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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transition period from ______ to ______
Commission File Number 0-27280
META GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-0971675
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
208 Harbor Drive, Stamford, Connecticut 06912-0061
------------------------------------------------------------
(Address of principal executive offices, including Zip Code)
(203) 973-6700
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The number of shares of the
issuer's Common Stock, $.01 par value per share, outstanding as of August 8,
2000 was 10,813,211.
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META GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets:
June 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Income (unaudited):
Three and six months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows (unaudited):
Six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements (unaudited): 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
META GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 789 $ 10,106
Accounts receivable, net 62,074 55,279
Deferred commissions 3,426 2,402
Deferred tax asset 379 407
Other current assets 5,718 1,795
--------- ---------
Total current assets 72,386 69,989
Marketable securities 6,322 6,253
Furniture and equipment, net 10,862 7,170
Deferred tax asset 1,908 1,908
Goodwill, net 13,913 5,527
Other assets 24,047 22,603
--------- ---------
Total assets $ 129,438 $ 113,450
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 748 $ 387
Deferred revenues 41,141 42,111
Bank demand note payable 5,100
Other current liabilities 4,613 9,267
--------- ---------
Total current liabilities 51,602 51,765
--------- ---------
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
11,436,975 and 10,856,124 shares 114 109
Paid-in capital 50,221 38,691
Retained earnings 28,249 23,674
Accumulated other comprehensive loss (428) (469)
Treasury stock, at cost (320) (320)
--------- ---------
Total stockholders' equity 77,836 61,685
--------- ---------
Total liabilities and stockholders' equity $ 129,438 $ 113,450
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
META GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Research and advisory services $22,907 $16,783 $43,954 $32,591
Strategic consulting 7,272 5,316 12,022 8,186
Published research products 1,889 2,012 3,579 3,439
------- ------- ------- -------
Total revenues 32,068 24,111 59,555 44,216
------- ------- ------- -------
Operating expenses:
Cost of services and fulfillment 15,849 12,883 29,826 24,169
Selling and marketing 8,011 5,806 15,712 10,788
General and administrative 2,671 2,080 5,122 3,873
Depreciation and amortization 1,069 659 1,774 1,252
------- ------- ------- -------
Total operating expenses 27,600 21,428 52,434 40,082
------- ------- ------- -------
Operating income 4,468 2,683 7,121 4,134
Other income, primarily interest, net 277 791 632 1,563
------- ------- ------- -------
Income before provision for income taxes 4,745 3,474 7,753 5,697
Provision for income taxes 1,954 1,426 3,178 2,340
------- ------- ------- -------
Net income $ 2,791 $ 2,048 $ 4,575 $ 3,357
======= ======= ======= =======
Net income per diluted common share $ .24 $ .18 $ .38 $ .28
======= ======= ======= =======
Weighted average number of diluted common
shares outstanding 11,832 11,317 11,923 12,136
======= ======= ======= =======
Net income per basic common share $ .26 $ .19 $ .43 $ .30
======= ======= ======= =======
Weighted average number of basic common
shares outstanding 10,738 10,851 10,666 11,338
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
META GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,575 $ 3,357
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 1,774 1,252
Provision for doubtful accounts 200 --
Deferred income taxes -- 1,906
Non-cash compensation 136 --
Changes in assets and liabilities:
Accounts receivable (7,279) 929
Other current assets (4,947) (2,246)
Other assets (1,037) (668)
Accounts payable 361 (1,313)
Accrued expenses and other current liabilities (4,655) (4,076)
Deferred revenues (970) 2,983
-------- --------
Net cash (used in) provided by operating activities (11,842) 2,124
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (5,251) (3,074)
Proceeds from sales/maturities of (investments in) marketable securities - net -- 17,437
Payments made for contingent consideration (847) --
Investments and advances (250) (2,435)
-------- --------
Net cash (used in) provided by investing activities (6,348) 11,928
-------- --------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 3,755 986
Proceeds from employee stock purchase plan 679 351
Proceeds from line of credit 5,100 --
Reacquisition of shares -- (22,485)
Reacquisition of shares - current stockholder (661) (266)
-------- --------
Net cash provided by (used in) financing activities 8,873 (21,414)
-------- --------
Net decrease in cash and cash equivalents (9,317) (7,362)
Cash and cash equivalents, beginning of period 10,106 9,945
======== ========
Cash and cash equivalents, end of period $ 789 $ 2,583
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
META GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Accordingly,
certain information and footnote disclosures required for complete financial
statements are not included herein. It is recommended that these financial
statements be read in conjunction with the financial statements and related
notes of META Group, Inc. (the "Company") as reported on the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of financial position, results of
operations and cash flows at the dates and for the periods presented have been
included. Results for interim periods are not necessarily indicative of results
for the entire year.
NOTE 2 - INCOME TAXES
During the quarter and six months ended June 30, 2000, the Company
recorded a tax provision of $1.9 million and $3.2 million, respectively,
reflecting an effective tax rate of 41%. For the six months ended June 30, 2000,
the Company paid $915,000 for state income tax liabilities, and $1,450,000 for
federal income tax liabilities.
NOTE 3 - MARKETABLE SECURITIES
Marketable securities at June 30, 2000 and December 31, 1999 include the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------
GROSS
UNREALIZED
HOLDING FAIR
COST GAINS (LOSSES) VALUE
---- -------------- -----
<S> <C> <C> <C>
U.S. government issued mortgage backed bonds $6,996 $ (674) $6,322
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C> <C> <C>
U.S. government issued mortgage backed bonds $6,996 $ (743) $6,253
====== ====== ======
</TABLE>
The contractual maturities of marketable securities at June 30, 2000 are as
follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------
FAIR
COST VALUE
------- ------
<S> <C> <C>
Due after one year through fifteen years $ 6,996 $6,322
======= ======
</TABLE>
6
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Actual maturities may differ from contractual maturities because the borrower
has the right to call the obligations.
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income for the three and six months ended June 30,
2000 and 1999 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 2,791 $ 2,048 $ 4,575 $ 3,357
Other comprehensive income, net of tax:
Unrealized gain (loss) on marketable
securities -- (347) 41 (347)
------- ------- ------- -------
Comprehensive income $ 2,791 $ 1,701 $ 4,616 $ 3,010
======= ======= ======= =======
</TABLE>
NOTE 5 - SEGMENT REPORTING
The Company operates in three business segments: Research and Advisory
Services, Strategic Consulting and Published Research Products. The Company's
reportable segments are separately managed strategic business segments. Each
operating segment offers different products/services, and such products/services
are sold via different distribution channels. The Company's interim segment
information disclosures are presented consistent with the way management
operates its business. Revenue and operating income information for the three
operating segments is set forth below (in thousands):
<TABLE>
<CAPTION>
RESEARCH AND PUBLISHED
ADVISORY STRATEGIC RESEARCH CONSOLIDATED
SERVICES CONSULTING PRODUCTS TOTAL
-------- ---------- -------- -----
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Revenues $22,907 $ 7,272 $ 1,889 $32,068
Operating income 3,370 1,454 (356) 4,468
THREE MONTHS ENDED JUNE 30, 1999
Revenues $16,783 $ 5,316 $ 2,012 $24,111
Operating income 1,708 1,241 (266) 2,683
SIX MONTHS ENDED JUNE 30, 2000
Revenues $43,954 $12,022 $ 3,579 $59,555
Operating income 6,720 843 (442) 7,121
SIX MONTHS ENDED JUNE 30, 1999
Revenues $32,591 $ 8,186 $ 3,439 $44,216
Operating income 4,235 450 (551) 4,134
</TABLE>
7
<PAGE>
NOTE 6 - GOODWILL
During the six months ended June 30, 2000 the Company recorded $7.3
million in goodwill in connection with the payment of contingent consideration
to the former shareholders of the Sentry Group Inc. ("Sentry") due to Sentry's
achievement of certain financial targets under the terms of the Agreement and
Plan of Merger between Sentry and the Company, as amended. The Company acquired
Sentry in October 1998. The Company issued 274,470 shares of its common stock
and paid approximately $470,000 in cash in May 2000 to certain of the former
Sentry shareholders. The Company anticipates that it will file a registration
statement with the Securities and Exchange Commission to provide for the resale
of these shares during 2000. Additionally, warrants to acquire 75,000 shares of
the Company's common stock at a price of $30 per share, which were previously
issued to the Sentry shareholders under the same Merger agreement, became
exercisable at the time the contingent consideration was paid. The fair value of
such warrants was approximately $940,000 and was recorded as additional goodwill
during the six months ended June 30, 2000. The 75,000 warrants expire in May
2004. The goodwill is being amortized over 30 years.
In 1997, the Company completed the acquisition of certain assets of The
Verity Group ("Verity"), an IT consulting company, for an initial payment of
$1,000 in cash and contingent consideration of up to $1,080,000 in cash in the
event certain financial targets were met by Verity in each of the four years
ending December 31, 2001. In March 2000, the Company paid Verity $373,000 for
meeting its 1999 financial targets. The additional payment was recorded as
goodwill and is being amortized over 10 years.
NOTE 7 - LINE OF CREDIT
As of June 30, 2000 the Company had $5.1 million in borrowings
outstanding under its line of credit with its bank. Borrowings under the line
of credit are at the bank's sole discretion, payable on demand and bear
interest at the bank's election at the rate of (i) LIBOR plus 1.5% or (ii)
the higher of the Prime Rate or the Federal Funds Rate plus 1/2%. During the
six months ended June 30, 2000, the Company paid approximately $10,000 in
interest expense. The limit on the Company's borrowings under its line of
credit was increased to $12 million after June 30, 2000. (See Note 8 below).
NOTE 8 - SUBSEQUENT EVENT
On July 28, 2000 the Company increased its line of credit with its
bank to $12 million. In addition, the Company signed a commitment letter with
its bank for a proposed $25 million one year senior revolving credit facility
which, upon expiration would convert into a five year term loan. Interest is
payable at the rate of (i) LIBOR plus 1.5% or (ii) the higher of the Prime
Rate or the Federal Funds Rate plus 1/2%. The proposed $25 million credit
facility would be collateralized by the Company's marketable securities. The
implementation of the line of credit is subject to (i) the verification by
the bank of all information provided to the bank in connection with the
request for the facility, the completion by the bank of, and its satisfaction
with the results of, its due diligence with respect thereto, including,
without limitation, review and approval of the business organizational
documents of the Company and opinions of the Company's counsel relating to
the loan documents, (ii) the negotiation and execution of the loan documents
and other instruments deemed necessary by the bank's counsel, (iii)
compliance by the Company and all guarantors of the facility with the bank's
closing requirements, (iv) the payment of all fees and expenses, and (v) the
absence of any material adverse change in the financial condition, business,
properties, prospects or operations of the Company and any guarantors of the
facilities prior to closing.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE DISCUSSION AND ANALYSIS BELOW CONTAINS TREND ANALYSIS AND OTHER
FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET
FORTH BELOW UNDER "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS" AND IN THE
COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, PRINCIPALLY
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999.
OVERVIEW
META Group, Inc. ("META Group"), together with its subsidiaries, The
Sentry Group, Inc. ("Sentry") and MG (Bermuda) Ltd. (collectively, the
"Company"), is an independent market and business process assessment company.
The Company provides research and analysis of developments, trends and
organizational issues relating to the computer hardware, software,
communications, and related information technology ("IT") industries and their
impact on the conduct of business 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.
The Company has three operating business segments: Research and
Advisory Services, Strategic Consulting and Published Research Products. The
Research and Advisory Services segment provides annually renewable
subscription services (focused on specific areas of IT, IT issues related to
a specific vertical market, or the specific needs of those within the IT
organization), service analyst briefing engagements, packaged consulting
(certain proprietary methodology of the Company encapsulated in product form
and delivered to the client) and conferences. Also included in the Company's
Research and Advisory Services is the Company's Infusion program, which
builds on the business-focused analysis of Research and Advisory Services by
offering interactive workshops that provide methodology and skill based
training needed to successfully manage specific business-critical issues. The
Strategic Consulting segment provides strategic consulting engagements
servicing clients' business and technology issues. The Published Research
Products segment provides reports, studies, surveys and in-depth analysis of
specific business or IT issues.
Research and Advisory Services revenues constituted approximately 71%
and 70% of the Company's total revenues for the quarters ended June 30, 2000 and
1999, respectively. Billings attributable to the Company's annually renewable
subscription based Research and Advisory Services are initially recorded as
deferred revenues and then recognized pro rata over the contract term. Research
and Advisory Service billings attributable to service analyst briefing
engagements, packaged consulting, Infusion programs and conferences are
recognized as revenue when the underlying services are rendered. Research and
Advisory 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 75% of amounts billed to those clients.
One measure of the volume of the Company's business is its annualized
"Contract Value," which the Company calculates as the aggregate annualized value
of revenue recognized from all Research and Advisory services contracts in
effect at a given point in time, without regard to the remaining duration of
such contracts. While Contract Value is not necessarily indicative of future
revenues, Contract Value has grown, sequentially and year-over-year, every
quarter since the Company's inception and increased 36%
9
<PAGE>
to $91.6 million at June 30, 2000 from $67.1 million at June 30, 1999. At June
30, 2000, the Company had 5,500 Research and Advisory Services subscribers in
approximately 2,500 client organizations worldwide, as compared to 4,400
subscribers in 1,900 organizations at June 30, 1999.
Revenues from Strategic Consulting engagements comprised approximately
23% and 22% of the Company's total revenues for the quarters ended June 30, 2000
and 1999, respectively. The Company recognizes revenues on Strategic Consulting
engagements as the work is performed. At June 30, 2000 and 1999, the Company
employed 84 and 71 consultants, respectively. The majority of the Company's
Strategic Consulting clients consist of Research and Advisory Services clients
seeking additional advice tailored to their individual IT requirements.
The Company's operating expenses consist of cost of services and
fulfillment, selling and marketing expenses and general and administrative
expenses. Cost of services and fulfillment represents the costs associated with
production and delivery of the Company's products and services and includes the
costs of research, development and preparation of periodic reports, analyst
telephone consultations, analyst briefings and conferences, published research,
consulting services, new product development, and all associated editorial and
support services. Selling and marketing expenses include the costs of salaries,
commissions and related benefits for such personnel, travel and promotion.
General and administrative expenses include the costs of the finance and
accounting departments, legal, human resources, corporate IT and other
administrative functions of the Company.
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES Total revenues increased 33% to $32.1 million in the quarter ended June
30, 2000 from $24.1 million in the quarter ended June 30, 1999.
Revenues from Research and Advisory Services increased 36% to $22.9 million in
the quarter ended June 30, 2000 from $16.8 million in the quarter ended June 30,
1999. The increase in revenues from Research and Advisory Services was due to
continued expansion and integration of the Company's direct sales force (which
sells the Company's Research and Advisory Services) and its inside sales channel
(which sells the Company's Published Research Products) resulting in an
increased client subscriber base, increased revenues from packaged consulting,
an increase in analyst briefings to existing clients, continued international
market acceptance of the Company's Research and Advisory Services and increased
Infusion program revenues. Research and Advisory Services revenues attributable
to international clients increased 17% in the quarter ended June 30, 2000 from
the quarter ended June 30, 1999, and decreased as a percentage of Research and
Advisory Services revenue to 15% from 18%. Such increase in Research and
Advisory Services revenue attributable to international clients was due
primarily to increased demand for the Company's Research and Advisory Services
and an increased demand for analyst briefings to existing clients.
Strategic Consulting revenues, which result from strategic consulting
engagements addressing clients' business and technology issues, increased 37%
to $7.3 million in the quarter ended June 30, 2000 from $5.3 million in the
quarter ended June 30, 1999, and increased as a percentage of total revenues
to 23% from 22%. The increase was primarily due to increased revenues from
sales of Internet security planning and operations services (which are
provided under the Company's outsourcing agreement with META Secur e-Com
Solutions (formerly known as META Security Group)), as well as increased
revenues resulting from increased client demand for the Company's consulting
services. The Company's Strategic Consulting clients typically consist of
Research and Advisory Services clients seeking additional advice tailored to
their individual IT requirements.
10
<PAGE>
Published Research Products revenues, which result from the sale of publications
offering in-depth analysis of single business or IT issues, decreased 6% to $1.9
million in the quarter ended June 30, 2000 from $2 million in the quarter ended
June 30, 1999, and decreased as a percentage of total revenues to 6% from 8%.
The decrease was primarily due to a higher level of sales in the quarter ended
June 30, 1999 as a result of publishing delays of certain products sold by the
Company that occurred in the quarter ended March 31, 1999.
COST OF SERVICES AND FULFILLMENT Cost of services and fulfillment increased
23% to $15.8 million in the quarter ended June 30, 2000 from $12.9 million in
the quarter ended June 30, 1999 due primarily to increased staffing costs for
analyst, consultant and fulfillment positions necessary to support the
Company's growth both domestically and internationally. The principal areas
of cost increases were compensation, and to a lesser extent, travel.
Additionally, royalty payments to META Secur e-Com Solutions increased as a
result of increased sales of the underlying services.
Cost of services and fulfillment decreased as a percentage of total revenues to
49% from 53% in the quarter ended June 30, 1999 due primarily to the Company's
ability to leverage its existing research analysts and consultants in fulfilling
its packaged consulting and Infusion product offerings and strategic consulting
engagements. The Company currently anticipates continuing increases in the costs
of services and fulfillment and expects that such expenses will increase
slightly as a percentage of total revenues during the remainder of 2000.
SELLING AND MARKETING EXPENSES Selling and marketing expenses increased 38% to
$8.0 million in the quarter ended June 30, 2000 from $5.8 million in the quarter
ended June 30, 1999 and increased as a percentage of total revenues to 25% from
24%. The increase in selling and marketing expenses was primarily due to
increased compensation and commission expenses associated with the integration
and expansion of the Company's sales force discussed above to support its
expanded product offerings. In addition, the Company incurred greater marketing
expenses, both domestically and internationally, in connection with the
Company's revenue growth. While the Company currently anticipates continuing
increases in the amount of selling and marketing expenses, it expects that such
expenses, as a percentage of total revenues, will decrease slightly during the
remainder of 2000.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
increased 28% to $2.7 million in the quarter ended June 30, 2000 from $2.1
million in the quarter ended June 30, 1999, and remained constant as a
percentage of total revenues at 8%. The increase in expenses was primarily due
to increased payroll, benefits, facility and telephone costs, all associated
with increased headcount during the quarter. The Company currently anticipates
continuing increases over the prior year in the amount of general and
administrative expenses and expects such expenses to remain approximately the
same as a percentage of total revenues during the remainder of 2000.
DEPRECIATION AND AMORTIZATION Depreciation and amortization expense increased
62% to $1.1 million in the quarter ended June 30, 2000 from $659,000 in the
quarter ended June 30, 1999. The increase in depreciation and amortization
expense was primarily due to an increase in amortization expense as a result
of $8.6 million in additional goodwill recorded in 2000 from the payment of
contingent consideration to the former Sentry shareholders and, to a lesser
extent, additional depreciation expense as a result of increased capital
expenditures, primarily in IT and web infrastructures, necessary to support
the Company's growth.
OTHER INCOME Other income decreased 65% to $277,000 in the quarter ended June
30, 2000 from $791,000 in the quarter ended June 30, 1999 due principally to a
decrease in interest income from the Company's cash and marketable securities
due to the decrease in such balances.
11
<PAGE>
PROVISION FOR INCOME TAXES Provision for income taxes of $2.0 million was
recorded for the quarter ended June 30, 2000, as compared to a provision of $1.4
million recorded for the quarter ended June 30, 1999, reflecting an effective
tax rate of 41%.
The Company currently anticipates increases in its level of operating expenses
(primarily in depreciation expense) because of additional investments in
technology infrastructure and personnel in connection with its new metagroup.com
division. The Company currently anticipates that initial expenditures will
principally consist of enhancements to its web site.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES Total revenues increased 35% to $59.6 million in the six months ended
June 30, 2000 from $44.2 million in the six months ended June 30, 1999.
Revenues from Research and Advisory Services increased 35% to $44.0 million in
the six months ended June 30, 2000 from $32.6 million in the six months ended
June 30, 1999. The increases in revenues from Research and Advisory Services
were primarily due to the expansion and integration of the Company's sales force
resulting in an increased client subscriber base, an increase in analyst
briefings to existing clients, increased revenues from the Company's packaged
consulting services, increased revenues from the Company's Infusion products and
growing international market acceptance of the Company's Research and Advisory
Services. Research and Advisory Services revenues attributable to international
clients increased 21% in the six months ended June 30, 2000 from the six months
ended June 30, 1999, and decreased as a percentage of Research and Advisory
Services revenues to 15% from 17%.
Strategic Consulting revenues increased 47% to $12.0 million in the six
months ended June 30, 2000 from $8.2 million in the six months ended June 30,
1999, and increased as a percentage of total revenues to 20% from 19%. The
increase was primarily due to the growth of the Company's core consulting
business, increased sales of Internet security planning and operations
services (which are provided under the Company's outsourcing agreement with
META Secur e-Com Solutions, and increased revenues from the growth of the
Company's consulting business internationally.
Published Research Products revenues increased 4% to $3.6 million in the six
months ended June 30, 2000 from $3.4 million in the six months ended June 30,
1999, and decreased as a percentage of total revenues to 6% from 8%. The
increase in revenues was primarily due to an increase in sales of publications
distributed under the Company's agreements with SPEX Research LLC and CXP
International, S.A.
COST OF SERVICES AND FULFILLMENT Cost of services and fulfillment increased 23%
to $29.8 million in the six months ended June 30, 2000 from $24.2 million in the
six months ended June 30, 1999, and decreased as a percentage of total revenues
to 50% from 55%. The increase was primarily due to increased staffing for
analyst, consultant and fulfillment positions necessary to support the Company's
growth both domestically and internationally. The principal areas of cost
increases were compensation, and to a lesser extent, travel. Additionally,
royalty payments to third parties with whom the Company has distribution
agreements (primarily META Secur e-Com Solutions (formerly known as META
Security Group)) increased as a result of increased sales of the underlying
services.
SELLING AND MARKETING EXPENSES Selling and marketing expenses increased 46% to
$15.7 million in the six months ended June 30, 2000 from $10.8 million in the
six months ended June 30, 1999 and increased as a percentage of total revenues
to 26% from 24%. The increase in selling and marketing
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<PAGE>
expenses was primarily due to increased compensation and travel expenses
associated with the expansion and integration of the direct sales force and
inside sales channel. In addition, the Company incurred greater marketing
expenses, both domestically and internationally, in connection with the
Company's revenue growth.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
increased 32% to $5.1 million in the six months ended June 30, 2000 from $3.9
million in the six months ended June 30, 1999 and remained approximately the
same as a percentage of total revenues at 9%. The increase in expenses was
primarily due to increased salary and benefit costs, facilities costs, and
telephone costs, all associated with increased headcount.
DEPRECIATION AND AMORTIZATION Depreciation and amortization expense increased
42% to $1.8 million in the six months ended June 30, 2000 from $1.3 million in
the six months ended June 30, 1999. The increase in depreciation and
amortization expense was principally due to an increase in amortization expense
as a result of $8.6 million in additional goodwill recorded in 2000 from the
payment of contingent consideration to the former Sentry shareholders and, to a
lesser extent, additional depreciation expense as a result of increased capital
expenditures, principally in IT and web infrastructures, necessary to support
the Company's growth.
OTHER INCOME Other income decreased 60% to $632,000 in the six months ended June
30, 2000 from $1.6 million in the six months ended June 30, 1999. The decrease
was principally due to a decrease in interest income from the Company's cash and
marketable securities balances due to the decrease in such balances.
PROVISION FOR INCOME TAXES Provision for income taxes of $3.2 million was
recorded for the six months ended June 30, 2000, as compared to a provision of
$2.3 million recorded for the six months ended June 30, 1999, reflecting an
effective tax rate of 41%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash from operating
activities which consists of net income adjusted for non-cash operating
activities and changes in current assets and liabilities, monies available
under its line of credit and, to a lesser extent, proceeds from the exercise
of stock options. The Company used $11.8 million of cash in operations during
the six months ended June 30, 2000, compared to $2.1 million of cash provided
by its operations in the same period of 1999. The increase in cash used in
operations was primarily due to a decrease in collections of the Company's
outstanding accounts receivable and, to a lesser extent, a decrease in the
Company's deferred revenues during the first six months of the year in
comparison to the same period of the previous year, prepayments of analyst
and consultant bonuses (included in other current assets on the Company's
consolidated balance sheets), an increase in prepaid commissions to the
Company's sales force due to strong 2000 billings and increased income tax
payments versus the same period of the previous year.
The Company used $5.2 million of cash in the six months ended June 30,
2000, compared to $3.1 million in the same period of 1999 for the purchase of
furniture, equipment, computers and related software for use by the Company's
employees. The increase was due primarily to upgrades to the Company's IT
infrastructure and collaborative capabilities, including but not limited to
continued development of its client relationship management and contract
information system, its accounting system and upgrades of its computers and
related software used by the Company's employee base. The Company expects that
additional purchases of equipment will be made as the Company's employee base
continues to grow and in connection with its metagroup.com initiatives. The
Company currently anticipates that metagroup.com initiatives will incur
approximately $2 million in technology
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<PAGE>
infrastructure expenditures in the second half of 2000. The Company has no other
material commitments for capital expenditures.
The Company received $8.9 million in cash from financing activities
primarily as a result of borrowings totaling $5.1 million from its line of
credit with its bank and $3.8 million in proceeds from the exercise of stock
options during the six months ended June 30, 2000 versus $1 million in the
same period last year. The limit on the Company's borrowings under its line
of credit was increased to $12 million after June 30, 2000.
During the six months ended June 30, 2000, the Company recorded $7.3
million in goodwill in connection with the payment of contingent consideration
to the former shareholders of the Sentry Group Inc. ("Sentry") due to Sentry's
achievement of certain financial targets under the terms of the Agreement and
Plan of Merger between Sentry and the Company, as amended. The Company acquired
Sentry in October 1998. The Company issued 274,470 shares of its common stock
and paid approximately $470,000 in cash in May 2000 to certain of the former
Sentry shareholders. The Company anticipates that it will file a registration
statement with the Securities and Exchange Commission to provide for the resale
of these shares during 2000. Additionally, warrants to acquire 75,000 shares of
the Company's common stock at a price of $30 per share, which were previously
issued to the Sentry shareholders under the same Merger agreement, became
exercisable at the time the contingent consideration was paid. The fair value of
such warrants was approximately $940,000 and was recorded as additional goodwill
during the six months ended June 30, 2000. The 75,000 warrants expire in May
2004.
In May 2000, the Company repurchased 15,558 shares of its common stock
and warrants to purchase 4,899 shares of its common stock for approximately
$659,000 in cash from a minority stockholder pursuant to the terms of a
Settlement Agreement, dated October 31, 1995, between the stockholder and
Sentry. Such repurchase obligation was assumed by the Company upon the
acquisition of Sentry in October 1998. The Company recovered the excess paid to
the minority stockholder over the fair market value of the securities the
Company repurchased and all associated costs from a purchase consideration
escrow established for the satisfaction of indemnification claims pursuant to
the terms of the Agreement and Plan of Merger between Sentry and the Company.
The recovery was in the form of a release of 9,673 shares of the Company's
common stock from the Sentry purchase consideration escrow. Such released
shares, and the aforementioned repurchased shares, were retired to the status of
authorized but unissued.
On April 14, 1999, the Company's Board of Directors unanimously
authorized the repurchase of up to 1.2 million shares of its common stock in the
open market and in privately negotiated transactions from time to time,
depending on market conditions and other factors. On May 3, 1999, the Company
announced the expansion of the repurchase program to a total of 2.4 million
shares. During the period April 19, 1999 to June 15, 1999, 1,989,993 shares were
repurchased at an average price of $11.28 per share for a total cost of $22.5
million. All shares repurchased have been retired to the status of authorized
but unissued. The Company financed all repurchases with its cash and marketable
securities balances.
As of June 30, 2000, the Company had cash of $789,000, marketable
securities of $6.3 million and working capital of $20.8 million. In addition,
after giving effect to the increase in the Company's borrowing limit under
its line of credit, as of July 28, 2000 the Company had approximately $2
million available under its line of credit with its bank. Additionally, the
Company signed a commitment letter with its bank for a proposed $25 million
one year senior revolving credit facility which, upon expiration would
convert into a five year term loan. Interest is payable at the rate of (i)
LIBOR plus 1.5% or (ii) the higher of the Prime Rate or the Federal Funds
Rate plus 1/2%. The proposed $25 million credit facility would be
collateralized by the Company's marketable securities. The implementation of
the line oF credit is subject to (i) the verification by the bank of all
information provided to the bank in connection with the request for the
facility, the completion by the bank of, and its satisfaction with the
results of, its due diligence with respect thereto, including, without
limitation, review and approval of the business
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<PAGE>
organizational documents of the Company and opinions of the Company's counsel
relating to the loan documents, (ii) the negotiation and execution of the
loan documents and other instruments deemed necessary by the bank's counsel,
(iii) compliance by the Company and all guarantors of the facility with the
bank's closing requirements, (iv) the payment of all fees and expenses, and
(v) the absence of any material adverse change in the financial condition,
business, properties, prospects or operations of the Company and any
guarantors of the facilities prior to closing. There can be no assurance that
a final agreement concerning the proposed $25 million credit facility will be
executed and implemented.
The significant decrease in cash and cash equivalents during the six
months ended June 30, 2000 was due primarily to decreased collections on the
Company's outstanding accounts receivable, increased capital expenditures due
to the infrastructure upgrades discussed above, prepayments of analyst and
consultant bonuses (included in other current assets on the Company's
consolidated balance sheets), an increase in prepaid commissions to the
Company's sales force due to strong 2000 billings and increased income tax
payments versus the same period of the previous year. Integration and
implementation challenges experienced during the Company's ongoing
infrastructure upgrades contributed to the Company's decrease in collections
of outstanding accounts receivable during the six months ended June 30, 2000.
The Company has recently undertaken corrective measures to address this
issue. The Company believes that existing cash balances, its ability to
borrow under its line of credit, and anticipated cash flows from operations
will be sufficient to meet its working capital, strategic investments and
capital expenditure requirements for the foreseeable future, including
expenditures relating to its metagroup.com division.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of the future financial
performance of the Company. However, from time to time, information provided by
the Company or statements made by its employees may contain "forward-looking"
information involving risks and uncertainties. In particular, statements
contained in this Form 10-Q that are not historical facts (including, but not
limited to, statements concerning the revenue growth rate in its three operating
segments, the shift in client business demand and the resulting impact on total
revenues, anticipated costs of services and fulfillment, selling and marketing
and general and administrative expense levels, cost and expense levels relative
to the Company's total revenues and anticipated mix of revenues, planned capital
expenditures, depreciation and amortization expenses and expenditures and
business plans related to the metagroup.com initiatives, the Company's working
capital and capital expenditure requirements, the collection of outstanding
accounts receivable and the implementation of a new credit facility) constitute
forward-looking statements and are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual results
of operations and financial condition have varied and may in the future vary
significantly from those stated in any forward-looking statements. Factors that
may cause such differences include, without limitation, the risks,
uncertainties, and other information discussed below, as well as the accuracy of
the Company's internal estimates of revenue and operation expense levels. Each
of these factors, and others, are discussed from time to time in the filings
made by the Company with the Securities and Exchange Commission.
The Company's future operating results are subject to substantial risks
and uncertainties. The Company currently derives most of its revenues from
subscriptions to its Research and Advisory Services. The Company, however,
continues to derive a greater amount of revenues from Strategic Consulting
engagements. As a result, any decline in the Company's ability to secure
subscription renewals or replace completed Strategic Consulting engagements with
new engagements may have a material adverse effect on the Company's results of
operations. The Company's ability to secure subscription renewals, at favorable
average selling prices, as well as to successfully market and sell its
15
<PAGE>
Strategic Consulting services and Published Research Products, is dependent upon
the Company's ability to deliver consistent, high-quality, and timely analysis
and advice with respect to issues, developments, and trends that clients view as
important. The Company's successful delivery of such analysis and advice is, in
turn, dependent upon many factors, including, among other things, its ability
to: understand and anticipate rapidly changing technologies and market trends so
as to keep its analysis focused on the changing needs of its clients, deliver
products and services of sufficiently high quality and timeliness to withstand
competition from competitors that may have greater financial, information
gathering, and marketing resources than the Company, and recruit and retain
highly talented professionals in a competitive job market. The loss of any of
the Company's senior management personnel, including Dale Kutnick (President,
Chief Executive Officer and Co-Research Director), could have a material adverse
affect on the Company. The Company's ability to market and sell its products and
services could also be adversely affected by the emergence of new competitors
into one or more of the market segments addressed by the Company's products and
services, which could cause pricing pressure and loss of market share. The
Company's pricing strategy may limit the potential market for the Company's
Research and Advisory Services and Strategic Consulting engagements. As a
result, the Company may be required to reduce prices for its Research and
Advisory Services and Strategic Consulting engagements or introduce new products
with lower prices in order to expand or maintain its market share. In addition,
a significant portion of the Company's revenues are attributable to
international clients, which may be adversely affected by factors including
difficulties in developing and managing relationships with independent
international sales representative organizations, reliance on sales entities
that the Company does not control, greater difficulty in maintaining direct
client contact, fluctuations in exchange rates, adverse political and economic
conditions, tariffs and other trade barriers, longer accounts receivable
collection cycles, and adverse tax consequences. The Company's future financial
results also depend in part on the development or acquisition of new products
and services, which may not successfully be achieved due to the inherent costs
and risks associated with development, assimilation, and marketing of a new
product or service, as well as the Company's limited experience in introducing
new products and services.
Furthermore, the Company's quarterly operating results may fluctuate
significantly due to various factors. Because a disproportionately large portion
of the Company's annually renewable subscription based Research and Advisory
Services contracts expire in the fourth quarter of each year, the Company incurs
operating expenses in the fourth quarter at a higher level than would otherwise
be required by its sequential growth, and such increased expenses are not
normally offset immediately by higher revenues. In addition, the Company's
operating results may fluctuate as a result of a variety of other factors,
including the level and timing of renewals of subscriptions to Research and
Advisory Services, the level and timing of contracted Strategic Consulting
Services, the timing and amount of business generated by the Company, the mix of
domestic versus international business, the mix of Research and Advisory
Services revenues versus Strategic Consulting and Published Research Products
revenues, the number, size and scope of Strategic Consulting engagements in
which the Company is engaged, the degree of completion of such engagements and
the Company's ability to complete such engagements, the timing of the
development, introduction, and marketing of new products and services, the
integration of acquired businesses into the operations of the Company, the
timing of the acquisition and integration into the Company of new business,
products, and services (including without limitation, Infusion products), the
timing of the delivery of Published Research Products sold by the Company, the
timing of the hiring of research analysts and consultants, employee utilization
rates and the accuracy of estimates of resources required to complete ongoing
Strategic Consulting engagements, the Company's ability to manage growth,
changes in the spending patterns of the Company's target clients, the Company's
accounts receivable collection experience, changes in market demand for IT
research and analysis, competitive conditions in the industry, the timing of the
sale of marketable securities held by the Company and any losses therefrom and
the timing of capital contributions or loans to entities that operate in
parallel or synergistic industries to the Company. Due to these factors, the
Company believes period-to-period comparisons of results of operations are not
necessarily meaningful and should not be relied
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<PAGE>
upon as an indication of future results of operations. The potential
fluctuations in the Company's operating results make it likely that, in some
future quarter, the Company's operating results will be below the expectations
of securities analysts and investors, which would have a material adverse effect
on the price of the Company's Common Stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference should be made to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 for quantitative and qualitative disclosure
of the Company's market risk. There have been no material changes to the market
risk information included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
As disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, the Company is a party to certain legal proceedings
arising in the ordinary course of business. The Company, however, believes that
none of these proceedings is likely to have a material adverse effect on the
Company's business, results of operations or financial condition.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In connection with the Company's acquisition of Sentry, the former
shareholders of Sentry received 274,470 shares of the Company's common stock
(the "Shares") in May 2000 as payment of contingent consideration due to
Sentry's achievement of certain financial targets under the terms of the
Agreement and Plan of Merger between Sentry and the Company, as amended (the
"Merger Agreement"). The Shares were issued in reliance upon an exemption from
the registration provisions of the Securities Act of 1933, as amended (the
"Act"), set forth in Section 4(2) thereof and Rule 506 of Regulation D of the
General Rules and Regulations under the Act promulgated by the Securities and
Exchange Commission ("Regulation D"). The Company reasonably believes that there
were less than 35 purchasers of the Shares calculated in accordance with Rules
501(e) and 502(a) of Regulation D. In the Merger Agreement, the former
stockholders of Sentry made certain representations to the Company as to their
investment intent, level of sophistication and access to information. The Shares
are subject to restrictions on transfer absent registration under the Act or
exemption therefrom.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 24, 2000, the Company held its Annual Meeting of Stockholders.
At such Annual Meeting the stockholders of the Company voted on the re-election
of one Class II Director to serve for a three-year term and until his successor
has been duly elected and qualified. The number of votes cast for the
re-election of the Class II Director listed below was as follows:
<TABLE>
<CAPTION>
Nominees NUMBER OF SHARES
----------------
FOR AGAINST WITHHOLD AUTHORITY
--- ------- ------------------
<S> <C> <C> <C>
Harry S. Gruner 9,312,464 18,724 1,121,870
</TABLE>
17
<PAGE>
Each of Dale Kutnick, Michael Simmons, George McNamee, Francis Saldutti and
Howard Rubin continued as Directors of the Company after the annual Meeting of
Stockholders.
On April 28, 2000, the Board of Directors of the Company elected Mr. Gayl
Doster, CPA, to serve as a member of the Board of Directors, Chairman of the
Audit Committee of the Board of Directors and a member of the Compensation
Committee of the Board of Directors.
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<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Amendment No. 2 dated as of May 12, 2000 to 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.
10.1 Letter Agreement dated July 28, 2000 between the Bank of New York and
META Group, Inc.
10.2 Master Promissory Note of META Group, Inc. in favor of the Bank of
New York dated as of July 28, 2000 in the principal amount of $12 million.
11.1 Statement regarding computation of per-share earnings
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company for the quarter
ended June 30, 2000.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
META GROUP, INC.
Date: August 14, 2000 By: /s/ BERNARD F. DENOYER
---------------------------
Bernard F. Denoyer
Senior Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting
Officer)
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------- --------------------------------------------------------------------------- -----------
<S> <C> <C>
2.1 Amendment No. 2 dated as of May 12, 2000 to 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.
10.1 Letter Agreement dated July 28, 2000 between the Bank of New York and META *
Group, Inc.
10.2 Master Promissory Note dated as of July 28, 2000 in the principal amount of *
$12 million between the Bank of New York and META Group, Inc.
11.1 Statement regarding computation of per-share earnings 22
27.1 Financial Data Schedule *
</TABLE>
------------------
* Exhibit included in EDGAR filing with Securities and Exchange Commission.
21
