**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                                                                                                                                                    |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                          |   |                                                                                                |
| **For the Quarterly period ended  September 30, 2002**                                                                                                                        |
|                                                                                                                                                                          |   |                                                                                                |
| **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 registrantas specified in its charter)

 

| **Delaware**                                                     |   | **06-0971675**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification No.) |
|                                                             |   |                               |
| **208  Harbor Drive, Stamford, Connecticut   06912-0061**   |
| (Address of principal  executive offices, including Zip Code)    |
|                                                             |   |                               |
| **(203)  973-6700**                                              |
| (Registrant’s telephone  number, including area code)       |

 

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

 

Yes         ý                            No           o

 

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

 

Yes         o                            No           ý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date: The number ofshares of the issuer’s common stock, $.01 par value per share, outstanding asof November 8, 2002 was 13,201,705.

 

 

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**META Group, Inc.**

 

**INDEX**

 
| **Part I**         |     | **FINANCIAL INFORMATION**                                                                                   |
|--------------------|----------|-------------------------------------------------------------------------------------------------------------|
|               |     |                                                                                                        |
|               | Item 1.  | Financial Statements                                                                                        |
|               |     |                                                                                                        |
|               |     | Consolidated Balance  Sheets:  September 30, 2002 (unaudited) and December 31, 2001                         |
|               |     |                                                                                                        |
|               |     | Consolidated  Statements of Operations (unaudited)  Three and nine months ended September 30, 2002 and 2001 |
|               |     |                                                                                                        |
|               |     | Consolidated  Statements of Cash Flows (unaudited)  Nine months ended September 30, 2002 and 2001           |
|               |     |                                                                                                        |
|               |     | Notes to  Consolidated Financial Statements (unaudited)                                                     |
|               |     |                                                                                                        |
|               | 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  2. | Changes  in Securities and Use of Proceeds                                                                  |
|               |     |                                                                                                        |
|               | Item 3.  | Default Upon  Senior Securities                                                                             |
|               |     |                                                                                                        |
|               | Item 6.  | Exhibits and  Reports on Form 8-K                                                                           |
|               |     |                                                                                                        |
| **Signature**      |
|               |     |                                                                                                        |
| **Certifications** |
|                    |          |                                                                                                             |  |  |

 

2

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**PARTI - FINANCIAL INFORMATION**

**Item1.    Financial Statements**

 

**META Group, Inc.**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands)**

 
|                                                                                     |   | **September  30,  2002** |       | **December  31,  2001** |       |
|------------------------------------------------------------------------------------------|--------|--------------------------|------------|-------------------------|------------|
|                                                                                     |   | **(unaudited)**          | ** ** |                    | ** ** |
| **Assets**                                                                               |   |                     |       |                    |       |
| Current assets:                                                                          |   |                     |       |                    |       |
| Cash and cash  equivalents                                                               |   | $                        | 23,729     |                    | $          | 21,433 |   |
| Accounts  receivable, net                                                                |   | 25,450                   |       | 40,542                  |       |
| Deferred  commissions                                                                    |   | 823                      |       | 1,150                   |       |
| Deferred tax  asset                                                                      |   |                     |       | 2,689                   |       |
| Other current  assets                                                                    |   | 2,083                    |       | 2,208                   |       |
| Total current assets                                                                     |   | 52,085                   |       | 68,022                  |       |
|                                                                                     |   |                     |       |                    |       |
| Non-current  portion of accounts receivable                                              |   | 1,251                    |       | 2,572                   |       |
| Furniture and  equipment, net                                                            |   | 8,836                    |       | 11,939                  |       |
| Deferred tax  asset                                                                      |   |                     |       | 9,866                   |       |
| Goodwill, net                                                                            |   | 7,390                    |       | 28,093                  |       |
| Other  intangibles                                                                       |   | 4,918                    |       | 5,779                   |       |
| Investments and  advances                                                                |   | 4,001                    |       | 8,190                   |       |
| Other assets                                                                             |   | 252                      |       | 554                     |       |
| Total assets                                                                             |   | $                        | 78,733     |                    | $          | 135,015 |   |
|                                                                                     |   |                     |       |                    |       |
| **Liabilities and Stockholders’  Equity**                                           |   |                     |       |                    |       |
| Current  liabilities:                                                                    |   |                     |       |                    |       |
| Accounts payable                                                                         |   | $                        | 2,125      |                    | $          | 2,068 |   |
| Deferred  revenues                                                                       |   | 37,228                   |       | 45,827                  |       |
| Borrowings under  revolving credit agreement                                             |   | 1,049                    |       | 3,042                   |       |
| Current portion  of long-term debt                                                       |   | 5,778                    |       | 2,724                   |       |
| Notes payable                                                                            |   | 330                      |       |                    |       |
| Accrued  compensation                                                                    |   | 3,472                    |       | 5,885                   |       |
| Accrued  liabilities                                                                     |   | 8,408                    |       | 6,742                   |       |
| Income taxes  payable                                                                    |   | 457                      |       | 567                     |       |
| Other current  liabilities                                                               |   | 4,072                    |       | 5,450                   |       |
| Total current  liabilities                                                               |   | 62,919                   |       | 72,305                  |       |
|                                                                                     |   |                     |       |                    |       |
| Long-term debt                                                                           |   |                     |       | 5,111                   |       |
| Non-current  portion of deferred revenues                                                |   | 2,680                    |       | 4,813                   |       |
| Notes payable                                                                            |   | 584                      |       |                    |       |
| Other non-current liabilities                                                            |   | 1,381                    |       |                    |       |
| Total non-current liabilities                                                            |   | 4,645                    |       | 9,924                   |       |
|                                                                                     |   |                     |       |                    |       |
| Total  liabilities                                                                       |   | 67,564                   |       | 82,229                  |       |
|                                                                                     |   |                     |       |                    |       |
| Minority  interest in consolidated subsidiaries                                          |   | 107                      |       |                    |       |
|                                                                                     |   |                     |       |                    |       |
| 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 13,848,721 |   | 138                      |       | 136                     |       |
| Paid-in capital                                                                          |   | 59,590                   |       | 58,102                  |       |
| Accumulated  deficit                                                                     |   | (48,154                  | )          | (4,412                  | )          |
| Accumulated  other comprehensive loss                                                    |   | (192                     | )          | (381                    | )          |
| Treasury stock,  at cost, 647,016 and 802,016 shares, respectively                       |   | (320                     | )          | (659                    | )          |
| Total  stockholders’ equity                                                         |   | 11,062                   |       | 52,786                  |       |
| Total  liabilities and stockholders’ equity                                         |   | $                        | 78,733     |                    | $          | 135,015 |   |

 

See notes to consolidatedfinancial statements.

 

3

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**META Group, Inc.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

(unaudited)

** **
|                                                                    |   | **For the  three months ended  September****30,** |    | **For the  nine months ended****September 30,** |   |
|-------------------------------------------------------------------------|--------|---------------------------------------------------|---------|-------------------------------------------------|--------|
|                                                                    |   | **2002**                                          |    | **2001**                                        |   | **2002** |   | **2001** |   |
|                                                                    |   |                                              |    |                                            |   |   |   |   |   |
| Revenues:                                                               |   |                                              |    |                                            |   |   |   |   |   |
| Research and  advisory services                                         |   | $                                                 | 18,843  |                                            | $      | 19,744 |   | $ | 57,866 |   | $ | 64,815 |   |
| Strategic  consulting                                                   |   | 7,075                                             |    | 6,564                                           |   | 23,364 |   | 18,995 |   |
| Published  research products                                            |   | 535                                               |    | 1,014                                           |   | 3,585 |   | 3,671 |   |
| Reimbursable  expenses                                                  |   | 701                                               |    | 485                                             |   | 1,962 |   | 1,730 |   |
|                                                                    |   |                                              |    |                                            |   |   |   |   |   |
| Total revenues                                                          |   | 27,154                                            |    | 27,807                                          |   | 86,777 |   | 89,211 |   |
|                                                                    |   |                                              |    |                                            |   |   |   |   |   |
| Operating  expenses:                                                    |   |                                              |    |                                            |   |   |   |   |   |
| Cost of services  and fulfillment                                       |   | 14,491                                            |    | 13,945                                          |   | 44,201 |   | 45,924 |   |
| Reimbursable expenses                                                   |   | 701                                               |    | 485                                             |   | 1,962 |   | 1,730 |   |
| Selling and  marketing                                                  |   | 7,932                                             |    | 10,436                                          |   | 23,495 |   | 30,765 |   |
| General and  administrative                                             |   | 5,434                                             |    | 3,351                                           |   | 14,511 |   | 10,440 |   |
| Depreciation and  amortization                                          |   | 1,607                                             |    | 1,911                                           |   | 4,742 |   | 5,718 |   |
| Restructuring  charge                                                   |   | 140                                               |    |                                            |   | 362 |   | 359 |   |
| Loss on facilities  leases                                              |   | 2,189                                             |    |                                            |   | 2,189 |   |   |   |
| Goodwill  impairment loss                                               |   | 1,178                                             |    |                                            |   | 2,630 |   |   |   |
|                                                                    |   |                                              |    |                                            |   |   |   |   |   |
| Total operating  expenses                                               |   | 33,672                                            |    | 30,128                                          |   | 94,092 |   | 94,936 |   |
|                                                                    |   |                                              |    |                                            |   |   |   |   |   |
| Operating loss                                                          |   | (6,518                                            | )       | (2,321                                          | )      | (7,315 | ) | (5,725 | ) |
| Investment  impairment loss                                             |   | (800                                              | )       | (2,854                                          | )      | (1,075 | ) | (2,854 | ) |
| Other income  (expense), net                                            |   | (64                                               | )       | (148                                            | )      | (58 | ) | 2,084 |   |
| Loss before  provision (benefit) for income taxes                       |   | (7,382                                            | )       | (5,323                                          | )      | (8,448 | ) | (6,495 | ) |
| Provision  (benefit) for income taxes                                   |   | 12,948                                            |    | (1,661                                          | )      | 13,044 |   | (1,911 | ) |
| Minority  interest in income of consolidated subsidiaries               |   | 22                                                |    |                                            |   | 44 |   |   |   |
| Loss before  cumulative effect of change in accounting principle        |   | (20,352                                           | )       | (3,662                                          | )      | (21,536 | ) | (4,584 | ) |
| Cumulative  effect of change in accounting principle                    |   |                                              |    |                                            |   | (22,206 | ) |   |   |
| Net loss                                                                |   | $                                                 | (20,352 | )                                               | $      | (3,662 | ) | $ | (43,742 | ) | $ | (4,584 | ) |
|                                                                    |   |                                              |    |                                            |   |   |   |   |   |
| Amounts per  basic and diluted common share:                            |   |                                              |    |                                            |   |   |   |   |   |
| Loss before  cumulative effect of change in accounting principle        |   | $                                                 | (1.56   | )                                               | $      | (.29 | ) | $ | (1.65 | ) | $ | (.39 | ) |
| Cumulative  effect of change in accounting principle                    |   |                                              |    |                                            |   | (1.71 | ) |   |   |
| Net loss                                                                |   | $                                                 | (1.56   | )                                               | $      | (.29 | ) | $ | (3.36 | ) | $ | (.39 | ) |
|                                                                    |   |                                              |    |                                            |   |   |   |   |   |
| Weighted average  number of basic and diluted common shares outstanding |   | 13,050                                            |    | 12,830                                          |   | 13,021 |   | 11,662 |   |

 

See notes to consolidatedfinancial statements.

 

4

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**META Group, Inc.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

(unaudited)

 
|                                                                             |   | **For the  nine months ended  September 30,** |    |
|----------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                             |   | **2002**                                      |    | **2001** |   |
| **Operating activities:**                                                        |   |                                          |    |   |   |
| Net loss                                                                         |   | $                                             | (43,742 | ) | $ | (4,584 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |                                          |    |   |   |
| Cumulative  effect of a change in accounting                                     |   | 22,206                                        |    |   |   |
| Depreciation and  amortization                                                   |   | 4,742                                         |    | 5,718 |   |
| Provision for  doubtful accounts                                                 |   | 944                                           |    | 1,648 |   |
| Gain on sale of  investment                                                      |   |                                          |    | (2,563 | ) |
| Impairment loss  on investments                                                  |   | 1,075                                         |    | 2,854 |   |
| Goodwill  impairment loss                                                        |   | 2,630                                         |    |   |   |
| Minority  interest                                                               |   | 44                                            |    |   |   |
| Valuation  allowance on deferred income taxes                                    |   | 12,185                                        |    |   |   |
| Deferred income  taxes                                                           |   | 374                                           |    | (1,840 | ) |
| Other non-cash  charges                                                          |   | 85                                            |    | 303 |   |
| Changes in  assets and liabilities:                                              |   |                                          |    |   |   |
| Accounts  receivable                                                             |   | 15,054                                        |    | 17,040 |   |
| Deferred  commissions                                                            |   | 333                                           |    | 353 |   |
| Other current  assets                                                            |   | 403                                           |    | 881 |   |
| Other assets                                                                     |   | (169                                          | )       | 4,841 |   |
| Accounts payable                                                                 |   | (446                                          | )       | (3,998 | ) |
| Accrued expenses  and other current liabilities                                  |   | (957                                          | )       | (439 | ) |
| Deferred  revenues                                                               |   | (10,453                                       | )       | (6,896 | ) |
| Net cash  provided by operating activities                                       |   | 4,308                                         |    | 13,318 |   |
|                                                                             |   |                                          |    |   |   |
| **Investing activities:**                                                        |   |                                          |    |   |   |
| Capital  expenditures                                                            |   | (633                                          | )       | (1,761 | ) |
| Payments for  acquisitions, net of cash acquired                                 |   | (906                                          | )       | (3,145 | ) |
| Proceeds from  sale of investment                                                |   |                                          |    | 2,940 |   |
| Investments and  advances                                                        |   | 2,275                                         |    | 400 |   |
| Net cash used in  investing activities                                           |   | 736                                           |    | (1,566 | ) |
|                                                                             |   |                                          |    |   |   |
| **Financing activities:**                                                        |   |                                          |    |   |   |
| Proceeds from  exercise of stock options                                         |   |                                          |    | 7 |   |
| Proceeds from  employee stock purchase plan                                      |   | 82                                            |    | 164 |   |
| Proceeds from  line of credit                                                    |   |                                          |    | 1,000 |   |
| Private  placement of common stock, net of offering costs                        |   | 425                                           |    | 4,603 |   |
| Repayment of  line of credit                                                     |   | (2,025                                        | )       |   |   |
| Repayment of  term loan                                                          |   | (2,057                                        | )       |   |   |
| Net cash (used  in) provided by financing activities                             |   | (3,575                                        | )       | 5,774 |   |
| Effect of  exchange rate changes on cash                                         |   | 827                                           |    | (12 | ) |
| Net (decrease)  increase in cash and cash equivalents                            |   | 2,296                                         |    | 17,514 |   |
| Cash and cash  equivalents, beginning of period                                  |   | 21,433                                        |    | 3,622 |   |
| Cash and cash  equivalents, end of period                                        |   | $                                             | 23,729  |   | $ | 21,136 |   |

 

See notes toconsolidated financial statements.

 

5

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**META Group, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1 - Interim Financial Statements**

 

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

 

In the opinion of management, the accompanyingunaudited consolidated financial statements contain all adjustments (consistingof normal recurring items) necessary for a fair presentation of results for theinterim periods presented. The results of operations for any interim period arenot necessarily indicative of results for the full year. These financialstatements and footnote disclosures should be read in conjunction with theaudited consolidated financial statements and the notes thereto included in theCompany’s Form 10-K for the year ended December 31, 2001.

 

The preparation of the financial statements inconformity with accounting principles generally accepted in the United Statesrequires 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 – Income StatementClassification of Reimbursements for Out-of-Pocket Expenses Incurred**

 

During the quarter ended September 30, 2002, theCompany adopted EITF No. 01-14, *IncomeStatement Characterization of Reimbursements Received for “Out-of-Pocket”Expenses Incurred*. Reimbursements, including those relating totravel and out-of-pocket expenses and other similar third party costs, are nowincluded in revenues with an equivalent amount also included in operatingexpense. All prior period financial statements have been reclassified to complywith the guidance in this issue.

 

**Note 3 – Goodwill and OtherIntangible Assets**

 

Effective January 1, 2002, the Company adoptedStatement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*(“SFAS142”). Under SFAS 142, goodwill and intangible assets deemed to have indefinitelives will no longer be amortized but will be subject to impairment tests on anannual basis, or more frequently if certain indicators arise. Other intangibleassets will continue to be amortized over their useful lives. During thequarter ended March 31, 2002, the remaining useful lives of intangible assetsbeing amortized were reviewed and deemed to be appropriate.

 

The goodwill impairment test is a two-step processthat requires goodwill to be allocated to the reporting units. In the firststep, the fair value of the reporting unit is compared to the carrying value ofthe reporting unit. If the fair value of the reporting unit is less than thecarrying value of the reporting unit, a goodwill impairment may exist, and thesecond step of the test is performed. In the second step, the fair value

 

6

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of the goodwill is compared to the carrying value of the goodwill andan impairment loss will be recognized to the extent that the carrying value ofthe goodwill exceeds the implied fair value of the goodwill.

 

The Company completed the second step of theimpairment test as of September 30, 2002 and determined that the StrategicConsulting and Published Research Products segments were impaired. Accordingly,the Company recorded a goodwill charge of $22.2 million relating to thecarrying value of the goodwill of these segments as of January 1, 2002. Theimpairment charge was recorded as the cumulative effect of a change inaccounting principle and recorded retroactive to January 1, 2002.

 

Additionally, as of September 30, 2002 the Companycompleted the annual impairment test for 2002 as required by SFAS 142, and as aresult of this test, it was determined that goodwill resulting from theacquisition of an additional interest in META Group AG ("META GroupGermany"), and contingent consideration earned by Rubin Systems Inc. andthe Verity Group, was impaired as it relates to the Strategic Consulting andPublished Research Products segments. Accordingly, the Company recorded a $2.6million charge which was recorded as an impairment loss and included as anelement of operating expenses.

 

A summary of the Company’sintangible assets as of September 30, 2002 and December 31, 2001 is as follows(amounts in thousands):

 
|                                              |   | **September 30, 2002**    |   | **December  31, 2001**        |    |
|---------------------------------------------------|--------|---------------------------|--------|-------------------------------|---------|
|                                              |   | **Gross Carrying Amount** |   | **Accumulated  Amortization** |    | **Total** |   | **Gross********Carrying Amount** |   | **Accumulated********Amortization** |   | **Total** |   |
| Amortized  intangible assets:                     |   |                      |   |                          |    |   |   |   |   |   |   |   |   |
| Customer lists                                    |   | $                         | 4,386  |                          | $       | (1,579 | )  | $ | 2,807 |   | $ | 4,325 |   | $ | (968 | ) | $ | 3,357 |   |
| Intellectual  property                            |   | 550                       |   | (174                          | )  | 376 |   | 513 |   | (85 | ) | 428 |   |
| Non-compete  agreement                            |   | 375                       |   | (178                          | )  | 197 |   | 375 |   | (95 | ) | 280 |   |
| Content  databases & other                    |   | 2,077                     |   | (539                          | )  | 1,538 |   | 2,000 |   | (286 | ) | 1,714 |   |
| Total                                             |   | $                         | 7,388  |                          | $       | 2,470 |   | $ | 4,918 |   | $ | 7,213 |   | $ | (1,434 | ) | $ | 5,779 |   |
|                                              |   |                      |   |                          |    |   |   |   |   |   |   |   |   |
| Unamortized  intangible assets:                   |   |                      |   |                          |    |   |   |   |   |   |   |   |   |
| Goodwill                                          |   |                      |   |                          |    | $ | 7,390 |   |   |   |   |   | $ | 28,093 |   |
|                                              |   |                      |   |                          |    |   |   |   |   |   |   |   |   |
| Aggregate  amortization expense:                  |   |                      |   |                          |    |   |   |   |   |   |   |   |   |
| Nine months  ended September 30, 2002:            |   | $                         | 995    |                          |    |   |   |   |   |   |   |   |   |   |
|                                              |   |                      |   |                          |    |   |   |   |   |   |   |   |   |
| Estimated  amortization expense:                  |   |                      |   |                          |    |   |   |   |   |   |   |   |   |
| Remaining three  months ending December 31, 2002: |   | $                         | 294    |                          |    |   |   |   |   |   |   |   |   |   |
| Year ending  December 31, 2003                    |   | 1,178                     |   |                          |    |   |   |   |   |   |   |   |   |
| Year ending  December 31, 2004                    |   | 1,157                     |   |                          |    |   |   |   |   |   |   |   |   |
| Year ending  December 31, 2005                    |   | 1,005                     |   |                          |    |   |   |   |   |   |   |   |   |
| Year ending  December 31, 2006                    |   | 552                       |   |                          |    |   |   |   |   |   |   |   |   |
| Year ending  December 31, 2007                    |   | 469                       |   |                          |    |   |   |   |   |   |   |   |   |
| Thereafter                                        |   | 263                       |   |                          |    |   |   |   |   |   |   |   |   |
| Total                                             |   | $                         | 4,918  |                          |    |   |   |   |   |   |   |   |   |   |
|                                                   |        |                           |        |                               |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

7

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The changes in the carrying amount of goodwill byreportable segment for the nine months ended September 30, 2002 is as follows(in thousands):

 
|                               |   | **Research and  Advisory Services** |   | **Strategic  Consulting** |   | **Published  Research  Products** |   | **Total** |   |
|------------------------------------|--------|-------------------------------------|--------|---------------------------|--------|-----------------------------------|--------|-----------|--------|
|                               |   |                                |   |                      |   |                              |   |      |   |
| Balance as of  January 1, 2002     |   | $                                   | 6,644  |                      | $      | 17,636                            |   | $         | 3,813  |   | $ | 28,093 |   |
| Goodwill  acquired during the year |   | 746                                 |   | 2,814                     |   | 573                               |   | 4,133     |   |
| Impairment  losses                 |   |                                |   | (20,450                   | )      | (4,386                            | )      | (24,836   | )      |
| Balance as of  September 30, 2002  |   | $                                   | 7,390  |                      | $      | —                            |   | $         | — |   | $ | 7,390 |   |

 

The Company ceased recording goodwill amortizationeffective January 1, 2002. The following table shows the net loss for the threeand nine months ended September 30, 2002 and the adjusted net loss for thethree and nine months ended September 30, 2001 exclusive of goodwillamortization (in thousands, except per share amounts).

 
|                                          |   | **Three  Months Ended  September 30,** |    | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                                          |   | **2002**                               |    | **2001**                              |   | **2002** |   | **2001** |   |
| Net loss:                                     |   | $                                      | (20,352 | )                                     | $      | (3,662 | ) | $ | (43,742 | ) | $ | (4,584 | ) |
| Addback:  goodwill amortization, net of tax   |   |                                   |    | 189                                   |   |   |   | 593 |   |
| Adjusted net  income (loss):                  |   | $                                      | (20,352 | )                                     | $      | (3,473 | ) | $ | (43,742 | ) | $ | (3,991 | ) |
|                                          |   |                                   |    |                                  |   |   |   |   |   |
| Basic and Diluted  Earnings Per Share:        |   |                                   |    |                                  |   |   |   |   |   |
| Net income  (loss) per common share:          |   | $                                      | (1.56   | )                                     | $      | (0.29 | ) | $ | (3.36 | ) | $ | (0.39 | ) |
| Addback:  goodwill amortization, net of tax   |   |                                   |    | 0.01                                  |   |   |   | 0.05 |   |
| Adjusted net  income (loss) per common share: |   | $                                      | (1.56   | )                                     | $      | (0.28 | ) | $ | (3.36 | ) | $ | (0.34 | ) |

 

**Note 4 - Income Taxes**

 

During the quarterand nine months ended September 30, 2002, the Company recorded an income taxprovision of $12.9 million and $13 million, respectively. During the quarterended September 30, 2002, the Company established a $12.2 million valuationallowance against its deferred income tax assets, which consist of netoperating loss carryforwards for income tax purposes and temporary differencesbetween the financial reporting basis and the income tax basis of the Company’sassets and liabilities. In view of the Company’s losses over its recenthistory, a determination was made that a valuation allowance should beestablished for the full amount of recorded deferred tax assets.

 

 

8

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**Note 5 – Comprehensive Loss**

 

Comprehensive loss for the three and nine months endedSeptember 30, 2002 and 2001 was as follows (in thousands):

 
|                                            |   | **Three  months ended  September 30,** |    | **Nine  months ended  September 30,** |   |
|-------------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                                            |   | **2002**                               |    | **2001**                              |   | **2002** |   | **2001** |   |
|                                            |   |                                   |    |                                  |   |   |   |   |   |
| Net loss                                        |   | $                                      | (20,352 | )                                     | $      | (3,662 | ) | $ | (43,742 | ) | $ | (4,584 | ) |
| Other  comprehensive (loss) income, net of tax: |   |                                   |    |                                  |   |   |   |   |   |
| Foreign currency  translation adjustment        |   | 214                                    |    | (263                                  | )      | 189 |   | (348 | ) |
| Unrealized gain  on marketable securities       |   |                                   |    | 142                                   |   |   |   | 187 |   |
|                                            |   |                                   |    |                                  |   |   |   |   |   |
| Comprehensive  loss                             |   | $                                      | (20,138 | )                                     | $      | (3,783 | ) | $ | (43,553 | ) | $ | (4,745 | ) |

 

###### **Note 6 – SegmentReporting**

 

TheCompany operates in three business segments: Research and Advisory Services,Strategic Consulting and Published Research Products. The Company’s operatingsegments are managed separately, because each operating segment represents astrategic business unit that generally offers distinct products or services.Research and Advisory Services provide comprehensive coverage of relevantinformation technology (“IT”) and business-related issues faced by its clientsthrough client/analyst interaction and published conclusions andrecommendations to each client’s specific IT requirements. Strategic Consultingprovides custom consulting services tailored to meet individual clientrequirements. Published Research Products offer various topic-specific reportsdesigned to serve both as complements to the Company’s core services and asstandalone deliverables that meet specific assessment requirements.

 

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 to assist in making internal operating decisions. The Companyevaluates performance based on standalone segment operating income, defined bythe Company as the segment revenues less segment cost of sales and corporateselling, general and administrative allocations. General and administrativeexpenses are allocated ratably based on each operating segment’s respectiveheadcount. Selling and marketing expenses are allocated ratably based on eachoperating segment’s revenues. Management does not allocate corporate assets, non-operatingincome (interest income), or income taxes when measuring segment results.Neither revenues from reimbursable expenses nor the reimbursable expensesthemselves are allocated to any of the Company’s segments.

 

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

 

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|                                       |   | **Research  and  Advisory  Services** |   | **Strategic  Consulting** |    | **Published  Research  Products** |    | **Unallocated** |   | **Consolidated  Total** |   |
|--------------------------------------------|--------|---------------------------------------|--------|---------------------------|---------|-----------------------------------|---------|-----------------|--------|-------------------------|--------|
| **Three months ended September 30,  2002** |   |                                  |   |                      |    |                              |    |            |   |                    |   |
|                                       |   |                                  |   |                      |    |                              |    |            |   |                    |   |
| Revenues                                   |   | $                                     | 18,843 |                      | $       | 7,075                             |    | $               | 535    |                    | $      | 701 |   | $ | 27,154 |   |
| Operating loss                             |   | (4,429                                | )      | (1,343                    | )  | (746                              | )  | —          |   | $                       | (6,518 | ) |
|                                       |   |                                  |   |                      |    |                              |    |            |   |                    |   |
| **Three months ended September 30,  2001** |   |                                  |   |                      |    |                              |    |            |   |                    |   |
|                                       |   |                                  |   |                      |    |                              |    |            |   |                    |   |
| Revenues                                   |   | $                                     | 19,744 |                      | $       | 6,564                             |    | $               | 1,014  |                    | $      | 485 |   | $ | 27,807 |   |
| Operating (loss)  income                   |   | (4,174                                | )      | 1,104                     |    | 749                               |    | —          |   | $                       | (2,321 | ) |
|                                       |   |                                  |   |                      |    |                              |    |            |   |                    |   |
| **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 | ) |
|                                       |   |                                  |   |                      |    |                              |    |            |   |                    |   |
| **Nine  months ended September 30, 2001**  |   |                                  |   |                      |    |                              |    |            |   |                    |   |
|                                       |   |                                  |   |                      |    |                              |    |            |   |                    |   |
| Revenues                                   |   | $                                     | 64,815 |                      | $       | 18,995                            |    | $               | 3,671  |                    | $      | 1,730 |   | $ | 89,211 |   |
| Operating (loss)  income                   |   | (5,550                                | )      | 1,232                     |    | (1,407                            | )  | —          |   | $                       | (5,725 | ) |

 

###### **Note 7–Acquisitions**

 

In September 2002, the Company completed theacquisition of an additional 39.8% equity interest in META Group Germany,bringing its total ownership interest to approximately 96%, in exchange for$400,000 in cash that was funded in October 2002, $412,000 in the form of267,282 options to purchase the Company’s common stock, and approximately$914,000 in notes payable to certain of the former META Group Germanyshareholders, payable from January 2003 through January 2006. The incrementalconsideration resulted in $0.3 million of goodwill recorded in the Research andAdvisory Services segment, $0.6 million of goodwill in the Strategic Consultingsegment, and $0.2 million of goodwill in the Published Research Productssegment. The allocation of goodwill is based on the respective revenuecontribution percentages of the acquired entity to each segment. The goodwillassociated with the Strategic Consulting and Published Research Productssegments was recorded as an impairment loss during the quarter ended September30, 2002, as it was determined that the goodwill associated with the twosegments was impaired as of September 30, 2002. The goodwill associated withthe Research and Advisory Services segment will be tested annually forimpairment, or more frequently if certain indicators arise, in accordance withSFAS 142.

 

During 2002, the Company recorded $0.9 million inadditional goodwill in connection with contingent consideration earned by RubinSystems, Inc. (“RSI”) in connection with the achievement of certain financialtargets for the year ended December 31, 2001, and $0.5 million in additionalgoodwill in connection with the fair value of options to purchase the Company’scommon stock granted to Dr. Howard Rubin. In satisfaction of the $0.9 millionof contingent consideration earned by RSI, the Company paid $569,000 in cashand $369,000 in the form of 202,499 shares of the Company’s common stock. Theadditional consideration recorded in 2002 resulted in $0.2 million of goodwillin the Research and Advisory Services segment, $1 million of goodwill in theStrategic Consulting segment and $0.2 million of goodwill in the PublishedResearch Products segment. The allocation of goodwill is based on therespective revenue contribution percentages of the acquired entity to eachsegment. The goodwill associated with the Strategic Consulting and PublishedResearch Products segments was recorded as an impairment loss during thequarter ended September 30, 2002, as it was determined that the goodwillassociated with the two segments was impaired as of September 30, 2002.  As of September 30, 2002 the Company hadrecorded an aggregate of $3.9 million in consideration for the purchase of RSI.In the event certain financial targets are met, additional contingentconsideration of $2.7 million payable in cash and $1.4 million payable in theCompany’s common stock may be paid through March 2007. In the event theaggregate number of shares issued in satisfaction of contingent consideration exceeds147,027, the remaining consideration will be payable in cash.  The Company completed the acquisition ofsubstantially all of the assets of RSI in October 2000. RSI is wholly owned byDr. Howard Rubin, a director and officer of the Company.

 

In March 2002, the Company paid $0.4 million ofcontingent consideration to The Verity Group (“Verity”), an IT consultingcompany, as additional contingent consideration earned during the year

 

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ended December 31, 2001. The contingent consideration paid in 2002 wasincluded in the $2.6 million goodwill impairment charge recorded during thenine months ended September 30, 2002. The Company acquired certain assets ofVerity in 1997 for an initial payment of $1,000 in cash and contingentconsideration of up to $1.1 million in the event certain financial targets weremet in each of the four years ended December 31, 2001. The aggregateconsideration paid by the Company amounted to approximately $1 million. Thereare no payments remaining under the earnout.

 

Effective January 1, 2002, META Group Germany acquireda majority interest in the Company’s distributor in Hungary, META GroupStratis, for approximately $327,000 paid in META Group Germany’s stock. Thepurchase price has been allocated to the assets acquired and the liabilitiesassumed, based on estimated fair values at the date of acquisition. Theconsideration resulted in $61,000 of goodwill recorded in the Research andAdvisory Services segment, $146,000 of goodwill in the Strategic Consultingsegment, and $36,000 of goodwill in the Published Research Products segment.The goodwill associated with the Strategic Consulting and Published ResearchProducts segments was recorded as an impairment loss during the nine monthsended September 30, 2002, as it was determined that the goodwill associatedwith the two segments was impaired as of September 30, 2002.

 

###### **Note 8 – Bank Debt**

 

In November 2001, the Company entered into a $20million amended and restated credit agreement with its bank (the “Facility”).On March 26, 2002, the Company entered into an amendment to the Facility,which, among other things, waived prior covenant defaults, reset existingcovenants and added a new consolidated net income covenant. The Facility consistsof an $8 million term loan (the “Term Loan”) payable in 36 consecutive monthlyinstallments that commenced in December 2001, and a $12 million revolvingcredit facility (the “Revolving Facility”). Both the Term Loan and theRevolving Facility mature in November 2004. As of September 30, 2002, the totalamount used by the Company under the Facility was $7.6 million, consisting of$6.8 million in outstanding borrowings ($5.8 million outstanding under the TermLoan and $1 million outstanding under the Revolving Facility) and $0.8 millionin letters of credit issued on behalf of one of the Company’s independent salesrepresentative organizations and as security for a portion of the Company’sStamford, CT premises lease. During the nine months ended September 30, 2002,the Company paid $252,000 in interest on the Facility.

 

The Facility has a borrowing base equal to 80% of theCompany’s eligible accounts receivable. Interest is payable at the rate of (i)LIBOR plus 2.5% or (ii) the higher of (a) the Prime Rate or (b) the FederalFunds Rate plus 0.5%. The Facility is collateralized by the Company’s accountsreceivable and requires payment of a commitment fee quarterly, in arrears, of0.25% based on the average, daily, unused portion of the Revolving Facility. TheFacility contains a number of covenants that, among other things, restrict theability of the Company to incur additional indebtedness, pay dividends or otherdistributions, dispose of certain assets, enter into sale and leasebacktransactions, create liens, make certain investments, acquisitions or mergers,and that otherwise restrict corporate activities. In addition, the Company isrequired to maintain certain financial covenants, including a leverage ratiocovenant, a fixed charge ratio covenant, a consolidated net income covenant anda minimum EBITDA covenant. The Company was not in compliance with the covenantsunder the Facility as of September 30, 2002. Under the terms of the Facility,each such covenant breach constitutes an event of default pursuant to which theCompany’s bank may, by notice to the Company, terminate the bank’s lendingcommitments to the Company and declare all obligations of the Company under theFacility due and payable immediately. The Company is currently negotiating withits bank to amend the Facility and the related covenants and to obtain waiversof the covenant defaults. The Company, however, cannot be certain that it willbe successful in negotiating such an amendment on favorable terms or obtainingwaivers. As the Company was in default under the Facility as of September 30,2002, all outstanding borrowings have been classified as a current liability onthe consolidated balance sheet as of September 30, 2002.

 

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During 2002, META Group Germany repaid all amountsoutstanding under its line of credit with its local bank (approximately €1million which approximated $1 million).

 

###### **Note 9 –Investment Impairment Losses**

 

The Company follows a practice to review itsindividual investments for impairment on a quarterly basis. This reviewincludes the examination of the estimated market value of each specificinvestment using peer group market comparables of public companies.Additionally, the Company reviews the business climate of each investee, itshistorical financial results, its projected cash flow needs, its plans for thefuture and the likelihood of achieving such plans. Based on such review, adetermination is made on a case-by-case basis as to whether an investment isdeemed to be permanently impaired and therefore requires an adjustment to thecarrying value.  The Company recordedimpairment losses of $1.1 million and $2.9 million for the nine months endedSeptember 30, 2002 and 2001, respectively. The losses taken were determined ona specific identification method considering each investee’s particular factsand circumstances in existence at that time. The remaining carrying value ofthe Company’s investments and advances is $4 million as of September 30, 2002.

 

###### **Note 10 – RestructuringCharges**

 

During the quarter ended September 30, 2002, METAGroup Germany reduced its workforce and recorded a $140,000 restructuringcharge for severance payments that will be made during the quarter endingDecember 31, 2002.

 

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 ended March 31,2002 for severance payments made during the quarter ended March 31, 2002.

 

In April 2001, the Companyannounced a restructuring whereby it reduced its workforce by 100 persons(representing 15% of the workforce at the time) in the quarter ended June 30, 2001.In addition, the Company’s president and the Company’s co-research director andpresident and chief executive officer of metagroup.com resigned. As a result ofthe restructuring, the Company incurred a $359,000 restructuring charge duringthe quarter ended June 30, 2001 for severance payments made during the quarterended June 30, 2001.

 

###### **Note 11 – Sale ofthe Company’s Common Stock – Related Party Transaction**

 

In September 2002 five trusts affiliated with theCompany’s President and Chief Executive Officer, Alfred J. Amoroso, and two members of the Company’s Board ofDirectors, Michael Simmons and Gayl W. Doster, purchased an aggregate of155,000 shares of the Company’s common stock from META Group Germany at apurchase price of $2.74 per shares. Total proceeds to META Group Germany wereapproximately $425,000.

 

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###### **Note 12 –Contingencies and Guarantees**

 

*Commitments:*

 

In 2001 META Group Germany acquired a minority equityinterest in META Group Northern Europe in the form of an equity investment anda 3-year promissory note. In 2001, META Group Northern Europe entered into anagreement with one of the Company’s independent sales representativeorganizations, META Group Norway, to purchase a majority interest in META GroupNorway for total consideration of $1.4 million.

 

As of September 30, 2002, approximately $780,000 inconsideration remains outstanding for the purchase of a majority interest inMETA Group Norway. The Company currently anticipates that it will fund theremaining outstanding consideration in the fourth quarter of 2002.

 

*Contingencies:*

 

TheCompany is not a party, nor is any of its property subject, to any materialpending legal proceedings, other than ordinary routine litigation incidental tothe Company's business.

 

*Guarantees:*

 

TheCompany had provided a corporate guarantee in the amount of 12 million BelgianFrancs (approximately $293,000) guaranteeing the local bank borrowings of oneof its former independent sales representative organizations. The guarantee waspaid in August 2002 in an amount equal to $293,000. The Company has provided acorporate guarantee in the amount of €62,000 (approximately $61,000)guaranteeing lease payments to the landlord of this former independent salesrepresentative organization. Additionally, the Company has provided a corporateguarantee to the landlord of one of its current sales representativeorganizations guaranteeing lease payments to the landlord in an annual amountof £120,000  (approximately $190,000)until 2013.

 

TheCompany has provided a general corporate guarantee on behalf of META GroupGermany in the amount of €1 million (approximately $1 million) and a generalcorporate guarantee on behalf of META Group Germany’s subsidiary in Switzerlandin the amount of $160,000.

 

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

 

*The discussion and analysis belowcontains trend analysis and other forward-looking statements within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934, which are subject to a number of risks and uncertainties.These forward-looking statements are typically denoted in this Quarterly Reporton Form 10-Q by words such as anticipate, believe, could, estimate, expect,intend, may, plan, project, should or will and similar words (as well as otherwords or expressions referencing future events, conditions or circumstances).Actual results could differ materially from those projected in theforward-looking statements as a result of the risk factors, including the riskfactors set forth below under “Certain Factors That May Affect Future Results.”This discussion should be read in conjunction with the consolidated financialstatements and related notes for the periods specified. Further referenceshould be made to the Company’s other filings with the Securities and ExchangeCommission, principally the Company’s Annual Report on Form 10-K for the yearended December 31, 2001.*

 

**Overview**

 

META Group, Inc.and its subsidiaries, 1422722 Ontario Inc. (“META Group Canada”), The SentryGroup, Inc., META Group Australia Holdings PTY Limited (“META GroupAustralia”), META Group Singapore PTE Limited (“META Group Singapore”),Abundant Strategy SDN.BHD (“META Group Malaysia”), META Group France S.A.(“META Group France”), META Group AG (“META Group Germany”) and MG (Bermuda)Ltd. (collectively the “Company”) is a leading independent research andconsulting firm focusing on information technology (“IT”) and businesstransformation strategies. The Company’s goal is to deliver objective, consistent,and actionable guidance to enable organizations to innovate more rapidly andeffectively.

 

The Company hasthree operating business segments: Advisory Services, Strategic Consulting andPublished Research Products.  TheAdvisory Services segment provides annually renewable subscription services(focused on specific areas of IT, IT issues related to a specific verticalmarket, or the specific needs of those within the IT organization), serviceanalyst briefing engagements, and conferences. Supplementing these services arethe Company’s Infusion programs, which build on the business-focused analysisof Advisory Services by offering methodologies and skill-based training neededto successfully manage specific business-critical issues. The Strategic Consultingsegment provides strategic consulting engagements addressing clients’ businessand technology issues. A significant portion of Strategic Consulting clientsare also Advisory Services subscribers. The Published Research Products segmentprovides reports, studies and surveys offering in-depth analysis of specificbusiness or IT issues.

 

Advisory Servicesrevenues, which generally are annually renewable contracts and payable byclients in advance, constituted approximately 69% and 71% of the Company’s totalrevenues for the quarters ended September 30, 2002 and 2001, respectively.Advisory Services revenues attributable to international clients are billed andcollected by the Company’s independent sales representative organizations andits wholly-owned subsidiaries in Canada, Australia, Singapore, Malaysia, andFrance and its majority owned subsidiary in Germany. The Company realizesAdvisory Service revenues from the international sales representativeorganizations at rates of 25% to 75% of amounts billed to those clients.

 

One measure of thevolume of the Company’s Advisory Services business is its “Contract Value,”which the Company calculates as the aggregate annual value of retainersubscription services contracts in force at a given point in time, withoutregard to the remaining duration of such contracts.

 

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Previously, theCompany computed Contract Value based on the annualized value of AdvisoryServices revenue recognized from all Advisory Services contracts in effect at agiven point in time. The previous year's Contract Value has been recomputedusing the new methodology. Contract Value is not necessarily indicative offuture Advisory Services revenues. Contract Value was $70.3 million at September30, 2002 versus $82.5 million at September 30, 2001, a 14.7% decrease.

 

Revenues fromStrategic Consulting engagements comprised approximately 26% and 24% of theCompany’s total revenues for the quarters ended September 30, 2002 and 2001,respectively. The majority of the Company’s Strategic Consulting clientsconsist of Advisory Services clients seeking additional advice tailored totheir individual IT requirements.

 

Revenues fromPublished Research Products comprised approximately 2% and 4% of the Company’stotal revenues for the quarters ended September 30, 2002 and 2001,respectively.

 

The Company’soperating expenses consist of cost of services and fulfillment, selling andmarketing expenses, general and administrative expenses and depreciation andamortization. Cost of services and fulfillment represents the costs associatedwith production and delivery of the Company’s products and services andincludes the costs of research, development, preparation of periodic reports,analyst telephone consultations, executive briefings and conferences, researchreports, consulting services, new product development, and all associatededitorial and support services. Selling and marketing expenses include thecosts of salaries, commissions, related benefits for selling and marketingpersonnel, as well as travel and promotion, and bad debt expense associatedwith accounts and notes receivable from its independent sales representativeorganizations. General and administrative expenses include the costs of thefinance and accounting departments, in addition to the legal, human resources,corporate IT and other administrative functions of the Company, as well as baddebt expense associated with accounts receivable from its domestic customers.

 

**THREE MONTHS ENDED SEPTEMBER 30, 2002AND 2001**

 

REVENUES  Total revenues decreased****2.3%to $27.2 million in the quarter ended September 30, 2002 from $27.8 million inthe quarter ended September 30, 2001. During the quarter ended September 30,2002, the Company adopted EITF No. 01-14, *IncomeStatement Characterization of Reimbursements Received for “Out-of-Pocket”Expenses Incurred*. Reimbursements, including those relating totravel and out-of-pocket expenses and other similar third party costs, are nowincluded in revenues with an equivalent amount also included in operatingexpense. All prior period financial statements have been reclassified to complywith the guidance in this issue. Revenues from reimbursable expenses were $0.7million and $0.5 million for the quarters ended September 30, 2002 and 2001,respectively.

 

Revenues fromAdvisory Services, which generally are derived from annually renewablecontracts payable by clients in advance, decreased 4.6%****to****$18.8 million in the quarterended September 30, 2002 from $19.7 million in the quarter ended September 30,2001, and decreased as a percentage of total revenues to 69% in the quarterended September 30, 2002 from 71% in the quarter ended September 30, 2001. Thedecrease in revenues from Advisory Services was principally due to decreasedsubscriptions to the Company’s Advisory Services as a result of the decrease indemand for such services that began in the second half of 2000 resulting fromdecreases in IT spending as a result of general economic conditions. As theCompany recognizes subscription revenues ratably over the underlying contractperiod, Advisory Services revenues were adversely impacted during the quarterended September 30, 2002 when compared to the quarter ended September 30, 2001by the continued decrease in billings that began in the second half of 2000.The decrease in revenues was partially offset by $0.8 million of incrementalrevenues realized during the quarter ended September 30, 2002 from theacquisitions of a majority interest in META Group Germany and the formation ofMETA Group France, both of which occurred in the second half of 2001. AdvisoryServices revenues attributable to international clients decreased 7% to $3.1million in the quarter ended September 30, 2002 from $3.4

 

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million thequarter ended September 30, 2001, and remained constant as a percentage ofAdvisory Services revenue at 17%. The decrease in Advisory Services revenueattributable to international clients was due principally to the decrease insubscription revenues resulting from the decrease in demand for the Company’sAdvisory Services discussed above.

 

StrategicConsulting revenues, which result from Strategic Consulting engagementsaddressing clients’ business and technology issues, increased 7.8% to $7.1million in the quarter ended September 30, 2002 from $6.6 million in thequarter ended September 30, 2001, and increased as a percentage of totalrevenues to 26% from 24%. The increase was principally due to $2.3 million ofincremental revenues from the acquisition of a majority interest in META GroupGermany in December 2001. The increase in revenues was partially offset by adecrease in domestic consulting principally due to a decrease in domesticconsulting headcount as well as from a decrease in demand resulting fromdecreases in IT spending as a result of general economic conditions.

 

Published ResearchProducts revenues, which result from the sale of published research productsoffering in-depth analysis of specific business or IT issues, decreased 47.2%to $0.5 million in the quarter ended September 30, 2002 from $1 million in thequarter ended September 30, 2001, and decreased as a percentage of totalrevenues to 2% from 4%. The decrease in Published Research Products revenueswas principally due to a reclassification out of revenue of certain first half2002 intercompany charges and recording them as reductions in expenses duringthe quarter ended September 30, 2002, and, to a lesser extent, due to thedecrease in IT spending as a result of general economic conditions. Thedecrease was partially offset by $0.1 million of incremental revenues from theacquisition of META Group Germany in December 2001.

 

COST OF SERVICES AND FULFILLMENT  Cost of services and fulfillment, includingreimbursable expenses, increased 5.3% to $15.2 million in the quarter endedSeptember 30, 2002 from $14.4 million in the quarter ended September 30, 2001and increased as a percentage of total revenues to 55.9% from 51.9%. Theincrease was principally due to $1.5 million of incremental expenses from theacquisition of a majority interest in META Group Germany in December 2001 andthe establishment of META Group France in September 2001. These increases werepartially offset by decreases in domestic payroll and payroll related costs(salaries, benefits and bonus expense) of the Company’s domestic research andfulfillment personnel and consultants as a result of the reductions inheadcount that occurred in February 2002. Additionally, reduced travel costs attributableto the decrease in headcount also contributed to the decrease in domesticcosts.

 

SELLING AND MARKETING EXPENSES  Selling and marketing expenses decreased 24%to $7.9 million in the quarter ended September 30, 2002 from $10.4 million inthe quarter ended September 30, 2001 and decreased as a percentage of totalrevenues to 29% from 38%. The decrease in selling and marketing expenses wasprincipally due to decreased commission expenses as a result of the Company’srestructured sales commission plan for the plan year ended January 31, 2002,which resulted in a decrease in commissions paid to the Company’s salespersonnel during the twelve months ended January 31, 2002. As the Companyamortizes commission payments over the subscription period in which the relatedAdvisory Services revenues are amortized to income, the Company experienced adecrease in commission expense during the quarter ended September 30, 2002.Additionally, the Company experienced a $1.1 million decrease in bad debtsduring the quarter ended September 30, 2002 when compared to the same period inthe previous year. The reductions in commission and bad debt expenses werepartially offset by $0.8 million of incremental expenses from the acquisitionof a majority interest in META Group Germany in December 2001 and theestablishment of META Group France in September 2001, and, to a lesser extent,$0.5 million in provisions for losses regarding certain legal matters with oneof the Company’s former independent sales representative organizations.

 

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GENERAL AND ADMINISTRATIVE EXPENSES  General and administrative expensesincreased 62.2% to $5.4 million in the quarter ended September 30, 2002 from$3.4 million in the quarter ended September 30, 2001, and increased as apercentage of total revenues to 20% from 12%. The increase in general andadministrative expenses was principally due to $1.3 million of incrementalexpenses from the acquisition of a majority interest in META Group Germany in December2001 and the establishment of META Group France in September 2001, and, to alesser extent, from $0.7 million in domestic sales tax accruals and $0.3million in international value added tax accruals.

 

DEPRECIATION AND AMORTIZATION  Depreciation and amortization expensedecreased 15.9% to $1.6 million in the quarter ended September 30, 2002 from$1.9 million in the quarter ended September 30, 2001 and decreased as apercentage of total revenues to 6% from 7%. The decrease was principally due tolower amortization of intangible assets as a result of the adoption ofStatement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*(“SFAS 142”). Pursuantto SFAS 142, goodwill and intangible assets deemed to have indefinite lives areno longer amortized but are subject to impairment tests on an annual basis, ormore frequently if certain indicators arise. Other intangible assets willcontinue to be amortized over their useful lives, which range from four toseven years.

 

RESTRUCTURING CHARGE  During the quarter ended September 30, 2002,META Group Germany reduced its workforce and recorded a $140,000 restructuringcharge for severance payments that will be made during the quarter endedDecember 31, 2002.

 

LOSS ON FACILITIES LEASES  During the quarter ended September 30, 2002,the Company recorded a $2.2 million loss on certain of its domestic and Germanfacilities leases. The losses pertain to rent expense associated with vacantspace 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 from theCompany’s annual goodwill impairment test in accordance with the provisions ofSFAS 142. The impaired goodwill related to the Strategic Consulting andPublished Research Products segments and resulted from the acquisition of anadditional interest in META Group Germany and contingent consideration earnedby Rubin Systems, Inc. earlier in 2002.

 

INVESTMENT IMPAIRMENT LOSS  During the quarter ended September 30, 2002,the Company determined that, based on estimates of future cash flows and otheravailable market data, several of its investments in and advances to companiesin parallel industries were impaired. Accordingly, the Company recorded animpairment loss of $0.8 million. The Company follows a practice to review itsindividual investments for impairment on a quarterly basis. This review includesthe examination of the estimated market value of each specific investment usingpeer group market comparables of public companies. Additionally, the Companyreviews the business climate of each investee, its historical financialresults, its projected cash flow, its plans for the future and the likelihoodof achieving such plans. Based on such review, a determination is made on acase-by-case basis as to whether an investment is deemed to be permanentlyimpaired and therefore requires an adjustment to the carrying value. TheCompany will continue to evaluate its investments for impairment every quarter,and based on its review, may record additional impairment losses should thefacts and circumstances in existence at that time merit such an adjustment. As ofSeptember 30, 2002, the balance of the Company’s Investments and Advances was$4 million.

 

OTHER INCOME (EXPENSE), NET  During the quarter ended September 30, 2002,the Company recorded net interest and other expenses (net of interest and otherincome) of $64,000, down from

 

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$148,000 of net interest and other expense during the quarter endedSeptember 30, 2001. The decrease was principally due to a decrease in interestexpense on its outstanding bank borrowings as a result of the decrease inoutstanding borrowings and lower interest rates during the quarter endedSeptember 30, 2002 versus the same period in the previous year.

 

PROVISION(BENEFIT) FOR INCOME TAXES During the quarter ended September 30, 2002, the Company recorded aprovision for income taxes of $12.9 million, versus an income tax benefit of$1.7 million recorded during the quarter ended September 30, 2001. The Companyestablished a $12.2 million valuation allowance 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 ENDED SEPTEMBER 30, 2002AND 2001**

 

REVENUES  Total revenues decreased 2.7% to $86.8 million in the nine monthsended September 30, 2002 from $89.2 million in the nine months September 30,2001. During the quarter ended September 30, 2002, the Company adopted EITF No.01-14, *Income Statement Characterization ofReimbursements Received for “Out-of-Pocket” Expenses Incurred*.Reimbursements, including those relating to travel and out-of-pocket expensesand other similar third party costs, are now included in revenues with anequivalent amount also included in operating expense. All prior periodfinancial statements have been reclassified to comply with the guidance in thisissue. Revenues from reimbursable expenses were $2 million and $1.7 million forthe nine months ended September 30, 2002 and 2001, respectively.

 

Revenues fromAdvisory Services decreased 10.7%****to****$57.9million in the nine months ended September 30, 2002 from $64.8 million inthe nine months ended September 30, 2001 and decreased as a percentage of totalrevenues to 67% from 73%. The decrease in revenues from Advisory Services wasprincipally due to decreased subscriptions to the Company’s Advisory Servicesas a result of the decrease in demand for such services that began in thesecond half of 2000 resulting from a decrease in IT spending as a result ofgeneral economic conditions. The decreases were partially offset by $2.3million of incremental revenues from the acquisition of a majority interest inMETA Group Germany in December 2001 and the establishment of META Group Francein September 2001. Advisory Services revenues attributable to internationalclients decreased 11% in the nine months ended September 30, 2002 from the ninemonths ended September 30, 2001, and remained constant as a percentage ofResearch and Advisory Services revenues at 17%.

 

StrategicConsulting revenues increased 23% to $23.4 million in the nine months endedSeptember 30, 2002 from $19 million in the nine months ended September 30,2001, and increased as a percentage of total revenues to 27% from 21%. Theincrease was principally due to $6.6 million of incremental revenues from theacquisition of a majority interest in META Group Germany in December 2001 andthe establishment of META Group France in September 2001, and, to a lesserextent, from increases in consulting revenues from the Company’s subsidiariesin Canada, and Australia during the nine months ended September 30, 2002 versusthe same period a year ago. The increases were partially offset by a decreasein the Company’s domestic consulting revenues due principally to a decrease indomestic consulting headcount as well as from a decrease in demand resultingfrom decreases in IT spending as a result of general economic conditions.

 

Published ResearchProducts revenues decreased 2.3% to $3.6 million in the nine months endedSeptember 30, 2002 from $3.7 million in the nine months ended September 30,2001 and remained constant as a percentage of total revenues at 4%. Thedecrease in revenues was principally due to a

 

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decrease in demandfor such products that began in the second half of 2000 resulting from adecrease in IT spending as a result of general economic conditions, and, to alesser extent, due to a decrease in the number of personnel in the Company’sinside sales channel that primarily sell the Company’s published researchproducts. These decreases were partially offset by $0.2 million of incrementalrevenues from the acquisition of META Group Germany in December 2001.

 

COST OF SERVICES AND FULFILLMENT  Cost of services and fulfillment, includingreimbursable expenses, decreased 3.1% to $46.2 million in the nine months endedSeptember 30, 2002 from $47.7 million in the nine months ended September 30,2001 and remained constant as a percentage of total revenues at 53%. Thedecrease was principally due to decreased payroll and payroll related costs(salaries, benefits and bonus expense) for analyst, consultant and fulfillmentpositions as a result of the reductions in headcount that occurred in April2001 and February 2002, and reduced travel expenses attributable to both thedecrease in headcount and other cost control measures. Such cost reductionswere partially offset by $6.2 million of incremental expenses from theacquisition of a majority interest in META Group Germany in December 2001 andthe establishment of META Group France in September 2001.

 

SELLING AND MARKETING EXPENSES  Selling and marketing expenses decreased23.6% to $23.5 million in the nine months ended September 30, 2002 from $30.8million in the nine months ended September 30, 2001 and decreased as apercentage of total revenues to 27% from 34%. The decrease in selling andmarketing expenses was due principally to decreased commission expenses as aresult of the Company’s restructured sales commission plan for the plan yearended January 31, 2002, which resulted in a decrease in commissions paid to theCompany’s sales personnel during the twelve months ended January 31, 2002. Asthe Company amortizes commission payments over the subscription period in whichthe related Advisory Services revenues are amortized to income, the Companyexperienced a decrease in commission expense during the nine months endedSeptember 30, 2002. Additionally, the Company experienced a decrease in baddebt expense during the nine months ended September 30, 2002 versus the sameperiod last year and experienced a decrease in marketing expensesinternationally associated with reduced marketing support of its independentsales representative organizations. Domestic payroll and payroll related costs(salaries and benefits) decreased during the nine months ended September 30,2002 versus the same period a year ago due principally to the reductions inheadcount that occurred in April 2001 and February 2002. Additionally, reducedtravel expenses attributable to both the decrease in headcount and other costcontrol measures also contributed to the decrease in domestic costs. Suchdecreases were partially offset by $2.2 million of incremental selling andmarketing expenses as a result of the acquisition of a majority interest inMETA Group Germany in December 2001 and the establishment of META Group Francein September 2001.

 

GENERAL AND ADMINISTRATIVE EXPENSES  General and administrative expensesincreased 39% to $14.5 million in nine months ended September 30, 2002 from$10.4 million in the nine months ended September 30, 2001 and increased as apercentage of total revenue to 17% from 12%. The increase in expenses wasprincipally due to $3 million of incremental expenses from the acquisition of amajority interest in META Group Germany in December 2001 and the establishmentof META Group France in September 2001.

 

DEPRECIATION AND AMORTIZATION  Depreciation and amortization expensedecreased 17.1% to $4.7 million in the nine months ended September 30, 2002from $5.7 million in the nine months ended September 30, 2001. The decrease wasprincipally due to lower amortization of intangible assets as a result of theadoption of SFAS 142. Pursuant to SFAS 142, goodwill and intangible assetsdeemed to have indefinite lives are no longer amortized but are subject toimpairment tests on an annual basis, or more frequently if certain indicatorsarise. Other intangible assets will continue to be amortized over their usefullives, which range from four to seven years.

 

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RESTRUCTURING CHARGE  During the quarter ended September 30, 2002,META Group Germany reduced its workforce and recorded a $140,000 restructuringcharge for severance payments that will be made during the quarter ended December31, 2002. Additionally, in February 2002, the Company announced a restructuringwhereby it reduced its workforce by 43 persons (representing 7% of theworkforce at the time). As a result of the restructuring, the Company incurreda $222,000 restructuring charge during the quarter ended March 31, 2002 forseverance payments made during the quarter ended March 31, 2002. In April 2001,the Company announced a restructuring whereby it reduced its workforce by 100persons, or 15% of the workforce at that time. As a result of therestructuring, the Company incurred a $359,000 restructuring charge during thequarter ended June 30, 2001 for severance payments made during the quarterended June 30, 2001.

 

LOSS ON FACILITIES LEASES  During the nine months 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  As of September 30, 2002, the Companycompleted the second step of the impairment test prescribed by SFAS 142 anddetermined that the goodwill associated with the Strategic Consulting andPublished Research Products segments were impaired. Accordingly, the Companyrecorded a goodwill charge of $22.2 million relating to the carrying value ofthe goodwill of these segments as of January 1, 2002. The impairment charge wasrecorded as the cumulative effect of a change in accounting principle andrecorded retroactive to January 1, 2002. Additionally, during the nine monthsended September 30, 2002, the Company recorded a $2.6 million goodwillimpairment loss resulting from the Company’s annual goodwill impairment test inaccordance with the provisions of SFAS 142. The impaired goodwill related tothe Strategic Consulting and Published Research Products segments and resultedfrom the acquisition of an additional interest in META Group Germany andcontingent consideration earned by Rubin Systems, Inc. and the Verity Group in2002.

 

INVESTMENT IMPAIRMENT LOSS  During the nine months 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 an impairment loss of $1.1 million. The Company follows a practice toreview its individual investments for impairment on a quarterly basis. Thisreview includes the examination of the estimated market value of each specificinvestment using peer group market comparables of public companies.Additionally, the Company reviews the business climate of each investee, itshistorical financial results, its projected cash flow, its plans for the futureand the likelihood of achieving such plans. Based on such review, adetermination is made on a case-by-case basis as to whether an investment isdeemed to be permanently impaired and therefore requires an adjustment to thecarrying value. The Company will continue to evaluate its investments forimpairment every quarter, and based on its review, may record additionalimpairment losses should the facts and circumstances in existence at that timemerit such an adjustment. As of September 30, 2002, the balance of theCompany’s Investments and Advances was $4 million.

 

OTHER INCOME (EXPENSE), NET  During the nine months ended September 30,2002, the Company recorded net interest and other expense of $58,000,consisting primarily of interest expense on its outstanding bank borrowings,net of interest income earned on its cash balances. This compares with netinterest and other income of $2.1 million in the nine months ended September30, 2001. During the nine months ended September 30, 2001, the Companyrecognized a $2.6 million gain on the sale of its investment in IntermediaGroup. Proceeds from the sale were $2.94 million. The gain was partially offset

 

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by interest expense recorded on the Company’s outstanding borrowingsunder its outstanding bank borrowings.

 

PROVISION(BENEFIT) FOR INCOME TAXES During the nine months ended September 30, 2002, the Company recorded aprovision for income taxes of $13 million, versus an income tax benefit of $1.9million recorded during the nine months ended September 30, 2001. The Companyestablished a $12.2 million valuation allowance 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 a valuationallowance should be established for the full amount of recorded deferred taxassets.

 

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 the sale of its common stock. The Company generated$4.3 million of cash from operations during the nine months ended September 30,2002, compared to $13.3 million of cash generated from operations in the sameperiod of 2001. The decrease in cash generated from operations was principallydue to an increase in the net loss experienced by the Company for the ninemonths ended September 30, 2002 versus the same period in the previous year,and, to a lesser extent, a decrease in collections of outstanding accountsreceivable during the nine months ended September 30, 2002 versus the year agoperiod, coupled with a decrease in the balance of deferred revenues as ofSeptember 30, 2002 versus the previous year, and as a result of the cash receivedduring the nine months ended September 30, 2001 from the Company’s sale of itslimited partnership interest in the JMI Equity Side Fund, L.P. associated withthe termination of the Company’s META Group/JMI Long-Term Incentive Plan forcertain of the Company’s key employees.

 

The Company used $0.6 million of cash in the ninemonths ended September 30, 2002, compared to $1.8 million in the same period of2001, for the purchase of furniture, equipment, computers and related softwareand web-site infrastructure. The purchases that were made during the ninemonths ended September 30, 2002 were made principally to support the Company’sweb-site and network infrastructure. The Company currently expects thatadditional purchases of equipment will be made during 2002 and that suchexpenditures will decrease slightly when compared to the 2001 levels. TheCompany has no material commitments for capital expenditures; however, theCompany anticipates that it will continue to upgrade its internal systems tosupport its business, including in particular its international subsidiaries.

 

In September 2002, the Company completed theacquisition of an additional 39.8% equity interest in META Group Germany,bringing its total ownership interest to approximately 96%, in exchange for$400,000 in cash that was funded in October 2002, $412,000 in the form of267,282 options to purchase the Company’s common stock, and approximately$914,000 in notes payable to certain of the former META Group Germanyshareholders, payable from January 2003 through January 2006. The incrementalconsideration resulted in $0.3 million of goodwill recorded in the Research andAdvisory Services segment, $0.6 million of goodwill in the Strategic Consultingsegment, and $0.2 million of goodwill in the Published Research Productssegment. The Company currently intends to pursue the acquisition of theremaining interests in META Group Germany for estimated additional cashconsideration of approximately $100,000. The Company will continue to assessits international distributors for purchase or investment consistent with itsgrowth plans.

 

During the nine months ended September 30, 2002, theCompany paid $0.4 million in cash to The Verity Group (“Verity”), an ITconsulting company, as additional contingent consideration earned during theyear ended December 31, 2001. The Company acquired certain assets of Verity in1997 for an

 

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initial payment of $1,000 in cash and contingent consideration of up to$1.1 million in the event certain financial targets were met in each of thefour years ended December 31, 2001. The aggregate consideration paid by theCompany amounted to approximately $1 million.

 

During the nine months ended September 30, 2002, theCompany recorded $0.9 million in additional goodwill in connection withcontingent consideration earned by Rubin Systems, Inc. (“RSI”) in connectionwith the achievement of certain financial targets for the year ended December31, 2001, and $0.5 million in additional goodwill in connection with the fairvalue of options to purchase the Company’s common stock granted to Dr. HowardRubin. In satisfaction of the $0.9 million of contingent consideration earnedby RSI, the Company paid $569,000 in cash and $369,000 in the form of 202,499shares of the Company’s common stock in August 2002. As of September 30, 2002,the Company had recorded an aggregate of $3.9 million in consideration for thepurchase of RSI. In the event certain financial targets are met, additionalcontingent consideration of $2.7 million payable in cash and $1.4 millionpayable in the Company’s common stock may be paid through March 2007. In theevent the aggregate number of shares issued in satisfaction of contingentconsideration exceeds 147,027, the remaining consideration will be payable incash.  The Company completed theacquisition of substantially all of the assets of RSI in October 2000. RSI iswholly owned by Dr. Howard Rubin, a director and officer of the Company.

 

In January 2001, the Company paid $300,000 ofcontingent consideration to RSI as a result of the achievement of certainfinancial targets for the year ended December 31, 2000.

 

In January 2001, the Company completed the acquisitionof substantially all of the assets of two of its Asia Pacific distributors, onebased in Sydney, Australia (“META Group Australia”), and the otherheadquartered in Singapore (“META Group Singapore”). With these acquisitions,the distributors become wholly owned subsidiaries of META Group, Inc. The totalpurchase price amounted to approximately $2.7 million, consisting of cash inthe amount of $1.7 million, the forgiveness of accounts receivable from thedistributor of $470,000, and the assumption of certain liabilities.

 

Exclusive of its acquisitions, the Company hashistorically made investments in and advances to several companies in parallelor synergistic industries. The Company did not make any such investments oradvances during the nine months ended September 30, 2002 and 2001. However, theCompany received proceeds in the amount of $1.6 million during the quarterended September 30, 2002 from its investment in Spikes Cavell & Co.(“Spikes Cavell”), a UK based business that went into receivership in September1999. Spikes Cavell’s most significant asset is an earn-out due from a thirdparty that purchased a portion of its business. The amount of the earn-out wascalculated based on the third party’s financial results for the three yearsended December 31, 2001 and was partially settled in the quarter endedSeptember 30, 2002. The remainder of the earn-out is currently expected to besettled during the first quarter of 2003. Additionally, the Company received$0.6 million in proceeds during the nine months ended September 30, 2002 fromthe dissolution of another company in which the Company had an equity interest.The balance of the Company’s investments and advances was $4 million and $13.8million at September 30, 2002 and 2001, respectively.

 

In March 2001, the Company closed on the sale of itsinvestment in Intermedia Group. Cash proceeds were $2.94 million.  The Company recognized a gain on the sale of$2.6 million. In May 2001, the Company received approximately $440,000 in cashrepresenting a repayment of a portion of the Company’s investment in a convertiblepromissory note of Syndicated Research Group, Inc. plus accrued interestthereon.

 

In September 2002 five trusts affiliated with theCompany’s President and Chief Executive Officer, Alfred J. Amoroso, and two members of the Company’s Board ofDirectors, Michael Simmons and Gayl W. Doster, purchased an aggregate of155,000 shares of the Company’s common stock from

 

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META Group Germany at a purchase price of $2.74per shares. Total proceeds to META Group Germany were approximately $425,000.

 

In June 2001 the Company completed a private placementof its common stock whereby the Company issued 1,726,617 shares of its commonstock for $2.78 per share to Dale Kutnick,the Company’s Chairman of the Board, Chief Executive Officer and Co-ResearchDirector, and additional purchasers affiliated with Francis J. Saldutti, HarryGruner and George McNamee, each of whom is a member of the Company’s Board ofDirectors (the “Board”). The Boardapproved the transaction after receiving the favorable recommendation of aSpecial Committee of the Board consisting of three disinterested Board members.The Special Committee retained BNY Capital Markets, Inc. as its financialadvisor to render a fairness opinion on the transaction. Total proceedsto the Company were $4.6 million, net of offering costs of approximately$227,000. The common stock offered in theprivate placement has not been registered with the Securities and ExchangeCommission and may not be offered or sold in the United States absentregistration or an applicable exemption from registration requirements. TheCompany has, however, filed a registration statement with the Securities andExchange Commission to register the shares issued (other than those issued to Mr.Kutnick), although such registration statement is not yet effective.

 

During the nine months ended September 30, 2002, theCompany repaid a total of $4.1 million in borrowings outstanding under itscredit agreements. During the nine months ended September 30, 2001, the Companyreceived $1 million in borrowings under its line of credit with its bank.

 

As of September 30, 2002, the total amount used underthe Company’s domestic facility (the “Facility”) was $7.6 million, consistingof $6.8 million in outstanding borrowings ($5.8 million outstanding under itsterm loan and $1 million outstanding under its revolving facility) and $0.8million in letters of credit issued on behalf of one of the Company’sindependent sales representative organizations and as security for a portion ofthe Company’s Stamford, CT premises lease. During the nine months endedSeptember 30, 2002, the Company paid $252,000 in interest on the Facility. TheFacility has a borrowing base equal to 80% of the Company’s eligible accounts receivable.Interest is payable at the rate of (i) LIBOR plus 2.5% or (ii) the higher of(a) the Prime Rate or (b) the Federal Funds Rate plus 0.5%. The Facility iscollateralized by the Company’s accounts receivable and requires payment of acommitment fee quarterly, in arrears, of 0.25% based on the average, daily,unused portion of the revolving facility. The Facility contains a number ofcovenants that, among other things, restrict the ability of the Company toincur additional indebtedness, pay dividends or other distributions, dispose ofcertain assets, enter into sale and leaseback transactions, create liens, makecertain investments, acquisitions or mergers, and that otherwise restrictcorporate activities.  In addition, theCompany is required to maintain certain financial covenants, including aleverage ratio covenant, a fixed charge ratio covenant, a consolidated netincome covenant and a minimum EBITDA covenant. The Company was not incompliance with the covenants under the Facility as of September 30, 2002.Under the terms of the Facility, each such covenant breach constitutes an eventof default pursuant to which the Company’s bank may, by notice to the Company,terminate the bank’s lending commitments to the Company and declare allobligations of the Company under the Facility due and payable immediately. TheCompany is currently negotiating with its bank to amend the Facility and therelated covenants and to obtain waivers of its covenant defaults. The Company,however, cannot be certain that it will be successful in negotiating such anamendment on favorable terms or obtaining waivers. As the Company was indefault under the Facility as of September 30, 2002, all outstanding borrowingshave been classified as a current liability on the consolidated balance sheetas of September 30, 2002.

 

During the nine months ended September 30, 2002, METAGroup Germany repaid all amounts outstanding under its line of credit with itslocal bank (approximately €1 million which approximated $1 million).

 

As ofJune 30, 2002, the Company had provided a corporate guarantee in the amount of12 million Belgian

 

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Francs (approximately $293,000) guaranteeing the local bank borrowingsof one of its former independent sales representative organizations. The fullamount guaranteed was paid by the Company in August 2002 in an amount equal to$293,000. The Company has provided a corporate guarantee in the amount of€62,000 (approximately $61,000) guaranteeing lease payments to the landlord ofthis former independent sales representative organization. Additionally, theCompany has provided a corporate guarantee to the landlord of one of itscurrent sales representative organizations guaranteeing lease payments to thelandlord in an annual amount of 120,000 £ (approximately $190,000) until 2013.

 

The Company has provided a general corporate guaranteeon behalf of META Group Germany in the amount of €1 million (approximately $1million) and a general corporate guarantee on behalf of META Group Germany’ssubsidiary in Switzerland in the amount of $160,000.

 

In 2001 META Group Germany acquired a minority equityinterest in META Group Northern Europe in the form of an equity investment anda 3-year promissory note. In 2001, META Group Northern Europe entered into anagreement with one of the Company’s independent sales representativeorganizations, META Group Norway, to purchase a majority interest in META GroupNorway for total consideration of $1.4 million.

 

As of September 30, 2002, approximately $780,000 inconsideration remains outstanding for the purchase of a majority interest inMETA Group Norway. The Company currently anticipates that it will fund theremaining outstanding consideration in the fourth quarter of 2002.

 

During the nine months ended September 30, 2002, theCompany received $82,000 in proceeds from its stock purchase plan versus$171,000 in proceeds from exercises of stock options and its stock purchaseplan for the same period of last year.

 

In September 2001, the Companyinitiated a voluntary stock option exchange offer for stock options with anexercise price greater than $12 per share to certain eligible employee optionholders. The Company’s senior executives and members of the Board of Directorswere not eligible to participate in the offer. In October 2001, the offerperiod expired and 752,469 stock options were accepted for exchange andcancelled. The Company issued 697,770 options in April 2002 at the fair marketvalue on the actual date of issuance to those eligible employees still employedat the date of grant.

 

The Company experienced a loss before the cumulativeeffect of a change in accounting principle of $21.5 million and $4.6 for thenine months ended September 30, 2002 and 2001, respectively. To return toprofitability, the Company will need to, among other things, achieve revenuegrowth and/or maintain expenses below revenue levels. The Company cannot becertain whether, or when, any of these will occur. If the Company fails toeither achieve sufficient revenue growth or maintain expenses below revenuelevels, any such failure will likely result in continued losses that would havea material adverse effect on the Company’s financial results and condition.

 

As of September 30, 2002, the Company had cash andcash equivalents of $23.7 million, versus $21.4 million at December 31, 2001.The Company currently believes existing cash balances and anticipated cashflows from operations will be sufficient to meet its working capital, capitalexpenditure and credit facility payment requirements for the next twelvemonths. The Company intends to continue its efforts to improve its accountsreceivable collections and manage expenses. The Company also currently believesthat decreases in and delays of IT spending as a result of general economicconditions are likely to continue to negatively impact its business for theforeseeable future.

 

The following summarizes the Company’s contractualobligations and other commitments as of September 30, 2002 and the effect suchobligations are currently expected to have on its liquidity and cash flow infuture periods (in thousands):

 

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|                                             |   | **Twelve Months  Ending September 30,** |   |
|--------------------------------------------------|--------|-----------------------------------------|--------|
|                                             |   | **2003**                                |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   |
| Operating leases                                 |   | $                                       | 5,356  |   | $ | 4,996 |   | $ | 4,568 |   | $ | 3,520 |   | $ | 3,778 |   | $ | 2,123 |   |
| Payments due  under employment agreements        |   | 332                                     |   | 233 |   |   |   |   |   |   |   |   |   |
| Term Loan(2)                                     |   | 2,667                                   |   | 2,667 |   | 444 |   |   |   |   |   |   |   |
| Borrowings under  revolving credit agreements(1) |   |                                    |   |   |   | 1,049 |   |   |   |   |   |   |   |
|                                             |   | $                                       | 8,355  |   | $ | 7,896 |   | $ | 6,061 |   | $ | 3,520 |   | $ | 3,778 |   | $ | 2,123 |   |

 

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(1)          Represents the contractual maturity of theCompany’s Revolving Facility with its bank. As the Company was in default underthe Facility as of September 30, 2002, all outstanding  borrowings have been classified as a currentliability on the consolidated balance sheet as of September 30, 2002.

(2)          Represents the contractual payment scheduleof the Company’s Term Loan with its bank. As the Company was in default underthe Facility as of September 30, 2002, all outstanding  borrowings have been classified as a currentliability on the consolidated balance sheet as of September 30, 2002.

 

**Critical Accounting Policies**

 

Our significant accounting policies are described inNote 3 to our consolidated financial statements included in our Annual Reporton Form 10-K for the year ended December 31, 2001, filed with the SEC on April1, 2002. However, certain of our accounting policies are particularly importantto the portrayal of our financial position and results of operations and mayrequire the application of significant judgment by our management; as a resultthey are subject to an inherent degree of uncertainty. In applying thosepolicies, our management uses its judgment to determine the appropriateassumptions to be used in the determination of certain estimates. Thoseestimates are based on our historical experience, our observance of trends inthe industry, information provided by our customers and information availablefrom other outside sources, as appropriate. Our significant accounting policiesinclude:

 

•                  Revenue Recognition – Revenues from our Advisory Services arerecognized on a straight-line basis over the subscription contract period,generally one year. All subscription contracts are billable at signing, absentspecial terms granted on a limited basis from time to time. As such, our policyis to record at the time of signing of an Advisory Services subscriptioncontract the fees receivable and related deferred revenues for the full amountof the subscription contract. Accounts receivable and deferred revenues thatextend beyond a 12-month period have been classified on the consolidatedbalance sheets as non-current. The Company also records the related salescommission obligation upon the signing of the subscription contract andamortizes the corresponding deferred commission expense over the subscriptionperiod in which the related Advisory Services revenues are earned and amortizedto income. Revenues from Strategic Consulting services and Published ResearchProducts are recognized at the time the applicable service is rendered orproduct is delivered. Additionally, we record reductions to revenue for estimatedcustomer 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, 2002 and 2001, our total accounts receivablebalance was $26.7 million and $37.6 million, respectively. During the ninemonths ended September 30, 2002, we provided $1 million for uncollectableaccounts receivable. We may need to record additional

 

25

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expenses in the future ifour collections or the financial condition of our customers were todeteriorate.

 

•                  Investment Recoverability –We followa practice to review our individual investments for impairment on a quarterlybasis. This review includes the examination of the estimated market value ofeach specific investment using peer group market comparables of public companies.Additionally, we review the business climate of each investee, its historicalfinancial results, its projected cash flow, its plans for the future and thelikelihood of achieving such plans. Based on such review, a determination ismade on a case-by-case basis as to whether an investment is deemed to bepermanently impaired and therefore requires an adjustment to the carryingvalue. As a result of our review for the nine months ended September 30, 2002,we recorded a $1.1 million impairment loss on several of our investments. Wewill continue to evaluate our investments for impairment every quarter, andbased on our review, may record additional impairment losses should the factsand circumstances in existence at that time merit such an adjustment.

 

•                  Deferred Tax Asset Recoverability –During the nine months ended September 30, 2002, we record 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. Likewise, should we determine that we would be able to realize ourdeferred tax assets in the future, an adjustment will be made to the balance ofthe valuation allowance.

 

•                  Goodwill Impairment - EffectiveJanuary 1, 2002, the Company adopted Statement of Financial AccountingStandards No. 142, *Goodwill and OtherIntangible Assets*(“SFAS 142”). SFAS 142 provides guidance on thefinancial accounting and reporting for acquired goodwill and other intangibleassets. Under SFAS 142, goodwill and indefinite lived intangible assets will nolonger be amortized. Intangible assets with finite lives will continue to beamortized over their useful lives. SFAS 142 also requires that goodwill andindefinite lived intangible assets be tested for impairment at least annually.

 

With respect to ourintangible assets with finite lives, during the quarter ended March 31, 2002,we assessed the remaining useful lives of such assets and deemed them to beappropriate.

 

With respect to ourgoodwill recorded as of January 1, 2002, the Company completed theimplementation of FAS 142 as of September 30, 2002. Based on the completion ofthe test, it was determined that the goodwill associated with the Company’sStrategic Consulting and Published Research Products segments were impaired asof January 1, 2002. Accordingly, the Company recorded a goodwill charge of$22.2 million relating to the carrying value of the goodwill of these segmentsas of January 1, 2002. The impairment charge was recorded as the cumulativeeffect of a change in accounting principle and recorded retroactive to January1, 2002.

 

Additionally, as ofSeptember 30, 2002 the Company completed the annual impairment test for 2002 inaccordance with the provisions with SFAS 142. As a result of this test, it wasdetermined that the goodwill associated with the Strategic Consulting andPublished Research Products segments was impaired. Accordingly, current yearadditions of $2.6 million to these segments resulting from the acquisition ofan additional interest in META Group Germany, and contingent considerationearned by Rubin Systems, Inc. and the Verity Group were recorded as animpairment loss.

 

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**CERTAINFACTORS THAT MAY AFFECT FUTURE RESULTS**

 

From time to time, information provided by the Companyor statements made by its employees may contain “forward-looking”statements.  In particular, this Form10-Q contains forward-looking statements made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements includestatements concerning:

 

¶     information technology spending;

¶     general economic conditions;

¶     revenues from Advisory Services, StrategicConsulting and Published Research Products, both domestically and internationally;

¶     costs of services and fulfillment, sellingand marketing, and general and administrative;

¶     cost savings as a result of cost controlsand cost reduction efforts;

¶     working capital;

¶     capital expenditures and capitalrequirements;

¶     cash flows and cash balances;

¶     collection of outstanding accountsreceivable;

¶     the Company’s credit facility;

¶     subleasing certain of the Company’sdomestic and German facilities;

¶     the settlement of the earn-out associatedwith Spikes Cavell; and

¶     payment of contingent consideration foracquisitions and allocation of such to goodwill.

 

Forward-looking statements also include statementsthat are not historical 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 norguarantees, but involve risks and uncertainties that could have a materialadverse effect on the Company’s business, results of operations and financialcondition or cause actual results to differ materially from those set forth inthe forward-looking statements.  Theserisks and uncertainties include:

 

¶     the Company’s ability to manage expenselevels;

¶     general economic conditions;

¶     decreases and delays in informationtechnology spending;

¶     market acceptance of and demand for theCompany’s products and services and the timing thereof, both domestically andinternationally;

¶     the Company’s ability to increase itspenetration of existing customers and expand to additional customers;

¶     the level and timing of subscriptionrenewals to the Company’s Research and Advisory services;

¶     the level and timing of non-recurringStrategic Consulting engagements;

¶     the level and timing of production anddelivery of Published Research products;

¶     changes in competitive conditions in theCompany’s industry;

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

¶     the mix of domestic versus internationalbusiness;

¶     the Company’s ability to manage and fundits international operations;

¶     the Company’s ability to find distributorsfor its products and services internationally;

¶     political and social turmoil in foreignmarkets and other international risks;

¶     the Company’s ability to collectoutstanding accounts receivable;

 

 

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¶     borrowings under and compliance with theCompany’s credit facility;

¶     the Company’s ability to receive waiversfrom its banks for financial covenant violations;

¶     goodwill and any impairment thereof;

¶     strategic investments and any impairmentthereof;

¶     the Company’s ability to recruit, retainand develop research analysts, consultants, management and administrativestaff;

¶     the Company’s dependence on key personnel;

¶     volatility and unpredictability of theCompany’s stock price; and

¶     other risks detailed in the Company’sfilings with the Securities and Exchange Commission, including those discussedin the Company’s annual report on Form 10-K for the year ended December 31,2001.

 

Readers are cautioned not to place undue reliance onthese forward-looking statements, which speak only as of the date thestatements were made.  Readers are alsoadvised to consider 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.

 

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**Item 3.**        **QUANTITATIVE****AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

The Company’s exposure tomarket risk for changes in interest rates relates primarily to borrowings underits $20 million credit facility, which consists of a $12 million revolvingcredit line and an $8 million term loan. At September 30, 2002, there was $6.8million in borrowings outstanding under this facility. Under the facility,interest is computed on outstanding borrowings at the rate of (i) LIBOR plus2.5% or (ii) the higher of (a) the Prime Rate or (b) the Federal Funds Rateplus 0.5%. The Company believes that an increase or a decrease of ten percentin the effective interest rate on available borrowings on its facility, iffully utilized, would not have a material effect on future results ofoperations.

 

The Company is exposed tomarket risk as it relates to changes in the market value of its strategicinvestments. The Company made investments in and advances to companies inparallel or synergistic industries to that of the Company’s. During the ninemonths ended September 30, 2002, the Company recorded a $1.1 million impairmentloss on its investments. As of September 30, 2002, the Company had investmentsand advances totaling $4 million. These investments and advances are inherentlyrisky because the investee companies are private companies that are typicallyin the early development stages. Adverse changes in market conditions, likethose experienced from the latter half of the year ended December 31, 2000through September 30, 2002, and poor operating results of the underlyinginvestments may result in the Company incurring additional losses or aninability to recover the remaining value of its investments and advances.

 

The Company is exposed tomarket risk as it relates to foreign currency exchange rates. Revenues and expensesin foreign currencies translate into higher or lower revenues and expenses inU.S. dollars as the U.S. dollar weakens or strengthens against foreigncurrencies. Changes in foreign currency exchange rates may therefore negativelyaffect the Company’s consolidated revenues and expenses. Currency transactiongains or losses arising from transactions in currencies other than thefunctional currency of the Company’s foreign subsidiaries are included in theresults of operations. Such gains and losses were not material to the Company’sconsolidated results of operations during the nine months ended September 30,2001 and 2002. The Company believes that an increase or a decrease of tenpercent in foreign currency exchange rates would not have a material effect onfuture results of operations. The Company has not entered into foreign currencyforward exchange contracts or other derivative financial instruments to hedgethe effects of adverse fluctuations in foreign currency exchange rates.

 

**Item 4.**        **CONTROLS****AND PROCEDURES**

 

Based on theirmost recent review, which was completed within 90 days of the filing of thisreport, the Company’s Chief Executive Officer and Chief Financial Officer haveconcluded that the Company’s disclosure controls and procedures are effectiveto ensure that information required to be disclosed by the Company in thereports that it files or submits under the Securities Exchange Act of 1934, asamended, is accumulated and communicated to the Company’s management, includingits Chief Executive Officer and Chief Financial Officer, as appropriate toallow timely decisions regarding required disclosure and are effective toensure that such information is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms. There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect those controls subsequent to the date of theirevaluation.

 

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# **PARTII - OTHER INFORMATION**

 

Item 1.    LegalProceedings.

 

TheCompany is not a party, nor is any of its property subject, to any materialpending legal proceedings, other than ordinary routine litigation incidental tothe Company’s business.

 

Item 2.    Changes in Securities and Use of Proceeds

 

During 2002, the Companyrecorded $0.9 million in additional goodwill in connection with contingentconsideration earned by Rubin Systems, Inc. (“RSI”) in connection with theachievement of certain financial targets for the year ended December 31, 2001.The Company paid $569,000 in cash and $369,000 in the form of 202,499 shares,(the “Rubin Contingent Shares”) of the Company’s common stock in satisfactionof the contingent consideration. As of September 30, 2002 the Company recordedan aggregate of $3.9 million in consideration for the purchase of RSI. In theevent certain financial targets are met, additional contingent consideration of$2.7 million payable in cash and $1.4 million payable in the Company’s commonstock may be paid through March 2007. In the event the aggregate number ofshares issued in satisfaction of contingent consideration exceeds 147,027, theremaining consideration will be payable in cash.  The Company completed the acquisition of substantially all of theassets of RSI in October 2000. RSI is wholly owned by Dr. Howard Rubin, adirector and officer of the Company.

 

The Rubin ContingentShares were issued in reliance upon exemption from the registration provisionsof the Securities Act of 1933, as amended (the “Act”), set forth in Section4(2) thereof and Rule 506 of Regulation D of the General Rules and Regulationsunder the Act promulgated by the Securities and Exchange Commission(“Regulation D”).  In its asset purchaseagreement, RSI made certain representations to the Company as to its investmentintent, level of sophistication, access to information and status as anaccredited investor as defined in Rule 501(a) of Regulation D. The RubinContingent Shares are subject to restrictions on transfer absent registrationunder the Act or exemption therefrom. The Company is required to register allshares issued to RSI.

 

On September 17, 2002five trusts affiliated with the Company’s President and Chief ExecutiveOfficer, Alfred J. Amoroso, and two membersof the Company’s Board of Directors, Michael Simmons and Gayl W. Doster(collectively the “Purchasers”), purchased an aggregate of 155,000 shares ofthe Company’s common stock from META Group Germany at a purchase price of $2.74per shares. Total proceeds to META Group Germany were approximately $425,000.The sale of the shares was made in reliance upon exemption from theregistration provisions of the Act set forth in Section 4(2) thereof and Rule506 of Regulation D. Each purchaser made certain representations to META GroupGermany as to his, her or its investment intent, level of sophistication,access to information and status as an accredited investor as defined in Rule501(a) of Regulation D. The shares are subject to restrictions on transferabsent registration under the Act or exemption therefrom.

 

On September 30, 2002,the Company completed the acquisition of an additional 39.8% equity interest inMETA Group Germany from certain other shareholders of META Group Germany (the“Selling Stockholders”), bringing its total ownership interest to approximately96%, in exchange for $400,000 in cash, $412,000 in the form of 267,282 optionsto purchase the Company’s common stock (the “Options”), and approximately$914,000 in notes payable to certain of the former META Group Germanyshareholders. The issuance of the Options was made in reliance upon Section 5of the Act and Regulation S of the General Rules and Regulations under the Actpromulgated by the Securities and Exchange Commission (“Regulation S”).

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Among otherthings, each Selling Stockholder made certain representations to the Companyregarding his, her or its status as a non-U.S. Person (as defined in RegulationS); not acquiring the Options for the account or benefit of a U.S. Person;reselling the Options only in accordance with the provisions of Regulation S,pursuant to registration under the Act, or pursuant to an available exemptionfrom registration; not engaging in hedging transactions with regard to theOptions unless in compliance with the Act; and access to information.  25% of the Options are exercisable in sixmonths from the date of grant, an additional 25% of the Options are exercisableone year from the date of grant, an additional 25% of the Options areexercisable two years from the date of grant, and the remaining 25% of theOptions are exercisable three years from the date of grant. The Options aresubject to restrictions on transfer absent registration under the Act orexemption therefrom.

 

Item 3.    DefaultUpon Senior Securities

 

The terms of theCompany’s $20 million amended and restated credit agreement with its bank (the“Facility”) require the Company to observe certain financial covenants,including a fixed charge ratio covenant, a leverage ratio covenant, a minimumEBITDA covenant and a consolidated net income covenant. The Company was not incompliance with these covenants for the relevant periods ended September 30,2002. Under the terms of the Facility, each such covenant breach constitutes anevent of default pursuant to which the Company’s bank may, by notice to theCompany, terminate the bank’s lending commitments to the Company and declareall obligations of the Company under the Facility due and payable immediately.The Company is currently negotiating with its bank to waive the breaches of thecovenants and the associated events of default and, in connection therewith, toamend certain provisions of the Facility. No assurances may be given that adefinitive agreement concerning the waiver of the breached covenants anddefaults and any amendments to the Facility will be executed or becomeeffective, or if executed, that any amendment or waiver will be on termsfavorable to the Company.

 

Item 6.    Exhibitsand Reports on Form 8-K.

 

(a)           Exhibits.

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                  |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                             |
| 3.1(1)              |   | Amended and Restated  Certificate of Incorporation of the Company                                                                                                |
| 3.2(1)              |   | Amended and Restated  Bylaws of the Company                                                                                                                      |
| 10.1*               |   | Employment agreement  between Alfred J. Amoroso and META Group, Inc., dated as of July 31, 2002                                                                  |
| 10.2*               |   | Incentive Stock Option  Agreement between META Group, Inc. and Alfred J. Amoroso dated July 31, 2002                                                             |
| 10.3*               |   | Non-Qualified Stock  Option Agreement between META Group, Inc. and Alfred J. Amoroso dated July  31, 2002                                                        |
| 10.4*               |   | Employee  Noncompetition, Nondisclosure and Developments Agreement between META Group,  Inc. and Alfred J. Amoroso dated as of July 31, 2002                     |
| 10.5*               |   | Severance Agreement  between META Group, Inc. and Dale Kutnick dated as of July 31, 2002                                                                         |
| 10.6(2)             |   | Amendment to Option  Agreements between META Group, Inc. and Dale Kutnick dated as of July 31,  2002                                                             |
| 10.7*               |   | Non-Qualified Stock  Option Agreement between META Group, Inc. and Dale Kutnick dated August 14,  2002                                                           |
| 10.8(2)             |   | Registration Rights  Agreement between META Group, Inc. and Dale Kutnick dated as of July 31, 2002                                                               |
| 10.9*               |   | Amendment No. 1 to  Asset Purchase Agreement among Rubin Systems, Inc., Howard Rubin and META  Group, Inc., dated as of July 31, 2002                            |
| 10.10*              |   | Revised Exhibit A to  the Amended Asset Purchase Agreement among Rubin Systems, Inc., Howard Rubin  and META Group, Inc., dated as of July 31, 2002              |
| 10.11*              |   | Amendment No. 1 to  Employment and Management Agreement between META Group, Inc. and Howard Rubin  dated as of July 31, 2002                                     |
| 10.12*              |   | Amendment No. 1 to  Non-competition Agreement between Howard Rubin and META Group, Inc. dated as  of July 31, 2002                                               |
| 10.13*              |   | Amendment No. 1 to  Non-Qualified Stock Option Agreement between Howard Rubin and META Group,  Inc., dated as of July 31, 2002                                   |
| 10.14*              |   | Common Stock Purchase  and Sale Agreement by and among META Group, Inc. and the purchasers listed on  the signature pages thereto dated as of September 17, 2002 |
| 11.1*               |   | Statement regarding  computation of per-share earnings                                                                                                           |
| 99.1*               |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                         |

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*    Exhibit included in EDGAR filing withSecurities and Exchange Commission.

(1) Incorporated hereinby reference to the exhibits to the Company's Registration Statement on FormS-1 (File No. 33-97848).

(2) Included in Exhibit10.5

 

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(b)           Reports on Form 8-K.

 

On September 19, 2002,the Company filed a report on Form 8-K dated September 17, 2002, announcingthat two members of the Registrant’s Board of Directors, Michael Simmons andGayl W. Doster, and five trusts affiliated with the Registrant’s President andChief Executive Officer, Alfred J. Amoroso,entered into a definitive agreement with META Group Germany, a majority-ownedsubsidiary of the Registrant, to purchase 155,000 shares of the Registrant’scommon stock, par value $0.01 per share, from META Group Germany, at a purchaseprice of $2.74 per share. The purchase price equaled the average closing bidprice of the Registrant’s common stock for the five consecutive trading days endingSeptember 16, 2002.

 

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**SIGNATURE**

 

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

 
|                                             | **META  Group, Inc.** |
|--------------------------------------------------|-----------------------|
|                                             |                  |   |
|                                             |                  |   |
| Date:      November 14, 2002 | By:                   | /s/ John A. Piontkowski |   |
|                                             |                  | John A. Piontkowski |
|                                             |                  | Executive Vice  President, Chief Financial Officer,  Treasurer and Assistant Secretary |
|                                             |                  | (Principal Financial  and Accounting Officer) |

 

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**CERTIFICATIONS**

 

I, Alfred J. Amoroso,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of META Group, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:                                  |   |   |
|----------------------------------------|--------|--------|
| November  14, 2002                     |   |
|                                   |   |
| /s/ Alfred J. Amoroso                  |   |
| President and Chief  Executive Officer |
|                                   |

 

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**CERTIFICATIONS**

I, John A. Piontkowski,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of META Group, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the “EvaluationDate”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:                              |   |   |
|------------------------------------|--------|--------|
| November 14, 2002                  |   |
|                               |   |
| /s/ John A. Piontkowski            |   |
| Executive Vice  President,         |
| Chief Financial  Officer,          |
| Treasurer and Assistant  Secretary |
|                               |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                  |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                             |
| 3.1(1)              |   | Amended and Restated  Certificate of Incorporation of the Company                                                                                                |
| 3.2(1)              |   | Amended and Restated  Bylaws of the Company                                                                                                                      |
| 10.1*               |   | Employment agreement  between Alfred J. Amoroso and META Group, Inc., dated as of July 31, 2002                                                                  |
| 10.2*               |   | Incentive Stock Option  Agreement between META Group, Inc. and Alfred J. Amoroso dated July 31, 2002                                                             |
| 10.3*               |   | Non-Qualified Stock  Option Agreement between META Group, Inc. and Alfred J. Amoroso dated July  31, 2002                                                        |
| 10.4*               |   | Employee  Noncompetition, Nondisclosure and Developments Agreement between META Group,  Inc. and Alfred J. Amoroso dated as of July 31, 2002                     |
| 10.5*               |   | Severance Agreement  between META Group, Inc. and Dale Kutnick dated as of July 31, 2002                                                                         |
| 10.6(2)             |   | Amendment to Option  Agreements between META Group, Inc. and Dale Kutnick dated as of July 31,  2002                                                             |
| 10.7*               |   | Non-Qualified Stock  Option Agreement between META Group, Inc. and Dale Kutnick dated August 14,  2002                                                           |
| 10.8(2)             |   | Registration Rights  Agreement between META Group, Inc. and Dale Kutnick dated as of July 31, 2002                                                               |
| 10.9*               |   | Amendment No. 1 to Asset  Purchase Agreement among Rubin Systems, Inc., Howard Rubin and META Group,  Inc., dated as of July 31, 2002                            |
| 10.10*              |   | Revised Exhibit A to  the Amended Asset Purchase Agreement among Rubin Systems, Inc., Howard Rubin  and META Group, Inc., dated as of July 31, 2002              |
| 10.11*              |   | Amendment No. 1 to  Employment and Management Agreement between META Group, Inc. and Howard Rubin  dated as of July 31, 2002                                     |
| 10.12*              |   | Amendment No. 1 to  Non-competition Agreement between Howard Rubin and META Group, Inc. dated as  of July 31, 2002                                               |
| 10.13*              |   | Amendment No. 1 to  Non-Qualified Stock Option Agreement between Howard Rubin and META Group,  Inc., dated as of July 31, 2002                                   |
| 10.14*              |   | Common Stock Purchase  and Sale Agreement by and among META Group, Inc. and the purchasers listed on  the signature pages thereto dated as of September 17, 2002 |
| 11.1*               |   | Statement regarding  computation of per-share earnings                                                                                                           |
| 99.1*               |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                         |

 

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*    Exhibit included in EDGAR filing withSecurities and Exchange Commission.

(1) Incorporated hereinby reference to the exhibits to the Company's Registration Statement on FormS-1 (File No. 33-97848).

(2) Included in Exhibit10.5

 

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