primarily due to the increased presence of the Company's
services in existing international markets. The Company currently has
independent sales representation in 30 countries. The Company currently expects
that international Continuous Services revenues will continue to grow at a
faster rate than domestic Continuous Services revenue.
Cost of Services and Fulfillment. Cost of services and fulfillment
increased 43% to $35.1 million in the year ended December 31, 1998 from $24.6
million in the year ended December 31, 1997, principally due to increased
analyst, consultant and fulfillment staffing and related compensation and
overhead expense required to support the Company's growth both domestically and
internationally; and, to a lesser extent, to increased royalty payments made in
connection with certain joint product offerings between the Company and certain
of its entities in which it has a minority investment. Costs of services and
fulfillment remained constant as a percent of revenues at 48%. The Company
currently expects continued increases in costs of services and fulfillment
and expects that such expenses as a percentage of total revenue will remain
approximately the same.
Selling and Marketing Expenses. Selling and marketing expenses
increased 34% to $16.7 million in the year ended December 31, 1998 from $12.5
million in the year ended December 31, 1997 and decreased as a percentage of
total revenues to 23% from 24%. The increase in expenses was principally due to
increased sales-related compensation expense associated with increased
Continuous Services revenues, the expansion of the Inside Sales channel for
selling publications, increased costs associated with development of
international markets, and higher marketing and promotion expenditures related
<PAGE> 21
to the launch of new publications and service conference promotion. The Company
anticipates continuing increases in the amount of selling and marketing expenses
as it continues to grow its domestic sales force to support the expanding scope
of its product offerings. The Company currently expects that such expenses as a
percentage of total revenues will remain approximately the same.
General and Administrative Expenses. General and administrative
expenses increased 35% to $6.8 million in the year ended December 31, 1998 from
$5.0 million in the year ended December 31, 1997 and decreased as a percentage
of total revenues to 9% from 10%. The increase in expenses was principally due
to increased employee benefits costs, recruiting fees, internal systems
maintenance and facilities, and professional education costs. The Company
currently anticipates continuing increases in the amount of general and
administrative expenses and expects such expenses to remain approximately
the same as a percentage of total revenues.
Depreciation and Amortization. Depreciation and amortization expense
increased 26% to $1.9 million in the year ended December 31, 1998 from $1.5
million in the year ended December 31, 1997. The increase in depreciation and
amortization expense was principally due to office furnishings and equipment
purchases required to support business growth.
Interest Income. Interest income increased 23% to $2.6 million in the
year ended December 31, 1998 from $2.1 million in the year ended December 31,
1997 due to an increase in the Company's balances of cash, cash equivalents and
marketable securities, resulting from positive cash flows from operations. In
addition the Company benefited from the reinvestment of a portion of its cash
into short-term, higher yield marketable securities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Provision for Income Taxes. The Company recorded a provision for income
taxes of $6.2 million and $4.0 million, reflecting an effective tax rate of 41%
during the years ended December 31, 1998 and 1997, respectively. The Company was
not required to pay federal income tax due to the utilization of net operating
loss carryforwards. The Company anticipates that it will begin paying federal
income tax during 1999, due to the utilization in full of its net operating loss
carryfowards for federal income tax purposes.
Years Ended December 31, 1997 and December 31, 1996
Total Revenues. Total revenues increased 38% to $51.2 million in the
year ended December 31, 1997 from $37.0 million in the year ended December 31,
1996. Revenues from Continuous Services increased 36% to $41.8 million in the
year ended December 31, 1997 from $30.8 million in the year ended December 31,
1996. The increases in total revenues and revenues from Continuous Services were
primarily due to continued expansion of the Company's domestic sales force,
increases in average selling prices, recognition of new revenue from launch of
new Continuous Services, as well as growing worldwide market acceptance of the
Company's products. The Company increased average selling prices 8% to $16,600
in 1997 from $15,400 in 1996 by continuing to broaden research coverage within
its existing Continuous Services. The Company grew its subscriber client base
22% to 3,410 Continuous Service subscribers at December 31, 1997 from 2,800
clients at December 31, 1996.
<PAGE> 22
Other revenues, consisting principally of revenues from consulting and
publications, increased 52% to $9.4 million in the year ended December 31, 1997
from $6.2 million in the year ended December 31, 1996, and increased as a
percentage of total revenues to 18% from 17%. The increase in other revenues was
primarily attributable to the growth of META Group Consulting and, to a lesser
extent, the growth of the Company's publications.
Revenues attributable to international clients increased 75% in the
year ended December 31, 1997 from the year ended December 31, 1996, and
increased as a percentage of total Continuous Services revenues to 13% from 10%.
The increase was primarily due to the increased presence of the Company's
services in existing international markets.
Cost of Services and Fulfillment. Cost of services and fulfillment
increased 30% to $24.6 million in the year ended December 31, 1997 from $18.9
million in the year ended December 31, 1996, principally due to increased
analyst, consultant and fulfillment staffing and related compensation expense
required to support the Company's growth both domestically and internationally
and, to a lesser extent, due to the development and launch of three new
Continuous Services. Costs of services and fulfillment decreased as a percent of
revenues to 48% from 51%. This decrease primarily reflects the improved average
selling prices discussed above.
Selling and Marketing Expenses. Selling and marketing expenses
increased 42% to $12.5 million in the year ended December 31, 1997 from $8.8
million in the year ended December 31, 1996 and remained constant as a
percentage of total revenues at 24%. The increase in expenses was principally
due to increased sales-related compensation expense associated with increased
revenues, the expansion of a direct marketing publications channel, and higher
marketing and promotion expenditures related to the launch of new services and
publications.
General and Administrative Expenses. General and administrative
expenses increased 34% to $5.0 million in the year ended December 31, 1997 from
$3.7 million in the year ended December 31, 1996 and remained constant as a
percentage of total revenues at 10%. The increase in expenses was principally
due to increased finance, accounting, and corporate IT staffing necessary to
support business growth. In addition, higher facilities costs were incurred in
connection with the Company's expansion into larger offices in Reston, VA and
Waltham, MA.
Depreciation and Amortization. Depreciation and amortization expense
increased 38% to $1.5 million in the year ended December 31, 1997 from $1.1
million in the year ended December 31, 1996. The increase in depreciation and
amortization expense was principally due to office furnishings and equipment
purchases required to support business growth and the expansion to larger
offices in Reston, VA and Waltham, MA during late 1996.
Interest Income. Interest income increased to $2.1 million in the year
ended December 31, 1997 from $1.9 million in the year ended December 31, 1996
due to an increase in the Company's balances of cash and marketable securities,
resulting from positive cash flows from operations.
<PAGE> 23
Provision for Income Taxes. The Company recorded a provision for income
taxes of $4.0 million and $2.7 million, reflecting an effective tax rate of 41%
and 43%, during the years ended December 31, 1997 and 1996, 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 1997 and 1996 due to the utilization of net operating
loss carryforwards.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through its
initial public offering, cash generated from operations, and proceeds from the
exercise of common stock options. In December 1995, the Company received net
proceeds (after deducting underwriting commissions and discounts and applicable
offering expenses) of $30.2 million relating to its initial public offering of
2,790,000 shares of Common Stock. The Company generated $9.3 million, $8.2
million, and $5.5 million of cash from operations during the years ended
December 31, 1998, 1997, and 1996, respectively, primarily due to net income and
the utilization of net operating loss carryfowards to reduce cash paid for
income taxes.
The Company used $3.2 million, $1.9 million and $1.7 million of cash in
the years ended December 31, 1998, 1997, and 1996, respectively 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 grows. As of December 31, 1998, the Company
had no material commitments for capital expenditures; however, the Company is
currently upgrading significant internal systems to support business growth. The
total cash outlay for the completion of the project in 1999 (excluding internal
resources) is not expected to exceed $1.0 million.
During the years ended December 31, 1998, 1997 and 1996, the Company
made investments and advances to several companies in parallel or synergistic
industries. The balance of the Company's investments and advances was $8.3
million, $6.4 million and $5.2 million at December 31, 1998, 1997, and 1996,
respectively. These investments and advancements are summarized below, and in
Note 6 to the notes to the consolidated financial statements. See "Certain
Factors That May Affect Future Results Risk Associated With New Product
Development" and "- Potential Acquisitions."
On March 15, 1999 the Company entered into an agreement to invest
$2.7 million in META Security Group, an independent start-up consulting firm.
META Security Group offers security consulting services and hands-on operational
support services including threats and vulnerability assessments, policy and
standards development, network monitoring services and technical research and
development.
In October 1998, the Company completed the acquisition of all of the
outstanding capital stock of The Sentry Group, Inc., an IT consulting company,
for an initial payment of 195,066 shares of the Company's common stock and a
contingent payment of up to $7.0 million in common stock or (at the Company's
option) cash in the event certain financial targets are met by Sentry in 1999.
In addition, the Company issued to Sentry stockholders warrants to purchase up
to 200,000 shares of the Company's common stock at $30.00 per share, 125,000
shares of which are currently exercisable and 75,000 shares of which are
contingently exercisable upon Sentry achieving certain financial targets in
1999. The 125,000 warrants currently exercisable expire in October 2002. The
75,000 warrants contingently exercisable expire four years after the date the
Company pays contingent consideration, if any, to the Sentry stockholders
pursuant to the terms of the acquisition. The fair value of the noncontingent
consideration, including acquisition costs, was $5.9 million. This acquisition
<PAGE> 24
was accounted for as a purchase. See "Business - Products and Services -
INitiatives: META Group Consulting" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Factors That May Affect
Future Results - Risk of Failure to Integrate Recent Acquisition and Risks
Associated with Potential Acquisitions."
In October 1998, the Company invested $500,000 in IMT Strategies, Inc.
("IMT") in the form of a loan represented by a secured promissory note
convertible at any time into IMT's common stock. IMT was established to deliver
syndicated research, publications, consulting services, management education and
training focused on the integration of marketing and technology.
In October 1998, the Company invested $300,000 in Intermedia Group,
Inc. ("IMG") in the form of a loan represented by a senior secured promissory
note convertible at any time into IMG's common stock. IMG is an intergrated
media and conference business established to serve markets in a complementary
fashion to the Company's main lines or new lines of business.
In September 1998, the Company made an investment of $1 million in
Client/Server Labs, Inc., a supplier of performance and functional IT testing
services devoted to assessing the performance and viability of IT solutions.
In November 1997, the Company advanced $1.3 million in cash to a joint
venture with SRI Consulting, Inc., designed to deliver thought-leading research,
methods, metrics, and tools to senior management of global 2000 companies
scenario planning for the future. SRI Consulting, Inc. is a wholly-owned
subsidiary of SRI International, a Silicon Valley based think-tank working with
companies worldwide to identify market opportunities and develop strategies for
competing in technology-driven markets. See "Business - Products and Services -
INitiatives: META Group Consulting."
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
consolidated balance sheets.
In addition, the Company invests in other short-term (less than
one-year maturity), high quality marketable debt securities. Generally, these
securities are purchased in denominations of $1 million to $5 million and held
to maturity. No losses have been experienced on such investments.
As of December 31, 1998, the Company had cash and cash equivalents of
$9.9 million, marketable securities valued at $36.9 million, and working capital
of $34.9 million. The Company believes that its existing cash balances and
anticipated cash flows from operations will be sufficient to meet its working
capital, investment, and capital expenditure requirements for the foreseeable
future.
<PAGE> 25
Year 2000 Readiness Disclosure
The following disclosure may be deemed "Year 2000 Readiness Disclosure"
pursuant to the Year 2000 Information and Readiness Disclosure Act.
State of Readiness
During 1998, the Company commenced a program to review the Year 2000
compliance status of both the IT and non-IT software and systems used in its
internal business processes, to obtain appropriate assurances of compliance from
the manufacturers of these products, and to modify or replace all non-compliant
products.
The Company made inquiries with critical third party providers of
intermediary products or services to determine the impact of Year 2000 issues on
their business and operations, and the resulting impact on the business and
operations of the Company. Certain of these systems relate to the ability of the
Company to transmit its products to its customers via the internet and by
CD-ROM, and are reliant on the compliance of the third parties in order to
operate past 1999. The Company has been advised by the applicable third parties
that the necessary modifications for the Year 2000 issue have been completed or
will be completed by the end of 1999. In addition, the Company believes that its
internal systems are Year 2000 compliant to interface with such third parties.
However, the Company can offer no assurance that its systems, to the extent they
are reliant on third party systems, will be operational on January 1, 2000.
The Company has contacted most of the suppliers of its other software
and systems to determine whether the products obtained by the Company are Year
2000 compliant and is currently reviewing other areas within its business and
operations which could be adversely affected by Year 2000 issues. Based on the
responses the Company has received from manufacturers and the internal
evaluation performed through March 1999, the Company believes that it will be
able to upgrade or replace any critical Year 2000 deficient software or systems
prior to the end of 1999.
Among the systems being reviewed is the Company's current telephone
system, which is critical to the function of the business. The Company currently
plans to replace its existing telephone system during 1999. Also, in response to
the increase in clients and employees, and the need for improved information
management for customer service, the Company expects to complete implementation
of a new client information system during the first half of 1999. In selecting
the new client information system, Year 2000 compliance was one of the criteria
reviewed, and the Company has obtained a representation from the vendor that the
system is Year 2000 compliant.
Currently, the Company has not identified any internal non-IT systems
that are both critical to the business and would cause significant disruption of
business in the event of failure in the year 2000.
Costs to Address Year 2000 Issues
Based on the Company's internal evaluation performed to date on
potential costs for completing the evaluating, testing, modifying or replacing
<PAGE> 26
of any of its internal IT or non-IT software or systems, the Company currently
expects to spend approximately $2.2 million (including $2.1 million of costs for
replacing the client information system and telephone system), of which the
Company has spent approximately $1.3 million as of December 31, 1998. The
Company will fund all Year 2000 compliance costs from existing working capital.
The potential costs associated with failure of the internet or other
major systems outside the Company's control (i.e., utilities, telephone service,
etc.), or of any significant non-IT systems, including increased costs of doing
business, inability to conduct business, potential loss of customers, and impact
of certain risk areas as discussed below, are unknown and cannot be estimated by
the Company.
Risks Associated with Year 2000 Issue
The primary risk to the Company in the event of non-compliance with
Year 2000 issues is a disruption of customer fulfillment. As a significant
portion of the Company's clients choose to have the Company's products delivered
via the internet, failure of that system could prevent customers from accessing
the Company's products via the Company's internet site. Likewise, failure of the
telephone systems would prevent the Company from speaking with its customers
directly, which is an integral part of the Company's service and products. Also,
failure of the client information system would result in potential delays in
responding to customers' inquiries.
In addition to the risks to the Company's systems as they relate to
customer service, and discussed above, the Year 2000 Issue presents the
following business risks to the Company:
o Because the Company's business results from selling knowledge based
research on a wide variety of IT issues, the short term demand for
certain of the Company's products could potentially be hindered while
customers and potential customers focus immediate resources on fixing
their own Year 2000 issues. Although the Company's products include
advisory services on the Year 2000 issue itself, and therefore could
potentially increase business for the Company, such impacts can not be
estimated by the Company at this time. As such, there remains a risk
that a shift in the focus of customers' and potential customers'
discretionary IT spending could have a material adverse effect on the
Company's business, operating results and financial condition.
o Part of the Company's services to its customers involves forming
opinions and making suggestions with regards to IT issues. As such,
customers rely on the Company for advice when making IT related
decisions, which may involve Year 2000 issues. Because of the overall
risk of litigation associated with the Year 2000 issue, there exists a
risk that the Company could face legal action from a customer or be
named as a co-defendant in an action by a third party against a
customer. The likelihood of such action occurring, and the potential
related costs, cannot be estimated by the Company at this time.
o Failure of certain systems of third parties due to Year 2000 issues
could potentially create the risk of impairment of certain assets of
the company. In particular, the Company currently has approximately
$36.9 million in marketable securities, which are primarily invested
<PAGE> 27
in unsecured, short- term investment grade, corporate debt
instruments (commercial paper). Financial impairment to certain
entities in which the Company has a minority investment, or a collapse
of the securities markets in general, would potentially have a material
adverse effect on the company's financial position. In addition, the
Company currently has over $35 million in accounts receivable from
customers and international sales representative organizations, as
well as significant investments in other companies. Financial
impairment to certain of such companies due to Year 2000 issues
could potentially have a material adverse effect on the company's
financial position and results of operations. The likelihood of
such action occurring, and the potential related costs, cannot be
estimated by the Company at this time.
Contingency Plans
The Company has the following contingency plans in place in order to
protect customer service in the event of Year 2000 disruptions:
o The Company's research is available in written form as well as via the
internet and CD-ROM. In the event of disruption of the other forms of
delivery, the Company will deliver research in printed form to all
customers. The incremental cost of doing so would not be material to
the results of operations and is currently an option many customers
continue to use.
o In the event the Company is unable to replace the existing client
information system prior to the end of 1999, the Company intends to
upgrade the existing system to be Year 2000 compliant prior to the end
of 1999.
o In the event the Company is unable to replace the existing phone system
prior to the end of 1999, the Company intends to upgrade the existing
system to be Year 2000 compliant prior to the end of 1999. The Company
does not currently have a contingency plan in the event of a failure of
long distance telephone service in general.
The Company does not currently have a contingency plan in place with
regards to the risk of asset impairment described above but will be reviewing
investment risk to include Year 2000 exposure as we approach the year 2000.
Certain Factors That May Affect Future Results
The Company does not provide forecasts of its future financial
performance. From time to time, however, 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-K (and in the documents incorporated by reference into this Form 10-K)
which are not historical facts (including, but not limited to, statements
concerning the shift in client business demand and the resulting impact on total
revenues, the growth rates of Continuous Services revenue and revenue from
Consulting and non-subscription publications, growth in international revenues,
anticipated operating expense levels and such expense levels relative to the
Company's total revenues, anticipated capital expenditure levels, working
capital investment and capital expenditure requirements, Year 2000 readiness and
<PAGE> 28
anticipated Year 2000 compliance costs) 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 within this Form 10-K (and in the documents incorporated
by reference into this Form 10-K), as well as the accuracy of the Company's
internal estimates of revenue, operating expense levels, growth rates and other
anticipated expenditures.
The following risk factors should be read in conjunction with the
detailed information in this Form 10-K (and in the documents incorporated by
reference into this Form 10-K). The following factors, among others, could cause
actual results to differ materially from those contained in forward looking
statements contained or incorporated by reference in this Form 10-K and
presented by management from time to time. Such factors, among others, may have
a material adverse effect upon the Company's business, results of operations and
financial condition.
Dependence on Renewals of Subscription-Based Services
The Company derived approximately 82% of its total revenues in 1997
from subscriptions to the Company's Continuous Services. In the year ended
December 31, 1998, the Company derived approximately 77% of its total revenues
from subscriptions to its Continuous Services. Approximately seventy-five
percent of the Company's Continuous Service clients renewed at least one
subscription in 1997 and 1998. The Company, however, may not be successful in
maintaining its subscription renewal rates. During 1998 the Company experienced
a shifting client demand towards more consultative, solution-oriented products.
With the advent of the internet, information alone, without analysis in context
of a client's environment, will have less value. In addition to this, the
Company's ability to renew subscriptions is subject to a number of risks,
including the following:
o the Company may be unsuccessful in delivering consistent, high
quality and timely analysis and advice to its clients.
o the Company may not be able to hire and retain a large and growing
number of highly talented professionals in a very competitive job
market.
o the Company may be unsuccessful in understanding and anticipating
market trends and the changing needs of its clients.
o the Company may not be able to deliver products and services of the
quality and timeliness to withstand competition.
If the Company is unable to successfully maintain its subscription renewal rates
or sustain the necessary level of performance, such an inability could have a
material adverse effect on the Company's business and financial results.
<PAGE> 29
Potential Fluctuations in Operating Results
The Company's operating results have varied significantly from quarter
to quarter. The Company expects future operating results to fluctuate due to
several factors, many of which are not in the Company's control:
o the disproportionately large portion of the Company's Continuous
Services subscriptions that expire in the fourth quarter of each
year;
o the level and timing of renewals of subscriptions to the Company's
Continuous Services;
o the mix of Continuous Services versus the consulting and publications
business;
o the timing and amount of new business generated by the Company;
o the mix of domestic versus international business;
o the timing of the development, introduction and marketing of new
products and services;
o the timing of the hiring of research analysts, consultants, and sales
representatives;
o changes in the spending patterns of the Company's clients;
o the Company's accounts receivable collection experience;
o changes in market demand for IT research and analysis; and
o 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 could have a material adverse effect
on the price of the Company's Common Stock.
Risks Associated with International Operations
Net revenues attributable to international clients represented
approximately 13% of the Company's total Continuous Services revenues for the
year ended December 31, 1997 and approximately 14% of the Company's total
Continuous Services revenues for the year ended December 31, 1998. The Company
sells its products internationally through a network of 30 independent sales
<PAGE> 30
representative organizations. The Company assumes significantly greater risk by
selling through independent sales representative organizations than through a
direct employee sales force. These risks to the Company include:
o greater accounts receivable collection risk (because the Company
relies on the sales representative organization to invoice and
collect receivables);
o longer accounts receivable collection cycles;
o the financial health of individual sales representative organizations;
o developing and managing relationships with sales representative
organizations;
o greater difficulty in maintaining direct client contact;
o fluctuations in exchange rates;
o political, social, and economic conditions in various jurisdictions;
o tariffs and other trade barriers; and
o potentially adverse tax consequences.
The Company expects that international operations will continue to
account for a significant portion of its revenues and intends to continue to
expand its international operations. Expansion into new geographic territories
may require considerable management and financial resources and may negatively
impact the Company's near-term results of operations. If the Company is unable
to successfully manage the risks associated with international operations, such
an inability could have a material adverse effect on the Company's business and
financial results.
Risks of Failing to Anticipate Changing Market Needs
The Company's success depends in part upon its ability to anticipate
rapidly changing technologies and market trends and to adapt its Products and
Services to meet the changing information and analysis needs of IT users. During
1998 the Company experienced a shifting client demand towards more consultative,
solution-oriented products. With the advent of the internet, information alone,
without analysis in context of a client's environment, will have less value. In
addition to this, frequent and often dramatic changes, including the following,
characterize the IT industry:
o introduction of new products and obsolescence of others;
o shifting strategies and market positions of major industry
participants;
o paradigm shifts with respect to system architectures; and
o changing objectives and expectations of IT users and vendors.
<PAGE> 31
This environment of rapid and continuous change presents significant
challenges to the Company's ability to provide its clients with current and
timely analysis and advice on issues of importance to them. The Company commits
substantial resources to meeting these challenges. If the Company fails to
provide insightful timely analysis of developments and assessment of
technologies and trends in a manner that meets changing market needs, such a
failure could have a material and adverse effect on the Company's future
operating results.
Dependence on Ability to Attract and Retain Qualified Personnel
The Company needs to hire, train and retain a significant number of
additional qualified employees to execute its strategy and support its growth.
In particular, the Company needs trained research analysts, consultants, sales
representatives and product development and operations staff. The Company
continues to experience intense competition in recruiting and retaining
qualified employees. The pool of experienced candidates is small; and, the
Company competes for qualified employees against many companies, including
Gartner Group, that have substantially greater financial resources than the
Company. If the Company is unable to successfully hire, retain and motivate a
sufficient number of qualified employees, such an inability will have a material
adverse effect on the Company's business and financial results.
Competition
The IT research and analysis industry is extremely competitive. The
Company competes directly with other independent providers of similar services
and indirectly with the internal staffs of current and prospective client
organizations. The Company's principal direct competitor, Gartner Group, has a
substantially longer operating history and has considerably greater financial
resources and market share than the Company. The Company also competes
indirectly with larger electronic and print media companies and consulting
firms. The Company's indirect competitors, many of which have substantially
greater financial, information gathering and marketing resources than the
Company, could choose to compete directly against the Company in the future.
The Company's market has few barriers to entry. New competitors could
easily compete against the Company in one or more market segments addressed by
the Company's Continuous Services. The Company's current and future competitors
may develop products and services that are more effective than the Company's
products. Competitors may also produce their products and services at less cost
and market them more effectively. If the Company is unable to successfully
compete against existing or new competitors, such an inability will have a
material adverse effect on the Company's operating results and would likely
result in pricing pressure and loss of market share.
Risks Associated With New Product Development
The Company's future success depends on its ability to develop or
acquire new products and services that address specific industry and business
sectors, changes in client requirements and technological changes in the IT
industry. The process of internally researching, developing, launching and
gaining client acceptance of a new product or service is inherently risky and
costly. Assimilating and marketing an acquired product or service is also risky
<PAGE> 32
and costly. During 1998 the Company experienced a shifting client demand towards
more consultative, solution-oriented products. With the advent of the internet,
information alone, without analysis in context of a client's environment, will
have less value. In addition to this, the Company has introduced few new
products or services and has had limited experience in managing strategic
investments. From April 1996 to December 1998, the Company invested $8.3 million
in several companies whose products, services and/or distribution channels
complement the Company's business. If the Company is unable to develop new
products and services or manage its strategic investments, such inabilities
could have a material adverse effect on the Company's operating results.
Dependence on Key Personnel
The Company relies, and will continue to rely, in large part on its key
management, research, consulting, sales, product development and operations
personnel. The Company's success in part depends on its ability to motivate and
retain highly qualified employees. If Dale Kutnick (President, Chief Executive
Officer and Co-Research Director) and/or other senior officers of the Company
leave the Company, such loss or losses could have a material adverse effect on
the Company.
Risk of Product Pricing Limiting Potential Market
The Company's pricing strategy may limit the potential market for the
Company's Continuous Services to substantial commercial and governmental users
and vendors of IT. As a result, the Company may be required to reduce prices for
its Continuous Services or to introduce new products with lower prices in order
to expand or maintain its market share. These actions could have a material
adverse effect on the Company's business and results of operations.
Management of Growth
Since inception, the Company's operations have changed substantially
due to the expansion and growth of the Company's business. Growth places
significant demands on the Company's management, administrative, operational and
financial resources. The Company's ability to manage growth, should it continue
to occur, will require the Company to continue to improve its systems and to
motivate and effectively manage an evolving workforce. If the Company's
management is unable to effectively manage a changing and growing business, the
quality of the Company's products, its retention of key employees and its
results of operations could be materially adversely affected.
Risk of Failure to Integrate Recent Acquisition and Risks Associated with
Potential Acquisitions
As part of its business strategy, the Company buys, or makes
investments in, complementary businesses, products and services. If the Company
finds a business it wishes to acquire, the Company could have difficulty
negotiating the terms of the purchase, financing the purchase, and assimilating
the employees, products and operations of the acquired business. Acquisitions
may disrupt the ongoing business of the Company and distract management.
Furthermore, acquisition of new businesses may not lead to the successful
development of new products, or if developed, such products may not achieve
<PAGE> 33
market acceptance or prove to be profitable. A given acquisition may also have a
material adverse effect on the Company's financial condition or results of
operations. In addition, the Company may be required to incur debt or issue
equity to pay for any future acquisitions.
In October 1998, the Company acquired Sentry, an IT consulting company.
The Sentry acquisition required extensive management time with respect to the
negotiation and consummation of the transaction. The Company expects that the
time and costs associated with the integration of the Sentry business into the
Company's existing MGC division will be significant. The Company may not be
able to successfully integrate the Sentry business, and any such inability
could have a material adverse affect on the Company's operations and financial
results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Concentration of Credit Risk" in Note 2 to the consolidated
financial statements for information regarding the Company's approach to
financial risk management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in the following Index to Consolidated
Financial Statements are filed as a part of this Annual Report on Form 10-K
under Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
META GROUP, INC.
Page
Independent Auditors' Report............................................... F-1
Consolidated Balance Sheets at December 31, 1998 and 1997.................. F-2
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996............................................................ F-3
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996............................................................ F-5
Notes to Consolidated Financial Statements................................. F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item may be found under the sections
captioned "Election of Directors," "Occupations of Directors and Executive
Officers" and "Section 16 (a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement (the "1999 Proxy Statement") for the Company's Annual
Meeting of Stockholders to be held on May 20, 1999, and is incorporated herein
by reference. The 1999 Proxy Statement will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the Company's
fiscal year ended December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item may be found under the section
captioned "Compensation And Other Information Concerning Directors and Officers"
in the 1999 Proxy Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item may be found under the section
captioned "Management And Principal Holders of Voting Securities" in the 1999
Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item may be found under the section
captioned "Certain Relationships and Related Transactions" in the 1999 Proxy
Statement, and is incorporated herein by reference.
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K
(a)(1)... Financial Statements.
The following consolidated financial statements are included in Item 8
of this report:
Page
----
Independent Auditors' Report................................................F-1
Consolidated Balance Sheets at December 31, 1998 and 1997...................F-2
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996.............................................................F-3
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996....................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996.............................................................F-5
Notes to Consolidated Financial Statements..................................F-6
(a)(2) Financial Statement Schedule.
The following financial statement schedule for the Company is filed as
part of this report:
Schedule II - Valuation and Qualifying Accounts.............................S-1
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
accompanying Consolidated Financial Statements or notes thereto.
<PAGE> 36
(a)(3) List of Exhibits.
The following exhibits are filed as part of, and incorporated by
reference into this Annual Report on Form 10-K:
Exhibit
Number Description
------ -----------
2.1(1)(2) Agreement and Plan of Merger by and among MET
Group, Inc., MG Acquisition Corporation and The
Sentry Group, Inc. dated as of September 23, 1998
("Agreement and Plan of Merger")
2.2(1) Amendment No. 1 to Agreement and Plan of Merger
3.1(3) Amended and Restated Certificate of Incorporation of
the Company
3.2(3) Amended and Restated By-Laws of the Company
4.1(3) Specimen certificate representing the Common Stock
4.2(1) Registration Rights Agreement dated as of October 20,
1998 by and among META Group,
Inc. and the stockholders of The Sentry Group, Inc.
listed on the signature pages
thereto
4.3(1) Escrow Agreement dated as of October 20, 1998 among
META Group, Inc., Peter A. Naber and State Street
Bank and Trust Company
4.4(6) Form of Common Stock Purchase Warrant (Immediate
Vesting)issued to stockholders of The Sentry Group,
Inc. on October 20, 1998
4.5(6) Form of Common Stock Purchase Warrant (Contingent
Vesting) issued to stockholders of The Sentry Group,
Inc. on October 20,1998
10.1(7)* Amended and Restated 1995 Stock Plan
10.2(4)* Form of Incentive Stock Option Agreement under the
Amended and Restated 1995 Stock Plan
10.3(4)* Form of Non-Qualified Stock Option Agreement under
the Amended and Restated 1995 Stock Plan
10.4(5)* 1995 Employee Stock Purchase Plan Enrollment
Authorization Form
10.5(3)* 1995 Non-Employee Director Stock Option Plan
10.6(4)* Form of Non-Qualified Stock Option Agreement under
the 1995 Non-Employee Director Stock Option Plan of
the Registrant
10.7(3)(2)* Agreement between First Albany Corporation and the
Company dated March 30, 1995
10.8(3)* Restated and Amended 1989 Stock Option Plan, as
amended
10.9(3)* Form of Incentive Stock Option Agreement under 1989
Stock Option Incentive Plan
10.10(3)* Form of Certificate and Agreement under Restated
and Amended 1989 Stock Option Plan
10.11(3)* 1993 Stock Option and Incentive Plan, as amended
10.12(3)* Form of Certificate and Agreement under 1993 Stock
Option and Incentive Plan
10.13(3)* Form of Warrant under the Restated and Amended 1989
Stock Option Plan and 1993 Stock Option and Incentive
Plan
10.14(3) Form of International Sales Representative Agreement
10.15(3) Office Lease between International Business Machines
Corporation and the Company dated August 1, 1994
<PAGE> 37
Exhibit
Number Description
------ -----------
10.16(6)* Form of META Group,Inc./JMI Long Term Incentive
Compensation Plan
10.17(7)* Amended and Restated 1996 Equity Compensation Plan of
The Sentry Group, Inc.
11.1+ Statement re computation of per share earnings
21.1+ List of subsidiaries
23.1+ Consent of Deloitte & Touche LLP
24.1+ Power of Attorney (see page 31)
27.1+ Financial Data Schedule
--------------
(1) Incorporated herein by reference to the exhibits to the Company's
Current Report on Form 8-K dated October 20, 1998
and filed on November 3, 1998 (File No. 0-27280).
(2) Confidential treatment obtained as to certain portions.
(3) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-97848).
(4) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 (File No. 333-1854).
(5) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on form S-8 (File No. 33-80539).
(6) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q dated November 16, 1998
(File No. 0-27280).
(7) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 (File No.333-68323).
* Indicates a management contract or any compensatory plan,
contract or arrangement.
+ Filed herewith.
(b) Reports On Form 8-K
The Company filed a Current Report on Form 8-K dated November 3, 1998
reporting the acquisition of The Sentry Group, Inc.
(c) Exhibits.
The Company hereby files as part of this Annual Report on Form 10-K the
exhibits listed in Item 14(a)(3) set forth above.
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 31, 1999 By: /s/ Dale Kutnick
--------------------------------------
Dale Kutnick
President, Chief Executive Officer and
Co-Research Director
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of META Group, Inc., hereby
severally constitute and appoint Dale Kutnick and Bernard F. Denoyer, and each
of them singly, our true and lawful attorneys, with the power to them and each
of them singly, to sign for us and in our names in the capacities indicated
below, any amendments to this Report on Form 10-K, and generally to do all
things in our names and on our behalf in such capacities to enable META Group,
Inc. to comply with the provisions of the Securities Exchange Act of 1934, as
amended, and all the requirements of the Securities and Exchange Commission.
<PAGE> 39
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant, in the capacities indicated, on the 31st day of March 1999.
Signature Title(s)
----------- ----------
/s/ Dale Kutnick President, Chief Executive Officer (Principal
- --------------------------- Executive Officer) and Co-Research Director
Dale Kutnick
/s/ Bernard F. Denoyer Senior Vice President-Finance, Chief Financial
- --------------------------- Officer, Treasurer and Secretary (Principal
Bernard F. Denoyer Financial Officer and Principal Accounting
Officer)
/s/ Marc Butlein Director
- ----------------------------
Marc Butlein
/s/ Francis J. Saldutti Director
- ----------------------------
Francis J. Saldutti
Director
- ----------------------------
Harry S. Gruner
/s/ Michael Simmons Director
- -----------------------------
Michael Simmons
/s/ George C. McNamee Director
- -----------------------------
George C. McNamee
Director
- ------------------------------
Howard Rubin
<PAGE> F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
META Group, Inc.
Stamford, Connecticut
We have audited the accompanying consolidated balance sheets of META
Group, Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. Our
audits also included the financial statement schedule listed at Item 14(a) 2.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of META Group, Inc. and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles. Also in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
February 5, 1999
(March 15, 1999 as to Note 13)
<PAGE> F-2
<TABLE>
META GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,945 $ 12,910
Marketable securities 21,031 23,700
Accounts receivable, less allowance for doubtful
accounts of $1,088 and $828 35,306 26,302
Deferred commissions 1,436 1,351
Deferred tax asset 3,808 1,490
Other current assets 2,894 1,126
-------- --------
Total current assets 74,420 66,879
Marketable securities 15,850 4,046
Furniture and equipment, net 4,553 2,765
Deferred tax asset 792 7,759
Goodwill, net 5,528
Other assets 11,044 8,004
-------- --------
Total assets $112,187 $ 89,453
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,432 $ 974
Deferred revenues 31,276 29,136
Accrued compensation 5,314 2,850
Other current liabilities 1,475 1,093
--------- ---------
Total current liabilities 39,497 34,053
--------- ---------
Commitments and contingencies (See Note 7)
Stockholders' equity:
Preferred stock, $.01 par value, authorized
2,000,000 shares; none issued
Common stock, $.01 par value, authorized
45,000,000 shares; issued 12,319,377 and
11,774,856 shares 123 118
Paid-in capital 58,443 49,943
Retained earnings 14,444 5,659
Treasury stock, at cost, 647,016 shares (320) (320)
--------- ---------
Total stockholders' equity 72,690 55,400
--------- ---------
Total liabilities and stockholders' equity $ 112,187 $ 89,453
========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE> F-3
<TABLE>
META GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Continuous services $56,086 $41,805 $30,769
Other, principally consulting and 16,699 9,390 6,197
publications ------- ------- -------
Total revenues 72,785 51,195 36,966
------- ------- -------
Operating expenses:
Cost of services and fulfillment 35,098 24,602 18,908
Selling and marketing 16,702 12,477 8,797
General and administrative 6,753 5,006 3,728
Depreciation and amortization 1,894 1,501 1,086
------- ------- -------
Total operating expenses 60,447 43,586 32,519
------- ------- -------
Operating income 12,338 7,609 4,447
Interest income 2,621 2,138 1,909
------- ------- -------
Income before provision for income tax 14,959 9,747 6,356
Provision for income tax 6,174 3,980 2,730
------- ------- -------
Net income $ 8,785 $ 5,767 $ 3,626
======= ======= =======
Net income per diluted common share $ .70 $ .48 $ .32
======= ======= =======
Weighted average number of diluted common 12,596 11,937 11,502
shares outstanding ======= ======= =======
Net income per basic common share $ .78 $ .53 $ .41
======= ======= =======
Weighted average number of basic common 11,326 10,821 8,925
shares outstanding ======= ======= =======
See notes to consolidated financial statements.
</TABLE>
<PAGE> F-4
<TABLE>
META GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
Retained
Common Stock Paid-in Earnings Treasury Stock
------------ --------------
Total Shares Amount Capital (Deficit) Shares Amount
----- ------ ------ ------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $31,868 8,881 $ 89 $35,833 $(3,734) (647) $(320)
Exercise of stock options 621 1,241 12 609
Costs related to the IPO (33) (33)
Issuance of shares under employee
stock purchase plan 322 24 1 321
Income tax benefit from stock
options exercised 6,324 6,324
Net income 3,626 3,626
------- ------- ---- ------- ------- ---- ----
Balance, December 31, 1996 42,728 10,146 102 43,054 (108) (647) (320)
Exercise of stock options 364 1,608 16 348
Issuance of shares under employee
stock purchase plan 254 21 254
Income tax benefit from stock
options exercised 6,287 6,287
Net income 5,767 5,767
------- ------- ---- ------- ------- ---- ----
Balance, December 31, 1997 55,400 11,775 118 49,943 5,659 (647) (320)
Exercise of stock options 1,636 328 3 1,633
Issuance of shares under employee
stock purchase plan 344 21 344
Income tax benefit from stock
options exercised 984 984
Sentry acquisition (Note 3) 4,706 195 2 4,704
Sentry warrants (Note 3) 835 835
Net income 8,785 8,785
-------- --- ---- ------- -------- ---- -----
Balance, December 31, 1998 $ 72,690 12,319 $123 $58,443 $ 14,444 (647) $(320)
======== ======= ==== ======= ======== ==== =====
See notes to consolidated financial statements.
</TABLE>
<PAGE> F-5
<TABLE>
META GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 8,785 $ 5,767 $ 3,626
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,894 1,501 1,086
Provision for doubtful accounts 260 77 318
Write-off of equipment 40
Deferred income taxes 5,970 3,820 2,682
Changes in assets and liabilities
(net of business acquisition):
Accounts receivable (8,253) (8,243) (7,907)
Deferred commissions (85) 124 (325)
Other current assets (783) (645) (155)
Other assets (1,077) (740) (705)
Accounts payable (271) 137 (8)
Accrued compensation and other expenses 704 144 548
Deferred revenues 2,110 6,251 6,328
-------- -------- --------
Net cash provided by operating activities 9,294 8,193 5,488
-------- -------- --------
Investing activities:
Capital expenditures (3,177) (1,908) (1,748)
Investment in marketable securities (9,135) (12,062) (15,684)
Investments and advances (1,927) (1,266) (5,156)
-------- -------- --------
Net cash used in investing activities (14,239) (15,236) (22,588)
-------- -------- --------
Financing activities:
Costs related to the IPO (33)
Proceeds from employee stock purchase plan 344 254 322
Proceeds from exercise of stock options 1,636 364 621
-------- -------- --------
Net cash provided by financing activities 1,980 618 910
-------- -------- --------
Net decrease in cash and cash equivalents (2,965) (6,425) (16,190)
Cash and cash equivalents at beginning of year 12,910 19,335 35,525
-------- -------- --------
Cash and cash equivalents at end of year $ 9,945 $ 12,910 $ 19,335
======== ======== ========
Supplemental information:
Cash paid during the year for income taxes $ 221 $ 216 $ 48
======== ======== ========
See notes to consolidated financial statements.
During the year ended December 31, 1998, the Company acquired The
Sentry Group, Inc. for 195,066 shares of common stock valued at $4.7 million and
warrants valued at $835,000.
</TABLE>
<PAGE> F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Description
META Group, Inc. and its subsidiary, The Sentry Group, Inc. (see Note
3), (collectively the "Company") 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 the Company's research, analysis and recommendations to
develop and employ cost-effective and revenue enhancing strategies for
selecting and implementing timely IT solutions and for aligning these
solutions with business priorities. IT vendors use the Company's services for
help in product positioning, marketing and market planning, as well as for
internal IT decision-making.
The Company's domestic revenues are generated by a direct sales force
calling on IT user and vendor clients. International marketing and sales are
performed by independent sales representative organizations. 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 from international sales representative organizations,
primarily in Europe, accounted for approximately 14%, 13% and 10% of the
Company's total Continuous Services revenues for the years ended December 31,
1998, 1997 and 1996, respectively.
2. Significant Accounting Policies
Principles of Consolidation The consolidated financial statements
include the accounts of META Group, Inc. and The Sentry Group, Inc. since the
date of acquisition. All significant intercompany balances and transactions
have been eliminated in consolidation.
Revenue and Commission Expense Recognition Continuous Services revenues
are recognized on a straight-line basis over the subscription contract period,
generally one year. All subscription contracts are billable at signing, absent
special terms granted on a limited basis from time to time. As such, the
Company's policy is to record at the time of signing of a Continuous Services
subscription contract the fees receivable and related deferred revenues for the
full amount of the subscription contract. The Company also records the related
commission obligation upon the signing of the subscription contract and
amortizes the corresponding deferred commission expense over the subscription
period in which the related Continuous Services revenues are earned and
amortized to income. All subscription contracts are cancelable only for
non-performance, except for government contracts which have a 30-day
cancellation clause. Historically, such cancellations have not been material.
Other revenues, consisting principally of consulting, conferences, and
publications, are recognized at the time the related service is rendered or
product delivered.
Product Development All costs incurred in the development of new
products and services are expensed as incurred.
<PAGE> F-7
Furniture and Equipment Furniture and equipment is stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets which range from three to seven years.
Income Taxes Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the income tax basis of
the Company's assets and liabilities as measured by the presently enacted tax
rates.
Cash Equivalents and Marketable Securities Cash and cash equivalents
include cash on hand and all investments in highly liquid instruments purchased
with original maturities of three months or less. Investments with original
maturities of more than three months are classified as marketable securities.
Marketable securities are considered "held-to-maturity" and valued at cost,
which approximates market. The Company intends to hold all marketable securities
investments to maturity.
Earnings per Share Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding and dilutive common equivalent shares
(common stock options) outstanding. Common shares outstanding includes issued
shares less shares held in treasury for the respective year.
Concentration of Credit Risk The Company has no material
off-balance-sheet concentration of credit risk such as foreign exchange
contracts, options contracts or other foreign hedging arrangements. The Company
invests the majority of its cash balances in short-term, high quality marketable
debt securities, managed by three financial institutions. The Company's accounts
receivable balances are primarily domestic. No single client accounted for
greater than 2% of revenues or represents a significant credit risk to the
Company.
Fair Value of Financial Instruments The carrying amount of all of the
Company's cash and cash equivalents, and marketable securities, approximates
fair value due to the short-term maturity of those investments.
Management Estimates The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Goodwill Goodwill consists of the excess of the purchase price over the
fair value of net assets acquired and is being amortized using the straight-line
method over thirty years.
<PAGE> F-8
Adoption of Financial Accounting Standards In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130,") and Statement
of Financial Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information," ("SFAS 131.") SFAS 130 requires that
comprehensive income, which includes net income as well as certain changes in
assets and liabilities recorded in stockholders' equity, be reported in the
financial statements. There were no components of comprehensive income other
than net income for the years ended December 31, 1998, 1997, and 1996. SFAS 131
requires disclosure of certain information about operating segments and about
products and services, geographic areas in which a company operates, and their
major customers. The Company has incorporated the provisions of SFAS 131 in Note
12.
Stock Split On April 27, 1998, the Board of Directors of the Company
declared a three for two stock split effected through the issuance of a fifty
percent stock dividend payable on June 11, 1998 to shareholders of record on May
22, 1998. All share and per share amounts affected by this split that are
contained in the accompanying consolidated financial statements have been
retroactively adjusted for all periods presented.
3. Acquisition
In October 1998, the Company completed the acquisition of all of the
outstanding capital stock of The Sentry Group, Inc. ("Sentry"), an IT consulting
company, for an initial payment of 195,066 shares of common stock and a
contingent payment of up to $7.0 million in common stock or (at the Company's
option) cash in the event certain financial targets are met by Sentry for 1999.
In addition, the Company issued to Sentry stockholders warrants to purchase up
to 200,000 shares of the Company's common stock at $30.00 per share, 125,000
shares of which are currently exercisable and 75,000 shares of which are
contingently exercisable upon Sentry achieving certain financial targets in
1999. The 125,000 warrants currently exercisable expire in October 2002. The
75,000 warrants contingently exercisable expire four years after the date the
Company pays contingent consideration, if any, to the Sentry stockholders
pursuant to the terms of the acquisition.
The fair value of the noncontingent consideration, including
acquisition costs, was $5.9 million. The acquisition was accounted for under the
purchase method and, accordingly, the operations of Sentry have been included in
the consolidated financial statements from the date of acquisition. The purchase
price was allocated to the net assets acquired based upon their estimated fair
values. Such allocation resulted in goodwill of $5.6 million which will be
amortized over thirty years. Accumulated amortization of goodwill at December
31, 1998 was $37,000. The fair value of the contingent consideration will be
included in the purchase price upon final resolution of the contingency.
The unaudited pro forma results of operations for the years ended
December 31, 1998 and 1997 have been set forth below as though the acquisition
had occurred as of January 1, 1997.
<PAGE> F-9
(In thousands, except per share data)
Year Ended December 31,
1998 1997
---- ----
(Unaudited)
Revenues $79,200 $59,365
Income before income taxes 14,745 9,973
Net income 8,659 5,901
Net income per common
share:
Diluted $ .68 $ .49
Basic $ .75 $ .54
4. Marketable Securities
At December 31, 1998 and 1997, the Company held investments in
marketable securities which were classified as held-to-maturity; accordingly,
they are carried at amortized cost plus accrued interest on the consolidated
balance sheets. Net unrealized gains (losses) have not been recognized in the
consolidated financial statements. Marketable securities at December 31, 1998
and 1997 include the following (in thousands):
<TABLE>
December 31, 1998
-----------------
Gross
Unrealized
Amortized Holding Fair
Cost Gains (Losses) Value
<S> <C> <C> <C>
Discounted commercial paper $20,370 $477 $20,847
U.S. government issued mortgage backed bonds 12,000 (97) 11,903
Asset backed securities 1,850 1,850
Municipal bonds 2,000 2,000
Accrued interest 661 661
------- ----- -------
$36,881 $380 $37,261
======= ==== =======
December 31, 1997
-----------------
Discounted commercial paper $19,274 $438 $19,712
U.S. government issued mortgage backed bonds 4,997 23 5,020
Corporate bonds 2,838 (30) 2,808
Accrued interest 637 637
------- ---- -------
$27,746 $431 $28,177
======= ==== =======
The contractual maturities of marketable securities at December 31, 1998 are
as follows:
<PAGE> F-10
December 31, 1998
-----------------
Amortized Fair
Cost Value
Within one year $20,370 $20,847
Due after one year through twenty years 14,000 13,903
Due after twenty years 1,850 1,850
------- -------
$36,220 $36,600
======= =======
Actual maturies may differ from contractual maturities because some
borrowers have the right to call the obligations.
</TABLE>
5. Furniture and Equipment
Furniture and equipment consists of the following (in thousands):
December 31,
------------
1998 1997
---- ----
Leasehold improvements $ 399 $ 208
Computer equipment, software, and peripherals 7,186 4,809
Furniture and fixtures 942 703
------ ------
8,527 5,720
Less: accumulated depreciation and amortization (3,974) (2,955)
------ ------
$4,553 $2,765
====== ======
Depreciation and amortization of furniture and equipment was
$1.8 million, $1.5 million and $1.1 million for the years ended December 31,
1998, 1997 and 1996, respectively.
6. Other Assets
During the years ended December 31, 1998 and 1997, the Company made
investments and advances to several companies in parallel or synergistic
industries. Such investments and advances are summarized below (in thousands):
<PAGE> F-11
<TABLE>
December 31, 1998 December 31, 1997
----------------- -----------------
<CAPTION>
Investments Advances Investments Advances
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Computerwire, plc. $1,850 $1,700
Computerwire, Inc. 16 $ 50 166 $ 50
Spikes Cavell & Co. 2,690 2,674
META CXP LLC 92 200 83 200
Market Perspectives Inc. 294 294
FirstMatter (SRI) 45 1,232 23 1,232
Client/Server Labs 1,029
IMG 321
IMT 529
------ ------ ------ ------
$6,866 $1,482 $4,940 $1,482
====== ====== ====== ======
</TABLE>
In October 1998, the Company invested $500,000 in IMT Strategies, Inc.
("IMT") in the form of a loan represented by a secured promissory note
convertible at any time into IMT's common stock. IMT was established to deliver
syndicated research, publications, consulting services, management education and
training focused on the integration of marketing and technology.
In October 1998, the Company invested $300,000 in Intermedia Group,
Inc. ("IMG") in the form of a loan represented by a senior secured promissory
note convertible at any time into IMG's common stock. IMG is an integrated media
and conference business established to serve markets in a complementary fashion
to the Company's main lines or new lines of business.
In September 1998, the Company made an investment of $1 million
in Client/Server Labs, Inc., a supplier of performance and functional IT testing
services devoted to assessing the performance and viability of IT solutions.
In November 1997, the Company advanced $1.3 million to a joint venture
with SRI Consulting, Inc., designed to deliver thought-leading research,
methods, metrics, and tools to senior management of global 2000 companies
scenario planning for the future. SRI Consulting, Inc. is a wholly-owned
subsidiary of SRI International, a Silicon Valley based think-tank working with
companies worldwide to identify market opportunities and develop strategies for
competing in technology-driven markets.
All of the investments listed above are for less than a 20% stock
ownership interest in the investee. As the Company does not exert significant
influence in of any of the investees, all investments are accounted for on the
cost basis.
7. Commitments and Contingencies
Lease Commitments:
<PAGE> F-12
The Company leases office facilities and equipment under noncancelable
operating leases. Future minimum lease payments relative to these agreements are
as follows (in thousands):
Year ending December 31,
------------------------
1999 $2,405
2000 2,161
2001 1,684
2002 43
------
$6,293
======
Total rent expense was $2.0 million, $1.6 million and $1.3 million for
years ended December 31, 1998, 1997, and 1996, respectively.
Contingencies:
The Company is a party to certain legal proceedings arising in the
ordinary course of business. 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. Accordingly, no provision for any
liability has been made in the accompanying consolidated financial statements.
Guarantees:
The Company currently guarantees certain local bank borrowings of its
independent sales representative organizations in Europe by extending
irrevocable letters of credit to local banks, renewable annually. Should the
independent sales representative default on the terms of their repayment
obligations to their bank, the Company's guarantee would be called upon. At
December 31, 1998 the total of these guarantees is less than $1.5 million
and none exceeds $350,000.
8. Income Taxes
<TABLE>
The provision for income taxes is as follows (in thousands):
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
------ ------ ------
<S> C> <C> <C>
Current-state $ 204 $ 160 $ 48
------ ------ ------
Deferred-federal 4,908 2,866 2,080
-state 1,062 954 602
------ ------ ------
5,970 3,820 2,682
------ ------ ------
$6,174 $3,980 $2,730
====== ====== ======
</TABLE>
<PAGE> F-13
A reconciliation of the income tax provision from the amount computed
using the federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax at statutory rate $5,086 $3,314 $2,161
State taxes, net of federal benefit 1,007 659 429
Other 81 7 140
------ ------ ------
$6,174 $3,980 $2,730
====== ====== ======
The principal components of the Company's deferred tax assets and
(liabilities) are as follows (in thousands):
December 31,
----------------
1998 1997
----- ------
Depreciation and amortization $ 96 $ 74
Accrued liabilities 1,157
Allowance for doubtful accounts 420 336
Capitalization of product development costs 30 35
Net operating loss carryforwards 6,061 8,789
Other 135
------ ------
Deferred tax asset 6,742 10,391
Valuation allowance (2,142) (1,142)
------ -------
Net deferred tax asset $4,600 $9,249
====== =======
</TABLE>
During the year ended December 31, 1998, the Company increased the
valuation allowance by $1 million to properly reflect the additional valuation
allowance related to the deferred tax assets acquired as part of the Sentry
acquisition. During the year ended December 31, 1997, the Company
increased the valuation allowance by $343,000, which represents the tax effect
of the state net operating loss carryforwards generated during the year.
At December 31, 1998, the Company has net operating loss carryforwards
for federal income tax purposes of $10.9 million expiring in 2004 through 2010.
The exercise of non-qualified stock options and the disqualifying
dispositions of incentive stock options under the Company's stock option plans
gives rise to compensation which is includable in the taxable income of the
recipients and deductible by the Company for federal and state income tax
purposes. The tax benefit recognized from the utilization of such deductions
increased paid-in capital by $1.0 million, $6.3 million, and $6.3 million during
the years ended December 31, 1998, 1997, and 1996, respectively. As of December
31, 1998, 434,389 shares were issuable upon the exercise of outstanding
non-qualified stock options held by employees.
<PAGE> F-14
9. Stock Option Plans
The Company's 1995 Non-Employee Director Stock Option Plan, Amended and
Restated 1995 Stock Plan, 1993 Stock Option and Incentive Plan, Amended and
Restated 1989 Stock Option Plan and Amended and Restated 1996 Equity
Compensation Plan of The Sentry Group, Inc., (the "Plans") provide for grants to
employees, directors and consultants of incentive stock options ("ISOs") and
non-qualified stock options ("NQSOs"), for the purchase of up to 225,000,
4,500,000, 2,400,000, 5,400,000 and 359,500 shares of the Company's common
stock, respectively. All options were granted at an exercise price of not less
than fair market value. Fair market value was determined by the Company's
Compensation Committee. The Compensation Committee determined the date(s) at
which options vest and become exercisable. Upon adoption of the 1995 Stock Plan,
the 1993 Stock Option and Incentive Plan and the 1989 Stock Option Plan were
terminated, except as to outstanding stock options.
<TABLE>
<CAPTION>
Weighted-Average
Options Option Price Range Exercise Price
<S> <C> <C> <C> <C>
Outstanding January 1, 1996 3,866,146 $ .10 - $ 7.09 $ .6883
Granted 665,055 13.75 - 22.17 15.7512
Exercised (1,241,275) .10 - 16.50 .5256
Canceled (157,895) .63 - 17.67 8.1098
---------- ------ ------ ------
Outstanding December 31, 1996 3,132,031 .10 - 22.17 3.5771
Granted 792,635 11.83 - 16.50 12.7417
Exercised (1,608,021) .10 - 15.83 .3616
Canceled (148,928) .63 - 17.67 12.0209
---------- ------ ------ -------
Outstanding December 31, 1997 2,167,717 .10 - 22.17 8.7850
Granted 1,332,999 15.58 - 27.44 19.1136
Exercised (327,817) .10 - 17.67 4.9931
Canceled (232,626) 3.17 - 24.13 17.0729
----------- ------ ------ --------
Outstanding December 31, 1998 2,940,273 $ .10 - $27.44 $13.2346
========== ====== ====== ========
Exercisable:
December 31, 1998 1,123,502 $ 6.9421
==========
December 31, 1997 1,015,941 $ 4.2446
==========
December 31, 1996 2,205,998 $ .7674
==========
</TABLE>
At December 31, 1998, 302,184 shares were issuable upon the exercise of
outstanding NQSOs. All other stock options outstanding were ISOs.
In October 1995, the Company adopted the 1995 Stock Plan, 1995
Non-Employee Director Stock Option Plan, and 1995 Employee Stock Purchase Plan.
Details of the Plans are as follows:
Amended and Restated 1995 Stock Plan. The Company's 1995 Stock Plan
(the "1995 Plan") was adopted by the Board of Directors on October 2, 1995 and
approved by the Company's stockholders on October 4, 1995. The 1995 Plan
<PAGE> F-15
provides for the issuance of a maximum of 4,500,000 shares of common stock
pursuant to the grant to employees of ISOs and the grant of NQSOs, stock awards
or opportunities to make direct purchases of stock in the Company to employees,
consultants, directors and officers of the Company.
1995 Non-Employee Director Stock Option Plan. The 1995 Non-Employee
Director Stock Option Plan (the "Director Option Plan") was adopted by the Board
of Directors on October 2, 1995 and approved by the Company's stockholders on
October 4, 1995. The Director Option Plan provides for the grant of NQSOs to
purchase a maximum of 225,000 shares of common stock to non-employee directors
of the Company. All options granted under the Director Option Plan will have an
exercise price equal to the fair market value of common stock on the date of
grant. The term of each option will be for a period of ten years from the date
of grant.
Amended and Restated 1995 Employee Stock Purchase Plan. The Amended and
Restated 1995 Employee Stock Purchase Plan (the "1995 Purchase Plan") was
adopted by the Board of Directors and approved by the Company's stockholders on
October 2, 1995. The 1995 Purchase Plan provides for the issuance of a maximum
of 375,000 shares of common stock pursuant to the exercise of non-transferable
options granted to participating employees. The exercise price for the option is
85% of the lesser of the market price of the Company's common stock on the first
or last day of the semi-annual plan period. During the years ended December 31,
1998 and 1997, the Company issued 21,620 and 20,604 shares, respectively, under
the 1995 Purchase Plan.
Amended and Restated 1996 Equity Compensation Plan of The Sentry Group,
Inc. The Amended and Restated 1996 Equity Compensation Plan of The Sentry Group,
Inc. (the "Sentry Plan") was adopted and assumed by the Company pursuant to the
acquisition by the Company of Sentry in October 1998. The Sentry Plan provides
for the issuance of a maximum of 359,500 shares of Common Stock pursuant to the
grant of ISOs to employees and the grant of NQSOs, stock awards and
opportunities to make direct purchases of stock to employees, consultants,
directors and officers of the Company. The terms of such options, including
number of shares, exercise price, duration and vesting are generally determined
by the Compensation Committee.
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
OPTIONS GRANTED OPTIONS EXERCISED
------------------------------------------------ --------------------------------
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AS OF 12/31/98 LIFE PRICE AS OF 12/31/98 PRICE
<S> <C> <C> <C> <C> <C>
$ .10 - $ .83 303,350 3.06 $ .4985 303,350 $ .4985
1.33 - 7.09 359,683 4.53 1.9337 359,683 1.9337
11.83 - 12.33 361,488 8.25 11.8333 83,561 11.8333
13.02 - 15.17 470,533 7.75 14.4330 196,309 14.5961
15.58 - 27.44 1,445,219 8.91 18.6807 180,599 17.1574
- ---------------- --------- ---- -------- --------- -------
$ .10 - $27.44 2,940,273 7.50 $13.2346 1,123,502 $6.9421
================ ========= ==== ======== ========= =======
</TABLE>
<PAGE> F-17
The estimated fair value of options granted during 1998, 1997 and 1996
was $10.55, $6.52 and $8.72 per share, respectively. The Company applies
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock option and purchase plans. No compensation cost has
been recognized for the Company's fixed stock option plans and stock purchase
plan. Had compensation cost for the Company's stock option plans and stock
purchase plan been determined based on fair value at the option grant dates for
awards in accordance with the provisions of SFAS 123, the Company's net income
and earnings per share for the years ended December 31, 1998, 1997 and 1996,
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Net income applicable to common stockholders: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
As reported $8,785 $5,767 $3,626
Pro forma 5,460 3,867 2,396
Net income per diluted common share:
As reported $ .70 $ .48 $ .32
Pro forma .43 .32 .21
Net income per basic common share:
As reported $ .78 $ .53 $ .41
Pro forma .48 .36 .27
</TABLE>
The fair value of options granted under the Company's fixed stock
option plans during 1998, 1997 and 1996 was estimated on the dates of grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used: dividend yield of zero, expected volatility
of approximately 57%, risk free interest rate of approximately 5% and expected
lives of option grants of approximately 2.5 years. Pro forma compensation cost
related to shares purchased under the 1995 Employee Stock Purchase Plan is
measured based on the discount from market value. The effects of applying SFAS
123 in this pro forma disclosure are not indicative of future pro forma effects.
Long Term Incentive Plan
In July 1998 the Company adopted the META Group, Inc./JMI Long Term
Incentive Compensation Plan (the "Long Term Plan"). The Long Term Plan provides
for the issuance of a maximum of 1,000 units to key officers of the
Company. The total number of units to be granted, selection of key officers for
participation in the Long Term Plan, the number of units to be granted to each
participant, the vesting period and the determination of the value of each
participant's units are generally determined by the Compensation Committee. As
of December 31, 1998, a total of 280 units were granted to key officers of the
Company and 720 units were available for future grants.
<PAGE> F-17
10. Employee 401(k) Savings Plan
The Company has a tax-deferred employee 401(k) savings plan covering
substantially all employees. Contributions by the Company are made at the
Company's discretion. No contributions have been made by the Company under this
plan.
11. Related Party Transactions
In July 1998 the Board of Directors approved the META Group, Inc./
JMI Long Term Incentive Compensation Plan (the "Plan") with a significant
retention feature for key management employees. The Company subscribed for up to
$4.0 million in limited partnership interests in the JMI Equity Side Fund, L.P.
(the "JMI Fund"), a venture capital fund managed by JMI Associates. The JMI Fund
will co-invest along with other funds affiliated with JMI Associates. The
Company has agreed to use the potential returns on the Company's investment in
the JMI Fund to fund payouts under the Plan to key management employees.
Contemporaneously with the Company's subscription to the JMI Fund, JMI Partners,
L.P., an affiliate of the JMI Fund, became a full-service client of the Company.
In 1998, the Company received $125,000 from JMI Partners, L.P. in consideration
of services and consulting. Mr. Gruner, a director of the Company, is also a
general partner of JMI Partners, L.P., the general partner of JMI Equity Fund,
L.P. and an affiliate of JMI Associates. Mr. Gruner does not have a direct
material interest in the JMI Fund. As of December 31, 1998, the Company invested
$634,000 in the JMI Fund which is included in other assets on the consolidated
balance sheet.
In March 1995, the Company entered into an exclusive strategic alliance
agreement with First Albany Corporation ("First Albany"), a financial services
firm. The agreement provides for the distribution of the Company's written
research and analysis, in its original form or as customized and expanded by
First Albany, to First Albany's financial services customers, which include many
institutional investors who are large IT users. The agreement restricts the
Company from marketing its services to any broker dealer or sell-side firm
offering services similar to those offered by First Albany. The Company is
permitted to market and sell Continuous Services to First Albany buy-side
customers. This agreement is annually renewable by First Albany, subject to
attainment of specified minimum revenue targets. The Company recognized
$750,000, $616,500 and $425,000 in revenues from this arrangement during the
years ended December 31, 1998, 1997, and 1996, respectively. First Albany owns
209,500 shares of the Company's common stock as of December 31, 1998. George C.
McNamee, a director of the Company, is also Chairman and Co-Chief Executive
Officer of First Albany.
12. Segment Reporting
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", during the fourth quarter of 1998. SFAS No.
131 established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services and
<PAGE> F-18
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision making group is the Executive Committee, which is
comprised of the President and the executive officers of the Company. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers different products/services and
serves different clients.
The Company's operating segments consist of Continuous Services,
Consulting and Publications. Continuous Services provide comprehensive coverage
of virtually all relevant IT and business related issues faced by its clients
through client/analyst interaction and published conclusions and recommendations
to the client's specific IT requirements. Consulting provides traditional IT
consulting in selected areas as well as custom consulting services tailored to
meet individual client requirements. Publications offers a variety of
topic-specific publications designed to serve both as complements to the
Company's core services and as stand-alone deliverables that meet specific
assessment requirements.
The accounting policies of the operating segments are the same as those
described in Note 2 except that the disaggregated financial results for the
Company's operating segments have been prepared using a management approach,
which is consistent with the basis and manner in which the Company's management
internally disaggregates financial information for the purposes of assisting in
making internal operating decisions. The Company evaluates performance based on
stand alone segment operating income, defined as the segment revenues less
segment cost of sales and corporate general and administrative allocations.
Management does not allocate corporate assets, non-operating income (interest
income), or income taxes when measuring segment results.
Information by operating segment is set forth below (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Continuous Consolidated
Services Consulting Publications Total
-------- ---------- ------------ -----
<S> <C> <C> <C> <C>
Revenues $58,485 (1) $9,650 $4,650 $ 72,785
Operating income 10,666 1,554 118 12,338
Assets 112,187
Year Ended December 31, 1997
Revenues $ 43,810 (1) $5,214 $2,171 $ 51,195
Operating income 7,060 330 219 7,609
Assets - - - 89,453
Year Ended December 31, 1996
Revenues $ 32,808 (1) $3,714 $ 444 $ 36,966
Operating income 4,997 71 (621) 4,447
Assets - - - 70,171
<PAGE> F-19
(1) Included in the above Continuous Services revenues for the years ended
December 31, 1998, 1997 and 1996, are analyst consulting and conference fees
associated with retainer services of $5,637, $2,808 and $2,039, respectively,
offset by subscription publications of $3,238, $803 and $0, respectively, which
are included in Continuous Services on the face of the consolidated statements
of income, categorized as Publication revenues for management purposes.
</TABLE>
International operations:
The Company sells its products internationally through a network of 30
independent sales representative organizations located primarily in Canada and
Europe. For each of the three years in the period ended December 31, 1998, net
sales to international sales representatives were $7,636, $5,422 and $3,097,
respectively.
13. Subsequent Event
On March 15, 1999 the Company entered into an agreement to
invest $2.7 million in META Security Group, an independent start-up
consulting firm. META Security Group offers security consulting services and
hands-on operational support services including threats and vulnerability
assessments, policy and standards development, network monitoring services and
technical research and development.
14. Selected Quarterly Financial Data (Unaudited)
The following table sets forth certain key interim financial
information for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
1998:
Revenues:
Continuous services $12,972 $13,347 $14,126 $15,641
Other, principally consulting and publications 2,170 3,113 4,328 7,088
------- ------- ------- -------
Total revenues 15,142 16,460 18,454 22,729
------- ------- ------- -------
Operating expenses:
Cost of services and fulfillment 7,538 7,857 8,675 11,028
Selling and marketing 3,446 4,050 4,270 4,936
General and administrative 1,520 1,437 1,764 2,032
Depreciation and amortization 447 453 458 536
------- ------- ------- -------
Total operating expenses 12,951 13,797 15,167 18,532
------- ------- ------- -------
Operating income 2,191 2,663 3,287 4,197
------- ------- ------- -------
Net income $ 1,648 $ 1,967 $ 2,356 $ 2,814
======= ======= ======= =======
Net income per diluted common share $ .13 $ .16 $ .19 $ .22
======= ======= ======= =======
Net income per basic common share $ .15 $ .17 $ .21 $ .24
======= ======= ======= =======
<PAGE> F-20
1997:
Revenues:
Continuous services $ 9,172 $ 9,846 $10,713 $12,074
Other, principally consulting and publications 1,639 1,892 2,705 3,154
------- ------- ------- -------
Total revenues 10,811 11,738 13,418 15,228
------- ------- ------- -------
Operating expenses:
Cost of services and fulfillment 5,532 5,838 6,344 6,888
Selling and marketing 2,341 2,770 3,469 3,897
General and administrative 1,158 1,199 1,279 1,370
Depreciation and amortization 333 366 391 411
------- ------- ------- -------
Total operating expenses 9,364 10,173 11,483 12,566
------- ------- ------- -------
Operating income 1,447 1,565 1,935 2,662
------- ------- ------- -------
Net income $ 1,107 $ 1,198 $ 1,570 $ 1,892
======= ======= ======= =======
Net income per diluted common share $ .09 $ .10 $ .13 $ .16
======= ======= ======= =======
Net income per basic common share $ .11 $ .11 $ .14 $ .17
======= ======= ======= -------
</TABLE>
The total of quarterly earnings per share may not equal the annual
amount as earnings per share is calculated independently for each quarter.
<PAGE> S-1
<TABLE>
SCHEDULE II
META GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<CAPTION>
Additions
---------------------------
Charged Charged
Balance at (Credited) to (Credited) to Balance
Beginning of Costs and Other at End
Period Expenses Accounts Deductions of Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts $ 828 $260 $1,088
------ ---- ------
Valuation allowance for deferred tax
asset $1,142 $1,000(a) $2,142
------ ------- ------
Year ended December 31, 1997:
Allowance for doubtful accounts $ 751 $ 77 $ 828
------ ---- ------
Valuation allowance for deferred tax
asset $ 849 $343 $50 $1,142
------ ---- --- ------
Year ended December 31, 1996:
Allowance for doubtful accounts $ 433 $318 $ 751
------ ---- ------
Valuation allowance for deferred tax
asset $ 455 $394 $ 849
------ ---- ------
(a) Reflects the additional allowance related to the deferred tax assets
acquired as part of the acqusition of The Sentry Group, Inc.
</TABLE>
<PAGE>
META GROUP, INC.
INDEX TO EXHIBITS FILED WITH FORM 10-K
YEAR ENDED DECEMBER 31, 1998
- ------------------------------------------------------------------------------
Exhibit
Number Description
- ------------ ------------------------------------------------------------
2.1(1)(2) Agreement and Plan of Merger by and among META Group, Inc., MG
Acquisition Corporation and The Sentry Group, Inc. dated as of
September 23, 1998 ("Agreement and Plan of Merger")
2.2(1) Amendment No. 1 to Agreement and Plan of Merger
3.1(3) Amended and Restated Certificate of Incorporation of the Company
3.2(3) Amended and Restated By-Laws of the Company
4.1(3) Specimen certificate representing the Common Stock
4.2(1) Registration Rights Agreement dated as of October 20, 1998 by
and among META Group, Inc. and the stockholders of The Sentry
Group, Inc. listed on the signature pages thereto
4.3(1) Escrow Agreement dated as of October 20, 1998 among META Group,
Inc., Peter A. Naber and State Street Bank and Trust Company
4.4(6) Form of Common Stock Purchase Warrant (Immediate Vesting)issued
to stockholders of The Sentry Group, Inc. on October 20, 1998
4.5(6) Form of Common Stock Purchase Warrant(Contingent Vesting)issued
to stockholders of The Sentry Group, Inc. on October 20, 1998
10.1(7)* Amended and Restated 1995 Stock Plan
10.2(4)* Form of Incentive Stock Option Agreement under the Amended and
Restated 1995 Stock Plan
10.3(4)* Form of Non-Qualified Stock Option Agreement under the Amended
and Restated 1995 Stock Plan
10.4(5)* 1995 Employee Stock Purchase Plan Enrollment Authorization Form
10.5(3)* 1995 Non-Employee Director Stock Option Plan
10.6(4)* Form of Non-Qualified Stock Option Agreement under the 1995
Non-Employee Director Stock Option Plan of the Registrant
10.7(3)(2)* Agreement between First Albany Corporation and the Company dated
March 30, 1995
<PAGE>
Exhibit
Number Description
---------- -----------------------------------------------------------
10.8(3)* Restated and Amended 1989 Stock Option Plan, as amended
10.9(3)* Form of Incentive Stock Option Agreement under 1989 Stock Option
Incentive Plan
10.10(3)* Form of Certificate and Agreement under Restated and Amended
1989 Stock Option Plan
10.11(3)* 1993 Stock Option and Incentive Plan, as amended
10.12(3)* Form of Certificate and Agreement under 1993 Stock Option and
Incentive Plan
10.13(3)* Form of Warrant under the Restated and Amended 1989 Stock Option
Plan and 1993 Stock Option and Incentive Plan
10.14(3) Form of International Sales Representative Agreement
10.15(3) Office Lease between International Business Machines Corporation
and the Company dated August 1, 1994
10.16(6)* Form of META Group, Inc./JMI Long Term Incentive Compensation
Plan
10.17(7)* Amended and Restated 1996 Equity Compensation Plan of The Sentry
Group, Inc.
11.1+ Statement re computation of per share earnings
21.1+ List of Subsidiaries
23.1+ Consent of Deloitte & Touche LLP
24.1+ Power of Attorney (see page 31)
27.1+ Financial Data Schedule
----------------
(1) Incorporated herein by reference to the exhibits to the Company's
Current Report on Form 8-K dated October 20, 1998 and filed on
November 3, 1998 (File No. 0-27280).
(2) Confidential treatment obtained as to certain portions.
(3) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1(File No. 33-97848).
(4) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 (File No. 333-1854).
(5) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on form S-8 (File No. 33-80539).
(6) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q dated November 16, 1998
(File No. 0-27280).
(7) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 (File No. 333-68323).
* Indicates a management contract or any compensatory plan, contract
or arrangement.
+ Filed herewith.
<PAGE>
<TABLE>
EXHIBIT 11.1
META GROUP, INC.
EXHIBIT TO ANNUAL REPORT ON FORM 10-K
Computation of Net Income Per Common Share
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net income $ 8,785,000 $ 5,767,000 $ 3,626,000
========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding:
Average number of common shares
outstanding during the year 11,326,228 10,821,648 8,925,700
Add common share equivalents -- options
to purchase common shares 1,269,986 1,114,738 2,575,917
----------- ---------- -----------
12,596,214 11,936,386 11,501,617
=========== =========== ===========
Net income per diluted common share $ .70 $ .48 $ .32
=========== =========== ===========
Net income per basic common share $ .78 $ .53 $ .41
=========== =========== ===========
All share and per share amounts have been retroactively adjusted for the three
for two stock split in 1998.
</TABLE>
<PAGE>
EXHIBIT 21.1
Subsidiaries of META Group, Inc.
The Sentry Group, Inc.- incorporated in the Commonwealth of Massachusetts.
MG (Bermuda) Ltd. incorporated in Bermuda.
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to the incorporation by reference in META Group, Inc.'s
Registration Statements Nos. 33-80539, 333-1854 and 333-68323 on Form S-8,and
No. 333-67557 on Form S-3 of our report dated February 5, 1999 (March 15, 1999
as to Note 13) and appearing on page F-1 of the Annual Report on Form 10-K for
the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 9,945
<SECURITIES> 36,881
<RECEIVABLES> 36,394
<ALLOWANCES> (1,088)
<INVENTORY> 0
<CURRENT-ASSETS> 74,420
<PP&E> 8,527
<DEPRECIATION> (3,974)
<TOTAL-ASSETS> 112,187
<CURRENT-LIABILITIES> 39,497
<BONDS> 0
0
0
<COMMON> 123
<OTHER-SE> 72,567
<TOTAL-LIABILITY-AND-EQUITY> 112,187
<SALES> 0
<TOTAL-REVENUES> 72,785
<CGS> 35,098
<TOTAL-COSTS> 35,098
<OTHER-EXPENSES> 25,349
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,959
<INCOME-TAX> 6,174
<INCOME-CONTINUING> 8,785
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,785
<EPS-PRIMARY> .78
<EPS-DILUTED> .70
</TABLE>
