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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 March 31, 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 May 8, 2000
was 10,471,688.
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META GROUP, INC.
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets:
March 31, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Income (unaudited)
Three months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 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 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
2
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PART I - FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
META GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,952 $ 10,106
Accounts receivable, net 52,400 55,279
Deferred commissions 4,272 2,402
Deferred tax asset 379 407
Other current assets 7,007 1,795
---------- ----------
Total current assets 70,010 69,989
Marketable securities 6,322 6,253
Furniture and equipment, net 8,655 7,170
Deferred tax asset 1,908 1,908
Goodwill, net 13,787 5,527
Other assets 23,362 22,603
---------- ----------
Total assets $124,044 $113,450
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 300 $ 387
Deferred revenues 43,392 42,111
Other current liabilities 5,698 9,267
---------- ----------
Total current liabilities 49,390 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 11,097,147 and 10,856,124 shares 111 109
Paid-in capital 49,834 38,691
Retained earnings 25,456 23,674
Accumulated other comprehensive loss (427) (469)
Treasury stock, at cost (320) (320)
---------- ----------
Total stockholders' equity 74,654 61,685
---------- ----------
Total liabilities and stockholders' equity $124,044 $113,450
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
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META GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
- --------------------------------------------------------------------------------------------
2000 1999
--------------------------
<S> <C> <C>
Revenues:
Research and advisory services $21,097 $15,808
Strategic consulting 4,700 2,870
Published research products 1,690 1,427
---------- -----------
Total revenues 27,487 20,105
---------- -----------
Operating expenses:
Cost of services and fulfillment 13,968 11,286
Selling and marketing 7,710 4,982
General and administrative 2,451 1,793
Depreciation and amortization 705 593
---------- -----------
Total operating expenses 24,834 18,654
---------- -----------
Operating income 2,653 1,451
Other income, primarily interest 355 772
---------- -----------
Income before provision for income taxes 3,008 2,223
Provision for income taxes 1,224 914
---------- -----------
Net income $ 1,784 $ 1,309
========== ===========
Net income per diluted common share $ .15 $ .10
========== ===========
Weighted average number of diluted common
shares outstanding 11,980 12,905
========== ===========
Net income per basic common share $ .17 $ .11
========== ===========
Weighted average number of basic
common shares outstanding 10,320 11,830
========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
META GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
- ----------------------------------------------------------------------------------------------
2000 1999
----------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,784 $ 1,309
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 705 593
Deferred income taxes 536
Non-cash compensation 70
Changes in assets and liabilities:
Accounts receivable 2,595 4,240
Other current assets (7,400) (2,807)
Other assets (217) 258
Accounts payable (87) (1,287)
Other current liabilities (3,569) (5,734)
Deferred revenues 1,281 2,548
---------- -----------
Net cash used in operating activities (4,838) (344)
---------- -----------
INVESTING ACTIVITIES:
Capital expenditures (2,129) (1,722)
Proceeds from sales/maturities of marketable securities - net 1,512
Payments made for contingent consideration (373) (152)
Investments and advances (1,285)
---------- -----------
Net cash used in investing activities (2,502) (1,647)
---------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 3,186 723
---------- -----------
Net cash provided by financing activities 3,186 723
---------- -----------
Net decrease in cash and cash equivalents (4,154) (1,268)
Cash and cash equivalents, beginning of period 10,106 9,945
========== ===========
Cash and cash equivalents, end of period $ 5,952 $ 8,677
========== ===========
</TABLE>
See notes to consolidated financial statements.
5
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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 ended March 31, 2000, the Company recorded a tax
provision of $1.2 million reflecting an effective tax rate of 41%. For the three
months ended March 31, 2000, the Company paid $243,400 for state income tax
liabilities and $150,000 for federal income tax liabilities.
NOTE 3 - MARKETABLE SECURITIES
Marketable securities at March 31, 2000 and December 31, 1999 include the
following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 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 March 31, 2000 are as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 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
Comprehensive income for the three months ended March 31, 2000 and 1999
was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Net Income $1,784 $ 1,309
------------- -------------
Other comprehensive income
Unrealized gain on marketable
securities, net of tax 42 --
------------- -------------
Total other comprehensive income 42 --
------------- -------------
Comprehensive Income $1,826 $1,309
============= =============
</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 distinct 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 MARCH 31, 2000
Revenues $21,097 $4,700 $1,690 $27,487
Operating income (loss) 3,350 (611) (86) 2,653
THREE MONTHS ENDED MARCH 31, 1999
Revenues $15,808 $2,870 $1,427 $20,105
Operating income (loss) 2,527 (791) (285) 1,451
</TABLE>
NOTE 6 - GOODWILL
During the quarter ended March 31, 2000, the Company recorded $7.0
million in goodwill in connection with contingent consideration earned by
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, which was consummated in
October
7
<PAGE>
1998. The Company intends to pay $6.6 million of the $7.0 million contingent
consideration by issuing approximately 259,000 shares of its common stock to
the former Sentry shareholders in May 2000. The Company currently anticipates
that it will file a registration statement with the Securities and Exchange
Commission to provide for the resale of the contingent shares in May 2000.
The Company intends to pay the remaining $400,000 in contingent consideration
in cash in May 2000 as directed by certain of the former Sentry shareholders.
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, will become exercisable at the
time the contingent consideration is paid. The fair value of such warrants
was approximately $940,000 and was recorded as additional goodwill during the
quarter ended March 31, 2000. The 75,000 warrants expire in May 2004.
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 payment was recorded as
goodwill.
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 and conferences. 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 77%
and 79% of the Company's total revenues for the quarters ended March 31, 2000
and 1999, respectively. Billings attributable to the Company's Research and
Advisory Services are initially recorded as deferred revenues and then
recognized pro rata over the contract term. Research and Advisory Services
revenues attributable to international clients are billed and collected by
independent 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.
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 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 33% to $84.4 million
at March 31, 2000 from $63.2 million at March 31, 1999. At March 31, 2000, the
Company had approximately 5,100 Research and Advisory Services subscribers in
9
<PAGE>
approximately 2,400 client organizations worldwide, as compared to approximately
4,200 subscribers in approximately 1,800 organizations at March 31, 1999.
Revenues from Strategic Consulting engagements comprised approximately
17% and 14% of the Company's total revenues for the quarters ended March 31,
2000 and 1999, respectively. The Company recognizes revenues on Strategic
Consulting engagements as the work is performed. At March 31, 2000 and 1999, the
Company employed 83 and 69 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, executive 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 MARCH 31, 2000 AND 1999
REVENUES Total revenues increased 37% to $27.5 million in the quarter ended
March 31, 2000 from $20.1 million in the quarter ended March 31, 1999.
Revenues from Research and Advisory Services, which generally are
derived from annually renewable contracts payable by clients in advance,
increased 33% to $21.1 million in the quarter ended March 31, 2000 from $15.8
million in the quarter ended March 31, 1999, and decreased as a percentage of
total revenues to 77% in the quarter ended March 31, 2000 from 79% in the
quarter ended March 31, 1999. The increase in revenues from Research and
Advisory Services was principally due to increased subscription revenues as a
result of the Company's expanded domestic sales force and increased client
subscriber base, an increase in analyst briefings to existing clients,
increased revenues from the Company's Infusion products, and continued
international market acceptance of the Company's Research and Advisory
Services. During the quarter ended March 31, 2000, the Company experienced a
continued shift in client demand from Research and Advisory Services towards
more focused consulting services and currently expects this trend to continue
for the foreseeable future.
Research and Advisory Services revenues attributable to international
clients increased 26% to $3 million in the quarter ended March 31, 2000 from
$2.4 million the quarter ended March 31, 1999, and decreased as a percentage
of Research and Advisory Services revenue to 14% from 15%. The increase in
Research and Advisory Services revenue attributable to international clients
was due principally to continued demand for the Company's Research and
Advisory Services and, to a lesser extent, an increased demand for the
Company's Infusion products.
The Company increased Contract Value 33% to $84.4 million at March 31,
2000 from $63.2 million at March 31, 1999. The Company grew its subscriber
client base 21% to approximately 5,100 Research and Advisory Services
subscribers at March 31, 2000 from approximately 4,200 subscribers at March
31, 1999.
Strategic Consulting revenues, which result from Strategic Consulting
engagements addressing clients' business and technology issues, increased 64%
to $4.7 million in the quarter ended March 31, 2000 from $2.9 million in the
quarter ended March 31, 1999, and increased as a percentage of total revenues
to 17%
10
<PAGE>
from 14%. The increases were principally due to a continuing shift in client
demand from Research and Advisory Services towards more focused consulting
services, and, to a lesser extent, increased revenues from international
engagements.
Published Research Products revenues, which result from the sale of
published research products offering in-depth analysis of specific business
or IT issues, increased 18% to $1.7 million in the quarter ended March 31,
2000 from $1.4 million in the quarter ended March 31, 1999, and decreased as
a percentage of total revenues to 6% from 7%. The increase was principally
due to an increase in the number of sales professionals selling the Company's
Published Research Products coupled with expanded product offerings
introduced in the second half of 1999.
The Company currently expects Strategic Consulting revenues to continue
to grow at a faster rate than Research and Advisory Services revenues due to
the shift in demand by clients towards more focused, actionable collaborative
services. The Company currently expects Published Research Products revenues
to grow at a slower rate than Research and Advisory Services and Strategic
Consulting revenues.
COST OF SERVICES AND FULFILLMENT Cost of services and fulfillment increased
24% to $14 million in the quarter ended March 31, 2000 from $11.3 million in
the quarter ended March 31, 1999 due principally to increased staffing costs
(which primarily consist of compensation, and to a lesser extent, travel) for
analyst, consultant and fulfillment positions necessary to support the
Company's growth both domestically and internationally.
Cost of services and fulfillment decreased as a percentage of total
revenues to 51% from 56% in the quarter ended March 31, 2000. This decrease
primarily reflects the Company's ability to leverage existing
business-focused research and analysis in its fulfillment of Infusion
programs and Strategic Consulting engagements. The Company currently
anticipates continuing increases in the costs of services and fulfillment.
SELLING AND MARKETING EXPENSES Selling and marketing expenses increased 55%
to $7.7 million in the quarter ended March 31, 2000 from $5 million in the
quarter ended March 31, 1999 and increased as a percentage of total revenues
to 28% from 25%. The increase in selling and marketing expenses was
principally due to increased compensation and travel expenses associated with
the expanded domestic sales force that sells the Company's Research and
Advisory Services and Strategic Consulting services and inside sales force
that sells the Company's Published Research Products to support the
increasing scope of the Company's product offerings. In addition, the Company
incurred greater marketing expenses in connection with the growth of the
Company's existing services, conferences and Infusion programs. 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.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
increased 37% to $2.5 million in the quarter ended March 31, 2000 from $1.8
million in the quarter ended March 31, 1999, and remained the same as a
percentage of total revenues at 9%. The increase in general and
administrative expenses was principally due to increased payroll and benefits
costs associated with an increase in administrative personnel and increased
facility costs due to the assumption of additional lease space in certain of
the Company's locations necessary to support the Company's growth. 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.
11
<PAGE>
DEPRECIATION AND AMORTIZATION Depreciation and amortization expense increased
19% to $705,000 in the quarter ended March 31, 2000 from $593,000 in the
quarter ended March 31, 1999. The increase in depreciation and amortization
expense was principally due to purchases of computer equipment and software,
leasehold improvements and office furniture required to support business
growth and the amortization of goodwill from the Sentry acquisition
consummated in October 1998. The Company currently anticipates that
depreciation and amortization expenses will increase as a percentage of total
revenues due to, among other factors, the additional goodwill recorded in the
quarter ended March 31, 2000 associated with the Sentry and Verity
acquisitions, and as a result of increased capital expenditures in connection
with the launch of the metagroup.com division described below.
OTHER INCOME Other income decreased 54% to $355,000 in the quarter ended
March 31, 2000 from $772,000 in the quarter ended March 31, 1999. The
decrease was principally due to a reduction in interest income during the
quarter ended March 31, 2000 due principally to the decreased levels of cash
and marketable securities on hand in 2000 versus 1999, resulting from the
Company's stock repurchases in the second quarter of 1999 totaling $22.5
million.
PROVISION FOR INCOME TAXES Provision for income taxes of $1.2 million was
recorded for the quarter ended March 31, 2000, as compared to a provision of
$0.9 million recorded for the quarter ended March 31, 1999, reflecting an
effective tax rate of approximately 41% for both periods.
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. The
Company currently anticipates that its metagroup.com initiative will
Web-enable clients in order to use META Group's products/services through a
collaborative and personalized delivery mechanism.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is cash from operating
activities which consists of net income adjusted for non-cash operating
activities and changes in current assets and liabilities and, to a lesser
extent, proceeds from the exercise of stock options. The Company used $4.8
million of cash in operations during the three months ended March 31, 2000,
compared to $344,000 of cash used in operations in the same period of 1999.
The increase in cash used in operations was principally due to an increase in
prepaid commissions to the Company's sales force due to strong fourth quarter
1999 billings, advances of analyst bonuses (included in other current assets
on the Company's consolidated balance sheets), and a decrease in collections
of the Company's outstanding accounts receivable. Such uses of cash were
partially offset by an increase in deferred revenues at March 31, 2000 versus
December 31, 1999.
The Company used $2.1 million of cash in the three months ended March
31, 2000, compared to $1.7 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 principally to greater
headcount. 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
infrastructure expenditures in 2000. The Company has no other material
commitments for capital expenditures.
12
<PAGE>
The Company received $3.2 million in cash from financing activities in
the form of proceeds from the exercise of stock options during the quarter ended
March 31, 2000 versus $723,000 in the same period last year.
During the quarter ended March 31, 2000, the Company recorded $7.0
million in goodwill in connection with contingent consideration earned by 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, which was consummated in
October 1998. The Company intends to pay $6.6 million of the $7.0 million
contingent consideration by issuing approximately 259,000 shares of its
common stock to the former Sentry shareholders in May 2000. The Company
currently anticipates that it will file a registration statement with the
Securities and Exchange Commission to provide for the resale of the
contingent shares in May 2000. The Company intends to pay the remaining
$400,000 in contingent consideration in cash in May 2000 as directed by
certain of the former Sentry shareholders. 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, will become exercisable at the time the contingent consideration
is paid. The fair value of such warrants was approximately $940,000 and was
recorded as additional goodwill during the quarter ended March 31, 2000. The
75,000 warrants expire in May 2004.
In May 2000, the Company intends to repurchase approximately 15,000
shares of its common stock and warrants to purchase approximately 5,000
shares of its common stock for approximately $659,000 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 intends to recover the excess paid to the minority stockholder over
the fair market value of the securities the Company repurchases 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 Company anticipates
that such recovery by the Company will be in the form of a release of
approximately 11,000 shares of the Company's common stock from the Sentry
purchase consideration escrow. Such released shares, and the aforementioned
repurchased shares, will be 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.
The Company regularly invests excess funds in investment-grade,
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.
As of March 31, 2000, the Company had cash and cash equivalents of
$5.9 million, marketable securities of $6.3 million, working capital of $20.6
million, and a $10 million unused line of credit with its bank. The decrease
in cash and cash equivalents during the quarter ended March 31, 2000 is due
principally to advances of analyst bonuses paid in the quarter ended March 31,
2000 (included in other current assets on the Company's consolidated balance
sheets), an increase in prepaid commissions to the Company's sales force, and
a decrease in collections of the Company's outstanding accounts receivable.
The Company believes that existing cash balances, its ability to borrow under
its credit facility, and anticipated cash flows from operations will be
sufficient to
13
<PAGE>
meet its working capital, strategic investments and capital expenditure
requirements for the foreseeable future, including expenditures relating to
its metagroup.com division.
YEAR 2000 READINESS DISCLOSURE
THE FOLLOWING DISCLOSURE MAY BE DEEMED "YEAR 2000 READINESS DISCLOSURE"
PURSUANT TO THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT.
To date, the Company has not suffered any significiant year 2000
problems or incurred any material expense related to any such problems. Year
2000 issues may arise in the future. The Company will continue to monitor the
year 2000 compliance and readiness of its systems and those of its suppliers.
In response to an increase in clients and employees and the need for
improved information management for customer service, the Company implemented
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 of such system that the system is Year 2000 compliant. Due to the
large amount of information contained in the old client information system,
not all information was transferred to the new system by the end of 1999.
Accordingly, the Company still uses the existing system for non-critical
functions. The company has completed the necessary upgrades and obtained
representations from the vendor to ensure the existing system is year 2000
compliant.
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, and the Company's
working capital and capital expenditure requirements) 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 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
14
<PAGE>
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 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
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.
15
<PAGE>
Item 5. OTHER INFORMATION
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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
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 March 31, 2000.
16
<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: May 15, 2000 By: /S/ BERNARD F. DENOYER
-------------------------------------
Bernard F. Denoyer
Senior Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------------------ ------------------------------------------------------ ------------
<S> <C> <C>
11.1 Statement regarding computation of per-share earnings 19
27.1 Financial Data Schedule *
* Exhibit included in EDGAR filing with Securities and Exchange Commission.
</TABLE>
------------------
18
<PAGE>
EXHIBIT 11.1
META GROUP, INC.
EXHIBIT TO QUARTERLY REPORT ON FORM 10-Q
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
- --------------------------------------------------------------------------------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net income.................................................................. $1,784,000 $1,309,000
========== ==========
Weighted average number of common and common equivalent shares outstanding:
Average number of common shares
outstanding during the period........................................ 10,319,896 11,830,397
Add common share equivalents -- options
to purchase common shares and contingent shares...................... 1,659,805 1,074,948
---------- ----------
Total......................................................... 11,979,701 12,905,345
========== ==========
Net income per diluted common share......................................... $.15 $.10
==== ====
Net income per basic common share........................................... $.17 $.11
==== ====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THIS FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,952
<SECURITIES> 6,322
<RECEIVABLES> 53,033
<ALLOWANCES> (633)
<INVENTORY> 0
<CURRENT-ASSETS> 70,010
<PP&E> 12,568
<DEPRECIATION> (3,913)
<TOTAL-ASSETS> 124,044
<CURRENT-LIABILITIES> 49,390
<BONDS> 0
0
0
<COMMON> 111
<OTHER-SE> 74,543
<TOTAL-LIABILITY-AND-EQUITY> 124,044
<SALES> 27,487
<TOTAL-REVENUES> 27,487
<CGS> 13,968
<TOTAL-COSTS> 24,834
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,008
<INCOME-TAX> 1,224
<INCOME-CONTINUING> 1,784
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,784
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.15
</TABLE>
