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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 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
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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) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 973-6700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 20, 2001 (based on the closing price as quoted by Nasdaq
National Market as of such date) was $32,138,981.
As of March 20, 2001, 10,984,009 shares of the registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement relating to the Company's Annual
Meeting of Stockholders to be held on May 24, 2001, are incorporated by
reference into Part III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
META Group, Inc., a Delaware corporation founded in 1989 ("META Group,"
together with its subsidiaries The Sentry Group, Inc. ["Sentry"], 1422722
Ontario Inc. ["META Canada"], META Group Australia Holdings PTY Limited ["META
Group Australia"], Cenntinum PTE Limited ["META Group Singapore"], and MG
[Bermuda] Ltd.--collectively the "Company"), is a leading independent research
and consulting firm focusing on information technology ("IT") and business
transformation strategies. The Company's goal is to deliver objective,
consistent, and actionable guidance to enable organizations to innovate more
rapidly and effectively.
IT user organizations utilize META Group's research, analysis, and
recommendations to develop and employ cost-effective and revenue-enhancing
strategies for selecting and implementing timely IT solutions--and for aligning
these solutions with business priorities. IT vendors use META Group's services
for help in product positioning, marketing, and market planning, as well as for
internal IT decision making.
META Group offers clients annual subscriptions to 13 different research
services ("Advisory Services") and five structured transformation programs
("Infusions"). These services are focused on specific areas of IT, the special
needs of those within the IT organization, or the distinct IT/business issues of
specific vertical markets. Recommendations to clients are based on projections
and analyses of important industry trends, experiences of other companies, key
technology and business best practices, and the impact of new technologies,
products, and services.
The Company also offers strategic consulting services through its consulting
division, META Group Consulting ("MGC"). A significant portion of MGC clients
are also Advisory Services subscribers. The Company also offers various targeted
publications as part of its Published Research Products family.
META Group targets as its clients substantial commercial and governmental
users of IT, as well as IT vendors. As of December 31, 2000, the Company had
more than 8,700 subscribers in approximately 3,100 client organizations.
From time to time, information provided by the Company or statements made by
its employees may contain "forward-looking" information that involves risks and
uncertainties. In particular, the statements set forth under the heading "The
META Group Solution" below, regarding the Company's objectives to expand the
range of clients it serves, further penetrate its existing client base, extend
its product line, and broaden the scope of its services, are "forward looking"
statements. The Company's actual results could differ materially as a result of
various factors, including the level and timing of subscription renewals to
Advisory Services, the level and timing of contracted Strategic Consulting
billing, the integration of new businesses into the operations of the Company,
the timing of production and delivery of Published Research Products sold by the
Company, the mix of domestic versus international business, the timing of the
development, introduction, marketing, and market acceptance of new products and
services, the timing of the hiring of research analysts and consultants, the
timing and execution of the Company's strategic plans, changes in the spending
patterns of the Company's target clients, changes in the market demand for IT
research, analysis, and strategic consulting services, competitive conditions in
the industry, and other risks and uncertainties detailed from time to time in
the Company's filings with the Securities and Exchange Commission. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors That May Affect Future Results" for a discussion of
certain factors that may cause actual results to vary significantly from those
stated in any forward-looking statement.
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Specific comparative financial information may be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
the notes to the consolidated financial statements.
META GROUP-Registered Trademark- is a registered trademark of the Company.
The META GROUP logo-TM-, META-TM-, META DELTAS-TM-, META FAX-TM-, META
FLASH-TM-, and META TRENDS-TM- are also trademarks of the Company. This report
includes trademarks and trade names of companies other than META Group.
INDUSTRY BACKGROUND
Businesses and other organizations remain dependent on IT for competitive
success, which has led to historical growth in IT-related expenditures. This
market growth is being driven by many factors, including intensified domestic
and global competition, Internet technologies and e-business, large-scale
migration from legacy mainframe systems to distributed architectures, the
accelerating pace of technological change, shortened product and business
planning life cycles, outsourcing, and widespread business process
re-engineering and corporate downsizing.
At the same time, the decision-making process involved in the planning,
selection, and implementation of IT solutions is growing more complex. Prior to
the emergence of open systems and distributed computing, organizations faced
easier technology choices. Traditionally, IT managers would simply purchase a
vertically integrated solution (hardware, operating system, applications, and
services) from one of the large systems vendors. Today, IT decision makers must
evaluate various new and rapidly evolving products from multiple vendors and
consider the interoperability of these products with one another and with
existing legacy systems.
As IT has become more entwined with day-to-day business operations and
strategic planning, a wider range of individuals are participating in the IT
decision-making process. With the shift to distributed computing, IT decision
making has spread to individual business units. Furthermore, as IT supports more
business-critical functions and businesses increasingly interact with
customer/suppliers through the Web, IT decision makers at all levels are
becoming key participants in the planning and implementation of business
decisions--and are often being called on to be strategic drivers of business and
technology innovation. As IT assumes a more business-critical role, senior
executives of organizations are compelled to take a more active role in IT
planning and decision making.
Because of these trends, there is an increasing need for a level of IT
guidance that often cannot be effectively supported by the internal resources of
a single organization. Organizations are more frequently turning to outside
sources for help with strategic and tactical advice in planning, selecting, and
implementing IT. Historically, however, available solutions have had significant
limitations. Software and equipment vendors generally offer advice biased toward
their own products or services, while often understating interoperability
issues. Many professional services firms and implementation companies provide
technical advice, but they have incentives to promote solutions that require
their services and often have purchasing and cooperative relationships with
particular hardware and software vendors. Some independent market research firms
provide vendor-neutral advice, but most target technology vendors rather than
the user community. Those market research firms that target users typically do
not offer advice over a full range of technology offerings. Therefore, there is
a need for objective, user-focused, and broad-based IT market research, coupled
with personalized advice within the specific context of an organization's
business environment and IT requirements.
THE META GROUP SOLUTION
The Company addresses the demand for user-focused guidance by providing
objective IT research, analysis, and advice to substantial commercial and
governmental users of IT. META Group services are also used by IT vendors for
help in product positioning, marketing, and market planning as well as for
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internal IT decision making. META Group Advisory Services assist clients in
making more informed, timely, and cost-effective decisions in the context of the
client's business and technology environments. Each Advisory Service is highly
focused on enhancing the client's ability to reduce and/or contain the cost of
IT, reduce risk, assess vendor business practices and strategies, evaluate
products and technologies, negotiate with vendors, develop financial strategies,
and formulate IT architectures and strategic plans.
META Group differentiates itself from most other IT research firms by
delivering IT industry coverage through more comprehensive and integrated
service segments, a higher level of personal service, and a greater emphasis on
client/analyst interaction. To provide this level of service, the Company
maintains a client-to-analyst ratio no higher than 50:1--affording clients more
opportunities to speak with analysts.
The Company's research is designed to alert clients to the sometimes subtle
and unforeseen opportunities and risks inherent in complex IT business
decisions. Although META Group research contains concrete conclusions and
recommendations, a client seeking to understand the complex IT issues addressed
in written research often requires further explanation and analysis in the
context of the client's unique business environment and IT requirements.
Accordingly, all META Group Advisory Services clients have direct access to the
Company's analysts, who adapt the Company's published conclusions and
recommendations to the client's specific IT environment. META Group analysts are
available to clients through direct telephone consultations, customized on-site
briefings, annual conferences, and in-depth quarterly teleconferences addressing
significant current IT developments.
META Group believes its proactive involvement in clients' specific IT
problem-solving situations enables it to provide actionable advice. META Group
analysts have real-time access to a broad base of current user experiences
spanning vertical industries and related technologies. This firsthand practical
knowledge is disseminated throughout the Company at weekly meetings of META
Group's entire research staff. As a result of this interaction and broad
knowledgebase, META Group's analysts deliver more informed conclusions and
recommendations. META Group believes that its interactive approach provides
significant value to senior management and IT decision makers by enhancing their
ability to make sound, practical, and cost-effective decisions.
META Group's objective is to leverage its reputation, comprehensive research
model, knowledgebase, customer relationships, and domestic and international
sales network to expand the range of clients it serves, further penetrate its
existing client base, extend its product line, and broaden the scope of its
services.
PRODUCTS AND SERVICES
META Group's services and products are designed to complement each other and
provide flexible access to market assessment and analytical expertise in the
following categories:
- Advisory Services
- Strategic Consulting
- Published Research Products
ADVISORY SERVICES
META Group's Advisory Services provide technology and business research
spanning the full spectrum of IT. Advisory Services offer bottom-line advice
that clients need to help them make better and faster IT decisions. The
Company's Advisory Services include one-on-one analyst interaction via on-site
briefings and telephone support, which complements the written deliverables
described below.
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Advisory service offerings include industry-specific coverage (e.g., energy,
insurance, government) as well as services targeted toward executive IT
management.
META Group believes its Advisory Services cover all material IT-related
issues faced by its clients. META Group applies a consistent approach to all
Advisory Services by offering a high level of personal service with an emphasis
on client/analyst interaction. Proactively contacting clients on a regular
basis, META Group analysts apply their knowledgebase of product information and
user experience to respond to the unique IT situation of each client with
in-context, definitive advice and recommendations.
The following deliverables, which involve the direct participation of META
Group research analysts, typically are provided to subscribers to META Group's
Advisory Services as an integral part of such services:
- TELEPHONE CONSULTATIONS afford each subscriber the opportunity to discuss
specific issues with META Group analysts.
- HALF-DAY BRIEFINGS are held at META Group headquarters or at client sites
and address client-specific issues.
- STRATEGIC PLAN REVIEWS provide META Group analysis and evaluation of
clients' strategic plans.
- META GROUP TREND TELECONFERENCES are held quarterly by each service to
provide an in-depth analysis of two to four of that service's annual META
Trends (i.e., long-term projections of major industry issues and trends
that META Group believes will impact users, vendors, and the IT market).
- SPECIAL EVENT TELECONFERENCES enable clients to participate in discussions
with META Group analysts and are generally held following key industry
events such as major announcements or trade shows.
- META GROUP CONFERENCES AND REGIONAL EVENTS address a broad range of
tactical and strategic issues relevant to each service. METAmorphosis, the
Company's forum for addressing industrywide issues, is held annually in
several locations worldwide.
- EBRIEFINGS are META Group teleconference content delivered in a multimedia
format, including streaming audio, presentation slides, and full-text
transcripts.
- WRITTEN RESEARCH: Each subscriber to a META Group Advisory Service
receives one or more of the following written materials:
- META DELTAS are analytical briefs published monthly that deliver
analysis of major events, issues, vendor products/strategies,
technology, and other pertinent matters.
- META FAXES are concise summaries of META Group's weekly research
meeting, at which industry events are reviewed and analyzed.
- META TRENDS, published annually, are three- to five-year projections of
significant issues and developments that will affect IT users and
vendors.
- META FLASHES are bulletins containing analysis of key industry events
or announcements that META Group deems to be of extraordinary
importance.
META Group research is available in print, as well as in the following
media. A rolling three years of research can be searched by service, topic, or
keyword.
- Internet
- Lotus Notes
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- CD-ROM
Following is a description of META Group's Advisory Services:
CORE TECHNOLOGY SERVICES
APPLICATION DELIVERY STRATEGIES (ADS)
Application Delivery Strategies focuses on both "buy side" and "sell side"
cross-functional e-business applications, which must integrate seamlessly
with numerous business application services increasingly executed over the
Web. ADS provides clients with technological foresight, and helps clients
rejuvenate their enterprise application portfolio to meet mandates for
corporate agility and innovation. ADS assists IT organizations in
establishing greater business credibility for business value creation--not
just cost containment--by focusing on three research topics: enterprise
business applications, data warehousing, and e-business application
development. ADS also focuses on the pivotal business and technology
initiatives of customer relationship management and enterprise application
integration.
ELECTRONIC BUSINESS STRATEGIES (EBS)
Electronic Business Strategies provides decisive, in-context guidance to
help companies mesh their technical efficiencies with a broad spectrum of
complex e-business imperatives. Offering pragmatic insight into content
creation, management, and process automation, EBS helps organizations
prioritize and streamline initiatives, spanning business-to-business (B2B),
business-to-consumer (B2C), and business-to-employee (B2E) applications and
environments. Focusing on such critical issues as Net markets,
e-procurement, presentment/payment, and enterprise portals, EBS provides
guidance concerning key IT and business issues vital to achieving e-business
success.
ENTERPRISE DATA CENTER STRATEGIES (EDCS)
Enterprise Data Center Strategies offers expertise and guidance regarding
effective externalization of legacy applications for rapidly expanding
e-business markets, efficient transition strategies, and large system
optimization. EDCS covers managerial, organizational, operational, and
technical factors behind evolving enterprise architectures, e-data centers,
storage systems, high-volume transaction processing/database systems, and
hardware/software asset management. Additional coverage includes
server/storage consolidation, high-availability solutions, operations
excellence, and vendor analysis and negotiation strategies.
GLOBAL NETWORKING STRATEGIES (GNS)
Global Networking Strategies helps clients formulate an integrated
networking strategy that addresses such key issues as transformational
secure networking, communications for optimal information delivery, and
securing enterprise assets online. Strong information security policies and
processes--coupled with best practices in the use of sourcing and the right
design/technology--deliver a flexible and scalable platform for business
communication. A core service competency of GNS is enabling IT and
infrastructure groups to plan, design and secure increasingly complex
business transactions that extend across multiple business constituencies.
SERVER INFRASTRUCTURE STRATEGIES (SIS)
Server Infrastructure Strategies delivers incisive, directed guidance to
help IT organizations develop adaptive infrastructures that create patterns
of network and server components that facilitate rapid change from
enterprise to e-business applications. SIS focuses on the combination of
hardware and software components that constitute the server half of the
infrastructure stack,
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including application, integration, database, storage and office system
servers. Tackling the entire spectrum of issues confronting infrastructure
professionals, SIS examines such key topics as high-availability e-business
infrastructure, database/data warehouse evolution, storage consolidation,
and middleware architecture. SIS takes a bottom-line approach to help
organizations realize their most pressing technology and organizational
objectives--identifying actionable strategies for maximizing infrastructure
agility, robustness, and value.
SERVICE MANAGEMENT STRATEGIES (SMS)
Service Management Strategies creates and revitalizes business and
information technology relationships by applying proven service delivery
techniques to IT operations and management. The focus is on aligning
IT/business goals through best-practice and robust infrastructure and
application management, superior service (end-user) support strategies, and
optimized use of external service providers to achieve strategic/pragmatic
goals. A key element is successful operations/management of increasingly
complex e-business applications that extend across organizational/business
boundaries.
WEB & COLLABORATION STRATEGIES (WCS)
Web & Collaboration Strategies assists IT organizations in developing
solutions for customer relationship management ("CRM"), information
management, and business collaboration. Emphasis is on improving individual
and business-unit productivity, enhancing customer interaction and
relationship management and supporting the various information value chains
that enhance corporate agility and market competitiveness. Coverage also
includes leveraging corporate Internet/ intranet Web sites and portals as a
critical application model, as well as optimizing the platforms used by
customers and corporate users to exploit these applications.
EXECUTIVE SERVICES
EXECUTIVE DIRECTIONS (ED)
Executive Directions provides intimate, one-on-one support to help chief
information officers ("CIOs") make quick and effective decisions that
improve their organization's information agility and credibility. By
targeting the intersection of business and technology, ED's focused
research, proven strategies, and solution-oriented workshops address the
critical challenges facing today's IT executive. ED's offerings are targeted
to CIOs and senior IT or line-of-business staff members.
ENTERPRISE ARCHITECTURE STRATEGIES (EAS)
Enterprise Architecture Strategies provides valuable, ongoing resource that
enable organizations to create an adaptive architecture that supports the
company's growth strategy while allowing for a quick response to industry
changes and advancements. Offering a set of architectural best practices to
guide IT organizations in the process of designing a flexible technical
infrastructure, EAS helps clients assess effectiveness, enhance
adaptability, and lower total cost of ownership.
IT PERFORMANCE ENGINEERING & MEASUREMENT STRATEGIES (PEMS)
IT Performance Engineering & Measurement Strategies provides IT
organizations with the framework and guidance for better business/IT
alignment through enterprisewide measurement programs. Encompassing IT
efficiency and effectiveness, PEMS provides information concerning in-depth
baselines and benchmarks that shows clients how they compare with peers and
best-practice organizations. PEMS enables IT organizations to lay the
groundwork for ongoing improvement and measurement initiatives.
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INDUSTRY-FOCUSED SERVICES
ELECTRONIC GOVERNMENT STRATEGIES (EGS)
Electronic Government Strategies is an advisory service designed to help
government IT professionals, policymakers, and vendors coordinate IT
strategy with public policy. Drawing on the diverse talents of META Group's
subject-matter experts, EGS analysts help clients formulate the most
effective, far-reaching IT strategies to deliver online capability and
efficiency for their public-sector programs. EGS's focus is on the key
trends and issues germane to each client's needs, including sourcing
strategies, labor force retention, IT value, delivery of e-government
services, and constituent relationship management. Combining broad-based
vision with individualized, practical directives, EGS offers a comprehensive
package of custom research, analysis, training, and tools, providing
guidance for implementation of policy and technical solutions for support of
government programs.
ENERGY INFORMATION STRATEGIES (EIS)
Energy Information Strategies addresses the needs and concerns of the
rapidly transforming energy industry. Staffed with experienced industry
analysts, EIS delivers sound, comprehensive research and advice to energy
company business leaders and information technologists. EIS covers the
entire energy value chain, with a focus that goes beyond technology to
business challenges, opportunities, and threats. By surveying the entire
energy industry and the general IT landscape, EIS provides advice to clients
on issues vital to their business.
INSURANCE INFORMATION STRATEGIES (IIS)
Insurance Information Strategies focuses on the key issues and trends
impacting the insurance and financial services industries. IIS helps clients
understand the business drivers shaping the competitive landscape, leverage
new business models and strategic initiatives, and optimize
business/technical architectures to support these initiatives. IIS's major
research themes include insurance e-commerce and e-health strategies;
customer relationship management for the insurance industry;
industry-specific vendor and solution evaluation; and emerging financial
services and healthcare payer standards and architectures.
META GROUP INFUSIONS
Supplementing the foregoing, during 1998 the Company introduced
Infusions--structured transformation programs that combine offerings across META
Group's Advisory Services. META Group's Infusions offer best practices that
enable clients to accelerate and drive change across their organizations. Based
on sound program and project management disciplines, Infusions provide a method
to break up challenges into manageable projects, phases, activities, and tasks.
To help clients achieve their goals, META Group's Infusions offer resources
and ongoing support that focus on accountability and communication to obtain
buy-in, demonstrate progress, and articulate value. Integral to the Infusion
programs are tools, templates, and workshops that accelerate the creation of key
deliverables and coaching to catalyze change, provide guidance, and drive
progress.
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Following is a description of META Group's Infusions:
ADAPTIVE INFRASTRUCTURE STRATEGIES INFUSION
The Adaptive Infrastructure Strategies Infusion helps clients design and
implement an infrastructure capable of rapidly responding to business
challenges and new initiatives. This structured transformation program
provides a library of best practices that enables clients to deliver an
adaptive infrastructure, while helping to reduce costs, increase quality,
and improve implementations. In addition, the program offers highly
interactive workshops and working sessions, practical models and methods,
and specialized research to address both day-to-day and long-term
infrastructure challenges.
COMMERCE CHAIN MANAGEMENT INFUSION
The Commerce Chain Management Infusion is a structured transformation
program that helps clients create--and drive forward--action plans for
supply and service chain excellence. Starting with overall e-business
strategies and organizational tactics, this program combines a step-by-step
approach to improving commerce chains with META Group's detailed analytics,
decision frameworks, and real-time, in-context advice from its industry
experts.
CUSTOMER RELATIONSHIP MANAGEMENT INFUSION
The Customer Relationship Management (CRM) Infusion is a structured
transformation program that helps clients create action plans for customer
relationship excellence. Starting with overall e-business strategies and
organizational tactics, this program combines a step-by-step approach to
becoming more customer-centric with META Group's detailed analytics,
decision frameworks, and real-time advice from its subject-matter experts.
Organizations can create customer patterns that cut across marketing, sales,
and service functions to produce a panoramic view of each customer in a
one-to-one relationship. CRM Infusion clients create these patterns through
a series of projects that evolve their business processes, application
portfolio, channels, and points of interaction into a multi-channel
ecosystem.
OPERATIONS EXCELLENCE INFUSION
The Operations Excellence Infusion provides best-practice methods and tools,
as well as metrics to track progress, for transforming operations into a
strategic asset capable of supporting the entire enterprise. This structured
transformation program helps clients optimize processes, contain costs,
improve service delivery, and communicate value.
SECURITY INFUSION
META Group's Security Infusion helps clients refine security policies,
optimize security processes, balance cost and risk, and communicate value.
Clients learn how to deploy a proven method for achieving security, despite
complex internal organizational boundaries, conflicting business priorities,
and corporate politics. The methods, tools, templates, and interactions with
the Company's coach and analyst team help achieve success in the critical
area of security and in support of major initiatives such as Web-based and
business-to-business applications.
STRATEGIC CONSULTING
META Group Consulting (MGC) offers project consulting services that address
clients' business and technology challenges. MGC combines tools, methods, and
project management skills with expertise to help mid- to large-sized businesses
measurably increase returns from technology investments. META Group's
collaborative client approach helps clients map out the required actions to
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achieve industry best practices through independent, unbiased analysis that
leverages the Company's Advisory Services research and analysis. Focusing on
critical business imperatives, MGC uses fully customized discovery, development,
and delivery techniques and methods, as well as structured transformation
programs, to help clients maximize the performance of their business
transformation efforts. MGC prices its projects on a fixed fee for fixed scope
of work basis.
MGC targets executives at both large end-user (Global 2000) organizations
and IT vendors that serve such organizations. Large end-user client
organizations typically use MGC's Strategic Consulting offerings when they need
to transform elements of their businesses through the use of information
technology. Such transformation support includes selecting, planning, and
integrating CRM or supply chain systems; rationalizing supplier networks while
deploying electronic procurement systems; optimizing strategic outsourcing
support; planning adaptive infrastructure to effectively use Internet/ intranet
technology; revitalizing operations to support e-business demands; and using
business intelligence to maximize the results of an enterprise's Internet
strategy. Strategic Consulting projects leverage the Company's base of
consulting expertise in IT with pre-existing frameworks, targeting increased
effectiveness for client IT organizations and a closer alignment between
clients' business and IT strategies.
IT vendors also face significant challenges given the complexities in
customer buying behavior, pressure from external forces (e.g., competition,
regulation) and internal practices that may not be optimized for a rapidly
changing environment. MGC provides customized offerings focused on the
challenges faced by IT vendors. MGC's services leverage proprietary tools and
methods to address such challenges as vendor market positioning relative to
customer demands, competitive landscape analysis, and partnering/channel
strategies.
MGC's consulting team combines technological expertise, extensive project
management experience, and extensive research resources to assist clients in
developing and implementing strategic IT initiatives. MGC has developed
complementary offerings linking Advisory Services and Strategic Consulting
services. These links are based on common models and templates enabling
customers to continue using the Company's services as their need for more
consulting-oriented services increases.
PUBLISHED RESEARCH PRODUCTS
The Company's Published Research Products provide reports, studies, and
surveys offering in-depth analysis of specific business and IT issues. The
Company offers a large portfolio of research reports and related interactive
resources (online data access and decision support as well as multimedia
briefing programs). Based on extensive Web and phone surveys, multiclient
studies, and accompanying META Group Advisory Services research, these reports
offer useful executive/operational insights and in-depth product evaluations and
market research.
Published Research Products, priced on a per-product basis, include products
containing quantitative analysis based on multiclient studies focusing on areas
such as e-business, customer relationship management, operations excellence,
value management, infrastructure development, and commerce chain management.
These and other new products leverage intellectual property, research, and
analysis existing across all of the Company's Advisory Services. The Company
develops its own published research products and also resells products produced
by third parties.
In April 1996, the Company entered into an exclusive distribution agreement
with CXP International, S.A. ("CXP")--a Paris-based company specializing in
gathering, analyzing, publishing, marketing, and selling technical evaluations
regarding computer and telecommunications software--and SPEX Research LLC
("SPEX"). Under the agreement, CXP provided SPEX with evaluation kits, which are
publications providing thorough hands-on evaluations and detailed side-by-side
product comparisons to assist in the software product decision-making process.
SPEX translated the publications to English and provided additional content
relevant to the US market. The Company acted
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as SPEX's distributor and promoted, marketed, and sold the evaluation kits
worldwide. In September 2000, the Company completed the acquisition of all the
outstanding limited liability company interests of SPEX. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and notes to the consolidated
financial statements.
In October 1996, the Company entered into an agreement with Rubin
Systems, Inc. ("RSI"), a provider of IT and software engineering measurement
consulting. Under the agreement, the Company distributed for RSI certain
published research products, primarily the WORLDWIDE BENCHMARK REPORT, a
publication presenting facts and trend-line data concerning IT
performance/productivity, budgets/ spending, emerging technologies, and business
requirements compiled from a worldwide sample of IT organizations. RSI is wholly
owned by a director of the Company. In October 2000, the Company acquired
substantially all the assets of RSI. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and notes to the consolidated financial statements.
The successful assimilation, marketing, and sale of new products are subject
to certain risks and uncertainties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors That May Affect
Future Results--Risks Associated With New Product and Services Development."
RESEARCH AND ANALYSIS
The Company employs a consistent, disciplined research and analysis
methodology across the Company's Advisory Services. Each Advisory service has a
Service Director who is responsible for implementing the Company's research and
analysis methodology in that service. The development methodology consists of an
iterative process of research, analysis, hypothesis, and testing. Analysts
conduct extensive primary research, working with the Company's user client base,
surveying vendors, and contacting other sources. These activities are
supplemented with searches of numerous trade, financial, and other third-party
source materials compiled in the Company's resource center. A meeting of the
entire META Group research staff is held weekly, at which findings are presented
and scrutinized. From this research, analysts identify significant patterns and
trends, develop assumptions, test hypotheses, and arrive at concrete
recommendations and conclusions to provide to clients. META Group analyst
compensation is based in part on meeting monthly publishing deadlines as well as
proactive client contact.
The knowledge and experience of the Company's analysts is critical to the
quality of the Company's products and services. To ensure consistency of
positions and analysis across service disciplines, all META Group research is
reviewed by one of the Company's four Co-Research Directors. While varying
opinions and philosophical contention among services and research disciplines
are encouraged, final positions and conclusions are consistent. This practice
ensures that the analytical structure and recommendations presented in the
Company's research better enable the various elements of client organizations to
formulate integrated strategies based on coherent information and analysis.
SALES AND MARKETING
META Group uses a direct sales force domestically and both a direct sales
force and a network of local independent sales affiliate organizations
internationally to market and sell its Advisory Services. The Company's domestic
direct sales force of approximately 90 sales and support people is located
throughout the United States. They are supported by teams of inside sales
people, relationship managers, and administrative personnel located in the
Company's regional offices and at its
11
headquarters. The inside sales department is an important source of Published
Research Products sales, sales to vendors, and sales to emerging vendors and
small to medium-sized enterprises.
In 2000, the Company reorganized its previously separate sales channels
under one manager. Management of the direct, inside, emerging vendor, small to
medium enterprise, and international sales channels were unified, achieving a
realignment of the sales territories in an effort to improve cooperation between
sales channels. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Internationally, the Company utilizes both wholly owned and independent
sales representative organizations selling Advisory Services, Strategic
Consulting, and Published Research Products throughout the Americas, Europe, the
Middle East, the Far East, Australia/New Zealand, India, and South Africa. In
2000, the Company acquired substantially all the assets of its independent sales
representative organization in Canada. In January 2001, the Company acquired
substantially all the assets of its independent sales representative
organizations in Australia and Singapore. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and notes to the consolidated
financial statements. In 2000, all international sales representative
organization offices in Asia, Europe, the Middle East, and Africa were placed
under regional management.
Under the terms of the Company's international sales representative
agreements, independent sales representative organizations are assigned
exclusive territories and annual quotas. These organizations also perform
selected client service functions, and bill and collect revenues attributable to
clients within their geographies. The Company realizes revenues from the
international sales representative organizations at rates of 25% to 40% of
amounts billed to those clients. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors That May Affect
Future Results--Risk Associated With International Operations" and Note 1 to the
consolidated financial statements.
As of December 31, 2000, the Company had over 8,700 subscribers to its
Advisory Services in approximately 3,100 client organizations worldwide. The
Company recognizes that it is not the exclusive provider of IT research and
advisory services to many of its clients.
In March 1995, META Group entered into an exclusive strategic alliance
agreement with First Albany Corporation ("First Albany"), a financial services
firm. The agreement provides for the distribution of the Company's written
research and analysis, in its original form or as customized and expanded by
First Albany, to First Albany's financial services customers, which include many
institutional investors. The agreement restricts the Company from marketing its
services to any broker dealer or sell-side firm offering services similar to
those offered by First Albany. The Company is permitted to market and sell
Advisory Services directly to First Albany customers. This agreement is annually
renewable by First Albany, subject to attainment of specified minimum revenue
targets. The Company recognized $1,035,000, $875,000, and $750,000 in revenues
from this arrangement in the years ended December 31, 2000, 1999, and 1998,
respectively. George McNamee, a director of the Company, is also Chairman and
Co-Chief Executive Officer of First Albany. See Note 14 to the consolidated
financial statements.
The Company also markets and sells certain of its products and services and
provides additional content to its internet subscribers on its Website,
metagroup.com.
CLIENT SUPPORT
META Group is committed to providing a high level of client service as
defined by response time, clarity of advice, and quality of communication. META
Group analysts respond to clients' inquiries and
12
concerns as they arise, and analyst compensation is based in part on client
inquiry response times. Analysts' regular contact with clients through telephone
consultations, briefings, and events also provides the Company with feedback
that is used in the enhancement of its services. In addition, the META Group
research library frequently performs client-specific topical searches on
particular IT issues. The Company maintains a key issues database that
identifies areas of particular concern to clients and regularly uses customer
satisfaction surveys to refine and enhance the quality of the services it
provides. As an integral part of the Company's commitment to customer service,
META Group offers a dedicated Client Services team that works to ensure each
client receives targeted assistance and quick decision-oriented information.
COMPETITION
The Company experiences competition in the market for IT research/analysis
products and services and strategic consulting services from other independent
providers of similar services, as well as from the internal planning and
marketing staffs of the Company's current and prospective clients. The Company's
principal direct competitor for Advisory Services, Gartner Group, Inc., has a
substantially longer operating history, is significantly larger, and has
considerably greater financial resources and market share than the Company. The
Company also competes indirectly against numerous other information and
consulting service providers, including electronic and print media companies and
consulting firms. The Company's indirect competitors could choose to compete
directly against the Company in the future. Many of the Company's direct and
indirect competitors have substantially greater financial, information
gathering, and marketing resources than the Company. In addition, although the
Company believes it has established a significant market presence, there are few
barriers to entry into the Company's market--and new competitors could readily
seek to compete against the Company in one or more market segments addressed by
the Company's Infusion programs, Strategic Consulting services, Published
Research Products, and Advisory Services. Increased competition could adversely
affect the Company's operating results through pricing pressure and loss of
market share. There can be no assurance that the Company will be able to
continue to compete successfully against existing or new competitors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors That May Affect Future Results--Competition."
The Company believes that, with respect to both IT research/analysis
products and services and strategic consulting services, the principal
competitive factors are quality of research and analysis applied in the context
of client IT environments, timely delivery of relevant information, client
support and responsiveness, the ability to offer products and services that meet
changing market needs for information and analysis, and price. The Company
believes it competes favorably with respect to each of these factors.
EMPLOYEES
As of December 31, 2000, the Company employed 723 people, including 379
research analysis and fulfillment personnel (including 305 analysts and
consultants), 231 sales and marketing personnel, and 113 administrative
personnel. None of the Company's employees is represented by a collective
bargaining arrangement, and the Company has experienced no work stoppages. The
Company considers its relations with its employees to be good.
The Company's future success depends in large part on the ability to
continue to motivate and retain highly qualified employees, including management
personnel, and to attract and retain a significant number of additional
qualified personnel, including research analysts, consultants, sales personnel,
and product development and operations staff. Competition for qualified
personnel in the Company's industry is intense, and many of the companies with
which META Group competes for qualified personnel, including Gartner Group, have
substantially greater financial and other resources than the Company.
Furthermore, competition for qualified personnel can be expected to become more
13
intense as competition in the Company's industry increases. In addition, the
Company retains outside consultants to perform services for the Company and its
clients. During 2000, the Company increasingly relied on outside consultants to
fulfill certain MGC engagements to the extent available employees did not
possess the skills necessary to complete existing consulting projects. There can
be no assurance that the Company will be able to recruit, retain, and motivate a
sufficient number of qualified personnel to compete successfully. The loss of
any of the Company's senior management personnel, particularly Dale Kutnick,
Chairman, Chief Executive Officer, and Co-Research Director of the Company, or
any material failure to recruit, retain, and motivate a sufficient number of
qualified personnel could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors That May Affect Future Results--Dependence on
Ability to Attract and Retain Qualified Personnel" and "--Dependence on Key
Personnel."
ITEM 2. PROPERTIES
The Company's headquarters are located in approximately 99,000 square feet
of office space in Stamford, Connecticut. This facility accommodates research,
marketing, sales, customer support, and corporate administration. The lease on
this facility expires in October 2001; however, the Company has entered into a
new lease agreement for its headquarters which expires in 2008. The Company also
leases office space in other locations to support research, sales, and other
administrative functions, including Danbury, CT; Reston, VA; Burlingame, CA;
Pleasanton, CA; Westborough, MA; Atlanta, GA; Williston, VT; Toronto, Ontario;
Montreal, Quebec; Ottawa, Ontario; and Calgary, Alberta. The Company believes
that its existing facilities are adequate for its current needs and that
additional facilities are available for lease to meet future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to certain legal proceedings arising in the ordinary
course of business. However, the Company believes none of these proceedings is
likely to have a material adverse effect on the Company's business, results of
operations, or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 2000.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "METG" since its initial public offering (the "Offering") at
$12.00 per share on December 1, 1995. Prior to the Offering, there was no
established public trading market for the Company's shares.
On March 20, 2001, the closing price of the Company's Common Stock was
$3.50, as reported by the Nasdaq National Market. On that date, there were
approximately 230 holders of record of the Company's Common Stock and
approximately 1,450 beneficial holders, based on information obtained from the
Company's transfer agent.
The Company has never paid cash dividends on its Common Stock. Any future
declaration and payment of dividends will be subject to the discretion of the
Company's Board of Directors, will be subject to applicable law, and will depend
on the Company's results of operations, earnings, financial condition,
contractual limitations, cash requirements, future prospects, and other factors
deemed relevant by the Company's Board of Directors. In addition, the terms of
the Company's credit facility with its bank restrict the payment of cash
dividends on its common stock.
The following table reflects the range of high and low bid quotations, as
reported on the Nasdaq National Market, for META Group Common Stock in each
quarter of the years ended December 31, 2000 and 1999.
HIGH LOW
-------- --------
2000:
Fourth Quarter............................................ $10.88 $ 4.50
Third Quarter............................................. $26.00 $12.38
Second Quarter............................................ $26.44 $17.00
First Quarter............................................. $35.63 $17.88
1999:
Fourth Quarter............................................ $19.00 $13.75
Third Quarter............................................. $18.63 $12.50
Second Quarter............................................ $16.88 $ 8.25
First Quarter............................................. $31.25 $15.38
In October 2000, the Company completed the acquisition of substantially all
the assets of Rubin Systems, Inc. ("RSI"). Pursuant to the terms of the Asset
Purchase Agreement among RSI, Howard Rubin and the Company dated October 27,
2000 (the "Asset Purchase Agreement"), RSI received an initial payment of
$750,000 in cash and $375,000 in common stock (36,874 shares; the "Initial
Shares"). 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 to RSI through March 2004. In the event the aggregate number of
shares issued in satisfaction of contingent consideration exceeds 406,610
shares, the remaining consideration will be payable in cash. As of March 31,
2001, RSI earned a contingent payment of $250,000 payable in 57,084 shares of
the Company's common stock. RSI is wholly-owned by Howard Rubin, a director and
officer of the Company.
The Initial Shares were issued in reliance upon an exemption from the
registration provisions of the Securities Act of 1933, as amended (the "Act"),
set forth in Section 4(2) thereof and Rule 506 of Regulation D of the General
Rules and Regulations under the Act promulgated by the Securities and Exchange
Commission ("Regulation D"). In the Asset Purchase Agreement, RSI made certain
representations to the Company as to its investment intent, level of
sophistication, access to information and status as an accredited investor as
defined in Rule 501(a) of Regulation D. The Initial Shares are subject to
restrictions on transfer absent registration under the Act or exemption
therefrom. The Company is required to register the Initial Shares.
15
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below is derived from the consolidated
financial statements of the Company, and should be read in connection with those
statements, which are included herein.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000(1) 1999(1) 1998(1) 1997(1) 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Advisory Services........................... $ 84,556 $69,998 $58,586 $44,152 $32,667
Strategic Consulting........................ 27,707 22,370 9,404 5,214 3,714
Published Research Products................. 7,009 7,315 4,795 1,829 585
-------- ------- ------- ------- -------
Total revenues............................ 119,272 99,683 72,785 51,195 36,966
-------- ------- ------- ------- -------
Operating expenses:
Cost of services and fulfillment............ 69,728 52,224 35,098 24,602 18,908
Selling and marketing....................... 37,161 23,194 16,702 12,477 8,797
General and administrative.................. 17,519 8,356 6,753 5,006 3,728
Depreciation and amortization............... 4,867 2,596 1,894 1,501 1,086
-------- ------- ------- ------- -------
Total operating expenses.................. 129,275 86,370 60,447 43,586 32,519
-------- ------- ------- ------- -------
Operating (loss) income....................... (10,003) 13,313 12,338 7,609 4,447
Other income (expense):
Impairment loss............................... (2,640)
Other income, primarily interest, net......... 361 1,800 2,621 2,138 1,909
-------- ------- ------- ------- -------
Income (loss) before provision (benefit) for
income tax.................................. (12,282) 15,113 14,959 9,747 6,356
Provision (benefit) for income tax............ (4,244) 5,883 6,174 3,980 2,730
-------- ------- ------- ------- -------
Income (loss) before cumulative effect of
change in accounting........................ (8,038) 9,230 8,785 5,767 3,626
Cumulative effect of change in accounting..... (2,438)
-------- ------- ------- ------- -------
Net income (loss)............................. $(10,476) $ 9,230 $ 8,785 $ 5,767 $ 3,626
======== ======= ======= ======= =======
Income(loss) before cumulative effect of
change in accounting per diluted common
share....................................... $ (.75) $ .80 $ .70 $ .48 $ .32
Cumulative effect of change in accounting..... $ (.22)
-------- ------- ------- ------- -------
Net income (loss) per diluted common share.... $ (.97) $ .80 $ .70 $ .48 $ .32
======== ======= ======= ======= =======
Weighted average number of diluted common
shares outstanding.......................... 10,763 11,501 12,596 11,937 11,502
======== ======= ======= ======= =======
Income (loss) before cumulative effect of
change in accounting per basic common
share....................................... $ (.75) $ .86 $ .78 $ .53 $ .41
Cumulative effect of change in accounting..... $ (.22)
-------- ------- ------- ------- -------
Net income (loss) per basic common share...... $ (.97) $ .86 $ .78 $ .53 $ .41
======== ======= ======= ======= =======
Weighted average number of basic common shares
outstanding................................. 10,763 10,719 11,326 10,821 8,925
======== ======= ======= ======= =======
16
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 3,622 $ 10,106 $ 9,945 $12,910 $19,335
Marketable securities....................... 6,719 6,253 36,881 27,746 15,684
Working capital (deficit)................... (6,181) 19,746 33,989 32,826 28,843
Total assets................................ 152,463 113,450 112,187 89,453 70,171
Deferred revenues........................... 50,425 42,111 31,276 29,136 22,885
Total stockholders' equity.................. 65,708 61,685 72,690 55,400 42,728
- ------------------------
(1) Results for 2000 include the cumulative effect of a change in accounting of
$2,438, net of tax, pursuant to the provisions of the Securities and
Exchange Commissions Staff Accounting Bulletin No. 101 "Revenue Recognition
in Financial Statements" ("SAB 101"). Had the Company adopted SAB 101
retroactive to 1997, net income for the years ended December 31, 1999, 1998,
and 1997 would have been $7,856, $8,685, and $4,802, respectively. Diluted
earnings per share for the same period would have been $0.68, $0.69, and
$0.40, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
META Group is a leading independent research and consulting firm focusing on
information technology ("IT") and business transformation strategies. META
Group's goal is to deliver objective, consistent, and actionable guidance to
enable organizations to innovate more rapidly and effectively.
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: Advisory Services,
Strategic Consulting and Published Research Products. The 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. Supplementing these services are the Company's
Infusion programs, which build on the business-focused analysis of the Company's
subscription services by offering methodologies and skill-based training needed
to successfully manage specific business-critical issues. The Strategic
Consulting segment (META Group Consulting--MGC) provides strategic consulting
engagements addressing clients' business and technology issues. A significant
portion of MGC clients are also Advisory Services subscribers. The Published
Research Products segment provides reports, studies, and surveys offering
in-depth analysis of specific business or IT issues.
Advisory Services subscriptions, which are annually renewable contracts and
generally payable by clients in advance, constituted approximately 71% and 70%
of the Company's total revenues for the years ended December 31, 2000 and 1999,
respectively. Billings attributable to the Company's Advisory Services are
initially recorded as deferred revenues and then recognized pro rata over the
contract term.
Advisory Services revenues attributable to international clients are billed
and collected by the Company's international sales representative organizations
and its wholly owned subsidiaries in Canada, Australia, and Singapore. The
Company realizes revenues from the international sales representative
organizations at rates of 25%-40% of the amounts billed to those clients.
17
One measure of the volume of the Company's Advisory Services business is its
annualized "Contract Value," which the Company calculates as the aggregate
annualized subscription revenue recognized from all Advisory Services contracts
in effect at a given point in time, without regard to the remaining duration of
such contracts. Contract Value is not necessarily indicative of future Advisory
Services revenues. Contract Value increased 8.8% to $88.1 million at
December 31, 2000, from $81 million at December 31, 1999.
Revenues from Strategic Consulting engagements constituted approximately 23%
and 22% of the Company's total revenues for the years ended December 31, 2000
and 1999, respectively. The Company recognizes revenues on Strategic Consulting
engagements as the work is performed.
Revenues from Published Research Products constituted approximately 6% and
7% of the Company's total revenues for the years ended December 31, 2000 and
1999, respectively. The Company recognizes revenues from the sale of Published
Research Products when the products are delivered.
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, research reports,
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, as well as travel and
promotion. General and administrative expenses include the costs of the finance
and accounting departments, in addition to the legal, human resources, corporate
IT, and other administrative functions of the Company. See "Segment Reporting"
in Note 15 to the consolidated financial statements for information regarding
the Company's operating segments.
In the fourth quarter of 2000, the Company adopted the provisions of Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). The Company identified certain newer Advisory Services product offerings
containing multiple service elements where revenue was recognized as the
services were performed. The Company has elected to record these
multiple-element contracts on the straight-line method over the contract term
consistent with the treatment of the Company's other traditional Advisory
Services product offerings, because it is the Company's belief that the
straight-line method is most appropriate given the increased sales volumes and
the varying usage patterns by customers of the underlying services. As required
by SAB 101, the Company retroactively adopted the provisions effective
January 1, 2000, and has reported this on the Consolidated Statement of
Operations as a cumulative effect of a change in accounting in the amount of
$2,438,000, net of tax. See Note 2 to the consolidated financial statements.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
TOTAL REVENUES. Total revenues increased 20% to $119.3 million in the year
ended December 31, 2000, from $99.7 million in the year ended December 31, 1999.
Revenues from Advisory Services, which generally are derived from annually
renewable contracts payable by clients in advance, increased 21% to
$84.6 million in the year ended December 31, 2000, from $70 million in the year
ended December 31, 1999, and increased as a percentage of total revenues to 71%
from 70%. The increase in revenues from Advisory Services was principally due to
increased subscription revenues as a result of the Company's expanded domestic
sales force, a reorganization under one manager of the Company's previously
separate sales channels intended to foster a more collaborative sales effort, an
increased client subscriber base, further penetration into the small and
medium-sized enterprise market, continued international market acceptance of the
Company's Advisory Services, an increase in analyst briefings to existing
clients, and increased demand for the Company's Infusion products. During 2000,
the Company experienced a lower growth rate of its Advisory Services
18
than anticipated primarily as a result of the continued shift in client demand
toward more focused, client-specific services (such as strategic consulting) and
softened demand for its Advisory Services experienced in the second half of
2000. The Company currently expects continuing decreases in the growth rate of
its Advisory Services.
Advisory Services revenues attributable to international clients increased
13% to $13.2 million in the year ended December 31, 2000, from $11.7 million in
the year ended December 31, 1999, and decreased as a percentage of Advisory
Services revenues to 16% from 17%. The increase in Advisory Services revenues
attributable to international clients was principally due to continued demand
for the Company's Advisory Services, increased demand for the Company's infusion
programs, and an increase in the number of analyst briefings to existing
clients.
Strategic Consulting revenues, which result from Strategic Consulting
engagements addressing clients' business and technology issues, increased 24% to
$27.7 million in the year ended December 31, 2000, from $22.4 million in the
year ended December 31, 1999, and increased as a percentage of total revenues to
23% from 22%. The increase was principally due to the continued shift in client
demand from Advisory Services toward more focused consulting services and was
partially offset by decreased revenues in a specific practice area of 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. In addition, the
increase was offset by an imbalance between the skill sets of available
consulting staff and the then existing consulting projects. In response to the
imbalance in staffing, at the end of the third quarter, MGC changed the focus of
its consulting resources to better align with increased client demand for
comprehensive and thematic research and services. In addition, the Company
experienced an increase in sales of its security planning and operations
services and recognized incremental revenues as a result of the acquisition of
Rubin Systems, Inc. ("RSI") in October 2000.
Published Research Products revenues decreased 4% to $7 million in the year
ended December 31, 2000, from $7.3 million in the year ended December 31, 1999,
and decreased as a percentage of total revenues to 6% from 7%. The decrease was
principally due to a refocusing of the Company's inside sales channel (telephone
professionals that sell the Company's Published Research Products) that occurred
during 2000 from selling only the Company's traditional publication products to
in addition selling Web-based subscription products that primarily consist of
content developed by the Company's Advisory Services personnel. Revenues
generated from the sale of these Web-based subscription products are recognized
as Advisory Services revenue. The decrease in revenues from Published Research
Products was partially offset by increases in traditional publication revenues
as a result of expanded product offerings and an increase in the number of
inside sales personnel.
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment
increased 34% to $69.7 million in the year ended December 31, 2000, from
$52.2 million in the year ended December 31, 1999, and increased as a percentage
of total revenues to 58% from 52%. The increase was principally due to
additional analyst and fulfillment costs as a result of the Company's increase
in headcount undertaken to support the Company's clients, fulfill anticipated
product demands, and broaden the Company's product offerings. The costs consist
of payroll and payroll-related expenses (payroll taxes and benefits), travel
costs, and, to a lesser extent, bonus expense. Outside consulting and royalty
expenses increased as a result of the Company's increased sales of its security
planning and operations service and multiclient studies, the fulfillment of
which requires the assistance of third parties, and as a result of an imbalance
between the skill sets of available consulting staff and the existing consulting
projects during the second half of 2000. Facilities costs increased due to the
acquisition of additional office space to support the Company's expanded
employee base.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
60% to $37.2 million in the year ended December 31, 2000, from $23.2 million in
the year ended December 31, 1999, and increased as a percentage of total
revenues to 31% from 23%. This increase was principally due to additional
financial incentives contained in the Company's sales commission plan when it
reorganized
19
the previously separate sales forces to motivate and improve cooperation among
the sales personnel. In January 2000, the Company changed its sales commission
plan year from a plan year ending on December 31 to a plan year ending on
January 31. As a result, the commission plan year ended January 31, 2000 covered
January 1, 1999 through January 31, 2000, a one time 13-month period.
Consequently, the number of sales representatives that triggered a higher
commission rate under the sales commission plan for the plan year ended
January 31, 2000 increased, causing the Company to recognize higher than
expected commission expense in 2000. In addition, salaries of the Company's
selling and marketing personnel increased as a result of increased staffing
levels.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 110% to $17.5 million in the year ended December 31, 2000, from
$8.4 million in the year ended December 31, 1999, and increased as a percentage
of total revenues to 15% in 2000 from 8% in 1999. Due to a continuing slowdown
in accounts receivable collections and increases in overdue accounts receivable,
in the fourth quarter of 2000 the Company increased its estimate of
uncollectable accounts receivable. This resulted in a charge of $3.7 million. In
addition, salary and bonus expense increased as a result of increased
administrative personnel necessary to handle the Company's growth (both
domestically and internationally) and systems implementation efforts, and
facilities costs increased due to the acquisition of additional lease space to
accommodate increased staff levels.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 88% to $4.9 million in the year ended December 31, 2000, from
$2.6 million in the year ended December 31, 1999. The increase in depreciation
and amortization expense was principally due to purchases of computer equipment,
office furniture, and leasehold improvements required to support business growth
and increased amortization of goodwill from the payment of contingent
consideration in 2000 and acquisitions consummated in 2000. See Note 4 to the
consolidated financial statements.
IMPAIRMENT LOSS. During the year ended December 31, 2000, the Company
determined that, based on estimates of future cash flows and other available
market data, two of its strategic investments were permanently impaired.
Accordingly, the Company recorded an impairment loss of $2.64 million for the
full carrying value of the investments. See "Certain Factors That May Affect
Future Results--Risks Associated with Strategic Investments."
OTHER INCOME, NET. Other income, net, decreased 80% to $361,000 in the year
ended December 31, 2000, from $1.8 million in the year ended December 31, 1999,
due to a reduction in interest income during the year ended December 31, 2000
because of the decreased levels of cash and marketable securities held by the
Company in 2000 versus 1999. In addition, the Company recorded $518,000 in
interest expense during the year ended December 31, 2000 on its outstanding
borrowing with its bank. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
Note 9 to the consolidated financial statements.
PROVISION FOR INCOME TAXES. The Company recorded an income tax benefit of
$4.2 million during the year ended December 31, 2000, and a provision for income
taxes of $5.8 million during the year ended December 31, 1999, reflecting an
effective tax rate of 35% for 2000 and 39% for 1999. The lower effective rate in
2000 was principally due to the impact of nondeductible expenses.
YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
TOTAL REVENUES. Total revenues increased 37% to $99.7 million in the year
ended December 31, 1999, from $72.8 million in the year ended December 31, 1998.
20
Revenues from Advisory Services increased 19% to $70 million in the year
ended December 31, 1999, from $58.6 million in the year ended December 31, 1998,
and decreased as a percentage of total revenues to 70% from 80%. The increase in
revenues from 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, continued international market acceptance of
the Company's Advisory Services, incremental revenues from the introduction of
the Company's security planning and operations services in the second quarter of
1999, incremental revenues from the introduction of the Company's Infusion
products in the fourth quarter of 1998, and an increase in analyst briefings to
existing clients. Commencing in 1998 and continuing through 1999, the Company
experienced a shift in business demand by clients toward more focused,
client-specific services. As a result, in 1999 the Company experienced a slight
decline in the growth rate of Advisory Services revenue as compared to the
growth rate in 1998, and an increase in the growth rate of both Strategic
Consulting and Published Research Products as compared to the growth rates in
1998.
Advisory Services revenues attributable to international clients increased
30% to $11.7 million in the year ended December 31, 1999, from $9 million in the
year ended December 31, 1998, and increased as a percentage of Advisory Services
revenues to 17% from 15%. The increase in Advisory Services revenues
attributable to international clients was principally due to continued demand
for the Company's Advisory Services and, to a lesser extent, incremental
revenues from the Company's Infusion programs.
During 1999, the Company experienced a decrease in the average selling price
of its Advisory Services of 5% to $16,700, from $17,600 in 1998, due to
discounts granted to customers as a result of an increase in the average number
of services subscribed to by clients. The Company grew its subscriber client
base 25% to 5,000 Advisory Services subscribers at December 31, 1999, from 4,000
at December 31, 1998.
Strategic Consulting revenues increased 138% to $22.4 million in the year
ended December 31, 1999, from $9.4 million in the year ended December 31, 1998,
and increased as a percentage of total revenues to 22% from 13%. The increase
was principally due to the incremental revenues from the acquisition of Sentry
in October 1998 coupled with a shift in client demand from Advisory Services
toward more focused consulting services. As a result, MGC has developed
complementary offerings linking Advisory Services and Strategic Consulting
services. These links are based on common models and templates enabling
customers to continue with the Company's services as their need for more
consulting-oriented services increases.
Published Research Products revenues increased 53% to $7.3 million in the
year ended December 31, 1999, from $4.8 million in the year ended December 31,
1998, and remained constant as a percentage of total revenues at 7%. The
increase was principally due to expanded product offerings introduced in 1999 to
include products containing more quantitative analysis based on multiclient
studies, focusing on areas such as e-business, customer relationship management,
operations excellence, value management, infrastructure development, and
commerce chain management, as well as new products that leverage intellectual
property, research, and analysis existing across all the Company's Advisory
Services and an increase in sales of Published Research Products distributed
under the Company's agreements with CXP International, S.A., SPEX Research LLC,
and Rubin Systems, Inc. (a corporation wholly owned by a director of the
Company). See Note 14 to the consolidated financial statements for a discussion
of Rubin Systems.
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment
increased 49% to $52.2 million in the year ended December 31, 1999, from
$35.1 million in the year ended December 31, 1998. The increase was principally
due to additional analyst and fulfillment costs as a result of the Sentry
acquisition and increased staffing costs (principally consisting of compensation
and, to a lesser extent, travel) for analyst, consultant, and fulfillment
positions necessary to support the Company's growth domestically and
internationally. In addition, cost of services and fulfillment increased due to
increased
21
royalty payments to third parties with which the Company has distribution
agreements as a result of increased sales of the underlying services, and
fulfillment costs associated with the emergence of the Company's security
planning and operations services. Costs of services and fulfillment increased as
a percentage of total revenues to 52% for the year ended December 31, 1999, from
48% a year ago, due to the increase in analyst and consultant headcount that
occurred in the first half of 1999 to support the Company's growth domestically
and internationally and the development of new product offerings to meet
changing customer demands.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
39% to $23.2 million in the year ended December 31, 1999, from $16.7 million in
the year ended December 31, 1998, and remained constant as a percentage of total
revenues at 23%. The increase in selling and marketing expenses was principally
due to increased compensation and travel expenses associated with the expanded
domestic direct sales force and inside sales force that markets Published
Research Products to support the increasing scope of the Company's product
offerings and to increase sales penetration into new and existing client
organizations. In addition, the Company incurred greater marketing expenses
domestically and internationally in connection with the growth of the Company's
existing services and conferences, as well as the launch of its new Infusion
programs, Published Research Products, and conferences.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 24% to $8.4 million in the year ended December 31, 1999, from
$6.8 million in the year ended December 31, 1998, and decreased as a percentage
of total revenues to 8% in 1999 from 9% in 1998. The increase in 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 at the Company's locations necessary to
support the Company's growth.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 37% to $2.6 million in the year ended December 31, 1999, from
$1.9 million in the year ended December 31, 1998. The increase in depreciation
and amortization expense was principally due to purchases of computer equipment,
office furniture, and leasehold improvements required to support business growth
and the amortization of goodwill from the Sentry acquisition consummated in
October 1998.
OTHER INCOME, NET Other income decreased 31% to $1.8 million in the year
ended December 31, 1999, from $2.6 million in the year ended December 31, 1998,
because of a reduction in interest income during the year ended December 31,
1999, due to the decreased levels of cash and marketable securities held by the
Company in 1999 versus 1998. Such cash balances and the proceeds from the sale
of marketable securities were used to finance the Company's stock repurchases
during the second quarter of 1999. The Company recognized $268,400 of losses
from the sale of marketable securities. The reduction in interest income was
partially offset by an increase in interest income from advances to investee
companies. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and Note 8 to the
consolidated financial statements.
PROVISION FOR INCOME TAXES. The Company recorded a provision for income
taxes of $5.8 million during the year ended December 31, 1999, and $6.2 million
during the year ended December 31, 1998. During the year ended December 31,
1999, the Company decreased its valuation allowance by $1.9 million. Of this
amount, $1.1 million was decreased due to the utilization of net operating loss
carryforwards during 1999. The remaining $800,000 decrease resulted from a
change in federal tax law that will permit the utilization of Sentry's
pre-acquisition net operating losses by the Company. While such losses will be
subject to an annual limitation, the Company believes that it is more likely
than not that such losses will be utilized in full during the carryforward
period. The impact of the takeback of the valuation allowance was partially
offset by increased provisions for state and other income taxes.
22
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily through cash generated from
operations, borrowings under its revolving credit facility, and proceeds from
the exercise of common stock options. The Company used $10.6 million in cash in
operations during the year ended December 31, 2000, and generated $4.0 million
and $9.3 million of cash from operations during the years ended December 31,
1999 and 1998, respectively. The significant decrease in operating cash flow was
principally due to the net loss suffered during the year ended December 31,
2000, decreased cash collections on outstanding accounts receivable, and
increases in prepaid commissions, other current and non-current assets,
partially offset by increases in the Company's deferred revenue balance at
December 31, 2000, versus the same period in 1999 and non-cash charges recorded
in 2000 versus 1999.
The Company used $11.7 million, $5.0 million, and $3.2 million of cash in
the years ended December 31, 2000, 1999, and 1998, respectively, for the
purchase of furniture, equipment, computers, software and Web site
infrastructure development costs. Such purchases were made to support the
Company's growth in business and number of employees. The Company expects that
additional purchases of equipment will be made in 2001; however, it expects that
such expenditures will decrease in 2001 when compared to 2000 capital
expenditures. As of December 31, 2000, the Company had no material commitments
for capital expenditures; however, the Company anticipates that it will continue
to upgrade its internal systems to support business growth.
During the year ended December 31, 2000, the Company expended $8.25 million
of cash to fund acquisitions and make contingent payouts. The specifics of the
acquisitions are as follows:
In October 1998, the Company completed the acquisition of all the
outstanding capital stock of The Sentry Group, Inc. ("Sentry"), an IT consulting
company, for an initial payment of 195,066 shares of common stock and a
contingent payment of up to $7 million in common stock or (at the Company's
option) cash in the event certain financial targets were met by Sentry for 1999.
In addition, the Company issued to Sentry stockholders warrants to purchase up
to 200,000 shares of the Company's common stock at $30.00 per share, 125,000
shares of which were immediately exercisable and 75,000 shares which were
contingently exercisable upon Sentry achieving certain financial targets in
1999. As of December 31, 1999, the contingent payment of $7 million had been
earned. Accordingly, the contingent warrants were fully exercisable. The fair
value of such warrants was approximately $940,000 and was recorded as additional
goodwill during 2000. The 125,000 warrants expire in October 2002, and the
75,000 warrants expire in May 2004. During 2000, the Company issued 274,470
shares of its common stock and paid approximately $470,000 in cash to certain of
the former Sentry shareholders to satisfy the Company's earnout obligation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors That May Affect Future Results--Risk of Failure to
Integrate Recent Acquisition and Risks Associated With Potential Acquisitions."
In November 2000, the Company completed the acquisition of substantially all
the assets of META Group Canada, Inc., the Company's independent sales
representative organization in Canada for $4.7 million in cash and the
assumption of certain liabilities.
In October 2000, the Company completed the acquisition of substantially all
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, $375,000 in common stock (36,874 shares)
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. In the event the
aggregate number of shares issued in satisfaction of contingent consideration
exceeds 406,610 shares, the remaining consideration will be payable in cash. As
of March 31, 2001, RSI earned a contingent payment of $250,000 payable in 57,084
shares of the Company's common stock. RSI is wholly owned by Dr. Howard Rubin, a
director and officer of the Company.
23
In September 2000, the Company completed the acquisition of all 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 $1.6 million in cash and the conversion of a
$200,000 convertible promissory note. In addition, the Company assumed
$1.2 million in liabilities.
Exclusive of its acquisitions, during the years ended December 31, 2000,
1999, and 1998, the Company made investments and advances to several companies
in parallel or synergistic industries. The balance of the Company's investments
and advances was $18.8 million, $19.3 million, and $8.7 million at December 31,
2000, 1999 and 1998, respectively. These investments and advances are summarized
below and in Note 8 to the consolidated financial statements. Each investment is
accounted for under the cost method. See "Certain Factors That May Affect Future
Results--Risks Associated With Strategic Investments."
In October 2000, the Company invested $500,000 in Ajunto, Inc. in exchange
for shares of Ajunto's Series B Convertible Preferred stock. Ajunto offers a
Web-based procurement service for information technology professionals and
providers, including a research and decision support tool.
Throughout 2000, the Company invested an aggregate amount of $652,000 in
three of its independent international sales representative organizations in
exchange for debt and equity of the underlying distributor organizations.
In December 1999, the Company invested $487,000 in enamics, Inc. ("enamics")
in exchange for shares of enamics Series A Cumulative Convertible Preferred
Stock. In addition, the Company advanced $1 million in exchange for a secured
subordinated note, convertible into enamics' Series A Cumulative Convertible
Preferred Stock. enamics was established to help companies define, simulate,
plan, and architect e-business initiatives.
In November 1999, the Company invested $1 million in Ninth House, Inc.
("Ninth House"), in exchange for shares of Ninth House's Series B Convertible
Preferred Stock. Ninth House is a provider of interactive, online learning
content to businesses and individuals utilizing both the Internet and corporate
intranets as delivery platforms. The Company recorded an impairment loss on its
investment in Ninth House as described below.
In May 1999, the Company advanced $960,000 to Syndicated Research Group
("SRG") in exchange for a subordinated convertible promissory note, convertible
into SRG's Series A Convertible Preferred Stock. SRG is a research and advisory
firm dedicated to helping human resources professionals make business decisions
concerning human capital management issues. In May 2000, the Company invested an
additional $250,000 in SRG in exchange for shares of SRG's Series B Convertible
Preferred Stock.
In March 1999, the Company entered into an agreement to advance
$2.8 million to META Secur e-Com Solutions, Inc. ("META SeS"--formerly "MSG"),
an independent Internet security consulting firm, in exchange for a secured
convertible promissory note, convertible into META SeS's common stock. As of
December 31, 1999, the Company had advanced the full $2.8 million. In
July 1999, the Company entered into an agreement to advance additional funds to
META SeS in exchange for a secured promissory note. As of December 31, 1999,
$216,000 had been advanced under such agreement. The $216,000 was repaid during
the first quarter of 2000. The Company has no further obligation to provide
funding to META SeS.
In the fourth quarter of 2000, the Company recorded $2.64 million of
impairment losses on its investments in Ninth House, Inc. and FirstMatter LLC.
Evaluation of possible impairment is based on management's estimate of the
Company's ability to recover the asset from expected future cash flows
(undiscounted and without interest charges) of the related operations as well as
other market data. In March 2001, the Company closed an agreement with
FirstMatter LLC. Under the agreement, the Company will receive intellectual
property and $100,000 in cash in return for the cancellation of notes receivable
and other assets valued at $1.7 million. The loss of $1.6 million on the
transaction is included in the provision for impairment losses of
$2.64 million.
24
In March 2001, the Company closed on the sale of its investment in
Intermedia Group. The Company received approximately $2.9 million in cash from
the sale.
In January 2001, the Company acquired substantially all of the assets of two
of its Asia Pacific distributors, one based in Sydney, Australia, and the other
headquartered in Singapore. With these acquisitions, the distributors became
wholly owned subsidiaries of META Group, Inc. The total purchase price amounted
to approximately $2.7 million, consisting of cash in the amount of $1.7 million
(of which the Company is obligated to pay a final installment of approximately
$302,000), the forgiveness of accounts receivable from the distributor of
$470,000, and the assumption of certain liabilities.
The Company has an obligation to invest an additional $1 million in a
venture capital limited partnership pursuant to its subscription agreement with
the JMI Equity Side Fund, L.P. (the "JMI Fund"). A director of the Company,
Harry Gruner, is a general partner of the general partner of the JMI Fund. See
Note 14 to the consolidated financial statements.
During the year ended December 31, 2000, the Company received $26.1 million
in cash from financing activities primarily as a result of borrowings totaling
$20.9 million from its $25 million revolving credit facility with its bank and
$5.2 million in proceeds from the exercise of stock options and proceeds
received under its employee stock purchase plan during the year ended
December 31, 2000, versus $20.5 million of cash used in financing activities
during the same period last year due principally 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. Giving effect to an amendment to the Facility dated March 30,
2001, interest is payable at the rate of (i) LIBOR plus 2.00% or (ii) the higher
of the Prime Rate or the Federal Funds Rate plus 0.50%. The Facility currently
is collateralized by the Company's marketable securities and accounts
receivable. As of December 31, 2000, the total outstanding amount under the
Facility was $22.66 million, which comprised $20.9 million in borrowings and
$1.76 million in letters of credit. The Company and its bank, however, have
entered into a standstill agreement with respect to the remaining $1.3 million
available to the Company under the Facility whereby the Company has agreed not
to request and the Bank has agreed not to make any further advances under the
Facility until certain financial information with respect to the Company's
financial performance during the first quarter of 2001 is provided to its bank.
In January 2001, the Company borrowed an additional $1 million to fund the
acquisition of its Asia Pacific distributors. The Facility requires payment of a
commitment fee payable quarterly, in arrears, of 0.25% based on the average
daily unused portion. The Facility contains a number covenants that, among other
things, restrict the ability of the Company to incur additional indebtedness,
pay dividends or other distributions, dispose of certain assets, enter into sale
and leaseback transactions, create liens, make certain investments, acquisitions
or mergers, and that otherwise restrict corporate activities. In addition, the
Company is required to meet certain financial covenants, including, but not
limited to, a leverage ratio, a fixed charge ratio and a minimum EBITDA
covenant. The Company was not in compliance with these covenants for the
relevant periods ended December 31, 2000, but has received waivers of such
noncompliance.
In April 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, and in May 1999 expanded the repurchase program by
an additional 1.2 million shares. During 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.
25
Additionally, in April 1999, the Company repurchased, for approximately
$266,470 in cash, 2,389 shares of its common stock and warrants to purchase
2,449 shares of its common stock from a minority stockholder pursuant to the
terms of a Settlement Agreement, dated October 31, 1995, between the stockholder
and Sentry. In May 2000, the Company repurchased, for $659,000 in cash, an
additional 15,558 shares of its common stock and warrants to purchase 4,899
shares of its common stock pursuant to the settlement agreement. Such repurchase
obligation was assumed by the Company upon the acquisition of Sentry in
October 1998. With respect to the shares and warrants repurchased in April 1999
and May 2000, the fair market value of the repurchased securities and all
associated costs were recovered 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. Such recovery by
the Company was in the form of a release of 24,937 shares of the Company's
common stock in April 1999 and May 2000 from the Sentry purchase consideration
escrow. Such released shares were retired to the status of authorized but
unissued.
As of December 31, 2000, the Company had cash of $3.6 million, marketable
securities valued at $6.7 million and negative working capital of $6.2 million.
The decreases in these assets from December 31, 1999 are principally due to the
net loss suffered during the year ended December 31, 2000, a significant
decrease in the amount of cash collected on outstanding accounts receivable,
increased capital expenditures due to infrastructure upgrades, and increased
cash used in acquisitions and strategic investments.
Integration and implementation issues experienced during the Company's
ongoing infrastructure upgrades contributed to the Company's significant
decrease in collections of outstanding accounts receivable during the year ended
December 31, 2000. In 2001, the Company's management implemented a plan in an
attempt to remedy the collection challenges encountered during 2000. Management
and sales personnel have been assigned increased responsibility in the overall
collection effort. However, there can be no assurance that the Company's
collections of outstanding accounts receivable will improve.
The Company currently expects operating losses to continue at least for the
first half of 2001. The Company experienced a net loss of $9.97 million for the
quarter ended December 31, 2000, and a net loss of $10.48 million for the year
ended December 31, 2000. To return to profitability, the Company will need,
among other things, to achieve revenue growth rates in excess of the revenue
growth rates achieved in 2000, maintain operating expenses below revenue levels,
and improve collections of its accounts receivable. The Company cannot be
certain whether, or when, any of these will occur. If the Company fails to
achieve sufficient revenue growth, maintain operating expenses below revenue
levels or improve collection of its accounts receivable, any such failure will
likely result in continued operating losses which would have a material adverse
effect on the Company's financial results and condition.
The Company currently believes that existing cash balances, anticipated cash
flows from operations and borrowings under its credit facility (after expiration
of the standstill period described above) will be sufficient to meet its working
capital, capital expenditure and credit facility payment requirements for the
next twelve months. As discussed above, however, the Company has experienced a
significant decrease in its cash position and cash flows during 2000 and
currently believes that decreases in IT spending as a result of general economic
conditions are likely to negatively impact its business. Consequently, in an
effort to improve its cash position the Company intends to continue to work to
increase accounts receivable collections. The Company is also currently
considering substantial cost-containment measures, including workforce
reductions and reorganizations, aggressive management of discretionary
expenditures and compensation levels and re-evaluation of expense policies. In
addition, the Company is also currently exploring potential debt or equity
financings, which may be significantly dilutive to the Company's current
stockholders. There can be no assurance that such financing will be available
when needed or desired or that, if available, such financing will include terms
favorable to the Company or its stockholders. See "Certain Factors That May
Affect Future Results" below. In addition to the foregoing, the Company is
considering the sale of its strategic investments in several companies. The
Company can make no assurance that any of these measures, if taken, will improve
its cash position.
26
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The impact of recently issued accounting pronouncements is discussed in
Note 3 to the consolidated financial statements.
FROM TIME TO TIME, INFORMATION PROVIDED BY THE COMPANY OR STATEMENTS MADE BY
ITS EMPLOYEES MAY CONTAIN "FORWARD-LOOKING" INFORMATION THAT INVOLVES RISKS AND
UNCERTAINTIES. IN PARTICULAR, STATEMENTS CONTAINED IN THIS FORM 10-K (AND IN THE
DOCUMENTS INCORPORATED BY REFERENCE INTO THIS FORM 10-K) THAT ARE NOT HISTORICAL
FACTS (INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONCERNING THE GROWTH RATE OF
REVENUES FROM THE COMPANY'S ADVISORY SERVICES, OPERATING AND NET LOSSES,
ANTICIPATED WORKING CAPITAL, CAPITAL EXPENDITURE AND CREDIT FACILITY PAYMENT
REQUIREMENTS, UPGRADING OF THE COMPANY'S SYSTEMS, POTENTIAL DEBT OR EQUITY
FINANCINGS, AND POTENTIAL SALES OF THE COMPANY'S STRATEGIC INVESTMENTS)
CONSTITUTE FORWARD-LOOKING STATEMENTS AND ARE MADE UNDER THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
STATEMENTS ARE NEITHER PROMISES NOR GUARANTEES. THE COMPANY'S ACTUAL RESULTS OF
OPERATIONS AND FINANCIAL CONDITION HAVE VARIED AND MAY IN THE FUTURE VARY
SIGNIFICANTLY FROM THOSE STATED IN ANY FORWARD-LOOKING STATEMENTS. FACTORS THAT
MAY CAUSE SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATION, THE RISKS,
UNCERTAINTIES, AND OTHER INFORMATION DISCUSSED WITHIN THIS FORM 10-K (AND IN THE
DOCUMENTS INCORPORATED BY REFERENCE INTO THIS FORM 10-K), AS WELL AS THE
ACCURACY OF THE COMPANY'S INTERNAL ESTIMATES OF REVENUE, OPERATING EXPENSE
LEVELS, GROWTH RATES, AND OTHER ANTICIPATED EXPENDITURES.
THE FOLLOWING RISK FACTORS SHOULD BE READ IN CONJUNCTION WITH THE DETAILED
INFORMATION IN THIS FORM 10-K (AND IN THE DOCUMENTS INCORPORATED BY REFERENCE
INTO THIS FORM 10-K). THE FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN FORWARD-LOOKING STATEMENTS
CONTAINED OR INCORPORATED BY REFERENCE IN THIS FORM 10-K AND PRESENTED BY
MANAGEMENT FROM TIME TO TIME. SUCH FACTORS, AMONG OTHERS, MAY HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL
CONDITION.
THE COMPANY'S CURRENT EXPECTATION OF FUTURE OPERATING LOSSES
The Company currently expects operating losses to continue for at least the
first half of 2001. The Company experienced a net loss of $9.97 million for the
quarter ended December 31, 2000, and a net loss of $10.48 million for the year
ended December 31, 2000. To return to profitability, the Company will need to,
among other things, achieve revenue growth rates in excess of the revenue growth
rates achieved in 2000, maintain operating expenses below revenue levels, and
improve collections of its accounts receivable. The Company cannot be certain
whether, or when, any of these will occur. If the Company fails to achieve
sufficient revenue growth, maintain operating expenses below revenue levels or
improve collection of its accounts receivable, any such failure will likely
result in continued operating losses which would have a material adverse effect
on the Company's financial results and condition.
THE COMPANY IS CONSIDERING COST CONTAINMENT AND SEEKING ADDITIONAL CAPITAL
As of December 31, 2000, the Company had cash of $3.6 million, marketable
securities valued at $6.7 million and negative working capital of $6.2 million.
The decreases in these assets from December 31, 1999 are principally due to the
net loss suffered during the year ended December 31, 2000, a significant
decrease in the amount of cash collected on outstanding accounts receivable,
increased capital expenditures due to infrastructure upgrades, and increased
cash used in acquisitions and strategic investments.
Integration and implementation issues experienced during the Company's
ongoing infrastructure upgrades contributed to the Company's significant
decrease in collections of outstanding accounts receivable during the year ended
December 31, 2000. There can be no assurance that the Company's collections of
outstanding accounts receivable will improve.
27
The Company currently believes that existing cash balances, anticipated cash
flows from operations and borrowings under its credit facility (after expiration
of the standstill period described above) will be sufficient to meet its working
capital, capital expenditure and credit facility payment requirements for the
next twelve months. As discussed above, however, the Company has experienced a
significant decrease in its cash position and cash flows during 2000 and in the
first quarter of 2001 and currently believes that decreases in IT spending as a
result of general economic conditions are likely to negatively impact its
business. Consequently, in an effort to improve its cash position the Company
intends to continue to work to increase accounts receivable collections. The
Company is also currently considering substantial cost-containment measures,
including workforce reductions and reorganizations, aggressive management of
discretionary expenditures and compensation levels and re-evaluation of expense
policies. In addition, the Company is also currently exploring potential debt or
equity financings, which may be significantly dilutive to the Company's current
stockholders. There can be no assurance that such financing will be available
when needed or desired 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. The
Company can make no assurance that any of these measures, if taken, will improve
its cash position.
POTENTIAL HARM TO THE COMPANY CAUSED BY A DECREASE IN IT SPENDING
The Company's business depends on continued spending on IT by substantial
commercial and governmental users of IT. The Company believes that, concurrently
with the recent economic slowdown in the U.S. and abroad, there has been a
decrease in IT spending and the IT spending projections of substantial
commercial and governmental users of IT. If as a result of general economic
uncertainty or otherwise IT users reduce IT spending levels, such a decrease in
spending would likely substantially reduce demand for the Company's products and
services, substantially harm the Company's business, and have a material adverse
effect on the Company's financial results and condition.
MANAGEMENT OF GROWTH
Since inception, the Company's operations have changed substantially due to
the expansion and growth of the Company's business. Growth places significant
demands on the Company's management, administrative, operational and financial
resources and systems. The Company's ability to manage growth, should it
continue to occur, will require the Company to continue to improve its systems
and to motivate and effectively manage an evolving workforce.
During 2000 the Company continued its investments in management information
systems. Integration and implementation problems encountered during the
Company's systems upgrades, however, contributed to the Company's significant
decrease in collections of outstanding accounts receivable during the year ended
December 31, 2000. There can be no assurance that the Company's collections of
outstanding accounts receivable will improve.
If the Company's management is unable to effectively manage a changing and
growing business and continue to improve its systems, the quality of the
Company's services and products, its retention of key employees, its results of
operations, and its financial condition could be materially adversely affected.
THE COMPANY'S DEPENDENCE ON RENEWALS OF SUBSCRIPTION-BASED SERVICES
The Company derived approximately 70% of its total revenues in 1999 from
subscriptions to the Company's Advisory Services. In the year ended
December 31, 2000, the Company derived approximately 71% of its total revenues
from subscriptions to its Advisory Services. The Company may
28
not be successful in maintaining its subscription renewal rates. Commencing in
1998 and continuing into 2000, the Company experienced a shift in client demand
toward more consultative, solution-oriented products and services. With the
advent of the Internet, information alone--without analysis in the context of a
client's environment--has less value. In addition, the Company's ability to
renew subscriptions is subject to a number of risks, including the following:
- The Company may be unsuccessful in delivering consistent, high-quality,
and timely analysis and advice to its clients
- The Company may not be able to hire and retain a large and growing number
of highly talented professionals in a very competitive job market
- The Company may be unsuccessful in understanding and anticipating market
trends and the changing needs of its clients
- The Company may not be able to deliver products and services of the
quality and timeliness necessary to withstand competition
If the Company is unable to successfully maintain its subscription renewal
rates or sustain the necessary level of performance, such an inability could
have a material adverse effect on the Company's business and financial results.
THE COMPANY'S DEPENDENCE ON NON-RECURRING STRATEGIC CONSULTING ENGAGEMENTS
The Company derived approximately 23% and 22% of its total revenues during
the years ended December 31, 2000 and 1999, respectively, from Strategic
Consulting engagements. Strategic Consulting engagements vary in number, size,
and scope, and typically are project-based and non-recurring. The Company's
ability to replace completed Strategic Consulting engagements with new
engagements is subject to a number of risks, including the following:
- The Company may be unsuccessful in delivering consistent, high-quality,
and timely consulting services to its clients
- The Company may not be able to hire and retain a large and growing number
of highly talented professionals in a very competitive job market
- The Company may not be able to develop new business
- The Company may not be able to maintain the costs of engagements despite a
fixed fee cost structure
- The Company may be unsuccessful in understanding and anticipating market
trends and the changing needs of its clients
- The skills and competencies of the Company's Strategic Consulting staff
may not match the skills required for the fulfillment of existing or
potential Strategic Consulting engagements
- The Company may not be able to deliver consulting services of the quality
and timeliness necessary to withstand competition
If the Company is not able to replace completed Strategic Consulting
engagements with new engagements, such an inability could have a material
adverse effect on the Company's business and financial results.
29
THE COMPANY'S EXPECTATION OF FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have varied significantly from quarter to
quarter. The Company expects future operating results to fluctuate due to
several factors, many of which are not in the Company's control:
- The disproportionately large percentage of the Company's Advisory Services
subscriptions that expire in the fourth quarter of each year
- The level and timing of renewals of subscriptions to the Company's
Advisory Services
- The mix of 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 ability of the Company to match the skills of its consulting staff to
consulting engagement opportunities
- The timing and amount of new business generated by the Company
- The mix of domestic versus international business
- The timing of the development, introduction, and marketing of new products
and services
- The timing of the hiring of research analysts, consultants, and sales
representatives
- Employee utilization rates and the accuracy of estimates of resources
required to complete ongoing Strategic Consulting engagements
- Changes in the spending patterns of the Company's clients
- The Company's ability to collect its accounts receivable
- Changes in market demand for IT research and analysis
- Decreases in spending on IT by substantial commercial and governmental
users of IT
- General economic uncertainty and economic slowdown in the U.S. and abroad
- Competitive conditions in the industry
Due to these factors, the Company believes period-to-period comparisons of
operating results are not necessarily meaningful and should not be relied on as
an indication of future operating results. 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, such as during the quarters ended September 30, 2000,
and December 31, 2000, which will likely have a material adverse effect on the
price of the Company's Common Stock.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Net revenues attributable to international clients represented approximately
17% of the Company's total Advisory Services revenues for the year ended
December 31, 1999, and approximately 16% of the Company's total Advisory
Services revenues for the year ended December 31, 2000. The Company sells its
products internationally through a network of independent sales representative
organizations and wholly owned subsidiaries. The risks to the Company of
international operations include:
- Greater accounts receivable collection risk with respect to sales through
its independent sales representative organizations (because the Company
relies on the sales representative organization to invoice and collect
receivables)
- Longer accounts receivable collection cycles
30
- The financial health of individual sales representative organizations
- Developing and managing relationships with sales representative
organizations and foreign employees
- Integration of acquired international operations into the Company's
existing operations
- Greater difficulty in maintaining direct client contact with respect to
sales through its independent sales representative organizations
- Political, social, and economic conditions in various jurisdictions
- Tariffs and other trade barriers
- Potentially adverse tax consequences
The Company expects that international operations will continue to account
for a significant portion of its revenues and intends to continue to expand its
international operations. Expansion into new geographic territories may require
considerable management and financial resources, as was the case in 2000, and
may negatively impact the Company's results of operations. If the Company is
unable to successfully manage the risks associated with international
operations, such an inability could have a material adverse effect on the
Company's business and financial results.
RISKS OF FAILING TO ANTICIPATE CHANGING MARKET NEEDS
The Company's success depends in part on its ability to anticipate rapidly
changing technologies and market trends and to adapt its products and services
to meet the changing information and analysis needs of IT users. Commencing in
1998 and continuing into 2000, the Company experienced a shift in client demand
toward more consultative, solution-oriented products and services. With the
advent of the Internet, information alone--without analysis in the context of a
client's environment--has less value. In addition to this, frequent and often
dramatic changes characterize the IT industry, including the following:
- Introduction of new products and obsolescence of others
- Shifting strategies and market positions of major industry participants
- Paradigm shifts with respect to system architectures
- Changing objectives and expectations of IT users and vendors
- Volatility in spending levels on IT by substantial commercial and
governmental users of IT
This environment of rapid and continuous change presents significant
challenges to the Company's ability to provide its clients with current and
timely analysis and advice on issues of importance to them. The Company commits
substantial resources to meeting these challenges. If the Company fails to
provide insightful timely analysis of developments and assessment of
technologies and trends in a manner that meets changing market needs, such a
failure could have a material and adverse effect on the Company's future
operating results.
THE COMPANY'S DEPENDENCE ON ITS ABILITY TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL
The Company needs to hire, train, and retain a significant number of
qualified employees to execute its strategy and support its growth. In
particular, the Company needs trained research analysts, consultants, sales
representatives, product development, management and operations staff. The
Company continues to experience intense competition in recruiting and retaining
qualified employees. Furthermore, the Company's ability to manage its business
effectively will require it to further develop the management skills of its
managers and supervisors and to train, motivate and manage its
31
employees. The pool of experienced candidates, particularly the pool of
experienced managers, is small, and the Company competes for qualified employees
against many companies, including Gartner Group, that have substantially greater
financial resources than the Company. If the Company is unable to successfully
hire, retain, and motivate a sufficient number of qualified employees, such an
inability will have a material adverse effect on the Company's business and
financial results.
COMPETITION
The IT research, analysis, and consulting industry is extremely competitive.
The Company competes directly with other independent providers of similar
services and indirectly with the internal staffs of current and prospective
client organizations. The Company's principal direct competitor, Gartner Group,
has a substantially longer operating history and has considerably greater
financial resources and market share than the Company. The Company also competes
indirectly with larger electronic and print media companies and consulting
firms. The Company's indirect competitors, many of which have substantially
greater financial, information gathering, and marketing resources than the
Company, could choose to compete directly against the Company in the future.
The Company's market has few barriers to entry. New competitors could easily
compete against the Company in one or more market segments addressed by the
Company's Advisory Services or Strategic Consulting services. The Company's
current and future competitors may develop products and services that are more
effective than the Company's products and services. Competitors may also produce
their products and services at less cost and market them more effectively. If
the Company is unable to successfully compete against existing or new
competitors, such an inability will have a material adverse effect on the
Company's operating results and would likely result in pricing pressure and loss
of market share.
RISKS ASSOCIATED WITH NEW PRODUCT AND SERVICES DEVELOPMENT
The Company's future success depends on its ability to develop or acquire
new products and services that address specific industry and business sectors,
changes in client requirements, and technological changes in the IT industry.
The process of internally researching, developing, launching, and gaining client
acceptance of a new product or service is inherently risky and costly.
Assimilating and marketing an acquired product or service is also risky and
costly. Commencing in 1998 and continuing into 2000, the Company experienced a
shift in client demand toward more consultative, solution-oriented products and
services. With the advent of the Internet, information alone--without analysis
in the context of a client's environment--has less value. In addition to this,
the Company has introduced relatively few new products or services and has had
limited experience in managing strategic investments. If the Company is unable
to develop new products and services, such inabilities could have a material
adverse effect on the Company's operating results and financial condition.
RISKS ASSOCIATED WITH STRATEGIC INVESTMENTS
In an effort to develop new products and services, from April 1996 to
December 2000, the Company made investments in and advances to companies in
parallel or synergistic businesses totaling approximately $21.5 million. Such
strategic investments and advances are highly risky and generally illiquid.
Furthermore, strategic investments may disrupt the ongoing business of the
Company and distract management. In the fourth quarter of 2000, the Company
recorded a $2.64 million impairment loss for the full carrying value of two of
its strategic investments. There can be no assurance that such strategic
investments will result in new product or service offerings for the Company or
otherwise be successful. Many factors outside the control of the Company,
including general economic conditions, could impair the value of the Company's
strategic investments, requiring the Company to record further, substantial
losses related to such investments. The Company is searching for potential
purchasers for certain of its strategic investments. There can be no assurances
that the Company will be
32
able to liquidate its strategic investments when needed or desired. If the
Company is unable to manage or liquidate its strategic investments, such
inabilities could have a material adverse effect on the Company's operating
results and financial condition.
THE COMPANY'S DEPENDENCE ON KEY PERSONNEL
The Company relies, and will continue to rely, in large part on its key
management, research, consulting, sales, product development, and operations
personnel. The Company's success partially depends on its ability to motivate
and retain highly qualified employees. If Dale Kutnick (Chairman, Chief
Executive Officer, and Co-Research Director) and/or other senior officers leave
the Company, such loss or losses could have a material adverse effect on the
Company.
RISK OF PRODUCT/SERVICES PRICING LIMITING POTENTIAL MARKET
The Company's pricing strategy may limit the potential market for the
Company's Advisory Services and Strategic Consulting services to substantial
commercial and governmental users and vendors of IT. As a result, the Company
may be required to reduce prices for its Advisory Services and Strategic
Consulting services or to introduce new products and services with lower prices
to expand or maintain its market share. These actions could have a material
adverse effect on the Company's business and results of operations.
RISK OF FAILURE TO INTEGRATE RECENT ACQUISITIONS AND RISKS ASSOCIATED WITH
POTENTIAL ACQUISITIONS
As part of its business strategy, the Company buys, or makes investments in,
complementary businesses, products, and services. If the Company finds a
business it wishes to acquire, the Company could have difficulty negotiating the
terms of the purchase, financing the purchase, and assimilating the employees,
products, and operations of the acquired business. Acquisitions may disrupt the
ongoing business of the Company and distract management. Furthermore,
acquisition of new businesses may not lead to the successful development of new
products or services, or if developed, such products or services may not achieve
market acceptance or prove to be profitable. A given acquisition may also have a
material adverse effect on the Company's financial condition or results of
operations. In addition, the Company may be required to pay cash, incur debt or
issue equity to pay for any future acquisitions or contingent payments in
connection with previously consummated acquisitions, which may be dilutive to
the Company's current stockholders and/or decrease the Company's working
capital.
RISKS ASSOCIATED WITH RESTRICTIVE COVENANTS
The credit facility with its bank (the "Facility") contains a number of
covenants that, among other things, restrict the ability of the Company to incur
additional indebtedness, pay dividends or other distributions, dispose of
certain assets, enter into sale and leaseback transactions, create liens, make
certain investments, acquisitions or mergers, and that otherwise restrict
corporate activities. In addition, under the Facility, the Company is required
to maintain specified financial covenants, including minimal levels of EBITDA,
minimum leverage ratios and minimum fixed charge coverage ratios. The ability of
the Company to comply with such provisions may be affected by events beyond its
control. The breach of any of these covenants could result in a default under
the Facility. In the event of any such default, the lender could elect to
declare all amounts borrowed under the Facility, together with all accrued
interest, to be due and payable. Any such election would likely have a material
adverse effect on the Company's financial condition.
THE VOLATILITY AND UNPREDICTABILITY OF THE COMPANY'S STOCK PRICE
The market price of the Company's common stock has been volatile and is
likely to continue to be highly volatile and could be subject to decreases.
During 2000, as reported on the Nasdaq National
33
Market, the Company's common stock quotations ranged from a high of $35.88 to a
low of $4.25. On March 29, 2001, the market price of the Company's common stock
was $1.37. The market price of the Company's common stock could be subject to
wide fluctuations in response to:
- The Company's perceived prospects, including anticipated revenue growth
- Variations in the Company's operating results and the Company's
achievement of key business targets
- The Company's ability to maintain operating expenses below revenue levels
or improve collection of its accounts receivable
- Changes in securities analysts' recommendations or earnings estimates
- Differences between the Company's reported results and those expected by
investors and securities analysts, such as during the quarters ended
September 30, 2000 and December 31, 2000
- Announcements of new service offerings by the Company or its competitors
- Market reaction to any acquisitions, joint ventures, or strategic
investments announced by the Company or its competitors
- General economic or stock market conditions unrelated to the Company's
operating performance
In the past, following periods of volatility in the market price of their
securities, many companies have been the subject of securities class action
litigation. If the Company were sued in a securities class action, it would
result in substantial costs as well as a diversion of management's attention and
resources, and it would likely cause the market price of the Company's common
stock to fall.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Concentration of Credit Risk" in Note 3 to the consolidated financial
statements for information regarding the Company's approach to financial risk
management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, financial statement schedule, and
exhibits listed under Item 14--Exhibits, Financial Statement Schedules, and
Reports on Form 8-K are filed as a part of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item may be found under the sections
captioned "Election of Directors," "Occupations of Directors and Executive
Officers," and "Section 16 (a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement (the "2001 Proxy Statement") for the Company's Annual
Meeting of Stockholders to be held on May 24, 2001, and is incorporated herein
by reference. The 2001 Proxy Statement will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the Company's
fiscal year ended December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item may be found under the section
captioned "Compensation and Other Information Concerning Directors and Officers"
in the 2001 Proxy Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item may be found under the section
captioned "Management and Principal Holders of Voting Securities" in the 2001
Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item may be found under the section
captioned "Certain Relationships and Related Transactions" in the 2001 Proxy
Statement, which is incorporated herein by reference, and in Note 14 to the
consolidated financial statements.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS.
The following consolidated financial statements are included in Item 8 of
this report:
PAGE
--------
Independent Auditors' Report................................ 41
Consolidated Balance Sheets at December 31, 2000 and 1999... 42
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999, and 1998......................... 43
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999, and 1998..... 44
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999, and 1998 45
Notes to Consolidated Financial Statements.................. 46
(a)(2) FINANCIAL STATEMENT SCHEDULE.
The following financial statement schedule for the Company is filed as part
of this report:
Schedule I--Valuation and Qualifying Accounts............... 66
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
accompanying Consolidated Financial Statements or notes thereto.
36
(a)(3) LIST OF EXHIBITS.
The following exhibits are filed as part of and incorporated by reference
into this Annual Report on Form 10-K:
EXHIBIT NUMBER DESCRIPTION
- -------------- ------------------------------------------------------------
2.1(1)(2) Agreement and Plan of Merger by and among META Group, Inc.,
MG Acquisition Corporation, and The Sentry Group, Inc. dated
as of September 23, 1998 ("Agreement and Plan of Merger")
2.2(1) Amendment No. 1 to Agreement and Plan of Merger dated as of
October 20, 1998
2.3(10) Amendment No. 2 to Agreement and Plan of Merger dated as of
May 12, 2000
3.1(3) Amended and Restated Certificate of Incorporation of the
Company
3.2(3) Amended and Restated Bylaws of the Company
4.1(3) Specimen Certificate Representing the Common Stock
4.2(1) Registration Rights Agreement dated as of October 20, 1998
by and among META Group, Inc. and the stockholders of The
Sentry Group, Inc. listed on the signature pages thereto
4.3(1) Escrow Agreement dated as of October 20, 1998 among META
Group, Inc., Peter A. Naber, and State Street Bank and
Trust Company
4.4(6) Form of Common Stock Purchase Warrant (Immediate Vesting)
issued to stockholders of The Sentry Group, Inc. on
October 20, 1998
4.5(6) Form of Common Stock Purchase Warrant (Contingent Vesting)
issued to stockholders of The Sentry Group, Inc. on
October 20, 1998
4.6(2)(11) Credit Agreement between META Group, Inc. and The Bank of
New York dated September 18, 2000 ("Credit Agreement")
4.7(11) 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
4.8(11) Security Agreement Between META Group, Inc. and The Bank of
New York dated September 18, 2000
4.9(11) Subsidiary Guarantee among MG (Bermuda) Ltd., The Sentry
Group, Inc., META Group, Inc., and The Bank of New York
dated September 18, 2000
4.10(12) Amendment No. 1 and Waiver No. 1 to the Credit Agreement
dated as of December 11, 2000
4.11+ Amendment No. 2 and Waiver No. 2 to the Credit Agreement
dated as of March 30, 2001
10.1(7)* Amended and Restated 1995 Stock Plan
10.2(4)* Form of Incentive Stock Option Agreement under the Amended
and Restated 1995 Stock Plan
10.3(4)* Form of Non-Qualified Stock Option Agreement under the
Amended and Restated 1995 Stock Plan
10.4(5)* 1995 Employee Stock Purchase Plan Enrollment Authorization
Form
10.5(3)* 1995 Non-Employee Director Stock Option Plan
10.6(4)* Form of Non-Qualified Stock Option Agreement under the 1995
Non-Employee Director Stock Option Plan of the Registrant
10.7(2)(3)* Agreement between First Albany Corporation and the Company
dated March 30, 1995
10.8(3)* Restated and Amended 1989 Stock Option Plan, as amended
10.9(3)* Form of Incentive Stock Option Agreement under 1989 Stock
Option Incentive Plan
10.10(3)* Form of Certificate and Agreement under Restated and Amended
1989 Stock Option Plan
10.11(3)* 1993 Stock Option and Incentive Plan, as amended
10.12(3)* Form of Certificate and Agreement under 1993 Stock Option
and Incentive Plan
37
EXHIBIT NUMBER DESCRIPTION
- -------------- ------------------------------------------------------------
10.13(3)* Form of Warrant under the Restated and Amended 1989 Stock
Option Plan and 1993 Stock Option and Incentive Plan
10.14(3) Form of International Sales Representative Agreement
10.15(3) Office Lease between International Business Machines
Corporation and the Company dated August 1, 1994
10.16(6)* Form of META Group, Inc./JMI Long Term Incentive
Compensation Plan
10.17(7)* Amended and Restated 1996 Equity Compensation Plan of The
Sentry Group, Inc.
10.18(8)* Employment agreement between META Group, Inc. and Larry R.
DeBoever dated as of October 15, 1996
10.19(8)* Promissory Note dated as of November 1, 1996 issued by
Larry R. DeBoever to META Inc. in an aggregate principal
amount of $500,000
10.20(8)* Amended and Restated 1995 Employee Stock Purchase Plan
10.21(2)(9)* Letter Agreement dated as of February 2, 2000 between META
Group, Inc. and Larry R. DeBoever
10.22(10) Letter Agreement dated as of July 28, 2000 between The Bank
of New York and META Group, Inc.
10.23(10) Master Promissory Note of META Group, Inc. in favor of The
Bank of New York dated as of July 28, 2000 in the principal
amount of $12 million
10.24*+ Asset Purchase Agreement among Rubin Systems Inc., Howard
Rubin, and META Group, Inc. dated as of October 27, 2000
10.25+* Employment and Management Agreement between META Group, Inc.
and Howard Rubin dated as of October 27, 2000*
10.26*+ Office Lease between Harbor Vista Associates Limited
Partnership and the Company dated March 31, 1999
21.1+ List of Subsidiaries
23.1+ Consent of Deloitte & Touche LLP
24.1+ Power of Attorney (see page 40)
- ------------------------
(1) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K dated October 20, 1998 and filed on November 3, 1998
(File No. 0-27280).
(2) Confidential treatment obtained as to certain portions.
(3) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-97848).
(4) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 as filed on March 1, 1996 (File
No. 333-1854).
(5) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on form S-8 as filed on December 19, 1995 (File
No. 33-80539).
(6) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1998 and
filed on November 17, 1998 (File No. 0-27280).
(7) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 as filed on December 3, 1998 (File
No. 333-68323).
(8) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1999 and filed
on May 14, 1999 (File No. 0-27280)
(9) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 and filed on
March 30, 2000 (File No. 0-27280)
38
(10) 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)
(11) 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).
(12) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K dated December 11, 2000 and filed on December 13, 2000
(File No. 0-27280).
* Indicates a management contract or any compensatory plan, contract, or
arrangement.
+ Filed herewith.
(B) REPORTS ON FORM 8-K
On October 27, 2000, the Registrant filed a report on Form 8-K announcing
that (i) a conference call was scheduled for Tuesday, November 7, 2000 at 4:15
pm Eastern Time to discuss its financial results for the third quarter ended
September 30, 2000, quarterly highlights, and current expectations regarding its
future performance, and (ii) the conference call was accessible to the public
through live Internet access in a listen-only mode.
On November 7, 2000, the Company filed a report on Form 8-K announcing that
(i) it moved the date on which it was to report its financial results for the
third quarter ended September 30, 2000 to after the market close on Thursday,
November 9, 2000, (ii) a conference call was scheduled for 8:15 am Eastern Time
on Friday, November 10, 2000 to discuss its financial results, quarterly
highlights, and current expectations regarding its future performance, and
(iii) the conference call on November 10, 2000 was accessible to the public
through live Internet access in a listen-only mode.
On December 11, 2000 the Company filed a report on Form 8-K announcing the
Company executed an amendment and waiver to its $25 million senior revolving
credit facility with The Bank of New York.
(C) EXHIBITS
The Company hereby files as part of this Annual Report on Form 10-K the
exhibits listed in Item 14(a)(3) set forth above.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
META GROUP, INC.
Date: April 2, 2001 By: /s/ DALE KUTNICK
-----------------------------------------
Dale Kutnick
CHAIRMAN, CHIEF EXECUTIVE OFFICER, AND
CO-RESEARCH DIRECTOR
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of META Group, Inc., hereby
severally constitute and appoint Dale Kutnick and John A. Piontkowski and each
of them singly, our true and lawful attorneys, with the power to them and each
of them singly, to sign for us and in our names in the capacities indicated
below, any amendments to this Report on Form 10-K, and generally to do all
things in our names and on our behalf in such capacities to enable META
Group, Inc. to comply with the provisions of the Securities Exchange Act of
1934, as amended, and all the requirements of the Securities and Exchange
Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities indicated, on the 2nd day of April 2001.
SIGNATURE TITLE(S)
--------- --------
/s/ DALE KUTNICK
------------------------------------------- Chairman, Chief Executive Officer (Principal
Dale Kutnick Executive Officer), and Co-Research Director
Senior Vice President--Finance, Chief
/s/ JOHN A. PIONTKOWSKI Financial
------------------------------------------- Officer, Treasurer, and Secretary (Principal
John A. Piontkowski Financial Officer and Principal Accounting
Officer)
/s/ GAYL W. DOSTER
------------------------------------------- Director
Gayl W. Doster
/s/ FRANCIS J. SALDUTTI
------------------------------------------- Director
Francis J. Saldutti
/s/ HARRY S. GRUNER
------------------------------------------- Director
Harry S. Gruner
/s/ MICHAEL SIMMONS
------------------------------------------- Director
Michael Simmons
/s/ GEORGE C. MCNAMEE
------------------------------------------- Director
George C. McNamee
/s/ HOWARD RUBIN
------------------------------------------- Director
Howard Rubin
40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
META Group, Inc.
Stamford, Connecticut
We have audited the accompanying consolidated balance sheets of META
Group, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed at Item 14(a) 2.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of META Group, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2000 the Company adopted the provisions of Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" and consequently changed
the method of revenue recognition for certain of the Company's Advisory
Services.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 13, 2001
(March 30, 2001 as to Note 9)
41
META GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,622 $ 10,106
Accounts receivable, less allowance for doubtful accounts
of $4,031 and $673...................................... 57,825 53,278
Deferred commissions...................................... 3,428 2,402
Deferred tax asset........................................ 5,806 407
Other current assets...................................... 3,555 1,795
-------- --------
Total current assets.................................... 74,236 67,988
Non-current portion of accounts receivable.................. 4,444 2,001
Marketable securities....................................... 6,719 6,253
Property and equipment, net................................. 14,712 7,170
Deferred tax asset.......................................... 3,733 1,908
Intangible assets, net...................................... 23,532 5,527
Investments and advances.................................... 18,818 19,275
Other non-current assets.................................... 6,269 3,328
-------- --------
Total assets............................................ $152,463 $113,450
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,856 $ 387
Deferred revenues......................................... 44,087 38,588
Bank note payable......................................... 20,900
Accrued compensation...................................... 6,086 4,934
Accrued liabilities....................................... 3,849 2,367
Income taxes payable...................................... 176 1,493
Other current liabilities................................. 463 473
-------- --------
Total current liabilities............................... 80,417 48,242
Non-current deferred revenues............................... 6,338 3,523
-------- --------
Total liabilities....................................... 86,755 51,765
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, authorized 2,000,000
shares; none issued.....................................
Common stock, $0.01 par value, authorized 45,000,000
shares; issued 11,619,025 and 10,856,124 shares......... 116 109
Paid-in capital........................................... 52,874 38,691
Retained earnings......................................... 13,198 23,674
Accumulated other comprehensive loss...................... (160) (469)
Treasury stock, at cost, 647,016 shares................... (320) (320)
-------- --------
Total stockholders' equity.............................. 65,708 61,685
-------- --------
Total liabilities and stockholders' equity.............. $152,463 $113,450
======== ========
See notes to consolidated financial statements.
42
META GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
2000 1999 1998
-------- -------- --------
Revenues:
Advisory Services......................................... $ 84,556 $69,998 $58,586
Strategic Consulting...................................... 27,707 22,370 9,404
Published Research Products............................... 7,009 7,315 4,795
-------- ------- -------
Total revenues.......................................... 119,272 99,683 72,785
-------- ------- -------
Operating expenses:
Cost of services and fulfillment.......................... 69,728 52,224 35,098
Selling and marketing..................................... 37,161 23,194 16,702
General and administrative................................ 17,519 8,356 6,753
Depreciation and amortization............................. 4,867 2,596 1,894
-------- ------- -------
Total operating expenses................................ 129,275 86,370 60,447
-------- ------- -------
Operating income (loss):.................................... (10,003) 13,313 12,338
Other income (expense):
Impairment loss............................................. (2,640)
Other income, primarily interest, net....................... 361 1,800 2,621
-------- ------- -------
Income (loss) before provision (benefit) for income taxes... (12,282) 15,113 14,959
Provision (benefit) for income taxes........................ (4,244) 5,883 6,174
-------- ------- -------
Income (loss) before cumulative effect of change in
accounting................................................ (8,038) 9,230 8,785
Cumulative effect of change in accounting (Note 2).......... (2,438)
-------- ------- -------
Net income (loss) (Note 2).................................. $(10,476) $ 9,230 $ 8,785
======== ======= =======
Income (loss) before cumulative effect of change in
accounting per diluted common share....................... $ (.75) $ .80 $ .70
Cumulative effect of change in accounting per diluted common
share..................................................... $ (.22)
-------- ------- -------
Net income (loss) per diluted common share.................. $ (.97) $ .80 $ .70
======== ======= =======
Weighted average number of diluted common shares
outstanding............................................... 10,763 11,501 12,596
======== ======= =======
Income (loss) before cumulative effect of change in
accounting per basic common share......................... $ (.75) $ .86 $ .78
Cumulative effect of change in accounting per basic common
share..................................................... $ (.22)
-------- ------- -------
Net income (loss) per basic common share.................... $ (.97) $ .86 $ .78
======== ======= =======
Weighted average number of basic common shares
outstanding............................................... 10,763 10,719 11,326
======== ======= =======
See notes to consolidated financial statements.
43
META GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
OTHER COMMON STOCK RETAINED TREASURY STOCK
COMPREHENSIVE ------------------- PAID-IN EARNINGS -------------------
TOTAL LOSS SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT
-------- ------------- -------- -------- -------- --------- -------- --------
Balance, January 1, 1998............ $ 55,400 11,775 $118 $49,943 $ 5,659 (647) $(320)
Exercise of stock options........... 1,636 328 3 1,633
Issuance of shares under employee
stock purchase plan............... 344 21 344
Income tax benefit from stock
options exercised................. 984 984
Sentry acquisition.................. 4,706 195 2 4,704
Sentry warrants..................... 835 835
Net income.......................... 8,785 8,785
-------- ----- ------ ---- ------- -------- ---- -----
Balance, December 31, 1998.......... 72,690 12,319 123 58,443 14,444 (647) (320)
Exercise of stock options........... 1,538 487 5 1,533
Issuance of shares under employee
stock purchase plan............... 734 57 1 733
Equity based compensation........... 150 150
Income tax benefit from stock
options exercised................. 563 563
Repurchase and retirement of
shares............................ (22,751) (2,007) (20) (22,731)
Comprehensive income:
Unrealized loss on marketable
securities...................... (469) $(469)
Net income........................ 9,230 9,230
-------- ----- ------ ---- ------- -------- ---- -----
Total comprehensive income.......... 8,761
--------
Balance, December 31, 1999.......... 61,685 (469) 10,856 109 38,691 23,674 (647) (320)
Exercise of stock options........... 4,165 376 3 4,162
Repurchase and retirement of
shares............................ (662) (25) (662)
Issuance of shares under employee
stock purchase plan............... 1,026 101 1 1,025
Equity-based compensation........... 129 129
Income tax benefit from stock
options exercised................. 1,425 1,425
Sentry earnout shares............... 6,793 274 3 6,790
Sentry earnout warrants............. 939 939
Rubin Systems Inc. acquisition...... 375 37 375
Comprehensive income (loss):
Unrealized gain on marketable
securities...................... 305 305
Foreign currency translation
adjustment...................... 4 4
Net income (loss)................. (10,476) (10,476)
--------
Total comprehensive income (loss)... (10,167)
-------- ----- ------ ---- ------- -------- ---- -----
Balance December 31, 2000........... $ 65,708 $(160) 11,619 $116 $52,874 $ 13,198 (647) $(320)
======== ===== ====== ==== ======= ======== ==== =====
See notes to consolidated financial statements.
44
META GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Operating activities:
Net income (loss)........................................... $(10,476) $ 9,230 $ 8,785
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Cumulative effect of change in accounting................. 2,438
Depreciation and amortization............................. 4,867 2,596 1,894
Provision (benefit) for doubtful accounts................. 4,723 (415) 260
Impairment loss on investments............................ 2,640
Loss on sale of marketable securities..................... 268
Equity-based compensation and other non-cash charges...... 559 150 40
Deferred income taxes..................................... (5,685) 2,559 4,986
Tax benefit from exercise of stock options................ 1,425 563 984
Changes in assets and liabilities (net of business
acquisitions):
Accounts receivable..................................... (14,120) (20,660) (8,253)
Deferred commissions.................................... (1,026) (966) (85)
Other current assets.................................... (873) 412 (783)
Other assets............................................ (2,084) (2,023) (1,077)
Accounts payable........................................ 4,469 (1,074) (271)
Accrued compensation and other expenses................. (793) 2,478 704
Deferred revenues....................................... 3,338 10,835 2,110
-------- -------- --------
Net cash (used in) provided by operating activities......... (10,598) 3,953 9,294
-------- -------- --------
Investing activities:
Capital expenditures...................................... (11,657) (4,978) (3,177)
Proceeds from sales/maturities of (investments in)
marketable securities................................... 29,357 (9,135)
Payments made for acquisitions............................ (8,251)
Investments and advances.................................. (1,406) (7,692) (1,927)
-------- -------- --------
Net cash (used in) provided by investing activities......... (21,314) 16,687 (14,239)
-------- -------- --------
Financing activities:
Proceeds from bank borrowings............................. 20,900
Repurchase of shares...................................... (662) (22,751)
Proceeds from employee stock purchase plan................ 1,025 734 344
Proceeds from exercise of stock options................... 4,165 1,538 1,636
-------- -------- --------
Net cash provided by (used in) financing activities......... 25,428 (20,479) 1,980
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (6,484) 161 (2,965)
Cash and cash equivalents at beginning of year.............. 10,106 9,945 12,910
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 3,622 $ 10,106 $ 9,945
======== ======== ========
Supplemental information:
Cash paid during the year for income taxes................ $ 3,433 $ 846 $ 221
======== ======== ========
Cash paid during the year for interest.................... $ 518
========
See notes to consolidated financial statements.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
META Group, Inc. and its wholly owned subsidiaries, 1422722 Ontario Inc.
("META Group Canada"), The Sentry Group, Inc., and MG (Bermuda) Ltd.
(collectively the "Company") is a leading independent research and consulting
firm focusing on information technology ("IT") and business transformation
strategies. The Company's goal is to deliver objective, consistent, and
actionable guidance to enable organizations to innovate more rapidly and
effectively.
The Company's domestic revenues are generated by a direct sales force
calling on IT user and vendor clients. International marketing and sales are
performed by independent sales representative organizations and its wholly owned
subsidiary in Canada. Under the terms of the Company's international sales
representative agreements, the Company realizes Advisory Services revenues from
the international sales representative organizations at rates of 25% to 40% of
amounts billed to their clients.
Revenues from international sales representative organizations and its
wholly owned subsidiary in Canada, accounted for approximately 16%, 17%, and 15%
of the Company's total Advisory Services revenues for the years ended
December 31, 2000, 1999, and 1998, respectively.
2. CHANGE IN ACCOUNTING
In the fourth quarter of 2000, the Company adopted the provisions of Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). The Company identified certain newer Advisory Services product offerings
containing multiple service elements where revenue was recognized as the
services were performed. The Company has elected to record these multiple
element contracts on the straight-line method over the contract term, consistent
with the treatment of the Company's other traditional Advisory Services product
offerings because it is the Company's belief that the straight-line method is
most appropriate given the increased sales volumes and the varying usage
patterns by customers of the underlying services. As required by SAB 101, the
Company retroactively adopted the provisions effective January 1, 2000, and has
reported this on the Consolidated Statement of Operations as a cumulative effect
of a change in accounting in the amount of $2,438, net of tax. The impact of
this change in accounting on quarterly results for 2000 is reflected in
Note 16.
The pro-forma impact to net income and earnings per share amounts assuming
an adoption date of January 1, 1998 are as follows:
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
Net (loss) income........................................... $7,856 $8,685
Net (loss) income per basic common share.................... $ 0.73 $ 0.77
====== ======
Net (loss) income per diluted common share.................. $ 0.68 $ 0.69
====== ======
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of META Group, Inc., MG (Bermuda) Ltd., META Group Canada, and The
Sentry Group, Inc. All significant intercompany balances and transactions have
been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION. All assets and liabilities of META Group
Canada are translated into US dollars at year-end exchange rates. Income and
expense items are translated at average exchange
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
rates prevailing during the year. The resulting translation adjustments are
recorded as a component of Stockholders' Equity.
REVENUE AND COMMISSION EXPENSE RECOGNITION. Advisory Services revenues are
recognized on a straight-line basis over the subscription contract period,
generally one year. All subscription contracts are billable at signing, absent
special terms granted on a limited basis from time to time. As such, the
Company's policy is to record at the time of signing of an Advisory Services
subscription contract the fees receivable and related deferred revenues for the
full amount of the subscription contract. Accounts receivable and deferred
revenues that extend beyond a 12-month period have been classified on the
consolidated balance sheets as non-current. The Company also records the related
sales commission obligation upon the signing of the subscription contract and
amortizes the corresponding deferred commission expense over the subscription
period in which the related Advisory Services revenues are earned and amortized
to income. All subscription contracts are cancelable only for non-performance,
except for certain government contracts that have a 30-day cancellation clause.
Historically, such cancellations have not been material. Strategic Consulting
and Published Research Products revenues are recognized at the time the
applicable service is rendered or product is delivered.
RECLASSIFICATIONS. In July 2000, the Emerging Issues Task Force reached a
consensus on Issue No. 00-15, "Classification in the Statement of Cash Flows of
the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified
Employee Stock Option," which requires that income tax benefits from stock
option exercises be classified as an operating cash flow. Prior period
Consolidated Statements of Cash Flows have been reclassified to conform to this
presentation. Certain other prior year balances have been reclassified to
conform with the current year presentation.
SUPPLEMENTAL STATEMENTS OF CASH FLOW DATA. During the year ended
December 31, 2000, in connection with the acquisition of substantially all the
assets of Rubin Systems, Inc., the Company issued 36,874 shares of its common
stock. The value of the shares issued ($375,000) was allocated to the assets
acquired. During the year ended December 31, 2000, the Company issued 274,470
shares in connection with the payment of contingent consideration pursuant to
the acquisition of the Sentry Group, Inc. In addition, 75,000 warrants to
purchase the Company's common stock became exercisable when such contingent
consideration was earned. The value of the shares and warrants totaled
$7.7 million and was recorded as goodwill. During the year ended December 31,
1998, the Company acquired the Sentry Group, Inc. for 195,066 shares of common
stock valued at $4.7 million and warrants valued at $835,000.
PRODUCT DEVELOPMENT. All costs incurred in the development of new products
and services are expensed as incurred.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets, which range from three to seven years.
COMPUTER SOFTWARE COSTS. Internal and external direct and incremental costs
incurred in developing or obtaining computer software for internal use are
capitalized in property and equipment and amortized under the straight-line
method over the estimated useful life of the software, generally three to five
years. General and administrative costs related to developing or obtaining such
software are expensed as incurred.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES. Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the income tax basis of
the Company's assets and liabilities as measured by the presently enacted tax
rates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES. Cash and cash equivalents
include cash on hand and all investments in highly liquid instruments purchased
with original maturities of three months or less. The Company had no cash
equivalents at December 31, 2000. At December 31, 1999, the Company had cash
equivalents of $5,774. Investments with original maturities of more than three
months are classified as marketable securities. Marketable securities at
December 31, 2000 are considered "available-for-sale" and carried at fair market
value. Unrealized gains and losses, net of income tax benefits, are reflected as
"Accumulated other comprehensive loss" in Stockholders' Equity and have no
effect on net income.
EARNINGS PER SHARE. Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding and dilutive common equivalent shares
(common stock options and warrants) outstanding. Common shares outstanding
includes issued shares less shares held in treasury for the respective year.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject the Company to credit risk consist primarily of cash and trade
receivables. The Company maintains its cash with major financial institutions.
Concentrations of credit risk with respect to accounts receivable are limited
due to the wide variety of customers and markets into which the Company's
products and services are provided, as well as their dispersion across many
different geographic areas. The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business. These financial
instruments are irrevocable letters of credit guaranteeing certain local bank
borrowings of its independent international sales representative organizations
and certain performance obligations by the Company. The Company has no other
material off-balance-sheet concentration of credit risk such as foreign exchange
contracts, options contracts, or other foreign hedging arrangements.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Most of the Company's financial
instruments, including cash, trade receivables, and payables, and accrued
liabilities are short-term in nature. Accordingly, the carrying amount of these
financial instruments approximates fair value. Investments in equity securities
that are not publicly traded are valued at cost. The Company believes the fair
value of its investments exceed cost; however, due to inherent limitations in
the valuation of non-marketable securities and changes in facts and
circumstances, including economic factors, the Company's estimate could change
significantly. The carrying amount of the Company's bank note payable
approximates fair value as the rate of interest on this facility approximates
the current market rate of interest for similar instruments with comparable
maturities.
LONG-LIVED ASSETS. The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." The Company reviews the
recoverability of its long-lived assets when events or changes in circumstances
occur that indicate that the carrying value of the asset may not be recoverable.
Evaluation of possible impairment is based on the Company's ability to recover
the asset from the expected future cash flows (undiscounted and without interest
charges) of the related operations. If the expected undiscounted cash flows are
less than the carrying value of such asset, an impairment loss would be
recognized for the difference between estimated fair value and carrying value.
As a result of
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the Company's review, in the fourth quarter of 2000 the Company recorded
$2.64 million of impairment losses on two of its investee companies. The
assessment of impairment requires management to make estimates of expected
future cash flows along with other available market data. It is possible that
future events or circumstances could cause these estimates to change.
MANAGEMENT ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
INTANGIBLE ASSETS. Intangible assets include goodwill, customer list,
non-compete agreement, and other intangibles. Goodwill represents the excess of
the purchase price of acquired businesses over the fair value of net assets
acquired and is being amortized using the straight-line method over a period
ranging from 10 to 30 years. The non-compete agreement is being amortized on a
straight-line basis over the period of the agreement (four years). The customer
list is being amortized over its estimated useful life of five years.
STOCK-BASED COMPENSATION. The Company follows the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). SFAS 123 encourages, but does not
require, companies to adopt a fair value based method for determining expense
related to stock-based compensation. The disclosures are set forth in Note 12.
The Company continues to account for stock based compensation for employees
using the intrinsic value method as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations.
NEW FINANCIAL ACCOUNTING STANDARDS. Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities," is effective for all fiscal years beginning after June 15,
2000. SFAS 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS 133, certain contracts
that were not formerly considered derivatives may now meet the definition of a
derivative. The Company will adopt SFAS 133 effective January 1, 2001.
Management does not expect the adoption of SFAS 133 to have a significant impact
on the consolidated financial position, results of operations, or cash flows of
the Company.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue
No. 00-2 "Accounting for Web Site Development Costs" ("EITF Issue No. 00-2"),
which applies to all Web site development costs incurred for quarters beginning
after June 30, 2000. The consensus states that the accounting for specific Web
site development costs should be based on a model consistent with AICPA
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The Company believes that its current
Web site development costs accounting policies are consistent with the guidance
of EITF Issue No. 00-2. Web site development costs are capitalized and amortized
over the estimated useful life of three years.
4. ACQUISITIONS
In October 1998, the Company completed the acquisition of all the
outstanding capital stock of The Sentry Group, Inc. ("Sentry"), an IT consulting
company, for an initial payment of 195,066 shares of common stock and a
contingent payment of up to $7 million in common stock or (at the Company's
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
option) cash in the event certain financial targets were met by Sentry for 1999.
In addition, the Company issued to Sentry stockholders warrants to purchase up
to 200,000 shares of the Company's common stock at $30.00 per share, 125,000
shares of which were immediately exercisable and 75,000 shares of which were
contingently exercisable upon Sentry achieving certain financial targets in
1999. As of December 31, 1999, the contingent payment of $7 million had been
earned. Accordingly, the contingent warrants were fully exercisable. The fair
value of such warrants was approximately $940,000 and was recorded as additional
goodwill during 2000. The 125,000 warrants expire in October 2002, and the
75,000 warrants expire in May 2004. During 2000, the Company issued 274,470
shares of its common stock and paid approximately $470,000 in cash to certain of
the former Sentry shareholders.
The acquisition was accounted for under the purchase method and,
accordingly, the operations of Sentry have been included in the consolidated
financial statements from the date of acquisition. The purchase price was
allocated to the net assets acquired based upon their estimated fair values at
the date of acquisition. Such allocation resulted in goodwill of $13.9 million,
which is being amortized over 30 years.
In November 2000, the Company completed the acquisition of substantially all
the assets of META Group Canada, Inc., the Company's independent sales
representative organization in Canada (the "Seller"), for $4.7 million in cash
and the assumption of certain liabilities. The acquisition was accounted for
under the purchase method. Accordingly, the purchase price has been allocated to
the assets acquired and the liabilities assumed, based on estimated fair values
at the date of acquisition. Such preliminary allocation resulted in goodwill of
$3.6 million, which is being amortized over 20 years. Of the acquired assets,
$2.2 million related to the customer list of the Seller, which is being
amortized over five years.
In October 2000, the Company completed the acquisition of substantially all
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, $375,000 in common stock (36,874 shares),
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. In the event the
aggregate number of shares issued in satisfaction of contingent consideration
exceeds 406,610 shares, the remaining consideration will be payable in cash. The
acquisition was accounted for under the purchase method. The initial
consideration of $1.1 million was preliminarily allocated to intangible assets
acquired, which are being amortized on a straight-line basis over a period of
four to seven years. RSI is wholly owned by Dr. Howard Rubin, a director and
officer of the Company.
In September 2000, the Company completed the acquisition of all 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 $1.6 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 assets
acquired was preliminarily $3.1 million and has been recorded as goodwill, which
is being amortized over 10 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
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
ending December 31, 2001. The Company paid Verity $373,000 and $152,000 in
March 2000 and 1999, respectively, for meeting certain financial targets. The
payments increased goodwill.
5. MARKETABLE SECURITIES
The Company held investments in marketable securities that are classified as
available for sale on the consolidated balance sheet at December 31, 2000 and
1999. At December 31, 2000 and 1999, such securities have been marked-to-market,
resulting in an unrealized loss of $164,000 and $469,000, net of $113,000 and
$274,000 of income tax benefits, respectively. The unrealized loss is reflected
as "Accumulated other comprehensive loss" in Stockholders' Equity. Marketable
securities at December 31, 2000 and 1999 include the following (in thousands):
DECEMBER 31, 2000
------------------------------------
GROSS
UNREALIZED
HOLDING FAIR
COST GAINS (LOSSES) VALUE
-------- -------------- --------
US government issued mortgage backed bonds..... $6,996 $(277) $6,719
====== ===== ======
DECEMBER 31, 1999
---------------------------------
US government issued mortgage backed bonds..... $6,996 $(743) $6,253
====== ===== ======
The contractual maturities of marketable securities at December 31, 2000 are
as follows (in thousands):
DECEMBER 31, 2000
---------------------
COST FAIR VALUE
-------- ----------
Due after one year through 15 years....................... $6,996 $6,719
====== ======
Actual maturities may differ from contractual maturities, because the
borrower has the right to call the obligations
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Leasehold improvements..................................... $ 1,600 $ 528
Computer equipment, software, and peripherals.............. 16,691 10,397
Web site development costs................................. 2,530
Furniture and fixtures..................................... 1,304 1,173
------- ------
22,125 12,098
Less: accumulated depreciation............................. (7,413) (4,928)
------- ------
$14,712 $7,170
======= ======
Depreciation expense was $4.1 million, $2.3 million, and $1.8 million, for
the years ended December 31, 2000, 1999, and 1998, respectively.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Goodwill................................................... $21,148 $5,770
Customer list.............................................. 2,167
Content databases.......................................... 971
Non-compete agreement...................................... 182
------- ------
Total.................................................. 24,468 5,770
Less: accumulated amortization............................. (936) (243)
------- ------
$23,532 $5,527
======= ======
8. INVESTMENTS AND ADVANCES
During the years ended December 31, 2000 and 1999, the Company continued to
make investments in and advances to companies in parallel or synergistic
industries. Such investments and advances are summarized below (in thousands):
DECEMBER 31, 2000 DECEMBER 31, 1999
---------------------- ----------------------
INVESTMENTS ADVANCES INVESTMENTS ADVANCES
----------- -------- ----------- --------
META Secur e-Com Solutions.......... $ 859 $1,940 $3,003
Spikes Cavell & Co.................. 2,690 75 $2,690 75
Computerwire........................ 1,721 810 1,721 771
enamics, Inc........................ 517 1,013 487 1,013
Client/Server Labs-Tescom........... 1,385 1,374
Syndicated Research Group........... 525 685 960
FirstMatter......................... 195 1,419
Ninth House, Inc.................... 1,050
META Belgium........................ 1,247 110
Other............................... 2,325 3,026 1,872 2,535
------- ------ ------ ------
$10,022 $8,796 $9,389 $9,886
======= ====== ====== ======
In July 1999, the Company advanced $110,000 to its independent sales
representative organization in Belgium in exchange for a five-year,
interest-bearing promissory note. In December 2000, the Company refinanced
$1.1 million of its accounts receivable from the Belgian sales representative
organization into a ten-year, interest-bearing promissory note.
In December 1999, the Company invested $487,000 in enamics, Inc. ("enamics")
in exchange for shares of enamics' Series A Cumulative Convertible Preferred
Stock. In addition, the Company advanced $1 million in exchange for a secured
subordinated note, convertible into enamics' Series A Cumulative Convertible
Preferred Stock. enamics was established to assist companies define, simulate,
plan, and architect e-business initiatives.
In November 1999, the Company invested $1 million in Ninth House, Inc.
("Ninth House"), in exchange for shares of Ninth House's Series B Convertible
Preferred Stock. Ninth House is a provider of interactive, online learning
content to businesses and individuals utilizing both the Internet and
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS AND ADVANCES (CONTINUED)
corporate intranets as delivery platforms. During the fourth quarter of 2000,
the Company made the determination that based on estimates of future cash flows
and other available market data, its investment in Ninth House was permanently
impaired. Accordingly, the Company recorded an impairment loss for the full
carrying value of its investment.
In May 1999, the Company advanced $960,000 to Syndicated Research Group
("SRG") in exchange for a subordinated convertible promissory note, convertible
into SRG's Series A Convertible Preferred Stock ("Series A Shares"). In
May 2000, the Company invested an additional $250,000 in SRG in exchange for
shares of SRG's Series B Convertible Preferred Stock. At the same time, the
Company elected to convert a portion of its convertible promissory note in
exchange for Series A shares. The Company's total stock ownership is less than
20%. SRG is a research and advisory firm dedicated to helping human resources
professionals make business decisions concerning human capital management
issues.
In March 1999, the Company entered into an agreement to advance
$2.8 million to META Secur e-Com Solutions, Inc. ("METASeS"--formerly META
Security Group, Inc. ["MSG"]), an independent Internet security consulting firm,
in exchange for a secured convertible promissory note, convertible into METASeS
Series A Preferred Stock ("Series A Shares"). As of December 31, 1999, the
Company had advanced the full $2.8 million. In May 2000, the Company elected to
convert a portion of its convertible promissory note in exchange for METASeS'
Series A shares. The Company's total equity ownership is less than 20%. In
July 1999, the Company entered into an agreement to advance an additional
$1 million to METASeS in exchange for a secured promissory note. As of
December 31, 1999, $216,000 had been advanced under such agreement. The $216,000
was repaid during 2000.
In September 1998, the Company made an investment of $1 million in
Client/Server Labs, Inc. ("CSL"), a supplier of performance and functional IT
testing services, in exchange for shares of CSL common stock. In the first
quarter of 1999, the Company advanced an additional $300,000 to CSL in exchange
for a convertible promissory note, convertible into CSL common stock. In
December 1999, the Company exercised its conversion option and received shares
of CSL common stock. In December 1999, all the outstanding shares of common
stock of CSL were acquired by Tescom Software Systems Testing Ltd. ("Tescom"), a
full service independent IT testing company, in exchange for shares of Tescom
common stock. Pursuant to such acquisition, the Company's shares in CSL were
exchanged for shares of Tescom
In August 1998, Spikes Cavell & Company Limited ("SC"), a UK-based
corporation, sold its market research database business to Ziff-Davis, Inc. for
upfront cash consideration and contingent performance-based consideration to be
paid through 2002. Subsequently, the business unit of Ziff-Davis, Inc. was sold
to Harte-Hanks, Inc. In September 1999, SC was placed in voluntary liquidation
and the collection of the contingent consideration is being addressed by a
licensed insolvency practitioner and joint liquidator appointed by the creditors
committee. The market research database business supporting the contingent
payment continues to operate as a business unit of Harte-Hanks, Inc.. Based on
the Company's evaluation of the performance of the research database business
and other factors, the Company has no reason to believe its investment in SC has
been impaired.
In addition to the Company's impairment loss recorded on its investment in
Ninth House, the Company determined that based on estimates of future cash flows
and other available market data, its investment in FirstMatter was permanently
impaired. Accordingly, the Company recorded an impairment loss for the full
carrying value of its investment in FirstMatter.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS AND ADVANCES (CONTINUED)
In the above table, included in Other are several investments and advances
in affiliate companies, some of which include investments in and advances to
certain of the Company's independent international sales representative
organizations. None of the investments and advances exceed more than $1 million
individually. All but one of the Company's investments are for less than a 20%
stock ownership interest in the investee. The investment in excess of 20% is
deemed to be temporary. As the Company does not exert significant influence in
any of the investees, all investments are accounted for on the cost method.
9. 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 60 consecutive monthly
installments. Interest is payable at the rate of (i) LIBOR plus 1.75% or
(ii) the higher of the Prime Rate or the Federal Funds Rate plus 0.50%. The
Facility is collateralized by the Company's marketable securities and accounts
receivable. As of December 31, 2000 the total outstanding amount under this
facility was $22.66 million, comprising $20.9 million in borrowings and
$1.76 million in letters of credit issued on behalf of certain of the Company's
independent sales representative organizations and as security for the Company's
Stamford, CT premises lease. The Company and its bank, however, have entered
into a standstill agreement with respect to the remaining $1.3 million available
to the Company under the Facility whereby the Company has agreed not to request
and its bank has agreed not to make any further advances under the Facility
until certain financial information with respect to the Company's financial
performance during the first quarter of 2001 is provided to its bank. The
Facility requires payment of a commitment fee payable quarterly, in arrears, of
0.25% based on the average, daily, unused portion. The Facility contains a
number covenants that, among other things, restrict the ability of the Company
to incur additional indebtedness, pay dividends or other distributions, dispose
of certain assets, enter into sale and leaseback transactions, create liens,
make certain investments, acquisitions or mergers, and that otherwise restrict
corporate activities. In addition, the Company is required to maintain certain
financial covenants, including, but not limited to, a leverage ratio covenant, a
fixed charge ratio covenant and a minimum EBITDA covenant. The Company was not
in compliance with these covenants for the period ended December 31, 2000. On
March 30, 2001 the Company entered into an amendment to the Facility, which
among other things, waived prior covenant defaults, reset covenants, and
increased the interest rate by 25 basis points to LIBOR plus 2.0%. The Company
is in compliance with the terms of the amended facility. During the year ended
December 31, 2000, the Company paid $518,000 in interest expense.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS:
The Company leases office facilities and equipment under non-cancelable
operating leases. Future minimum lease payments relative to these agreements are
as follows (in thousands):
YEAR ENDING DECEMBER 31,
- ------------------------
2001........................................................ $ 3,895
2002........................................................ 4,694
2003........................................................ 4,739
2004........................................................ 4,704
2005........................................................ 3,688
Thereafter.................................................. 8,284
-------
$30,004
=======
Total rent expense was $3.4 million, $2.5 million, and $2.0 million for the
years ended December 31, 2000, 1999, and 1998 respectively.
CONTINGENCIES:
The Company is a party to certain legal proceedings arising in the ordinary
course of business. The Company believes that none of these proceedings is
likely to have a material adverse effect on the Company's business, results of
operations, or financial position.
11. INCOME TAXES
The provision (benefit) for income taxes is as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Current --federal................................. $ 962 $1,890 $ 204
--state and other.......................... 479 1,434
--foreign
------- ------ ------
1,441 3,324 204
------- ------ ------
Deferred --federal................................. (4,363) 1,477 4,908
--state.................................... (934) 1,082 1,062
--foreign.................................. (388)
------- ------ ------
(5,685) 2,559 5,970
------- ------ ------
$(4,244) $5,883 $6,174
======= ====== ======
In 1999 and 1998, all income was generated domestically. During 2000, the
Company generated a pre-tax loss of $11,310 in the US and a pre-tax loss of $970
in Canada.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
A reconciliation of the income tax (benefit) provision from the amount
computed using the federal statutory rate is as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Income tax at statutory rate....................... $(4,298) $5,289 $5,086
State and other taxes, net of federal benefit...... (324) 2,454 1,007
Foreign taxes...................................... (48)
Impact of valuation allowance...................... (1,939)
Other.............................................. 426 79 81
------- ------ ------
$(4,244) $5,883 $6,174
======= ====== ======
The principal components of the Company's deferred tax assets and
(liabilities) are as follows (in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Depreciation and amortization............................... $ 627 $ 244
Unrealized losses on securities............................. 1,268 383
Allowance for doubtful accounts............................. 1,684 407
Accrued expenses............................................ 2,248
Net operating loss carryforwards............................ 1,891 1,666
Deferred revenues........................................... 1,874
Other....................................................... 150 (182)
------ ------
Deferred tax asset.......................................... 9,742 2,518
Valuation allowance......................................... (203) (203)
------ ------
Net deferred tax asset...................................... $9,539 $2,315
====== ======
During the year ended December 31, 1999, the Company decreased the valuation
allowance by $1.9 million. Of this amount, $1.1 million was decreased due to the
utilization of net operating loss carryforwards during 1999. The remaining
$800,000 decrease resulted from a change in federal tax law that will permit the
utilization of Sentry's pre-acquisition net operating losses by the Company.
While such losses will be subject to an annual limitation, the Company believes
that it is more likely than not that such losses will be utilized in full during
the carryforward period.
At December 31, 2000, the Company has net operating loss carryforwards for
federal income tax purposes of $1.2 million expiring in 2001 through 2015. In
addition, the Company has foreign net operating loss carryforwards of $388,000
expiring in 2007.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The exercise of non-qualified stock options and the disqualifying
dispositions of incentive stock options under the Company's stock option plans
gives rise to compensation which is includable in the taxable income of the
recipients and deductible by the Company for federal and state income tax
purposes. The tax benefit recognized from the utilization of such deductions
increased paid-in capital by $1.4 million, $563,000, and $1.0 million during the
years ended December 31, 2000, 1999, and 1998, respectively.
12. STOCKHOLDERS' EQUITY
COMMON STOCK REPURCHASES
In April 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, and in May 1999 expanded the repurchase program by
an additional 1.2 million shares. During 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.
In addition, the Company repurchased and retired other shares in 2000 and 1999
in connection with a settlement agreement with a minority stockholder. Such
settlement agreement was assumed pursuant to the Sentry acquisition in 1998.
STOCK OPTION PLANS
The Company's 1995 Non-Employee Director Stock Option Plan, Amended and
Restated 1995 Stock Plan, 1993 Stock Option and Incentive Plan, Amended and
Restated 1989 Stock Option Plan, and Amended and Restated 1996 Equity
Compensation Plan of The Sentry Group, Inc. (the "Plans") provide for grants to
employees, directors, and consultants of incentive stock options ("ISOs") and
non-qualified stock options ("NQSOs"), for the purchase of up to 225,000,
4,500,000, 2,400,000, 5,400,000, and 359,500 shares of the Company's common
stock, respectively. All options granted under the plans are at an exercise
price of not less than fair market value. The Compensation Committee of the
Board of Directors determined the date(s) at which options vest and become
exercisable. Upon adoption of the 1995 Stock Plan, the 1993 Stock Option and
Incentive Plan and the 1989 Stock Option Plan were terminated, except as to
outstanding stock options.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
Stock option activity under the Plans from January 1, 1998 to December 31,
2000 was as follows:
WEIGHTED-AVERAGE
OPTIONS OPTION PRICE RANGE EXERCISE PRICE
--------- --------------------- ----------------
Outstanding January 1, 1998....................... 2,167,717 $ .10--$22.17 $ 8.79
Granted........................................... 1,332,999 15.58-- 27.44 19.11
Exercised......................................... (327,817) .10-- 17.67 4.99
Canceled.......................................... (232,626) 3.17-- 24.13 17.07
---------
Outstanding December 31, 1998..................... 2,940,273 .10-- 27.44 13.23
Granted........................................... 1,304,350 8.25-- 25.25 11.37
Exercised......................................... (487,262) .10-- 21.79 3.16
Canceled.......................................... (340,979) 8.25-- 25.25 15.80
---------
Outstanding December 31, 1999..................... 3,416,382 .25-- 27.44 13.71
Granted........................................... 1,755,894 5.29-- 27.50 16.07
Exercised......................................... (375,517) 0.42-- 25.25 11.09
Canceled.......................................... (494,890) 8.25-- 25.25 16.57
---------
Outstanding December 31, 2000..................... 4,301,869 .25-- 27.50 14.57
=========
Exercisable:
December 31, 2000................................. 1,500,260 $14.31
=========
December 31, 1999................................. 1,145,481 $12.84
=========
December 31, 1998................................. 1,123,502 $ 6.94
=========
At December 31, 2000, 650,568 shares were issuable upon the exercise of
outstanding NQSOs. All other stock options outstanding were ISOs.
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AS OF 12/31/00 LIFE PRICE AS OF 12/31/00 PRICE
--------------------- -------------- --------- -------- -------------- --------
$ 0.25--$ 8.25 1,377,305 7.77 $ 6.45 267,669 $ 4.54
9.19-- 14.38 646,947 7.07 11.62 319,946 12.09
14.50-- 15.83 730,287 6.83 15.22 425,010 15.16
15.83-- 23.75 924,263 7.66 21.30 398,650 19.42
23.88-- 27.50 623,067 8.86 24.83 88,985 24.79
--------- ---------
$ 0.25--$27.50 4,301,869 7.64 $14.57 1,500,260 $14.31
========= =========
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
The weighted average remaining contractual life of options outstanding at
December 31, 2000, 1999, and 1998 was 7.64, 7.24, and 7.29 years, respectively.
The estimated fair value of options granted during 2000, 1999, and 1998 was
$10.26, $6.81, and $10.55 per share, respectively. The Company applies
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock option and purchase plans. Had compensation cost for
the Company's stock option plans and stock purchase plan been determined based
on fair value at the option grant dates for awards in accordance with the
provisions of SFAS 123, the Company's net income (loss) and earnings (loss) per
share for the years ended December 31, 2000, 1999, and 1998 would have been
reflective of the pro forma amounts indicated below:
2000 1999 1998
-------- -------- --------
Net (loss) income:
As reported............................................... $(10,476) $9,230 $8,785
Pro forma................................................. (16,163) 4,845 5,460
Net (loss) income per diluted common share:
As reported............................................... $ (0.97) $ .80 $ .70
Pro forma................................................. (1.50) .42 .43
Net (loss) income per basic common share:
As reported............................................... $ (0.97) $ .86 $ .78
Pro forma................................................. (1.50) .45 .48
The fair value of options granted under the Company's fixed stock option
plans during 2000, 1999, and 1998 was estimated on the dates of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used: dividend yield of zero, expected volatility of approximately
73%-99%, risk-free interest rate of approximately 4.9%-5.3%, and expected lives
of option grants of approximately 1.6-5.4 years. Pro forma compensation cost
related to shares purchased under the Amended and Restated 1995 Employee Stock
Purchase Plan is measured based on the discount from market value. The effects
of applying SFAS 123 in this pro forma disclosure are not indicative of future
pro forma effects.
STOCK PURCHASE PLAN
The Company has in place the Amended and Restated 1995 Employee Stock
Purchase Plan (the "1995 Purchase Plan") which was adopted by the Board of
Directors and approved by the Company's stockholders on October 2, 1995. The
1995 Purchase Plan provides for the issuance of a maximum of 375,000 shares of
common stock to employees at prices equal to 85% of the lesser of the market
price of the Company's common stock on the first or last day of the semi-annual
plan period. During the years ended December 31, 2000 and 1999, the Company
issued 101,271 and 57,131 shares, respectively, under the 1995 Purchase Plan.
EARNINGS PER SHARE
For the year ended December 31, 2000, for the purpose of calculating
earnings per share--basic and diluted, the weighted average number of common
shares outstanding was 10,763,454. Diluted earnings per share for the year ended
December 31, 2000 excludes 1,061,380 common stock equivalents (options and
warrants) because they are anti-dilutive. For the year ended December 31, 1999,
for the purpose of calculating earnings per share--basic, the weighted average
number of common shares outstanding was 10,719,094; and for the purpose of
calculating earnings per share--diluted, the
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
weighted average number of common shares outstanding, including dilutive
securities, was 11,500,692, which includes 781,598 shares representing the
dilutive effect of outstanding options. For the year ended December 31, 1998,
for the purpose of calculating earnings per share--basic, the weighted average
number of common shares outstanding was 11,326,228; and for the purpose of
calculating earnings per share--diluted, the weighted average number of common
shares outstanding, including dilutive securities, was 12,596,214, which
includes 1,269,986 shares representing the dilutive effect of outstanding
options
LONG TERM INCENTIVE PLAN
In July 1998 the Company adopted the META Group, Inc./JMI Long Term
Incentive Compensation Plan (the "Long Term Plan"). The Long Term Plan provides
for the issuance of a maximum of 1,000 units to key officers of the Company. The
total number of units to be granted, selection of key officers for participation
in the Long Term Plan, the number of units to be granted to each participant,
the vesting period, and the determination of the value of each participant's
units are generally determined by the Compensation Committee. As of
December 31, 2000, a total of 588 units were outstanding with key officers of
the Company and 412 units were available for future grants. No compensation
expense was recognized by the Company pursuant to the Long Term Plan during the
years ended December 31, 2000, 1999, and 1998.
13. EMPLOYEE 401(K) SAVINGS PLAN
The Company has a tax-deferred employee 401(k) savings plan covering
substantially all employees. Contributions by the Company are made at the
Company's discretion. No contributions have been made by the Company under this
plan. On December 9, 1999, the Board of Directors authorized the merger of
Sentry's 401(k) profit sharing plan (the "Sentry Plan") into the Company's
existing plan. The merger was effective as of January 1, 2000. Immediately prior
to the effective date of the merger, all participants in the Sentry Plan became
100% vested in their account balance under the Sentry Plan.
14. RELATED PARTY TRANSACTIONS
In July 1998 the Board of Directors approved the META Group, Inc./JMI Long
Term Incentive Compensation Plan (the "Long Term Plan") with a significant
retention feature for key management employees. The Company subscribed for up to
$4.0 million in limited partnership interests in the JMI Equity Side Fund, L.P.
(the "JMI Fund"), a venture capital fund managed by JMI Associates. The JMI Fund
will co-invest along with other funds affiliated with JMI Associates. The
Company has agreed to use the realized returns, if any, on the Company's
investment in the JMI Fund to fund payouts under the Plan to key management
employees. No compensation expense was recognized by the Company pursuant to the
Long Term Plan during the years ended December 31, 2000, 1999, and 1998.
Contemporaneously with the Company's subscription to the JMI Fund, JMI Partners,
L.P., an affiliate of the JMI Fund, became a full-service client of the Company.
In 2000, 1999, and 1998, the Company received $83,000, $125,000, and $125,000
from JMI Partners, L.P. in consideration of services and consulting. A director
of the Company is a general partner of JMI Partners, L.P., the general partner
of JMI Equity Fund, L.P., and an affiliate of JMI Associates. The director does
not have a direct material interest in the JMI Fund and does not sit on the
Compensation or Audit Committees of the Board of Directors. As of December 31,
2000 and 1999, the Company had invested $2.96 million and
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
$2.15 million, respectively, in the JMI Fund which is included in other assets
on the consolidated balance sheets.
In October 1996, the Company entered into an agreement (the "Original
Agreement") with Rubin Systems, Inc. ("RSI"), a provider of IT and software
engineering measurement consulting. Under the Original Agreement, RSI provided,
on an exclusive basis, measurement research and analysis for use in the
Company's PEMS service. In June 1998, the Company and RSI entered into an
addendum to the Original Agreement whereby the Company distributed for RSI
certain published research products, primarily the WORLDWIDE BENCHMARK REPORT (a
publication presenting facts and trend-line data concerning IT performance and
productivity, budgets and spending, emerging technologies, and business
requirements compiled from a worldwide sample of IT organizations). In
October 2000, the Company completed the acquisition of substantially all the
assets of RSI for an initial payment of $750,000 in cash, $375,000 in common
stock (36,874 shares), and the assumption of certain liabilities. Pursuant to
the terms of the asset purchase agreement, the Company is still obligated to pay
a royalty to Dr. Howard Rubin (sole owner of RSI and employee-director of the
Company) on certain products and services sold by the Company. The Company
recognized $4.3 million, $3.4 million, and $1.8 million in revenues from the
sale of RSI derivative products during the years ended December 31, 2000, 1999,
and 1998 respectively. In exchange for the content provided by Dr. Howard Rubin
and RSI, the Company paid $1.0 million, $825,500, and $470,700 in royalties to
RSI during the years ended December 31, 2000, 1999, and 1998 respectively.
In March 1995, the Company entered into an exclusive strategic alliance
agreement with First Albany Corporation ("First Albany"), a financial services
firm. The agreement provides for the distribution of the Company's written
research and analysis, in its original form or as customized and expanded by
First Albany, to First Albany's financial services customers, which include many
institutional investors who are large IT users. The agreement restricts the
Company from marketing its services to any broker dealer or sell-side firm
offering services similar to those offered by First Albany. The Company is
permitted to market and sell Advisory Services directly to First Albany
customers. This agreement is annually renewable by First Albany, subject to
attainment of specified minimum revenue targets. The Company recognized
$1,035,000, $875,000, and $750,000 in revenues from this arrangement during the
years ended December 31, 2000, 1999, and 1998, respectively. First Albany owns
134,500 shares of the Company's common stock as of December 31, 2000. A director
of the Company is also Chairman and Co-Chief Executive Officer of First Albany.
In November 1996, the Company acquired all the assets of DeBoever
Architectures, Inc., an IT architecture planning and implementation advisory
services firm wholly owned and managed by Larry DeBoever. The business of
DeBoever Architectures, Inc. was merged into the Company's portfolio of Advisory
Services. In connection with the acquisition, in November 1996 the Company
loaned $500,000 to Mr. DeBoever pursuant to a Promissory Note and Pledge and
Security Agreement (the "Promissory Note"). Under the terms of the Promissory
Note, as amended, the principal balance of $500,000, plus 9% interest per annum,
will be extinguished over a three-year period ending December 31, 2001, provided
the Company's Enterprise Architecture Strategies service meets certain financial
performance criteria through 2001. During 2000, the Company recognized $426,000
in expense related to the forgiveness of the Promissory Note. As of
December 31, 2000, the remaining balance of the Promissory Note plus accrued
interest was approximately $213,000.
In July 1999 and amended in January 2000, the Company entered into an
outsourcing and sales channels agreement with META Secur e-Com Solutions, Inc.
("META SeS"), a full-service provider of
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
networking and e-business security solutions and services. Under the terms of
the agreement, the Company sells META SeS's products and services and acts as a
general contractor and counterparty to certain contracts and agreements with
third-party clients for the provision of META SeS's products and services, and
META SeS acts as subcontractor and provides such products and services. The
agreement is renewable annually upon the consent of both parties. During the
years ended December 31, 2000 and 1999, the Company recognized $3.6 million and
$1.5 million in revenues, respectively, from this arrangement and paid META SeS
$3.3 million and $1.3 million in royalties during the years ended December 31,
2000 and 1999, respectively.
15. SEGMENT REPORTING
The Company's chief operating decision-making group is the Executive
Committee, which comprises the President and the executive officers of the
Company. The Company's operating segments are managed separately, because each
operating segment represents a strategic business unit that offers distinct
products/services. The Company's operating segments consist of Advisory
Services, Strategic Consulting, and Published Research Products. Advisory
Services provide comprehensive coverage of virtually all relevant IT- and
business-related issues faced by its clients through client/analyst interaction
and published conclusions and recommendations to each client's specific IT
requirements. Strategic Consulting provides custom consulting services tailored
to meet individual client requirements. Published Research Products offer
various topic-specific reports designed to serve both as complements to the
Company's core services and as standalone deliverables that meet specific
assessment requirements.
The accounting policies of the operating segments are the same as those
described in Note 3 except that the disaggregated financial results for the
Company's operating segments have been prepared using a management approach,
which is consistent with the basis and manner in which the Company's management
internally disaggregates financial information for the purposes of assistance in
making internal operating decisions. The Company evaluates performance based on
standalone segment operating income, defined by the Company as the segment
revenues less segment cost of sales and corporate general and administrative
allocations. Management does not allocate corporate assets, non-operating income
(interest income), or income taxes when measuring segment results.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT REPORTING (CONTINUED)
Information by operating segment is set forth below (in thousands):
PUBLISHED
ADVISORY STRATEGIC RESEARCH CONSOLIDATED
SERVICES CONSULTING PRODUCTS TOTAL
-------- ---------- --------- ------------
YEAR ENDED DECEMBER 31, 2000
Revenues............................................ $84,556 $27,707 $7,009 $119,272
Operating income (loss)............................. (6,855) (870) (2,278) (10,003)
Assets.............................................. -- -- -- 152,463
YEAR ENDED DECEMBER 31, 1999
Revenues............................................ $69,998 $22,370 $7,315 $ 99,683
Operating income.................................... 9,003 4,745 (435) 13,313
Assets.............................................. -- -- -- 113,450
YEAR ENDED DECEMBER 31, 1998
Revenues............................................ $58,586 $ 9,404 $4,795 $ 72,785
Operating income.................................... 10,320 1,881 137 12,338
Assets.............................................. -- -- -- 112,187
INTERNATIONAL OPERATIONS:
The Company sells its products internationally through its wholly owned
subsidiary in Canada and a network of independent sales representative
organizations located primarily in Europe. For each of the three years in the
period ended December 31, 2000, net revenues from international sales
representative organizations were $13,228, $11,664, and $8,990, respectively.
Revenues for the year ended December 31, 2000 relating to the Canadian
subsidiary from the date of acquisition were $662,000.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain key interim financial information for
the years ended December 31, 2000 and 1999. The 2000 quarterly information has
been restated to show the impact of
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
the adoption of SAB 101. The pro-forma effect of adoption of SAB 101 on the
fourth quarter of 1999 has also been presented.
FIRST FIRST SECOND SECOND
QUARTER AS QUARTER AS QUARTER AS QUARTER AS
REPORTED RESTATED REPORTED RESTATED
---------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
2000:
Total revenues:................................. $27,487 $27,145 $32,068 $32,108
Gross profit.................................... 13,519 13,177 16,219 16,259
Income (loss) before cumulative effect of change
in accounting................................. 1,784 1,582 2,791 2,816
Cumulative effect of change in accounting....... (2,438)
Net income (loss)............................... $ 1,784 $ (856) $ 2,791 $ 2,816
Income (loss) before cumulative effect of change
in accounting per diluted common share........ $ .15 $ .13 $ .24 $ .24
Net income (loss) per diluted common share...... $ .15 $ (.08) $ .24 $ .24
======= ======= ======= =======
Income (loss) before cumulative effect of change
in accounting per basic common share.......... $ .17 $ .15 $ .26 $ .26
Net income (loss) per basic common share........ $ .17 $ (.08) $ .26 $ .26
======= ======= ======= =======
THIRD THIRD
QUARTER AS QUARTER AS FOURTH
REPORTED RESTATED QUARTER
---------- ---------- ---------
Total revenues:............................................ $28,730 $29,046 $30,973
Gross profit............................................... 11,162 11,478 8,639
Income (loss) before cumulative effect of change in
accounting............................................... (2,653) (2,468) (9,968)
Cumulative effect of change in accounting
Net income (loss).......................................... $(2,653) $(2,468) $(9,968)
Income (loss) before cumulative effect of change in
accounting per diluted common share...................... $ (.25) $ (.23) $ (.91)
Net income (loss) per diluted common share................. $ (.25) $ (.23) $ (.91)
======= ======= =======
Income (loss) before cumulative effect of change in
accounting per basic common share........................ $ (.25) $ (.23) $ (.91)
Net income (loss) per basic common share................... $ (.25) $ (.23) $ (.91)
======= ======= =======
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(1)
--------- --------- --------- ----------
1999:
Total revenues:................................. $20,105 $24,111 $25,479 $29,988
Gross profit.................................... 8,819 11,228 12,197 15,215
Net income...................................... $ 1,309 $ 2,048 $ 2,454 $ 3,419
======= ======= ======= =======
Net income per diluted common share............. $ .10 $ .18 $ .23 $ .31
======= ======= ======= =======
Net income per basic common share............... $ .11 $ .19 $ .24 $ .34
======= ======= ======= =======
- ------------------------
(1) Had the Company adopted the provisions of SAB 101 in the fourth quarter of
1999, net income and diluted earnings per share would have been $2,512 and
$0.23 per share, respectively.
The total of quarterly earnings per share may not equal the annual amount,
because earnings per share is calculated independently for each quarter.
17. SUBSEQUENT EVENTS
On January 23, 2001, the Company acquired two of its Asia Pacific
distributors, one based in Sydney, Australia, and the other headquartered in
Singapore. With these acquisitions, the distributors become wholly owned
subsidiaries of META Group, Inc. The total purchase price amounted to
approximately $2.7 million, consisting of cash in the amount of $1.7 million,
the forgiveness of accounts receivable from the distributor of $470,000, and the
assumption of certain liabilities. The acquisition will be accounted for under
the purchase method.
On March 5, 2001, the Company received cash proceeds from the sale of its
investment in Intermedia Group amounting to $2.9 million, which resulted in a
pre-tax gain of approximately $2.6 million.
65
SCHEDULE I
META GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
-----------------------------
CHARGED CHARGED
BALANCE AT (CREDITED) TO (CREDITED) TO BALANCE
BEGINNING OF COSTS AND OTHER AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------ ------------- ------------- ---------- ---------
Year Ended December 31, 2000
Allowance for doubtful accounts..... $ 673 $ 4,723 $(1,365) $4,031
Valuation allowance for deferred tax
asset............................... $ 203 $ 203
Year ended December 31, 1999:.........
Allowance for doubtful accounts $1,088 $ (415) $ 673
Valuation allowance for deferred tax
asset............................... $2,142 $(1,939)(a) $ 203
Year ended December 31, 1998:.........
Allowance for doubtful accounts $ 828 $ 260 $1,088
Valuation allowance for deferred tax
asset............................... $1,142 $ 1,000 (b) $2,142
- ------------------------
(a) Reflects the utilization in 1999 and the projected utilization of the
Company's net operating loss carryforwards.
(b) Reflects the additional allowance related to the deferred tax assets
acquired as part of the acquisition of The Sentry Group, Inc.
66
META GROUP, INC.
INDEX TO EXHIBITS FILED WITH FORM 10-K
YEAR ENDED DECEMBER 31, 2000
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------
2.1(1)(2) Agreement and Plan of Merger by and among META Group, Inc.,
MG Acquisition Corporation, and The Sentry Group, Inc. dated
as of September 23, 1998 ("Agreement and Plan of Merger")
2.2(1) Amendment No. 1 to Agreement and Plan of Merger dated as of
October 20, 1998
2.3(11) Amendment No. 2 to Agreement and Plan of Merger dated as of
May 12, 2000
3.1(3) Amended and Restated Certificate of Incorporation of the
Company
3.2(3) Amended and Restated Bylaws of the Company
4.1(3) Specimen Certificate Representing the Common Stock
4.2(1) Registration Rights Agreement dated as of October 20, 1998
by and among META Group, Inc. and the stockholders of The
Sentry Group, Inc. listed on the signature pages thereto
4.3(1) Escrow Agreement dated as of October 20, 1998 among META
Group, Inc., Peter A. Naber, and State Street Bank and Trust
Company
4.4(6) Form of Common Stock Purchase Warrant (Immediate Vesting)
issued to stockholders of The Sentry Group, Inc. on October
20, 1998
4.5(6) Form of Common Stock Purchase Warrant (Contingent Vesting)
issued to stockholders of The Sentry Group, Inc. on October
20, 1998
4.6(2)(11) Credit Agreement between META Group, Inc. and The Bank of
New York dated September 18, 2000 ("Credit Agreement")
4.7(11) 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
4.8(11) Security Agreement Between META Group, Inc. and The Bank of
New York dated September 18, 2000
4.9(11) Subsidiary Guarantee among MG (Bermuda) Ltd., The Sentry
Group, Inc., META Group, Inc., and The Bank of New York
dated September 18, 2000
4.10(12) Amendment No. 1 and Waiver No. 1 to the Credit Agreement
dated as of December 11, 2000
4.11+ Amendment No. 2 and Waiver No. 2 to the Credit Agreement
dated as of March 30, 2001
10.1(7)* Amended and Restated 1995 Stock Plan
10.2(4)* Form of Incentive Stock Option Agreement under the Amended
and Restated 1995 Stock Plan
67
META GROUP, INC.
INDEX TO EXHIBITS FILED WITH FORM 10-K
YEAR ENDED DECEMBER 31, 2000
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------
10.3(4)* Form of Non-Qualified Stock Option Agreement under the
Amended and Restated 1995 Stock Plan
10.4(5)* 1995 Employee Stock Purchase Plan Enrollment Authorization
Form
10.5(3)* 1995 Non-Employee Director Stock Option Plan
10.6(4)* Form of Non-Qualified Stock Option Agreement under the 1995
Non-Employee Director Stock Option Plan of the Registrant
10.7(2)(3)* Agreement between First Albany Corporation and the Company
dated March 30, 1995
10.8(3)* Restated and Amended 1989 Stock Option Plan, as amended
10.9(3)* Form of Incentive Stock Option Agreement under 1989 Stock
Option Incentive Plan
10.10(3)* Form of Certificate and Agreement under Restated and Amended
1989 Stock Option Plan
10.11(3)* 1993 Stock Option and Incentive Plan, as amended
10.12(3)* Form of Certificate and Agreement under 1993 Stock Option
and Incentive Plan
10.13(3)* Form of Warrant under the Restated and Amended 1989 Stock
Option Plan and 1993 Stock Option and Incentive Plan
10.14(3) Form of International Sales Representative Agreement
10.15(3) Office Lease between International Business Machines
Corporation and the Company dated August 1, 1994
10.16(6)* Form of META Group, Inc./JMI Long Term Incentive
Compensation Plan
10.17(7)* Amended and Restated 1996 Equity Compensation Plan of The
Sentry Group, Inc.
10.18(8)* Employment agreement between META Group, Inc. and Larry R.
DeBoever dated as of October 15, 1996
10.19(8)* Promissory Note dated as of November 1, 1996 issued by Larry
R. DeBoever to META Group, Inc. in an aggregate principal
amount of $500,000
10.20(8)* Amended and Restated 1995 Employee Stock Purchase Plan
10.21(2)(9)* Letter Agreement dated as of February 2, 2000 between META
Group, Inc. and Larry R. DeBoever
10.22(10) Letter Agreement dated as of July 28, 2000 between The Bank
of New York and META Group, Inc.
10.23(10) Master Promissory Note of META Group, Inc. in favor of The
Bank of New York dated as of July 28, 2000 in the principal
amount of $12 million
10.24*+ Asset Purchase Agreement among Rubin Systems Inc., Howard
Rubin, and META Group, Inc. dated as of October 27, 2000
68
META GROUP, INC.
INDEX TO EXHIBITS FILED WITH FORM 10-K
YEAR ENDED DECEMBER 31, 2000
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------
10.25+* Employment and Management Agreement between META Group, Inc.
and Howard Rubin dated as of October 27, 2000
10.26*+ Office Lease between Harbor Vista Associates Limited
Partnership and the Company dated March 31, 1999
21.1+ List of Subsidiaries
23.1+ Consent of Deloitte & Touche LLP
24.1+ Power of Attorney (see page 40)
- ------------------------
(1) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K dated October 20, 1998 and filed on November 3, 1998
(File No. 0-27280).
(2) Confidential treatment obtained as to certain portions.
(3) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-97848).
(4) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 as filed on March 1, 1996 (File
No. 333-1854).
(5) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on form S-8 as filed on December 19, 1995 (File
No. 33-80539).
(6) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1998 and
filed on November 17, 1998 (File No. 0-27280).
(7) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 as filed on December 3, 1998 (File
No. 333-68323).
(8) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1999 and filed
on May 14, 1999 (File No. 0-27280)
(9) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 and filed on
March 30, 2000 (File No. 0-27280)
(10) 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)
(11) 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).
(12) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K dated December 11, 2000 and filed on December 13, 2000
(File No. 0-27280).
* Indicates a management contract or any compensatory plan, contract or
arrangement.
+ Filed herewith.
69