**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **ý** |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                              |
|       |   | **For the Quarterly period ended  September 30, 2003**                                                                                                       |
|       |   |                                                                                                                                                              |
|       |   | **OR**                                                                                                                                                            |
|       |   |                                                                                                                                                              |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.**                                                              |
|       |   |                                                                                                                                                              |
|       |   | **For the Transition period from             to            ** |

 

**Commission File Number 0-27280**

 

**META Group,Inc.**

(Exact name of registrant as specified in itscharter)

 

| **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 telephone number, 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 Actof 1934 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 by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 

Yes         o            No           ý

 

The number of shares of the registrant’s common stock, $.01 par valueper share, outstanding as of November 6, 2003 was 13,370,877.

 

 

----

 

**METAGroup, Inc.**

** **

**INDEX**

** **
|          | **Part I**                                                                                         | **FINANCIAL INFORMATION** |   |
|---------------|----------------------------------------------------------------------------------------------------|---------------------------|--------|
|          |                                                                                               |                      |
| Item 1.       | Financial Statements (Unaudited)                                                                   |                      |
|          |                                                                                               |                      |
|          | Consolidated Balance Sheets:September 30, 2003 and  December 31, 2002                    |                      |
|          |                                                                                               |                      |
|          | Consolidated Statements of OperationsThree and nine  months ended September 30, 2003 and 2002 |                      |
|          |                                                                                               |                      |
|          | Consolidated Statements of Cash FlowsNine months ended  September 30, 2003 and 2002           |                      |
|          |                                                                                               |                      |
|          | Notes to Consolidated Financial Statements                                                         |                      |
|          |                                                                                               |                      |
| Item 2.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations        |                      |
|          |                                                                                               |                      |
| Item 3.       | Quantitative and Qualitative Disclosures  About Market Risk                                        |                      |
|          |                                                                                               |                      |
| Item 4.       | Controls and Procedures                                                                            |                      |
|          |                                                                                               |                      |
| **Part II**   | **OTHER INFORMATION**                                                                              |                      |
|          |                                                                                               |                      |
| Item 1.       | Legal Proceedings                                                                                  |                      |
|          |                                                                                               |                      |
| Item 6.       | Exhibits and Reports on Form 8-K                                                                   |                      |
|          |                                                                                               |                      |
| **Signature** |                                                                                               |

 

2

----

 

**PART I - FINANCIAL INFORMATION**

**Item 1.    FinancialStatements**

 

**METAGroup, Inc.**

**CONSOLIDATED BALANCESHEETS**

**(inthousands, except share data)**

(Unaudited)

 
|                                                                                                                  |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| **Assets**                                                                                                            |   |                         |   |                        |   |
| Current assets:                                                                                                       |   |                         |   |                        |   |
| Cash and cash equivalents                                                                                             |   | $                            | 11,576 |                        | $      | 21,448 |   |
| Accounts receivable, net                                                                                              |   | 25,911                       |   | 33,676                      |   |
| Deferred commissions                                                                                                  |   | 1,562                        |   | 1,221                       |   |
| Other current assets                                                                                                  |   | 1,714                        |   | 2,593                       |   |
| Total  current assets                                                                                                 |   | 40,763                       |   | 58,938                      |   |
|                                                                                                                  |   |                         |   |                        |   |
| Restricted cash                                                                                                       |   | 6,000                        |   | —                      |   |
| Non-current portion of accounts receivable                                                                            |   | 555                          |   | 4,584                       |   |
| Furniture and equipment, net                                                                                          |   | 5,674                        |   | 7,724                       |   |
| Goodwill                                                                                                              |   | 9,731                        |   | 7,483                       |   |
| Other intangibles, net                                                                                                |   | 4,407                        |   | 4,630                       |   |
| Investments and advances                                                                                              |   | 8,997                        |   | 3,997                       |   |
| Other assets                                                                                                          |   | 262                          |   | 321                         |   |
| Total assets                                                                                                          |   | $                            | 76,389 |                        | $      | 87,677 |   |
|                                                                                                                  |   |                         |   |                        |   |
| **Liabilities and Stockholders’ Equity**                                                                         |   |                         |   |                        |   |
| Current liabilities:                                                                                                  |   |                         |   |                        |   |
| Accounts payable                                                                                                      |   | $                            | 1,345  |                        | $      | 2,447 |   |
| Deferred revenues                                                                                                     |   | 40,757                       |   | 42,400                      |   |
| Borrowings under revolving credit agreement                                                                           |   | —                       |   | 1,049                       |   |
| Current portion of long-term debt                                                                                     |   | —                       |   | 5,111                       |   |
| Notes payable                                                                                                         |   | 198                          |   | 335                         |   |
| Accrued compensation                                                                                                  |   | 5,238                        |   | 2,283                       |   |
| Accrued liabilities                                                                                                   |   | 10,425                       |   | 9,834                       |   |
| Income taxes payable                                                                                                  |   | 690                          |   | 497                         |   |
| Other current liabilities                                                                                             |   | 2,915                        |   | 1,843                       |   |
| Total current liabilities                                                                                             |   | 61,568                       |   | 65,799                      |   |
|                                                                                                                  |   |                         |   |                        |   |
| Non-current portion of deferred revenues                                                                              |   | 2,152                        |   | 6,008                       |   |
| Notes payable                                                                                                         |   | 442                          |   | 589                         |   |
| Other non-current liabilities                                                                                         |   | 1,768                        |   | 1,969                       |   |
| Total liabilities                                                                                                     |   | 65,930                       |   | 74,365                      |   |
|                                                                                                                  |   |                         |   |                        |   |
| Minority interest in consolidated  subsidiaries                                                                       |   | 281                          |   | 96                          |   |
|                                                                                                                  |   |                         |   |                        |   |
| Stockholders’ equity:                                                                                            |   |                         |   |                        |   |
| Preferred stock, $.01 par value per-share,  authorized 2,000,000 shares; none issued                                  |   | —                       |   | —                      |   |
| Common stock, $.01 par value per-share,  authorized 45,000,000 shares, issued 14,017,528 and 13,886,612, respectively |   | 140                          |   | 139                         |   |
| Paid-in capital                                                                                                       |   | 59,990                       |   | 59,706                      |   |
| Accumulated deficit                                                                                                   |   | (49,228                      | )      | (45,892                     | )      |
| Accumulated other comprehensive loss                                                                                  |   | (382                         | )      | (395                        | )      |
| Treasury stock, at cost, 657,016 shares                                                                               |   | (342                         | )      | (342                        | )      |
| Total stockholders’ equity                                                                                       |   | 10,178                       |   | 13,216                      |   |
| Total liabilities and stockholders’ equity                                                                       |   | $                            | 76,389 |                        | $      | 87,677 |   |

 

See notes to consolidated financialstatements.

 

3

----

 

**METAGroup, Inc.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(inthousands, except per-share data)**

(Unaudited)

 
|                                                             |   | **For the  three months ended****September 30,** |   | **For the  nine months ended****September 30,** |   |
|------------------------------------------------------------------|--------|-------------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                             |   | **2003**                                              |   | **2002**                                             |   | **2003** |   | **2002** |   |
|                                                             |   |                                                  |   |                                                 |   |   |   |   |   |
| Revenues:                                                        |   |                                                  |   |                                                 |   |   |   |   |   |
| Advisory services                                                |   | $                                                     | 18,741 |                                                 | $      | 18,843 |   | $ | 56,404 |   | $ | 57,866 |   |
| Strategic consulting                                             |   | 8,802                                                 |   | 7,075                                                |   | 24,959 |   | 23,364 |   |
| Published research products                                      |   | 1,348                                                 |   | 535                                                  |   | 4,538 |   | 3,585 |   |
| Reimbursable expenses                                            |   | 503                                                   |   | 701                                                  |   | 1,723 |   | 1,962 |   |
|                                                             |   |                                                  |   |                                                 |   |   |   |   |   |
| Total revenues                                                   |   | 29,394                                                |   | 27,154                                               |   | 87,624 |   | 86,777 |   |
|                                                             |   |                                                  |   |                                                 |   |   |   |   |   |
| Operating expenses:                                              |   |                                                  |   |                                                 |   |   |   |   |   |
| Cost of services and fulfillment                                 |   | 15,999                                                |   | 14,491                                               |   | 45,842 |   | 44,201 |   |
| Reimbursable expenses                                            |   | 503                                                   |   | 701                                                  |   | 1,723 |   | 1,962 |   |
| Selling and marketing                                            |   | 7,905                                                 |   | 7,932                                                |   | 23,581 |   | 23,495 |   |
| General and administrative                                       |   | 5,805                                                 |   | 5,434                                                |   | 16,602 |   | 14,511 |   |
| Depreciation and amortization                                    |   | 1,091                                                 |   | 1,607                                                |   | 3,705 |   | 4,742 |   |
| Loss on facilities leases                                        |   | —                                                |   | 2,189                                                |   | — |   | 2,189 |   |
| Restructuring charge                                             |   | —                                                |   | 140                                                  |   | — |   | 362 |   |
| Goodwill impairment loss                                         |   | —                                                |   | 1,178                                                |   | — |   | 2,630 |   |
|                                                             |   |                                                  |   |                                                 |   |   |   |   |   |
| Total operating expenses                                         |   | 31,303                                                |   | 33,672                                               |   | 91,453 |   | 94,092 |   |
|                                                             |   |                                                  |   |                                                 |   |   |   |   |   |
| Operating loss                                                   |   | (1,909                                                | )      | (6,518                                               | )      | (3,829 | ) | (7,315 | ) |
| Investment impairment loss                                       |   | —                                                |   | (800                                                 | )      | — |   | (1,075 | ) |
| Other income (expense), net                                      |   | 23                                                    |   | (64                                                  | )      | 723 |   | (58 | ) |
| Loss before provision for income taxes                           |   | (1,886                                                | )      | (7,382                                               | )      | (3,106 | ) | (8,448 | ) |
| Provision for income taxes                                       |   | 16                                                    |   | 12,948                                               |   | 148 |   | 13,044 |   |
| Minority interest in income of consolidated  subsidiaries        |   | 28                                                    |   | 22                                                   |   | 82 |   | 44 |   |
| Loss before cumulative effect of change in  accounting principle |   | (1,930                                                | )      | (20,352                                              | )      | (3,336 | ) | (21,536 | ) |
| Cumulative effect of change in accounting  principle             |   | —                                                |   | —                                               |   | — |   | (22,206 | ) |
| Net loss                                                         |   | $                                                     | (1,930 | )                                                    | $      | (20,352 | ) | $ | (3,336 | ) | $ | (43,742 | ) |
|                                                             |   |                                                  |   |                                                 |   |   |   |   |   |
| Amounts per basic and diluted share:                             |   |                                                  |   |                                                 |   |   |   |   |   |
| Loss before cumulative effect of change in  accounting principle |   | $                                                     | (0.14  | )                                                    | $      | (1.56 | ) | $ | (0.25 | ) | $ | (1.65 | ) |
| Cumulative effect of change in accounting  principle             |   | —                                                |   | —                                               |   | — |   | (1.71 | ) |
| Net loss                                                         |   | $                                                     | (0.14  | )                                                    | $      | (1.56 | ) | $ | (0.25 | ) | $ | (3.36 | ) |
|                                                             |   |                                                  |   |                                                 |   |   |   |   |   |
| Weighted average number of basic and  diluted shares outstanding |   | 13,334                                                |   | 13,050                                               |   | 13,283 |   | 13,021 |   |

 

See notes to consolidated financialstatements.

 

4

----

 

**METAGroup, Inc.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(inthousands)**

(Unaudited)

** **
|                                                                             |   | **For the  nine months ended  September 30,** |   |
|----------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                             |   | **2003**                                           |   | **2002** |   |
|                                                                             |   |                                               |   |   |   |
| **Operating activities:**                                                        |   |                                               |   |   |   |
| Net loss                                                                         |   | $                                                  | (3,336 | ) | $ | (43,742 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |                                               |   |   |   |
| Cumulative effect of change in accounting  principle                             |   | —                                             |   | 22,206 |   |
| Depreciation and amortization                                                    |   | 3,705                                              |   | 4,742 |   |
| Provision for doubtful accounts                                                  |   | (600                                               | )      | 944 |   |
| Gain on sale of investments                                                      |   | (615                                               | )      | — |   |
| Impairment loss on investments                                                   |   | —                                             |   | 1,075 |   |
| Goodwill impairment loss                                                         |   | —                                             |   | 2,630 |   |
| Minority interest                                                                |   | 82                                                 |   | 44 |   |
| Deferred income taxes                                                            |   | —                                             |   | 12,559 |   |
| Other non-cash charges                                                           |   | 199                                                |   | 85 |   |
| Changes in assets and liabilities:                                               |   |                                               |   |   |   |
| Accounts receivable                                                              |   | 11,946                                             |   | 15,054 |   |
| Deferred commissions                                                             |   | (315                                               | )      | 333 |   |
| Other current assets                                                             |   | 1,665                                              |   | 403 |   |
| Other assets                                                                     |   | 32                                                 |   | (169 | ) |
| Accounts payable                                                                 |   | (1,409                                             | )      | (446 | ) |
| Accrued expenses and other current  liabilities                                  |   | 2,936                                              |   | (957 | ) |
| Deferred revenues                                                                |   | (6,664                                             | )      | (10,453 | ) |
| Net cash provided by operating activities                                        |   | 7,626                                              |   | 4,308 |   |
|                                                                             |   |                                               |   |   |   |
| **Investing activities:**                                                        |   |                                               |   |   |   |
| Capital expenditures                                                             |   | (673                                               | )      | (633 | ) |
| Payments for acquisitions, net of cash  acquired                                 |   | (5,399                                             | )      | (906 | ) |
| Proceeds from sales of investments                                               |   | 888                                                |   | 2,275 |   |
| Net cash (used in) provided by investing  activities                             |   | (5,184                                             | )      | 736 |   |
|                                                                             |   |                                               |   |   |   |
| **Financing activities:**                                                        |   |                                               |   |   |   |
| Proceeds from exercise of stock options                                          |   | 224                                                |   | — |   |
| Proceeds from employee stock purchase plan                                       |   | 62                                                 |   | 82 |   |
| Private placement of common stock                                                |   | —                                             |   | 425 |   |
| Repayment of line of credit                                                      |   | (1,049                                             | )      | (2,025 | ) |
| Repayment of term loan                                                           |   | (5,111                                             | )      | (2,057 | ) |
| Repayment of notes payable                                                       |   | (369                                               | )      | — |   |
| Increase in restricted cash                                                      |   | (6,000                                             | )      | — |   |
| Net cash used in financing activities                                            |   | (12,243                                            | )      | (3,575 | ) |
| Effect of exchange rate changes on cash                                          |   | (71                                                | )      | 827 |   |
| Net (decrease) increase in cash and cash  equivalents                            |   | (9,872                                             | )      | 2,296 |   |
| Cash and cash equivalents, beginning of  period                                  |   | 21,448                                             |   | 21,433 |   |
| Cash and cash equivalents, end of period                                         |   | $                                                  | 11,576 |   | $ | 23,729 |   |

 

See notes to consolidated financialstatements.

 

5

----

 

**METAGroup, Inc.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1 - InterimFinancial Statements**

 

The accompanying consolidated financial statements include the accountsof META Group, Inc. (the “Company”) and its subsidiaries and have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America for interim financial reporting and with the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and notes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. Certain prior year amounts have been reclassified to conform to thecurrent year presentation.

 

In the opinion of management, the accompanying consolidated financialstatements contain all adjustments (consisting of normal recurring items)necessary for a fair presentation of results for the interim periods presented.The results of operations for any interim period are not necessarily indicativeof results for the full year. These financial statements and footnotedisclosures should be read in conjunction with the December 31, 2002audited consolidated financial statements and the notes thereto included in theCompany’s Form 10-K/A for the year ended December 31, 2002.

 

The preparation of the financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in the accompanying consolidated financial statements and notes.Actual results could differ from those estimates.

 

**Note 2 - Acquisitions**

 

In 2003 the Company completed several acquisitions in order to gaindirect control over substantially all operations in Europe and create more uniformityin the Company’s service offerings. Information relating to the acquisitions is as follows:

 

In June 2003, the Company acquired 100%of META Group Italia S.R.L. (“META Group Italy”) for $0.28 million incash.  The operations of META GroupItaly have been included in the consolidated financial statements from the dateof acquisition. The purchase price has been allocated to the assets acquiredand the liabilities assumed, based on estimated fair values at the date ofacquisition. Such allocation resulted in goodwill of $0.4 million recorded inthe Advisory Services segment and $0.1 million related to the customer list ofthe seller, which is being amortized over 7 years.

 

In August 2003, the Company acquired100% of META Group UK Holdings Limited (“META Group UK”) for $1.6 million incash.  The operations of META Group UKhave been included in the consolidated financial statements from the date ofacquisition. The purchase price has been allocated to the assets acquired andthe liabilities assumed, based on estimated fair values at the date ofacquisition. Such allocation resulted in goodwill of $0.75 million recorded inthe Advisory Services segment, $0.4 million recorded in the StrategicConsulting segment and $0.4 million related to the customer list of the seller,which is being amortized over 7 years. The allocation of goodwill is based onthe respective revenue contribution percentages of the acquired entity to eachsegment.

 

In September 2003, the Company acquired100% of META Group Norway A/S, META Group Sweden AB, META Group Finland OY,META Group Denmark A/S, META Group Northern Europe ApS, and ATEM NetherlandsApS (collectively “Northern Europe”). The purchase price was $3.6 million incash and 175,000 shares of the Company’s common stock which the Companycurrently anticipates issuance of in the quarter ending December 31, 2003.The purchase price, as well as other assets related to Northern Europe,

 

6

----

 

consisting primarily of $2.6million in promissory notes owed to the Company by certain of the sellers ofNorthern Europe and $1.5 million in trade receivables owed to the Company bythe Northern European entities, are included in investments and advances on theconsolidated balance sheet as of September 30, 2003 as the operations ofthe Company’s international subsidiaries, other than Canada, are consolidatedon a one month lag. Accordingly, the operations of Northern Europe will beincluded in the consolidated financial statements commencing in October 2003.

 

## **Note 3 – Goodwill and OtherIntangible Assets**

 

Effective January 1, 2002, the Company adopted Statement ofFinancial Accounting Standards No. 142, *Goodwilland Other Intangible Assets*(“SFAS 142”). Under SFAS 142, goodwilland intangible assets deemed to have indefinite lives will no longer beamortized but will be subject to impairment tests on an annual basis, or morefrequently if certain indicators arise. Other intangible assets will continueto be amortized over their useful lives. During the quarter endedSeptember 30, 2003, the remaining useful lives of intangible assets beingamortized were reviewed and deemed to be appropriate.

 

The goodwill impairment test is a two-step process that requiresgoodwill to be allocated to the reporting units. In the first step, the fairvalue of the reporting unit is compared to the carrying value of the reportingunit. If the fair value of the reporting unit is less than the carrying valueof the reporting unit, a goodwill impairment may exist, and the second step ofthe test is performed. In the second step, the implied fair value of thegoodwill is compared to the carrying value of the goodwill and an impairmentloss will be recognized to the extent that the carrying value of the goodwillexceeds the implied fair value of the goodwill.

 

The Company completed the second step of the impairment test as ofSeptember 30, 2002. As a result of operating losses in recent history ofthe Company’s Strategic Consulting and Published Research Products segments andthe overall decline in IT spending that began in the second half of 2000 andcontinued through 2002, the Company determined that the goodwill related to theStrategic Consulting and Published Research Products segments was impaired.Accordingly, the Company recorded a goodwill charge of $22.2 million relatingto the carrying value of the goodwill of these segments as of January 1,2002. The impairment charge was recorded as the cumulative effect of a changein accounting principle and recorded retroactive to January 1, 2002.Additionally, as a result of the impairment of the Strategic Consulting andPublished Research Products segments, additions to goodwill of the respectivesegments totaling $2.6 million during the nine months ended September 30,2002 were deemed impaired and recorded as an impairment loss during the ninemonths ended September 30, 2002. During the nine months endedSeptember 30, 2003, there were additions of $1.16 million to the AdvisoryServices segment and additions of $0.4 million to the Strategic Consultingsegment resulting from the acquisitions of META Group UK and META Group Italy.The Company completed the annual impairment test for 2003 as ofSeptember 30 which indicated that no impairment losses were warranted asof such date.

 

A summary of the Company’s intangible assets as of September 30,2003 and December 31, 2002 is as follows (amounts in thousands):

 
|                                       |   | **September 30,  2003**  |   |
|--------------------------------------------|--------|-------------------------------|--------|
|                                       |   | **Gross****Carrying  Amount** |   | **Accumulated  Amortization** | ** ** | **Net** |   |
| Amortized intangible assets:               |   |                          |   |   |   |   |   |
| Customer lists                             |   | $                             | 5,354  |   | $ | (2,609 | ) | $ | 2,745 |   |
| Intellectual property                      |   | 648                           |   | (335 | ) | 313 |   |
| Non-compete agreement                      |   | 375                           |   | (275 | ) | 100 |   |
| Content databases & other              |   | 2,078                         |   | (829 | ) | 1,249 |   |
| Total                                      |   | $                             | 8,455  |   | $ | (4,048 | ) | $ | 4,407 |   |
|                                       |   |                          |   |   |   |   |   |
| Aggregate amortization expense:            |   |                          |   |   |   |   |   |
| Nine months ended September 30, 2003: |   | $                             | 962    |   |   |   |   |   |

 

7

----

 
|                                                   |   | **December 31, 2002**    | ** ** |
|--------------------------------------------------------|--------|-------------------------------|------------|
|                                                   |   | **Gross****Carrying  Amount** |       | **Accumulated  Amortization** |   | **Net** | ** ** |
| Amortized intangible assets:                           |   |                          |       |   |   |   |   |
| Customer lists                                         |   | $                             | 4,395      |   | $ | (1,750 | ) | $ | 2,645 |   |
| Intellectual property                                  |   | 561                           |       | (206 | ) | 355 |   |
| Non-compete agreement                                  |   | 375                           |       | (202 | ) | 173 |   |
| Content databases & other                          |   | 2,068                         |       | (611 | ) | 1,457 |   |
| Total                                                  |   | $                             | 7,399      |   | $ | (2,769 | ) | $ | 4,630 |   |
|                                                   |   |                          |       |   |   |   |   |
| Aggregate amortization expense:                        |   |                          |       |   |   |   |   |
| Twelve months ended December 31, 2002:            |   | $                             | 1,335      |   |   |   |   |   |
|                                                   |   |                          |       |   |   |   |   |
| Estimated amortization expense:                        |   |                          |       |   |   |   |   |
| Remaining three months ending  December 31, 2003: |   | $                             | 355        |   |   |   |   |   |
| Year ending December 31, 2004                     |   | 1,323                         |       |   |   |   |   |
| Year ending December 31, 2005                     |   | 1,166                         |       |   |   |   |   |
| Year ending December 31, 2006                     |   | 633                           |       |   |   |   |   |
| Year ending December 31, 2007                     |   | 547                           |       |   |   |   |   |
| Year ending December 31, 2008                     |   | 246                           |       |   |   |   |   |
| Year ending December 31, 2009                     |   | 78                            |       |   |   |   |   |
| Year ending December 31, 2010                     |   | 59                            |       |   |   |   |   |
| Total                                                  |   | $                             | 4,407      |   |   |   |   |   |

 

The changes in the carrying amount of goodwill by reportable segmentfor the nine months ended September 30, 2003 are as follows (inthousands):

 
|                                  |   | **Advisory  Services** |   | **Strategic  Consulting** |   | **Total** |   |
|---------------------------------------|--------|------------------------|--------|---------------------------|--------|-----------|--------|
|                                  |   |                   |   |                      |   |      |   |
| Balance as of January 1, 2003    |   | $                      | 7,483  |                      | $      | —    |   | $ | 7,483 |   |
| Goodwill acquired                     |   | 1,162                  |   | 403                       |   | 1,565     |   |
| Translation adjustments               |   | 683                    |   | —                    |   | 683       |   |
| Balance as of September 30, 2003 |   | $                      | 9,328  |                      | $      | 403       |   | $ | 9,731 |   |
|                                       |        |                        |        |                           |        |           |        |  |  |  |  |  |

 

8

----

 

**Note 4 – Comprehensive Loss**

 

Comprehensive loss for the three and nine months endedSeptember 30, 2003 and 2002 was as follows (in thousands):

 
|                                            |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|-------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                            |   | **2003**                                    |   | **2002**                                   |   | **2003** |   | **2002** |   |
|                                            |   |                                        |   |                                       |   |   |   |   |   |
| Net loss                                        |   | $                                           | (1,930 | )                                          | $      | (20,352 | ) | $ | (3,336 | ) | $ | (43,742 | ) |
| Other comprehensive income (loss), net of  tax: |   |                                        |   |                                       |   |   |   |   |   |
| Foreign currency translation adjustment         |   | (145                                        | )      | 214                                        |   | 13 |   | 189 |   |
|                                            |   |                                        |   |                                       |   |   |   |   |   |
| Comprehensive loss                              |   | $                                           | (2,075 | )                                          | $      | (20,138 | ) | $ | (3,323 | ) | $ | (43,553 | ) |

 

**Note 5 – Segment Reporting**

 

The Company operates in three businesssegments: Advisory Services, Strategic Consulting and Published ResearchProducts. The Company’s operating segments are managed separately, because eachoperating segment represents a strategic business unit that generally offersdistinct products or services. Advisory Services provide comprehensive coverageof relevant information technology and business-related issues faced by itsclients through client/analyst interaction, published conclusions and recommendationsto each client’s specific IT requirements. Strategic Consulting provides customconsulting services tailored to meet individual client requirements. PublishedResearch Products offer various topic-specific reports designed to serve bothas complements to the Company’s core services and as standalone deliverablesthat meet specific assessment requirements.

 

Theaccounting policies of the operating segments are the same as those describedin Note 4 to the Company’s 2002 Annual Report on Form 10-K/A except that thedisaggregated financial results for the Company’s operating segments have beenprepared using a management approach, which is consistent with the basis andmanner in which the Company’s management internally disaggregates financialinformation for the purposes of assistance in making internal operatingdecisions. The Company evaluates performance based on stand-alone segmentoperating income, defined by the Company as the segment revenues less segmentcost of sales and corporate selling, general and administrative allocations.Selling, general and administrative expenses are allocated ratably based oneach operating segments’ revenues. Management does not allocate corporateassets, capital expenditures, non-operating income (interest income), or incometaxes when measuring segment results.

 

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

 
|                                           |   | **Advisory  Services** |   | **Strategic  Consulting** |   | **Published  Research  Products** |   | **Unallocated** |   | **Consolidated  Total** |   |
|------------------------------------------------|--------|------------------------|--------|---------------------------|--------|-----------------------------------|--------|-----------------|--------|-------------------------|--------|
| **Three months ended September 30, 2003** |   |                   |   |                      |   |                              |   |            |   |                    |   |
|                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| Revenues                                       |   | $                      | 18,741 |                      | $      | 8,802                             |   | $               | 1,348  |                    | $      | 503 |   | $ | 29,394 |   |
| Operating income (loss)                        |   | 1,562                  |   | (3,512                    | )      | 41                                |   |            |   | (1,909                  | )      |
| Assets                                         |   |                   |   |                      |   |                              |   | $               | 76,389 |                    | $      | 76,389 |   |
|                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| **Three months ended September 30, 2002** |   |                   |   |                      |   |                              |   |            |   |                    |   |
|                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| Revenues                                       |   | $                      | 18,843 |                      | $      | 7,075                             |   | $               | 535    |                    | $      | 701 |   | $ | 27,154 |   |
| Operating loss                                 |   | (4,429                 | )      | (1,343                    | )      | (746                              | )      | —          |   | $                       | (6,518 | ) |
| Assets                                         |   |                   |   |                      |   |                              |   | $               | 78,733 |                    | $      | 78,733 |   |
|                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| **Nine months ended September 30, 2003**  |   |                   |   |                      |   |                              |   |            |   |                    |   |
|                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| Revenues                                       |   | $                      | 56,404 |                      | $      | 24,959                            |   | $               | 4,538  |                    | $      | 1,723 |   | $ | 87,624 |   |
| Operating income (loss)                        |   | 4,249                  |   | (8,770                    | )      | 692                               |   |            |   | (3,829                  | )      |
| Assets                                         |   |                   |   |                      |   |                              |   | $               | 76,389 |                    | $      | 76,389 |   |
|                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| **Nine Months ended  September 30, 2002** |   |                   |   |                      |   |                              |   |            |   |                    |   |
|                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| Revenues                                       |   | $                      | 57,866 |                      | $      | 23,364                            |   | $               | 3,585  |                    | $      | 1,962 |   | $ | 86,777 |   |
| Operating loss                                 |   | (2,615                 | )      | (4,154                    | )      | (546                              | )      | —          |   | $                       | (7,315 | ) |
| Assets                                         |   |                   |   |                      |   |                              |   | $               | 78,733 |                    | $      | 78,733 |   |

 

9

----

 

Revenues and operating income (loss) by geographic region are asfollows:

 
|                                           |   | **Revenues** |   | **Operating  Income (loss)** |   |
|------------------------------------------------|--------|--------------|--------|------------------------------|--------|
| **Three months ended September 30, 2003** |   |         |   |                         |   |
|                                           |   |         |   |                         |   |
| Americas                                       |   | $            | 22,967 |                         | $      | (330 | ) |
| Asia-Pacific                                   |   | 1,343        |   | (1,116                       | )      |
| Europe, Middle East, Africa                    |   | 5,084        |   | (463                         | )      |
| Consolidated Total                             |   | $            | 29,394 |                         | $      | (1,909 | ) |
|                                           |   |         |   |                         |   |
| **Three months ended September 30, 2002** |   |         |   |                         |   |
|                                           |   |         |   |                         |   |
| Americas                                       |   | $            | 21,633 |                         | $      | (7,374 | ) |
| Asia-Pacific                                   |   | 1,214        |   | 223                          |   |
| Europe, Middle East, Africa                    |   | 4,307        |   | 633                          |   |
| Consolidated Total                             |   | $            | 27,154 |                         | $      | (6,518 | ) |

 
|                                          |   | **Revenues** |   | **Operating  Income (loss)** |   |
|-----------------------------------------------|--------|--------------|--------|------------------------------|--------|
| **Nine months ended September 30, 2003** |   |         |   |                         |   |
|                                          |   |         |   |                         |   |
| Americas                                      |   | $            | 68,404 |                         | $      | (1,713 | ) |
| Asia-Pacific                                  |   | 4,162        |   | (847                         | )      |
| Europe, Middle East, Africa                   |   | 15,058       |   | (1,269                       | )      |
| Consolidated Total                            |   | $            | 87,624 |                         | $      | (3,829 | ) |
|                                          |   |         |   |                         |   |
| **Nine months ended September 30, 2002** |   |         |   |                         |   |
|                                          |   |         |   |                         |   |
| Americas                                      |   | $            | 71,229 |                         | $      | (8,966 | ) |
| Asia-Pacific                                  |   | 3,578        |   | 1,208                        |   |
| Europe, Middle East, Africa                   |   | 11,970       |   | 443                          |   |
| Consolidated Total                            |   | $            | 86,777 |                         | $      | (7,315 | ) |

 

10

----

 

**Note 6 – Bank Debt**

 

As ofDecember 31, 2002, the Company had $6.2 million ($5.2 million outstandingunder the term loan and $1 million outstanding under the revolving facility) inborrowings outstanding under its $20 million credit facility with its bank (the“Old Facility”). The Company was in breach of a number of covenants containedin the Old Facility. As the Company was in default under the Old Facility as ofDecember 31, 2002, all outstanding borrowings were classified as a currentliability on the consolidated balance sheet as of December 31, 2002. InJanuary 2003, the Company repaid all amounts outstanding under the OldFacility from its cash on hand.

 

InMarch 2003 the Company received a waiver of all prior covenant defaults.Additionally in March 2003 the Company executed a new $6 million amendedand restated credit agreement with its bank (the “Amended Facility”). TheAmended Facility replaced the Old Facility and consists of a $6 millionrevolving credit facility. Under the Amended Facility, interest on anyoutstanding borrowings will be payable at the rate of LIBOR, as determined bythe bank, plus 1.5% or the higher of the Prime Rate or the Federal Funds Rateplus 0.5%. The Amended Facility is fully collateralized by a $6 million cashdeposit with its bank. This cash deposit is reflected as restricted cash on theCompany’s consolidated balance sheet as of September 30, 2003. The AmendedFacility contains a number of covenants that, among other things, restricts theability of the Company to create liens; dispose of assets; consolidate with, beacquired by or enter into a merger agreement or into any binding agreement todo any of the foregoing which is not contingent on obtaining the consent of thebank, other than mergers in which the Company shall be the surviving companyafter such merger is effective; materially change the nature of the Company’sbusiness; alter or modify the Company’s name, structure or status or change itsfiscal year. The Amended Facility contains no financial covenants, and maturesin November 2004. As of September 30, 2003, there was $0.8 millionused under the Amended Facility in the form of letters of credit issued onbehalf of one of the Company’s independent sales representative organizationsand as security for a portion of the Company’s Stamford, CT and Reston, VApremises leases. There were no borrowings outstanding as of September 30,2003.

 

**Note 7 – Stock-Based Compensation**

 

The Company has three active stock-based employee compensation plans,which are described more fully in Note 13 to the Company’s 2002 Annual Reporton Form 10-K/A. The Company accounts for those plans under the recognition andmeasurement principles of Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees”, and related Interpretations. Nostock-based employee compensation cost is reflected in net loss, as all optionsgranted under those plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant. The following table illustratesthe effect on net loss and loss per share if the Company had applied the fairvalue recognition provisions of Statement of Financial Accounting Standards No.123, “Accounting for Stock-Based Compensation” to stock-based employeecompensation (in thousands, except per share data):

 

11

----

 
|                                                                                                                            |   | **Three  Months Ended  (unaudited)  September 30,** |   | **Nine  Months Ended  (unaudited)  September 30,** |       |
|---------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|---------------------------------------------------------|------------|
|                                                                                                                            |   | **2003**                                                 |   | **2002**                                                | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                            |   |                                                     |   |                                                    |       |   |   |   |   |
| Reported net  loss                                                                                                              |   | $                                                        | (1,930 | )                                                       | $          | (20,352 | ) | $ | (3,336 | ) | $ | (43,742 | ) |
| Deduct:  Total stock based employee compensation expense determined under fair value  based methods for all awards, net of tax: |   | (557                                                     | )      | (645                                                    | )          | (1,898 | ) | (1,613 | ) |
| Pro forma  net loss                                                                                                             |   | $                                                        | (2,487 | )                                                       | $          | (20,997 | ) | $ | (5,234 | ) | $ | (45,355 | ) |
|                                                                                                                            |   |                                                     |   |                                                    |       |   |   |   |   |
| Net loss per  share                                                                                                             |   |                                                     |   |                                                    |       |   |   |   |   |
| Reported                                                                                                                        |   |                                                     |   |                                                    |       |   |   |   |   |
| Basic and  Diluted                                                                                                              |   | $                                                        | (0.14  | )                                                       | $          | (1.56 | ) | $ | (0.25 | ) | $ | (3.36 | ) |
|                                                                                                                            |   |                                                     |   |                                                    |       |   |   |   |   |
| Pro forma                                                                                                                       |   |                                                     |   |                                                    |       |   |   |   |   |
| Basic and Diluted                                                                                                               |   | $                                                        | (0.19  | )                                                       | $          | (1.61 | ) | $ | (0.39 | ) | $ | (3.48 | ) |

 

**Note 8 – Net Income Per Share**

 

The following table sets forth the computation of net income per sharefor the three and nine months ended September 30, 2003 and 2002 (inthousands except per share data):

 
|                                                                                         |   | **Three****months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                         |   | **2003**                                      |   | **2002**                                   |   | **2003** |   | **2002** |   |
|                                                                                         |   |                                          |   |                                       |   |   |   |   |   |
| Net loss                                                                                     |   | $                                             | (1,930 | )                                          | $      | (20,352 | ) | $ | (3,336 | ) | $ | (43,742 | ) |
|                                                                                         |   |                                          |   |                                       |   |   |   |   |   |
| Average number of shares outstanding during  the period                                      |   | 13,334                                        |   | 13,050                                     |   | 13,283 |   | 13,021 |   |
| Add common share equivalents — options to  purchase common shares and contingent shares |   | —                                        |   | —                                     |   | — |   | — |   |
| Total                                                                                        |   | 13,334                                        |   | 13,050                                     |   | 13,283 |   | 13,021 |   |
|                                                                                         |   |                                          |   |                                       |   |   |   |   |   |
| Amounts per basic and diluted share:                                                         |   |                                          |   |                                       |   |   |   |   |   |
| Loss before cumulative effect of change in  accounting principle                             |   | $                                             | (0.14  | )                                          | $      | (1.56 | ) | $ | (0.25 | ) | $ | (1.65 | ) |
| Cumulative effect of change in accounting  principle                                         |   | —                                        |   | —                                     |   | — |   | (1.71 | ) |
| Net loss                                                                                     |   | $                                             | (0.14  | )                                          | $      | (1.56 | ) | $ | (0.25 | ) | $ | (3.36 | ) |

 

Diluted earnings per share for the three months endedSeptember 30, 2003 and 2002 excludes 1,453,297 and 462,950 common stockequivalents (options and warrants), respectively, because they areanti-dilutive. Diluted earnings per share for the nine months endedSeptember 30, 2003 and 2002 excludes 1,243,529 and 308,628 common stockequivalents (options and warrants), respectively, because they areanti-dilutive.

 

12

----

 

**Note 9 – Impairment Loss**

 

During the nine months ended September 30, 2002, the Companydetermined that, based on estimates of future cash flows and other availablemarket data, several of its investments in and advances to companies inparallel industries were impaired. Accordingly, the Company recorded animpairment loss of $1.1 million. There was no impairment loss during the ninemonths ended September 30, 2003.

 

**Note 10 – Restructuring Charge**

 

During the quarter ended September 30, 2002, META Group Germanyreduced its workforce and recorded a $140,000 restructuring charge forseverance payments that were made during the quarter ended December 31,2002. Additionally, in February 2002, the Company announced arestructuring whereby it reduced its workforce by 43 persons (representing 7%of the workforce at the time). As a result of the restructuring, the Companyincurred a $222,000 restructuring charge during the quarter endedMarch 31, 2002 for severance payments made during the quarter endedMarch 31, 2002.

 

**Note 11 – Contingencies and Guarantees**

 

*Contingencies:*

 

*Otherthan ordinary routine litigation incidental to the Company’s business, theCompany is not a party, nor is any of its property subject to, any pendinglegal proceedings.*

* *

*Letters of Credit:*

* *

*As ofSeptember 30, 2003, the Company had a $115,000 standby letter of credit(an “LC”) issued on behalf of one of the Company’s independent salesrepresentative organizations (the “Distributor”). The LC was issued as securityagainst the borrowings of the Distributor and arose as a result of previousdefaults on such borrowings. Any future default by the Distributor may triggerthe letter of credit being called. The LC has a six-month term and expires inDecember 2003. In June 2003 the Company recorded a charge of $25,000(reflected in general and administrative expenses on the Company’s consolidatedstatements of operations for the nine months ended September 30, 2003)equal to the estimated fair value of the guarantee upon its issuance. InNovember 2003, the Company renewed the LC for a six-month term expiring inJune 2004.*

* *

*Guarantees:*

* *

*InSeptember 2000 the Company provided a corporate guarantee in the amount ofEuro 62,000 (approximately $72,000) for lease payments to the landlord of oneof the Company’s former independent sales representative organizations. InJanuary 2002, the landlord called the guarantee. The claim is currentlybeing negotiated with the landlord. The Company is currently uncertain as towhen this issue will be resolved. As of September 30, 2003, the Companyhas $61,000 accrued for this guarantee.*

* *

*13*

----

 

**Item2.**    **MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The discussion and analysis below containstrend analysis and other forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934, which are subject to a number of risks anduncertainties. These forward-looking statements are typically denoted in thisQuarterly Report on Form 10-Q by words such as anticipate, believe, could,estimate, expect, intend, may, plan, project, should or will and similar words(as well as other words or expressions referencing future events, conditions orcircumstances). Actual results could differ materially from those projected inthe forward-looking statements as a result of the risk factors, including therisk factors set forth below under “Certain Factors That May Affect FutureResults.” This discussion should be read in conjunction with the consolidatedfinancial statements and related notes for the periods specified. Furtherreference should be made to the Company’s other filings with the Securities andExchange Commission, principally the Company’s Annual Report on Form 10-K/A forthe year ended December 31, 2002.*

 

**Overview**

 

META Group, Inc. with its subsidiaries(collectively the “Company”) is a leading independent research and consultingfirm focusing on information technology (“IT”) and business transformationstrategies. The Company’s goal is to deliver objective, consistent, andactionable guidance to enable organizations to innovate more rapidly andeffectively.

 

The Company has three operating business segments: Advisory Services,Strategic Consulting and Published Research Products.  The Advisory Services segment provides annually renewablesubscription services (focused on specific areas of IT, the special needs ofthe CIO and others within the IT organization, or the distinct IT/businessissues of specific industry markets and the public sector), service analystbriefing engagements, and conferences. Supplementing these services are theCompany’s Infusion programs, which provide an important bridge betweentraditional Advisory Services that examine broader industry issues andStrategic Consulting which focuses on specific projects for a given client. TheStrategic Consulting segment offers project consulting services that addressclients’ business and technology challenges. A significant portion of StrategicConsulting clients are also Advisory Services subscribers. The PublishedResearch Products segment includes research reports and online resources whichoffer thorough market research, practical executive/operational guides andin-depth IT product evaluations.

 

Advisory Services revenues, which generally are annually renewablecontracts and payable by clients in advance, constituted approximately 64% and69% of the Company’s total revenues for the quarters ended September 30,2003 and 2002, respectively. Advisory Services revenues attributable tointernational clients are billed and collected by the Company’s independentsales representative organizations, its wholly-owned subsidiaries in Canada,Australia, Singapore, Malaysia, Korea, the Philippines, Hong Kong, France,Germany, the UK and Italy. The Company realizes Advisory Service revenues fromthe international sales representative organizations at rates of 40% to 75% ofamounts billed to those clients.

 

One measure of the volume of the Company’s AdvisoryServices business is its annualized “Contract Value,” which the Companycalculates as the aggregate value of retainer subscription services contractsin force at a given point in time, without regard to the remaining duration ofsuch contracts. Contract Value is not necessarily indicative of future AdvisoryServices revenues. Contract Value was $69.7 million at September 30, 2003versus $69.8 million at September 30, 2002.

 

14

----

 

Revenues from Strategic Consulting engagementscomprised approximately 30% and 26% of the Company’s total revenues for thequarters ended September 30, 2003 and 2002, respectively. The majority ofthe Company’s Strategic Consulting clients consist of Advisory Services clientsseeking additional advice tailored to their individual IT requirements.

 

Revenues from Published Research Products comprised approximately 5% and2% of the Company’s total revenues for the quarters ended September 30,2003 and 2002, respectively.

 

The Company’s operating expenses consist of cost of services andfulfillment, selling and marketing expenses, general and administrativeexpenses and depreciation and amortization. Cost of services and fulfillmentrepresents the costs associated with production and delivery of the Company’sproducts and services and includes the costs of research, development,preparation of periodic reports, analyst telephone consultations, executivebriefings and conferences, research reports, consulting services, new productdevelopment, and all associated editorial and support services. Selling andmarketing expenses include the costs of salaries, commissions, related benefitsfor selling and marketing personnel, as well as travel and promotion, and baddebt expense associated with accounts and notes receivable. General andadministrative expenses include the costs of the finance and accountingdepartments, in addition to the legal, human resources, corporate IT and otheradministrative functions of the Company.

 

**THREE MONTHS ENDEDSEPTEMBER 30, 2003 AND 2002**

 

REVENUES Total revenues increased****8.2%to $29.4 million in the quarter ended September 30, 2003 from $27.2 millionin the quarter ended September 30, 2002.

 

Revenues from Advisory Services, which generally are derived fromannually renewable contracts payable by clients in advance, decreased slightly****to****$18.7million in the quarter ended September 30, 2003 from $18.8 million in thequarter ended September 30, 2002, and decreased as a percentage of totalrevenues to 63.8% in the quarter ended September 30, 2003 from 69.4% inthe quarter ended September 30, 2002. The decrease in revenues from Advisory Services was principally due todecreased subscriptions to the Company’s Advisory Services as a result ofdecreased IT spending due to general economic conditions. This decrease waspartially offset by an increase in guru consulting revenue, which generally arehalf-day briefings with the Company’s analysts which complement thedeliverables underlying the Company’s advisory services, and, to a lesserextent, from approximately $0.2 million in incremental revenues from theacquisitions of META Group UK and META Group Italy. Advisory Servicesrevenues attributable to international clients increased 16.3% to $3.9 millionin the quarter ended September 30, 2003 from $3.4 million in the quarterended September 30, 2002, and increased as a percentage of Advisory Servicesrevenue to 21% from 18%. The increase in Advisory Services revenue attributableto international clients was due principally to the incremental revenuerealized from the acquisitions of META Group UK and META Group Italy. 

 

Strategic Consulting revenues, which result from Strategic Consultingengagements addressing clients’ business and technology issues, increased 24.4%to $8.8 million in the quarter ended September 30, 2003 from $7.1 millionin the quarter ended September 30, 2002. The increase was principally dueto increased domestic consulting revenue from the Company’s benchmarking andoperations-focused consulting offerings as a result of additional engagementssecured during the quarter ended September 30, 2003. 

 

15

----

 

Published Research Products revenues, which result from the sale ofpublished research products offering market research, practicalexecutive/operational guides and in-depth IT product evaluations, increased to$1.3 million in the quarter ended September 30, 2003 from $0.5 million inthe quarter ended September 30, 2002, and increased as a percentage oftotal revenues to 4.6% from 2.0%. Published Research Products revenues for thequarter ended September 30, 2002 includes certain first half 2002intercompany charges totaling $0.5 million which were reclassified during thequarter ended September 30, 2002 from revenues to expense which createdthe most significant fluctuation quarter-over-quarter. Additionally, during thequarter ended September 30, 2003, the Company experienced an increase indemand for the Company’s Published Research Products in the areas ofmeasurement and architecture when compared to the same period in the previousyear. 

 

COST OF SERVICES AND FULFILLMENT  Cost of services and fulfillment, includingreimbursable expenses, increased 8.6% to $16.5 million in the quarter endedSeptember 30, 2003 from $15.2 million in the quarter endedSeptember 30, 2002 and increased as a percentage of total revenues to56.1% from 55.9%. The increase was principally due to increases in personnelcosts (salary and related benefits) of the Company’s research and fulfillmentpersonnel and consultants during the quarter ended September 30, 2003 whencompared to the prior year, and, to a lesser extent, as a result ofapproximately $0.35 million in incremental costs from the acquisitions of METAGroup UK and META Group Italy.

 

SELLING AND MARKETING EXPENSES  Selling and marketing expenses remainedconsistent at $7.9 during the quarter ended September 30, 2003 whencompared to the same period in the previous year, and decreased as a percentageof revenue to 26.9% from 29.2%. During the quarter ended September 30,2003, the Company incurred approximately $0.6 million in marketing expensesassociated with the Company’s marketing and branding campaign launched inMarch 2003. Additionally, the Company experienced an increase in personnelcosts (salary and benefits) as a result of higher salary levels and increasedselling and marketing personnel on hand during the quarter endedSeptember 30, 2003 when compared to the same period in the previous year.These increases were offset by decreases in bad debt expense and other chargesrelating to certain of its independent sales representative organizations. Specifically,in the third quarter of 2002, the Company recorded charges totaling $1.1million relating to bad debts as well as accruals for legal matters pertaining to certain former independentsales representative organizations.

 

GENERAL AND ADMINISTRATIVE EXPENSES  General and administrative expensesincreased 6.8% to $5.8 million in the quarter ended September 30, 2003from $5.4 million in the quarter ended September 30, 2002, and decreasedas a percentage of total revenues to 19.7% from 20.0%. The increase in generaland administrative expenses was principally due to higher personnel costs(salary and benefits), an increase in professional fees and non-income relatedtaxes, incremental costs resulting from the acquisitions of META Group UK andMETA Group Italy and incremental costs associated with the establishment of newentities in the Asia Pacific region during the quarter ended September 30,2003,when compared to the same period in the previous year.

 

DEPRECIATION AND AMORTIZATION  Depreciation and amortization expensedecreased 32.1% to $1.1 million in the quarter ended September 30, 2003from $1.6 million in the quarter ended September 30, 2002 and decreased asa percentage of total revenues to 3.7% from 5.9%. The decrease was principallydue to decreased levels of net depreciable assets on hand during the quarterended September 30, 2003 versus the same period in the previous year whichresulted from decreased capital expenditures that commenced in 2001 andcontinued through the first half of 2003.

 

RESTRUCTURING CHARGE  During the quarter ended September 30, 2002, META GroupGermany reduced its workforce and recorded a $140,000 restructuring charge forseverance payments that were made during the quarter ended December 31,2002.

 

16

----

 

LOSS ON FACILITIES LEASES  During the quarter ended September 30,2002, the Company recorded a $2.2 million loss on certain of its domestic andGerman facilities leases. The losses pertain to rent expense associated withvacant space in these facilities that will continue to be incurred under therespective contracts for their remaining terms without economic benefit to theCompany. The fair value of the losses was computed based on the aggregateremaining lease obligations of the vacant space reduced by estimated subleaserentals that the Company reasonably expects to obtain for the space.

 

GOODWILL IMPAIRMENT LOSS  During the quarter ended September 30,2002, the Company recorded a $1.2 million goodwill impairment loss resulting fromthe Company’s goodwill impairment test performed in accordance with SFAS 142.The impaired goodwill related to additions to goodwill in the StrategicConsulting and Published Research Products segments that occurred during thequarter ended September 30, 2002. The Company completed its 2003 annualimpairment test as of September 30, 2003, which indicated that noimpairment losses were warranted as of such date.

 

INVESTMENT IMPAIRMENT LOSS  During the quarter ended September 30,2002, the Company determined that based on estimates of future cash flows andother available market data, several of its investments in and advances tocompanies in parallel industries were impaired. Accordingly, the Companyrecorded a $0.8 million impairment loss. There was no impairment loss duringthe quarter ended September 30, 2003.

 

OTHER INCOME (EXPENSE), NET  During the quarter ended September 30,2003, the Company recorded other income, net, of $23,000, which consistedprimarily of interest income on the Company’s cash balances. During the quarterended September 30, 2002, the Company recorded net other expense of$64,000, which consisted primarily of interest expense related to the Company’soutstanding borrowings under its credit facility partially offset by interestincome on the Company’s cash balances.

 

PROVISION FOR INCOME TAXES During the quarter ended September 30,2003, the Company recorded a provision for income taxes of $16,000 versus aprovision for income taxes of $12.9 million during the quarter ended September 30,2002. During the quarter ended September 30, 2002, the Company establisheda $12.2 million valuation allowance established against its deferred income taxassets, which consist of net operating loss carryforwards for income taxpurposes and temporary differences between the financial reporting basis andthe income tax basis of the Company’s assets and liabilities. In view of theCompany’s losses over its recent history, a determination was made that avaluation allowance should be established for the full amount of recordeddeferred tax assets.

 

**NINE MONTHS ENDEDSEPTEMBER 30, 2003 AND 2002**

 

REVENUES Total revenues increased 1.0% to $87.6 million in the nine months endedSeptember 30, 2003 from $86.8 million in the nine months endedSeptember 30, 2002.

 

Revenues from Advisory Services decreased 2.5%****to****$56.4 million in the nine months ended September 30, 2003 from $57.9million in the nine months ended September 30, 2002 and decreasedas a percentage of total revenues to 64.4% from 66.7%. The decrease in revenuesfrom Advisory Services was principally due to decreased subscriptions to theCompany’s Advisory Services. This resulted from the decrease in demand for suchservices that began in the second half of 2000 due to a decrease in IT spendingas a result of general economic conditions and continued through the end of2002. This decrease was partially offset by an increase in guru consultingrevenue, which generally are half-day briefings with the Company’sanalysts which complement the deliverables underlying the Company’s advisoryservices, and, to a lesser extent, by an increase in conference revenueduring the nine months ended September 30, 2003

 

17

----

 

when compared to the prior year period as a result of the Company’sability to secure vendor sponsorships at certain of its events.  The Company currently expects decreases inIT spending and pricing pressure to continue to impact its Advisory Servicerevenue for the foreseeable future.

 

Strategic Consultingrevenues increased 6.8% to $25.0 million in the nine months endedSeptember 30, 2003 from $23.4 million in the nine months endedSeptember 30, 2002, and increased as a percentage of total revenues to28.5% from 26.9%. The increase was principally due to increases experienced inthe US and Germany as a result of increases in the Company’s benchmarking andoperations-focused consulting offerings. Such increases were partially offsetby decreases in the Company’s consulting practice in Canada and as a result ofcompetitive pricing conditions in the industry and as a result of decreases inand delays of IT spending as a result of general economic conditions.  The Company currently expects decreases inIT spending and pricing pressure to continue to impact its Strategic Consultingrevenue for the foreseeable future.

 

Published Research Products revenues increased 26.6% to $4.5 million inthe nine months ended September 30, 2003 from $3.6 million in the ninemonths ended September 30, 2002 and increased as a percentage of totalrevenues to 5.2% from 4.1%.  Theincrease in revenues was principally due to increased demand for the Company’sPublished Research Products in the areas of measurement and architecture whencompared to the same period in the previous year.

 

COST OF SERVICES AND FULFILLMENT  For the nine months ended September 30,2003, Cost of services and fulfillment, including reimbursable expenses,increased 3.0% to $47.6 million from $46.2 million in the nine months endedSeptember 30, 2002 and increased as a percentage of total revenues to54.3% from 53.2%. During the nine months ended September 30, 2003, theCompany experienced an increase in expenses in its subsidiaries in Germany,France and within the Asia Pacific region due to an increase in the number ofanalyst, consultant and fulfillment positions within such subsidiaries as wellas  incremental expenses resulting fromthe acquisitions of META Group UK and META Group Italy. These increases werepartially offset by a decrease in outside consulting charges and a decrease inemployee travel expenses.

 

SELLING AND MARKETING EXPENSES  Selling and marketing expenses increased to$23.6 million in the nine months ended September 30, 2003 from $23.5million in the nine months ended September 30, 2002 and decreased as apercentage of total revenues to 26.9% from 27.1%. The increase in selling andmarketing expenses was principally due to increased marketing expensesassociated with the Company’s marketing and branding campaign launched inMarch 2003, and increased personnel costs (salary, bonus and relatedbenefits) as a result of an increase in the total number of selling andmarketing personnel on hand during the nine months ended September 30,2003 versus the comparable period in the previous year. Such increases wereoffset by a decrease in bad debt expense incurred during the nine months endedSeptember 30, 2003 versus the same period in the previous year.Additionally, during the nine months ended September 30, 2002, the Companyrecorded a provision of $0.5 million for certain legal matters with one of theCompany’s former independent sales representative organizations.

 

GENERAL AND ADMINISTRATIVE EXPENSES  General and administrative expensesincreased 14.4% to $16.6 million in the nine months ended September 30,2003 from $14.5 million in the nine months ended September 30, 2002 andincreased as a percentage of total revenue to 18.9% from 16.7%. The increase inexpenses was principally due to increased expenses throughout the Company’sinternational subsidiaries as a result of additional management personnel addedin certain of the Company’s subsidiaries, incremental costs associated with theacquisitions of META Group UK and META Group Italy, additional costs incurredassociated with the establishment of new entities in the Asia Pacific region in2003 and increased personnel costs (salary and bonus) in the Americas.

 

DEPRECIATION AND AMORTIZATION  Depreciation and amortization expensedecreased 21.9% to $3.7 million in the nine months ended September 30, 2003from $4.7 million in the nine months ended September 30, 2002. Thedecrease was principally due to decreased levels of net depreciable assets on

 

18

----

 

hand during the nine months ended September 30, 2003 versus thesame period in the previous year as a result of decreased capital expendituresthat commenced in 2001 and continued through the first half of 2003.

 

RESTRUCTURING CHARGE  During the quarter ended September 30, 2002, META GroupGermany reduced its workforce and recorded a $140,000 restructuring charge forseverance payments that were made during the quarter ended December 31,2002. Additionally, in February 2002, the Company announced arestructuring whereby it reduced its workforce by 43 persons (representing 7%of the workforce at the time). As a result of the restructuring, the Companyincurred a $222,000 restructuring charge during the quarter endedMarch 31, 2002 for severance payments made during the quarter endedMarch 31, 2002.

 

LOSS ON FACILITIES LEASES  During the nine months endedSeptember 30, 2002, the Company recorded a $2.2 million loss on certain ofits domestic and German facilities leases. The losses pertain to rent expenseassociated with vacant space in these facilities that will continue to beincurred under the respective contracts for their remaining terms withouteconomic benefit to the Company. The fair value of the losses was computedbased on the aggregate remaining lease obligations of the vacant space reducedby estimated sublease rentals that the Company reasonably expects to obtain forthe space.

 

GOODWILL IMPAIRMENT LOSS  During the nine months endedSeptember 30, 2002, the Company recorded a $2.6 million goodwillimpairment loss resulting from the Company’s goodwill impairment test performedin accordance with SFAS 142. The impaired goodwill related to additions togoodwill in the Strategic Consulting and Published Research Products segmentsthat occurred during the nine months ended September 30, 2002. The Companycompleted its 2003 annual impairment test as of September 30, 2003, whichindicated that no impairment losses were warranted as of such date.

 

INVESTMENT IMPAIRMENT LOSS  During the nine months endedSeptember 30, 2002, the Company determined that, based on estimates offuture cash flows and other available market data, several of its investmentsin and advances to companies in parallel industries were impaired. Accordingly,the Company recorded an impairment loss of $1.1 million. 

 

OTHER INCOME (EXPENSE), NET  During the nine months endedSeptember 30, 2003, the Company recorded net other income of $0.7 millionwhich consisted of a gain of $0.3 million recognized on the final settlement ofthe Company’s investment in Spikes Cavell, a gain of $0.3 million recognized onthe sale of another of the Company’s investments in a third party, and interestincome earned on the Company’s cash balances. During the nine months endedSeptember 30, 2002, the Company recognized net other expense of $58,000which consisted of interest expense on the Company’s outstanding borrowingsunder its credit facility partially offset by interest income earned on theCompany’s cash balances.

 

PROVISION FOR INCOME TAXES  During the nine months endedSeptember 30, 2003, the Company recorded an income tax provision of$148,000 versus a provision for income taxes of $13.0 million recorded duringthe nine months ended September 30, 2002. During the nine months endedSeptember 30, 2002, the Company established a $12.2 million valuationallowance established against its deferred income tax assets, which consist ofnet operating loss carryforwards for income tax purposes and temporarydifferences between the financial reporting basis and the income tax basis ofthe Company’s assets and liabilities. In view of the Company’s losses over itsrecent history, a determination was made that a valuation allowance should beestablished for the full amount of recorded deferred tax assets.

 

19

----

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company funds its operations primarily throughcash generated from operations, and, to a lesser extent, from borrowings underits credit facility and from the sale of its common stock. The Companygenerated approximately $7.6 million of cash from operations during the ninemonths ended September 30, 2003, compared to $4.3 million of cashgenerated from operations in the same period of 2002. The increase in cashgenerated from operations was principally due to a decrease in bonus payments madeduring the nine months ended September 30, 2003 versus the same period inthe previous year, and, to a lesser extent, as a result of increased levels ofdeferred revenues at September 30, 2003 versus September 30, 2002. Thesewere partially offset by a decrease in cash collections during the nine monthsended September 30, 2003 versus the same period in the previous year as aresult of overall decreases in billings that began in the second half of 2000and continued through the end of 2002.

 

TheCompany used $0.7 million of cash in the nine months ended September 30,2003, compared to $0.6 million in the same period of 2002, for capitalexpenditures consisting of furniture, equipment, computers and relatedsoftware, other internal use software and network infrastructure. The Companycurrently expects that additional purchases of equipment will be made during2003 and that such expenditures will remain approximately the same whencompared to the 2002 levels. The Company has no material commitments for capitalexpenditures; however, the Company anticipates that it will continue to upgradeits internal systems to support its business.

 

During the quarter ended March 31, 2003, theCompany received final proceeds of $588,000 on the liquidation of Spikes Cavelland recognized a gain of $315,000. Additionally, in May 2003 the Companysold another of its investments in a third party entity. Total proceeds were$0.3 million, and the Company recognized a gain on the sale of $0.3 million.

 

Duringthe nine months ended September 30, 2002, the Company paid approximately$0.4 million in cash to The Verity Group (“Verity”), an IT consulting company,as additional contingent consideration earned during the year endedDecember 31, 2001. The consideration was recorded as additional goodwill.There are no additional contingent consideration payments remaining under theterms of the Verity purchase agreement. During the nine months endedSeptember 30, 2002, the Company recorded $0.9 million in additionalgoodwill in connection with contingent consideration earned by Rubin Systems,Inc. (“RSI”) in connection with the achievement of certain financial targetsfor the year ended December 31, 2001. The Company paid $569,000 in cashand issued $369,000 (202,499 shares) in the Company’s common stock in 2002 insatisfaction of the contingent consideration. In the event certain financialtargets are met, additional contingent consideration of $2.7 million payable incash and $1.4 million payable in the Company’s common stock may be paid throughMarch 2007. In the event the aggregate number of shares issued insatisfaction of contingent consideration exceeds 147,027, the remainingconsideration will be payable in cash. RSI is wholly owned by Dr. Howard Rubin,a director and officer of the Company.

 

In June 2003, the Company acquired 100%of META Group Italia S.R.L. (“META Group Italy”) for $0.28 million in cash. InAugust 2003, the Company acquired 100% of META Group UK Holdings Limited(“META Group UK”) for $1.6 million in cash. In September 2003, the Companyacquired 100% of META Group Norway A/S, META Group Sweden AB, META GroupFinland OY, META Group Denmark A/S, META Group Northern Europe ApS, and ATEMNetherlands ApS (collectively “Northern Europe”). The purchase price was $3.6 millionin cash and 175,000 shares of the Company’s common stock which the Companycurrently anticipates issuance of in the quarter ending December 31, 2003.The acquisitions were done in an effort to gain direct control oversubstantially all operations in Europe and create more uniformity in theCompany’s service offerings.

 

20

----

 

As ofDecember 31, 2002, the Company had $6.2 million ($5.2 million outstandingunder the term loan and $1 million outstanding under the revolving facility) inborrowings outstanding under its $20 million credit facility with its bank (the“Old Facility”). The Company was in breach of a number of covenants containedin the Old Facility. As the Company was in default under the Old Facility as ofDecember 31, 2002, all outstanding borrowings were classified as a currentliability on the consolidated balance sheet as of December 31, 2002. InJanuary 2003, the Company repaid all amounts outstanding under the OldFacility from its cash on hand.

 

InMarch 2003, the Company received a waiver of all prior covenant defaults.Additionally, in March 2003, the Company executed a new $6 million amendedand restated credit agreement with its bank (the “Amended Facility”). TheAmended Facility replaced the Old Facility and consists of a $6 millionrevolving credit facility. Under the Amended Facility, interest on anyoutstanding borrowings will be payable at the rate of LIBOR, as determined bythe bank, plus 1.5% or the higher of the Prime Rate or the Federal Funds Rateplus 0.5%. The Amended Facility is fully collateralized by a $6 million cashdeposit with its bank. This cash deposit is reflected as restricted cash on theCompany’s consolidated balance sheet as of September 30, 2003. The AmendedFacility contains a number of covenants that, among other things, restricts theability of the Company to create liens; dispose of assets; consolidate with, beacquired by or enter into a merger agreement or into any binding agreement todo any of the foregoing which is not contingent on obtaining the consent of thebank other than mergers in which the Company shall be the surviving companyafter such merger is effective; materially change the nature of the Company’sbusiness; alter or modify the Company’s name, structure or status or change itsfiscal year. The Amended Facility contains no financial covenants, and maturesin November 2004.

 

During the nine months ended September 30, 2003, the Company paid$369,000 in satisfaction of the terms of notes payable held by certain formershareholders of META Group Germany. The notes were acquired when the Companyacquired the remaining interest in META Group Germany in September 2002.As of September 30, 2003, $640,000 remains payable under the notes, whichare payable through January 2006.

 

*As ofSeptember 30, 2003, the Company had a $115,000 standby letter of credit(an “LC”) issued on behalf of one of the Company’s independent salesrepresentative organizations (the “Distributor”). The LC was issued as securityagainst the borrowings of the Distributor and arose as a result of previousdefaults on such borrowings. Any future default by the Distributor may triggerthe letter of credit being called. The LC has a six month term and expires inDecember 2003. In November 2003, the Company renewed the LC for asix-month term expiring in June 2004.*

* *

*InSeptember 2000 the Company provided a corporate guarantee in the amount ofEuro 62,000 (approximately $72,000) guaranteeing lease payments to the landlordof one of the Company’s former independent sales representative organizations.In January 2002, the landlord called the guarantee. The claim is currentlybeing negotiated with the landlord. The Company is currently uncertain as towhen this issue will be resolved.*

* *

As of September 30, 2003, the Company has a liability forseverance payments owed to the former Chief Executive Officer of the Company.The total liability is approximately $440,000 and will be paid throughout theremainder of 2003 with a final payment to occur during the first quarter of2004.

 

As ofSeptember 30, 2003, the Company had cash and cash equivalents of $11.6million, restricted cash of $6 million, and negative working capital of $20.8million. The Company generated a net loss of $3.3 million for the nine months endedSeptember 30, 2003, and a loss before the cumulative effect of a change inaccounting principle of $21.5 million for the nine months endedSeptember 30, 2002. To maintain profitability, the Company will need to,among other things, achieve revenue growth and/or maintain expenses belowrevenue levels. The Company cannot be certain whether, or when, any of thesewill occur. If the Company fails to either achieve sufficient revenue growth ormaintain expenses below revenue levels, any such failure will likely result incontinued losses that would have a material adverse effect on the Company’sfinancial results and condition.

 

21

----

 

**The Company currently believesexisting 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 next 12months. The Company currently intends to continue its efforts to monitor itsaccounts receivable collections and manage expenses. The Company also currentlybelieves that decreases in and delays of IT spending as a result of generaleconomic conditions and competitive pricing pressure are likely to continue tonegatively impact its business for the foreseeable future.**

** **

**The following summarizes theCompany’s contractual obligations and other commitments as ofSeptember 30, 2003 and the effect such obligations are currently expectedto have on its liquidity and cash flow in future periods (in thousands):**

** **
|                                                |   | **Twelve  Months Ending December 31,** |   |
|-----------------------------------------------------|--------|---------------------------------------------|--------|
|                                                |   | **2003 (1)**                                |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   |
| Operating leases                                    |   | $                                           | 1,544  |   | $ | 5,697 |   | $ | 4,870 |   | $ | 4,367 |   | $ | 4,503 |   | $ | 2,363 |   |
| Payments due under employment/severance  agreements |   | 122                                         |   | 572 |   | — |   | — |   | — |   | — |   |
| Notes payable                                       |   | —                                      |   | 353 |   | 253 |   | 34  |   | — |   | — |   |
|                                                |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
|                                                |   | $                                           | 1,666  |   | $ | 6,622 |   | $ | 5,123 |   | $ | 4,401 |   | $ | 4,503 |   | $ | 2,363 |   |

 

----

(1) Represents three months endingDecember 31, 2003

 

**CriticalAccounting Policies**

 

Our significant accounting policies are described in Note 4 to ourconsolidated financial statements included in our Annual Report on Form 10-K/Afor the year ended December 31, 2002. However, certain of our accountingpolicies are particularly important to the portrayal of our financial positionand results of operations and may require the application of significantjudgment by our management; as a result they are subject to an inherent degreeof uncertainty. In applying those policies, our management uses its judgment todetermine the appropriate assumptions to be used in the determination ofcertain estimates. Those estimates are based on our historical experience, ourobservance of trends in the industry, information provided by our customers andinformation available from other outside sources, as appropriate. Oursignificant accounting policies include:

 

22

----

 

•                  RevenueRecognition – Revenues from our Advisory Services are recognized on astraight-line basis over the subscription contract period, generally one year.All subscription contracts are billable at signing, absent special termsgranted on a limited basis from time to time. Our policy is to record at thetime of signing of an Advisory Services subscription contract the fees receivableand related deferred revenues for the amounts billed. Accounts receivable anddeferred revenues that extend beyond a 12-month period have been classified onthe consolidated balance sheets as non-current. We also record the relatedsales commission obligation upon the signing of the subscription contract andamortize the corresponding deferred commission expense over the subscriptionperiod in which the related Advisory Services revenues are earned and amortizedto income. We recognize revenue on Strategic Consulting engagements as the workis performed and the services are rendered utilizing the percentage ofcompletion method or based on time and materials on a contract by contractbasis. The average duration of our consulting engagements is 2 –3 months.Revenues from Published Research Products are recognized at the time theapplicable product is delivered. Additionally, we record reductions to revenuefor estimated customer cancellations.

 

•                  Accounts Receivable Allowance –We generallyevaluate our accounts receivable on a monthly basis. As part of our analysis,we examine our collections history, the age of the receivables in question, anyspecific customer collection issues that we have identified, and general marketconditions. At September 30, 2003 and 2002, our total accounts receivablebalance was $26.5 million and $26.7 million, respectively. Based upon ouranalysis of estimated recoveries and collections associated with thereceivables balances, we have $1 million and $2.1 million of accountsreceivable reserves at September 30, 2003 and 2002, respectively. Thedetermination of the amount of the accounts receivable reserves is subject tosignificant levels of judgment and estimation by our management. Ifcircumstances change or economic conditions deteriorate, we may need toincrease the reserve.

 

•                  InvestmentRecoverability –We follow a practice to review our individual investments forimpairment on a quarterly basis. This review includes the examination of theestimated market value of each specific investment using peer group marketcomparables of public companies. Additionally, we review the business climateof each investee, its historical financial results, its projected cash flow,its plans for the future and the likelihood of achieving such plans. Based onsuch review, a determination is made on a case-by-case basis as to whether aninvestment is deemed to be permanently impaired and therefore requires anadjustment to the carrying value. As a result of our review, there were noprovisions for impairment in the nine months ended September 30, 2003. Forthe nine months ended September 30, 2002, we recorded impairment chargesof $1.1 million. We will continue to evaluate our investments for impairmentevery quarter, and based on our review, may record additional impairment lossesshould the facts and circumstances in existence at that time merit such anadjustment.

 

•                  Deferred Tax Asset Recoverability –During the year ended December 31, 2002, we recorded a full valuationallowance against our deferred tax assets as a result of our losses over therecent history. We considered future taxable income versus the cumulativelosses incurred during the previous three years and determined that, in lightof the cumulative losses over our recent history, we could not support aconclusion that realization of the existing deferred tax assets was more likelythan not. During the nine months ended September 30, 2003, there was nochange in the circumstances described above. Should we determine that we wouldbe able to realize our deferred tax assets in the future, an adjustment will bemade to the balance of the valuation allowance.

 

•                  Goodwill Impairment - EffectiveJanuary 1, 2002, we adopted Statement of Financial Accounting StandardsNo. 142, *Goodwill and Other IntangibleAssets*(“SFAS 142”). SFAS 142 provides guidance on the financialaccounting and reporting for acquired goodwill and other intangible

 

23

----

 

assets. Under SFAS 142, goodwill and intangible assetsdeemed to have indefinite lives will no longer be amortized but will be subjectto impairment tests on an annual basis, or more frequently if certainindicators arise. Intangible assets with finite lives will continue to beamortized over their useful lives. With respect to our intangible assets withfinite lives, during the quarter ended September 30, 2003 we assessed theremaining useful lives of such assets and deemed them to be appropriate.

 

With respect to our goodwill recorded as ofJanuary 1, 2002, we completed the implementation of FAS 142 as ofSeptember 30, 2002. Based on the completion of the test, it was determinedthat the goodwill associated with our Strategic Consulting and PublishedResearch Products segments was impaired as of January 1, 2002.Accordingly, we recorded a goodwill charge of $22.2 million relating to thecarrying value of the goodwill of these segments as of January 1, 2002.The impairment charge was recorded as the cumulative effect of a change inaccounting principle and recorded retroactive to January 1, 2002.

 

As ofSeptember 30, 2003, we have on our consolidated balance sheet goodwill of$9.3 million associated with the Advisory Services segment and $0.4 millionassociated with the Strategic Consulting segment. During the nine months endedSeptember 30, 2003, there were additions of $1.16 million to the AdvisoryServices segment and additions of $0.4 million to the Strategic Consultingsegment resulting from the acquisitions of META Group UK and META Group Italy.We have completed the annual impairment test for 2003 as of September 30,and we determined that no goodwill impairment existed. We will test thisgoodwill more frequently if certain indicators arise.

 

# **Impact of Recently Issued Accounting Pronouncements**

# ** **

In November 2002, the Emerging Issues Task Force reached aconsensus on Issue No. 00-21 “Revenue Arrangements with MultipleDeliverables,” (“EITF 00-21”). EITF 00-21 provides guidance on how to accountfor arrangements that involve the delivery or performance of multiple products,services and rights to use assets. The provisions of EITF 00-21 apply torevenue arrangements entered into in the fiscal periods beginning afterJune 15, 2003. The Company has examined its current Advisory Serviceofferings and has determined that its present accounting policies areconsistent with the guidance contained in EITF 00-21.

 

In January 2003, the FASB issued FASB Interpretation No. 46, *Consolidation of Variable Interest Entities*,an interpretation of ARB No. 51 (“FIN 46”). FIN 46 clarifies the application ofAccounting Research Bulletin No. 51, Consolidated Financial Statements, tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. FIN 46 explains how to identify variable interestentities and how an enterprise assesses its interest in a variable interestentity to decide whether to consolidate that entity. It requires existingunconsolidated variable interest entities to be consolidated by their primarybeneficiaries if the entities do not effectively disperse risks among partiesinvolved. It also requires certain disclosures by the primary beneficiary of avariable interest entity and by an enterprise that holds significant variableinterests in a variable interest entity where the enterprise is not the primarybeneficiary. FIN 46 is effective for variable interest entities created afterJanuary 31, 2003 and to variable interest entities in which an enterpriseobtains an interest after that date, and effective for the first fiscal year orinterim period beginning after June 15, 2003 to variable interest entitiesin which an enterprise holds a variable interest that it acquired beforeFebruary 1, 2003. FIN 46 requires an entity to disclose certaininformation regarding a variable interest entity, if, when the Interpretationbecomes effective, it is reasonably possible that an enterprise willconsolidate or have to disclose information about that variable interestentity, regardless of the date on which the variable interest entity wascreated.  The Company currently does nothave any interest in

 

24

----

 

any unconsolidated entity for which variable interest entity accountingis required and therefore FIN 46 did not impact the Company’s consolidatedfinancial statements.

 

**CERTAIN FACTORS THATMAY AFFECT FUTURE RESULTS**

 

From time to time, information provided by the Company or statementsmade by its employees may contain “forward-looking” statements.  In particular, this Form 10-Q containsforward-looking statements made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995.  Such forward-looking statements include statements concerning:

 

•                  informationtechnology spending;

•                  general economicconditions;

•                  competitivepricing pressure;

•                  anticipatedexpense levels relative to the Company’s total revenues;

•                  working capital;

•                  capitalexpenditures and capital requirements; and 

•                  cash flows andcash balances.

 

Forward-looking statements also include statements that are nothistorical facts or statements using words such as “anticipate”, “believe”, “could”,“estimate”, “expect”, “intend”, “likely”, “may”, “opportunity”, “plan”,“potential”, “project”, “should” or “will”.

 

Forward-looking statements are neither promises nor guarantees, butinvolve risks and uncertainties that could have a material adverse effect onthe Company’s business, results of operations and financial condition or causeactual results to differ materially from those set forth in the forward-lookingstatements.  These risks anduncertainties include:

 

•                                          theCompany’s ability to manage expense levels;

•                                          generaleconomic conditions;

•                                          decreasesand delays in information technology spending;

•                                          productpricing limiting the potential market for the Company’s Advisory Services,Strategic Consulting services and Published Research products;

•                                          thelevel and timing of subscription renewals to the Company’s Research andAdvisory services;

•                                          thelevel and timing of non-recurring Strategic Consulting engagements;

•                                          thelevel and timing of production and delivery of Published Research products;

•                                          marketacceptance of and demand for the Company’s products and services and the timingthereof, both domestically and internationally;

•                                          theCompany’s ability to increase its penetration of existing customers and expandto additional customers;

•                                          theCompany’s ability to deliver consistent, high-quality and timely analysis andadvice to its clients;

•                                          theCompany’s ability to recruit, retain and develop research analysts,consultants, management and administrative staff;

•                                          theCompany’s ability to anticipate changing market needs;

•                                          fluctuationsin the Company’s operating results

•                                          changesin competitive conditions in the Company’s industry;

•                                          theintegration of new businesses into the Company’s operations;

•                                          theCompany’s ability to manage and fund its international operations;

 

25

----

 

•                                          theCompany’s ability to find distributors for its products and servicesinternationally;

•                                          politicaland social turmoil in foreign markets and other international risks;

•                                          goodwilland any impairment thereof;

•                                          strategicinvestments and any impairment thereof;

•                                          volatilityand unpredictability of the Company’s stock price; and

•                                          otherrisks detailed in the Company’s filings with the Securities and ExchangeCommission, including those discussed in the Company’s annual report on Form10-K/A for the year ended December 31, 2002.

 

Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date the statements weremade.  Readers are also advised toconsider such forward-looking statements in light of the risks anduncertainties discussed above.  TheCompany undertakes no obligation to update any forward-looking statementscontained in the Quarterly Report on Form 10-Q.

 

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

 

The Company’s exposure to market risk for changes ininterest rates relates primarily to borrowings under its $6 million amended andrestated credit facility. As of September 30, 2003, there were noborrowings outstanding under this facility. In the event the Company draws onthe facility, interest is computed on outstanding borrowings at the rate ofLIBOR, as determined by the bank, plus 1.5% or the higher of the Prime Rate orthe Federal Funds Rate plus 0.5%. The Company believes that an increase or adecrease of ten percent in the effective interest rate on available borrowingson its facility, if fully utilized, would not have a material effect on futureresults of operations.

 

The Company is exposed to market risk as itrelates to changes in the market value of its strategic investments. TheCompany made investments in and advances to companies in parallel orsynergistic industries to that of the Company. During the nine months endedSeptember 30, 2002, the Company recorded $1.1 million impairment losses oncertain of its investments. There were no impairment losses recognized duringthe nine months ended September 30, 2003. As of September 30, 2003,the Company had investments and advances totaling $1.2 million excluding the$7.7 million of investments in and receivables from Northern Europe. Theseinvestments and advances are inherently risky because the investee companiesare private companies that are typically in the early development stages. Adversechanges in market conditions, like those experienced during the latter half ofthe year ended December 31, 2000 through 2002, and poor operating resultsof the underlying investments may result in the Company incurring additionallosses or an inability to recover the remaining value of its investments andadvances.

 

The Company is exposed to market risk as itrelates to foreign currency exchange rates. Changes in foreign currency exchange rates may negatively affect theCompany’s consolidated revenues and expenses as well as its net investment inits foreign subsidiaries. Currency transaction gains or losses arising fromtransactions in currencies other than the functional currency of the Company’sforeign subsidiaries are included in the results of operations. Such gains andlosses were not material to the Company’s consolidated results of operationsduring the nine months ended September 30, 2003 and 2002. The Company hasnot entered into foreign currency forward exchange contracts or other derivativefinancial instruments to hedge the effects of adverse fluctuations in foreigncurrency exchange rates.

 

26

----

 

**Item 4.**    **CONTROLSAND PROCEDURES**

 

 The Company evaluated thedesign and operation of its disclosure controls and procedures to determinewhether they are effective in ensuring that the disclosure of requiredinformation is timely made in accordance with the Exchange Act and the rulesand forms of the Securities and Exchange Commission. This evaluation was madeunder the supervision and with the participation of management, including theCompany’s principal executive officer and principal financial officer as of theend of the period covered by this report. Although the Company believes itspre-existing disclosure controls and procedures were adequate to enable it tocomply with its disclosure obligations, as a result of such review, the Companyimplemented changes, primarily to formalize and document procedures already inplace. The Company also established a disclosure committee, which consists ofcertain members of the Company’s senior management. The Company’s disclosurecontrols and procedures, as defined at Exchange Act Rules 13a-15(e) and15d-15(e), are effective to ensure that information required to be disclosed bythe Company in reports that it files under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

 

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

 

*There havebeen no significant changes in the Company’s internal controls or other factorsthat could significantly affect internal controls subsequent to the date theCompany carried out this evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.*

* *

# **PART II - OTHERINFORMATION**

# ** **

Item 1.    Legal Proceedings.

 

*Otherthan ordinary routine litigation incidental to the Company’s business that theCompany believes is unlikely to have a material adverse effect on its business,the Company is not a party, nor is any of its property subject to, any pendinglegal proceedings.*

* *

Item 6.    Exhibits and Reports on Form 8-K.

 

(a)           Exhibits.

 
| **Exhibit Number** |   | **Description**                                                                                                                          |
|--------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1 (1)            |   | Amended and Restated Certificate of Incorporation of the Company                                                                         |
| 3.2 (2)            |   | Amended and Restated Bylaws of the Company (as of May 1, 2003)                                                                      |
| 31.1               |   | Certification of the Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                             |
| 31.2               |   | Certification of the Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                             |
| 32                 |   | Certification of the Chief Executive Officer and Chief Financial  Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

----

(1)          Incorporated herein by reference to theexhibits to the Company’s Registration Statement on Form S-1 (File No.33-97848).

(2)          Incorporated herein by reference to theexhibits to the Company’s Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2003 filed on May 15, 2003 (File No. 0-27280)

 

27

----

 

(b)           Reports on Form 8-K.

 

On August 11, 2003, the Company filed a report on Form 8-K datedAugust 7, 2003, in connection with a release of the Company’s results ofoperations for the quarter ended June 30, 2003.

 

On August 14, 2003, the Company filed a report on Form 8-K datedMay 5, 2003, containing the transcript from the conference call regardingthe earnings and financial performance for the Company for the quarter endedMarch 31, 2003.

 

On August 14, 2003, the Company filed a report on Form 8-K datedAugust 7, 2003, containing the transcript from the conference callregarding the earnings and financial performance for the Company for thequarter ended June 30, 2003.

 

28

----

 

**SIGNATURE**

 

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

 
|                                          | **META Group, Inc.** |
|-----------------------------------------------|----------------------|
|                                          |                 |   |
|                                          |                 |   |
| Date:   November 14, 2003 | By:                  | /s/ John A. Piontkowski |   |
|                                          |                 | John A. Piontkowski |
|                                          |                 | Executive Vice President, Chief Financial  Officer, Treasurer and Secretary  (Principal Financial and Accounting Officer) |

 

29

----