WASHINGTON, D.C. 20549

 

FORM 10-Q

 

ý                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly period ended September 30, 2004

 

OR

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the Transition period from               to               

 

Commission File Number 0-27280

 

META Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

208 Harbor Drive, Stamford, Connecticut 06912-0061

(Address of principal executive offices, including Zip Code)

 

(203) 973-6700

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

ý

No

o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

o

No

ý

 

The number of shares of the registrant’s common stock, $.01 par value per share, outstanding as of September 30, 2004 was 13,903,508.

 

 

META Group, Inc.

 

INDEX

 

Part I	FINANCIAL INFORMATION
Item 1.	Condensed Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets September 30, 2004 and December 31, 2003
	Condensed Consolidated Statements of Operations Three and nine months ended September 30, 2004 and 2003
	Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2004 and 2003
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II	OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K
Signature

 

2

 

PART I - FINANCIAL INFORMATION

Item 1.           Financial Statements

 

META Group, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for share and per share data)

(Unaudited)

 

		September 30, 2004			December 31, 2003
Assets
Current assets:
Cash and cash equivalents		$	7,565		$	8,814
Restricted cash		6,000			—
Accounts receivable, net		30,314			38,693
Deferred commissions		1,751			1,550
Other current assets		1,441			2,591
Total current assets		47,071			51,648
Restricted cash		—			6,000
Non-current portion of accounts receivable		—			184
Property and equipment, net		4,990			5,392
Goodwill		14,757			13,016
Other intangibles, net		8,429			8,982
Investments and advances		834			1,146
Other assets		686			344
Total assets		$	76,767		$	86,712
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	1,317		$	2,041
Deferred revenues		41,053			48,891
Borrowings under revolving credit agreement		1,300			—
Notes payable		288			294
Accrued compensation		4,974			5,495
Accrued and other current liabilities		14,286			16,618
Total current liabilities		63,218			73,339
Long-term portion of notes payable		218			389
Non-current deferred revenues		101			549
Other non-current liabilities		1,390			2,039
Total non-current liabilities		1,709			2,977
Total liabilities		64,927			76,316
Minority interest		—			322
Commitments and contingencies (see notes)
Stockholders’ equity:
Preferred stock, $.01 par value per-share, authorized 2,000,000 shares; none issued		—			—
Common stock, $.01 par value per-share, authorized 45,000,000 shares, issued 14,550,524 and 14,303,655, respectively		146			143
Paid-in capital		62,134			61,013
Accumulated deficit		(50,245		)	(50,197		)
Accumulated other comprehensive income (loss)		125			(565		)
Treasury stock, at cost, 647,016 shares		(320		)	(320		)
Total stockholders’ equity		11,840			10,074
Total liabilities and stockholders’ equity		$	76,767		$	86,712

 

See notes to condensed consolidated financial statements.

 

3

 

META Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share data)

(Unaudited)

 

		For the three months ended September 30,						For the nine months ended September 30,
		2004			2003			2004			2003
Revenues:
Advisory services		$	21,516		$	18,741		$	67,281		$	56,404
Strategic consulting		10,768			8,802			30,697			24,959
Published research products		1,429			1,348			4,309			4,538
Reimbursable expenses		682			503			1,890			1,723
Total revenues		34,395			29,394			104,177			87,624
Operating expenses:
Cost of services and fulfillment		16,035			16,334			51,701			46,873
Reimbursable expenses		682			503			1,890			1,723
Selling and marketing		9,923			8,201			31,456			24,493
General and administrative		5,220			5,174			15,285			14,659
Depreciation and amortization		1,197			1,091			3,538			3,705
Loss on sale of subsidiary		416			—			416			—
Total operating expenses		33,473			31,303			104,286			91,453
Operating income (loss)		922			(1,909		)	(109		)	(3,829		)
Other income, net		60			23			128			723
Income (loss) before provision for income taxes and minority interest		982			(1,886		)	19			(3,106		)
Provision (benefit) for income taxes		(124		)	16			(10		)	148
Minority interest in income of consolidated subsidiary		66			28			77			82
Net income (loss)		$	1,040		$	(1,930	)	$	(48	)	$	(3,336	)
Net income (loss) per basic common share		$	0.07		$	(0.14	)	$	0.00		$	(0.25	)
Net income (loss) per fully diluted common share		$	0.07		$	(0.14	)	$	0.00		$	(0.25	)
Weighted average number of basic common shares outstanding		13,887			13,334			13,796			13,283
Weighted average number of diluted common shares outstanding		14,829			13,334			13,796			13,283

 

See notes to condensed consolidated financial statements.

 

4

 

META Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

		For the nine months ended September 30,
		2004			2003
Operating activities:
Net loss		$	(48	)	$	(3,336	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		3,538			3,705
Provision for doubtful accounts		—			(600		)
Gain on sale of investments		—			(615		)
Minority interest in income of consolidated subsidiary		77			82
Other non-cash charges		—			199
Loss on sale of subsidiary		416			—
Stock compensation expense		456			—
Changes in assets and liabilities:
Accounts receivable		8,990			11,946
Deferred commissions		(201		)	(315		)
Other current assets		1,509			1,665
Other assets		(208		)	32
Accounts payable		(1,031		)	(1,409		)
Accrued liabilities		(5,340		)	2,936
Deferred revenues		(8,906		)	(6,664		)
Net cash provided by (used in) operating activities		(748		)	7,626
Investing activities:
Capital expenditures		(560		)	(673		)
Payments for acquisitions, net of cash acquired		(781		)	(5,399		)
Proceeds from sale of investments		—			888
Disposition of subsidiary		(733		)	—
Net cash used in investing activities		(2,074		)	(5,184		)
Financing activities:
Proceeds from exercise of stock options		493			224
Proceeds from employee stock purchase plan		175			62
Proceeds from bank borrowings		5,500			—
Repayment of bank borrowings		(4,200		)	(1,049		)
Repayment of term loan		—			(5,111		)
Repayment of notes payable		(177		)	(369		)
Payment of capital lease obligations		(235		)	—
Increase in restricted cash		—			(6,000		)
Net cash provided by (used in) financing activities		1,556			(12,243		)
Effect of exchange rate changes on cash		17			(71		)
Net decrease in cash and cash equivalents		(1,249		)	(9,872		)
Cash and cash equivalents, beginning of period		8,814			21,448
Cash and cash equivalents, end of period		$	7,565		$	11,576

 

See notes to condensed consolidated financial statements.

 

5

 

META Group, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 - Interim Financial Statements

 

The accompanying unaudited condensed consolidated financial statements include the accounts of META Group, Inc. (the “Company”) and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements and footnote disclosures should be read in conjunction with the December 31, 2003 audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2003, as amended.

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates.

 

Certain 2003 amounts have been reclassified to conform to the current periods’ presentation.

 

Note 2 – Acquisitions

 

Acquisition of META Group Middle East

 

In April 2004, the Company acquired 100% of META Group Middle East for $950,000 in cash.  The Company acquired this distributor in order to have full ownership control in the Middle East (other than Israel) to better serve its customers in the region. The purchase price has been allocated to the assets acquired and the liabilities assumed, based on estimated fair values at the date of acquisition. The preliminary allocation resulted in goodwill of $1.1 million recorded in the Advisory Services segment and $0.5 million recorded in the Consulting segment and $0.4 million related to the customer list of the seller, which is being amortized on the straight line method over 7 years.

 

2003 Acquisitions

 

During 2003, the Company completed three acquisitions of former distributors in Italy, the United Kingdom, and Northern Europe. The Company acquired these distributors in order to have full ownership control of major operations in Europe, in order to better serve its customers in the region.  A description of these transactions follows:

 

Acquisition of META Group Italy

 

In June 2003, the Company acquired 100% of META Group Italia S.R.L. (“META Group Italy”) for $280,000 in cash. The purchase price has been allocated to the assets acquired and the liabilities assumed, based on estimated fair values at the date of acquisition. The allocation resulted in goodwill of $203,000

 

6

 

recorded in the Advisory Services segment, $60,000 recorded in the Consulting segment and $300,000 related to the customer list of the seller, which is being amortized on the straight line method over 7 years.

 

Acquisition of META Group UK

 

In August 2003, the Company acquired 100% of META Group UK Holdings Limited (“META Group UK”) for $1.6 million in cash. The purchase price has been allocated to the assets acquired and the liabilities assumed, based on estimated fair values at the date of acquisition. The allocation resulted in goodwill of $108,000 recorded in the Advisory Services segment, $61,000 recorded in the Consulting segment and $1.3 million related to the customer list of the seller, which is being amortized on the straight line method over 7 years.

 

Acquisition of META Group Northern Europe

 

In September 2003, the Company acquired 100% of META Group Norway A/S, META Group Sweden AB, META Group Finland OY, META Group Denmark A/S, META Group Belgium SA and META Group Nederland BV (collectively “Northern Europe”). The purchase price consisted of $3.6 million in cash and 175,000 shares of the Company’s common stock (valued at $700,000), as well as forgiveness of $2.6 million in promissory notes and $1.5 million in trade receivables owed to the Company by the Northern European entities. The purchase price has been allocated to the assets acquired and the liabilities assumed, based on estimated fair values at the date of acquisition.  The preliminary allocation resulted in goodwill of approximately $ 3.7 million recorded in the Advisory Services segment, $352,000 recorded in the Consulting segment and $3.9 million related to the customer lists of the sellers, which are being amortized on the straight line method over 7 years.

 

Note 3– Goodwill and Other Intangible Assets

 

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to impairment tests on an annual basis, or more frequently if certain indicators arise. Other finite lived intangible assets will continue to be amortized over their useful lives.

 

The goodwill impairment test is a two-step process that requires goodwill to be allocated to the reporting units. In the first step, the fair value of the reporting unit is compared to the carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of the reporting unit, goodwill impairment may exist, and the second step of the test is performed. In the second step, the fair value of the goodwill is compared to the carrying value of the goodwill and an impairment loss will be recognized to the extent that the carrying value of the goodwill exceeds the implied fair value of the goodwill.

 

In accordance with SFAS 142, the Company has selected a date by which the annual impairment test will be performed, such date being September 30. The Company performed its annual impairment test in September 2004 which resulted in no goodwill impairment.

7

A summary of the Company’s intangible assets as of September 30, 2004 and December 31, 2003 is as follows (amounts in thousands):

 

		September 30, 2004
		Gross Carrying Amount			Accumulated Amortization			Total
Amortized intangible assets:
Customer lists		$	11,130		$	(3,894	)	$	7,237
Intellectual property		699			(501		)	198
Non-compete agreement		375			(371		)	4
Content databases & other		2,110			(1,120		)	990
Total		$	14,314		$	(5,886	)	$	8,429
Aggregate amortization expense:
Nine months ended September 30, 2004:								$	1,586

 

		December 31, 2003
		Gross Carrying Amount			Accumulated Amortization			Total
Amortized intangible assets:
Customer lists		$	10,124		$	(2,715	)	$	7,408
Intellectual property		648			(334		)	314
Non-compete agreement		375			(298		)	77
Content databases & other		2,085			(902		)	1,183
Total		$	13,232		$	(4,250	)	$	8,982
Aggregate amortization expense:
Twelve months ended December 31, 2003:								$	1,481
Estimated amortization expense:
Remaining three months ending December 31, 2004:		$	560
Year ending December 31, 2005		2,136
Year ending December 31, 2006		1,552
Year ending December 31, 2007		1,439
Year ending December 31, 2008		1,213
Thereafter		1,529
Total		$	8,429

 

The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2004 is as follows (in thousands):

 

		Advisory Services			Strategic Consulting			Total
Balance as of January 1, 2004		$	12,543		$	473		$	13,016
Goodwill acquired		1,079			485			1,564
Translation adjustments		165			12			177
Balance as of September 30, 2004		$	13,787		$	970		$	14,757

 

8

 

Note 4 – Comprehensive Income (Loss)

 

Comprehensive income (loss) for the three and nine months ended September 30, 2004 and 2003 was as follows (in thousands):

 

		Three months ended September 30,						Nine months ended September 30,
		2004			2003			2004			2003
Net income (loss):		$	1,040		$	(1,930	)	$	(48	)	$	(3,336	)
Other comprehensive income (loss), net of tax:
Unrealized loss on investment in equity security		(192		)	—			(368		)	—
Foreign currency translation adjustment		316			(145		)	1,058			13
Comprehensive income (loss)		$	1,164		$	(2,075	)	$	642		$	(3,323	)

 

During the quarter ended March 31, 2004, the shares that the Company owns in Tescom became a marketable security as a result of an initial public offering that Tescom completed.  The carrying value of the Company’s available for sale investment was $717,000 at September 30, 2004, which is net of an unrealized loss of $368,000.  The Company monitors its investment in Tescom on a continuing basis.  For various periods during the three and nine months ended September 30, 2004, Tescom stock traded above the Company’s per share basis in Tescom.  Additionally, there have been no fundamental changes in the operating performance of Tescom to indicate that an other than temporary decline in fair value of its stock has occurred.

 

Note 5 – Segment Reporting

 

In the quarter ended March 31, 2004, the Company completed a reorganization of the management structure overseeing Advisory Services and Published Research Products.  In addition, the Company also completed a re-evaluation of its strategy around content generation and delivery as they relate to Published Research Products.  As a result, the Company has organized itself around two business segments: Advisory Services and Strategic Consulting. The Company’s operating segments are managed separately, because each operating segment represents a strategic business unit that generally offers distinct products / services. Advisory Services provide comprehensive coverage of relevant information technology and business-related issues faced by its clients through client/analyst interaction, published conclusions and recommendations to each client’s specific IT requirements, including various topic-specific reports and standalone deliverables that meet specific assessment requirements. Strategic Consulting provides custom consulting services tailored to meet individual client requirements.

 

9

 

The accounting policies of the operating segments are the same as those described in Note 1 to the Company’s 2003 Annual Report on Form 10-K, as amended, 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. In 2004, the Company also changed how it evaluates performance based on stand-alone segment gross margin, defined by the Company as the segment revenues less segment cost of services and fulfillment excluding selling, marketing, general and administrative expenses.  Those expenses were previously allocated ratably based on each operating segments’ revenues.  In 2004, the Company continued to refine the measurement of segment revenues and, as a result, reclassified $0.4 million and $1.5 million for the three and nine months ended September 30, 2004, respectively, to Strategic Consulting from Advisory Services, and reclassified $0.4 million and $0.8 million for the three and nine months ended September 2003, respectively, to Strategic Consulting from Advisory Services. Management does not allocate corporate assets, non-operating income or income taxes when measuring segment results. The Company evaluates the results of its geographic segments excluding intercompany royalty income and expense.

 

The Company earns revenue from clients in many countries.  In the three and nine months ended September 30, 2004 and 2003, other than the United States and Germany, there was no individual country in which revenues from external clients represent 10% or more of the Company’s consolidated revenues. Additionally, no single client accounted for 10% or more of total revenue in the quarters and nine months ended September 30, 2004 and 2003, and the loss of a single client, in management’s opinion, would not have a material adverse effect on revenues.

 

Information by operating segment is set forth below (in thousands):

 

		Advisory Services			Strategic Consulting			Unallocated			Consolidated Total
Three months ended September 30, 2004
Revenues		$	22,530		$	11,183		$	682		$	34,395
Gross Margin		13,985			3,693			—			17,678
Assets		—			—			76,767			76,767
Three months ended September 30, 2003
Revenues		$	19,697		$	9,194		$	503		$	29,394
Gross Margin		9,940			2,617			—			12,557
Assets		—			—			76,389			76,389
Nine months ended September 30, 2004
Revenues		$	70,063		$	32,224		$	1,890		$	104,177
Gross Margin		41,213			9,373			—			50,586
Assets		—			—			76,767			76,767
Nine months ended September 30, 2003
Revenues		$	60,121		$	25,780		$	1,723		$	87,624
Gross Margin		32,725			6,303			—			39,028
Assets		—			—			$	76,389		$	76,389

 

10

 

The Company sells its products in the United States, and internationally through its subsidiaries in Canada, the Asia Pacific region, Europe and the Middle East. The Company also utilizes a network of independent sales representative organizations located in Poland, Hungary, South Africa, Israel, Japan and Argentina to distribute its products.

 

Information by geographic region is set forth below (in thousands):

 

		Americas				Asia-Pacific			Europe, Middle East Africa			Consolidated Total
Three months ended September 30, 2004
Revenues		$		22,368		$	1,527		$	10,500		$	34,395
Operating income (loss)		1,061				(174		)	35			922
Long – lived assets		6,542				2,040			21,114			29,696
Three months ended September 30, 2003
Revenues		$	22,967			$	1,343		$	5,084		$	29,394
Operating income (loss)		(330			)	(1,116		)	(463		)	(1,909		)
Long – lived assets		8,049				1,908			11,277			21,234
Nine months ended September 30, 2004
Revenues		$	67,461			$	5,754		$	30,962		$	104,177
Operating income (loss)		(2,567			)	190			2,268			(109		)
Long – lived assets		6,542				2,040			21,114			29,696
Nine months ended September 30, 2003
Revenues		$	68,060			$	4,253		$	15,311		$	87,624
Operating income (loss)		(2,408			)	(796		)	(625		)	(3,829		)
Long – lived assets		8,049				1,908			11,277			21,234

 

Note 6 – Bank Debt

 

In March 2003, the Company executed a new $6 million revolving credit agreement (the “Amended Facility”). Under the Amended Facility, interest on any outstanding borrowings will be payable at the rate of LIBOR, as determined by the bank, plus 1.5%, or the higher of the Prime Rate or the Federal Funds Rate plus 0.5%. The Amended Facility is fully collateralized by a $6 million cash deposit reflected as restricted cash as of September 30, 2004 and December 31, 2003. The Amended Facility contains no financial covenants, and matured in November 2004. The Company has executed a five-month extension of its Amended Facility effective as of November 4, 2004, which will extend the maturity date to April 4, 2005. The Company reclassified its restricted cash deposit to current assets in connection with the short term facility extension.  As of September 30, 2004 and December 31, 2003, there was $1,533,000 and $836,000, respectively, used under the Amended Facility in the form of standby letters of credit issued on behalf of one of the Company’s independent sales representative

 

11

 

organizations and as collateral for a portion of the Company’s U.S. premises leases and equipment leases. In addition, there were $1.3 million in borrowings outstanding as of September 30, 2004 and no borrowings outstanding as of December 31, 2003.

 

Note 7 – Stock-Based Compensation

 

The Company has three active stock-based employee compensation plans, which are described more fully in Note 9 to the Company’s 2003 Annual Report on Form 10-K, as amended. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” to stock-based employee compensation (in thousands, except per share data):

 

		Three Months Ended						Nine Months Ended
		September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
Reported net income (loss)		$	1,040		$	(1,930	)	$	(48	)	$	(3,336	)
Add: Stock compensation expense included in net income		456			—			456			—
Deduct: Total stock based employee compensation expense determined under fair value based methods for all awards, net of tax:		(679		)	(557		)	(1,955		)	(1,898		)
Pro forma net income (loss)		$	817		$	(2,487	)	$	(1,547	)	$	(5,234	)
Net income (loss) per share
Reported
Basic		$	0.07		$	(014	)	$	0.00		$	(0.25	)
Diluted		$	0.07		$	(0.14	)	$	0.00		$	(0.25	)
Pro forma
Basic		$	0.06		$	(0.19	)	$	(0.11	)	$	(0.39	)
Diluted		$	0.06		$	(0.19	)	$	(0.11	)	$	(0.39	)

 

Note 8 – Net Income (Loss) Per Share

 

The following table sets forth the computation of net income (loss) per share for the three and nine months ended September 30, 2004 and 2003 (in thousands, except per share data):

 

12

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net income (loss)		$	1,040		$	(1,930	)	$	(48	)	$	(3,336	)
Average number of common shares outstanding during the period		13,887			13,334			13,796			13,283
Add: common share equivalents — options to purchase common shares		942			—			—			—
Total		14,829			13,334			13,796			13,283
Amounts per basic common share
Net income (loss)		$	0.07		$	(0.14	)	$	0.00		$	(0.25	)
Amounts per fully diluted common share
Net income (loss)		$	0.07		$	(0.14	)	$	0.00		$	(0.25	)

 

For the third quarter ended September 30, 2003, options on 1,323,816 shares of common stock were not included in the calculation of weighted average shares for diluted earnings per share because their effects were antidilutive.

 

For the nine months ended September 30, 2004 and 2003, options on 1,403,918 and 1,099,474  shares of common stock, respectively, were not included in the calculation of weighted average shares for diluted earnings per share because their effects were antidilutive.

 

Note 9 – Other Income, Net

 

During the nine months ended September 30, 2003, the Company received final proceeds of $588,000 on the liquidation of its investment in Spikes Cavell and recognized a gain of $315,000. Additionally, the Company sold an investment to a third party and recognized a gain of $350,000. These gains were included in other income, net for the nine months ended September 30, 2003.

 

Note 10 – Commitments and Contingencies

 

Contingencies:

 

Legal:

 

Other than ordinary routine litigation incidental to the Company’s business, the Company is neither a party, nor is any of its property subject to, any pending legal proceedings.

 

Earnout Provision Related to Acquisition of Assets of Rubin Systems, Inc. (“RSI”)

 

The Company’s purchase agreement for the October 2000 acquisition of the assets of RSI included certain earnout provisions. Under the agreement, in the event certain financial targets were met, additional contingent consideration of $2.7 million payable in cash and $1.4 million payable in the Company’s common stock could have been paid through March 2007. In the event the aggregate number of shares issued in satisfaction of contingent consideration exceeded 147,027, the remaining consideration could have been payable in cash. RSI was

 

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wholly owned by Dr. Howard Rubin, an employee of the Company.  No payment was required for the year ended December 31, 2003.

 

In August 2004, the Company and Dr. Rubin entered into an Amended and Restated Employment, Compensation and Release Agreement (the “Restated Agreement”).  The term of the Restated Agreement is through December 31, 2008, but is subject to earlier termination.  The Restated Agreement supersedes the above-referenced earnout provisions, and provides, effective as of January 1, 2004, for the following earnout arrangements:

 

•              Dr. Rubin’s earnout potential for the term of the Restated Agreement is $2,300,000, split into equal $460,000 annual increments for the years 2004 and 2008.  Of the $460,000, Dr. Rubin can earn up to $230,000 per year based on Company performance or other criteria established by the Company’s Compensation Committee, and he can earn up to another $230,000 based on a percentage of the Company’s WWB benchmark, WWB publication and WWB guru consulting revenue (“WWB Revenue”).  The amount earned is a percentage of the WWB Revenue is equal to ten percent, eight percent, seven percent, five percent and four percent in each of fiscal years 2004, 2005, 2006, 2007 and 2008, respectively, capped at $230,000 per year.  No carryover is permitted.

 

•              Dr. Rubin is not eligible for any earnout payments for a given fiscal year if his retainer consulting revenue for the year is less than $1 million.

 

Letters of Credit:

 

See Note 6 for discussion of standby letters of credit.

 

Guarantees:

 

In September 2000 the Company provided a corporate guarantee in the amount of €62,000 (approximately $76,000) guaranteeing lease payments to the landlord of one of the Company’s former independent sales representative organizations. In January 2002, the landlord called the guarantee. The claim is currently being negotiated with the landlord. The Company is currently uncertain as to when this issue will be resolved.

 

Note 11- Restructuring Charges

 

During 2003, the Company recorded restructuring charges totaling $1,642,000. These charges were associated with workforce reductions, which totaled 41 employees.  As of September 30, 2004, $65,000 remains unpaid and is expected to be paid by December 31, 2004.

 

Note 12- Income Taxes

 

In 2004, the Company recorded a benefit for income taxes of $10,000 versus an income tax provision of $148,000 in 2003.  The tax benefit is the result of certain state tax refunds expected to be received, which largely offset state and foreign tax provisions.

 

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Item 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The discussion and analysis below contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to a number of risks and uncertainties. These forward-looking statements are typically denoted in this Quarterly Report on Form 10-Q by words such as anticipate, believe, could, estimate, expect, intend, may, plan, project, should or will and similar words (as well as other words or expressions referencing future events, conditions or circumstances). Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors, including the risk factors set forth below under “Certain Factors That May Affect Future Results.” This discussion should be read in conjunction with the consolidated financial statements and related notes for the periods specified. Further reference should be made to the Company’s other filings with the Securities and Exchange Commission, principally the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as amended, which includes a full discussion of many of the risks we face in our business.

 

Overview

 

META Group, Inc. with its subsidiaries (collectively the “Company”) is a leading provider of information technology (“IT”) research, advisory services, and strategic consulting. The Company’s mission is to help clients be more efficient, effective, and timely in their use of IT to achieve their business goals.

 

In the quarter ended March 31, 2004, the Company completed a reorganization of the management structure overseeing Advisory Services and Published Research Products.  In addition, the Company also completed a re-evaluation of its strategy around content generation and delivery as it relates to Published Research Products.  As a result, the Company has organized itself around two business segments:  Advisory Services and Strategic Consulting. The Advisory Services segment provides annually renewable subscription services (focused on specific areas of IT, the special needs of the CIO and others within the IT organization, or the distinct IT/business issues of specific industry markets and the public sector), service analyst briefing engagements, conferences, research reports and online resources which offer thorough market research, practical executive / operational guides and in-depth IT product evaluations. Supplementing these services are the Company’s Infusion programs, which provide an important bridge between traditional Advisory Services that examine broader industry issues and Strategic Consulting which drills into specific projects for a given client.  The Strategic Consulting segment offers project consulting services that address clients’ business and technology challenges. A significant portion of Strategic Consulting clients are also Advisory Services subscribers.

 

The Current Economic Environment

 

The economic climate in which we operate has been difficult over the last three years, and capital spending has decreased dramatically, including significant decreases in IT spending. This has had a pronounced effect on our ability to generate revenues from our Advisory Services,

 

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Strategic Consulting and Published Research Products.  We believe we are well positioned to provide our Advisory Services, Strategic Consulting and Published Research Products to a growing customer base, but we cannot provide any assurance that these pressures on IT spending will ease, or that the general economic climate will improve.  Continued competitive pressure and a weak economy could have a continuing pronounced effect on our operating results. We have undertaken a variety of cost reduction measures designed to bring our operating expenses in line with our perceptions of the business climate, including workforce reductions.

 

Financial Events in Quarter and Nine Months ended September 30, 2004

 

During the quarter ended September 30, 2004, we achieved total revenue of $34.4 million, and had income before income taxes and minority interest of $1.0 million. During the nine months ended September 30, 2004, we achieved total revenue of $104.2 million, and had income before income taxes and minority interest of $19 thousand.

 

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Results of Operations

 

The following table sets forth, for the years indicated, the results of operations in thousands of dollars, and results of operations as a percentage of total revenues:

 

		Quarter ended September 30, 2004					Quarter ended September 30, 2003					Nine Months ended September 30, 2004					Nine Months ended September 30, 2003
		Dollars			Percent		Dollars			Percent		Dollars			Percent		Dollars			Percent
Revenues:
Advisory services		$	21,516		62.6		$	18,741		63.8		$	67,281		64.6		$	56,404		64.4
Strategic consulting		10,768			31.3		8,802			29.9		30,697			29.5		24,959			28.5
Published research products		1,429			4.1		1,348			4.6		4,309			4.1		4,538			5.2
Reimbursable expenses		682			2.0		503			1.7		1,890			1.8		1,723			1.9
Total revenues		34,395			100.0		29,394			100.0		104,177			100.0		87,624			100.0
Operating expenses:
Cost of services and fulfillment		16,035			(46.6	)	16,334			(55.6	)	51,701			(49.6	)	46,873			(53.5	)
Reimbursable expenses		682			(2.0	)	503			(1.7	)	1,890			(1.8	)	1,723			(1.9	)
Selling and marketing		9,923			(28.8	)	8,201			(27.9	)	31,456			(30.2	)	24,493			(28.0	)
General and administrative		5,220			(15.2	)	5,174			(17.6	)	15,285			(14.7	)	14,659			(16.7	)
Depreciation and amortization		1,197			(3.5	)	1,091			(3.7	)	3,538			(3.4	)	3,705			(4.3	)
Loss on sale of subsidiary		416			(1.2	)	—			—		416			(0.4	)	—			—
Total operating expenses		33,473			(97.3	)	31,303			(106.5	)	104,286			(100.1	)	91,453			(104.4	)
Operating income (loss)		922			2.7		(1,909		)	(6.5	)	(109		)	(0.1	)	(3,829		)	(4.4	)
Other income, net		60			0.2		23			0.1		128			0.1		723			0.8
Income (loss) before provision for income taxes and minority interest		982			2.9		(1,886		)	(6.4	)	19			0.0		(3,106		)	(3.6	)
Provision (benefit) for income taxes		(124		)	(0.3	)	16			0.1		(10		)	(0.0	)	148			0.2
Minority interest in income of consolidated subsidiary		66			0.2		28			0.1		77			0.1		82			0.1
Net income (loss)		$	1,040		3.0		$	(1,930	)	(6.6	)	$	(48	)	(0.1	)	$	(3,336	)	(3.9	)

 

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