**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**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 March 31, 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             ** |

 

**CommissionFile Number 0-27280**

 

**META Group,Inc.**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                     |   | **06-0971675**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification No.) |

 

**208Harbor Drive, Stamford, Connecticut 06912-0061**

(Address ofprincipal executive offices, including Zip Code)

 

**(203)973-6700**

(Registrant’stelephone number, including area code)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes         ý                            No           o

 

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

 

Yes         o                            No           ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: The number of shares of the issuer’s common stock,$.01 par value per share, outstanding as of May 10, 2004 was 13,797,870.

 

 

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**META Group, Inc.**

 

**INDEX**

 
| **Part I**    |    | **FINANCIAL  INFORMATION**                                                                  |   |
|---------------|---------|---------------------------------------------------------------------------------------------|--------|
|          |    |                                                                                        |   |
|          | Item 1. | Financial Statements (unaudited)                                                            |   |
|          |    |                                                                                        |   |
|          |    | Consolidated Balance  Sheets:  March 31, 2004 and December 31, 2003                         |   |
|          |    |                                                                                        |   |
|          |    | Consolidated  Statements of Operations  Three months ended March 31, 2004 and 2003          |   |
|          |    |                                                                                        |   |
|          |    | Consolidated  Statements of Cash Flows  Three months ended March 31, 2004 and 2003          |   |
|          |    |                                                                                        |   |
|          |    | Notes to 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

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**PART I****- FINANCIALINFORMATION**

**Item 1****.****    FinancialStatements**

 

**META Group, Inc.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands, except for share andper share data)**

(Unaudited)

 
|                                                                                                                          |   | **March 31,  2004** |   | **December  31,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **Assets**                                                                                                                    |   |                |   |                    |   |
| Current assets:                                                                                                               |   |                |   |                    |   |
| Cash and cash equivalents                                                                                                     |   | $                   | 17,003 |                    | $      | 8,814 |   |
| Accounts  receivable, net                                                                                                     |   | 29,255              |   | 38,693                  |   |
| Deferred  commissions                                                                                                         |   | 2,423               |   | 1,550                   |   |
| Other current  assets                                                                                                         |   | 1,936               |   | 2,591                   |   |
| Total current assets                                                                                                          |   | 50,617              |   | 51,648                  |   |
|                                                                                                                          |   |                |   |                    |   |
| Restricted cash                                                                                                               |   | 6,000               |   | 6,000                   |   |
| Non-current  portion of accounts receivable                                                                                   |   | 55                  |   | 184                     |   |
| Property and  equipment, net                                                                                                  |   | 6,000               |   | 5,392                   |   |
| Goodwill                                                                                                                      |   | 13,249              |   | 13,016                  |   |
| Other  intangibles, net                                                                                                       |   | 9,247               |   | 8,982                   |   |
| Investments and  advances                                                                                                     |   | 1,125               |   | 1,146                   |   |
| Other assets                                                                                                                  |   | 577                 |   | 344                     |   |
| Total assets                                                                                                                  |   | $                   | 86,870 |                    | $      | 86,712 |   |
|                                                                                                                          |   |                |   |                    |   |
| **Liabilities and Stockholders’  Equity**                                                                                |   |                |   |                    |   |
| Current liabilities:                                                                                                          |   |                |   |                    |   |
| Accounts payable                                                                                                              |   | $                   | 2,045  |                    | $      | 2,041 |   |
| Deferred  revenues                                                                                                            |   | 49,305              |   | 48,891                  |   |
| Notes payable                                                                                                                 |   | 300                 |   | 294                     |   |
| Accrued  compensation                                                                                                         |   | 7,094               |   | 5,495                   |   |
| Accrued and  other current liabilities                                                                                        |   | 15,071              |   | 16,618                  |   |
| Total current  liabilities                                                                                                    |   | 73,815              |   | 73,339                  |   |
|                                                                                                                          |   |                |   |                    |   |
| Long-term  portion of notes payable                                                                                           |   | 396                 |   | 389                     |   |
| Non-current  deferred revenues                                                                                                |   | 303                 |   | 549                     |   |
| Other  non-current liabilities                                                                                                |   | 2,150               |   | 2,039                   |   |
| Total  non-current liabilities                                                                                                |   | 2,849               |   | 2,977                   |   |
|                                                                                                                          |   |                |   |                    |   |
| Total  liabilities                                                                                                            |   | 76,664              |   | 76,316                  |   |
|                                                                                                                          |   |                |   |                    |   |
| Minority  interest                                                                                                            |   | 334                 |   | 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 14,391,728 and  14,303,655 shares, respectively |   | 144                 |   | 143                     |   |
| Paid-in capital                                                                                                               |   | 61,236              |   | 61,013                  |   |
| Accumulated  deficit                                                                                                          |   | (51,733             | )      | (50,197                 | )      |
| Accumulated  other comprehensive income (loss)                                                                                |   | 545                 |   | (565                    | )      |
| Treasury stock,  at cost, 647,016 shares                                                                                      |   | (320                | )      | (320                    | )      |
| Total  stockholders’ equity                                                                                              |   | 9,872               |   | 10,074                  |   |
| Total  liabilities and stockholders’ equity                                                                              |   | $                   | 86,870 |                    | $      | 86,712 |   |

 

See notes toconsolidated financial statements.

 

3

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**META Group, Inc.**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(in thousands, except per-share data)**

(Unaudited)

 
|                                                                   |   | **For the  three months ended  March 31,** |   |
|------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                   |   | **2004**                                   |   | **2003** |   |
| Revenues:                                                              |   |                                       |   |   |   |
| Advisory  services                                                     |   | $                                          | 21,240 |   | $ | 18,382 |   |
| Strategic  consulting                                                  |   | 9,339                                      |   | 7,458 |   |
| Published  research products                                           |   | 1,517                                      |   | 1,814 |   |
| Reimbursable expenses                                                  |   | 506                                        |   | 519 |   |
|                                                                   |   |                                       |   |   |   |
| Total revenues                                                         |   | 32,602                                     |   | 28,173 |   |
|                                                                   |   |                                       |   |   |   |
| Operating  expenses:                                                   |   |                                       |   |   |   |
| Cost of services  and fulfillment                                      |   | 16,700                                     |   | 14,230 |   |
| Reimbursable expenses                                                  |   | 506                                        |   | 519 |   |
| Selling and  marketing                                                 |   | 10,532                                     |   | 7,172 |   |
| General and  administrative                                            |   | 5,262                                      |   | 5,089 |   |
| Depreciation and  amortization                                         |   | 1,150                                      |   | 1,332 |   |
|                                                                   |   |                                       |   |   |   |
| Total operating  expenses                                              |   | 34,150                                     |   | 28,342 |   |
|                                                                   |   |                                       |   |   |   |
| Operating loss                                                         |   | (1,548                                     | )      | (169 | ) |
|                                                                   |   |                                       |   |   |   |
| Other income,  net                                                     |   | 47                                         |   | 350 |   |
|                                                                   |   |                                       |   |   |   |
| (Loss) income  before provision for income taxes and minority interest |   | (1,501                                     | )      | 181 |   |
| Provision for  income taxes                                            |   | 47                                         |   | 82 |   |
| Minority  interest in income of consolidated subsidiary                |   | (12                                        | )      | (12 | ) |
|                                                                   |   |                                       |   |   |   |
| Net (loss)  income                                                     |   | $                                          | (1,536 | ) | $ | 111 |   |
|                                                                   |   |                                       |   |   |   |
| Net (loss)  income per basic common share                              |   | $                                          | (0.11  | ) | $ | 0.01 |   |
|                                                                   |   |                                       |   |   |   |
| Net (loss)  income per fully diluted common share                      |   | $                                          | (0.11  | ) | $ | 0.01 |   |
|                                                                   |   |                                       |   |   |   |
| Weighted average  number of basic shares outstanding                   |   | 13,715                                     |   | 13,243 |   |
| Weighted average  number of fully diluted shares outstanding           |   | 13,715                                     |   | 13,664 |   |

 

See notes toconsolidated financial statements.

 

4

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**META Group, Inc.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

(Unaudited)

 
|                                                                             |   | **For the three  months ended  March 31,** |   |
|----------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                             |   | **2004**                                   |   | **2003** |   |
| **Operating  activities:**                                                       |   |                                       |   |   |   |
| Net (loss)  income                                                               |   | $                                          | (1,536 | ) | $ | 111 |   |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |                                       |   |   |   |
| Gain on sale of  investment                                                      |   | —                                     |   | (315 | ) |
| Depreciation and  amortization                                                   |   | 1,150                                      |   | 1,332 |   |
| Minority  interest in income of consolidated subsidiary                          |   | (12                                        | )      | (12 | ) |
| Other non-cash  charges                                                          |   | —                                     |   | 248 |   |
| Changes in  assets and liabilities:                                              |   |                                       |   |   |   |
| Accounts  receivable                                                             |   | 9,567                                      |   | 8,157 |   |
| Deferred  commissions                                                            |   | (873                                       | )      | (846 | ) |
| Other current  assets                                                            |   | 655                                        |   | 2,135 |   |
| Other assets                                                                     |   | (332                                       | )      | (5 | ) |
| Accounts payable                                                                 |   | 4                                          |   | (737 | ) |
| Accrued  liabilities                                                             |   | (615                                       | )      | (219 | ) |
| Deferred  revenues                                                               |   | 168                                        |   | 1,142 |   |
| Net cash  provided by operating activities                                       |   | 8,176                                      |   | 10,991 |   |
|                                                                             |   |                                       |   |   |   |
| **Investing  activities:**                                                       |   |                                       |   |   |   |
| Capital  expenditures                                                            |   | (353                                       | )      | (276 | ) |
| Proceeds from  sale of investment                                                |   | —                                     |   | 588 |   |
| Net cash (used  in) provided by investing activities                             |   | (353                                       | )      | 312 |   |
|                                                                             |   |                                       |   |   |   |
| **Financing  activities:**                                                       |   |                                       |   |   |   |
| Increase in  restricted cash                                                     |   | —                                     |   | (6,000 | ) |
| Proceeds from  bank borrowings                                                   |   | 1,000                                      |   | — |   |
| Repayment of  line of credit                                                     |   | (1,000                                     | )      | (1,049 | ) |
| Repayment of  term loan                                                          |   | —                                     |   | (5,111 | ) |
| Repayment of  notes payable                                                      |   | —                                     |   | (369 | ) |
| Payment of  capital lease obligations                                            |   | (81                                        | )      | — |   |
| Proceeds from  exercise of stock options                                         |   | 224                                        |   | 51 |   |
| Net cash  provided by (used in) financing activities                             |   | 143                                        |   | (12,478 | ) |
| Effect of  exchange rate changes on cash                                         |   | 223                                        |   | 49 |   |
| Net increase  (decrease) in cash and cash equivalents                            |   | 8,189                                      |   | (1,126 | ) |
| Cash and cash  equivalents, beginning of period                                  |   | 8,814                                      |   | 21,448 |   |
| Cash and cash  equivalents, end of period                                        |   | $                                          | 17,003 |   | $ | 20,322 |   |
|                                                                             |   |                                       |   |   |   |
| Supplemental  schedule of noncash financing activities:                          |   |                                       |   |   |   |
| Acquisition of  equipment under capital leases                                   |   | $                                          | 859    |   | — |   |

 

 

See notes to consolidated financial statements.

 

5

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**META Group, Inc.**

**NOTESTO CONSOL****IDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1 - Interim Financial Statements**

 

The accompanying unaudited consolidated financialstatements include the accounts of META Group, Inc. (the “Company”) and itssubsidiaries and have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialreporting and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand notes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements.

 

In the opinion ofmanagement, the accompanying unaudited consolidated financial statementscontain all adjustments (consisting of normal recurring items) necessary for afair presentation of results for the interim periods presented. The results ofoperations for any interim period are not necessarily indicative of results forthe full year. These financial statements and footnote disclosures should beread in conjunction with the December 31, 2003 audited consolidatedfinancial statements and the notes thereto included in the Company’sForm 10-K for the year ended December 31, 2003.

 

The preparation of thefinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the amounts reported in the accompanyingconsolidated financial statements and notes. Actual results could differ fromthose estimates.

 

###### **Note 2 –Acquisitions**

 

During 2003, the Company consummated threeacquisitions of former distributors in Italy, the United Kingdom, and NorthernEurope. The Company acquired these distributors in order to have full ownershipcontrol of major operations in Europe, in order to better serve its customersin the region.  A description of thesetransactions follows:

 

*Acquisitionof 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 beenallocated to the assets acquired and the liabilities assumed, based onestimated fair values at the date of acquisition. The preliminary allocationresulted in goodwill of $203,000 recorded in the Advisory Services segment,$60,000 recorded in the Consulting segment and $300,000 related to the customerlist of the seller, which is being amortized over 7 years.

 

*Acquisitionof META Group UK*

In August 2003, the Company acquired 100% of META Group UK HoldingsLimited (“META Group UK”) for $1.6 million in cash. The purchase price has beenallocated to the assets acquired and the liabilities assumed, based onestimated fair values at the date of acquisition. The preliminary allocationresulted in goodwill of $104,000 recorded in the Advisory Services segment,$61,000 recorded in the Consulting segment, $4,000 recorded in the Publicationssegment and $1.3 million related to the customer list of the seller, which isbeing amortized over 7 years.

 

6

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*Acquisitionof 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 GroupBelgium SA and META Group Nederland BV (collectively “Northern Europe”). Thepurchase price consisted of $3.6 million in cash and 175,000 shares of theCompany’s common stock (valued at $700,000), as well as forgiveness of $2.6million in promissory notes and $1.5 million in trade receivables owed to theCompany by the Northern European entities. The purchase price has beenallocated to the assets acquired and the liabilities assumed, based onestimated fair values at the date of acquisition.  The preliminary allocation resulted in goodwill of approximately$ 3.6 million recorded in the Advisory Services segment, $352,000 recorded inthe Consulting segment, $117,000 recorded in the Publications segment and $3.9million related to the customer lists of the sellers, which are being amortizedover 7 years.

 

## **Note3– Goodwill and Other Intangible Assets**

 

Effective January 1,2002, the Company adopted Statement of Financial Accounting StandardsNo. 142, *Goodwill and Other IntangibleAssets*(“SFAS 142”). Under SFAS 142, goodwill and intangible assetsdeemed to have indefinite lives will no longer be amortized but will be subjectto impairment tests on an annual basis, or more frequently if certainindicators arise. Other finite lived intangible assets will continue to beamortized over their useful lives. During the quarter ended March 31, 2004, theremaining useful lives of intangible assets being amortized were reviewed anddeemed to be appropriate.

 

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

 

In accordance with SFAS142, the Company has selected a date by which the annual impairment test willbe performed, such date being September 30. The Company performed its annualimpairment test in September 2003 which resulted in no goodwill impairment.

 

A summary of theCompany’s intangible assets as of March 31, 2004 and December 31, 2003 is asfollows (amounts in thousands):

 
|                                |   | **March 31,  2004**           |   |
|-------------------------------------|--------|-------------------------------|--------|
|                                |   | **Gross****Carrying  Amount** |   | **Accumulated  Amortization** |   | **Total** |   |
| Amortized  intangible assets:       |   |                          |   |   |   |   |   |
| Customer lists                      |   | $                             | 10,995 |   | $ | (3,210 | ) | $ | 7,785 |   |
| Intellectual  property              |   | 774                           |   | (477 | ) | 297 |   |
| Non-compete  agreement              |   | 375                           |   | (323 | ) | 52 |   |
| Content  databases & other      |   | 2,088                         |   | (975 | ) | 1,113 |   |
| Total                               |   | $                             | 14,232 |   | $ | (4,985 | ) | $ | 9,247 |   |
|                                |   |                          |   |   |   |   |   |
| Aggregate  amortization expense:    |   |                          |   |   |   |   |   |
| Three months  ended March 31, 2004: |   |                          |   |   |   | $ | 524 |   |

 

7

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|                                             |   | **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 nine  months ending December 31, 2004: |   | $                           | 1,675  |   |   |   |   |   |
| Year ending  December 31, 2005                   |   | 2,080                       |   |   |   |   |   |
| Year ending  December 31, 2006                   |   | 1,497                       |   |   |   |   |   |
| Year ending  December 31, 2007                   |   | 1,401                       |   |   |   |   |   |
| Year ending  December 31, 2008                   |   | 1,175                       |   |   |   |   |   |
| Thereafter                                       |   | 1,419                       |   |   |   |   |   |
| Total                                            |   | $                           | 9,247  |   |   |   |   |   |

 

The changes in the carrying amount of goodwill byreportable segment for the three months ended March 31, 2004 is as follows (inthousands):

 
|                           |   | **Advisory  Services** |   | **Strategic  Consulting** |   | **Total** |   |
|--------------------------------|--------|------------------------|--------|---------------------------|--------|-----------|--------|
|                           |   |                   |   |                      |   |      |   |
| Balance as of  January 1, 2004 |   | $                      | 12,543 |                      | $      | 473       |   | $ | 13,016 |   |
| Translation  adjustments       |   | 225                    |   | 8                         |   | 233       |   |
| Balance as of  March 31, 2004  |   | $                      | 12,768 |                      | $      | 481       |   | $ | 13,249 |   |

 

###### **Note 4 –Comprehensive (Loss) Income**

 

Comprehensive (loss) income for the three months endedMarch 31, 2004 and 2003 was as follows (in thousands):

 

8

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|                                              |   | **Three  months ended  March 31,** |   |
|---------------------------------------------------|--------|------------------------------------|--------|
|                                              |   | **2004**                           |   | **2003** |   |
|                                              |   |                               |   |   |   |
| Net (loss)  income:                               |   | $                                  | (1,536 | ) | $ | 111 |   |
| Other  comprehensive (loss) income, net of tax:   |   |                               |   |   |   |
| Unrealized loss  on investment in equity security |   | (55                                | )      | — |   |
| Foreign currency  translation adjustment          |   | 1,165                              |   | 95 |   |
|                                              |   |                               |   |   |   |
| Comprehensive  (loss) income                      |   | $                                  | (426   | ) | $ | 206 |   |

 

###### **During the quarter ended March 31, 2004, the sharesthat the Company owns in Tescom became a marketable security as a result of aninitial public offering that Tescom completed. The carrying value of the Company’s investment was $1,050,000 at March31, 2004, which is net of an unrealized loss of $55,000.**

 

###### **Note 5 – SegmentReporting**

 

In 2004, the Company completed a reorganization of themanagement structure overseeing Advisory Services and Published ResearchProducts.  In addition, the Company alsocompleted a re-evaluation of its strategy around content generation and deliveryas they relate to Published Research Products. As a result, the Company has organized itself around two businesssegments: Advisory Services and Strategic Consulting. The Company’s operatingsegments are managed separately, because each operating segment represents astrategic business unit that generally offers distinct products / services.Advisory Services provide comprehensive coverage of relevant informationtechnology and business-related issues faced by its clients throughclient/analyst interaction, published conclusions and recommendations to eachclient’s specific IT requirements, including various topic-specific reports andstandalone deliverables that meet specific assessment requirements. StrategicConsulting provides custom consulting services tailored to meet individual clientrequirements.

 

Theaccounting policies of the operating segments are the same as those describedin Note 1 to the Company’s 2003 Annual Report on Form 10-K except that thedisaggregated financial results for the Company’s operating segments have beenprepared using a management approach, which is consistent with the basis andmanner in which the Company’s management internally disaggregates financialinformation for the purposes of assistance in making internal operatingdecisions. In 2004, the Company also changed how it evaluates performance basedon standalone segment gross margin, defined by the Company as the segmentrevenues less segment cost of sales excluding corporate selling, general andadministrative expenses.  Those expenseswere previously allocated ratably based on each operating segments’revenues.   Management does not allocatecorporate assets, non-operating income or income taxes when measuring segmentresults.

 

The Company earns revenue from clients in manycountries.  In the quarters ended March31, 2004 and 2003, other than the United States and Germany, there was noindividual country in which revenues from external clients represent 10% ormore of the Company’s consolidated revenues. Additionally, no single clientaccounted for 10% or more of total revenue in the quarters ended March 31, 2004and 2003, and the loss of a single client, in management’s opinion, would nothave a material adverse effect on revenues.

 

9

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

* *
|                                   |   | **Advisory  Services** |   | **Strategic  Consulting** |   | **Unallocated** |   | **Consolidated  Total** |   |
|----------------------------------------|--------|------------------------|--------|---------------------------|--------|-----------------|--------|-------------------------|--------|
| **Three  months ended March 31, 2004** |   |                   |   |                      |   |            |   |                    |   |
|                                   |   |                   |   |                      |   |            |   |                    |   |
| Revenues                               |   | $                      | 22,757 |                      | $      | 9,339           |   | $                       | 506    |   | $ | 32,602 |   |
| Gross Margin                           |   | 13,227                 |   | 2,169                     |   | —          |   | 15,396                  |   |
| Assets                                 |   | —                 |   | —                    |   | 86,870          |   | 86,870                  |   |
|                                   |   |                   |   |                      |   |            |   |                    |   |
| **Three  months ended March 31, 2003** |   |                   |   |                      |   |            |   |                    |   |
|                                   |   |                   |   |                      |   |            |   |                    |   |
| Revenues                               |   | $                      | 20,196 |                      | $      | 7,458           |   | $                       | 519    |   | $ | 28,173 |   |
| Gross Margin                           |   | 11,942                 |   | 1,482                     |   | —          |   | 13,424                  |   |
| Assets                                 |   | —                 |   | —                    |   | 83,680          |   | 83,680                  |   |

* *

The Company sells itsproducts in the United States, and internationally through its subsidiaries inCanada, the Asia Pacific region and Europe. The Company also utilizes a networkof independent sales representative organizations located in Africa, the MiddleEast, 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 March 31, 2004** |   |         | *** *** |             | *** *** |                              | *** *** |                    | *** *** |
| Revenues                              |   | $            | 20,794       |             | $            | 2,104                             |         | $                       | 9,704        |   | $ | 32,602 |   |
| Operating income  (loss)              |   | (3,382       | )            | 275              |         | 1,559                             |         | (1,548                  | )            |
| Long – lived  assets             |   | 7,901        |         | 2,355            |         | 19,942                            |         | 30,198                  |         |
|                                  |   |         |         |             |         |                              |         |                    |         |
| **Three months ended March 31, 2003** |   |         |         |             |         |                              |         |                    |         |
| Revenues                              |   | $            | 22,234       |             | $            | 1,077                             |         | $                       | 4,862        |   | $ | 28,173 |   |
| Operating income  (loss)              |   | 3            |         | (48              | )            | (124                              | )            | (169                    | )            |
| Long – lived  assets             |   | 11,727       |         | 1,925            |         | 9,582                             |         | 23,234                  |         |

 

###### **Note 6 – Bank Debt**

 

As ofDecember 31, 2002, the Company had $6.2 million in borrowings outstanding ($5.2million term loan and $1 million revolving credit facility) under its $20million credit facility  (the “OldFacility”).  The Company was in breachof covenants contained in the Old Facility, and, as a result, all outstandingborrowings were classified as a current liability as of December 31, 2002.  In January 2003, the Company repaid allamounts outstanding under the Old Facility.

 

10

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InMarch 2003, the lender waived all prior covenant defaults and the Companyexecuted a new $6 million revolving credit agreement (the “Amended Facility”)which replaced the Old Facility. Under the Amended Facility, interest on anyoutstanding borrowings will be payable at the rate of LIBOR, as determined bythe bank, plus 1.5%, or the higher of the Prime Rate or the Federal Funds Rateplus 0.5%. The Amended Facility is fully collateralized by a $6 million cashdeposit reflected as restricted cash as of March 31, 2004 and December 31,2003. The Amended Facility contains no financial covenants, and matures inNovember 2004. As of March 31, 2004 and December 31, 2003, there was $1,533,000and $836,000, respectively, used under the Amended Facility in the form ofstandby letters of credit issued on behalf of one of the Company’s independentsales representative organizations and as collateral for a portion of theCompany’s U.S. premises leases and equipment leases. There were no borrowingsoutstanding as of March 31, 2004 and December 31, 2003.

 

###### **Note 7 –Stock-Based Compensation**

 

The Company has threeactive stock-based employee compensation plans, which are described more fullyin Note 9 to the Company’s 2003 Annual Report on Form 10-K. The Companyaccounts for those plans under the recognition and measurement principles ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees”, and related Interpretations. No stock-based employee compensationcost is reflected in net income (loss), as all options granted under thoseplans had an exercise price equal to the market value of the underlying commonstock on the date of grant. The following table illustrates the effect on netincome (loss) and earnings (loss) per share if the Company had applied the fairvalue recognition provisions of Statement of Financial Accounting Standards No.123, “Accounting for Stock-Based Compensation” to stock-based employeecompensation (in thousands, except per share data):

 
|                                                                                                                            |   | **Three  Months Ended** |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                            |   | **March 31,  2004**     |   | **March 31,  2003** |   |
|                                                                                                                            |   |                    |   |   |   |
| Reported net  (loss) income                                                                                                     |   | $                       | (1,536 | ) | $ | 111 |   |
| Deduct: Total  stock based employee compensation expense determined under fair value based  methods for all awards, net of tax: |   | (564                    | )      | (765 | ) |
| Pro forma net  loss                                                                                                             |   | $                       | (2,100 | ) | $ | (654 | ) |
|                                                                                                                            |   |                    |   |   |   |
| Net (loss)  income per share                                                                                                    |   |                    |   |   |   |
| Reported                                                                                                                        |   |                    |   |   |   |
| Basic                                                                                                                           |   | $                       | (0.11  | ) | $ | 0.01 |   |
| Diluted                                                                                                                         |   | $                       | (0.11  | ) | $ | 0.01 |   |
|                                                                                                                            |   |                    |   |   |   |
| Pro forma                                                                                                                       |   |                    |   |   |   |
| Basic                                                                                                                           |   | $                       | (0.15  | ) | $ | (0.05 | ) |
| Diluted                                                                                                                         |   | $                       | (0.15  | ) | $ | (0.05 | ) |

 

11

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**Note 8 – Net (Loss) Income Per Share**

 

Thefollowing table sets forth the computation of net (loss) income per share forthe three months ended March 31, 2004 and 2003:

 
|                                                                                         |   | **For the  three months ended  March 31,** |       |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                         |   | **2004**                                   |       | **2003** |   |
| Net (loss)  income                                                                           |   | $                                          | (1,536,000 | ) | $ | 111,000 |   |
|                                                                                         |   |                                       |       |   |   |
| Average number  of common shares outstanding during the period                               |   | 13,714,966                                 |       | 13,242,813 |   |
| Add common share  equivalents — options to purchase common shares and contingent shares |   | —                                     |       | 421,677 |   |
| Total                                                                                        |   | 13,714,966                                 |       | 13,664,490 |   |
|                                                                                         |   |                                       |       |   |   |
| Amounts per  basic common share                                                              |   |                                       |       |   |   |
| Net (loss)  income                                                                           |   | $                                          | (0.11      | ) | $ | 0.01 |   |
|                                                                                         |   |                                       |       |   |   |
| Amounts per  fully diluted common share                                                      |   |                                       |       |   |   |
| Net (loss)  income                                                                           |   | $                                          | (0.11      | ) | $ | 0.01 |   |

 

Diluted earnings per share for the three months ended March 31, 2004excludes 1,875,448 common stock equivalents (options and warrants) because theyare anti-dilutive.

###### ** **

###### **Note 9 – OtherIncome, Net**

 

During the quarterended March 31, 2003, the Company received final proceeds of $588,000 on theliquidation of its investment in Spikes Cavell and recognized a gain of$315,000, which is included in other income, net, on the consolidated statementof operations for the quarter ended March 31, 2003.

 

###### **Note 10 –Contingencies and Guarantees**

 

*Contingencies:*

 

*Legal:*

 

*Other than ordinary routinelitigation incidental to the Company’s business, the Company is not a party,nor is any of its property subject to, any pending legal proceedings.*

* *

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

* *

TheCompany’s purchase agreement for the October 2000 acquisition of the assets ofRSI included certain earnout provisions. In the event certain financial targetsare met, additional contingent consideration of $2.7 million payable in cashand $1.4 million payable in the Company’s common stock may be paid throughMarch 2007. In the event the aggregate number of shares issued in satisfactionof

 

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contingentconsideration exceeds 147,027, the remaining consideration will be payable incash. RSI is wholly owned by Dr. Howard Rubin, a director and officer of theCompany.

* *

*Lettersof Credit:*

 

*See Note 6 for discussion ofstandby letters of credit.*

 

*Guarantees:*

 

*In September 2000 the Company provided a corporateguarantee in the amount of €62,000 (approximately $76,000) guaranteeing leasepayments to the landlord of one of the Company’s former independent salesrepresentative organizations. In January 2002, the landlord called theguarantee. The claim is currently being negotiated with the landlord. TheCompany is currently uncertain as to when this issue will be resolved.*

 

**Note 11-****Restructuring Charges**

 

During 2003, the Company recorded restructuringcharges totaling $1,642,000. These charges were associated with workforcereductions, which totaled 41 employees. As of March 31, 2004, $ 741,000 remains unpaid and is expected to bepaid in 2004.

 

**Note 12– Subsequent Event – Purchase of META Group Middle East**

 

On April 30, 2004,the Company announced that it had completed the acquisition of its Middle Eastdistributor.  With this acquisition, theCompany now has direct control over its operations in Kuwait, Saudi Arabia, theUnited Arab Emirates, Egypt and India. The purchase consideration consisted of $950,000 in cash, approximately$326,000 in receivables to be collected by the seller, and forgiveness of$912,000 in payables due to the Company by the seller.

 

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

 

*Thediscussion and analysis below contains trend analysis and other forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934, which are subject to anumber of risks and uncertainties. These forward-looking statements aretypically denoted in this Quarterly Report on Form 10-Q by words such asanticipate, believe, could, estimate, expect, intend, may, plan, project,should or will and similar words (as well as other words or expressionsreferencing future events, conditions or circumstances). Actual results coulddiffer materially from those projected in the forward-looking statements as aresult of the risk factors, including the risk factors set forth below under“Certain Factors That May Affect Future Results.” This discussion should beread in conjunction with the consolidated financial statements and relatednotes for the periods specified. Further reference should be made to theCompany’s other filings with the Securities and Exchange Commission,principally the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003, which includes a full discussion of many of the risks weface in our business.*

 

#### **Overview**

 

META Group, Inc. with its subsidiaries (collectivelythe “Company”) is a leading provider ofinformation technology (“IT”) research, advisory services, and strategicconsulting. 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 2004, the Company completed a reorganization of themanagement structure overseeing Advisory Services and Published ResearchProducts.  In addition, the Company alsocompleted a re-evaluation of its strategy around content generation and deliveryas they relate to Published Research Products. As a result, the Company has organized itself around two businesssegments:  Advisory Services andStrategic Consulting. The Advisory Services segment provides annually renewablesubscription services (focused on specific areas of IT, the special needs ofthe CIO and others within the IT organization, or the distinct IT/businessissues of specific industry markets and the public sector), service analystbriefing engagements, conferences, research reports and online resources whichoffer thorough market research, practical executive / operational guides andin-depth IT product evaluations. Supplementing these services are the Company’sInfusion programs, which provide an important bridge between traditionalAdvisory Services that examine broader industry issues and Strategic Consultingwhich drills into specific projects for a given client.  The Strategic Consulting segment offersproject consulting services that address clients’ business and technologychallenges. A significant portion of Strategic Consulting clients are alsoAdvisory Services subscribers.

 

***The Current Economic Environment***

 

The economic climate in which we operate has been difficultover the last three years, and capital spending has decreased dramatically,including significant decreases in IT spending. This has had a pronouncedeffect on our ability to generate revenues from our Advisory Services,Strategic Consulting and Published Research Products.  We believe we are well positioned to

 

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provideour Advisory Services, Strategic Consulting and Published Research Products toa growing customer base, but we cannot provide any assurance that thesepressures on IT spending will ease, or that the general economic climate willimprove.  Continued competitive pressureand a weak economy could have a continuing pronounced effect on our operatingresults. We have undertaken a variety of cost reduction measures designed tobring our operating expenses in line with our perceptions of the businessclimate, including workforce reductions.

 

***SignificantFinancial Events in Quarter ended March 31, 2004***

 

Duringthe quarter ended March 31, 2004, we achieved total revenue of $32.6 million,and incurred a loss before income taxes and minority interest of $1.5 million.

 

***Results of Operations***

 

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

 
|                                                                   |   | **Quarter  ended  March 31, 2004** |   | **Quarter  ended  March 31, 2003** |   |
|------------------------------------------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|                                                                   |   | **Dollars**                        |   | **Percent**                        |   | **Dollars** |   | **Percent** |   |
| Revenues:                                                              |   |                               |   |                               |   |   |   |   |   |
| Advisory  services                                                     |   | $                                  | 21,240 |                               | 65.2   |   | $ | 18,382 |   | 65.3 |   |
| Strategic  consulting                                                  |   | 9,339                              |   | 28.6                               |   | 7,458 |   | 26.5 |   |
| Published  research products                                           |   | 1,517                              |   | 4.6                                |   | 1,814 |   | 6.4 |   |
| Reimbursable  expenses                                                 |   | 506                                |   | 1.6                                |   | 519 |   | 1.8 |   |
| Total revenues                                                         |   | 32,602                             |   | 100.0                              |   | 28,173 |   | 100.0 |   |
|                                                                   |   |                               |   |                               |   |   |   |   |   |
| Operating  expenses:                                                   |   |                               |   |                               |   |   |   |   |   |
| Cost of services  and fulfillment                                      |   | 16,700                             |   | (51.2                              | )      | 14,230 |   | (50.5 | ) |
| Reimbursable  expenses                                                 |   | 506                                |   | (1.6                               | )      | 519 |   | (1.8 | ) |
| Selling and  marketing                                                 |   | 10,532                             |   | (32.3                              | )      | 7,172 |   | (25.5 | ) |
| General and  administrative                                            |   | 5,262                              |   | (16.1                              | )      | 5,089 |   | (18.1 | ) |
| Depreciation and  amortization                                         |   | 1,150                              |   | (3.5                               | )      | 1,332 |   | (4.7 | ) |
| Total operating  expenses                                              |   | 34,150                             |   | (104.7                             | )      | 28,342 |   | (100.6 | ) |
|                                                                   |   |                               |   |                               |   |   |   |   |   |
| Operating loss                                                         |   | (1,548                             | )      | (4.7                               | )      | (169 | ) | (0.6 | ) |
|                                                                   |   |                               |   |                               |   |   |   |   |   |
| Other income,  net                                                     |   | 47                                 |   | —                             |   | 350 |   | 1.3 |   |
|                                                                   |   |                               |   |                               |   |   |   |   |   |
| (Loss) income  before provision for income taxes and minority interest |   | (1,501                             | )      | (4.7                               | )      | 181 |   | 0.7 |   |
|                                                                   |   |                               |   |                               |   |   |   |   |   |
| Provision for  income taxes                                            |   | 47                                 |   | —                             |   | 82 |   | (0.3 | ) |
|                                                                   |   |                               |   |                               |   |   |   |   |   |
| Minority  interest in income of consolidated subsidiary                |   | (12                                | )      | —                             |   | (12 | ) | — |   |
|                                                                   |   |                               |   |                               |   |   |   |   |   |
| Net (loss)  income                                                     |   | $                                  | (1,536 | )                                  | (4.7   | ) | $ | 111 |   | 0.4 |   |

 

Advisory Servicesrevenues are principally annually renewable contracts and are 

 

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generally payable by clients in advance.  Billings attributable to the Company’s Advisory Services areinitially recorded as deferred revenues and then recognized pro rata over the contractterm.  Advisory Services revenuesattributable to international clients not serviced by the Company’ssubsidiaries are billed and collected by its independent sales representativeorganizations. The Company realized Advisory Services revenues from theindependent sales representative organizations at rates of 40%- 75% of theamounts billed to their clients. One measure of the volume of the Company’sAdvisory Services business is its “Contract Value,” which the Companycalculates as the aggregate annual value of retainer subscription servicescontracts in force at a given point in time, without regard to the remainingduration of such contracts. Contract Value is not necessarily indicative offuture Advisory Services revenues. Contract Value was $72.0 million at March31, 2004 versus $69.0 million at March 31, 2003, a 4% increase.

 

The Companyrecognizes revenue on Strategic Consulting engagements on a contract bycontract basis, as the work is performed, utilizing the percentage ofcompletion method for fixed fee projects, or as services are rendered for timeand material projects.

 

The Companyrecognizes revenues from the sale of Published Research Products when theproducts are delivered.

 

The Company’soperating expenses consist of cost of services and fulfillment, selling andmarketing expenses, general and administrative expenses and depreciation andamortization. Cost of services and fulfillment represents the cost associatedwith production and delivery of the Company’s products and services and includesthe costs of research, development, preparation of periodic reports, analysttelephone consultations, executive briefings and conferences, research reports,consulting services, new product development, and all associated editorial andsupport services. Selling and marketing expenses include the costs of salaries,commissions, and related benefits for selling and marketing personnel as wellas travel and promotion, and bad debt expense. General and administrative expenses include the costs of the administrativefunctions of the Company, including finance and accounting, corporate IT,legal, human resources, and corporate management departments.  See “Segment Reporting” in Note 5 to theconsolidated financial statements for information regarding the Company’soperating segments.

 

# **Results of Operations**

# **Quarters Ended March 31, 2004 and March 31, 2003**

 

*TotalRevenues.*   Totalrevenues increased 16.3% to $32.8 million in 2004 from $28.2 million in 2003.

The table belowgives an analysis of the major changes in revenues (in thousands):

 

**Changes in Revenues – Quarters endedMarch 31, 2004 versus 2003**

 
|                         |   | **Acquisitions** |   | **Ongoing  Operations** |   | **Foreign  Exchange** |   | **Net Change** |   |
|------------------------------|--------|------------------|--------|-------------------------|--------|-----------------------|--------|----------------|--------|
| Advisory  Services           |   | $                | 1,786  |                    | $      | 465                   |   | $              | 607    |   | $ | 2,858 |   |
| Strategic  Consulting        |   | 1,326            |   | (152                    | )      | 707                   |   | 1,881          |   |
| Published  Research Products |   | 20               |   | (369                    | )      | 52                    |   | (297           | )      |
| Reimbursable  Expenses       |   | 100              |   | (143                    | )      | 30                    |   | (13            | )      |
| Total                        |   | $                | 3,232  |                    | $      | (199                  | )      | $              | 1,396  |   | $ | 4,429 |   |

 

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Revenues from AdvisoryServices increased 15%****to****$21.2million in 2004 from $18.4 million in 2003 and remained level as apercentage of total revenues at 65%. The increase in revenues was principallydue to the acquisition of subsidiaries in Italy, the United Kingdom, andNorthern Europe in 2003 (which collectively added incremental revenue of $1.8million), the impact of foreign currency exchange rates on revenues fromongoing operations in Canada, Europe and the Asia Pacific region of $0.6million, as well as $0.5 million of higher revenue from ongoing operations. TheCompany currently expects decreases in IT spending and pricing pressure tocontinue for the foreseeable future.

 

Strategic Consulting revenues increased 24% to $9.3million in 2004 from $7.5 million in 2003, and increased as a percentage oftotal revenues to 29% from 26%. The increase was principally due to theacquisition of subsidiaries in Italy, the United Kingdom and Northern Europe in2003 (which collectively added incremental revenue of $1.3 million), and theimpact of foreign currency of $0.7 million. These increases were partiallyoffset by a net decrease of $0.1 million in the Company’s ongoing consultingrevenues due to competitive pricing conditions as a result of decreases in anddelays of IT spending due to general economic conditions.   The Company currently expects decreases inIT spending and pricing pressure to continue for the foreseeable future.

 

Published Research Products revenues decreased 17% to$1.5 million in 2004 from $1.8 million in 2003 and decreased as a percentage oftotal revenues to 5% from 6%. The decrease in revenues was principally due to adelay in the release of an annual publication compared to a year-ago period,partially offset by increased revenues due to the acquisition of subsidiaries inItaly, the United Kingdom, and Northern Europe in 2003.

 

*Total Operating Expenses.*   Total operating expenses increased 20.8% to$34.2 million in 2004 from $28.3 million in 2003.

 

The table below gives ananalysis of the major changes in operating expenses (in thousands):

 

**Changesin Operating Expenses - Quarters ended March 31, 2004 versus 2003**

 
|                                   |   | **Acquisitions** |   | **Ongoing  Operations** |   | **Foreign  Exchange** |   | **Net Change** |   |
|----------------------------------------|--------|------------------|--------|-------------------------|--------|-----------------------|--------|----------------|--------|
| Cost of Services  and Fulfillment      |   | $                | 1,616  |                    | $      | 165                   |   | $              | 676    |   | $ | 2,457 |   |
| Selling and  Marketing Expenses        |   | 936              |   | 1,965                   |   | 459                   |   | 3,360          |   |
| General &  Administrative Expenses |   | 595              |   | (618                    | )      | 196                   |   | 173            |   |
| Depreciation and  Amortization         |   | 210              |   | (442                    | )      | 50                    |   | (182           | )      |
|                                   |   |             |   |                    |   |                  |   |           |   |
| Total                                  |   | $                | 3,357  |                    | $      | 1,070                 |   | $              | 1,381  |   | $ | 5,808 |   |

 

17

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*Cost ofServices and Fulfillment*.  Cost of services and fulfillment, including reimbursable expenses,increased 17.0% or approximately $2.5 million to $17.2 million in 2004 from$14.7 million in 2003 and increased as a percentage of total revenues to 51%from 50%. The increase was principally due to incremental costs of $1.6 millionassociated with subsidiaries in Italy, the United Kingdom and Northern Europeacquired in 2003, $0.7 million from the impact of foreign exchange rates on thecosts from ongoing operations in Canada, Europe and the Asia Pacific region,and $0.2 million of increased costs from ongoing operations.   On a forward-looking basis, we expect thecost of services and fulfillment to increase in absolute dollars, though suchexpenses may vary as a percentage of revenues.

 

*Sellingand Marketing Expenses*.  Selling and marketing expenses increased 45.8% or approximately $3.4million to $10.5 million in 2004 from $7.2 million in 2003 and increased as apercentage of total revenues to 32% from 26%. The increase in selling andmarketing expenses was due to $0.9 million in incremental personnel costsassociated with subsidiaries in Italy, the United Kingdom and Northern Europeacquired in 2003, $0.5 million from the impact of foreign exchange rates on thecosts from ongoing operations in Canada, Europe and the Asia Pacific region,and $2.0 million of increased expenses from ongoing operations due to thefollowing: higher sales training, commissions and other selling costs of $0.9 millionin 2004, and lower 2003 expenses due to the reversal of $0.4 million of otheraccounts receivable provisions in the United States, and higher selling andmarketing expenses of $0.7 million in foreign subsidiaries.   On a forward-looking basis, we expectselling and marketing expenses to increase in absolute dollars, though suchexpenses may vary as a percentage of revenues.

 

*Generaland Administrative Expenses*.   General and administrative expenses increased 3.9% orapproximately $0.2 million to $5.3 million in 2004 from $5.1 million in 2003.The increase in general and administrative expenses was due to $0.6 million inincremental personnel costs associated with subsidiaries in Italy, the UnitedKingdom and Northern Europe acquired in 2003, an increase in expenses of $0.2million due to the impact of foreign exchange rates on the costs from ongoingoperations in Canada, Europe and the Asia Pacific region, which was partiallyoffset by $0.6 million of decreased expenses in the ongoing operations. On a forward-lookingbasis, we expect general and administrative expenses to remain relativelyconstant in absolute dollars, though such expenses may vary as a percentage ofrevenues.

 

*Depreciationand Amortization*.  Depreciation and amortization expense decreased 15.4% orapproximately  $0.2 million to $1.1million in 2004 from $1.3 million in 2003. The decrease was principally due to$0.5 million in lower depreciation expense on reduced levels of depreciablefixed assets in the United States, partially offset by $0.3 million of higherdepreciation and amortization expense from incremental costs associated withsubsidiaries in Italy, the United Kingdom and Northern Europe acquired in 2003.On a forward-looking basis, we expect

 

18

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depreciation andamortization to remain relatively constant in absolute dollars, though suchexpenses may vary as a percentage of revenues.

 

*OtherIncome,Net*.   Otherincome, net, decreased to $47,000 in 2004 from $350,000 in 2003. The decreaseis principally due to a non-recurring gain of $315,000 recognized in 2003 onthe final settlement of the Company’s investment in Spikes Cavell. See Footnote9 to the consolidated financial statements.

 

*Provisionfor Income Taxes*.  In2004, the Company recorded a provision for income taxes of $47,000 versus anincome tax provision of $82,000 in 2003.

 

***Liquidity and Capital Resources***

 

TheCompany funds its operations primarily through cash generated from operations.The Company generated $8.2 million in cash from operations during the threemonths ended March 31, 2004, compared to $11.0 million of cash generated fromoperations in the same period last year. The decrease in operating cash flow in2004 versus 2003 was due to lower operating results, a reduction in net workingcapital and a reduction in non-cash operating charges.

 

The Company used $0.4million of cash in the three months ended March 31, 2004, compared to $0.3million in the same period of 2003, for capital expenditures.  The purchases were principally made tosupport the Company’s computer equipment, software and network infrastructure.The Company currently expects to make additional purchases in 2004 andcurrently expects that such expenditures will remain approximately the samewhen compared to 2003 levels. As of March 31, 2004, the Company had no materialcommitments for capital expenditures; however, the Company anticipates that itwill continue to upgrade its internal systems to support its business,including in particular its international subsidiaries. In the quarter endedMarch 31, 2003, the Company liquidated its investment in Spikes Cavell andreceived $0.6 million in final proceeds, and recognized a gain of $0.3 million.

 

Duringthe quarter ended March 31, 2004, the Company generated $0.1 million of cashfrom financing activities primarily due to the exercise of stock options.During the quarter ended March 31, 2003, the Company used $12.5 million of cashfrom financing activities primarily as a result of repayments of $6.1 millionof borrowings outstanding under the Company’s credit facilities, and theestablishment of a $6.0 million restricted cash account as required by theCompany’s credit facility discussed below, and repaid notes of $0.4 million.

 

As ofDecember 31, 2002, the Company had $6.2 million in borrowings outstanding ($5.2million outstanding under the term loan and $1 million outstanding under therevolving credit facility) under its $20 million credit facility (the “OldFacility”).  The Company was in breachof a number of covenants contained in the Old Facility.  As the Company was in default under the OldFacility as of December 31, 2002, all outstanding borrowings were classified asa current liability on the consolidated balance sheet as of December 31,2002.  In January 2003, the Companyrepaid all amounts outstanding under the Old Facility from its cash on hand.

 

In March 2003 the Companyreceived a waiver of all prior covenant defaults. Additionally, in March 2003the Company executed a new $6 million revolving credit agreement (the “AmendedFacility”). The Amended Facility replaced the Old Facility and consists of a $6

 

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million revolvingcredit facility. Under the Amended Facility, interest on any outstandingborrowings 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. Thiscash deposit is reflected as restricted cash on the Company’s consolidatedbalance sheet as of March 31, 2004 and December 31, 2003. The Amended Facilitycontains no financial covenants, and matures in November 2004. As of March 31,2004, there was $1,533,000 used under the Amended Facility in the form ofstandby letters of credit issued on behalf of one of the Company’s independentsales representative organizations and as collateral for a portion of theCompany’s U.S. premises leases and equipment leases. There were no borrowingsoutstanding as of March 31, 2004.

 

Duringthe year 2003, the Company paid $368,000 in satisfaction of the terms of notespayable held by certain former shareholders of META Group Germany. The noteswere acquired when the Company acquired the remaining interest in META GroupGermany in September 2002.  As of March31, 2004, $696,000 remains payable under the notes, which are payable throughNovember 2008.

 

*As ofMarch 31, 2004 the Company had outstanding a corporate guarantee in the amountof €62,000 (approximately $76,000) guaranteeing lease payments to the landlordof one of the Company’s former independent sales representative organizations.In January 2002, the landlord called the guarantee. The claim is currentlybeing negotiated with the landlord. The Company is currently uncertain as towhen this issue will be resolved.*

 

As ofMarch 31, 2004, the Company had cash of $17.0 million, restricted cash of $6million and negative working capital of $23.2 million. The increase in theCompany’s cash balances during the quarter was due primarily to increasedcollections of its accounts receivable. Days sales outstanding (DSOs) forthe first quarter were 81 days, compared to 97 days for the year-ago period.After adjusting for those accounts receivable with future payment terms relatedto multiyear contracts, DSOs were 64 days, compared with 57 days a year ago. TheCompany generated a net loss of $1.5 million for the quarter ended March 31,2004. To return to profitability, the Company will need to, among other things,achieve revenue growth and/or maintain expenses below revenue levels. TheCompany cannot be certain whether, or when, any of these will occur. If theCompany fails to either achieve sufficient revenue growth or maintain expensesbelow revenue levels, any such failure will likely result in continued lossesthat would have a material adverse effect on the Company’s financialstatements.

* *

**The Company currently believesexisting cash balances, anticipated cash flows from operations and borrowingsunder its existing credit facility will be sufficient to meet its workingcapital and capital expenditure requirements for the next 12 months. TheCompany also believes that it has sufficient funds to maintain currentoperations and to complete its current projects and plans.  The Company intends to continue its effortsto monitor its accounts receivable collections and manage expenses. However,the Company also currently believes that if decreases in and delays of ITspending continue, that together with competitive pricing pressure on theCompany’s products and services, it will continue to negatively impact theCompany’s business.**

** **

**The following table summarizes theCompany’s contractual obligations and other commitments as of March 31, 2004and the effect such obligations are currently expected to have on its liquidityand cash flow in future periods (in thousands):**

 

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|                                                  |   | **Twelve Months Ending December 31,** |   |
|-------------------------------------------------------|--------|---------------------------------------|--------|
|                                                  |   | **2004(1)**                           |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   |
|                                                  |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Operating leases                                      |   | $                                     | 5,210  |   | $ | 5,739 |   | $ | 5,083 |   | $ | 5,153 |   | $ | 2,244 |   | $ | 1,224 |   |
| Capital leases                                        |   | 265                                   |   | 361 |   | 151 |   | — |   | — |   | — |   |
| Notes payable                                         |   | 294                                   |   | 293 |   | 55 |   | 20 |   | 21 |   | — |   |
| Payments due  under employment / severance agreements |   | 572                                   |   | — |   | — |   | — |   | — |   | — |   |
|                                                  |   | $                                     | 6,341  |   | $ | 6,393 |   | $ | 5,289 |   | $ | 5,173 |   | $ | 2,265 |   | $ | 1,224 |   |

 

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(1) Represents nine months ending December 31, 2004.

 

**Critical Accounting Policies**

 

Our significant accounting policies are described inNote 1 to our consolidated financial statements in our annual report on Form10-K for the year ended December 31, 2003. However, certain of our accountingpolicies are particularly important to the portrayal of our financial positionand results of operations and may require the application of significantjudgment by our management; as a result they are subject to an inherent degreeof uncertainty. In applying those policies, our management uses its judgment todetermine the appropriate assumptions to be used in the determination ofcertain estimates. Those estimates are based on our historical experience, ourobservance of trends in the industry, information provided by our customers andinformation available from other outside sources, as appropriate. Oursignificant accounting policies include:

 

•      Revenue Recognition – Revenues from our AdvisoryServices are recognized on a straight-line basis over the subscription contractperiod, generally one year. All subscription contracts are billable at signing,absent special terms granted on a limited basis from time to time. As such, ourpolicy is to record at the time of signing of an Advisory Services subscriptioncontract the fees receivable and related deferred revenues for the full amountof the subscription contract. Accounts receivable and deferred revenues thatextend beyond a 12-month period have been classified on the consolidatedbalance sheets as non-current. We also record the related sales commissionobligation upon the signing of the subscription contract and amortize thecorresponding deferred commission expense over the subscription period in whichthe related Advisory Services revenues are earned and amortized to income. Werecognize revenue on Strategic Consulting engagements on a contract by contractbasis, as the work is performed, utilizing the percentage of completion methodfor fixed fee projects, or as services are rendered for time and materialprojects. The average duration of our consulting engagements is 2-3 months.Revenues from Published Research Products are recognized at the time theapplicable product is delivered. Additionally, we record reductions to revenuefor estimated customer cancellations.

 

•      Accounts Receivable Reserves – Wegenerally evaluate our accounts receivable on a monthly basis. As part of ouranalysis, we examine our collections history, the age of the receivables inquestion, any specific customer collection issues that we have identified,

 

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and general market conditions. At March 31, 2004 and 2003, our totalaccounts receivable balances were $29.3 million and $30.4 million,respectively. Based upon our analysis of estimated recoveries and collectionsassociated with the receivables balances, we have $1.0 million and $2.3 millionof accounts receivable reserves at March 31, 2004 and 2003, respectively.  The determination of the amount of accountsreceivable reserves is subject to significant levels of judgment and estimationby our management.  If circumstanceschange or economic conditions deteriorate, we may need to increase the reserve.

 

•      Deferred Tax Valuation Allowance – During 2002, werecorded a full valuation allowance against our deferred tax assets as a resultof our losses over our recent history. We considered future taxable incomeversus the cumulative losses incurred during the previous three years anddetermined that, in light of the cumulative losses over our recent history, wecould not support a conclusion that realization of the existing deferred taxassets was more likely than not. During the quarters ended March 31, 2004 and2003, there was no substantive change in the above circumstances. Should wedetermine that we would be able to realize our deferred tax assets in thefuture, an adjustment will be made to the valuation allowance.

 

•      Goodwill Valuation - Effective January 1, 2002,we adopted Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets”**(“SFAS142”). SFAS 142 provides guidance on the financial accounting and reporting foracquired goodwill and other intangible assets. Under SFAS 142, goodwill andintangible assets deemed to have indefinite lives will no longer be amortized,but will be subject to impairment tests on an annual basis, or more frequentlyif certain indicators arise.  Intangibleassets with finite lives will continue to be amortized over their useful lives.

 

As of September 30, 2003we completed the annual impairment test for 2003 in accordance with theprovisions of SFAS 142.  There was noimpairment of goodwill noted as a result of this test.

 

As of March 31, 2004, wehave on our consolidated balance sheet goodwill of  $12.7 million associated with the Advisory Services segment and$0.5 million associated with the Strategic consulting segment. We will testthis goodwill annually, or more frequently if certain indicators arise.

 

* *

**CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

From time to time,information provided by the Company or statements made by its employees maycontain “forward-looking” statements. In particular, this Form 10-Q contains forward-looking statements madepursuant to the safe harbor provisions of the Private Securities LitigationReform Act of 1995.  Such forward-lookingstatements include statements concerning:

 

•      information technology spending;

•      general economic conditions;

•      competitive pricing pressure;

•      anticipated expense levels relative to theCompany’s total revenues;

•      working capital;

 

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•      capital expenditures and capital requirements;

•      cash flows and cash balances;

 

Forward-lookingstatements also include statements that are not historical facts or statementsusing words such as “anticipate”, “believe”, “could”, “estimate”, “expect”,“intend”, “likely”, “may”, “opportunity”, “plan”, “potential”, “project”,“should” or “will”.

 

Forward-lookingstatements are neither promises nor guarantees, but involve risks anduncertainties that could have a material adverse effect on the Company’sbusiness, results of operations and financial condition or cause actual resultsto differ materially from those set forth in the forward-lookingstatements.  These risks anduncertainties include the items listed below, which are discussed in detail inthe Company’s annual report on Form 10-K for the year ended December 31, 2003filed with the Securities and Exchange Commission:

 

•      the Company’s ability to manage expense levels;

•      general economic conditions;

•      decreases and delays in information technologyspending;

•      product pricing limiting the potential market forthe Company’s Advisory Services, Strategic Consulting services and PublishedResearch products;

•      the level and timing of subscription renewals tothe Company’s Research and Advisory services;

•      the level and timing of non-recurring StrategicConsulting engagements;

•      the level and timing of production and deliveryof Published Research products;

•      market acceptance of and demand for the Company’sproducts and services and the timing thereof, both domestically andinternationally;

•      the Company’s ability to increase its penetrationof existing customers and expand to additional customers;

•      the Company’s ability to deliver consistent,high-quality and timely analysis and advice to its clients;

•      the Company’s ability to recruit, retain anddevelop research analysts, consultants, management and administrative staff;

•      the Company’s ability to anticipate changingmarket needs;

•      fluctuations in the Company’s operating results

•      changes in competitive conditions in theCompany’s industry;

•      the integration of new businesses into theCompany’s operations;

•      the Company’s ability to manage and fund itsinternational operations;

•      the Company’s ability to find distributors for itsproducts and services internationally;

•      political and social turmoil in foreign marketsand other international risks;

•      goodwill and any impairment thereof;

•      strategic investments and any impairment thereof;

•      volatility and unpredictability of the Company’sstock price; and

•      other risks detailed in the Company’s filingswith the Securities and Exchange Commission.

 

Readers are cautioned notto place undue reliance on these forward-looking statements, which speak onlyas of the date the statements were made. Readers are also advised to consider such forward-looking statements inlight of the risks and uncertainties discussed above.  The Company undertakes no obligation to update anyforward-looking statements contained in the Quarterly Report on Form 10-Q.

 

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**Item 3****.**        **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

*Interest Rate Risk*

 

TheCompany’s exposure to market risk for changes in interest rates relatesprimarily to borrowings under its $6 million amended and restated creditfacility. As of March 31, 2004, there were no borrowings outstanding under thisfacility. In the event the Company draws on the facility, interest is computedon outstanding borrowings at the rate of LIBOR as determined by the bank plus1.5% or the higher of the Prime Rate or the Federal Funds Rate plus 0.5%. TheCompany believes that an increase or a decrease of ten percent in the effectiveinterest rate on available borrowings on its facility, if fully utilized, wouldnot have a material effect on future results of operations.

 

*InvestmentRisk*

 

The Company is exposed tomarket risk as it relates to changes in the market value of its strategicinvestments. The Company made investments in and advances to companies inparallel or synergistic industries to that of the Company’s. There were noimpairment losses recognized during the quarter ended March 31, 2004. As ofMarch 31, 2004, the Company had investments and advances totaling $1.1 million.Adverse changes in market conditions and poor operating results of theunderlying investments may result in the Company incurring additional losses oran inability to recover the remaining value of its investments and advances.

 

*ForeignCurrency Exchange Risk*

 

The Company is exposed tomarket risk as it relates to foreign currency exchange rates. Revenues andexpenses in foreign currencies translate into higher or lower revenues andexpenses in U.S. dollars as the U.S. dollar weakens or strengthens againstforeign currencies. Changes in foreign currency exchange rates may thereforenegatively affect the Company’s consolidated revenues and expenses. Currencytransaction gains or losses arising from transactions in currencies other thanthe functional currency of the Company’s foreign subsidiaries are included inthe results of operations. Such gains and losses were not material to theCompany’s consolidated results of operations during the quarters ended March31, 2004 and 2003. The Company has not entered into foreign currency forwardexchange contracts or other derivative financial instruments to hedge theeffects of adverse fluctuations in foreign currency exchange rates.

 

 

**Item 4****.**        **CONTROLS ANDPROCEDURES**

 

In accordance with Rule13a-15(b) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), within 90 days prior to the filing date of this report, the Companycarried out an evaluation, under the supervision and with the participation ofthe Company’s management, including the Company’s President and Chief ExecutiveOfficer along with its Vice President and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rule 13a-14(c) under the Exchange Act). Basedupon their evaluation of these disclosure controls and procedures, theCompany’s President and Chief Executive Officer along with the Vice Presidentand Chief Financial Officer concluded that the Company’s disclosure controlsand procedures are effective to ensure that information required to bedisclosed by us in reports we file under the Exchange Act is recorded,processed, summarized and reported by management of the Company on a timelybasis in order to comply with the Company’s disclosure obligations under theExchange Act and the SEC rules thereunder.

 

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## ***Changes in Internal Controls***

*There have been no significantchanges in the Company’s internal controls or other factors that couldsignificantly affect internal controls subsequent to the date the Companycarried out this evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.*

 

# **PART II**- OTHER INFORMATION

 

Item6.    Exhibits andReports on Form 8-K.

 

(a)           Exhibits.

 
| **Exhibit  Number** |   | **Description**                                                              |
|---------------------|--------|------------------------------------------------------------------------------|
|                |   |                                                                         |
| 10.1                |   | Employment Agreement  Between META Group, Inc. and John Piontkowski          |
| 31.1                |   | Certifications pursuant  to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
| 32.1                |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002     |

 

(b)           Reportson Form 8-K.

 

On February 5, 2004, theCompany filed a report on Form 8-K in connection with the furnishing of arelease of the Company’s results of operations for the quarter ended December31, 2003.

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Company has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |         | **META Group, Inc.** |
|--------|--------------|----------------------|
|   |         |                 |   |
|   |         |                 |   |
| Date:  | May 14, 2004 | By:                  | /s/ John W. Riley |   |
|   |         |                 | John W. Riley |
|   |         |                 | Vice President, Chief  Financial Officer,  Treasurer and Secretary |
|   |         |                 | (Principal Financial  and Accounting Officer) |

 

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