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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 September 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 November 7,
2000 was 10,911,911.
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META GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets:
September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations (unaudited):
Three and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows (unaudited):
Nine months ended September 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 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 3. Defaults Upon Senior Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURE 19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
META GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------
ASSETS 2000 1999
-------------------------------------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $2,269 $10,106
Accounts receivable, net 59,098 55,279
Deferred commissions 3,431 2,402
Deferred tax asset 532 407
Other current assets 3,838 1,795
------------- -------------
Total current assets 69,168 69,989
Marketable securities 6,387 6,253
Furniture and equipment, net 12,326 7,170
Deferred tax asset 1,755 1,908
Goodwill, net 16,907 5,527
Other assets 24,202 22,603
------------- -------------
Total assets $130,745 $113,450
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,950 $387
Deferred revenues 35,466 42,111
Bank demand note payable 10,900 -
Accrued compensation 2,676 4,934
Other current liabilities 3,175 4,333
------------- -------------
Total current liabilities 55,167 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
11,493,702 and 10,856,124 shares 115 109
Paid-in capital 50,549 38,691
Retained earnings 25,596 23,674
Accumulated other comprehensive loss (362) (469)
Treasury stock, at cost (320) (320)
------------- -------------
Total stockholders' equity 75,578 61,685
------------- -------------
Total liabilities and stockholders' equity $130,745 $113,450
============= =============
</TABLE>
See notes to consolidated financial statements.
3
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META GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Research and advisory services $20,213 $17,032 $64,167 $49,627
Strategic consulting 7,069 7,175 19,091 15,357
Published research products 1,448 1,272 5,027 4,711
---------- ---------- ---------- ----------
Total revenues 28,730 25,479 88,285 69,695
---------- ---------- ---------- ----------
Operating expenses:
Cost of services and fulfillment 17,568 13,282 47,394 37,451
Selling and marketing 9,630 5,395 25,342 16,183
General and administrative 4,927 2,006 10,049 5,879
Depreciation and amortization 1,230 683 3,004 1,935
---------- ---------- ---------- ----------
Total operating expenses 33,355 21,366 85,789 61,448
---------- ---------- ---------- ----------
Operating (loss) income (4,625) 4,113 2,496 8,247
Other income, primarily interest, net 129 93 761 1,656
---------- ---------- ---------- ----------
(Loss) income before (benefit) provision
for income taxes (4,496) 4,206 3,257 9,903
(Benefit) provision for income taxes (1,843) 1,752 1,335 4,092
---------- ---------- ---------- ----------
Net (loss) income $ (2,653) $ 2,454 $ 1,922 $ 5,811
========== ========== ========== ==========
Net (loss) income per diluted common share $ (.25) $ .23 $ .16 $ .50
========== ========== ========== ==========
Weighted average number of diluted common
shares outstanding 10,822 10,807 11,802 11,708
========== ========== ========== ==========
Net (loss) income per basic common share $ (.25) $ .24 $ .18 $ .53
========== ========== ========== ==========
Weighted average number of basic common
shares outstanding 10,822 10,095 10,718 10,919
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
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META GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $1,922 $5,811
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 3,004 1,935
Provision for doubtful accounts 990 -
Deferred income taxes - 3,575
Other non-cash charges 190 -
Changes in assets and liabilities:
Accounts receivable (5,093) (4,974)
Other current assets (4,281) (2,259)
Other assets (1,117) (1,303)
Accounts payable 2,563 (1,375)
Accrued expenses and other current liabilities (3,416) (2,982)
Deferred revenues (6,645) 3,129
---------------- ---------------
Net cash (used in) provided by operating activities (11,883) 1,557
---------------- ---------------
INVESTING ACTIVITIES:
Capital expenditures (7,752) (4,089)
Proceeds from sales/maturities of marketable securities - net - 22,344
Payments made for acquisitions (2,502) -
Investments and advances (702) (3,890)
---------------- ---------------
Net cash (used in) provided by investing activities (10,956) 14,365
---------------- ---------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 4,084 1,067
Proceeds from employee stock purchase plan 679 351
Proceeds from line of credit 10,900 -
Reacquisition of shares - (22,485)
Reacquisition of shares - current stockholder (661) (266)
---------------- ---------------
Net cash provided by (used in) financing activities 15,002 (21,333)
---------------- ---------------
Net decrease in cash and cash equivalents (7,837) (5,411)
Cash and cash equivalents, beginning of period 10,106 9,945
---------------- ---------------
Cash and cash equivalents, end of period $2,269 $ 4,534
================ ===============
</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. Certain prior year balances have been reclassified to conform with the
current year presentation. Results for interim periods are not necessarily
indicative of results for the entire year.
NOTE 2 - INCOME TAXES
During the quarter ended September 30, 2000, the Company recorded a tax
benefit of $1.8 million due to the operating loss recognized by the Company.
For the nine months ended September 30, 2000, the Company recorded a tax
provision of $1.3 million, reflecting an effective tax rate of 41%. For the
nine months ended September 30, 2000, the Company paid $567,000 for state
income tax liabilities and $1.9 million for federal income tax liabilities.
NOTE 3 - MARKETABLE SECURITIES
Marketable securities at September 30, 2000 and December 31, 1999 include the
following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
------------------
GROSS UNREALIZED FAIR
COST HOLDING LOSSES VALUE
<S> <C> <C> <C>
U.S. government issued mortgage backed bonds $ 6,996 $ (609) $ 6,387
======= ======= =======
<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 September 30, 2000 are as
follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
------------------
FAIR
COST VALUE
---- -----
<S> <C> <C>
Due after one year through fifteen years $6,996 $6,387
====== ======
</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 (loss) for the three and nine months ended
September 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income $ (2,653) $2,454 $1,922 $ 5,811
Other comprehensive income, net of tax:
Unrealized gain (loss) on marketable
securities 65 (90) 134 (437)
Less: reclassification adjustment for
losses included in net income - - - 126
--------------- ----------------- ---------------- ---------------
Other comprehensive income: 65 (90) 134 (311)
--------------- ----------------- ---------------- ---------------
=============== ================= ================ ===============
Comprehensive (loss) income $ (2,588) $2,364 $2,056 $5,500
=============== ================= ================ ===============
</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 STRATEGIC PUBLISHED CONSOLIDATED
ADVISORY SERVICES CONSULTING RESEARCH PRODUCTS TOTAL
----------------- ---------- ----------------- -----
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Revenues $20,213 $ 7,069 $1,448 $28,730
Operating income (3,791) (1,590) 756 (4,625)
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues $17,032 $ 7,175 $1,272 $25,479
Operating income 2,885 1,473 (245) 4,113
NINE MONTHS ENDED SEPTEMBER 30, 2000
7
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Revenues $64,167 $19,091 $5,027 $88,285
Operating income 2,929 (747) 314 2,496
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues $49,627 $15,357 $4,711 $69,695
Operating income 7,185 1,858 (796) 8,247
</TABLE>
NOTE 6 - ACQUISITION
In September 2000, the Company completed the acquisition of all of the
outstanding limited liability company interests of SPEX Research, LLC
("SPEX"), an IT market research company that conducts evaluations of
enterprise software packages, for approximately $1.7 million in cash and the
conversion of a $200,000 convertible promissory note. In addition, the
Company assumed $1.2 million in liabilities. The acquisition was accounted
for under the purchase method and, accordingly, the operations of SPEX have
been included in the consolidated financial statements from the date of
acquisition. The excess purchase price over the fair value of amounts
assigned to the net tangible assets acquired was $3.1 million and has been
recorded as goodwill, which is being amortized over 10 years.
NOTE 7 - GOODWILL
During the nine months ended September 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 filed a registration statement
with the Securities and Exchange Commission in September 2000 to provide for the
resale of these shares. 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 nine months ended September 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 8 - LINE OF CREDIT
In September 2000, the Company entered into a $25 million one-year
senior revolving credit facility (the "Facility") with its bank, which upon
expiration would convert into a five-year term loan payable in sixty
consecutive monthly installments. Currently, 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 Facility currently is collateralized by the
Company's marketable securities only. As of September 30, 2000 the total
outstanding amount under the Facility was $12.9 million, which was comprised
of $10.9 million in borrowings and $2 million in letters of credit. The
Facility calls for a commitment fee payable quarterly, in arrears, of 0.25%
based on the average daily unused portion. Under the terms of the Facility,
the Company is required to meet certain quarterly financial covenants,
including, but not limited to, a fixed charge ratio covenant (the "Fixed
Charge Covenant") and a minimum EBITDA covenant (the "EBITDA Covenant"). The
Company was not in compliance with these covenants for the relevant periods
ended September 30, 2000. Under the terms of the Facility, each such covenant
breach constitutes an event of default. The Company is currently negotiating
with its bank to waive the breaches of the covenants and the associated
events of default and, in connection therewith, to amend certain provisions
of the Facility. See "Defaults Upon Senior Securities" below. During the nine
months ended September 30, 2000, the Company paid approximately $174,000 in
interest expense.
8
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NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of Effective Date of
FASB No. 133". The Statement defers for one year the effective date of FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The rule now will apply to fiscal quarters of fiscal years
beginning after June 15, 2000. In June 1998, SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" was issued. The statement will
require the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of the derivative's
change in fair value will be immediately recognized in earnings. The Company
does not expect SFAS No. 133 to have an impact on the earnings and financial
position of the Company.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In June 2000, the SEC issued SAB No. 101B to defer for
three quarters the effective date of implementation of SAB No. 101 with
earlier application encouraged. The Company is required to adopt SAB 101 in
the fourth quarter of 2000.
NOTE 10 - SUBSEQUENT EVENTS
In October 2000, the Company completed the acquisition of substantially
all of the assets of Rubin Systems, Inc. ("RSI"), a provider of IT
trend-tracking, finance analysis and software engineering measurement
consulting, for an initial payment of $750,000 in cash, 36,874 shares of its
common stock and the assumption of certain liabilities. In the event certain
financial targets are met, contingent consideration of $4.3 million payable in
cash and $2.1 million payable in stock may be paid through March 2004. The
acquisition will be accounted for under the purchase method. RSI is wholly-owned
by Dr. Howard Rubin, a director and officer of the Company.
In November 2000, the Company completed the acquisition of
substantially all of the assets of META Group Canada, Inc., the Company's
independent sales representative organization in Canada, for $4.8 million in
cash and the assumption of certain liabilities. The acquisition will be
accounted for under the purchase method.
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"), MG (Bermuda) Ltd. and 1422722 Ontario Inc.
(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
9
<PAGE>
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
70% and 67% of the Company's total revenues for the quarters ended September
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 25% to 50% of
amounts billed to those clients for Research and Advisory Services.
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 increased 19% to $80.9 million at September 30, 2000
from $68.1 million at September 30, 1999. At September 30, 2000, the Company had
5,600 Research and Advisory Services subscribers in approximately 2,600 client
organizations worldwide, as compared to 4,500 subscribers in 1,975 organizations
at September 30, 1999.
Revenues from Strategic Consulting engagements comprised approximately
25% and 28% of the Company's total revenues for the quarters ended September 30,
2000 and 1999, respectively. The Company recognizes revenues on Strategic
Consulting engagements as the work is performed. At September 30, 2000 and 1999,
the Company employed 97 and 74 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 SEPTEMBER 30, 2000 AND 1999
REVENUES Total revenues increased 13% to $28.7 million in the quarter ended
September 30, 2000 from $25.5 million in the quarter ended September 30, 1999.
Revenues from Research and Advisory Services increased 19% to $20.2 million
in the quarter ended September 30, 2000 from $17.0 million in the quarter
ended September 30, 1999. The increase in revenues from Research and Advisory
Services was due to growth in the Company's retainer-based Research and
Advisory Services due to an increase in client subscribers and an increase in
sales of the Company's Infusion products. The revenue growth was lower than
expected due to decreased sales growth in its Research and Advisory Services
10
<PAGE>
experienced during the quarter and were partially offset by decreases in the
Company's analyst briefings to existing clients and decreases in packaged
consulting and conference revenues. Research and Advisory Services revenues
attributable to international clients increased 10% in the quarter ended
September 30, 2000 from the quarter ended September 30, 1999 due primarily to
an increase in analyst briefings to existing clients, and decreased as a
percentage of Research and Advisory Services revenue to 15% from 16%. The
Company currently anticipates an increase in its Research and Advisory
Services revenue for the remainder of 2000 and anticipates that its Research
and Advisory Services revenue will decrease slightly as a percentage of total
revenues during the same period.
Strategic Consulting revenues, which result from strategic consulting
engagements addressing clients' business and technology issues, decreased 1%
to $7.1 million in the quarter ended September 30, 2000 from $7.2 million in
the quarter ended September 30, 1999, and decreased as a percentage of total
revenues to 25% from 28%. The decrease was primarily due to decreased
revenues in a specific practice area of META Group Consulting ("MGC") caused
by the loss of key personnel in the middle of the second quarter and a
decrease in new business development within this practice area of MGC.
Consequently, the Company experienced an imbalance between the skill sets of
available consulting staff and the backlog in consulting projects. These
issues are being addressed through recruitment and development of business
consultants. The Company currently anticipates an increase in its Strategic
Consulting revenues for the remainder of 2000 and anticipates that its
Strategic Consulting revenues will remain approximately the same as a
percentage of total revenues during the same period.
Published Research Products revenues, which result from the sale of
publications offering in-depth analysis of single business or IT issues,
increased 14% to $1.4 million in the quarter ended September 30, 2000 from
$1.3 million in the quarter ended September 30, 1999, and remained constant
as a percentage of total revenues at 5%. The increase was primarily due to
expanded product offerings and an increase in the number of sales
professionals selling the Company's Published Research Products. The lower
than expected growth in Published Research Reports revenues was due to
changes in product emphasis and changes in the mission of the Company's
Inside Sales channel (sales professionals that sell the Company's Published
Research Products). Specifically, the Company has begun to restructure some
of its Published Research Products so they may be sold not only as a one-time
product but also on an annual subscription basis. The Company currently
anticipates that its Published Research Products revenue will continue to
increase for the remainder of 2000 and increase slightly as a percentage of
total revenues during the same period.
COST OF SERVICES AND FULFILLMENT Cost of services and fulfillment increased 32%
to $17.6 million in the quarter ended September 30, 2000 from $13.3 million in
the quarter ended September 30, 1999 due primarily to the accrual of a
discretionary bonus intended to retain research staff (which the Company intends
to pay in the first quarter of 2001), increased staffing costs (which consist of
compensation and travel) for analyst, consultant and fulfillment positions in
connection with the Company's growth and an increase in outside consulting
costs.
Cost of services and fulfillment increased to a higher than expected level as
a percentage of total revenues to 61% from 52% in the quarter ended September
30, 1999 due primarily to the accrual of the discretionary bonus discussed
above. The Company currently anticipates additional accruals of the
discretionary bonus discussed above and increased staffing costs due to the
anticipated increase in headcount. The Company currently expects that such
expenses will decrease as a percentage of total revenues during the remainder
of 2000.
11
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SELLING AND MARKETING EXPENSES Selling and marketing expenses increased 79% to
$9.6 million in the quarter ended September 30, 2000 from $5.4 million in the
quarter ended September 30, 1999 and increased as a percentage of total revenues
to 34% from 21%. The higher than expected 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 to
support its product offerings, greater marketing expenses, both domestically and
internationally, in connection with the Company's revenue growth and increased
sales expenses incurred in association with the acquisitions discussed in the
notes to the Company's consolidated financial statements. 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 during the remainder of 2000.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
increased 146% to $4.9 million in the quarter ended September 30, 2000 from
$2.0 million in the quarter ended September 30, 1999, and increased as a
percentage of total revenues to 17% from 8%. The higher than expected
increase in expenses was primarily due to increased payroll, benefits,
facility and telephone costs, all associated with increased headcount during
2000 and an increase to the Company's provision for doubtful accounts
associated with the increase in outstanding accounts receivable. The Company
currently anticipates continuing increases over the prior year in the amount
of general and administrative expenses primarily due to anticipated increases
in headcount and expects such expenses to decrease as a percentage of total
revenues during the remainder of 2000.
DEPRECIATION AND AMORTIZATION Depreciation and amortization expense increased
80% to $1.2 million in the quarter ended September 30, 2000 from $683,000 in the
quarter ended September 30, 1999. The increase in depreciation and amortization
expense was primarily due to an increase in amortization expense as a result of
$11.7 million in additional goodwill recorded in 2000 from the payment of
contingent consideration to the former Sentry shareholders, the Verity Group and
the acquisition of SPEX Research LLC and, to a lesser extent, additional
depreciation expense as a result of increased capital expenditures, primarily in
information technology and web-site infrastructure, necessary to support the
Company's growth.
OTHER INCOME Other income increased 39% to $129,000 in the quarter ended
September 30, 2000 from $93,000 in the quarter ended September 30, 1999 due
primarily to increased interest income from advances to the Company's
affiliates, partially offset by interest expense on the Company's outstanding
balance on its line of credit.
BENEFIT FOR INCOME TAXES A benefit for income taxes of $1.8 million was
recognized for the quarter ended September 30, 2000, as compared to a provision
of $1.8 million recorded for the quarter ended September 30, 1999, due to the
pre-tax loss experienced during the quarter ended September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES Total revenues increased 27% to $88.3 million in the nine months ended
September 30, 2000 from $69.7 million in the nine months ended September 30,
1999.
Revenues from Research and Advisory Services increased 29% to $64.2 million
in the nine months ended September 30, 2000 from $49.6 million in the nine
months ended September 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 Infusion products, increased revenues from
12
<PAGE>
the Company's packaged consulting services and increased revenues from the
Company's international clients. Research and Advisory Services revenues
attributable to international clients increased 18% in the nine months ended
September 30, 2000 from the nine months ended September 30, 1999, and
decreased as a percentage of Research and Advisory Services revenues to 15%
from 16%.
Strategic Consulting revenues increased 24% to $19.1 million in the nine months
ended September 30, 2000 from $15.4 million in the nine months ended September
30, 1999, and remained constant as a percentage of total revenues at 22%. The
increase was primarily due to the growth of the Company's core consulting
business, increased revenues from the growth of the Company's consulting
business internationally and increased sales of Internet security planning and
operations services (which are provided under the Company's outsourcing
agreement with META Secur e-Com Solutions).
Published Research Products revenues increased 7% to $5.0 million in the nine
months ended September 30, 2000 from $4.7 million in the nine months ended
September 30, 1999, and decreased as a percentage of total revenues to 6% from
7%. The increase in revenues was primarily due to an increase in sales of the
Company's SPEX publications (which provide evaluations of enterprise software
packages), formerly distributed under the Company's agreements with SPEX
Research LLC and CXP International, S.A. See notes to the consolidated financial
statements and Liquidity and Capital Resources for a discussion of the SPEX
acquisition.
COST OF SERVICES AND FULFILLMENT Cost of services and fulfillment increased 27%
to $47.4 million in the nine months ended September 30, 2000 from $37.5 million
in the nine months ended September 30, 1999, and remained constant as a
percentage of total revenues at 54%. 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.
SELLING AND MARKETING EXPENSES Selling and marketing expenses increased 57% to
$25.3 million in the nine months ended September 30, 2000 from $16.2 million in
the nine months ended September 30, 1999 and increased as a percentage of total
revenues to 29% from 23%. The increase in selling and marketing 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 71% to $10.0 million in the nine months ended September 30, 2000
from $5.9 million in the nine months ended September 30, 1999 and increased
as a percentage of total revenues to 11% from 8%. The increase in expenses
was primarily due to an increase to the Company's provision for doubtful
accounts associated with the increase in aged accounts receivable and
increased salary and benefit costs, facilities costs, and telephone costs,
all associated with increased headcount.
DEPRECIATION AND AMORTIZATION Depreciation and amortization expense increased
55% to $3.0 million in the nine months ended September 30, 2000 from $1.9
million in the nine months ended September 30, 1999. The increase in
depreciation and amortization expense was primarily due to an increase in
amortization expense as a result of the increase in goodwill discussed above
and, to a lesser extent, additional depreciation expense as a result of
increased capital expenditures, primarily in information technology and web-site
infrastructure, necessary to support the Company's growth.
OTHER INCOME Other income decreased 54% to $761,000 in the nine months ended
September 30, 2000 from $1.7 million in the nine months ended September 30,
1999. The decrease was primarily due to a decrease in interest income from the
Company's cash and marketable securities balances due to the
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<PAGE>
decrease in such balances as well as interest expense on the Company's
outstanding balance on its line of credit recorded in the nine months ended
September 30, 2000.
PROVISION FOR INCOME TAXES Provision for income taxes of $1.3 million was
recorded for the nine months ended September 30, 2000, as compared to a
provision of $4.1 million recorded for the nine months ended September 30, 1999,
reflecting an effective tax rate of 41%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash collections on
outstanding accounts receivable, monies available under its revolving credit
facility and, to a lesser extent, proceeds from the exercise of stock
options. The Company used $11.9 million of cash in operations during the nine
months ended September 30, 2000, compared to $1.6 million of cash provided by
its operations in the same period of 1999. The significant increase in cash
used in operations was primarily due to a decrease in the Company's deferred
revenues during the year (as a result of the shift in client demand from
subscription-based services toward more focused advisory services and the
slowed Research and Advisory Services growth), a decrease in collections of
the Company's outstanding accounts receivable and, to a lesser extent,
prepayments of analyst and consultant bonuses (included in other current
assets on the Company's consolidated balance sheets), increased income tax
payments versus the same period of the previous year and an increase in
prepaid commissions to the Company's sales force, partially offset by an
increase in the Company's accounts payable balance.
The Company used $7.8 million of cash for the purchase of furniture,
equipment, computers and related software for use by the Company's employees
in the nine months ended September 30, 2000, compared to $4.1 million in the
same period of 1999. The increase was due primarily to upgrades to the
Company's information technology 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 employees. 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 $1
million in technology infrastructure expenditures in the remainder of 2000.
In addition, the Company currently anticipates that it will spend
approximately $500,000 in connection with the continued upgrade of its client
information system, as well as $1 million in connection with the opening of a
new administrative facility and data center in Danbury, CT. The Company has
no other material commitments for capital expenditures.
The Company expended $2.5 million of cash in the nine months ended
September 30, 2000 to fund acquisitions. In particular, the Company paid $1.7
million for the acquisition of SPEX Research LLC, paid approximately $500,000 in
cash to the former Sentry shareholders 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, and paid $373,000 of contingent
consideration to the Verity Group due to Verity's achievement of certain
financial targets.
In October 2000, the Company completed the acquisition of
substantially all of the assets of Rubin Systems, Inc., for an initial
payment of $750,000 in cash, 36,874 shares of its common stock and the
assumption of certain liabilities. In the event certain financial targets are
met, contingent consideration of $4.3 million payable in cash and $2.1
million payable in stock may be paid through March 2004. Rubin Systems, Inc.
is wholly-owned by Dr. Howard Rubin, a director and officer of the Company.
Additionally, in November 2000, the Company completed the acquisition of
substantially all of the assets of META Group Canada, Inc., the Company's
independent sales representative organization in Canada, for approximately
$4.8 million in cash and the assumption of certain liabilities. The Company
will continue to assess its international distributors for purchase or
investment consistent with its growth plans.
The Company received $15 million in cash from financing activities
primarily as a result of borrowings totaling $10.9 million from its $25 million
revolving credit facility with its bank and $4.7
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<PAGE>
million in proceeds from the exercise of stock options and proceeds received
under its employee stock purchase plan during the nine months ended September
30, 2000 versus $21 million used in cash during the same period last year due to
the Company's stock repurchase program. In September 2000, the Company
entered into a $25 million one-year senior revolving credit facility (the
"Facility") with its bank, which upon expiration would convert into a
five-year term loan payable in sixty consecutive monthly installments.
Currently, 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 Facility
currently is collateralized by the Company's marketable securities only. As
of September 30, 2000 the total outstanding amount under the Facility was
$12.9 million, which was comprised of $10.9 million in borrowings and $2
million in letters of credit. The Facility calls for a commitment fee payable
quarterly, in arrears, of 0.25% based on the average daily unused portion.
Under the terms of the Facility, the Company is required to meet certain
quarterly financial covenants, including, but not limited to, a fixed charge
ratio covenant (the "Fixed Charge Covenant") and a minimum EBITDA covenant
(the "EBITDA Covenant"). The Company was not in compliance with these
covenants for the relevant periods ended September 30, 2000. Under the terms
of the Facility, each such covenant breach constitutes an event of default.
The Company is currently negotiating with its bank to waive the breaches of
the covenants and the associated events of default and, in connection
therewith, to amend certain provisions of the Facility. See "Defaults Upon
Senior Securities" below. During the nine months ended September 30, 2000,
the Company paid approximately $174,000 in interest expense.
During the nine months ended September 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 filed a registration statement
with the Securities and Exchange Commission to provide for the resale of these
shares in September 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 nine months ended September 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 September 30, 2000, the Company had cash of $2.3 million,
marketable securities of $6.4 million and working capital of $14 million. In
addition, the Company currently has approximately $4.5 million available under
its facility with its bank.
The decrease in cash and cash equivalents during the nine months
ended September 30, 2000 was due primarily to slower collections on the
Company's outstanding accounts receivable, increased capital expenditures due
to the infrastructure upgrades discussed above, prepayments of analyst and
15
<PAGE>
consultant bonuses (included in other current assets on the Company's
consolidated balance sheets), cash consideration paid for acquisitions,
increased income tax payments versus the same period of the previous year and
an increase in prepaid commissions to the Company's sales force due to
increased 2000 billings. Integration and implementation issues experienced
during the Company's ongoing infrastructure upgrades contributed to the
Company's decrease in collections of outstanding accounts receivable during
the nine months ended September 30, 2000. The Company has put a receivables
management plan in place to address this issue. However, it is currently
anticipated that significant improvement in collections will not occur until
the end of 2000 and early in 2001. 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, capital
expenditure and credit facility payment requirements for the next twelve
months. In the event that the Company's cash balances, its ability to borrow
under its line of credit and anticipated cash flows from operations are not
sufficient to meet its working capital, capital expenditure and credit
facility payment requirements, the Company may seek to finance such cash
shortfall through additional debt or other financings. There can be no
assurance that additional financing will be available when needed or that if
available, such financing will include terms favorable to the Company or its
stockholders. If such financing is not available when required or is not
available on acceptable terms, the Company may be unable to meet operating
obligations, which would likely have a material adverse impact on the
Company's business, results of operations and financial condition. See
"Certain Factors That May Affect Future Results" below.
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 Quarterly Report on 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
future market acceptance of and demand for the Company's products and
services, 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, the recruitment, retention
and development of the Company's employees, the future success of the
Company's business, marketing and infrastructure strategies for supporting
future growth, anticipated payments of bonuses to the Company's employees,
anticipated increases in headcount, planned capital expenditures,
depreciation and amortization expenses, 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, the availability of and ability to borrow funds under its
revolving credit facility, statements concerning the Company's negotiations
with its bank concerning waivers of certain defaults and the availability of
any additional debt or other sources of financing) 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
16
<PAGE>
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, staff client
engagements with appropriately skilled professionals, and recruit, retain and
develop highly talented professionals in a competitive job market. The loss
of any of the Company's senior management personnel, including Dale Kutnick
(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, Strategic Consulting
engagements and Published Research Products. As a result, the Company may be
required to reduce prices for its Research and Advisory Services, Strategic
Consulting engagements and Published Research Products 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 ability to finance such developments and acquisitions
and 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, without limitation, 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
new 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, marketing and market acceptance 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 production and delivery of Published
Research Products sold by the Company, the recruitment, retention and
development of research analysts, consultants and administrative staff,
employee utilization rates and the accuracy of estimates of the level of
resources and skills required to complete ongoing Strategic Consulting
engagements, the Company's ability to manage growth and implement systems and
processes required by such growth, changes in the spending patterns of the
Company's target clients, the timing and execution of the Company's strategic
plans, the Company's ability to manage expense levels, the risk of operating
losses, risks associated with borrowings under the Company's revolving credit
facility, risks associated with executing a definitive agreement with its
bank concerning certain defaults under its Facility, risks associated with the
collection of outstanding accounts receivable, risks associated with any
failure by the Company to meet its working capital, strategic investments,
capital expenditure and credit facility payment requirements, the Company's
ability to obtain additional debt or other financing when needed or that, if
available, such financng will include terms favorable to the Company or its
stockholders, changes in market demand for IT research and analysis,
competitive conditions in the industry 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
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<PAGE>
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 3. DEFAULTS UPON SENIOR SECURITIES.
The terms of the Company's $25 million one-year senior revolving
credit facility (the "Facility") with its bank require the company to observe
certain financial covenants, including, but not limited to, a fixed charge
ratio covenant (the "Fixed Charge Covenant") and a minimum EBITDA covenant
(the "EBITDA Covenant"). The Company was not in compliance with the Fixed
Charge Covenant and the EBITDA Covenant for the relevant periods ended
September 30, 2000. Under the terms of the Facility, each such covenant
breach constitutes an event of default pursuant to which the Company's bank
may, by notice to the Company, terminate the bank's lending commitments to
the Company and declare all obligations of the Company under the Facility due
and payable immediately. The Company is currently negotiating with its bank
to waive the breaches of the Fixed Charge Covenant and the EBITDA Covenant
and the associated events of default and, in connection therewith, to amend
certain provisions of the Facility. No assurances may be given that a
definitive agreement concerning the waiver of the breached covenants and
defaults will be executed or become effective. The conditions to the
effectiveness of any such definitive agreement are expected to include an
increase in the Facility's interest rate, the payment by the Company of a
waiver fee and expenses to its bank and an amendment to the security
agreement with its bank. See "Certain Factors That May Affect Future Results"
above.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
4.1(1) Credit Agreement between META Group, Inc. and The
Bank of New York dated September 18, 2000 (with
certain information omitted).
4.2(1) Note of META Group, Inc. in favor of The Bank of New
York in the principal amount of $25,000,000 dated
September 18, 2000.
4.3(1) Security Agreement between META Group, Inc. and The
Bank of New York dated September 18, 2000.
4.4(1) Subsidiary Guarantee among MG (Bermuda) Ltd., The
Sentry Group, Inc., META Group, Inc. and The Bank of
New York dated September 18, 2000.
10.1(2) Letter Agreement dated July 28, 2000 between The
Bank of New York and META Group, Inc.
10.2(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 $12,000,000.
11.1 Statement regarding computation of per-share
earnings
27.1 Financial Data Schedule
</TABLE>
(1) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K dated September 19, 2000 and filed on October 3, 2000
(File No. 0-27280).
(2) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
and filed on August 14, 2000 (File No. 0-27280).
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company for the quarter
ended September 30, 2000.
18
<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: November 14, 2000 By: /s/ Robert F. Toole
------------------------------------------
Robert F. Toole
Executive Vice President and
Chief Operating Officer
(Principal Financial and Chief Accounting
Officer)
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
4.1 Credit Agreement between META Group, Inc. and The Bank of New York dated (1)
September 18, 2000 (with certain information omitted).
4.2 Note of META Group, Inc. in favor of The Bank of New York in the principal (1)
amount of $25,000,000 dated September 18, 2000.
4.3 Security Agreement between META Group, Inc. and The Bank of New York dated (1)
September 18, 2000.
4.4 Subsidiary Guarantee among MG (Bermuda) Ltd., The Sentry Group, Inc., META (1)
Group, Inc. and The Bank of New York dated September 18, 2000.
10.1 Letter Agreement dated July 28, 2000 between The Bank of New York and META (2)
Group, Inc.
10.2 Master Promissory Note of META Group, Inc. in favor of The Bank of New York (2)
dated as of July 28, 2000 in the principal amount of $12,000,000.
11.1 Statement regarding computation of per-share earnings 21
27.1 Financial Data Schedule *
</TABLE>
* Exhibit included in EDGAR filing with Securities and Exchange Commission.
(1) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K dated September 19, 2000 and filed on October 3, 2000
(File No. 0-27280).
(2) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
and filed on August 14, 2000 (File No. 0-27280).
------------------
20
