**UNITEDSTATES**

**SECURITIESAND 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 theQuarterly period ended June 30, 2002**

 

**OR**

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

** **

**For theTransition period from                to                **

 

**CommissionFile Number 0-27280**

 

**META Group, Inc.**

(Exact name of registrantas specified in its charter)

 

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

 

----

 

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

 

Yes         ý                            No           o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date: The number ofshares of the issuer’s common stock, $.01 par value per share, outstanding asof August 8, 2002 was 12,844,206.

 

 

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**META Group, Inc.**

 

**INDEX**

 
| **Part I**    |     | **FINANCIAL  INFORMATION**                                                                            |
|---------------|----------|-------------------------------------------------------------------------------------------------------|
|          |     |                                                                                                  |
|          | Item  1. | Financial Statements                                                                                  |
|          |     |                                                                                                  |
|          |     | Consolidated Balance  Sheets:  June 30, 2002 (unaudited) and December 31, 2001                        |
|          |     |                                                                                                  |
|          |     | Consolidated  Statements of Operations (unaudited)  Three and six months ended June 30, 2002 and 2001 |
|          |     |                                                                                                  |
|          |     | Consolidated  Statements of Cash Flows (unaudited)  Six months ended June 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                                           |
|          |     |                                                                                                  |
| **Part II**   |     | **OTHER INFORMATION**                                                                                 |
|          |     |                                                                                                  |
|          | Item 1.  | Legal Proceedings                                                                                     |
|          | Item  4. | Submission  of Matters to a Vote of Securitiy Holders                                                 |
|          | Item  5. | Other Information                                                                                     |
|          | Item  6. | Exhibits and Reports  on Form 8-K                                                                     |
|          |     |                                                                                                  |
| **Signature** |

 

----

 

 

**PART I****- FINANCIAL INFORMATION**

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

 

**META Group, Inc.**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands)**

 
|                                                                                     |   | **June 30,  2002** |    | **December  31,  2001** |   |
|------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                                                     |   | **(unaudited)**    |    |                    |   |
| **Assets**                                                                               |   |               |    |                    |   |
| Current assets:                                                                          |   |               |    |                    |   |
| Cash and cash  equivalents                                                               |   | $                  | 20,984  |                    | $      | 21,433 |   |
| Accounts  receivable, net                                                                |   | 29,629             |    | 40,542                  |   |
| Deferred  commissions                                                                    |   | 841                |    | 1,150                   |   |
| Deferred tax  asset                                                                      |   | 2,606              |    | 2,689                   |   |
| Other current  assets                                                                    |   | 2,557              |    | 2,208                   |   |
| Total current assets                                                                     |   | 56,617             |    | 68,022                  |   |
|                                                                                     |   |               |    |                    |   |
| Non-current  portion of accounts receivable                                              |   | 1,053              |    | 2,572                   |   |
| Furniture and  equipment, net                                                            |   | 9,952              |    | 11,939                  |   |
| Deferred tax  asset                                                                      |   | 9,408              |    | 9,866                   |   |
| Goodwill                                                                                 |   | 29,751             |    | 28,093                  |   |
| Other  Intangibles                                                                       |   | 5,363              |    | 5,779                   |   |
| Investments and  advances                                                                |   | 7,066              |    | 8,190                   |   |
| Other assets                                                                             |   | 432                |    | 554                     |   |
| Total assets                                                                             |   | $                  | 119,642 |                    | $      | 135,015 |   |
|                                                                                     |   |               |    |                    |   |
| **Liabilities and Stockholders’  Equity**                                           |   |               |    |                    |   |
| Current  liabilities:                                                                    |   |               |    |                    |   |
| Accounts payable                                                                         |   | $                  | 2,528   |                    | $      | 2,068 |   |
| Deferred  revenues                                                                       |   | 41,158             |    | 45,827                  |   |
| Borrowings under  revolving credit agreement                                             |   | 1,049              |    | 3,042                   |   |
| Current portion  of long-term debt                                                       |   | 6,444              |    | 2,724                   |   |
| Accrued  compensation                                                                    |   | 1,500              |    | 5,885                   |   |
| Accrued  liabilities                                                                     |   | 6,949              |    | 6,742                   |   |
| Income taxes  payable                                                                    |   | 20                 |    | 567                     |   |
| Other current  liabilities                                                               |   | 4,260              |    | 5,450                   |   |
| Total current  liabilities                                                               |   | 63,908             |    | 72,305                  |   |
|                                                                                     |   |               |    |                    |   |
| Long-term debt                                                                           |   | —             |    | 5,111                   |   |
| Non-current  portion of deferred revenues                                                |   | 3,376              |    | 4,813                   |   |
| Total  liabilities                                                                       |   | 67,284             |    | 82,229                  |   |
|                                                                                     |   |               |    |                    |   |
| Minority  interest in consolidated subsidiaries                                          |   | 156                |    | —                  |   |
|                                                                                     |   |               |    |                    |   |
| 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 13,646,222 |   | 136                |    | 136                     |   |
| Paid-in capital                                                                          |   | 58,727             |    | 58,102                  |   |
| Accumulated  deficit                                                                     |   | (5,596             | )       | (4,412                  | )      |
| Accumulated  other comprehensive loss                                                    |   | (406               | )       | (381                    | )      |
| Treasury stock,  at cost, 802,016 shares                                                 |   | (659               | )       | (659                    | )      |
| Total  stockholders’ equity                                                         |   | 52,202             |    | 52,786                  |   |
| Total  liabilities and stockholders’ equity                                         |   | $                  | 119,642 |                    | $      | 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****June 30,** |   | **For the  six months ended****June 30,** |   |
|---------------------------------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------|--------|
|                                                          |   | **2002**                                    |   | **2001**                                  |   | **2002** |   | **2001** |   |
|                                                          |   |                                        |   |                                      |   |   |   |   |   |
| Revenues:                                                     |   |                                        |   |                                      |   |   |   |   |   |
| Research and  advisory services                               |   | $                                           | 20,373 |                                      | $      | 21,956 |   | $ | 39,023 |   | $ | 45,071 |   |
| Strategic  consulting                                         |   | 8,404                                       |   | 7,452                                     |   | 16,289 |   | 12,431 |   |
| Published  research products                                  |   | 1,269                                       |   | 1,317                                     |   | 3,134 |   | 2,665 |   |
|                                                          |   |                                        |   |                                      |   |   |   |   |   |
| Total revenues                                                |   | 30,046                                      |   | 30,725                                    |   | 58,446 |   | 60,167 |   |
|                                                          |   |                                        |   |                                      |   |   |   |   |   |
| Operating  expenses:                                          |   |                                        |   |                                      |   |   |   |   |   |
| Cost of services  and fulfillment                             |   | 14,807                                      |   | 15,671                                    |   | 29,794 |   | 31,987 |   |
| Selling and  marketing                                        |   | 7,348                                       |   | 9,343                                     |   | 15,563 |   | 20,329 |   |
| General and  administrative                                   |   | 4,431                                       |   | 4,002                                     |   | 9,077 |   | 7,089 |   |
| Depreciation and  amortization                                |   | 1,434                                       |   | 1,974                                     |   | 3,135 |   | 3,807 |   |
| Restructuring  charge                                         |   |                                        |   | 359                                       |   | 222 |   | 359 |   |
| Goodwill  impairment loss                                     |   | 1,452                                       |   |                                      |   | 1,452 |   |   |   |
|                                                          |   |                                        |   |                                      |   |   |   |   |   |
| Total operating  expenses                                     |   | 29,472                                      |   | 31,349                                    |   | 59,243 |   | 63,571 |   |
|                                                          |   |                                        |   |                                      |   |   |   |   |   |
| Operating income  (loss)                                      |   | 574                                         |   | (624                                      | )      | (797 | ) | (3,404 | ) |
| Investment  impairment loss                                   |   | (50                                         | )      |                                      |   | (275 | )  |   |   |
| Other income  (expense), net                                  |   | (41                                         | )      | (128                                      | )      | 6 |   | 2,232 |   |
| Income (loss)  before provision (benefit) for income taxes    |   | 483                                         |   | (752                                      | )      | (1,066 | ) | (1,172 | ) |
| Provision  (benefit) for income taxes                         |   | 314                                         |   | (103                                      | )      | 96 |   | (250 | ) |
| Minority  interest in income of consolidated subsidiaries     |   |                                        |   |                                      |   | 22 |   |   |   |
| Net (loss)  income                                            |   | $                                           | 169    |                                      | $      | (649 | ) | $ | (1,184 | ) | $ | (922 | ) |
|                                                          |   |                                        |   |                                      |   |   |   |   |   |
| Amounts per  basic common share:                              |   |                                        |   |                                      |   |   |   |   |   |
| Net (loss)  income                                            |   | $                                           | .01    |                                      | $      | (.06 | ) | $ | (.09 | ) | $ | (.08 | ) |
|                                                          |   |                                        |   |                                      |   |   |   |   |   |
| Amounts per  diluted common share:                            |   |                                        |   |                                      |   |   |   |   |   |
| Net (loss)  income                                            |   | $                                           | .01    |                                      | $      | (.06 | ) | $ | (.09 | ) | $ | (.08 | ) |
|                                                          |   |                                        |   |                                      |   |   |   |   |   |   |
| Weighted average  number of basic common shares outstanding   |   | 13,024                                      |   |                                      | 11,099 |   | 13,024 |   | 11,069 |   |
| Weighted average  number of diluted common shares outstanding |   | 13,153                                      |   | 11,099                                    |   | 13,024 |   | 11,069 |   |
|                                                               |        |                                             |        |                                           |        |  |  |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

4

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**META Group, Inc.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

(unaudited)

 
|                                                                             |   | **For the  six months ended  June 30,** |   |
|----------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                             |   | **2002**                                |   | **2001** |   |
| **Operating activities:**                                                        |   |                                    |   |   |   |
| Net loss                                                                         |   | $                                       | (1,184 | ) | $ | (922 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |                                    |   |   |   |
| Depreciation and  amortization                                                   |   | 3,135                                   |   | 3,807 |   |
| Provision for  doubtful accounts                                                 |   | 452                                     |   |   |   |
| Gain on sale of  investment                                                      |   |                                    |   | (2,563 | ) |
| Impairment loss  on investments                                                  |   | 275                                     |   |   |   |
| Goodwill  impairment loss                                                        |   | 1,452                                   |   |   |   |
| Minority  interest                                                               |   | 22                                      |   |   |   |
| Deferred income  taxes                                                           |   | 560                                     |   | (250 | ) |
| Other non-cash  charges                                                          |   | 36                                      |   | 266 |   |
| Changes in  assets and liabilities:                                              |   |                                    |   |   |   |
| Accounts  receivable                                                             |   | 11,151                                  |   | 13,256 |   |
| Deferred  commissions                                                            |   | 324                                     |   | (1,592 | ) |
| Other current  assets                                                            |   | (205                                    | )      | 1,295 |   |
| Other assets                                                                     |   | 321                                     |   | 4,485 |   |
| Accounts payable                                                                 |   | 297                                     |   | (3,465 | ) |
| Accrued expenses  and other current liabilities                                  |   | (6,869                                  | )      | (1,851 | ) |
| Deferred  revenues                                                               |   | (5,908                                  | )      | (855 | ) |
| Net cash  provided by operating activities                                       |   | 3,859                                   |   | 11,611 |   |
|                                                                             |   |                                    |   |   |   |
| **Investing activities:**                                                        |   |                                    |   |   |   |
| Capital  expenditures                                                            |   | (519                                    | )      | (1,446 | ) |
| Payments for  acquisitions, net of cash acquired                                 |   | (812                                    | )      | (2,573 | ) |
| Proceeds from  sale of investment                                                |   |                                    |   | 2,940 |   |
| Investments and  advances                                                        |   |                                    |   | 400 |   |
| Net cash used in  investing activities                                           |   | (1,331                                  | )      | (679 | ) |
|                                                                             |   |                                    |   |   |   |
| **Financing activities:**                                                        |   |                                    |   |   |   |
| Proceeds from  exercise of stock options                                         |   |                                    |   | 7 |   |
| Proceeds from  employee stock purchase plan                                      |   | 82                                      |   | 164 |   |
| Proceeds from  line of credit                                                    |   |                                    |   | 1,000 |   |
| Repayments of  line of credit                                                    |   | (1,992                                  | )      | — |   |
| Private placement  of common stock, net of offering costs                        |   |                                    |   | 4,603 |   |
| Repayment of  term loan                                                          |   | (1,391                                  | )      |   |   |
| Net cash (used  in) provided by financing activities                             |   | (3,301                                  | )      | 5,774 |   |
| Effect of  exchange rate changes on cash                                         |   | 324                                     |   | 54 |   |
| Net (decrease)  increase in cash and cash equivalents                            |   | (449                                    | )      | 16,760 |   |
| Cash and cash  equivalents, beginning of period                                  |   | 21,433                                  |   | 3,622 |   |
| Cash and cash  equivalents, end of period                                        |   | $                                       | 20,984 |   | $ | 20,382 |   |

 

See notes to consolidatedfinancial 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 theDecember 31, 2001 audited consolidated financial statements and the notesthereto included in the Company’s Form 10-K for the year ended December31, 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 – New Accounting Policies**

 

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 2002, theremaining useful lives of intangible assets being amortized were reviewed anddeemed 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 of thegoodwill is compared to the carrying value of the goodwill and an impairmentloss will be recognized to the extent that the carrying value of the goodwillexceeds the implied fair value of the goodwill.

 

With respect to the goodwill recorded as of January 1,2002, the first step of the initial test for impairment was completed by June30, 2002. Based on the completion of this first step, it is anticipated that animpairment loss will have to be recorded in the Strategic Consulting segmentand may possibly have to be recorded in the Published Research Productssegment. The second step of the impairment test is the quantification of theamount of impairment that existed in the Company’s Strategic Consulting segmentand may possibly exist in the Published Research Products segment.  The Company currently anticipates that it willcomplete the second step of the impairment test by the end of the third quarterof 2002.  The impairment will berecorded as a cumulative effect of a change in accounting retroactive toJanuary 1, 2002.

 

Primarily as a result of the completion of the firststep of the impairment test, current year additions of $1.45 million to theCompany’s Strategic Consulting reporting segment resulting from contingentconsideration earned by Rubin Systems, Inc. and the Verity Group were deemedimpaired and recorded as an impairment loss.

 

*        The Company ceased recording goodwillamortization effective January 1, 2002. The following table shows net income(loss) for the first half of 2002 and adjusted net income (loss) for the firsthalf of 2001 exclusive of goodwill amortization (in thousands, except per shareamounts).*

 
|                                          |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|-----------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                          |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Net income  (loss):                           |   | $                                | 169    |                           | $      | (649 | ) | $ | (1,184 | ) | $ | (922 | ) |
| Addback:  goodwill amortization, net of tax   |   |                             |   | 232                            |   |   |   | 404 |   |
| Adjusted net  income (loss):                  |   | $                                | 169    |                           | $      | (417 | ) | $ | (1,184 | ) | $ | (518 | ) |
|                                          |   |                             |   |                           |   |   |   |   |   |
| Basic and  Diluted Earnings Per Share:        |   |                             |   |                           |   |   |   |   |   |
| Net income  (loss) per common share:          |   | $                                | .01    |                           | $      | (.06 | ) | $ | (.09 | ) | $ | .(08 | ) |
| Addback:  goodwill amortization, net of tax   |   |                             |   | .02                            |   |   |   | .04 |   |
| Adjusted net  income (loss) per common share: |   | $                                | .01    |                           | $      | (.04 | ) | $ | (.09 | ) | $ | (.04 | ) |

 

6

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**Note 3 -Income Taxes**

 

During the quarter and six months ended June 30, 2002,the Company recorded an income tax provision of $314,000 and $96,000,respectively. The provision for income taxes includes a $50,000 tax benefit asa result of the impact and tax nature of the goodwill impairment loss of $1.45million recorded as of June 30, 2002 as not all of the goodwill was taxdeductible. Additionally, the Company recorded a full valuation allowance forthe tax benefits associated with the losses generated by META Group Germany andMETA Group France during the quarter and six months ended June 30, 2002 due tothe uncertainty of realizing the loss carry-forwards because of the start-upnature of these subsidiaries.

 

**Note 4 – Comprehensive Income**

 

Comprehensive income (loss) for the three and sixmonths ended June 30, 2002 and 2001 was as follows (in thousands):

 
|                                             |   | **Three  months ended June 30,** |   | **Six months  ended June 30,** |   |
|--------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                             |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                             |   |                             |   |                           |   |   |   |   |   |
| Net income  (loss)                               |   | $                                | 169    |                           | $      | (649 | ) | $ | (1,184 | ) | $ | (922 | ) |
| Other  comprehensive (loss) income, net of tax:  |   |                             |   |                           |   |   |   |   |   |
| Foreign currency  translation adjustment         |   | (49                              | )      | 341                            |   | (25 | ) | (85 | ) |
| Unrealized gain  (loss) on marketable securities |   |                             |   | (51                            | )      |   |   | 45 |   |
|                                             |   |                             |   |                           |   |   |   |   |   |
| Comprehensive  (loss) income                     |   | $                                | 120    |                           | $      | (359 | ) | $ | (1,209 | ) | $ | (962 | ) |

 

**Note 5 – Segment Reporting**

 

The Company operates in three business segments:Advisory Services, Strategic Consulting and Published Research Products. TheCompany’s operating segments are managed separately, because each operatingsegment represents a strategic business unit that generally offers distinctproducts or services. Advisory Services provide comprehensive coverage ofrelevant information technology  andbusiness-related issues faced by its clients through client/analyst interactionand published conclusions and recommendations to each client’s specific ITrequirements. Strategic Consulting provides custom consulting services tailoredto meet individual client requirements. Published Research Products offervarious topic-specific reports designed to serve both as complements to theCompany’s core services and as standalone deliverables that meet specificassessment requirements.

 

The disaggregated financial results for the Company’soperating segments have been prepared using a management approach, which isconsistent with the basis and manner in which the Company’s managementinternally disaggregates financial information for the purposes of assistancein making internal operating decisions. The Company evaluates performance basedon standalone segment operating income, defined by the Company as the segmentrevenues less segment cost of sales and corporate selling, general andadministrative allocations. General and administrative expenses are allocatedratably based on each operating segments’ respective headcount. Selling andmarketing expenses are allocated ratably based on each operating segments’revenues. Management does not

 

7

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allocate corporate assets, non-operating income (interest income), orincome taxes when measuring segment results.

 

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

 
|                                 |   | **Advisory  Services** |   | **Strategic  Consulting** |   | **Published  Research  Products** |   | **Consolidated  Total** |   |
|--------------------------------------|--------|------------------------|--------|---------------------------|--------|-----------------------------------|--------|-------------------------|--------|
| **Three months ended June 30, 2002** |   |                   |   |                      |   |                              |   |                    |   |
|                                 |   |                   |   |                      |   |                              |   |                    |   |
| Revenues                             |   | $                      | 20,373 |                      | $      | 8,404                             |   | $                       | 1,269  |   | $ | 30,046 |   |
| Operating income                     |   | 106                    |   | 427                       |   | 41                                |   | 574                     |   |
|                                 |   |                   |   |                      |   |                              |   |                    |   |
| **Three months ended June 30, 2001** |   |                   |   |                      |   |                              |   |                    |   |
|                                 |   |                   |   |                      |   |                              |   |                    |   |
| Revenues                             |   | $                      | 21,956 |                      | $      | 7,452                             |   | $                       | 1,317  |   | $ | 30,725 |   |
| Operating income  (loss)             |   | 529                    |   | 370                       |   | (1,523                            | )      | (624                    | )      |
|                                 |   |                   |   |                      |   |                              |   |                    |   |
| **Six months ended June 30, 2002**   |   |                   |   |                      |   |                              |   |                    |   |
|                                 |   |                   |   |                      |   |                              |   |                    |   |
| Revenues                             |   | $                      | 39,023 |                      | $      | 16,289                            |   | $                       | 3,134  |   | $ | 58,446 |   |
| Operating income  (loss)             |   | 1,814                  |   | (2,811                    | )      | 200                               |   | (797                    | )      |
|                                 |   |                   |   |                      |   |                              |   |                    |   |
| **Six  Months ended June 30, 2001**  |   |                   |   |                      |   |                              |   |                    |   |
|                                 |   |                   |   |                      |   |                              |   |                    |   |
| Revenues                             |   | $                      | 45,071 |                      | $      | 12,431                            |   | $                       | 2,665  |   | $ | 60,167 |   |
| Operating income  (loss)             |   | (1,376                 | )      | 128                       |   | (2,156                            | )      | (3,404                  | )      |

 

**Note 6 – Acquisitions**

 

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. The Company paid $569,000 in cashas of August 2002, and currently expects to issue $369,000 (202,499 shares) ofthe Company’s common stock in the third quarter of 2002 in satisfaction of thecontingent consideration. As of June 30, 2002, the Company recorded anaggregate of $3.4 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 stock may be paidthrough March 2007. In the event the aggregate number of shares issued insatisfaction of contingent consideration exceeds 349,526, the remainingconsideration will be payable in cash. The Company completed the acquisition of substantially all of the assetsof RSI in October 2000. RSI is wholly owned by Dr. Howard Rubin, a director andofficer 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 endedDecember 31, 2001. The Company acquired certain assets of Verity in 1997 for aninitial payment of $1,000 in cash and contingent consideration of up to $1.1million in the event certain financial targets were met in each of the fouryears ended December 31, 2001. The aggregate consideration paid by the Companyamounted to approximately $1 million. There are no payments remaining under the earnout.

 

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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. Suchallocation resulted in goodwill in the Company’s Research and Advisory Servicessegment of approximately $214,000.

 

**Note 7 – 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 Facilityconsists of an $8 million term loan (the “Term Loan”) payable in 36 monthlyconsecutive installments that commenced in December 2001, and a $12 millionrevolving credit facility (the “Revolving Facility”). Both mature in November2004. As of June 30, 2002, the total amount used under the Facility was $9.3million, consisting of $7.5 million in outstanding borrowings ($6.5 millionoutstanding under the Term Loan and $1 million outstanding under the RevolvingFacility) and $1.8 million in letters of credit issued on behalf of one of theCompany’s independent sales representative organizations, on behalf of METAGroup Germany, and as security for a portion of the Company’s Stamford, CTpremises lease. During the six months ended June 30, 2002, the Company paid$171,000 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 payable quarterly, inarrears, of 0.25% based on the average, daily, unused portion of the RevolvingFacility. The Facility contains a number of covenants that, among other things,restrict the ability of the Company to incur additional indebtedness, paydividends or other distributions, dispose of certain assets, enter into saleand leaseback transactions, create liens, make certain investments,acquisitions or mergers, and that otherwise restrict corporate activities. Inaddition, the Company is required to maintain certain financial covenants,including a leverage ratio covenant, a fixed charge ratio covenant, aconsolidated net income covenant and a minimum EBITDA covenant. As a result ofthe implementation of SFAS 142 and the identification of potential impairmentas described in note 2 to the consolidated financial statements, theCompany currently anticipates that it will be in default of its covenants whensuch impairment is quantified in the second half of 2002. Accordingly, theCompany currently intends to negotiate with its bank to amend the Facility andthe related covenants for the third quarter of 2002 and beyond to address thisissue. The Company, however, cannot be certain that it will be successful innegotiating such an amendment. Until the Facility is formally amended, all borrowingsoutstanding as of June 30, 2002 have been classified as a current liability onthe Company’s consolidated balance sheet.

 

During the quarter ended June 30, 2002, META GroupGermany repaid all amounts outstanding under its line of credit with its local bank(approximately €1 million which approximated $1 million). In February 2002the Company provided an irrevocable letter of credit for €1 million(approximately $1 million) as collateral to META Group Germany’soutstanding borrowings with its bank as a result of covenant defaults whichwere waived. The letter of credit was cancelled in July 2002.

 

**Note 8 – Investment Impairment Losses**

 

During the quarter ended March 31, 2002, the Companyrecorded a $225,000 impairment loss on its investment in Spikes Cavell &Co. (“Spikes Cavell”), a UK based business that went into receivership inSeptember 1999. Spikes Cavell’s most significant asset is an earn-out due froma third party that purchased a portion of its business. The amount of theearn-out is calculated based on the third party’s financial results for

 

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the three years ended December 31, 2001 and is currently expected to besettled in the third quarter of 2002. During the six months ended June 30,2002, the Company held discussions with and obtained from Spikes Cavell’sliquidator updated financial information regarding the status of the claimsfiled in the liquidation proceeding and the estimated assets that theliquidator is expected to receive on behalf of Spikes Cavell. Based on thosediscussions and a review of the underlying financial data provided by theliquidator, the Company adjusted its carrying value down to the estimatedamounts to be realized upon the final liquidation of Spikes Cavell. This resultedin a $225,000 impairment loss.

 

During the quarter ended June 30, 2002, the Companyrecorded a $50,000 impairment loss on its investment in Computerwire, PLC., aUK based business that commenced formal dissolution procedures during thequarter ended June 30, 2002. Consequently, the Company recorded an impairmentloss on the remaining value of its investment during the quarter ended June 302002.

 

There were no impairment losses recorded by theCompany during the three or six month periods ended June 30, 2001.

 

**Note 9 – Restructuring Charges**

 

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-researchdirector and president and chief executive officer of metagroup.com resigned.As a result of the restructuring, the Company incurred a $359,000 restructuringcharge during the quarter ended June 30, 2001 for severance payments madeduring the quarter ended June 30, 2001.

 

**Note 10 – Commitments, Contingenciesand Guarantees**

 

*                Commitments:*

*               *In2001 META Group Germany acquired a minority equity interest in META GroupNorthern Europe in the form of an equity investment and a 3 year promissorynote. In 2001, META Group Northern Europe entered into an agreement with one ofthe Company’s independent sales representative organizations, META GroupNorway, to purchase a majority interest in META Group Norway for totalconsideration of $1.4 million. 

 

As of June 30, 2002,approximately $780,000 in consideration remains outstanding for the purchase ofa majority interest in META Group Norway. The Company currently anticipatesthat it will fund the remaining outstanding consideration in the second half of2002.

** **

*Contingencies:*

 

Other than ordinary routine litigation incidental tothe Company’s business which the Company believes is unlikely to have amaterial adverse effect on its business, the Company is not a party, nor is anyof its property subject to, any pending legal proceedings.

 

*Guarantees:*

 

As of June 30, 2002, the Company had a corporateguarantee in the amount of 12 million Belgian Francs (approximately $290,000)guaranteeing the local bank borrowings of one of its former independent salesrepresentative organizations. The full amount guaranteed was paid in August2002. Additionally, the Company has provided a general corporate guarantee onbehalf of META Group Germany in the amount of €1 million (approximately $1million) and a general corporate guarantee on behalf of its subsidiary inSwitzerland in the amount of $160,000.

 

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

 

*The discussion and analysis belowcontains trend analysis and other forward-looking statements within the meaningof Section 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934, which are subject to a number of risks and uncertainties.These forward-looking statements are typically denoted in this Quarterly Reporton Form 10-Q by words such as anticipate, believe, could, estimate, expect,intend, may, 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 OntarioInc. (“META Group Canada”), The Sentry Group, Inc., META Group AustraliaHoldings PTY Limited (“META Group Australia”), 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 GroupGermany”) and MG (Bermuda) Ltd. (collectively the “Company”) is a leadingindependent research and consulting firm focusing on information technology(“IT”) and business transformation strategies. The Company’s goal is to deliverobjective, consistent, and actionable guidance to enable organizations toinnovate more rapidly and effectively.

 

The Company has three operating business segments:Advisory Services, Strategic Consulting and Published Research Products.  The Advisory Services segment providesannually renewable subscription services (focused on specific areas of IT, ITissues related to a specific vertical market, or the specific needs of thosewithin the IT organization), service analyst briefing engagements, andconferences. Supplementing these services are the Company’s Infusion programs,which build on the business-focused analysis of Advisory Services by offeringmethodologies and skill-based training needed to successfully manage specificbusiness-critical issues. The Strategic Consulting segment provides strategicconsulting engagements addressing clients’ business and technology issues. Asignificant portion of Strategic Consulting clients are also Advisory Servicessubscribers. The Published Research Products segment provides reports, studiesand surveys offering in-depth analysis of specific business or IT issues.

 

Advisory Services revenues, which generally areannually renewable contracts and are payable by clients in advance, constitutedapproximately 68% and 71% of the Company’s total revenues for the quartersended June 30, 2002 and 2001, respectively. Advisory Services revenuesattributable to international clients are billed and collected by the Company’sindependent sales representative organizations, its wholly-owned subsidiariesin Canada, Australia, Singapore, Malaysia, and France and its majority ownedsubsidiary in Germany. The Company realizes Advisory Service revenues from theinternational sales representative organizations at rates of 25% to 40% ofamounts billed to those clients.

 

One measure of the volume of the Company’s AdvisoryServices business is its “Contract Value,” which the Company calculates as theaggregate value of retainer subscription services contracts in force at a givenpoint in time, without regard to the remaining duration of such contracts.Previously, the Company computed Contract Value based on the annualized valueof Advisory Services

 

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revenue recognized from all Advisory Services contracts in effect at agiven point in time. Contract Value is not necessarily indicative of futureAdvisory Services revenues. Contract Value was $68.4 million at June 30, 2002versus $84.7 million at June 30, 2001, a 19% decrease.

 

Revenues from Strategic Consulting engagementscomprised approximately 28% and 24% of the Company’s total revenues for thequarters ended June 30, 2002 and 2001, respectively. The majority of theCompany’s Strategic Consulting clients consist of Advisory Services clientsseeking additional advice tailored to their individual IT requirements.

 

Revenues from Published Research Products comprisedapproximately 4% of the Company’s total revenues for the quarters ended June30, 2002 and 2001.

 

The Company’s operating expenses consist of cost ofservices and fulfillment, selling and marketing expenses, general andadministrative expenses and depreciation and amortization. Cost of services andfulfillment represents the costs associated with production and delivery of theCompany’s products and services and includes the costs of research,development, preparation of periodic reports, analyst telephone consultations,executive briefings and conferences, research reports, consulting services, newproduct development, and all associated editorial and support services. Sellingand marketing expenses include the costs of salaries, commissions, relatedbenefits for selling and marketing personnel, as well as travel and promotion,and bad debt expense associated with accounts and notes receivable from itsindependent sales representative organizations. General and administrativeexpenses include the costs of the finance and accounting departments, inaddition to the legal, human resources, corporate IT and other administrativefunctions of the Company, as well as bad debt expense associated with accountsreceivable from its domestic customers.

 

**THREEMONTHS ENDED JUNE 30, 2002 AND 2001**

 

REVENUES  Total revenues decreased****2.2%to $30 million in the quarter ended June 30, 2002 from $30.7 million in thequarter ended June 30, 2001.

 

Revenues from Advisory Services, which generally arederived from annually renewable contracts payable by clients in advance,decreased 7.2%****to****$20.4 million in the quarter ended June30, 2002 from $22 million in the quarter ended June 30, 2001, and decreased asa percentage of total revenues to 68% in the quarter ended June 30, 2002 from71% in the quarter ended June 30, 2001. The decrease in revenues from Advisory Services was principally due todecreased subscriptions to the Company’s Advisory Services as a result of thedecrease in demand for such services that began in the second half of 2000resulting from a decrease in IT spending as a result of general economic conditions.As the Company recognizes subscription revenues ratably over the underlyingcontract period, Advisory Services revenues were adversely impacted during thequarter ended June 30, 2002 when compared to the quarter ended June 30, 2001 bythe continued decrease in billings that began in the second half of 2000. Thedecrease in revenues was partially offset by $0.7 million of incrementalrevenues realized during the quarter ended June 30, 2002 from the acquisitionof a majority interest in META Group Germany and the formation of META GroupFrance, both of which occurred in the second half of 2001. Advisory Servicesrevenues attributable to international clients decreased 22% to $3.4 million inthe quarter ended June 30, 2002 from $4.3 million in the quarter ended June 30,2001, and decreased as a percentage of Advisory Services revenue to 17% from21%. The decrease in Advisory Services revenue attributable to internationalclients was due principally to the decrease in subscription revenues resultingfrom the decrease in demand for the Company’s Advisory Services discussedabove.

 

Strategic Consulting revenues, which result fromStrategic Consulting engagements addressing clients’ business and technologyissues, increased 12.8% to $8.4 million in the quarter ended June 30, 2002 from$7.5 million in the quarter ended June 30, 2001, and increased as a percentageof total

 

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revenues to 28% from 24%. The increase was principally due to $1.9million of incremental revenues from the acquisition of a majority interest inMETA Group Germany in December 2001, and, to a lesser extent, from increasedconsulting revenues from META Group Canada during the quarter ended June 30,2002 versus the year ago period as a result of an increase in strategicconsulting engagements completed during the quarter ended June 30, 2002. Theincrease in revenues was partially offset by a decrease in domestic consultingprincipally due to a decrease in domestic consulting headcount as well as fromthe decrease in IT spending as a result of general economic conditions.

 

Published Research Products revenues, which resultfrom the sale of published research products offering in-depth analysis ofspecific business or IT issues, decreased 3.6% to $1.27 million in the quarterended June 30, 2002 from $1.3 million in the quarter ended June 30, 2001, andremained constant as a percentage of total revenues at 4%. The decrease inPublished Research Products revenues was principally due to a decrease in ITspending as a result of general economic conditions. The decrease was partiallyoffset by $0.1 million of incremental revenues from the acquisition of amajority interest in META Group Germany in December 2001.

 

COST OF SERVICES AND FULFILLMENT  Cost of services and fulfillment decreased5.5% to $14.8 million in the quarter ended June 30, 2002 from $15.7 million inthe quarter ended June 30, 2001 and decreased as a percentage of total revenuesto 49% from 51%. The decrease was principally due to decreases in domesticpayroll and payroll related costs (salaries, benefits and bonus expense) of theCompany’s domestic research and fulfillment personnel and consultants as aresult of the reductions in headcount that occurred in April 2001 and, to alesser extent,  in February 2002, andreduced travel costs attributable to both the decrease in headcount and othercost control measures. Such cost reductions were partially offset by $2.3million of incremental expenses from the acquisition of a majority interest in METAGroup Germany in December 2001 and the establishment of META Group France inSeptember 2001.

 

SELLING AND MARKETING EXPENSES  Selling and marketing expenses decreased21.4% to $7.3 million in the quarter ended June 30, 2002 from $9.3 million inthe quarter ended June 30, 2001 and decreased as a percentage of total revenuesto 24% from 30%. The decrease in selling and marketing expenses was principallydue to decreased commission expenses as a result of the Company’s restructuredsales commission plan for the plan year ended January 31, 2002, which resultedin a decrease in commissions paid to the Company’s sales personnel during thetwelve months ended January 31, 2002. As the Company amortizes commission payments over the subscriptionperiod in which the related Advisory Services revenues are amortized to income,the Company experienced a decrease in commission expense during the quarterended June 30, 2002.  Additionally,domestic salary expense decreased during the quarter ended June 30, 2002 versusthe same period a year ago due principally to the reductions in domesticheadcount that occurred in April 2001 and, to a lesser extent, in February2002. The reductions in commission and salary expenses were partially offset by$0.7 million of incremental expenses from the acquisition of a majorityinterest in META Group Germany in December 2001 and the establishment of METAGroup France in September 2001.

 

GENERAL AND ADMINISTRATIVE EXPENSES  General and administrative expensesincreased 10.7% to $4.4 million in the quarter ended June 30, 2002 from $4million in the quarter ended June 30, 2001, and increased as a percentage oftotal revenues to 15% from 13%. The increase in general and administrativeexpenses was principally due to $0.8 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.

 

DEPRECIATION AND AMORTIZATION  Depreciation and amortization expensedecreased 27.4% to $1.4 million in the quarter ended June 30, 2002 from $2million in the quarter ended June 30, 2001 and decreased as a percentage oftotal revenues to 5% from 6%. The decrease was principally due to loweramortization of intangible assets as a result of the adoption of Statement ofFinancial Accounting Standards No. 142, *Goodwilland Other Intangible Assets*(“SFAS 142”). Pursuant to SFAS 142,goodwill and intangible assets deemed to have indefinite lives will no longerbe amortized but will be

 

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subject to impairment tests on an annual basis, or more frequently ifcertain indicators arise. Other intangible assets will continue to be amortizedover their useful lives, which range from four to seven years.

 

GOODWILL IMPAIRMENT LOSS  During the quarter ended June 30, 2002, theCompany recorded a $1.45 million goodwill impairment loss as a result of theadoption of SFAS 142. The Company was required to complete a transitionalimpairment test of goodwill existing at January 1, 2002 by June 30,2002.  Based on the transitional testperformed, it is currently anticipated that an impairment loss will have to berecorded in the Company’s Strategic Consulting business segment and may possiblyexist in the Company’s Published Research Products segment as of January 1,2002. The quantification of the amount of impairment that existed as of January1, 2002 is required to be determined by December 31, 2002, and will beaccounted for as a cumulative effect of a change in accounting retroactive toJanuary 1, 2002. Primarily as a result of the transitional test performed,current year additions to goodwill in the Strategic Consulting business segmentin the amount of $1.45 million, arising from contingent consideration paymentsearned by Rubin Systems, Inc. and the Verity Group as of June 30, 2002, weredeemed to be impaired as of June 30, 2002.

 

INVESTMENT IMPAIRMENT LOSS  During the quarter ended June 30, 2002, theCompany recorded a $50,000 impairment loss on its investment in Computerwire,PLC., a UK based business that commenced formal dissolution procedures duringthe quarter ended June 30, 2002. Consequently, the Company recorded animpairment loss on the remaining value of its investment during the quarterended June 30 2002. There was no impairment loss during the quarter ended June30, 2001.

 

OTHER INCOME (EXPENSE), NET  During the quarter ended June 30, 2002, theCompany recorded net interest expense (net of interest income) of $41,000, downfrom $128,000 of net interest expense during the quarter ended June 30, 2001.The decrease was principally due to a decrease in interest expense on itsoutstanding bank borrowings as a result of the decrease in outstandingborrowings during the quarter ended June 30, 2002 versus the same period in theprevious year.

 

PROVISION FORINCOME TAXES  Duringthe quarter ended June 30, 2002, the Company recorded a provision for incometaxes of $314,000, reflecting an effective tax rate of 65%, versus an incometax benefit of $103,000 recorded during the quarter ended June 30, 2001. Thehigh effective tax rate in the quarter ended June 30, 2002 was principally dueto the impact and tax nature of the goodwill impairment loss of $1.45 millionrecorded during the quarter ended June 30, 2002 for which the Company recordeda $50,000 tax benefit as not all of the goodwill was tax deductible.Additionally, the Company recorded a full valuation allowance for the taxbenefits associated with the losses generated by META Group Germany and METAGroup France during the quarter ended June 30, 2002 due to the uncertainty ofrealizing the loss carry-forwards because of the start-up nature of thesesubsidiaries.

 

**SIX MONTHS ENDED JUNE 30, 2002 AND2001**

 

REVENUES  Total revenues decreased 2.9% to $58.4 million in the six monthsended June 30, 2002 from $60.2 million in the six months ended June 30, 2001.

 

Revenues from Advisory Services decreased 13.4%****to****$39 million in the six months ended June 30, 2002 from $45.1 million inthe six months ended June 30, 2001 and decreased as a percentage of totalrevenues to 67% from 75%. 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 the secondhalf of 2000 resulting from a decrease in IT spending as a result of generaleconomic conditions. The decreases were partially offset by $1.5 million ofincremental revenues from the acquisition of a majority interest in META GroupGermany in December 2001 and the establishment of META Group France inSeptember 2001. Advisory Services revenues attributable to international

 

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clients decreased 13% in the six months ended June 30, 2002 from thesix months ended June 30, 2001, and remained constant as a percentage ofResearch and Advisory Services revenues at 17%.

 

Strategic Consulting revenues increased 31% to $16.3 million in the sixmonths ended June 30, 2002 from $12.4 million in the six months ended June 30,2001, and increased as a percentage of total revenues to 28% from 21%. Theincrease was principally due to $4.3 million of incremental revenues from theacquisition of a majority interest in META Group Germany in December 2001, and,to a lesser extent, from increases in consulting revenues from the Company’ssubsidiaries in Canada and Australia during the six months ended June 30, 2002versus the same period a year ago. The increases were partially offset by adecrease in the Company’s domestic consulting revenues due principally to adecrease in domestic consulting headcount.

 

Published Research Products revenues increased 17.6% to $3.1 million inthe six months ended June 30, 2002 from $2.7 million in the six months endedJune 30, 2001 and increased as a percentage of total revenues to 5% from4%.  The increase in revenues wasprincipally due to $0.3 million of incremental revenues from the acquisition ofMETA Group Germany in December 2001, and partially offset by decrease in ITspending as a result of general economic conditions.

 

COST OF SERVICES AND FULFILLMENT  Cost of services and fulfillment decreased6.9% to $29.8 million in the six months ended June 30, 2002 from $32 million inthe six months ended June 30, 2001 and decreased as a percentage of totalrevenues to 51% from 53%.  The decreasewas principally due to decreased domestic payroll and payroll related costs(salaries, benefits and bonus expense) for domestic analyst, consultant andfulfillment positions as a result of the reductions in domestic headcount thatoccurred in April 2001, and, to a lesser extent, in February 2002, and reducedtravel expenses attributable to both the decrease in headcount and other costcontrol measures. Such cost reductions were partially offset by $4.6 million ofincremental expenses from the acquisition of a majority interest in META GroupGermany in December 2001 and the establishment of META Group France inSeptember 2001.

 

SELLING AND MARKETING EXPENSES  Selling and marketing expenses decreased23.4% to $15.6 million in the six months ended June 30, 2002 from $20.3 millionin the six months ended June 30, 2001 and decreased as a percentage of totalrevenues to 27% from 34%. 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 Company amortizes commission paymentsover the subscription period in which the related Advisory Services revenuesare amortized to income, the Company experienced a decrease in commissionexpense during the six months ended June 30, 2002.  Domestic payroll and payroll related costs(salaries and benefits) decreased during the six months ended June 30, 2002versus the same period a year ago due principally to the reductions in domesticheadcount that occurred in April 2001 and, to a lesser extent, February 2002,and travel expenses decreased due to both the decrease in headcount and othercost control measures. The Company also experienced a decrease in marketingexpenses internationally associated with reduced marketing support of itsindependent sales representative organizations. Such decreases were partiallyoffset by $1.5 million of incremental selling and marketing expenses as aresult of the acquisition of a majority interest in META Group Germany inDecember 2001 and the establishment of META Group France in September 2001.

 

GENERAL AND ADMINISTRATIVE EXPENSES  General and administrative expensesincreased 28% to $9.1 million in the six months ended June 30, 2002 from $7.1million in the six months ended June 30, 2001 and increased as a percentage oftotal revenue to 16% from 12%. The increase in expenses was principally due to$1.7 million of incremental expenses from the acquisition of a majorityinterest in META Group Germany in December 2001 and the establishment of METAGroup France in September 2001.

 

DEPRECIATION AND AMORTIZATION  Depreciation and amortization expensedecreased 17.7% to $3.1 million in the six months ended June 30, 2002 from $3.8million in the six months ended June 30, 2001. The decrease was principally dueto lower amortization of intangible assets as a result of the

 

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adoption of SFAS 142. Pursuant to SFAS 142, goodwill and intangibleassets deemed to have indefinite lives will no longer be amortized but will besubject to impairment tests on an annual basis, or more frequently if certainindicators arise. Other intangible assets will continue to be amortized overtheir useful lives, which range from four to seven years.

 

RESTRUCTURING CHARGE  In February 2002,  the Company announced a restructuring whereby it reduced itsworkforce by 43 persons, representing 7% of the workforce at the time. As aresult of the restructuring, the Company incurred a $222,000 restructuringcharge during the quarter ended March 31, 2002 for severance payments madeduring the quarter ended March 31, 2002. In April 2001, the Company announced arestructuring whereby it reduced its workforce by 100, or 15% of the workforceat that time. As a result of the restructuring, the Company incurred a $359,000restructuring charge during the quarter ended June 30, 2001 for severancepayments made during the quarter ended June 30, 2001.

 

GOODWILL IMPAIRMENT LOSS  During the quarter ended June 30, 2002, theCompany recorded a $1.45 million goodwill impairment loss as a result of theadoption of SFAS 142. The Company was required to complete a transitionalimpairment test of goodwill existing at January 1, 2002 by June 30,2002.  Based on the transitional testperformed, it is currently anticipated that an impairment loss will have to berecorded in the Company’s Strategic Consulting business segment and maypossibly exist in the Company’s Published Research Products segment as ofJanuary 1, 2002. The quantification of the amount of impairment that existed asof January 1, 2002 is required to be determined by December 31, 2002, and willbe accounted for as a cumulative effect of a change in accounting retroactiveto January 1, 2002. Primarily as a result of the transitional test performed,current year additions to goodwill in the Strategic Consulting business segmentin the amount of $1.45 million, arising from contingent consideration paymentsearned by Rubin Systems, Inc. and the Verity Group as of June 30, 2002, weredeemed to be impaired as of June 30, 2002.

 

INVESTMENT IMPAIRMENT LOSS  During the six months ended June 30, 2002,the Company recorded impairment losses of $275,000 on its investments inComputerwire, PLC. (“Computerwire”), and Spikes Cavell & Co. (“SpikesCavell”). Spikes Cavell is a UK based business that went into receivership inSeptember 1999. Spikes Cavell’s most significant asset is an earn-out due froma third party that purchased a portion of its business. The amount of theearn-out is calculated based on the third party’s financial results for thethree years ended December 31, 2001 and is currently expected to be settled bythe third quarter of 2002. During the six months ended June 30, 2002, theCompany held discussions with and obtained from Spikes Cavell’s liquidatorupdated financial information regarding the status of the claims filed in theliquidation proceeding and the estimated assets that the liquidator is expectedto receive on behalf of Spikes Cavell. Based on those discussions and a reviewof the underlying financial data provided by the liquidator, the Companyadjusted its carrying value down to the estimated amounts to be realized uponthe final liquidation of Spikes Cavell. This resulted in a $225,000 impairmentloss. Computerwire is a UK based business that commenced formal dissolutionprocedures during the quarter ended June 30, 2002. Consequently, the Companyrecorded an impairment loss of $50,000 on the remaining value of its investmentduring the quarter ended June 30 2002. There were no impairment losses duringthe six months ended June 30, 2001.

 

OTHER INCOME (EXPENSE), NET  Other income (expense), net, decreased to$6,000 of net interest income (net of interest expense) during the six monthsended June 30, 2002 from $2.2 million in the six months ended June 30, 2001. Duringthe six months ended June 30, 2001, the Company recognized a $2.6 million gainon the sale of its investment in Intermedia Group. Proceeds from the sale were$2.94 million. The gain was partially offset by interest expense recorded onthe Company’s outstanding borrowings under its credit facility. 

 

PROVISION FORINCOME TAXES  Duringthe six months ended June 30, 2002, the Company recorded an income taxprovision of $96,000 versus a benefit of $250,000 for the six months ended June30, 2001. The provision for income taxes includes a $50,000 tax benefit as aresult of the impact and tax nature of the goodwill

 

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impairment loss of$1.45 million recorded during the six months ended June 30, 2002 as not all ofthe goodwill was tax deductible. Additionally, the Company recorded a fullvaluation allowance for the tax benefits associated with the losses generatedby META Group Germany and META Group France during the quarter ended June 30,2002 due to the uncertainty of realizing the loss carry-forwards because of thestart-up nature of these subsidiaries.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company funds its operations primarily throughcash generated from operations, borrowings under its credit facility, and, to alesser extent, from the sale of its common stock. The Company generated $3.9million of cash from operations during the six months ended June 30, 2002,compared to $11.6 million of cash generated from operations in the same periodof 2001. The decrease in cash generated from operations was principally due todecreases in accrued expenses and other current liabilities at June 30, 2002versus the year ago period primarily as a result of the deferral of certainbonus payments (earned in fiscal 2000) to the end of the third quarter of 2001,reduced levels of deferred revenues at June 30, 2002 versus 2001, the cashreceived during the six months ended June 30, 2001 from the Company’s sale ofits limited partnership interest in the JMI Equity Side Fund, L.P. associatedwith the termination of the Company’s META Group/JMI Long-Term Incentive Planfor certain of the Company’s key employees, and a decrease in collections ofoutstanding accounts receivable during the six months ended June 30, 2002versus the year ago period as a result of the significant efforts to reduceoverdue accounts receivable that commenced during the first half of 2001. Suchdecreases were partially offset by increases in the Company’s accounts payablebalances at June 30, 2002 versus June 30, 2001, and, to a lesser extent, adecrease in sales commissions paid during the six months ended June 30, 2002when compared to the same period in the previous year.

 

The Company used $0.5 million of cash in the sixmonths ended June 30, 2002, compared to $1.4 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 six monthsended June 30, 2002 were made principally to support the Company’s Web site andnetwork infrastructure. The Company currently expects that additional purchasesof equipment will be made during 2002 and that such expenditures will decreaseslightly when compared to the 2001 levels. The Company has no material commitmentsfor capital expenditures; however, the Company anticipates that it willcontinue to upgrade its internal systems to support its business, including inparticular its international subsidiaries.

 

During the six months ended June 30, 2002, the Companypaid $0.4 million in cash to The Verity Group (“Verity”), an IT consultingcompany, as additional contingent consideration earned during the year endedDecember 31, 2001. The Company acquired certain assets of Verity in 1997 for aninitial payment of $1,000 in cash and contingent consideration of up to $1.1million in the event certain financial targets were met in each of the fouryears ended December 31, 2001. The aggregate consideration paid by the Companyamounted to approximately $1 million. There are no payments remaining under theearnout.

 

During the six months ended June 30, 2002, the Companyrecorded $0.9 million in additional goodwill in connection with contingentconsideration earned by Rubin Systems, Inc. (“RSI”) in connection with the achievementof certain financial targets for the year ended December 31, 2001. The Companypaid $569,000 in cash and currently expects to issue $369,000 (202,499 shares)of the Company’s common stock in the third quarter of 2002 in satisfaction ofthe contingent consideration. As of June 30, 2002, the Company recorded anaggregate of $3.4 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 stock may be paidthrough March 2007.  In the event theaggregate number of shares

 

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issued in satisfaction of contingent consideration exceeds 349,526, 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.

 

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 six months ended June 30, 2002 and 2001. The balance of theCompany’s investments and advances was $7.1 million and $17.9 million at June30, 2002 and 2001, respectively. The Company follows a practice to review itsindividual investments and advances 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 recorded animpairment loss of $225,000 on its investment in Spikes Cavell during thequarter ended March 31, 2002, an impairment loss of $50,000 on its investmentin Computerwire during the quarter ended June 30, 2002 and recorded impairmentlosses of $9.2 million for the year ended December 31, 2001. The losses takenwere determined on a specific identification method considering each investee’sparticular facts and circumstances in existence at that time. The Company willcontinue to evaluate its investments for impairment every quarter, and based onits review, may record additional impairment losses should the facts andcircumstances in existence at that time merit such an adjustment.

 

*               *In2001 META Group Germany acquired a minority equity interest in META GroupNorthern Europe in the form of an equity investment and a 3 year promissorynote. In 2001, META Group Northern Europe entered into an agreement with one ofthe Company’s independent sales representative organizations, META GroupNorway, to purchase a majority interest in META Group Norway for totalconsideration of $1.4 million.

 

As of June 30, 2002,approximately $780,000 in consideration remains outstanding for the purchase ofa majority interest in META Group Norway. The Company currently anticipatesthat it will fund the remaining outstanding consideration in the second half of2002.

 

In March 2001, the Company closed on the sale of itsinvestment in Intermedia Group.  Cashproceeds were $2.94 million.  TheCompany recognized a gain on the sale of $2.6 million. In May 2001, the Companyreceived approximately $440,000 in cash representing a repayment of a portionof the Company’s investment in a convertible promissory note of SyndicatedResearch Group, Inc. plus accrued interest thereon.

 

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 and Co-Research Director, and additionalpurchasers affiliated with Francis J. Saldutti, Harry Gruner and GeorgeMcNamee, each of whom is a member of the Company’s Board of Directors (the“Board”). The Board approved thetransaction after receiving the favorable recommendation of a Special Committeeof the Board consisting of three disinterested Board members. The SpecialCommittee retained BNY Capital Markets, Inc. as its financial advisor to rendera fairness opinion on the transaction. Total proceeds to the Companywere $4.6 million, net of offering costs of approximately $227,000. The common stock offered in the private placementhas not been registered with the Securities and Exchange Commission and may notbe offered or sold in the United States absent registration or an applicableexemption from registration requirements. The Company has, however, filed aregistration statement with the Securities and Exchange Commission to registerthe shares issued (other than those issued to Mr. Kutnick), although suchregistration statement is not yet effective.

 

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During the six months ended June 30, 2002, the Companyrepaid a total of $3.4 million in borrowings outstanding under its creditagreements. During the six months ended June 30, 2001, the Company received $1million in borrowings under its line of credit with its bank.

 

As of June 30, 2002, the total amount used under theCompany’s domestic facility (the “Facility”) was $9.3 million, consisting of$7.5 million in outstanding borrowings ($6.5 million outstanding under its termloan and $1 million outstanding under its revolving facility) and $1.8 millionin letters of credit issued on behalf of one of the Company’s independent salesrepresentative organizations, on behalf of META Group Germany, and as securityfor a portion of the Company’s Stamford, CT premises lease. During the sixmonths ended June 30, 2002, the Company paid $171,000 in interest on theFacility. The Facility has a borrowing base equal to 80% of the Company’seligible accounts receivable. Interest is payable 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 Facility is collateralized by the Company’s accounts receivableand requires payment of a commitment fee payable quarterly, in arrears, of0.25% based on the average, daily, unused portion of the revolving facility.The Facility contains a number of covenants that, among other things, restrictthe ability of the Company to incur additional indebtedness, pay dividends orother distributions, dispose of certain assets, enter into sale and leasebacktransactions, create liens, make certain investments, acquisitions or mergers,and that otherwise restrict corporate activities.  In addition, the Company is required to maintain certain financialcovenants, including a leverage ratio covenant, a fixed charge ratio covenant,a consolidated net income covenant and a minimum EBITDA covenant.  As a result of the implementation of SFAS142 and the identification of potential impairment, the Company currentlyanticipates that it will be in default of its covenants when such impairment isquantified in the second half of 2002. Accordingly, the Company currentlyintends to negotiate with its bank to amend the Facility and the relatedcovenants for the third quarter of 2002 and beyond to address this issue.  The Company, however, cannot be certain thatit will be successful in negotiating such an amendment. Until the Facility isformally amended, all borrowings outstanding as of June 30, 2002 have been classifiedas a current liability on the Company’s consolidated balance sheet.

 

During the quarter ended June 30, 2002, META GroupGermany repaid all amounts outstanding under its line of credit with its localbank (approximately €1 million which approximated $1 million). In February 2002the Company provided an irrevocable letter of credit for €1 million(approximately $1 million) as collateral to META Group Germany’soutstanding borrowings with its bank as a result of covenant defaults whichwere waived. The letter of credit was cancelled in July 2002.

 

As of June 30, 2002, the Company had a corporateguarantee in the amount of 12 million Belgian Francs (approximately $290,000)guaranteeing the local bank borrowings of one of its former independent salesrepresentative organizations. The full amount guaranteed was paid by theCompany in August 2002. Additionally, the Company has provided a generalcorporate guarantee on behalf of its majority owned subsidiary in Germany inthe amount of €1 million (approximately $1 million as of June 30, 2002) and ageneral corporate guarantee on behalf of its subsidiary in Switzerland in theamount of $160,000.

 

During the six months ended June 30, 2002, the Companyreceived $82,000 in proceeds from its stock purchase plan versus $171,000 inproceeds from exercises of stock options and its stock purchase plan for thesame 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 $2.05, the fairmarket value on the actual date of issuance to those eligible employees stillemployed at the date of grant.

 

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In February 2002, the Company announced a strategicreorganization to align the Company’s resources with current market demand andto better position the Company for profitability. As part of thereorganization, the Company reduced its workforce by 43 persons (representing7% of the workforce at the time). The Company incurred a $222,000 restructuringcharge during the quarter ended March 31, 2002 for severance payments madeduring the quarter ended March 31, 2002. In April 2001, the Company announced arestructuring whereby it reduced its workforce by 100, or 15% of the workforceat that time. As a result of the restructuring, the Company incurred a $359,000restructuring charge during the quarter ended June 30, 2001 for severancepayments made during the quarter ended June 30, 2001.

 

The Company experienced a net loss of $1.2 million forthe six months ended June 30, 2002, and $0.9 million for the six months endedJune 30, 2001. To return to profitability, the Company will need to, amongother things, achieve revenue growth and/or maintain expenses below revenuelevels. The Company cannot be certain whether, or when, any of these willoccur. If the Company fails to either achieve sufficient revenue growth ormaintain expenses below revenue levels, any such failure will likely result incontinued losses that would have a material adverse effect on the Company’sfinancial results and condition.

 

As of June 30, 2002, the Company had cash and cashequivalents of $21 million. The Company currently believes existing cashbalances, anticipated cash flows from operations and borrowings under itscredit facility will be sufficient to meet its working capital, capitalexpenditure and credit facility payment requirements for the next 12 months.The Company intends to continue its efforts to improve its accounts receivablecollections and manage expenses. The Company also currently believes thatdecreases in and delays of IT spending as a result of general economicconditions are likely to continue to adversely impact its business for theforeseeable future.

 

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

 
|                                          |   | **Twelve  Months Ending June 30,** |   |
|-----------------------------------------------|--------|------------------------------------|--------|
|                                          |   | **2003**                           |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   |
| Operating leases                              |   | $                                  | 5,389  |   | $ | 5,069 |   | $ | 4,583 |   | $ | 3,636 |   | $ | 3,691 |   | $ | 3,999 |   |
| Term Loan (2)                                 |   | 2,667                              |   | 2,667 |   | 1,110 |   |   |   |   |   |   |   |
| Borrowings under  revolving credit agreements |   |                               |   |   |   | 1,049 | (1) |   |   |   |   |   |   |
|                                          |   | $                                  | 8,056  |   | $ | 7,736 |   | $ | 6,742 |   | $ | 3,636 |   | $ | 3,691 |   | $ | 3,999 |   |
|                                               |        |                                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Represents the contractual maturity of theCompany’s Revolving Facility with its bank. The amount is classified as a current liability on the Company'sconsolidated balance sheet at June 30, 2002.

(2)          Represents the contractual payment scheduleof the Company’s Term Loan with its bank. Until the Company formally executesan amendment to the Facility as a consequence of probable future defaults as aresult of the implementation of SFAS 142, all amounts have been classified as acurrent liability in the Company’s consolidated balance sheet at June 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

 

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to be used in the determination of certain estimates. Those estimatesare based on our historical experience, our observance of trends in theindustry, information provided by our customers and information available fromother outside sources, as appropriate. Our significant accounting policiesinclude:

 

•                  Revenue Recognition **–**Revenues from our Advisory Services are recognized on a straight-linebasis over the subscription contract period, generally one year. Allsubscription contracts are billable at signing, absent special terms granted ona limited basis from time to time. As such, our policy is to record at the timeof signing of an Advisory Services subscription contract the fees receivableand related deferred revenues for the full amount of the subscription contract.Accounts receivable and deferred revenues associated with multi-year contractsthat extend 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, estimated customer cancellations are recordas reductions to revenue.

 

•                  Accounts Receivable Allowance **–**We generally evaluate our accountsreceivable on a monthly basis. As part of our analysis, we examine ourcollections history, the age of the receivables in question, any specificcustomer collection issues that we have identified, and general marketconditions. At June 30, 2002 and 2001, our total accounts receivable balancewas $30.7 million and $44.0 million, respectively. During the six months endedJune 30, 2002, we provided $488,000 for uncollectable accounts receivable. Wemay need to record additional expenses in the future if our collections or thefinancial condition of our customers were to deteriorate.

 

•                  Investment Recoverability **–**We follow a practice of reviewing ourindividual 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, 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 six months ended June 30, 2002, werecorded a $225,000 impairment loss on our investment in Spikes Cavell and a$50,000 impairment loss on our investment in Computerwire. We will continue toevaluate our investments for impairment every quarter, and based on our review,may record additional impairment losses should the facts and circumstances inexistence at that time merit such an adjustment.

 

•                  Deferred Tax Asset Recoverability **–** We record a valuation allowance to reduceour deferred tax assets to the amount that we believe is more likely than notto be realized. While we consider future taxable income in assessing the needfor the valuation allowance, in the event we were to determine that we wouldnot be able to realize all or part of our net deferred tax assets in thefuture, an adjustment to the deferred tax assets would be charged to income inthe period such determination was made. Likewise, should we determine that wewould be able to realize our deferred tax assets in the future in excess of ournet recorded amount, an adjustment to the deferred tax assets would increasenet income in the period such determination was made.

 

•                  Goodwill Impairment **–** Effective January 1, 2002, theCompany adopted Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*(“SFAS142”). SFAS 142 provides guidance on the financial accounting and reporting foracquired goodwill and other

 

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intangible assets. Under SFAS 142, goodwill andindefinite lived intangible assets will no longer be amortized. Intangibleassets with finite lives will continue to be amortized over their useful lives.SFAS 142 also requires that goodwill and indefinite lived intangible assets betested for impairment at least annually. The goodwill impairment test is atwo-step process that requires goodwill to be allocated to our reporting units.In the first step, the fair value of the reporting unit is compared to thecarrying value of the reporting unit. If the fair value of the reporting unitis less than the carrying value of the reporting unit, a goodwill impairmentmay exist, and the second step of the test is performed. In the second step,the fair value of the goodwill is compared to the carrying value of thegoodwill and an impairment loss will be recognized to the extent that thecarrying value of the goodwill exceeds the implied fair value of the goodwill.

 

With respect to our intangible assets with finitelives, during 2002 we assessed the remaining useful lives of such assets anddeemed them to be appropriate.

 

With respect to our goodwill recorded as of January 1,2002, the first step of the initial test for impairment was completed by June30, 2002. Based on the completion of this first step, it is anticipated that animpairment loss will have to be recorded in our Strategic Consulting segmentand may possibly have to be recorded in our Published Research Productssegment. The determination of the amount of this initial impairment is notexpected to be finalized until the third quarter of 2002 and any relatedimpairment charges will be reflected as a cumulative effect of a change in accountingby retroactive restatement of the consolidated results of operations for thefirst quarter 2002. The Company currently believes that it is likely that thecumulative effect adjustment arising from the completion of the second step ofthe impairment test will be material.

 

**CERTAINFACTORS THAT MAY AFFECT FUTURE RESULTS**

 

From time to time, information provided by the Companyor statements made by its employees may contain “forward-looking” informationthat involves risks and uncertainties. In particular, statements contained inthis Form 10-Q that are not historical facts (including, but not limited to:statements concerning IT spending; general economic conditions; anticipatedrevenues from Advisory Services, Strategic Consulting and Published ResearchProducts; anticipated revenues from international operations; additionalfunding by the Company of META Group Germany; anticipated costs of services andfulfillment, selling and marketing, and general and administrative; anticipatedcost and expense levels relative to the Company’s total revenues; anticipatedcost savings as a result of cost controls and cost reduction efforts;anticipated working capital; capital expenditures; capital requirements; cashflow and cash balances; payment of contingent consideration for acquisitionsand allocation of such to goodwill; collection of outstanding accountsreceivable; credit facility borrowing capacity; credit facility paymentrequirements; potential debt or equity financings; potential sales of theCompany’s strategic investments; acquisitions; goodwill; or other statementsusing words such as “anticipate”, “believe”, “could”, “estimate”, “expect”,“intend”, “may”, “plan”, “project”, “should” or “will”) constituteforward-looking statements and are made under the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995. The Company’s actual resultsof operations and financial condition have varied and may in the future varysignificantly from those stated in any forward-looking statements.  Factors that may cause such differencesinclude, without limitation, the risks, uncertainties, and other informationdiscussed below, as well as the accuracy of the Company’s internal estimates ofrevenue and operating expense levels. Each of these factors, and others, arediscussed from time to time in the filings made by the Company with theSecurities and Exchange Commission.

 

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The Company’s future operating results are subject tosubstantial risks and uncertainties. The Company currently derives most of itsrevenues from subscriptions to its Advisory Services and a significant amountof revenues from Strategic Consulting engagements.  As a result, any decline in the Company’s ability to securesubscription renewals or replace completed Strategic Consulting engagementswith new engagements may have a material adverse effect on the Company’sresults of operations.  The Company’sability to secure subscription renewals, at favorable average selling prices,as well as to successfully market and sell its Strategic Consulting servicesand Published Research Products, is dependent upon the Company’s ability todeliver consistent, high-quality, and timely analysis and advice with respectto issues, developments, and trends that clients view as important.  The Company’s successful delivery of suchanalysis and advice is, in turn, dependent upon many factors, including, amongother things, its ability to: understand and anticipate rapidly changingtechnologies and market trends so as to keep its analysis focused on thechanging needs of its clients; deliver products and services of sufficientlyhigh quality and timeliness to withstand competition from competitors that mayhave greater financial, information gathering and marketing resources than theCompany; recruit and retain highly talented professionals in a competitive jobmarket; and match the skills and competencies of the Company’s StrategicConsulting staff with the skills required for the fulfillment of existing orpotential Strategic Consulting engagements. The loss of any of the Company’s senior management personnel, includingDale Kutnick (Chairman of the Board and Co-Research Director), could have amaterial adverse effect on the Company. The Company’s ability to market and sell its products and services couldalso be adversely affected by the emergence of new competitors into one or moreof the market segments addressed by the Company’s products and services, whichcould cause pricing pressure and loss of market share. The Company’s pricingstrategy may limit the potential market for the Company’s Advisory Services andStrategic Consulting engagements.  As aresult, the Company may be required to reduce prices for its Advisory Servicesand Strategic Consulting engagements or introduce new products with lowerprices in order to expand or maintain its market share.  In addition, an increasing portion of theCompany’s revenues are attributable to international clients, which may beadversely affected by factors including difficulties in finding distributorsfor its products and services, difficulties in developing and managingrelationships with independent sales representative organizations, thefinancial health of individual sales representative organizations, failure bythe Company to replace sales representative agreements on terms beneficial tothe Company or on a timely basis and clients’ potential unwillingness tocontinue to do business with the Company or its new distributor in the eventthat any existing agreements with independent sales representativeorganizations are terminated, integration of acquired foreign subsidiaries intothe Company’s existing operations, difficulty in maintaining direct clientcontact, reliance on sales entities that the Company does not control,fluctuations in exchange rates, adverse political and economic conditions,tariffs and other trade barriers, longer accounts receivable collection cycles,greater accounts receivable collection risk with respect to sales through itsindependent sales representative organizations (because the Company relies onthe sales representative organization to invoice and collect receivables), andadverse tax consequences. The Company’s future financial results also depend inpart on the integration of recent acquisitions and potential acquisitions, aswell as the development or acquisition of new products and services, which maynot successfully be achieved due to the inherent costs and risks associatedwith development, assimilation, and marketing of a new product or service, aswell as the Company’s limited experience in introducing new products andservices.

 

Furthermore, the Company’s quarterly operating resultsmay fluctuate significantly due to various factors. Because a disproportionatelylarge portion of the Company’s Advisory Services contracts expire in the fourthquarter of each year, the Company incurs operating expenses in the fourthquarter at a higher level than would otherwise be required by its sequentialgrowth, and such increased expenses are not normally offset immediately byhigher revenues. In addition, the Company’s operating results may fluctuate asa result of a variety of other factors, including operating losses and theability to achieve profitability, the Company’s ability to manage expenselevels and realize efficiencies from reorganizations, any failure by theCompany to meet its working capital, capital expenditure and credit facilitypayment requirements, borrowing under and

 

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compliance with the Company’s credit facility, the timing and executionof the Company’s strategic plans, the timing and amount of new businessgenerated by the Company, the inability of the Company to increase itspenetration of existing customers and expand to additional customers, changesin the spending patterns of the Company’s target clients (including, but notlimited to, decreases in IT spending), changes in market demand for IT researchand analysis, competitive conditions in the industry, decreases in spending onIT by substantial commercial and governmental users of IT, general economicuncertainty and economic slowdown in the U.S. and abroad, failure to collectits outstanding accounts receivable, the level and timing of renewals ofsubscriptions to Advisory Services, the level and timing of contractedStrategic Consulting services, the number, size and scope of StrategicConsulting engagements in which the Company is engaged, the degree ofcompletion of such engagements and the ability of the Company to match theskills of its consulting staff to consulting engagement opportunities, employeeutilization rates and the accuracy of estimates of resources required tocomplete ongoing Strategic Consulting engagements, the mix of domestic versusinternational business, the mix of Advisory Services revenues versus StrategicConsulting and Published Research Products revenues, the timing of thedevelopment, introduction, marketing and market acceptance of new products andservices, the integration of acquired businesses into the operations of theCompany, the timing of the acquisition and integration into the Company of newbusiness, products, and services, the recruitment, retention and development ofresearch analysts, consultants, management and administrative staff, theCompany’s ability to collect its accounts receivable, strategic investments inentities that operate in parallel or synergistic industries to the Company andany impairments thereof, including but not limited to any failure by theCompany to sell its interest in strategic investments, goodwill and anyimpairment thereof, the inability of the Company to sublease unutilizedfacilities, volatility and unpredictability of the Company’s stock price, andother risks detailed in the Company’s filings with the Securities and ExchangeCommission, including those discussed in the Company’s annual report filed withthe Securities and Exchange Commission on Form 10-K for the year ended December31, 2001. Due to these factors, the Company believes period-to-periodcomparisons of results of operations are not necessarily meaningful and shouldnot be relied upon as an indication of future results of operations. Thepotential fluctuations in the Company’s operating results make it likely that,in some future quarter, the Company’s operating results will be below theexpectations of securities analysts and investors, which would have a materialadverse effect on the price of the Company’s Common Stock.

 

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

 

The Company’s exposure to market risk for changes ininterest rates relates primarily to borrowings under its $20 million creditfacility, which consists of a $12 million revolving credit line and an $8million term loan. At June 30, 2002, there was $7.5 million in borrowingsoutstanding under this facility. Under the facility, interest is computed onoutstanding borrowings 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 Companybelieves that an increase or a decrease of ten percent in the effectiveinterest rate on available borrowings on its facility, if fully utilized, wouldnot have a material effect on future results of operations.

 

The Company is exposed to market risk as it relates tochanges in the market value of its strategic investments. The Company madeinvestments in and advances to companies in parallel or synergistic industriesto that of the Company’s. During the six months ended June 30, 2002, theCompany recorded a $225,000 impairment loss on its investment in Spikes Cavelland a $50,000 impairment loss on its investment in Computerwire. As of June 30,2002, the Company had investments and advances totaling $7.1 million. Theseinvestments and advances are inherently risky because the investee companiesare private companies that are typically in the early development stages.Adverse changes in market conditions, like those experienced from the latterhalf of the year ended December 31, 2000 through June 30, 2002, and pooroperating results of the underlying investments may result in the Companyincurring additional losses or an inability to recover the remaining value ofits investments and advances.

 

The Company is exposed to market risk as it relates toforeign currency exchange rates.

 

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Revenues and expenses in foreign currencies translate into higher orlower revenues and expenses in U.S. dollars as the U.S. dollar weakens orstrengthens against foreign currencies. Changes in foreign currency exchangerates may therefore negatively affect the Company’s consolidated revenues andexpenses. Currency transaction gains or losses arising from transactions incurrencies other than the functional currency of the Company’s foreignsubsidiaries are included in the results of operations. Such gains and losseswere not material to the Company’s consolidated results of operations duringthe six months ended June 30, 2001 and 2002. The Company believes that anincrease or a decrease of ten percent in foreign currency exchange rates wouldnot have a material effect on future results of operations. The Company has notentered into foreign currency forward exchange contracts or other derivativefinancial instruments to hedge the effects of adverse fluctuations in foreigncurrency exchange rates.

 

**PART II****- OTHER INFORMATION**

 

Item 1.    LegalProceedings.

 

Other than ordinary routine litigation incidental tothe Company’s business that the Company believes is unlikely to have a materialadverse effect on its business, the Company is not a party, nor is any of itsproperty subject to, any pending legal proceedings.

 

Item 4.    Submissionof Matters to a Vote of Security Holders.

 

On May 20, 2002, the Company held its Annual Meetingof Stockholders. At such Annual Meeting, the stockholders of the Company votedto elect two members of the Board of Directors as Class I Directors, each toserve for a three-year term and until his or her successor has been dulyelected and qualified or until his or her earlier resignation or removal.

 

The number of votes cast for the re-election of the Class I Directorslisted below were as follows:

 
|                |   | **Number of Shares** |   |
|---------------------|--------|----------------------|--------|
| **Nominees**        |   | **For**              |   | **Against** |   | **Withhold Authority** |   |
| Dale Kutnick        |   | 9,430,288            |   | — |   | 795,826 |   |
| Francis J. Saldutti |   | 10,199,743           |   | — |   | 26,371 |   |

 

Each of Harry Gruner, Gayl W. Doster, Michael Simmons, George McNameeand Howard Rubin continued as directors of the Company after the Annual Meetingof Stockholders.

 

Item 5.  OtherInformation.

 

On August 1, 2002, the Company announced that it appointed Alfred J. Amoroso to theoffices of Chief Executive Officer, President, and Vice Chairman of the Boardof Directors effective July 31, 2002, with Dale Kutnick remaining as Chairmanof the Board of Directors and Co-Research Director, as more fully described inthe Company’s press release dated August 1, 2002, which is attached hereto asExhibit 99.2.

 

Item 6.    Exhibitsand Reports on Form 8-K.

 

(a)           Exhibits.

 

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| **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                                                                      |
| 4.1 *(2)            |       | Amended and Restated Credit Agreement between META  Group, Inc. and The Bank of New York dated November 5, 2001 |
| 4.2 *(2)            |       | Amendment No. 1 and Waiver No. 1 to the Credit  Agreement dated as of March 26, 2002                            |
| 11.1 *              |       | Statement regarding computation of per-share  earnings                                                          |
| 99.1 *              |       | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                        |
| 99.2 *              |       | Press release of META Group, Inc. dated August 1,  2002                                                         |

 

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

(2)          In the Company’s AnnualReport on Form 10-K for the year ended December 31, 2001 (File No. 0-27280),the Company sought confidential treatment with respect to certain portions ofthe exhibit that were omitted and filed separately with the Securities andExchange Commission. The Company has withdrawn its request for confidentialtreatment and the exhibits filed herewith include such previously omittedportions.

 

* Exhibit included in EDGAR filing with Securities and ExchangeCommission.

 

(b)           Reportson Form 8-K.

 

On April 2, 2002, the Company filed a report on Form8-K dated April 1, 2002, announcing the resignation of its President, MikeLevine, effective April 1, 2002.

 

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**SIGNATURE**

 

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

 

 
|   | **META Group, Inc.** |
|--------|----------------------|
|   |                 |   |
|   |                 |   |
| Date:  | August 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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**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                                                                      |
| 4.1 *(2)             |   | Amended and Restated Credit Agreement between META  Group, Inc. and The Bank of New York dated November 5, 2001 |
| 4.2 *(2)             |   | Amendment No. 1 and Waiver No. 1 to the Credit Agreement  dated as of March 26, 2002                            |
| 11.1 *               |   | Statement regarding computation of per-share  earnings                                                          |
| 99.1 *               |   | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                        |
| 99.2 *               |   | Press release of META Group, Inc. dated August 1,  2002                                                         |

 

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(1)        Incorporatedherein by reference to the exhibits to the Company’s Registration Statement onForm S-1 (File No. 33-97848).

(2)          In the Company’s AnnualReport on Form 10-K for the year ended December 31, 2001 (File No. 0-27280),the Company sought confidential treatment with respect to certain portions ofthe exhibit that were omitted and filed separately with the Securities andExchange Commission. The Company has withdrawn its request for confidentialtreatment and the exhibits filed herewith include such previously omittedportions.

 

* Exhibit included in EDGAR filing with Securities and ExchangeCommission.

 

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