** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

 

ý           **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**              OF THE SECURITIES EXCHANGE ACT OF 1934**

                                **Forthe Quarterly period ended September 30, 2001**

** **

**OR**

 

o           **TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**              OF THE SECURITIES EXCHANGE ACT OF 1934**.

                                **Forthe Transition period from ______ to ______**

 

 

**CommissionFile Number 0-27280**

 

**META Group, Inc.**

(Exact name of registrantas specified in its charter)

 

 

| **Delaware**                                                    |   |   |   | **06-0971675**                     |
|-----------------------------------------------------------------|--------|--------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   |   |   | (IRS Employer  Identification No.) |
|                                                            |   |   |   |                               |
| **208  Harbor Drive, Stamford, Connecticut 06912-0061**         |
| (Address of principal  executive offices, including Zip Code)   |

 

**(203)973-6700**

(Registrant’s telephonenumber, including area code)

 

----

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

                Yes         ý                            No           o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date: The number ofshares of the issuer’s Common Stock, $.01 par value per share, outstanding asof November 1, 2001 was 12,829,922.

 

 

 

 

 

 

 

**META Group, Inc.**

 

 

**INDEX**

 

 
|          |   |                                                                                                         |   |
|---------------|--------|--------------------------------------------------------------------------------------------------------------|--------|
|          |   |                                                                                                         |   |
| **Part I**    |   | **FINANCIAL INFORMATION**                                                                                    |   |
|          |   |                                                                                                         |
| Item 1.       |   | Financial Statements                                                                                         |   |
|          |   |                                                                                                         |   |
|          |   | Consolidated Balance  Sheets: September  30, 2001 (unaudited) and December 31, 2000                          |   |
|          |   |                                                                                                         |   |
|          |   | Consolidated  Statements of Operations (unaudited): Three  and nine months ended September 30, 2001 and 2000 |   |
|          |   |                                                                                                         |   |
|          |   | Consolidated  Statements of Cash Flows (unaudited): Nine  months ended September 30, 2001 and 2000           |   |
|          |   |                                                                                                         |   |
|          |   | Notes  to Consolidated Financial Statements (unaudited)                                                      |   |
|          |   |                                                                                                         |   |
| Item 2.       |   | Management’s  Discussion and Analysis of Financial Conditionand  Results of Operations                  |   |
|          |   |                                                                                                         |   |
| Item 3.       |   | Quantitative  and Qualitative Disclosures About Market Risk                                                  |   |
|          |   |                                                                                                         |   |
|          |   |                                                                                                         |   |
| **Part  II**  |   | **OTHER INFORMATION**                                                                                        |   |
|          |   |                                                                                                         |   |
| Item 1.       |   | Legal Proceedings                                                                                            |   |
|          |   |                                                                                                         |   |
| Item 6.       |   | Exhibits and  Reports on Form 8-K                                                                            |   |
|          |   |                                                                                                         |   |
|          |   |                                                                                                         |   |
| **Signature** |   |                                                                                                         |   |

 

 

**PARTI - FINANCIAL INFORMATION**

 

**                Item 1.    FinancialStatements**

 

**META Group, Inc.**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands)**

 

 
|                                                                                                  |   | **September 30,** |          | **December 31,** |   |
|-------------------------------------------------------------------------------------------------------|--------|-------------------|---------------|------------------|--------|
|                                                                                                  |   | **2001**          |          | **2000**         |   |
|                                                                                                  |   | **(unaudited)**   |          |             |   |
| **Assets**                                                                                            |   |              |          |             |   |
| Current assets:                                                                                       |   |              |          |             |   |
| Cash and cash equivalents                                                                             |   | $                 |  21,136  |             | $      |  3,622 |   |
| Marketable  securities                                                                                |   | 7,034             |          | -                |   |
| Accounts  receivable, net                                                                             |   | 35,509            |          | 57,825           |   |
| Deferred  commissions                                                                                 |   | 3,068             |          | 3,428            |   |
| Deferred tax  asset                                                                                   |   | 3,221             |          | 5,806            |   |
| Other current  assets                                                                                 |   | 2,669             |          | 3,555            |   |
| Total current assets                                                                                  |   | 72,637            |          | 74,236           |   |
|                                                                                                  |   |              |          |             |   |
| Non-current  portion of accounts receivable                                                           |   | 2,081             |          | 4,444            |   |
| Marketable  securities                                                                                |   | -                 |          | 6,719            |   |
| Furniture and  equipment, net                                                                         |   | 12,656            |          | 14,712           |   |
| Deferred tax  asset                                                                                   |   | 8,010             |          | 3,733            |   |
| Goodwill and  other intangibles, net                                                                  |   | 25,529            |          | 23,532           |   |
| Investments and  advances                                                                             |   | 13,756            |          | 18,818           |   |
| Other assets                                                                                          |   | 7,908             |          | 6,269            |   |
| Total assets                                                                                          |   | $                 |  142,577 |             | $      |  152,463 |   |
|                                                                                                  |   |              |          |             |   |
| **Liabilities and Stockholders’  Equity**                                                        |   |              |          |             |   |
| Current  liabilities:                                                                                 |   |              |          |             |   |
| Accounts payable                                                                                      |   | $                 |  857     |             | $      |  4,856 |   |
| Deferred  revenues                                                                                    |   | 39,205            |          | 44,087           |   |
| Borrowings under  revolving credit agreement                                                          |   | 11,535            |          | -                |   |
| Current portion  of long-term debt                                                                    |   | 4,587             |          | 20,900           |   |
| Accrued  compensation                                                                                 |   | 2,860             |          | 6,086            |   |
| Accrued  liabilities                                                                                  |   | 5,535             |          | 3,849            |   |
| Income taxes  payable                                                                                 |   | 132               |          | 176              |   |
| Other current  liabilities                                                                            |   | 1,241             |          | 463              |   |
| Total current  liabilities                                                                            |   | 65,952            |          | 80,417           |   |
| Long-term debt                                                                                        |   | 5,778             |          | -                |   |
| Non-current  portion of deferred revenues                                                             |   | 4,794             |          | 6,338            |   |
| Total  liabilities                                                                                    |   | 76,524            |          | 86,755           |   |
|                                                                                                  |   |              |          |             |   |
| Stockholders’  equity:                                                                           |   |              |          |             |   |
| Preferred  stock, $.01 par value, authorized 2,000,000 shares, none issued                            |   | –            |          | –           |   |
| Common stock,  $.01 par value, authorized 45,000,000 shares, issued 13,476,938 and  11,619,025 shares |   | 135               |          | 116              |   |
| Paid-in capital                                                                                       |   | 57,946            |          | 52,874           |   |
| Retained earnings                                                                                     |   | 8,614             |          | 13,198           |   |
| Accumulated  other comprehensive loss                                                                 |   | (322              | )             | (160             | )      |
| Treasury stock,  at cost, 647,016 shares                                                              |   | (320              | )             | (320             | )      |
| Total  stockholders’ equity                                                                      |   | 66,053            |          | 65,708           |   |
| Total  liabilities and stockholders’ equity                                                      |   | $                 |  142,577 |             | $      |  152,463 |   |

See notes to consolidatedfinancial statements.

**META Group, Inc.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

(unaudited)

 

** **

** **
|                                                                      |   | **For the three months ended** |   | **For the nine months ended** |   |
|---------------------------------------------------------------------------|--------|--------------------------------|--------|-------------------------------|--------|
|                                                                      |   | **September****30,**           |   | **September****30,**          |   |
|                                                                      |   |                           |   |                          |   |
|                                                                      |   | **2001**                       |   | **2000**                      |   | **2001** |   | **2000** |   |
|                                                                      |   |                           |   |                          |   |   |   |   |   |
| Revenues:                                                                 |   |                           |   |                          |   |   |   |   |   |
| Research and  advisory services                                           |   | $                              | 19,744 |                          | $      | 20,529 |   | $ | 64,815 |   | $ | 64,181 |   |
| Strategic  consulting                                                     |   | 6,564                          |   | 7,069                         |   | 18,995 |   | 19,091 |   |
| Published  research products                                              |   | 1,014                          |   | 1,448                         |   | 3,679 |   | 5,027 |   |
|                                                                      |   |                           |   |                          |   |   |   |   |   |
| Total revenues                                                            |   | 27,322                         |   | 29,046                        |   | 87,489 |   | 88,299 |   |
|                                                                      |   |                           |   |                          |   |   |   |   |   |
| Operating  expenses:                                                      |   |                           |   |                          |   |   |   |   |   |
| Cost of services  and fulfillment                                         |   | 13,945                         |   | 17,568                        |   | 45,932 |   | 47,394 |   |
| Selling and  marketing                                                    |   | 10,436                         |   | 9,630                         |   | 30,765 |   | 25,342 |   |
| General and  administrative                                               |   | 3,351                          |   | 4,927                         |   | 10,440 |   | 10,049 |   |
| Depreciation and  amortization                                            |   | 1,911                          |   | 1,230                         |   | 5,718 |   | 3,004 |   |
| Restructuring  charge                                                     |   | -                              |   | -                             |   | 359 |   | - |   |
|                                                                      |   |                           |   |                          |   |   |   |   |   |
| Total operating  expenses                                                 |   | 29,643                         |   | 33,355                        |   | 93,214 |   | 85,789 |   |
|                                                                      |   |                           |   |                          |   |   |   |   |   |
| Operating (loss)  income                                                  |   | (2,321                         | )      | (4,309                        | )      | (5,725 | ) | 2,510 |   |
| Impairment loss                                                           |   | (2,854                         | )      | -                             |   | (2,854 | ) | - |   |
| Other income  (expense), net                                              |   | (148                           | )      | 129                           |   | 2,084 |   | 761 |   |
| Income (loss)  before provision (benefit) for income taxes                |   | (5,323                         | )      | (4,180                        | )      | (6,495 | ) | 3,271 |   |
| Provision  (benefit) for income taxes                                     |   | (1,661                         | )      | (1,712                        | )      | (1,911 | ) | 1,341 |   |
| Income (loss)  before cumulative effect of change in accounting principle |   | (3,662                         | )      | (2,468                        | )      | (4,584 | ) | 1,930 |   |
| Cumulative  effect of change in accounting principle                      |   | -                              |   | -                             |   | - |   | (2,438 | ) |
| Net loss                                                                  |   | $                              | (3,662 | )                             | $      | (2,468 | ) | $ | (4,584 | ) | $ | (508 | ) |
|                                                                      |   |                           |   |                          |   |   |   |   |   |
| Amounts per  basic common share:                                          |   |                           |   |                          |   |   |   |   |   |
| Income (loss)  before cumulative effect of change in accounting principle |   | $                              | (.29   | )                             | $      | (0.23 | ) | $ | (.39 | ) | $ | .18 |   |
| Cumulative  effect of change in accounting principle                      |   |                           | -      |                          | -      |   | - |   | $ | (.23 | ) |
| Net loss                                                                  |   | $                              | (.29   | )                             | $      | (0.23 | ) | $ | (.39 | ) | $ | (0.05 | ) |
|                                                                      |   |                           |   |                          |   |   |   |   |   |
| Amounts per  diluted common share:                                        |   |                           |   |                          |   |   |   |   |   |
| Income before  cumulative effect of change in accounting principle        |   | $                              | (.29   | )                             | $      | (0.23 | ) | $ | (.39 | ) | $ | .16 |   |
| Cumulative  effect of change in accounting principle                      |   |                           | -      |                          | -      |   | - |   | $ | (.20 | ) |
| Net loss                                                                  |   | $                              | (.29   | )                             | $      | (0.23 | ) | $ | (.39 | ) | $ | (.04 | ) |
|                                                                      |   |                           |   |                          |   |   |   |   |   |
| Weighted average  number of basic common shares outstanding               |   | 12,830                         |   | 10,822                        |   | 11,662 |   | 10,718 |   |
| Weighted average  number of diluted common shares outstanding             |   | 12,830                         |   | 10,822                        |   | 11,662 |   | 11,802 |   |

 

See notes to consolidatedfinancial statements.

 

 

**META Group, Inc.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

(unaudited)

 

 

 

** **
|                                                                                         |   | **For the nine months ended** |          |
|----------------------------------------------------------------------------------------------|--------|-------------------------------|---------------|
|                                                                                         |   | **September 30,**             |          |
|                                                                                         |   | **2001**                      |          | **2000** |   |
| **Operating activities:**                                                                    |   |                          |          |   |   |
| Net (loss)                                                                                   |   | $                             | (4,584        | ) | $ | (508 | ) |
| Adjustments to  reconcile net (loss) to net cash provided by (used in) operating activities: |   |                          |     |   |     |
| Cumulative  effect of change in accounting principle                                         |   |                          |          | 2,438 |   |
| Depreciation and  amortization                                                               |   | 5,718                         |          | 3,004 |   |
| Provision for  doubtful accounts                                                             |   | 1,648                         |          | 990 |   |
| Gain on sale of  investment                                                                  |   | (2,563                        | )             | – |   |
| Impairment loss  on investments                                                              |   | 2,854                         |          | - |   |
| Deferred income  taxes                                                                       |   | (1,840                        | )             | - |   |
| Other non-cash  charges                                                                      |   | 303                           |          | 190 |   |
| Changes in  assets and liabilities:                                                          |   |                          |          |   |   |
| Accounts  receivable                                                                         |   | 17,040                        |          | (5,093 | ) |
| Deferred  commissions                                                                        |   | 353                           |          | (1,029 | ) |
| Other current  assets                                                                        |   | 881                           |          | (3,252 | ) |
| Other assets                                                                                 |   | 4,841                         |          | (1,117 | ) |
| Accounts payable                                                                             |   | (3,998                        | )             | 2,563 |   |
| Accrued expenses  and other current liabilities                                              |   | (439                          | )             | (3,416 | ) |
| Deferred  revenues                                                                           |   | (6,896                        | )             | (6,653 | ) |
| Net cash  provided by (used in) operating activities                                         |   | 13,318                        |          | (11,883 | ) |
|                                                                                         |   |                          |          |   |   |
| **Investing activities:**                                                                    |   |                          |          |   |   |
| Capital  expenditures                                                                        |   | (1,761                        | )             | (7,752 | ) |
| Payments for  acquisitions                                                                   |   | (3,145                        | )             | (2,502 | ) |
| Proceeds from  sale of investment                                                            |   | 2,940                         |          | – |   |
| Investments and  advances                                                                    |   | 400                           |          | (702 | ) |
| Net cash used in  investing activities                                                       |   | (1,566                        | )             | (10,956 | ) |
|                                                                                         |   |                          |          |   |   |
| **Financing activities:**                                                                    |   |                          |          |   |   |
| Proceeds from  exercise of stock options                                                     |   | 7                             |          | 4,084 |   |
| Proceeds from  employee stock purchase plan                                                  |   | 164                           |          | 679 |   |
| Proceeds from  line of credit                                                                |   | 1,000                         |          | 10,900 |   |
| Private  placement of common stock, net of offering costs                                    |   | 4,603                         |          | – |   |
| Reacquisition of  shares – current stockholder                                          |   | –                        |          | (661 | ) |
| Net cash  provided by financing activities                                                   |   | 5,774                         |          | 15,002 |   |
| Effect of  exchange rate changes on cash                                                     |   | (12                           | )             | - |   |
| Net increase  (decrease) in cash and cash equivalents                                        |   | 17,514                        |          | (7,837 | ) |
| Cash and cash  equivalents, beginning of period                                              |   | 3,622                         |          | 10,106 |   |
| Cash and cash  equivalents, end of period                                                    |   | $                             | 21,136        |   | $ | 2,269 |   |

 

See notes toconsolidated financial statements.

 

 

**META Group, Inc.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

**Note 1 - Interim Financial Statements**

 

        The accompanying unaudited interimfinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and pursuant to therules and regulations of the Securities and Exchange Commission for reportingon Form 10-Q. Accordingly, certain information and footnote disclosuresrequired for complete financial statements are not included herein. It isrecommended that these financial statements be read in conjunction with thefinancial statements and related notes of META Group, Inc. (the “Company”) asreported in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2000. In the opinion of management, all adjustments (consisting ofnormal recurring adjustments) considered necessary for a fair presentation offinancial position, results of operations and cash flows at the dates and forthe periods presented have been included. Results for interim periods are notnecessarily indicative of results for the entire year.

 

## **Note2 – Change in Accounting Principle**

 

        In the fourth quarter of 2000, theCompany adopted the provisions of Staff Accounting Bulletin No. 101 “RevenueRecognition in Financial Statements” (“SAB 101”). The Company identifiedcertain newer Advisory Services product offerings containing multiple serviceelements where revenue was recognized as the services were performed. TheCompany elected to record these multiple element contracts on the straight-linemethod over the contract term, consistent with the treatment of the Company’sother traditional Advisory Services product offerings because it is theCompany’s belief that the straight-line method is most appropriate given theincreased sales volumes and the varying usage patterns by customers of theunderlying services. As required by SAB 101, the Company retroactively adoptedthe provisions effective January 1, 2000; accordingly, the results ofoperations for the three and nine months ended September 30, 2000 have beenrestated from the previously reported amounts.

 

**Note 3 - Income Taxes**

 

        During the quarter and nine months endedSeptember 30, 2001, the Company recorded a tax benefit of $1.66 million and$1.9 million, respectively, reflecting an effective tax rate of 31% and 29%,respectively.  The Company has recordeda full valuation allowance for the net operating loss carry-forwards generatedby its wholly-owned subsidiaries in Canada, Australia and Singapore due to theuncertainty of realizing the loss carry-forwards due to the start-up nature ofthe organizations.

 

## **Note4 – Marketable Securities**

 

Marketable securities at September 30, 2001 and December 31, 2000include the following (in thousands):

 
|                                          |   | **Cost**               |       | **Gross Unrealized Holding Gains (Losses)** |       | **Fair  Value** |       |
|-----------------------------------------------|--------|------------------------|------------|---------------------------------------------|------------|-----------------|------------|
|                                          |   |                   |       |                                        |       |            |       |
|                                          |   | **September 30, 2001** |       |
| U.S. government  issued mortgage backed bonds |   | $                      | 6,996      |                                        | $          | 38              |       | $ | 7,034 |   |
|                                          |   |                   | ** ** |                                        | ** ** |            | ** ** |
|                                          |   | **December  31, 2000** | ** ** |
| U.S. government  issued mortgage backed bonds |   | $                      | 6,996      |                                        | $          | (277            | )          | $ | 6,719 |   |

 

 

*Thecontractual maturities of marketable securities at September 30, 2001 are asfollows (in thousands):*

** **
|                                       |   | **September  30, 2000** |   |
|--------------------------------------------|--------|-------------------------|--------|
|                                       |   | **Cost**                |   | **Fair  Value** |   |
| Due after one  year through thirteen years |   | $                       | 6,996  |   | $ | 7,034 |   |
|                                            |        |                         |        |  |  |  |  |

 

Actual maturities may differ from contractual maturities because theissuer has the right to call the obligations. In October 2001, $2 million ofmarketable securities were called by the issuer. The proceeds were used to paydown the Company’s bank facility.

 

It is currently the Company’s intent to liquidate the remainingmarketable securities; accordingly, the balance at September 30, 2001 isclassified as a current asset.

 

 

###### **Note 5 – ComprehensiveIncome (Loss)**

 

                Totalcomprehensive income (loss) for the three and nine months ended September 30,2001 and 2000 was as follows (in thousands):

 
|                                                  |   | **Three months ended September 30,** |   | **Nine months ended September 30,** |   |
|-------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                  |   | **2001**                             |   | **2000**                            |   | **2001** |   | **2000** |   |
|                                                  |   |                                 |   |                                |   |   |   |   |   |
| Net loss                                              |   | $                                    | (3,662 | )                                   | $      | (2,468 | ) | $ | (4,584 | ) | $ | (508 | ) |
| Other  comprehensive (loss) income:                   |   |                                 |   |                                |   |   |   |   |   |
| Foreign currency  translation adjustment              |   | (263                                 | )      | –                              |   | (348 | ) | - |   |
| Unrealized gain  on marketable securities, net of tax |   | 142                                  |   | 65                                  |   | 187 |   | 134 |   |
|                                                  |   |                                 |   |                                |   |   |   |   |   |
| Comprehensive  loss                                   |   | $                                    | (3,783 | )                                   | $      | (2,403 | ) | $ | (4,745 | ) | $ | (374 | ) |

 

 

###### **Note 6 – SegmentReporting**

 

                The Companyoperates in three business segments: Research and Advisory Services, StrategicConsulting and Published Research Products. The Company’s reportable segmentsare separately managed strategic business segments.  Each operating segment offers different products/services, andsuch products/services are generally sold via different distribution channels.The Company’s interim segment information disclosures are presented consistentwith the way management operates its business. Revenue and operating income information for the three operatingsegments is set forth below (in thousands):

 
|                                                          |   | ** Research and Advisory Services** |   | **Strategic Consulting** |   | **Published Research Products** |   | **Consolidated Total** |   |
|---------------------------------------------------------------|--------|------------------------------------------|--------|--------------------------|--------|---------------------------------|--------|------------------------|--------|
| **     Three months ended September 30, 2001** |   |                                     |   |                     |   |                            |   |                   |   |
|                                                          |   |                                     |   |                     |   |                            |   |                   |   |
| Revenues                                                      |   | $                                        | 19,744 |                     | $      | 6,564                           |   | $                      | 1,014  |   | $ | 27,322 |   |
| Operating income                                              |   | (4,174                                   | )      | 1,104                    |   | 749                             |   | (2,321                 | )      |
|                                                          |   |                                     |   |                     |   |                            |   |                   |   |
| **     Three months ended September 30, 2000** |   |                                     |   |                     |   |                            |   |                   |   |
|                                                          |   |                                     |   |                     |   |                            |   |                   |   |
| Revenues                                                      |   | $                                        | 20,529 |                     | $      | 7,069                           |   | $                      | 1,448  |   | $ | 29,046 |   |
| Operating income                                              |   | (3,475                                   | )      | (1,590                   | )      | 756                             |   | (4,309                 | )      |
|                                                          |   |                                     |   |                     |   |                            |   |                   |   |
| **     Nine months ended September 30, 2001**  |   |                                     |   |                     |   |                            |   |                   |   |
|                                                          |   |                                     |   |                     |   |                            |   |                   |   |
| Revenues                                                      |   | $                                        | 64,815 |                     | $      | 18,995                          |   | $                      | 3,679  |   | $ | 87,489 |   |
| Operating income                                              |   | (5,550                                   | )      | 1,232                    |   | (1,407                          | )      | (5,725                 | )      |
|                                                          |   |                                     |   |                     |   |                            |   |                   |   |
| **Nine  months ended September 30, 2000**                     |   |                                     |   |                     |   |                            |   |                   |   |
|                                                          |   |                                     |   |                     |   |                            |   |                   |   |
| Revenues                                                      |   | $                                        | 64,181 |                     | $      | 19,091                          |   | $                      | 5,027  |   | $ | 88,299 |   |
| Operating income                                              |   | 2,943                                    |   | (747                     | )      | 314                             |   | 2,510                  |   |

 

###### **Note 7 – Acquisitions**

 

In January 2001, the Company acquired substantiallyall of the assets of two of its Asia Pacific distributors, one based in Sydney,Australia (“META Group Australia”), and the other headquartered in Singapore(“META Group Singapore”). With these acquisitions, the distributors becamewholly owned subsidiaries of META Group, Inc. The total purchase price amountedto approximately $2.9 million, consisting of cash in the amount of $1.9million, the forgiveness of accounts receivable from the distributors of$470,000, and the assumption of certain liabilities. The acquisitions wereaccounted for under the purchase method. Accordingly, the purchase price has been allocated to the assetsacquired and the liabilities assumed, based on estimated fair values at thedate of acquisition.  Such preliminaryallocation resulted in goodwill of $1.6 million, which is being amortized over20 years.

 

                During the ninemonths ended September 30, 2001, the Company paid $1.04 million in cash andissued $250,000 in common stock (57,084 shares) as contingent consideration toRubin Systems, Inc. (“RSI”), as a result of the achievement of certainfinancial targets in connection with the acquisition of substantially all ofthe assets of RSI in October 2000.  Inthe event certain future financial targets are met, additional contingentconsideration of up to $3.2 million payable in cash and $1.875 million payablein stock may be paid through March 2004. In the event the aggregate number ofshares issued in satisfaction of additional contingent consideration exceeds349,526 shares, the remaining consideration will be payable in cash.  The additional consideration was allocatedto intangible assets and goodwill, which are amortized over a period of four tofifteen years. RSI is wholly owned by Dr. Howard Rubin, a director and officerof the Company.

 

###### **Note 8 – Line of Credit**

 

In September 2000, the Company entered into a $25 million one-yearsenior revolving credit facility (the “Facility”) with its bank, which inSeptember 2001 converted into a five-year term loan payable in 60 consecutivemonthly installments. As of September 30, 2001, the total outstanding amountunder the Facility was $22.8 million, consisting of $21.9 million in borrowingsand $0.9 million in letters of credit issued on behalf of certain of theCompany’s independent sales representative organizations and as security forthe Company’s Stamford, CT premises lease. In October 2001, the Company made aprincipal payment of $365,000 in accordance with the terms of the Facility.Additionally in October 2001, $2 million of the Company’s marketable securitieswere called by the issuer. The proceeds were used to pay down the Facility. OnNovember 5, 2001 the Company restructured its existing credit facility with itsbank by entering into a $20 million amended and restated credit agreement (the“New Facility”). The New Facility replaces the Company’s previous $25 millionfacility and consists of an $8 million term loan (the “Term Loan”) payable in36 monthly consecutive installments commencing in December 2001, and a $12million revolving credit facility (the “Revolving Facility”). Both mature inNovember 2004. The New Facility has a borrowing base equal to 80% of theCompany’s eligible accounts receivable. Interest is payable at the rate of (i)LIBOR plus 2.5% or (ii) the higher of the Prime Rate or the Federal Funds Rateplus 0.5%. The New Facility is collateralized by the Company’s marketablesecurities and accounts receivable, and requires payment of a commitment feepayable quarterly, in arrears, of 0.25% based on the average, daily, unusedportion of the Revolving Facility. The New Facility contains a number ofcovenants that, among other things, restrict the ability of the Company to incuradditional indebtedness, pay dividends or other distributions, dispose ofcertain assets, enter into sale and leaseback transactions, create liens, makecertain investments, acquisitions or mergers, and that otherwise restrictcorporate activities.  In addition, theCompany is required to maintain certain financial covenants, including, but notlimited to, a leverage ratio covenant, a fixed charge ratio covenant and aminimum EBITDA covenant. During the nine months ended September 30, 2001, theCompany paid $1.09 million in interest expense.

 

Outstanding borrowings at September 30, 2001 have beenclassified in the accompanying balance sheet in accordance with the terms ofthe New Facility.

 

 

###### **Note 9 – PrivatePlacement of the Company’s Common Stock**

 

                In June 2001 theCompany completed a private placement of its common stock whereby the Companyissued 1,726,617 shares of its common stock for $2.78 per share to DaleKutnick, the Company’s Chairman of the Board, Chief Executive Officer andCo-Research Director, and additional purchasers affiliated with Francis J.Saldutti, Harry Gruner and George McNamee, each of whom is a member of theCompany’s Board of Directors (the “Board”). The Board approved the transactionafter receiving the favorable recommendation of a Special Committee of theBoard consisting of three disinterested Board members. The Special Committeeretained BNY Capital Markets, Inc. as its financial advisor to render afairness opinion on the transaction. Total proceeds to the Company were $4,603,000,net of offering costs of approximately $197,000. The common stock offered inthe private placement has not been registered with the Securities and ExchangeCommission and may not be offered or sold in the United States absentregistration or an applicable exemption from registration requirements. TheCompany has agreed, however, to file a registration statement with theSecurities and Exchange Commission to register the shares issued (other thanthose issued to Mr. Kutnick) upon request, such registration to be effective noearlier than December 31, 2001.

 

###### **Note 10 – Restructuring**

 

In April 2001, theCompany announced a restructuring whereby it reduced its workforce by 100, or15% in the quarter ended June 30, 2001. In addition, the Company’s president,and the Company’s co-research director and president and chief executiveofficer of metagroup.com resigned. As a result of the restructuring, theCompany incurred a $359,000 restructuring charge during the quarter ended June30, 2001 for severance payments made during the quarter ended June 30, 2001.

 

###### **Note 11 – Sale of LimitedPartnership Interest**

 

*       *In June2001, the Company sold its limited partnership interest in the JMI Equity SideFund, L.P. (the “Fund”) to affiliates of the Fund and an unrelated third partyfor total proceeds of $3.15 million. Distributions from the Fund in excess of areturn of capital and the Company’s cost of capital were intended to fundpayouts under the Company’s META Group/JMI Long-Term Incentive Plan for its keyemployees. Prior to the Company's sale of its interest in the Fund, eachparticipant in the META Group/JMI Long-Term Incentive Plan waived his or herrights to receive such payouts in consideration for stock options granted bythe Company. The Company recorded a loss on the sale of $26,000. Mr. HarryGruner, a director of the Company, is a managing member of JMI Side Associates,L.L.C, the general partner of the Fund, is affiliated with certain of the otherpurchasers and purchased approximately three percent of the limited partnershipinterests sold by the Company.

 

###### ** **

###### **Note 12 – Sale ofInvestment**

 

            In March 2001, the Company closedon the sale of its investment in Intermedia Group.  Cash proceeds were $2.94 million.  The Company recognized a gain on the sale of $2.56 million whichis included in other income (expense), net on the Company’s consolidatedstatements of operations.

 

 

**Note 13 – Investment Impairment**

 

                During the quarterended September 30, 2001, the Company made the determination that based onestimates of future cash flows and other available market data, certain of itsinvestments in and advances to companies in parallel industries were impaired.Accordingly, the Company recorded impairment losses totaling $2.85 million.

 

 

###### **Note 14 – RecentAccounting Pronouncements**

 

*Effective January 1, 2001, the Company adopted Statement ofFinancial Accounting Standards No. 133 (“SFAS 133”), “Accounting for DerivativeInstruments and Hedging Activities.” SFAS 133, as amended, establishesaccounting and reporting standards for derivative instruments, includingcertain derivative instruments embedded in other contracts and for hedgingactivities. Under SFAS 133, certain contracts that were not formerly consideredderivatives may now meet the definition of a derivative. The adoption of SFAS133 did not have an impact on the consolidated financial position, results ofoperations, or cash flows of the Company.*

 

In July 2001, Statement ofFinancial Accounting Standards No. 141 (“SFAS 141”) "BusinessCombinations" and Statement ofFinancial Accounting Standards No. 142 (“SFAS 142”) "Goodwill andOther Intangible Assets" were released. The related statements addressfinancial accounting and reporting for business combinations and acquiredgoodwill and other intangible assets. SFAS No. 141 is effective for allbusiness combinations initiated after June 30, 2001. SFAS No. 142 is effectivefor all fiscal years beginning after December 15, 2001. As required by SFAS142, the Company will perform an impairment test on goodwill and otherintangible assets as of the adoption date. Thereafter, the Company will performimpairment tests annually and whenever events or circumstances occur indicatingthat goodwill or other intangible assets might be impaired. Amortization ofgoodwill and certain other intangible assets, including those recorded in pastbusiness combinations, will cease. The Company is required to adopt SFAS 142 infiscal 2002. The Company is currently assessing the impact that SFAS No. 142will have on its financial position and results of operations.

 

In August 2001, Statement of Financial Accounting Standards No.143 (“SFAS 143”) "Accounting for Asset Retirement Obligations” wasreleased. This statement, effective January 1, 2003, addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs. InOctober 2001, Statement of FinancialAccounting Standards No. 144 (“SFAS 144”) "Accounting for theImpairment or Disposal of Long-Lived Assets" was released. This statement,effective January 1, 2002, addresses financial accounting and reporting for theimpairment or disposal of long-lived assets. SFAS 143 and SFAS 144 arecurrently not expected to have any material impact on the Company’s results ofoperations or financial position.

 

**Item2.**        **MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL**

**                    CONDITIONAND RESULTS OF OPERATIONS**

 

*The discussion and analysis belowcontains trend analysis and other forward-looking statements within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934, which are subject to a number of risks and uncertainties.These forward-looking statements are typically denoted in this Quarterly Reporton Form 10-Q by words such as anticipate, believe, could, estimate, expect,intend, may, 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 various risk factors, including the risk factors set forth belowunder “Certain Factors That May Affect Future Results.” This discussion shouldbe read 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, 2000.*

 

**Overview**

 

                META Group, Inc.(“META Group”, together with its subsidiaries, The Sentry Group, Inc.[“Sentry”], 1422722 Ontario Inc. [“META Canada”], META Group Australia HoldingsPTY Limited [“META Group Australia”], Cenntinum PTE Limited [“META GroupSingapore”], and MG (Bermuda) Ltd. – collectively, the “Company”), is a leadingindependent research and consulting firm focusing on information technology(“IT”) and business transformation strategies. The Company’s goal is to deliver objective, consistent, and actionableguidance to enable organizations to innovate more rapidly and effectively.

 

                The Company hasthree operating business segments: Advisory Services, Strategic Consulting andPublished Research Products.  TheAdvisory Services segment provides annually renewable subscription services(focused on specific areas of IT, IT issues related to a specific verticalmarket or the specific needs of those within the IT organization), serviceanalyst briefing engagements and conferences. Included in the Company’s Advisory Services are the Company’s Infusionprograms, which build on the business-focused analysis of Advisory Services byoffering tools, templates and interactive workshops that provide methodologyand skill based training needed to successfully manage specificbusiness-critical issues. The Strategic Consulting segment provides strategicconsulting services addressing clients’ business and technologychallenges.  The Published ResearchProducts segment provides reports, studies, surveys and in-depth analysis ofspecific business or IT issues.

 

Advisory Services revenues constituted approximately72% and 71% of the Company’s total revenues for the quarters ended September30, 2001 and 2000, respectively. Billings attributable to the Company’s Advisory Services are initiallyrecorded as deferred revenues and then recognized pro rata over the contractterm. Advisory Services revenues attributable to international clients arebilled and collected by the Company’s independent sales representative organizationsand its wholly-owned subsidiaries in Canada, Australia and Singapore. TheCompany realizes revenues from the international sales representativeorganizations at rates of 25% to 75% of amounts billed to those clients.

 

                One measure of the volume of the Company’s businessis its annualized “Contract Value,” which the Company calculates as theaggregate annualized subscription revenue recognized from all Advisory Servicescontracts in effect at a given point in time, without regard to the remainingduration of such contracts. Contract Value was $76.6 million at September 30,2001 versus $82 million at September 30, 2000, a 6.7% decrease.

 

                Revenues from Strategic Consulting engagementscomprised approximately 24% of the Company’s total revenues for the quartersended September 30, 2001 and 2000, respectively. The Company recognizesrevenues on Strategic Consulting engagements as the work is performed.  The majority of the Company’s StrategicConsulting clients consist of Advisory Services clients seeking additionaladvice tailored to their individual IT requirements.

The Company’s operating expenses consist of cost ofservices and fulfillment, selling and marketing expenses and general andadministrative expenses. Cost of services and fulfillment represents the costsassociated with production and delivery of the Company’s products and servicesand includes the costs of research, development and preparation of periodicreports, analyst telephone consultations, executive briefings and conferences,published research, consulting services, new product development, and allassociated editorial and support services. Selling and marketing expensesinclude the costs of salaries, commissions and related benefits for suchpersonnel, travel and promotion. General and administrative expenses includethe costs of the finance and accounting departments, legal, human resources,corporate IT and other administrative functions of the Company.

 

                In the fourthquarter of 2000, the Company adopted the provisions of Staff AccountingBulletin No. 101 “Revenue Recognition in Financial Statements” (“SAB 101”). TheCompany identified certain newer Advisory Services product offerings containingmultiple service elements where revenue was recognized as the services wereperformed. The Company elected to record these multiple element contracts onthe straight-line method over the contract term, consistent with the treatmentof the Company’s other traditional Advisory Services product offerings becauseit is the Company’s belief that the straight-line method is most appropriategiven the increased sales volumes and the varying usage patterns by customersof the underlying services. As required by SAB 101, the Company retroactivelyadopted the provisions effective January 1, 2000; accordingly, the results ofoperations for the quarter and nine months ended September 30, 2000 have beenrestated from the previously reported amounts.

 

 

**THREE MONTHS ENDED SEPTEMBER 30, 2001AND 2000**

 

REVENUES  Total revenues decreased 6% to $27.3 million in the quarterended September 30, 2001 from $29.0 million in the quarter ended September30, 2000.

 

Revenues from Advisory Services, which generally are derived fromannually renewable contracts payable by clients in advance, decreased4% to $19.7 million in the quarter ended September 30, 2001 from$20.5 million in the quarter ended September 30, 2000, but increased as apercentage of total revenues to 72% from 71%. The decrease in revenues fromAdvisory Services was due primarily to decreases and delays in IT spending as aresult of general economic conditions, partially offset by an increase in theCompany’s Advisory Service revenues attributable to international clients.

 

Advisory Services revenues attributable to international clientsincreased 17% in the quarter ended September 30, 2001 from the quarter endedSeptember 30, 2000 and increased as a percentage of Advisory Services revenuesto 18% in the quarter ended September 30, 2001 from 15% in the quarter endedSeptember 30, 2000. Such increases in Advisory Services revenue attributable tointernational clients were due principally to incremental revenues as a resultof the acquisitions of META Group Canada, META Group Australia and META GroupSingapore, and, to a lesser extent, growth from many of the Company’sindependent distributors. These increases were partially offset by a generalslowdown in IT spending experienced internationally. The Company currentlyanticipates that revenues attributable to international clients will continueto grow faster than revenues attributable to domestic clients for theforeseeable future.

 

Strategic Consulting revenues, which result from strategic consultingengagements addressing clients’ business and technology issues, decreased 7% to$6.6 million in the quarter ended September 30, 2001 from $7.1 million in thequarter ended September 30, 2000, and remained constant as a percentage oftotal revenues at 24% in the quarters ended September 30, 2001 and 2000. Thedecrease was principally due to a significant decrease in headcount in theCompany’s domestic consulting practice as well as market pricing pressuresstemming from general economic conditions. The decreases were partially offsetby incremental revenues from the acquisitions of META Group Canada, META GroupAustralia and Rubin Systems, Inc., increased productivity of existing staff, aswell as increased demand for the Company’s consulting services that focus oncost reduction strategies.

Published Research Products revenues, which result from the sale ofpublications offering in-depth analysis of single business or IT issues,decreased 30% to $1 million in the quarter ended September 30, 2001 from $1.4million in the quarter ended September 30, 2000, and decreased as a percentageof total revenues to 4% in the quarter ended September 30, 2001 from 5% in thequarter ended September 30, 2000.  Thedecrease was principally due to the overall decrease in IT spending as a resultof general economic conditions, and, to a lesser extent, a change in the mix ofproducts sold by the Company’s inside sales channel (telephone professionalsthat sell the Company’s Published Research Products). Previously, these salespersonnel sold only the Company’s traditional publication products. Over thelast twelve months, they have also been selling bundled packages that combinetraditional publications with service analyst inquiry and selling Web-basedsubscription products that consist primarily of content developed by theCompany’s Advisory Services personnel. Revenues from the sales of these bundledproducts and services and Web-based subscription products are recognized asAdvisory Services revenues. The Company currently anticipates that its insidesales channel will continue to sell these bundled packages for the foreseeablefuture. 

 

The Company currently believes that decreases in and delays of ITspending as a result of general economic conditions are likely to continue tonegatively impact its revenues for the foreseeable future.

 

COST OF SERVICES AND FULFILLMENT  Cost of services and fulfillment decreased21% to $13.9 million in the quarter ended September 30, 2001 from $17.6 millionin the quarter ended September 30, 2000 and decreased as a percentage of totalrevenues to 51% in the quarter ended September 30, 2001 from 61% in the quarterended September 30, 2000. The decrease was principally due to a decrease inpayroll and bonus expense as a result of lower headcount in the Company’sresearch and fulfillment staff, lower accrued discretionary bonuses from theyear ago period, and, to a lesser extent, due to a decrease in travel costs bythe Company’s analysts and consultants. The decreases were partially offset byincremental costs as a result of the acquisitions of META Group Canada, METAGroup Australia, META Group Singapore and Rubin Systems, Inc.

 

SELLING AND MARKETING EXPENSES  Selling and marketing expenses increased8.4% to $10.4 million in the quarter ended September 30, 2001 from $9.6 millionin the quarter ended September 30, 2000 and increased as a percentage of totalrevenues to 38% in the quarter ended September 30, 2001 from 33% in the quarterended September 30, 2000. The increase in selling and marketing expenses wasprincipally due to the write off of a $1.25 million note receivable owed fromthe Company’s independent distributor in the France/Belgium territory as aresult of the termination of the distributor agreement, and a provision for a$225,000 guarantee by the Company of borrowings of the former distributor withits local bank that are in default. The Company is currently seeking to assignterritory rights to two of its existing international distributors that haveassumed the responsibility of the region in the interim period.  Additionally, the Company recognizedincreased commission expenses associated with increased commissions paid underthe Company’s sales commission plan for the plan year ended January 31, 2001.The increased commission payments were principally due to financial incentivescontained in the Company’s sales commission plan when it reorganized thepreviously separate sales forces in 2000. Because the Company amortizescommission payments over the subscription period in which the related AdvisoryServices revenues are amortized to income, the Company has experiencedincreased commission expense in the quarter ended September 30, 2001 whencompared to the quarter ended September 30, 2000. The Company has restructuredits sales commission plan for the plan year ending January 31, 2002 in anattempt to decrease certain financial incentives and reduce total commissionspaid. In addition, the Company incurred greater marketing expensesinternationally in connection with the acquisitions of META Group Canada, METAGroup Australia and META Group Singapore. The increases in selling andmarketing expenses were partially offset by a decrease in salary expense in thequarter ended September 30, 2001 when compared to the quarter ended September30, 2000 due principally to the Company’s cost reduction measures, including,but not limited to, the reduction in force that occurred in April 2001 andreduced travel costs.

GENERAL AND ADMINISTRATIVE EXPENSES  General and administrative expensesdecreased 32% to $3.4 million in the quarter ended September 30, 2001 from $4.9million in the quarter ended September 30, 2000 and decreased as a percentageof total revenues to 12% in the quarter ended September 30, 2001 from 17% inthe quarter ended September 30, 2000. The decrease in expenses was principallydue to lower discretionary bonuses accrued during the quarter ended September30, 2001 versus the year ago period, and, to a lesser extent, reduced bad debtexpense. Such decreases were partially offset by incremental costs associatedwith the acquisitions of META Group Canada, META Group Australia and META GroupSingapore and increased salary expense experienced during the quarter.

 

DEPRECIATION AND AMORTIZATION  Depreciation and amortization expenseincreased 55% to $1.9 million in the quarter ended September 30, 2001 from $1.2million in the quarter ended September 30, 2000. The increase in depreciationand amortization expense was principally due to higher levels of property andequipment on hand during the quarter ended September 30, 2001 versus the sameperiod of 2000 and higher levels of goodwill and other intangible assets duringthe same period due to the payment of contingent consideration for certain ofthe Company’s acquisitions and for acquisitions consummated in 2000 and thenine months ended September 30, 2001.

 

IMPAIRMENT LOSS During the quarterended September 30, 2001, the Company made the determination that based onestimates of future cash flows and other available market data, certain of itsinvestments in and advances to companies in parallel industries were impaired.Accordingly, the Company recorded impairment losses totaling $2.85 million. TheCompany will continue to evaluate its investments for possible impairment.

 

 OTHER INCOME (EXPENSE), NET  Other income (expense), net decreased to$148,000 of other expense (net) in the quarter ended September 30, 2001 from$129,000 of other income (net) in the quarter ended September 30, 2000 dueprincipally to an increase in interest expense recorded on outstandingborrowings under the Company’s credit facility. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations – Liquidity andCapital Resources” and Note 8 to the consolidated financial statements.

 

PROVISION (BENEFIT) FOR INCOME TAXES  During the quarter ended September 30, 2001,the Company recorded an income tax benefit of $1.66 million reflecting aneffective tax rate of 31%, compared to a benefit of $1.7 million recorded forthe quarter ended September 30, 2000. The lower effective rate in 2001 wasprincipally due to the full valuation allowance recorded for the net operatingloss carry-forwards generated by its wholly-owned subsidiaries in Canada,Australia and Singapore due to the uncertainty of realizing the losscarry-forwards attributable to the start-up nature of the organizations.

 

 

**NINE MONTHS ENDED SEPTEMBER 30, 2001AND 2000**

 

REVENUES  Total revenues decreased 1% to $87.5 million in the nine monthsended September 30, 2001 from $88.3 million in the nine months ended September30, 2000.

 

Revenues from Advisory Services increased 1% to $64.8 million in the nine months endedSeptember 30, 2001 from $64.2 million in the nine months ended September30, 2000 and increased as a percentage of total revenues to 74.1% from 72.7%.The increase in revenues from Advisory Services was principally due toincremental revenues from the acquisitions of META Group Canada, META GroupAustralia and META Group Singapore, and, to a lesser extent, due to an increasein revenues from its independent international distributors. Such increaseswere offset by a decrease in the Company’s domestic Advisory Service revenuescaused by decreases and delays in IT spending as a result of general economicconditions. Advisory Services revenues attributable to international clientsincreased 19% in the nine months ended September 30, 2001 from the nine monthsended September 30, 2000, and increased as a percentage of Research andAdvisory Services revenues to 18%from 15%.

Strategic Consulting revenues decreased 1% to $19.0 million in the ninemonths ended September 30, 2001 from $19.1 million in the nine months endedSeptember 30, 2000, and remained constant as a percentage of total revenues at22%.  The decrease was principally dueto the decrease in headcount in the Company’s consulting practice as well asmarket pricing pressures stemming from general economic conditions. Thedecreases were offset by growth of the Company’s core consulting business dueprincipally to the increased demand for the Company’s consulting services thatfocus on cost reduction strategies, increased productivity of its existingstaff, and incremental revenues from the acquisitions of META Group Canada,META Group Australia and Rubin Systems, Inc.

 

Published Research Products revenues decreased 27% to $3.7 million inthe nine months ended September 30, 2001 from $5.0 million in the nine monthsended September 30, 2000 and decreased as a percentage of total revenues to4.2% from 5.7%.  The decrease inrevenues was principally due to the overall decrease in IT spending as a resultof general economic conditions, and, to a lesser extent, a change in the mix ofproducts sold by the Company’s inside sales channel. Previously, these salespersonnel sold only the Company’s traditional publication products. Over thelast twelve months, they have also been selling bundled packages that combinetraditional publications with service analyst inquiry and selling Web-basedsubscription products that consist primarily of content developed by theCompany’s Advisory Services personnel. Revenues from the sales of these bundledproducts and services and Web-based subscription products are recognized asAdvisory Services revenues. The Company currently anticipates that its insidesales channel will continue to sell these bundled packages for the foreseeablefuture.

 

COST OF SERVICES AND FULFILLMENT  Cost of services and fulfillment decreased3% to $45.9 million in the nine months ended September 30, 2001 from $47.4million in the nine months ended September 30, 2000 and decreased as apercentage of total revenues to 52.5% from 53.7%.  The decrease was principally due to decreases in royalties paidto third parties that produce content included in certain products and servicessold by the Company, lower accrued discretionary bonuses during the currentyear versus the year ago period, decreases in travel costs incurred by theCompany’s analysts, consultants and fulfillment personnel, and decreasedpayroll and payroll related costs for analyst, consultant and fulfillmentpositions as a result of a decrease in headcount in such positions during thethree months ended September 30, 2001. The decreases were partially offset byincremental costs from the acquisitions of META Group Canada, META GroupAustralia and META Group Singapore and increased payroll and payroll relatedcosts for analyst, consultant and fulfillment positions as a result of anincrease in headcount in such positions for the nine months ended September 30,2001 when compared to the same period of the prior year.

 

SELLING AND MARKETING EXPENSES  Selling and marketing expenses increased 21%to $30.8 million in the nine months ended September 30, 2001 from $25.3 millionin the nine months ended September 30, 2000 and increased as a percentage oftotal revenues to 35.2% from 28.7%. The increase in selling and marketingexpenses was principally due to the write off of a $1.25 million notereceivable owed from the Company’s independent distributor in theFrance/Belgium territory as a result of the termination of the distributoragreement, and a provision for a $225,000 guarantee by the Company of borrowingsof the former distributor with its local bank that are in default. The Companyis currently seeking to assign territory rights to two of its existinginternational distributors that have assumed the responsibility of the regionin the interim period. In addition, the Company incurred greater marketingexpenses internationally in connection with the acquisitions of META GroupCanada, META Group Australia and META Group Singapore and in connection withmarketing support of its independent sales representative organizations, andexperienced increased commission expenses associated with the expanded domesticsales force that sells the Company’s Advisory Services and Strategic Consultingservices and inside sales force that principally sells the Company’s PublishedResearch Products. The headcount increases in selling and marketing wereundertaken in 2000 in anticipation of higher revenue growth rates than therevenue growth rates achieved in 2000. Consequently, in April 2001, the Companyreduced its workforce by approximately 15% in order to better align itsresources with market demand. While the Company’s headcount reductions occurredacross the organization, the majority of the headcount reduction occurred inselling and marketing. Because the Company amortizes commission payments overthe subscription period in which the related Advisory Services revenues areamortized to income, the Company experienced increased commission expense in2001 when compared to 2000 in connection with the increased commissions paidunder the Company’s sales commission plan for the plan year ended January 31,2001. The increased commission payments were principally due to financialincentives contained in the Company’s sales commission plan when it reorganizedthe previously separate sales forces in 2000. The Company has restructured itssales commission plan for the plan year ending January 31, 2002 in an attemptto decrease certain financial incentives and reduce total commissions paid.

GENERAL AND ADMINISTRATIVE EXPENSES  General and administrative expensesincreased 4% to $10.4 million in the nine months ended September 30, 2001 from$10.0 million in the nine months ended September 30, 2000 and increased as apercentage of total revenue to 11.9% from 11.4%. The increase in expenses wasprincipally due to increased salary and benefit costs, incremental costs as aresult of the acquisitions of META Group Canada, META Group Australia and METAGroup Singapore, and increased facilities costs (consisting of rent, telephoneand utilities), and were partially offset by decreased bad debt expense andlower accrued discretionary bonuses in the nine months ended September 30, 2001versus the same period of the prior year.

 

DEPRECIATION AND AMORTIZATION  Depreciation and amortization expenseincreased to $5.7 million in the nine months ended September 30, 2001 from $3.0million in the nine months ended September 30, 2000. The increase indepreciation and amortization expense was principally due to higher levels ofproperty and equipment on hand during the nine months ended September 30, 2001versus the same period of 2000 and higher levels of goodwill and otherintangible assets during the same period due to the payment of contingentconsideration for certain of the Company’s acquisitions and for acquisitionsconsummated in 2000 and the nine months ended September 30, 2001.

 

RESTRUCTURING CHARGE   As mentioned above, in April 2001, theCompany announced a restructuring whereby it reduced its workforce by 100 or15% in the quarter ended June 30, 2001. As a result of the restructuring, theCompany incurred a $359,000 restructuring charge during the quarter ended June30, 2001 for severance payments made during the quarter ended June 30, 2001.There were no restructuring charges in 2000. See Note 10 to the consolidatedfinancial statements.

 

IMPAIRMENT LOSS During the quarterended September 30, 2001, the Company made the determination that based onestimates of future cash flows and other available market data, certain of itsinvestments in and advances to companies in parallel industries were impaired.Accordingly, the Company recorded impairment losses totaling $2.85 million.

 

OTHER INCOME Other income increasedto $2.1 million in the nine months ended September 30, 2001 from $0.8 millionin the nine months ended September 30, 2000. The increase was principally dueto a $2.6 million gain recognized on the sale of its investment in IntermediaGroup. Proceeds from the sale were $2.94 million. The gain was partially offsetby interest expense recorded on the Company’s outstanding borrowings under itsline of credit. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Liquidity and Capital Resources” and Note8 to the consolidated financial statements.

 

PROVISION(BENEFIT) FOR INCOME TAXES During the nine months ended September 30, 2001, the Company recorded anincome tax benefit of $1.9 million versus a provision for income taxes of $1.3million for the nine months ended September 30, 2000, reflecting an effectivetax rate of 29% and 41%, respectively. The decrease in the effective tax rateis due to the full valuation allowance recorded for the net operating losscarry-forwards generated by its wholly-owned subsidiaries in Canada, Australiaand Singapore due to the uncertainty of realizing the loss carry-forwardsattributable to the start-up nature of the organizations.

 

LIQUIDITY AND CAPITALRESOURCES

 

The Company funds its operations primarily throughcash generated from operations, borrowings under its credit facility, and, to a lesser extent, from thesale of its common stock. The Company generated $13.3 million of cash fromoperations during the nine months ended September 30, 2001, compared to $11.9million used in operations during the same period of 2000. The increase in cashgenerated from operations was principally due to an increase in collections ofits outstanding accounts receivable and proceeds from the Company’s sale of itslimited partnership interest in the JMI Equity Side Fund, L.P. discussed below,partially offset by decreases in accounts payable due to increased levels ofcash on hand during the nine months ended September 30, 2001 versus the sameperiod of the prior year.

 

*        In June 2001, the Company sold itslimited partnership interest in the JMI Equity Side Fund, L.P. (the “Fund”) toaffiliates of the Fund and an unrelated third party for total proceeds of $3.15million. Distributions from the Fund in excess of a return of capital and theCompany’s cost of capital were intended to fund payouts under the Company’sMETA Group/JMI Long-Term Incentive Plan for its key employees. Prior to theCompany's sale of its interest in the Fund, each participant in the METAGroup/JMI Long-Term Incentive Plan waived his or her rights to receive such payoutsin consideration for stock options granted by the Company. The Company recordeda loss on the sale of $26,000. Mr. Harry Gruner, a director of the Company, isa managing member of JMI Side Associates, L.L.C, the general partner of theFund, is affiliated with certain of the other purchasers, and purchasedapproximately three percent of the limited partnership interests sold by theCompany.*

 

The Company used $1.76million of cash in the nine months ended September 30, 2001 compared to $7.75million in the same period of 2000 for the purchase of furniture, equipment,computers and related software for use by the Company’s employees. While theCompany currently expects to continue to make additional purchases ofequipment, the Company currently believes that such expenditures will continueto be significantly less than expenditure levels in 2000. The Company currentlyhas no material commitments for capital expenditures.

 

In March 2001, the Company closed on the sale of itsinvestment in Intermedia Group.  Cashproceeds were $2.94 million.  TheCompany recognized a gain on the sale of $2.56 million. In May 2001, theCompany received approximately $440,000 in cash representing a repayment of aportion of the Company’s investment in a convertible promissory note ofSyndicated Research Group, Inc. plus accrued interest thereon.

 

In January 2001, the Company completed the acquisitionof substantially all of the assets of two of its Asia Pacific distributors, onebased in Sydney, Australia (“META Group Australia”), and the otherheadquartered in Singapore (“META Group Singapore”). With these acquisitions,the distributors became wholly owned subsidiaries of META Group, Inc. The totalpurchase price amounted to approximately $2.9 million, consisting of cash inthe amount of $1.9 million, the forgiveness of accounts receivable from thedistributors of $470,000, and the assumption of certain liabilities.

 

                During the ninemonths ended September 30, 2001, the Company paid $1.04 million in cash andissued $250,000 in stock (57,084 shares) as contingent consideration to RubinSystems, Inc. (“RSI”), as a result of the achievement of certain financialtargets in connection with the acquisition of substantially all of the assetsof RSI in October 2000.  In the eventcertain future financial targets are met, additional contingent considerationof up to $3.2 million payable in cash and $1.875 million payable in stock maybe paid through March 2004. In the event the aggregate number of shares issuedin satisfaction of contingent consideration exceeds 349,526 shares, theremaining consideration will be payable in cash.  The additional consideration was allocated to intangible assetsand goodwill, which are amortized over a period of four to fifteen years. RSIis wholly owned by Dr. Howard Rubin, a director and officer of the Company.

 

                In June 2001 theCompany completed a private placement of its common stock whereby the Companyissued 1,726,617 shares of its common stock for $2.78 per share to DaleKutnick, the Company’s Chairman of the Board, Chief Executive Officer andCo-Research Director, and additional purchasers affiliated with Francis J.Saldutti, Harry Gruner and George McNamee, each of whom is a member of theCompany’s Board of Directors (the “Board”). The Board approved the transactionafter receiving the favorable recommendation of a Special Committee of theBoard consisting of three disinterested Board members. The Special Committeeretained BNY Capital Markets, Inc. as its financial advisor to render afairness opinion on the transaction. Total proceeds to the Company were$4,603,000, net of offering costs of approximately $197,000. The common stockoffered in the private placement has not been registered with the Securitiesand Exchange Commission and may not be offered or sold in the United Statesabsent registration or an applicable exemption from registration requirements.The Company has agreed, however, to file a registration statement with theSecurities and Exchange Commission to register the shares issued (other thanthose issued to Mr. Kutnick) upon request, such registration to be effective noearlier than December 31, 2001.

 

In September 2001, the Companyinitiated a tender offer for stock options with an exercise price greater than$12 per share to certain eligible employee option holders. The Company’s seniorexecutives and members of the board of directors were not eligible toparticipate in the tender offer. In October 2001, the offer period expired and752,469 stock options were accepted for exchange and cancelled. The Companycurrently intends to issue the same amount of options in April 2002 at the fairmarket value on the actual date of issuance to those eligible employees stillemployed at the date of offer.

 

**Duringthe nine months ended September 30, 2001 the Company received $1 million inborrowings under its line of credit and $171,000 in proceeds from the exerciseof stock options and its stock purchase plan compared to $4.76 million inproceeds from the exercise of stock options and its stock purchase plan in thesame period of last year.**

 

In September 2000, the Company entered into a $25million one-year senior revolving credit facility (the “Facility”) with itsbank, which in September 2001 converted into a five-year term loan payable in60 consecutive monthly installments. As of September 30, 2001, the totaloutstanding amount under the Facility was $22.8 million, consisting of $21.9million in borrowings and $0.9 million in letters of credit issued on behalf ofcertain of the Company’s independent sales representative organizations and assecurity for the Company’s Stamford, CT premises lease. In October 2001, theCompany made a principal payment of $365,000 in accordance with the terms ofthe Facility. Additionally in October 2001, $2 million of the Company’smarketable securities were called by the issuer. The proceeds were used to paydown the Facility. On November 5, 2001 the Company restructured its existingcredit facility with its bank by entering into a $20 million amended andrestated credit agreement (the “New Facility”). The New Facility replaces theCompany’s previous $25 million facility and consists of an $8 million term loan(the “Term Loan”) payable in 36 monthly consecutive installments commencing inDecember 2001, and a $12 million revolving credit facility (the “RevolvingFacility”). Both mature in November 2004. The New Facility has a borrowing baseequal to 80% of the Company’s eligible accounts receivable. Interest is payableat the rate of (i) LIBOR plus 2.5% or (ii) the higher of the Prime Rate or theFederal Funds Rate plus 0.5%. The New Facility is collateralized by theCompany’s marketable securities and accounts receivable, and requires paymentof a commitment fee payable quarterly, in arrears, of 0.25% based on theaverage, daily, unused portion of the Revolving Facility. The New Facilitycontains a number of covenants that, among other things, restrict the abilityof the Company to incur additional indebtedness, pay dividends or otherdistributions, dispose of certain assets, enter into sale and leasebacktransactions, create liens, make certain investments, acquisitions or mergers,and that otherwise restrict corporate activities.  In addition, the Company is required to maintain certainfinancial covenants, including, but not limited to, a leverage ratio covenant,a fixed charge ratio covenant and a minimum EBITDA covenant. During the ninemonths ended September 30, 2001, the Company paid $1.09 million in interestexpense.

 

In November 2001, the Company made a payment of $2.04million against the Revolving Facility as a result of the excess of theCompany’s outstanding borrowings under its Revolving Facility and Term Loanover its borrowing base.

 

As of September 30, 2001,the Company had cash of $21.1 million, marketable securities of $7 million andworking capital of $6.7 million. The increase in cash and cash equivalentsduring the nine months ended September 30, 2001 is due principally to increasedcollections on its accounts receivable, proceeds from the private placement ofits common stock, proceeds from the sale of its limited partnership interest inthe JMI Equity Side Fund, L.P. and cash received from the sale of the Company’sinvestment in Intermedia Group, partially offset by increased commissionpayments, increased payments on outstanding trade payables, payments to fundits acquisitions and capital expenditures and a decrease in borrowings underits credit facility. The Company currently intends to sell its remaining $5million of marketable securities during the fourth quarter. The proceeds fromthe sale of the marketable securities are currently intended to be used to paydown the credit facility. During the nine months ended September 30, 2001, theCompany experienced significant improvement in its accounts receivablecollection efforts when compared to the year ago period. The Company intends tocontinue its efforts to improve its accounts receivable collections by, amongother things, continuing to assign management and sales personnel increasedresponsibility in the overall collection effort and increasing staff assignedto collections in the first quarter of 2002 to assist in collecting receivablesfrom the Company’s historically stronger fourth quarter.

 

In April 2001, theCompany announced a restructuring in order to better align its resources withmarket demand and implemented substantial cost containment measures. As part ofits restructuring, the Company reduced its workforce by 100, or 15%. Inaddition, the Company’s president, Larry R. DeBoever, and the Company’sco-research director and president and chief executive officer ofmetagroup.com, Peter Burris, resigned. As a result, the Company anticipates anannual estimated cost savings of approximately $10 million, includingapproximately $8 million in payroll and related benefits savings. Such savingsbegan to materialize in the second half of the second quarter. The Company,however, recorded a one-time cash charge of $359,000 in the second quarter of2001 for severance payments made during the quarter ended June 30, 2001. If theCompany fails to achieve sufficient revenue growth, maintain operating expensesbelow revenue levels or fail to continue to improve collection of its accountsreceivable, then any such failure will likely result in continued operating andnet losses which would have a material adverse effect on the Company’sfinancial results and condition.

 

The Company believes thatexisting cash balances, anticipated cash flows from operations and borrowingsunder its credit facility will be sufficient to meet its working capital,capital expenditure and credit facility payment requirements for the nexttwelve months. The Company intends to continue its efforts to improve itsaccounts receivable collections and examine its expenses. The Company alsocurrently believes that decreases in and delays of IT spending as a result ofgeneral economic conditions are likely to continue to negatively impact itsbusiness for the foreseeable future.

 

 

**CERTAINFACTORS THAT MAY AFFECT FUTURE RESULTS**

 

* From time to time, information provided bythe Company or statements made by its employees may contain"forward-looking" information involving risks and uncertainties. Inparticular, statements contained in this Quarterly Report on Form 10-Q that arenot historical facts (including, but not limited to, statements concerninganticipated costs of selling and marketing expense levels, purchases ofequipment and other capital expenditures, anticipated capital expenditurelevels, operating losses, revenues, profitability, estimated cost savings andreductions, including the timing of the impact of such savings and reductions,anticipated working capital and credit facility payment requirements, thecollection of outstanding accounts receivable, cash flow and cash balances, ITinvestment decisions by customers, changes in the spending patterns of theCompany's target clients, (including but not limited to decreases in and delaysof IT spending and  general economicconditions and timing of a recovery) asset impairment, restructured salescommission plan, assigning territory rights to foreign distributors, payment ofcontingent consideration in acquisitions and allocation of such payments togoodwill, registration of stock of the Company, the impact of SFAS 143 and 144,intent to issue stock options, intent to sell marketable securities, and intentto pay down indebtedness under its credit facility) constitute forward-lookingstatements and are made under the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. The Company’s actual results ofoperations and financial condition have varied and may in the future varysignificantly from those stated in any forward-looking statements. Factors thatmay cause such differences include, without limitation, the risks,uncertainties, and other information discussed below, as well as the accuracyof the Company’s internal estimates of revenue and operation expense levels.Each of these factors, and others, are discussed from time to time in thefilings made by the Company with the Securities and Exchange Commission.*

 

The Company’s future operating results are subject tosubstantial risks and uncertainties. The Company currently derives most of itsrevenues from subscriptions to its Advisory Services.  The Company, however, derives a significant amount of revenuesfrom Strategic Consulting engagements. As a result, any decline in the Company’s ability to secure subscriptionrenewals or replace completed Strategic Consulting engagements with newengagements may have a material adverse effect on the Company’s results ofoperations. The Company’s ability to secure subscription renewals and StrategicConsulting engagements at favorable average selling prices, as well as tosuccessfully market and sell its Strategic Consulting services and PublishedResearch Products, is dependent upon the Company’s ability to deliverconsistent, high-quality, and timely analysis and advice with respect toissues, developments and trends that clients view as important. The Company’ssuccessful delivery of such analysis and advice is, in turn, dependent uponmany factors, including, among other things, its ability to: understand andanticipate rapidly changing technologies and market trends so as to keep itsanalysis focused on the changing needs of its clients, deliver products andservices of sufficiently high quality and timeliness to withstand competitionfrom competitors that may have greater financial, information gathering, andmarketing resources than the Company, recruit and retain highly talentedprofessionals in a competitive job market, and match the skills andcompetencies of the Company’s Strategic Consulting staff with the skillsrequired for the fulfillment of existing or potential Strategic Consultingengagements.  The loss of any of theCompany’s senior management personnel, including Dale Kutnick (Chief ExecutiveOfficer and Co-Research Director), could have a material adverse affect on theCompany.  The Company’s ability tomarket and sell its products and services could also be adversely affected bythe emergence of new competitors into one or more of the market segmentsaddressed by the Company’s products and services, which could cause pricingpressure and loss of market share. The Company’s pricing strategy may limit thepotential market for the Company’s Advisory Services and Strategic Consultingengagements.  As a result, the Companymay be required to reduce prices for its Advisory Services and StrategicConsulting engagements or introduce new products with lower prices in order toexpand or maintain its market share.  Asignificant portion of the Company’s revenues are attributable to internationalclients, which may be adversely affected by factors including difficulties indeveloping and managing relationships with independent international salesrepresentative organizations, reliance on sales entities that the Company doesnot control, greater difficulty in maintaining direct client contact,fluctuations in exchange rates, adverse political and economic conditions, tariffsand other trade barriers, longer accounts receivable collection cycles, greateraccounts receivable collection risk with respect to sales through itsindependent sales representative organizations (because the Company relies onthe sales representative organizations to invoice and collect receivables),adverse tax consequences, the inability of the Company to find distributors forits products and services, and the financial health of individual salesrepresentative organizations. In addition, decreases and delays of IT spendingresulting from general economic conditions may adversely affect the Company’srevenues.  The Company’s futurefinancial results also depend in part on the integration of recent acquisitionsand potential acquisitions, as well as the development or acquisition of newproducts and services, which may not successfully be achieved due to theinherent costs and risks associated with development, assimilation, andmarketing of a new product or service, as well as the Company’s limitedexperience in introducing new products and services.

 

Furthermore, the Company’s quarterly operating resultsmay fluctuate significantly due to various factors. Because adisproportionately large portion of the Company’s Advisory Services contractsexpire in the fourth quarter of each year, the Company incurs operatingexpenses in the fourth quarter at a higher level than would otherwise berequired by its sequential growth, and such increased expenses are not normallyoffset immediately by higher revenues. In addition, the Company’s operatingresults may fluctuate as a result of a variety of other factors, includingoperating losses and the ability to achieve profitability, the Company'sability to manage expense levels, the Company’s ability to collect its accountsreceivable, any failure by the Company to meet its working capital, capitalexpenditure and credit facility payment requirements, changes in the spendingpatterns of the Company’s target clients (including, but not limited to,decreases in IT spending), general economic uncertainty and economic slowdownin the U.S. and abroad, changes in market demand for IT research and analysisand competitive conditions in the industry, the Company's ability to managegrowth and implement systems and processes required by such growth, marketacceptance of and demand for the Company’s products and services, the level andtiming of renewals of subscriptions to Advisory Services, the level and timingof contracted Strategic Consulting Services, the timing of the acquisition andintegration of acquired businesses into the operations of the Company, thetiming of the production and delivery of Published Research Products sold bythe Company, the mix of domestic versus international business, the timing ofthe development, introduction, marketing, and market acceptance of new productsand services, the inability of the Company to increase its penetration ofexisting customers and expand to additional customers, the inability of theCompany to find distributors for its products and services internationally, therecruitment, retention and development of research analysts, consultants,management and administrative staff, the availability of outside consultantsneeded to fulfill certain service offerings, the timing and execution of theCompany's strategic plans, borrowings under the Company’s credit facility,strategic investments in entities that operate in parallel or synergisticindustries to the Company and any impairments thereof, the inability of theCompany to sell its existing bonds, volatility and unpredictability of theCompany’s stock price, the timing and amount of new business generated by theCompany, the mix of Advisory Services revenues versus Strategic Consulting andPublished Research Products revenues, the number, size and scope of StrategicConsulting engagements in which the Company is engaged, the degree ofcompletion of such engagements and the ability of the Company to match theskills of its consulting staff to consulting engagement opportunities, employeeutilization rates and the accuracy of estimates of resources required tocomplete ongoing Strategic Consulting engagements, and other risks detailed inthe Company's filings with the Securities and Exchange Commission, includingthose discussed in the Company's annual report filed with the Securities andExchange Commission on Form 10-K for the year ended December 31, 2000. Due tothese factors, the Company believes period-to-period comparisons of results ofoperations are not necessarily meaningful and should not be relied upon as anindication of future results of operations. The potential fluctuations in theCompany’s operating results make it likely that, in some future quarter, theCompany’s operating results will be below the expectations of securitiesanalysts and investors, which would have a material adverse effect on the priceof the Company’s Common Stock.

 

**Item3.**        **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**       **Referenceshould be made to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2000 for quantitative and qualitative disclosure of the Company’smarket risk.  There have been nomaterial changes to the market risk information included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2000.

 

# **PART II - OTHER INFORMATION**

 

Item 1.    Legal Proceedings.

 

                As disclosed inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2000,the Company is a party to certain legal proceedings arising in the ordinarycourse of business.  The Company,however, believes that none of these proceedings is likely to have a materialadverse effect on the Company’s business, results of operations or financialcondition.

 

 

Item 6.    Exhibitsand Reports on Form 8-K.

 

 

                (a)           Exhibits.

 
| **Exhibit   Number** |   | **Description**                                                                                                                                 |   |
|----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.1                 |   | Employment Agreement between META Group, Inc. and  Michael Levine   dated September 11, 2001.                                                   |   |
|                 |   |                                                                                                                                            |   |
| 10.2                 |   | Employee Noncompetition, Nondisclosure and  Developments Agreement between META Group, Inc. and Michael Levine dated as  of September 11, 2001. |   |
|                 |   |                                                                                                                                            |   |
| 10.3                 |   | Incentive Stock Option Agreement between META Group,  Inc. and Michael Levine dated as of September 11, 2001.                                   |   |
| 11.1                 |   | Statement regarding computation of per-share  earnings                                                                                          |   |

 

 

                (b)           Reportson Form 8-K.

 

On September 25, 2001 the Company filed a CurrentReport on Form 8-K dated September 11, 2001 regarding the appointment of MikeB. Levine as President of the Company effective September 11, 2001.

 

 

 

 

**SIGNATURE**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

 
|   |              |   | **META  Group, Inc.**                                                             |
|--------|-------------------|--------|-----------------------------------------------------------------------------------|
|   |              |   |                                                                              |
|   |              |   |                                                                              |
|   |              |   |                                                                              |
| Date:  | November 14, 2001 | By:    | /s/ John A. Piontkowski                                                           |
|   |              |   | John A. Piontkowski                                                               |
|   |              |   | Senior Vice President, Finance, Chief Financial  Officer, Secretary and Treasurer |
|   |              |   | (Principal Financial and Accounting Officer)                                      |
|   |              |   |                                                                              |

 

 

 

 

 

**EXHIBIT INDEX**

 

 

 
| **Exhibit Number** |   | **Description**                                                                                                                                 |   | **Sequentially  Numbered Page** |
|--------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|
|               |   |                                                                                                                                            |   |                            |
| 10.1               |   | Employment Agreement between META Group, Inc. and  Michael Levine dated September 11, 2001.                                                     |   | *                               |
|               |   |                                                                                                                                            |   |                            |
| 10.2               |   | Employee Noncompetition,  Nondisclosure and Developments Agreement between META Group, Inc. and Michael  Levine dated as of September 11, 2001. |   | *                               |
|               |   |                                                                                                                                            |   |                            |
| 10.3               |   | Incentive Stock Option Agreement between META Group,  Inc. and Michael Levine dated as of September 11, 2001.                                   |   | *                               |
| 11.1               |   | Statement regarding computation of per-share  earnings                                                                                          |   | *                               |

 

----

* Exhibit included in EDGAR filing with Securities and ExchangeCommission.