**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|
|       |                                                                                         |
|       |                                                                                         | **For the Quarterly period ended June 30, 2003** |

 

**OR**

 
| **o**  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |
|--------|------------------------------------------------------------------------------------------------------|
|   |                                                                                                 |
|   |                                                                                                 | **For the Transition period from                 to               ** |

 

**Commission File Number 0-27280**

 

**META Group, Inc.**

(Exact name of registrant as specified in 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 whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 
|   | Yes       ý | No       o |   |
|--------|-----------------------------------------------------|-----------------------------------------------|--------|

 

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

 
|   | Yes       o | No       ý |   |
|--------|------------------------------------------------|----------------------------------------------------|--------|

 

The number of shares of theregistrant’s common stock, $.01 par value per share, outstanding as ofJune 30, 2003 was 13,324,586.

 

 

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**META Group, Inc.**

 

**INDEX**

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

 

----

 

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

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

 

**META Group, Inc.**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

(Unaudited)

 
|                                                                                                    |   | **June 30,  2003** |   | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                                                                                    |   |                    |   |                        |   |
| **Assets**                                                                                              |   |                    |   |                        |   |
| Current assets:                                                                                         |   |                    |   |                        |   |
| Cash and cash equivalents                                                                               |   | $                       | 15,162 |                        | $      | 21,448 |   |
| Accounts receivable, net                                                                                |   | 29,587                  |   | 33,676                      |   |
| Deferred commissions                                                                                    |   | 1,761                   |   | 1,221                       |   |
| Other current assets                                                                                    |   | 1,080                   |   | 2,593                       |   |
| Total  current assets                                                                                   |   | 47,590                  |   | 58,938                      |   |
|                                                                                                    |   |                    |   |                        |   |
| Restricted cash                                                                                         |   | 6,000                   |   | —                      |   |
| Non-current portion of accounts receivable                                                              |   | 697                     |   | 4,584                       |   |
| Furniture and equipment, net                                                                            |   | 6,122                   |   | 7,724                       |   |
| Goodwill                                                                                                |   | 8,221                   |   | 7,483                       |   |
| Other intangibles, net                                                                                  |   | 4,230                   |   | 4,630                       |   |
| Investments and advances                                                                                |   | 3,775                   |   | 3,997                       |   |
| Other assets                                                                                            |   | 576                     |   | 321                         |   |
| Total assets                                                                                            |   | $                       | 77,211 |                        | $      | 87,677 |   |
|                                                                                                    |   |                    |   |                        |   |
| **Liabilities and Stockholders’ Equity**                                                           |   |                    |   |                        |   |
| Current liabilities:                                                                                    |   |                    |   |                        |   |
| Accounts payable                                                                                        |   | $                       | 1,688  |                        | $      | 2,447 |   |
| Deferred revenues                                                                                       |   | 43,245                  |   | 42,400                      |   |
| Borrowings under revolving credit agreement                                                             |   | —                  |   | 1,049                       |   |
| Current portion of long-term debt                                                                       |   | —                  |   | 5,111                       |   |
| Notes payable                                                                                           |   | 154                     |   | 335                         |   |
| Accrued compensation                                                                                    |   | 2,762                   |   | 2,283                       |   |
| Accrued liabilities                                                                                     |   | 7,808                   |   | 9,834                       |   |
| Income taxes payable                                                                                    |   | 248                     |   | 497                         |   |
| Other current liabilities                                                                               |   | 2,759                   |   | 1,843                       |   |
| Total current liabilities                                                                               |   | 58,664                  |   | 65,799                      |   |
|                                                                                                    |   |                    |   |                        |   |
| Non-current portion of deferred revenues                                                                |   | 3,607                   |   | 6,008                       |   |
| Notes payable                                                                                           |   | 525                     |   | 589                         |   |
| Other non-current liabilities                                                                           |   | 1,994                   |   | 1,969                       |   |
| Total liabilities                                                                                       |   | 64,790                  |   | 74,365                      |   |
|                                                                                                    |   |                    |   |                        |   |
| Minority interest in consolidated  subsidiaries                                                         |   | 253                     |   | 96                          |   |
|                                                                                                    |   |                    |   |                        |   |
| Stockholders’ equity:                                                                              |   |                    |   |                        |   |
| Preferred stock, $.01 par value per-share,  authorized 2,000,000 shares; none issued                    |   | —                  |   | —                      |   |
| Common stock, $.01 par value per-share,  authorized 45,000,000 shares, issued 13,981,602 and 13,886,612 |   | 140                     |   | 139                         |   |
| Paid-in capital                                                                                         |   | 59,905                  |   | 59,706                      |   |
| Accumulated deficit                                                                                     |   | (47,298                 | )      | (45,892                     | )      |
| Accumulated other comprehensive loss                                                                    |   | (237                    | )      | (395                        | )      |
| Treasury stock, at cost, 657,016 shares                                                                 |   | (342                    | )      | (342                        | )      |
| Total stockholders’ equity                                                                         |   | 12,168                  |   | 13,216                      |   |
| Total liabilities and stockholders’ equity                                                         |   | $                       | 77,211 |                        | $      | 87,677 |   |

 

See notes to consolidated financial statements.

 

3

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**META Group, Inc.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(in thousands, exceptper-share data)**

(Unaudited)

 
|                                                                      |   | **For the  three months ended****June 30,** |   | **For the  six months ended****June 30,** |   |
|---------------------------------------------------------------------------|--------|--------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                      |   | **2003**                                         |   | **2002**                                       |   | **2003** |   | **2002** |   |
|                                                                      |   |                                             |   |                                           |   |   |   |   |   |
| Revenues:                                                                 |   |                                             |   |                                           |   |   |   |   |   |
| Advisory services                                                         |   | $                                                | 19,281 |                                           | $      | 20,373 |   | $ | 37,663 |   | $ | 39,023 |   |
| Strategic consulting                                                      |   | 8,699                                            |   | 8,404                                          |   | 16,157 |   | 16,289 |   |
| Published research products                                               |   | 1,376                                            |   | 1,227                                          |   | 3,190 |   | 3,050 |   |
| Reimbursable expenses                                                     |   | 701                                              |   | 719                                            |   | 1,220 |   | 1,261 |   |
|                                                                      |   |                                             |   |                                           |   |   |   |   |   |
| Total revenues                                                            |   | 30,057                                           |   | 30,723                                         |   | 58,230 |   | 59,623 |   |
|                                                                      |   |                                             |   |                                           |   |   |   |   |   |
| Operating expenses:                                                       |   |                                             |   |                                           |   |   |   |   |   |
| Cost of services and fulfillment                                          |   | 15,613                                           |   | 14,765                                         |   | 29,843 |   | 29,710 |   |
| Reimbursable expenses                                                     |   | 701                                              |   | 719                                            |   | 1,220 |   | 1,261 |   |
| Selling and marketing                                                     |   | 8,504                                            |   | 7,348                                          |   | 15,676 |   | 15,563 |   |
| General and administrative                                                |   | 5,708                                            |   | 4,431                                          |   | 10,797 |   | 9,077 |   |
| Depreciation and amortization                                             |   | 1,282                                            |   | 1,434                                          |   | 2,614 |   | 3,135 |   |
| Restructuring charge                                                      |   | —                                           |   | —                                         |   | — |   | 222 |   |
| Goodwill impairment loss                                                  |   | —                                           |   | 1,452                                          |   | — |   | 1,452 |   |
|                                                                      |   |                                             |   |                                           |   |   |   |   |   |
| Total operating expenses                                                  |   | 31,808                                           |   | 30,149                                         |   | 60,150 |   | 60,420 |   |
|                                                                      |   |                                             |   |                                           |   |   |   |   |   |
| Operating income (loss)                                                   |   | (1,751                                           | )      | 574                                            |   | (1,920 | ) | (797 | ) |
| Investment impairment loss                                                |   | —                                           |   | (50                                            | )      | — |   | (275 | ) |
| Other income (expense), net                                               |   | 350                                              |   | (41                                            | )      | 700 |   | 6 |   |
| Income (loss) before provision for income  taxes                          |   | (1,401                                           | )      | 483                                            |   | (1,220 | ) | (1,066 | ) |
| Provision for income taxes                                                |   | 50                                               |   | 314                                            |   | 132 |   | 96 |   |
| Minority interest in income of consolidated  subsidiaries                 |   | 66                                               |   | —                                         |   | 54 |   | 22 |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | (1,517                                           | )      | 169                                            |   | (1,406 | ) | (1,184 | ) |
| Cumulative effect of change in accounting  principle                      |   | —                                           |   | —                                         |   | — |   | (22,206 | ) |
| Net income (loss)                                                         |   | $                                                | (1,517 | )                                              | $      | 169 |   | $ | (1,406 | ) | $ | (23,390 | ) |
|                                                                      |   |                                             |   |                                           |   |   |   |   |   |
| Amounts per fully diluted common share:                                   |   |                                             |   |                                           |   |   |   |   |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | $                                                | (0.11  | )                                              | $      | 0.01 |   | $ | (0.11 | ) | $ | (0.09 | ) |
| Cumulative effect of change in accounting  principle                      |   | —                                           |   | —                                         |   | — |   | (1.71 | ) |
| Net income (loss)                                                         |   | $                                                | (0.11  | )                                              | $      | 0.01 |   | $ | (0.11 | ) | $ | (1.80 | ) |
|                                                                      |   |                                             |   |                                           |   |   |   |   |   |
| Amounts per basic common share:                                           |   |                                             |   |                                           |   |   |   |   |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | $                                                | (0.11  | )                                              | $      | 0.01 |   | $ | (0.11 | ) | $ | (0.09 | ) |
| Cumulative effect of change in accounting  principle                      |   | —                                           |   | —                                         |   | — |   | (1.71 | ) |
| Net income (loss)                                                         |   | $                                                | (0.11  | )                                              | $      | 0.01 |   | $ | (0.11 | ) | $ | (1.80 | ) |
|                                                                      |   |                                             |   |                                           |   |   |   |   |   |
| Weighted average number of basic common  shares outstanding               |   | 13,272                                           |   | 13,024                                         |   | 13,258 |   | 13,024 |   |
| Weighted average number of diluted common  shares outstanding             |   | 13,272                                           |   | 13,153                                         |   | 13,258 |   | 13,024 |   |

 

See notes to consolidated financial statements.

 

4

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**META Group, Inc.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

(Unaudited)

 
|                                                                             |   | **For the  six months ended  June 30,** |    |
|----------------------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                                             |   | **2003**                                     |    | **2002** |   |
| **Operating activities:**                                                        |   |                                         |    |   |   |
| Net loss                                                                         |   | $                                            | (1,406  | ) | $ | (23,390 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |                                         |    |   |   |
| Cumulative effect of change in accounting  principle                             |   | —                                       |    | 22,206 |   |
| Depreciation and amortization                                                    |   | 2,614                                        |    | 3,135 |   |
| Provision for doubtful accounts                                                  |   | —                                       |    | 452 |   |
| Gain on sale of investment                                                       |   | (615                                         | )       |   |   |
| Impairment loss on investments                                                   |   | —                                       |    | 275 |   |
| Goodwill impairment loss                                                         |   | —                                       |    | 1,452 |   |
| Minority interest                                                                |   | 54                                           |    | 22 |   |
| Deferred income taxes                                                            |   | —                                       |    | 560 |   |
| Other non-cash charges                                                           |   | 165                                          |    | 36 |   |
| Changes in assets and liabilities:                                               |   |                                         |    |   |   |
| Accounts receivable                                                              |   | 8,741                                        |    | 11,151 |   |
| Deferred commissions                                                             |   | (507                                         | )       | 324 |   |
| Other current assets                                                             |   | 1,412                                        |    | (25 | ) |
| Other assets                                                                     |   | (34                                          | )       | 321 |   |
| Accounts payable                                                                 |   | (949                                         | )       | 297 |   |
| Accrued expenses and other current  liabilities                                  |   | (1,354                                       | )       | (6,753 | ) |
| Deferred revenues                                                                |   | (2,284                                       | )       | (6,204 | ) |
| Net cash provided by operating activities                                        |   | 5,837                                        |    | 3,859 |   |
|                                                                             |   |                                         |    |   |   |
| **Investing activities:**                                                        |   |                                         |    |   |   |
| Capital expenditures                                                             |   | (323                                         | )       | (519 | ) |
| Payments for acquisitions                                                        |   | (250                                         | )  | (812 | ) |
| Proceeds from sale of investments                                                |   | 888                                          |    |   |   |
| Net cash (used in) provided by investing  activities                             |   | 315                                          |    | (1,331 | ) |
|                                                                             |   |                                         |    |   |   |
| **Financing activities:**                                                        |   |                                         |    |   |   |
| Proceeds from exercise of stock options                                          |   | 139                                          |    | — |   |
| Proceeds from employee stock purchase plan                                       |   | 62                                           |    | 82 |   |
| Repayment of line of credit                                                      |   | (1,049                                       | )       | (1,992 | ) |
| Repayment of term loan                                                           |   | (5,111                                       | )       | (1,391 | ) |
| Repayment of notes payable                                                       |   | (369                                         | )       | — |   |
| Increase in restricted cash                                                      |   | (6,000                                       | )       | — |   |
| Net cash used in financing activities                                            |   | (12,328                                      | )       | (3,301 | ) |
| Effect of exchange rate changes on cash                                          |   | (110                                         | )       | 324 |   |
| Net decrease in cash and cash equivalents                                        |   | (6,286                                       | )       | (449 | ) |
| Cash and cash equivalents, beginning of  period                                  |   | 21,448                                       |    | 21,433 |   |
| Cash and cash equivalents, end of period                                         |   | $                                            | 15,162  |   | $ | 20,984 |   |

 

See notes to consolidated financialstatements.

 

5

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**META Group, Inc.**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

(Unaudited)

 

**Note1 - Interim Financial Statements**

 

The accompanying consolidated financial statements include the accountsof META Group, Inc. (the “Company”) and its subsidiaries and have been preparedin accordance with accounting principles generally accepted in the UnitedStates for interim financial reporting and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and notes required by accounting principles generallyaccepted in the United States for complete financial statements. Certain prioryear amounts have been reclassified to conform to the current yearpresentation.

 

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

 

The preparation of the financial statements in conformity withaccounting principles generally accepted in the United States requires managementto make estimates and assumptions that affect the amounts reported in theaccompanying consolidated financial statements and notes. Actual results coulddiffer from those estimates.

 

###### **Note 2 – Income StatementClassification of Reimbursements for Out-of-Pocket Expenses Incurred**

 

During the quarter ended September 30, 2002, the Company adoptedEITF No. 01-14, *Income StatementCharacterization of Reimbursements Received for “Out-of-Pocket” ExpensesIncurred*. Reimbursements, including those relating to travel andout-of-pocket expenses are now included in revenues with an equivalent amountalso included in operating expense.

 

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

 

EffectiveJanuary 1, 2002, the Company adopted Statement of Financial Accounting StandardsNo. 142, *Goodwill and Other IntangibleAssets*(“SFAS 142”). Under SFAS 142, goodwill and intangible assetsdeemed to have indefinite lives will no longer be amortized but will be subjectto impairment tests on an annual basis, or more frequently if certainindicators arise. Other intangible assets will continue to be amortized overtheir useful lives. During the quarter ended June 30, 2003, the remaininguseful lives of intangible assets being amortized were reviewed and deemed tobe appropriate.

 

The goodwillimpairment test is a two-step process that requires goodwill to be allocated tothe reporting units. In the first step, the fair value of the reporting unit iscompared to the carrying value of the reporting unit. If the fair value of thereporting unit is less than the carrying value of the reporting unit, agoodwill impairment may exist, and the second step of the test is performed. Inthe second step, the implied fair value

 

6

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of the goodwill is compared tothe carrying value of the goodwill and an impairment loss will be recognized tothe extent that the carrying value of the goodwill exceeds the implied fairvalue of the goodwill.

 

The Companycompleted the second step of the impairment test as of September 30, 2002.As a result of operating losses in recent history of the Company’s StrategicConsulting and Published Research Products segments and the overall decline inIT spending that began in the second half of 2000 and continued through 2002,the Company determined that the goodwill related to the Strategic Consultingand Published Research Products segments was impaired. Accordingly, the Companyrecorded a goodwill charge of $22.2 million relating to the carrying value ofthe goodwill of these segments as of January 1, 2002. The impairmentcharge was recorded as the cumulative effect of a change in accountingprinciple and recorded retroactive to January 1, 2002. Additionally, as aresult of the impairment of the Strategic Consulting and Published ResearchProducts segments, additions to goodwill of the respective segments totaling$1.45 million during the six months ended June 30, 2002 were deemedimpaired and recorded as an impairment loss during the quarter endedJune 30, 2002. There were no additions to goodwill of the respectivesegments during the six months ended June 30, 2003.

 

In accordancewith SFAS 142, the Company has selected a date by which the annual impairmenttest will be performed, such date being September 30.

 

  Asummary of the Company’s intangible assets as of June 30, 2003 andDecember 31, 2002 is as follows (amounts in thousands):

 
|                                 |   | **June 30,  2003**       |   |
|--------------------------------------|--------|-------------------------------|--------|
|                                 |   | **Gross****Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net** |   |
| Amortized intangible assets:         |   |                          |   |   |   |   |   |
| Customer lists                       |   | $                             | 4,827  |   | $ | (2,396 | ) | $ | 2,431 |   |
| Intellectual property                |   | 653                           |   | (305 | ) | 348 |   |
| Non-compete agreement                |   | 375                           |   | (250 | ) | 125 |   |
| Content databases & other        |   | 2,083                         |   | (757 | ) | 1,326 |   |
| Total                                |   | $                             | 7,938  |   | $ | (3,708 | ) | $ | 4,230 |   |
|                                 |   |                          |   |   |   |   |   |
| Aggregate amortization expense:      |   |                          |   |   |   |   |   |
| Six months ended June 30, 2003: |   |                          |   |   |   | $ | 630 |   |

 
|                                                 |   | **December 31,  2002** | ** ** |
|------------------------------------------------------|--------|-----------------------------|------------|
|                                                 |   | **Gross  Carrying  Amount** |       | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Amortized intangible assets:                         |   |                        |       |   |   |   |   |
| Customer lists                                       |   | $                           | 4,395      |   | $ | (1,750 | ) | $ | 2,645 |   |
| Intellectual property                                |   | 561                         |       | (206 | ) | 355 |   |
| Non-compete agreement                                |   | 375                         |       | (202 | ) | 173 |   |
| Content databases & other                        |   | 2,068                       |       | (611 | ) | 1,457 |   |
| Total                                                |   | $                           | 7,399      |   | $ | (2,769 | ) | $ | 4,630 |   |
|                                                 |   |                        |       |   |   |   |   |
| Aggregate amortization expense:                      |   |                        |       |   |   |   |   |
| Twelve months ended December 31, 2002:          |   |                        |       |   |   | $ | 1,335 |   |
|                                                 |   |                        |       |   |   |   |   |
| Estimated amortization expense:                      |   |                        |       |   |   |   |   |
| Remaining six months ending  December 31, 2003: |   | $                           | 649        |   |   |   |   |   |
| Year ending December 31, 2004                   |   | 1,251                       |       |   |   |   |   |
| Year ending December 31, 2005                   |   | 1,093                       |       |   |   |   |   |
| Year ending December 31, 2006                   |   | 555                         |       |   |   |   |   |
| Year ending December 31, 2007                   |   | 469                         |       |   |   |   |   |
| Year ending December 31, 2008                   |   | 213                         |       |   |   |   |   |
| Total                                                |   | $                           | 4,230      |   |   |   |   |   |

 

7

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The changes inthe carrying amount of goodwill by reportable segment for the six months endedJune 30, 2003 is as follows (in thousands):

 
|                               |   | **Advisory Services** |   | **Strategic  Consulting** |   | **Published  Research  Products** |   | **Total** |   |
|------------------------------------|--------|-----------------------|--------|---------------------------|--------|-----------------------------------|--------|-----------|--------|
|                               |   |                  |   |                      |   |                              |   |      |   |
| Balance as of January 1, 2003 |   | $                     | 7,483  |                      | $      | —                            |   | $         | — |   | $ | 7,483 |   |
| Translation adjustments            |   | 738                   |   | —                    |   | —                            |   | 738       |   |
| Balance as of June 30, 2003        |   | $                     | 8,221  |                      | $      | —                            |   | $         | — |   | $ | 8,221 |   |

 

###### **Note4 – Comprehensive Income  (Loss)**

 

Comprehensiveincome (loss) for the three and six months ended June 30, 2003 and 2002was as follows (in thousands):

 
|                                            |   | **Three  months ended June 30,** |   | **Six months  ended June 30,** |   |
|-------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                            |   | **2003**                              |   | **2002**                            |   | **2003** |   | **2002** |   |
|                                            |   |                                  |   |                                |   |   |   |   |   |
| Net income (loss)                               |   | $                                     | (1,517 | )                                   | $      | 169 |   | $ | (1,406 | ) | $ | (23,390 | ) |
| Other comprehensive income (loss), net of  tax: |   |                                  |   |                                |   |   |   |   |   |
| Foreign currency translation adjustment         |   | 63                                    |   | (49                                 | )      | 158 |   | (25 | ) |
|                                            |   |                                  |   |                                |   |   |   |   |   |
| Comprehensive income (loss)                     |   | $                                     | (1,454 | )                                   | $      | 120 |   | $ | (1,248 | ) | $ | (23,415 | ) |

 

###### **Note5 – Segment Reporting**

 

The Companyoperates in three business segments: Advisory Services, Strategic Consultingand Published Research Products. The Company’s operating segments are managedseparately, because each operating segment represents a strategic business unitthat generally offers distinct products or services. Advisory Services providecomprehensive coverage of relevant information technology and business-

 

8

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related issues faced by itsclients through client/analyst interaction, published conclusions andrecommendations to each client’s specific IT requirements. Strategic Consultingprovides custom consulting services tailored to meet individual clientrequirements. Published Research Products offer various topic-specific reportsdesigned to serve both as complements to the Company’s core services and asstandalone deliverables that meet specific assessment requirements.

 

The accounting policiesof the operating segments are the same as those described in Note 4 to theCompany’s 2002 Annual Report on Form 10-K except that the disaggregatedfinancial results for the Company’s operating segments have been prepared usinga management approach, which is consistent with the basis and manner in whichthe Company’s management internally disaggregates financial information for thepurposes of assistance in making internal operating decisions. The Companyevaluates performance based on standalone segment operating income, defined bythe Company as the segment revenues less segment cost of sales and corporateselling, general and administrative allocations. Selling, general andadministrative expenses are allocated ratably based on each operating segments’revenues. Management does not allocate corporate assets, capital expenditures,non-operating income (interest income), or income taxes when measuring segmentresults.

 

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

 
|                                                                           |   | **Advisory  Services** |   | **Strategic  Consulting** |   | **Published  Research  Products** |   | **Unallocated** |   | **Consolidated  Total** |   |
|--------------------------------------------------------------------------------|--------|------------------------|--------|---------------------------|--------|-----------------------------------|--------|-----------------|--------|-------------------------|--------|
| **Three months ended June 30, 2003**                                      |   |                   |   |                      |   |                              |   |            |   |                    |   |
|                                                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| Revenues                                                                       |   | $                      | 19,281 |                      | $      | 8,699                             |   | $               | 1,376  |                    | $      | 701 |   | $ | 30,057 |   |
| Operating income  (loss)          |   | 531                    |   | (2,426                    | )      | 144                               |   | —          |   | (1,751                  | )      |
| Assets                                                                         |   |                   |   |                      |   |                              |   | 77,211          |   | 77,211                  |   |
|                                                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| **Three months ended June 30, 2002**                                      |   |                   |   |                      |   |                              |   |            |   |                    |   |
|                                                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| Revenues                                                                       |   | $                      | 20,373 |                      | $      | 8,404                             |   | $               | 1,227  |                    | 719    |   | $ | 30,723 |   |
| Operating income (loss)                                                        |   | 106                    |   | 427                       |   | 41                                |   | —          |   | 574                     |   |
| Assets                                                                         |   |                   |   |                      |   |                              |   | 118,668         |   | 118,668                 |   |
|                                                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| **Six months ended June 30, 2003**                                        |   |                   |   |                      |   |                              |   |            |   |                    |   |
|                                                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| Revenues                                                                       |   | $                      | 37,663 |                      | $      | 16,157                            |   | $               | 3,190  |                    | 1,220  |   | $ | 58,230 |   |
| Operating income  (loss)          |   | 2,687                  |   | (5,258                    | )      | 651                               |   | —          |   | (1,920                  | )      |
| Assets                                                                         |   |                   |   |                      |   |                              |   | 77,211          |   | 77,211                  |   |
|                                                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| **Six Months ended  June 30, 2002**                                       |   |                   |   |                      |   |                              |   |            |   |                    |   |
|                                                                           |   |                   |   |                      |   |                              |   |            |   |                    |   |
| Revenues                                                                       |   | $                      | 39,023 |                      | $      | 16,289                            |   | $               | 3,050  |                    | 1,261  |   | $ | 59,623 |   |
| Operating income (loss)                                                        |   | 1,814                  |   | (2,811                    | )      | 200                               |   | —          |   | (797                    | )      |
| Assets                                                                         |   |                   |   |                      |   |                              |   | 118,668         |   | 118,668                 |   |
|                                                                                |        |                        |        |                           |        |                                   |        |                 |        |                         |        |  |  |  |  |  |

 

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

 
|                                      |   | **Revenues** |   | **Operating  Income (loss)** |   |
|-------------------------------------------|--------|--------------|--------|------------------------------|--------|
| **Three months ended June 30, 2003** |   |         |   |                         |   |
|                                      |   |         |   |                         |   |
| Americas                                  |   | $            | 22,859 |                         | $      | (2,080 | ) |
| Asia-Pacific                              |   | 1,833        |   | 368                          |   |
| Europe, Middle East, Africa               |   | 5,365        |   | (39                          | )      |
| Consolidated Total                        |   | $            | 30,057 |                         | $      | (1,751 | ) |
|                                      |   |         |   |                         |   |
| **Three months ended June 30, 2002** |   |         |   |                         |   |
|                                      |   |         |   |                         |   |
| Americas                                  |   | $            | 25,922 |                         | $      | 271 |   |
| Asia-Pacific                              |   | 1,216        |   | 536                          |   |
| Europe, Middle East, Africa               |   | 3,585        |   | (233                         | )      |
| Consolidated Total                        |   | $            | 30,723 |                         | $      | 574 |   |

 
|                                    |   | **Revenues** |       | **Operating  Income (loss)** | ** ** |
|-----------------------------------------|--------|--------------|------------|------------------------------|------------|
| **Six months ended June 30, 2003** |   |         | ** ** |                         | ** ** |
|                                    |   |         |       |                         |       |
| Americas                                |   | $            | 45,094     |                         | $          | (2,078 | ) |
| Asia-Pacific                            |   | 2,909        |       | 320                          |       |
| Europe, Middle East, Africa             |   | 10,227       |       | (162                         | )          |
| Consolidated Total                      |   | $            | 58,230     |                         | $          | (1,920 | ) |
|                                    |   |         |       |                         |       |
| **Six months ended June 30, 2002** |   |         |       |                         |       |
|                                    |   |         |       |                         |       |
| Americas                                |   | $            | 49,283     |                         | $          | (1,815 | ) |
| Asia-Pacific                            |   | 2,396        |       | 977                          |       |
| Europe, Middle East, Africa             |   | 7,944        |       | 41                           |       |
| Consolidated Total                      |   | $            | 59,623     |                         | $          | (797 | ) |

 

###### **Note6 – Bank Debt**

 

As of December 31,2002, the Company had $6.2 million ($5.2 million outstanding under the termloan and $1 million outstanding under the revolving facility) in borrowingsoutstanding under its $20 million credit facility with its bank (the “OldFacility”). The Old Facility had a borrowing base equal to 80% of the Company’seligible accounts receivable. Interest was payable at the rate of LIBOR plus2.5% or the higher of the Prime Rate or the Federal Funds Rate plus 0.5%. TheOld Facility was collateralized by the Company’s accounts receivable andrequired payment of a commitment fee payable quarterly, in arrears, of 0.25%based on the average, daily, unused portion of the Revolving Facility. The OldFacility contained a number of covenants that, among other things, restrictedthe 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 restricted corporate activities. In addition, the Companywas required to maintain certain financial covenants, including a leverageratio covenant, a fixed charge ratio covenant, a consolidated net incomecovenant and a minimum EBITDA covenant. The Company was not in compliance withthese covenants as of December 31, 2002. Under the terms of the OldFacility, each such covenant breach constituted an event of default pursuant towhich the Company’s bank could, by notice to the Company, have terminated thebank’s lending commitments to the Company and declared all obligations of theCompany under the facility due and payable immediately. As the Company was indefault under the Old Facility as of December 31, 2002, all outstandingborrowings were classified as a current liability on the consolidated balancesheet as of December 31, 2002. In January 2003, the Company repaidall amounts outstanding under the Old Facility from its cash on hand.

 

On March 12, 2003,the Company received a waiver of all prior covenant defaults. Additionally onMarch 12, 2003, the Company executed a new $6 million amended and restatedcredit agreement with its bank (the “Amended Facility”). The Amended Facilityreplaced the Old Facility and consists of a $6 million revolving creditfacility. Under the Amended Facility, interest on any outstanding borrowingswill be payable

 

10

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at the rate ofLIBOR plus 1.5% or the higher of the Prime Rate or the Federal Funds Rate plus0.5%. The Amended Facility is fully collateralized by a $6 million cash depositwith its bank. This cash deposit is reflected as restricted cash on theCompany’s consolidated balance sheet as of June 30, 2003. The AmendedFacility contains a number of covenants that, among other things, restricts theability of the Company to create liens; dispose of assets; consolidate with, beacquired by or enter into a merger agreement or into any binding agreement todo any of the foregoing which is not contingent on obtaining the consent of thebank; materially change the nature of the Company’s business; alter or modifythe Company’s name, structure or status or change its fiscal year. The AmendedFacility contains no financial covenants, and matures in November 2004. Asof June 30, 2003, there was $0.8 million used under the Amended Facility in theform of letters of credit issued on behalf of one of the Company's independentsales representative organizations and as security for a portion of theCompany's Stamford, CT and Reston, VA premises leases. There were no borrowingsoutstanding as of June 30, 2003.

 

###### **Note7 – Stock-Based Compensation**

 

The Companyhas three active stock-based employee compensation plans, which are describedmore fully in Note 13 to the Company’s 2002 Annual Report on Form 10-K. TheCompany accounts for those plans under the recognition and measurementprinciples of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees”, and related Interpretations. No stock-based employeecompensation cost is reflected in net income (loss), as all options grantedunder those plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. The following table illustratesthe effect on net income (loss) and earnings (loss) per share if the Companyhad applied the fair value recognition provisions of Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” tostock-based employee compensation (in thousands, except per share data):

 
|                                                                                                                            |   | **Three  Months Ended** |   | **Six Months  Ended**   |       |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|------------|
|                                                                                                                            |   | **June 30,  2003** |   | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
|                                                                                                                            |   |                    |   |                    |       |   |   |   |   |
| Reported net  income (loss)                                                                                                     |   | $                       | (1,517 | )                       | $          | 169 |   | $ | (1,406 | ) | $ | (23,390 | ) |
| Deduct:  Total stock based employee compensation expense determined under fair value  based methods for all awards, net of tax: |   | (562                    | )      | (320                    | )          | (1,341 | ) | (586 | ) |
| Pro forma  net loss                                                                                                             |   | $                       | (2,079 | )                       | $          | (151 | ) | $ | (2,747 | ) | $ | (23,976 | ) |
|                                                                                                                            |   |                    |   |                    |       |   |   |   |   |
| Net income  (loss) per share                                                                                                    |   |                    |   |                    |       |   |   |   |   |
| Reported                                                                                                                        |   |                    |   |                    |       |   |   |   |   |
| Basic                                                                                                                           |   | $                       | (0.11  | )                       | $          | 0.01 |   | $ | (0.11 | ) | $ | (1.80 | ) |
| Diluted                                                                                                                         |   | $                       | (0.11  | )                       | $          | 0.01 |   | $ | (0.11 | ) | $ | (1.80 | ) |
|                                                                                                                            |   |                    |   |                    |       |   |   |   |   |
| Pro forma                                                                                                                       |   |                    |   |                    |       |   |   |   |   |
| Basic                                                                                                                           |   | $                       | (0.16  | )                       | $          | (0.01 | ) | $ | (0.21 | ) | $ | (1.84 | ) |
| Diluted                                                                                                                         |   | $                       | (0.16  | )                       | $          | (0.01 | ) | $ | (0.21 | ) | $ | (1.84 | ) |

 

###### **Note8 – Impairment Loss**

 

During the quarterended March 31, 2002, the Company recorded a $225,000 impairment loss onits investment in Spikes Cavell & Co. (“Spikes Cavell”), a UK basedbusiness that went into receivership in September 1999. Spikes Cavell’smost significant asset was an earn-out due from a third party that purchased

 

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a portion of itsbusiness. The amount of the earn-out was calculated based on the third party’sfinancial results for the three years ended December 31, 2001 and wasultimately settled late in the first quarter of 2003. During 2002  the Company held discussions with andobtained from Spikes Cavell’s liquidator updated financial informationregarding the status of the claims filed in the liquidation proceeding and theestimated assets that the liquidator expected to receive on behalf of SpikesCavell. Based on those discussions and a review of the underlying financialdata provided by the liquidator, the Company adjusted its carrying value downto the estimated amounts to be realized upon the final liquidation of SpikesCavell. This resulted in a $225,000 impairment loss during the quarter endedMarch 31, 2002 and an additional loss of $150,000 recognized during thequarter ended September 30, 2002. During the six months ended June 30,2003, the Company received final proceeds of $588,000 and recognized a gain of$315,000, which is included in other income (expense) net, on the consolidatedstatement of operations for the six months ended June 30, 2003.

 

During the quarterended June 30, 2002, the Company recorded a $50,000 impairment loss on itsinvestment in Computerwire, PLC., a UK based business that commenced formaldissolution procedures during the quarter ended June 30, 2002.Consequently, the Company recorded an impairment loss on the remaining value ofits investment.

 

There were noimpairment losses recorded by the Company during the three or six month periodsended June 30, 2003.

 

###### **Note9 – Restructuring Charge**

 

InFebruary 2002, the Company announced a restructuring whereby it reducedits workforce by 43 persons (representing 7% of the workforce at the time). Asa result 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.

 

###### **Note10 – Contingencies and Guarantees**

 

*Contingencies:*

 

*Other than ordinary routine litigation incidentalto the Company’s business, the Company is not a party, nor is any of itsproperty subject to, any pending legal proceedings.*

* *

*Letters of Credit:*

* *

*As of June 30, 2003, the Company had a$115,000 standby letter of credit (an “LC”) issued on behalf of one of theCompany’s independent sales representative organizations (the “Distributor”).The LC was issued as security against the borrowings of the Distributor andarose as a result of previous defaults on such borrowings. Any future defaultby the Distributor may trigger the letter of credit being called. The LC has asix month term and expires in December 2003. During the quarter endedJune 30, 2003, the Company recorded a charge of $25,000 (reflected ingeneral and administrative expenses on the Company’s consolidated statements ofoperations for the quarter and six months ended June 30, 2003) equal tothe estimated fair value of the guarantee upon its issuance.*

* *

*Commitments:*

* *

As ofJune 30, 2003, the Company has a liability for severance payments owed tothe former Chief Executive Officer of the Company. The total liability isapproximately $524,000 and will be paid throughout 2003.

 

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*Guarantees:*

* *

*As of June 30, 2003, the Company has the followingguarantees in place:*

* *

*•*                  In 1998, the Companyprovided a corporate guarantee to the landlord of one of its current salesrepresentative organizations guaranteeing lease payments to the landlord in anannual amount of 120,000 £ (approximately $198,000). Any future default on the lease by the salesrepresentative organization may trigger the guarantee being called. Theguarantee expires in January 2013. The maximum potential amount of futurepayments (undiscounted) the Company could be required to make under theguarantee is approximately $1.9 million. The carrying amount of this guaranteeis zero.

* *

*•*                  In September 2000 theCompany provided a corporate guarantee in the amount of €62,000 (approximately$73,000) guaranteeing lease payments to the landlord of one of the Company’sformer independent sales representative organizations. In January 2002,the landlord called the guarantee. The claim is currently being negotiated withthe landlord. The Company is currently uncertain as to when this issue will beresolved. As of June 30, 2003, the Company has $61,000 accrued for thisguarantee.

* *

*13*

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* *

**Item 2****.**                     **MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The discussion and analysis below contains trend analysis and otherforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934, which aresubject to a number of risks and uncertainties. These forward-lookingstatements are typically denoted in this Quarterly Report on Form 10-Q by wordssuch as anticipate, believe, could, estimate, expect, intend, may, plan,project, should or will and similar words (as well as other words orexpressions referencing future events, conditions or circumstances). Actualresults could differ materially from those projected in the forward-lookingstatements as a result of the risk factors, including the risk factors setforth below under “Certain Factors That May Affect Future Results.” Thisdiscussion 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, 2002.*

 

**Overview**

 

META Group,Inc. with its subsidiaries, 1422722 Ontario Inc. (“META Group Canada”), TheSentry Group, Inc., META Group Australia Holdings PTY Limited (“META GroupAustralia”), META Group Singapore PTE Limited (“META Group Singapore”),Abundant Strategy SDN.BHD (“META Group Malaysia”), META Group Hong Kong Limited(“META Group Hong Kong”), META Group IT Corp. (“META Group Phillippenes”), METAGroup Korea Co. Ltd (“META Group Korea”), META Group Italia S.R.L. (“META GroupItaly”), META Group France S.A. (“META Group France”), META Group AG (“METAGroup Germany”) 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 Companyhas three operating business segments: Advisory Services, Strategic Consultingand Published Research Products.  TheAdvisory Services segment provides annually renewable subscription services(focused on specific areas of IT, the special needs of the CIO and otherswithin the IT organization, or the distinct IT/business issues of specificindustry markets and the public sector), service analyst briefing engagements,and conferences. Supplementing these services are the Company’s Infusionprograms, which provide an important bridge between traditional AdvisoryServices that examine broader industry issues and Strategic Consulting whichdrills into specific projects for a given client. The Strategic Consultingsegment offers project consulting services that address clients’ business andtechnology challenges. A significant portion of Strategic Consulting clientsare also Advisory Services subscribers. The Published Research Products segmentincludes research reports and online resources which offer thorough marketresearch, practical executive/operational guides and in-depth IT productevaluations.

 

AdvisoryServices revenues, which generally are annually renewable contracts and payableby clients in advance, constituted approximately 64% and 66% of the Company’stotal revenues for the quarters ended June 30, 2003 and 2002,respectively. Advisory Services revenues attributable to international clientsare billed and collected by the Company’s independent sales representativeorganizations, its wholly-owned subsidiaries in Canada, Australia, Singapore,Malaysia, France and Germany. The Company realizes Advisory Service revenuesfrom the international sales representative organizations at rates of 25% to75% of amounts billed to those clients.

 

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

 

14

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Previously, the Companycomputed Contract Value based on the annualized value of Advisory Servicesrevenue recognized from all Advisory Services contracts in effect at a givenpoint in time. The previous year’s Contract Value has been recomputed using thenew methodology. Contract Value is not necessarily indicative of futureAdvisory Services revenues. Contract Value was $67.9 million at June 30,2003 versus $69.6 million at June 30, 2002, a 2% decrease.

 

Revenues fromStrategic Consulting engagements comprised approximately 29% and 27% of theCompany’s total revenues for the quarters ended June 30, 2003 and 2002,respectively. The majority of the Company’s Strategic Consulting clientsconsist of Advisory Services clients seeking additional advice tailored totheir individual IT requirements.

 

Revenues fromPublished Research Products comprised approximately 4% of the Company’s totalrevenues for the quarters ended June 30, 2003 and 2002.

 

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

 

**THREEMONTHS ENDED JUNE 30, 2003 AND 2002**

 

REVENUES  Total revenues decreased****2.2% to $30.1 million in the quarter ended June 30, 2003 from$30.7 million in the quarter ended June 30, 2002.

 

Revenues fromAdvisory Services, which generally are derived from annually renewablecontracts payable by clients in advance, decreased 5.4%****to****$19.3 million in the quarterended June 30, 2003 from $20.4 million in the quarter ended June 30,2002, and decreased as a percentage of total revenues to 64.2% in the quarterended June 30, 2003 from 66.3% in the quarter ended June 30,2002.  The decrease in revenues fromAdvisory Services was principally due to decreased subscriptions to theCompany’s Advisory Services as a result of decreased IT spending due to generaleconomic conditions, as well as a decrease in guru consulting revenue, which generally arehalf-day briefings with the Company’s analysts which complement thedeliverables underlying the Company’s advisory services. These decreaseswere partially offset by an increase in conference revenue during the quarterended June 30, 2003 when compared to the prior year period as a result ofthe Company’s ability to secure vendor sponsorships at certain of its eventsthat occurred during the quarters ended June 30, 2003 and 2002. AdvisoryServices revenues attributable to international clients increased 59.9% to $5.3million in the quarter ended June 30, 2003 from $3.3 million the quarterended June 30, 2002, and increased as a percentage of Advisory Servicesrevenue to 27.5% from 16.3%. The increase in Advisory Services revenueattributable to international clients was due principally to increases in theCompany’s German, French and Asia Pacific subsidiaries. The Company currentlyexpects decreases in IT spending and pricing pressure to continue to impact itsAdvisory Service revenue for the foreseeable future.

 

Strategic Consultingrevenues, which result from Strategic Consulting engagements addressingclients’ business and technology issues, increased 3.5% to $8.7 million in thequarter ended June 30, 2003 from $8.4 million in the quarter endedJune 30, 2002, and increased as a percentage of total

 

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revenues to 28.9%from 27.4%. The increase was principally due to increased consulting revenuefrom the Company’s German subsidiary, and was partially offset by a decrease inthe Americas (US and Canada) as a result of competitive pricing pressures inthe industry. The Company currently expects decreases in IT spending andpricing pressure to continue to impact its Strategic Consulting revenues forthe foreseeable future.

 

PublishedResearch Products revenues, which result from the sale of published researchproducts offering market research, practical executive/operational guides andin-depth IT product evaluations, increased 12.1% to $1.4 million in the quarterended June 30, 2003 from $1.2 million in the quarter ended June 30,2002, and increased as a percentage of total revenues to 4.6% from 4.0%. Theincrease in Published Research Products revenues was principally due to anincrease in demand for the Company's Published Research Products surroundingthe areas of measurement and architecture during the quarter ended June 30,2003 when compared to the same period in the previous year. However, theCompany currently expects pricing pressure to continue to impact its PublishedResearch Products revenue for the foreseeable future.

 

COST OFSERVICES AND FULFILLMENT  Cost of services and fulfillment, including reimbursableexpenses, increased 5.4% to $16.3 million in the quarter ended June 30,2003 from $15.5 million in the quarter ended June 30, 2002 and increasedas a percentage of total revenues to 54.3% from 50.4%. The increase wasprincipally due to increases in payroll costs (salary and bonus expense) as aresult of increased provisions for employee bonuses and increased salary levelsof the Company’s research and fulfillment personnel and consultants during thequarter ended June 30, 2003 when compared to the prior year. Theseincreases were partially offset by decreases in outside consulting expenses andtravel costs of the Company’s fulfillment personnel and consultants.

 

SELLING ANDMARKETING EXPENSES Selling and marketing expenses increased 15.7% to $8.5 million in thequarter ended June 30, 2003 from $7.3 million in the quarter endedJune 30, 2002 and increased as a percentage of total revenues to 28.3%from 23.9%. The increase in selling and marketing expenses was principally dueto $0.7 million in marketing expenses associated with the Company’s marketingand branding campaign launched in March 2003, increased personnel costs(salary and benefits) as a result of higher salary levels and increased sellingand marketing costs in the Company’s international subsidiaries during thequarter ended June 30, 2003 versus the same period in the previous year.These increases were partially offset by a decrease in bad debt expense duringthe quarter ended June 30, 2003 versus the same period in the previousyear.

 

GENERAL ANDADMINISTRATIVE EXPENSES  General and administrative expenses increased 28.8% to $5.7million in the quarter ended June 30, 2003 from $4.4 million in thequarter ended June 30, 2002, and increased as a percentage of totalrevenues to 19% from 14.4%. The increase in general and administrative expenseswas principally due to increased expenses throughout the Company’sinternational subsidiaries as a result of the implementation of additionalmanagement throughout the subsidiaries, additional costs incurred associatedwith the establishment of new entities in the Asia Pacific region during thequarter, and increased personnel costs (salary and bonus) in the US as a resultof provisions for employee bonuses and higher salary levels during the quarterended June 30, 2003 versus the same period in the previous year.

 

DEPRECIATIONAND AMORTIZATION Depreciation and amortization expense decreased 10.6% to $1.3 million inthe quarter ended June 30, 2003 from $1.4 million in the quarter endedJune 30, 2002 and decreased as a percentage of total revenues to 4.3% from4.7%. The decrease was principally due to decreased levels of net depreciableassets on hand during the quarter ended June 30, 2003 versus the sameperiod in the previous year which resulted from decreased capital expendituresthat commenced in 2001 and continued through the first half of 2003.

 

GOODWILLIMPAIRMENT LOSS During the quarter ended June 30, 2002, the Company recorded a$1.45 million goodwill impairment loss as a result of the adoption of SFAS 142.The Company was required to complete a transitional impairment test of goodwillexisting at January 1, 2002 by June 30, 2002. The transitional testperformed indicated that impairment existed in the Company’s StrategicConsulting and Published Research Products business segments as ofJanuary 1, 2002. As a result of this

 

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determination, additions togoodwill in the Strategic Consulting business segment in the amount of $1.45million, arising from contingent consideration payments earned by RubinSystems, Inc. and the Verity Group earned as of June 30, 2002, were deemedto be impaired as of June 30 2002. There were no goodwill impairmentlosses recognized during the three months ended June 30, 2003.

 

INVESTMENTIMPAIRMENT LOSS During the quarter ended June 30, 2002, the Company recorded a$50,000 impairment loss on its investment in Computerwire, PLC., a UK basedbusiness that commenced formal dissolution procedures during the quarter endedJune 30, 2002. Consequently, the Company recorded an impairment loss on theremaining value of its investment during the quarter ended June 30 2002.There was no impairment loss during the quarter ended June 30, 2003.

 

OTHER INCOME(EXPENSE), NET During the quarter ended June 30, 2003, the Company had total otherincome of $350,000 and consisted primarily of a gain recognized on the sale ofone of the Company’s investments in a third party. During the quarter endedJune 30, 2002, the Company recorded net other expense (primarily interestexpense net of interest income) of $41,000, which consisted primarily ofinterest expense related to the Company’s outstanding borrowings under itscredit facility.

 

PROVISION FOR INCOME TAXES     Duringthe quarter ended June 30, 2003, the Company recorded a provision forincome taxes of $50,000 versus a provision for income taxes of $314,000 duringthe quarter ended June 30, 2002.

 

**SIXMONTHS ENDED JUNE 30, 2003 AND 2002**

 

REVENUES  Total revenues decreased 2.3% to $58.2million in the six months ended June 30, 2003 from $59.6 million in thesix months ended June 30, 2002.

 

Revenues from Advisory Servicesdecreased 3.5%****to****$37.7million in the six months ended June 30, 2003 from $39.0 million inthe six months ended June 30, 2002 and decreased as a percentage of totalrevenues to 64.7% from 65.5%. The decrease in revenues from Advisory Serviceswas principally due to decreased subscriptions to the Company’s AdvisoryServices. This resulted from the decrease in demand for such services thatbegan in the second half of 2000 due to a decrease in IT spending as a resultof general economic conditions, and, to a lesser extent, from a decrease inguru consulting revenue, which generally are half-day briefings with theCompany’s analysts which complement the deliverables underlying the Company’sadvisory services. These decreases were partially offset by increases inconference revenue during the six months ended June 30, 2003 when comparedto the prior year period as a result of the Company’s ability to secure vendorsponsorships at certain of its events.

 

Strategic Consultingrevenues decreased 1% to $16.2 million in the six months ended June 30,2003 from $16.3 million in the six months ended June 30, 2002, andincreased as a percentage of total revenues to 27.7% from 27.3%. The decreasewas principally due to decreases experienced in the US and Canada as a resultof competitive pricing conditions in the industry and as a result of decreasesin and delays of IT spending as a result of general economic conditions. Thedecreases were partially offset by increases in consulting revenues from theCompany’s subsidiaries in Germany and France during the six months endedJune 30, 2003 versus the same period in the previous year.

 

Published Research Productsrevenues increased 4.6% to $3.2 million in the six months ended June 30,2003 from $3.0 million in the six months ended June 30, 2002 and increasedas a percentage of total revenues to 5.5% from 5.1%.  The increase in revenues was principally due to increased demand forthe Company's Published Research Products surrounding the areas of measurementand architecture during the six months ended June 30, 2003 when compared to thesame period in the previous year.

 

COST OFSERVICES AND FULFILLMENT  Cost of services and fulfillment, including reimbursableexpenses, remained constant at $31 million, and increased as a percentage oftotal revenues to 53.3%

 

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from 51.9%. During the sixmonths ended June 30, 2003, the Company experienced an increase inexpenses in its subsidiaries in Asia Pacific, and to a lesser extent, in Francedue to an increase in the number of analyst, consultant and fulfillmentpositions within such subsidiaries and an increase in outside consultingcharges incurred throughout the subsidiaries during the six months endedJune 30, 2003 versus the same period in the previous year. Additionally,bonus expense increased during the six months ended June 30, 2003 versusthe same period in the previous year. These increases were offset by a decreasein outside consulting charges incurred in the US and a decrease in employeetravel expenses.

 

SELLING ANDMARKETING EXPENSES Selling and marketing expenses increased 1% to $15.7 million in the sixmonths ended June 30, 2003 from $15.6 million in the six months ended June 30,2002 and increased as a percentage of total revenues to 26.9% from 26.1%. Theincrease in selling and marketing expenses was principally due to increasedmarketing expenses associated with the Company’s marketing and brandingcampaign launched in March 2003, and was partially offset by a decrease inbad debt expense incurred during the six months ended June 30, 2003 versusthe same period in the previous year.

 

GENERAL ANDADMINISTRATIVE EXPENSES  General and administrative expenses increased 18.9% to $10.8million in the six months ended June 30, 2003 from $9.1 million in the sixmonths ended June 30, 2002 and increased as a percentage of total revenueto 18.5% from 15.2%. The increase in expenses was principally due to increasedexpenses throughout the Company’s international subsidiaries as a result of theimplementation of additional management throughout the subsidiaries, additionalcosts incurred associated with the establishment of new entities in the AsiaPacific region during the six months ended June 30, 2003, and increasedpersonnel costs (salary and bonus) in the US as a result of provisions foremployee bonuses and higher salary levels during the six months endedJune 30, 2003 versus the same period in the previous year.

 

DEPRECIATIONAND AMORTIZATION Depreciation and amortization expense decreased 16.6% to $2.6 million inthe six months ended June 30, 2003 from $3.1 million in the six monthsended June 30, 2002. The decrease was principally due to decreased levelsof net depreciable assets on hand during the six months ended June 30,2003 versus the same period in the previous year as a result of decreasedcapital expenditures that commenced in 2001 and continued through the firsthalf of 2003.

 

RESTRUCTURINGCHARGE  InFebruary 2002,  the Companyannounced a restructuring whereby it reduced its workforce by 43 persons,representing 7% of the workforce at the time. As a result of the restructuring,the Company incurred a $222,000 restructuring charge during the quarter endedMarch 31, 2002 for severance payments made during the quarter endedMarch 31, 2002. There were no restructuring charges recorded during thesix months ended June 30, 2003.

 

GOODWILLIMPAIRMENT LOSS During the six months ended June 30, 2002, the Company recorded a$1.45 million goodwill impairment loss as a result of the adoption of SFAS 142.The Company was required to complete a transitional impairment test of goodwillexisting at January 1, 2002 by June 30, 2002. The transitional testperformed indicated that impairment existed in the Company’s StrategicConsulting and Published Research Products business segments as ofJanuary 1, 2002. As a result of this determination, additions to goodwillin the Strategic Consulting business segment in the amount of $1.45 million, arisingfrom contingent consideration payments earned by Rubin Systems, Inc. and theVerity Group earned as of June 30, 2002, were deemed to be impaired as ofJune 30 2002. There were no goodwill impairment losses recognized duringthe six months ended June 30, 2003.

 

INVESTMENTIMPAIRMENT LOSS During the six months ended June 30, 2002, the Company recordedimpairment losses of $275,000 on its investments in Computerwire, PLC.(“Computerwire”), and Spikes Cavell & Co. (“Spikes Cavell”). Spikes Cavellis a UK based business that went into receivership in September 1999.Spikes Cavell’s most significant asset was an earn-out due from a third

 

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party that purchased a portionof its business. The amount of the earn-out was calculated based on the thirdparty’s financial results for the three years ended December 31, 2001.During the quarter ended March 31, 2002, the Company held discussions withand obtained from Spikes Cavell’s liquidator updated financial informationregarding the status of the claims filed in the liquidation proceeding and theestimated assets that the liquidator expected to receive on behalf of SpikesCavell. Based on those discussions and a review of the underlying financialdata provided by the liquidator, the Company adjusted the carrying value downto the estimated amounts to be realized upon the final liquidation of SpikesCavell. This resulted in a $225,000 impairment loss. Computerwire was a UKbased business that commenced formal dissolution procedures during the quarterended June 30, 2002. Consequently, the Company recorded an impairment lossof $50,000 on the remaining value of its investment during the quarter endedJune 30 2002. There were no impairment losses during the six months endedJune 30, 2003.

 

OTHER INCOME(EXPENSE), NET During the six months ended June 30, 2003, the Company recorded netother income of $0.7 million which consisted of a gain of $0.3 millionrecognized on the final settlement of the Company’s investment in SpikesCavell, a gain of $0.3 million recognized on the sale of another of theCompany’s investments in a third party, and interest income earned on theCompany’s cash balances. During the quarter ended June 30, 2002, theCompany recognized net other income of $6,000 which consisted of interestincome earned on the Company’s cash balances, offset by interest expense on theCompany’s outstanding borrowings under its credit facility.

 

PROVISION FOR INCOME TAXES  During the six months ended June 30,2003, the Company recorded an income tax provision of $132,000 versus aprovision for income taxes of $96,000 recorded during the six months endedJune 30, 2002.

 

LIQUIDITY ANDCAPITAL RESOURCES

 

The Company fundsits operations primarily through cash generated from operations, and, to alesser extent, from borrowings under its credit facility and from the sale ofits common stock. The Company generated approximately $5.8 million of cash fromoperations during the six months ended June 30, 2003, compared to $3.9 millionof cash generated from operations in the same period of 2002. The increase incash generated from operations was principally due to a decrease in bonuspayments made during the six months ended June 30, 2003 versus the sameperiod in the previous year, and, to a lesser extent, as a result of increasedlevels of deferred revenues at June 30, 2003 versus 2002. These werepartially offset by a decrease in cash collections during the six months endedJune 30, 2003 versus the same period in the previous year as a result ofoverall decreases in billings that began in the second half of 2000.

 

The Company used $0.3million of cash in the six months ended June 30, 2003, compared to $0.5million in the same period of 2002, for capital expenditures consisting of furniture,equipment, computers and related software and Web site infrastructure. Thepurchases that were made during the six months ended June 30, 2003 weremade principally to support the Company’s Web site and network infrastructure.The Company currently expects that additional purchases of equipment will bemade during 2003 and that such expenditures will remain approximately the samewhen compared to the 2002 levels. The Company has no material commitments forcapital expenditures; however, the Company anticipates that it will continue toupgrade its internal systems to support its business.

 

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During the quarter endedMarch 31, 2003, the Company received final proceeds of $588,000 on theliquidation of Spikes Cavell and recognized a gain of $315,000. Additionally,in May 2003 the Company sold another of its investments in a third partyentity. Total proceeds were $0.3 million. The Company recognized a gain on thesale of $0.3 million.

 

During the sixmonths ended June 30, 2002, the Company paid $0.4 million in cash to TheVerity Group (“Verity”), an IT consulting company, as additional contingentconsideration earned during the year ended December 31, 2001. Theconsideration was recorded as additional goodwill. There are no

 

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additional contingentconsideration payments remaining under the terms of the Verity purchaseagreement.

 

During the six monthsended June 30, 2002, the Company recorded $0.9 million in additionalgoodwill in connection with contingent consideration earned by Rubin Systems,Inc. (“RSI”) in connection with the achievement of certain financial targetsfor the year ended December 31, 2001. The Company paid $569,000 in cashand issued $369,000 (202,499 shares) in the Company’s common stock in the thirdquarter of 2002 in satisfaction of the contingent consideration. In the eventcertain financial targets are met, additional contingent consideration of $2.7million payable in cash and $1.4 million payable in the Company’s common stockmay be paid through March 2007. In the event the aggregate number ofshares issued in satisfaction of contingent consideration exceeds 147,027, theremaining consideration will be payable in cash. RSI is wholly owned by Dr.Howard Rubin, a director and officer of the Company.

 

During the six monthsended June 30, 2003, the Company paid $250,000 for the purchase of itsdistributor in Italy. As of June 30, 2003, the Company currently believesthat it will complete the acquisitions of its distributors in England andNorthern Europe during the second half of 2003. Total consideration for thepurchase of the two distributors is currently estimated to be $5 million, whichthe Company currently believes will be paid in cash during the second half of2003.

 

As of December 31, 2002, the Company had $6.2million ($5.2 million outstanding under the term loan and $1 millionoutstanding under the revolving facility) in borrowings outstanding under its$20 million credit facility with its bank (the “Old Facility”). The OldFacility had a borrowing base equal to 80% of the Company’s eligible accountsreceivable. Interest was payable at the rate of LIBOR plus 2.5% or the higherof the Prime Rate or the Federal Funds Rate plus 0.5%. The Old Facility wascollateralized by the Company’s accounts receivable and required payment of acommitment fee payable quarterly, in arrears, of 0.25% based on the average,daily, unused portion of the Revolving Facility. The Old Facility contained anumber of covenants that, among other things, restricted the ability of theCompany to incur additional indebtedness, pay dividends or other distributions,dispose of certain assets, enter into sale and leaseback transactions, createliens, make certain investments, acquisitions or mergers, and that otherwiserestricted corporate activities. In addition, the Company was required tomaintain certain financial covenants, including a leverage ratio covenant, afixed charge ratio covenant, a consolidated net income covenant and a minimumEBITDA covenant. The Company was not in compliance with these covenants as ofDecember 31, 2002. Under the terms of the Old Facility, each such covenantbreach constituted an event of default pursuant to which the Company’s bankcould, by notice to the Company, have terminated the bank’s lending commitmentsto the Company and declared all obligations of the Company under the facilitydue and payable immediately. As the Company was in default under the OldFacility as of December 31, 2002, all outstanding borrowings wereclassified as a current liability on the consolidated balance sheet as ofDecember 31, 2002. In January 2003, the Company repaid all amountsoutstanding under the Old Facility from its cash on hand.

 

On March 12, 2003,the Company received a waiver of all prior covenant defaults. Additionally onMarch 12, 2003, the Company executed a new $6 million amended and restatedcredit agreement with its bank (the “Amended Facility”). The Amended Facilityreplaced the Old Facility and consists of a $6 million revolving creditfacility. Under the Amended Facility, interest on any outstanding borrowingswill be payable at the rate of LIBOR plus 1.5% or the higher of the Prime Rateor the Federal Funds Rate plus 0.5%. The Amended Facility is fullycollateralized by a $6 million cash deposit with its bank. This cash deposit isreflected as restricted cash on the Company’s consolidated balance sheet as ofJune 30, 2003. The Amended Facility contains a number of covenants that,among other things, restricts the ability of the Company to create liens;dispose of assets; consolidate with, be acquired by or enter into a mergeragreement or into any binding agreement to do any of the foregoing which is notcontingent on obtaining the consent of the bank; materially change the natureof the Company’s business; alter or modify the Company’s name, structure orstatus or change its fiscal year. The Amended Facility contains no financialcovenants, and matures in November 2004.

 

During the sixmonths ended June 30, 2003, the Company paid $368,000 in satisfaction ofthe terms of notes payable held by certain former shareholders of META GroupGermany. The notes were acquired when the Company acquired the remaininginterest in META Group Germany in September 2002. As of June 30,2003, $679,000 remains payable under the notes, which are payable throughJanuary 2006.

 

*As of June 30, 2003, the Company had a$115,000 standby letter of credit (an “LC”) issued on behalf of one of theCompany’s independent sales representative organizations (the “Distributor”).The LC was issued as security against the borrowings of the Distributor andarose as a result of previous defaults on such borrowings. Any future defaultby the Distributor may trigger the letter of credit being called. The LC has asix month term and expires in December 2003.*

* *

*As of June 30, 2003, the Company has thefollowing guarantees in place:*

* *

*•*                  In 1998, the Companyprovided a corporate guarantee to the landlord of one of its current sales representativeorganizations guaranteeing lease payments to the landlord in an annual amountof 120,000 £ (approximately $198,000). Any future default on the lease by thesales representative organization may trigger the guarantee being called. Theguarantee expires in January 2013. The maximum potential amount of futurepayments (undiscounted) the Company could be required to make under theguarantee is approximately $1.9 million.

* *

*•*                  In September 2000 theCompany provided a corporate guarantee in the amount of €62,000 (approximately$73,000) guaranteeing lease payments to the landlord of one of the Company’sformer independent sales representative organizations. In January 2002,the landlord called the guarantee. The claim is currently being negotiated withthe landlord. The Company is currently uncertain as to when this issue will beresolved.

* *

As ofJune 30, 2003, the Company has a liability for severance payments owed tothe former Chief Executive Officer of the Company. The total liability isapproximately $524,000 and will be paid throughout 2003.

 

 

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As of June 30, 2003,the Company had cash and cash equivalents of $15.2 million, restricted cash of$6 million, and negative working capital of $11.1 million. The Companygenerated a net loss of $1.4 million for the six months ended June 30,2003, and a loss before the cumulative effect of a change in accountingprinciple of $1.2 million for the six months ended June 30, 2002. Tomaintain profitability, the Company will need to, among other things, achieverevenue growth and/or maintain expenses below revenue levels. The Companycannot be certain whether, or when, any of these will occur. If the Companyfails to either achieve sufficient revenue growth or maintain expenses belowrevenue levels, any such failure will likely result in continued losses thatwould have a material adverse effect on the Company’s financial results andcondition.

 

**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 currently intends to continue its efforts to monitor its accountsreceivable collections and manage expenses. The Company also currently believesthat decreases in and delays of IT spending as a result of general economicconditions and competitive pricing pressure are likely to continue tonegatively impact its business for the foreseeable future.**

 

**The following summarizes the Company’s contractualobligations and other commitments as of June 30, 2003 and the effect suchobligations are currently expected to have on its liquidity and cash flow infuture periods (in thousands):**

 
|                                                |   | **Twelve  Months Ending December 31,** |   |
|-----------------------------------------------------|--------|---------------------------------------------|--------|
|                                                |   | **2003 (1)**                                |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   |
| Operating leases                                    |   | $                                           | 3,088  |   | $ | 5,769 |   | $ | 4,921 |   | $ | 4,400 |   | $ | 4,530 |   | $ | 2,411 |   |
| Payments due under employment/severance  agreements |   | 587                                         |   | 233 |   |   |   |   |   |   |   |   |   |
| Notes payable                                       |   | —                                      |   | 372 |   | 272 |   | 36  |   |   |   |   |   |
|                                                |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
|                                                |   | $                                           | 3,675  |   | $ | 6,374 |   | $ | 5,193 |   | $ | 4,436 |   | $ | 4,530 |   | $ | 2,411 |   |

 

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(1) Represents six months endingDecember 31, 2003

 

**CriticalAccounting Policies**

 

Oursignificant accounting policies are described in Note 4 to our consolidatedfinancial statements included in our Annual Report on Form 10-K for the yearended December 31, 2002, filed with the SEC on March 28, 2003.However, certain of our accounting policies are particularly important to theportrayal of our financial position and results of operations and may requirethe application of significant judgment by our management; as a result they aresubject to an inherent degree of uncertainty. In applying those policies, ourmanagement uses its judgment to determine the appropriate assumptions to beused in the determination of certain estimates. Those estimates are based onour historical experience, our observance of trends in the industry,information provided by our customers and information available from otheroutside sources, as appropriate. Our significant accounting policies include:

 

•                  RevenueRecognition – Revenues from our Advisory Services are recognized on astraight-line basis over the subscription contract period, generally one year.All subscription contracts are billable at signing, absent special termsgranted on a limited basis from time to time. As such, our

 

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policy is torecord at the time of signing of an Advisory Services subscription contract thefees receivable and related deferred revenues for the full amount of thesubscription contract. Accounts receivable and deferred revenues that extendbeyond a 12-month period have been classified on the consolidated balance sheetsas non-current. We also record the related sales commission obligation upon thesigning of the subscription contract and amortize the corresponding deferredcommission expense over the subscription period in which the related AdvisoryServices revenues are earned and amortized to income. We recognize revenue onStrategic Consulting engagements as the work is performed and the services arerendered utilizing the percentage of completion method or based on time andmaterials on a contract by contract basis. The average duration of ourconsulting engagements is 2-3 months. Revenues from Published Research Productsare recognized at the time the applicable product is  delivered. Additionally, we record reductions to revenue forestimated customer cancellations.

 

•                  Accounts Receivable Allowance –We generallyevaluate our accounts receivable on a monthly basis. As part of our analysis,we examine our collections history, the age of the receivables in question, anyspecific customer collection issues that we have identified, and general marketconditions. At June 30, 2003 and 2002, our total accounts receivablebalance was $30.3 million and $30.7 million, respectively. Based upon ouranalysis of estimated recoveries and collections associated with the receivablesbalances, we have $2.2 million and $2.4 million of accounts receivable reservesat June 30, 2003 and 2002, respectively. The determination of the amountof the accounts receivable reserves is subject to significant levels ofjudgment and estimation by our management. If circumstances change or economicconditions deteriorate, we may need to increase the reserve.

 

•                  InvestmentRecoverability –We follow a practice to review our individual investments forimpairment on a quarterly basis. This review includes the examination of theestimated market value of each specific investment using peer group marketcomparables of public companies. Additionally, we review the business climateof each investee, its historical financial results, its projected cash flow, itsplans for the future and the likelihood of achieving such plans. Based on suchreview, a determination is made on a case-by-case basis as to whether aninvestment is deemed to be permanently impaired and therefore requires anadjustment to the carrying value. As a result of our review, there were noprovisions for impairment in the six months ended June 30, 2003. For thesix months ended June 30, 2002, we recorded impairment charges of$275,000. We will continue to evaluate our investments for impairment everyquarter, and based on our review, may record additional impairment lossesshould the facts and circumstances in existence at that time merit such anadjustment.

 

•                  DeferredTax Asset Recoverability – During the year ended December 31, 2002, werecorded a full valuation allowance against our deferred tax assets as a resultof our losses over the recent history. We considered future taxable incomeversus the cumulative losses incurred during the previous three years anddetermined that, in light of the cumulative losses over our recent history, wecould not support a conclusion that realization of the existing deferred taxassets was more likely than not. During the six months ended June 30,2003, there was no change in the circumstances described above. Should wedetermine that we would be able to realize our deferred tax assets in thefuture, an adjustment will be made to the balance of the valuation allowance.

 

•                  GoodwillImpairment - Effective January 1, 2002, we adopted Statement of FinancialAccounting Standards No. 142, *Goodwilland Other Intangible Assets*(“SFAS 142”). SFAS 142 provides guidanceon the financial accounting and reporting for acquired goodwill and otherintangible assets. Under SFAS 142, goodwill and intangible assets deemed tohave indefinite lives will no longer be amortized but will be subject toimpairment tests on an annual basis, or more

 

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frequently ifcertain indicators arise. Intangible assets with finite lives will continue tobe amortized over their useful lives. With respect to our intangible assetswith finite lives, during the quarter ended June 30, 2003, we assessed theremaining useful lives of such assets and deemed them to be appropriate.

 

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

 

As of June 30, 2003,we have on our consolidated balance sheet goodwill of $8.2 million associatedwith the Advisory Services segment. In accordance with SFAS 142, we haveselected a date by which the annual impairment test will be performed, suchdate being September 30. We will test this goodwill more frequently ifcertain indicators arise.

 

**Impact of Recently Issued AccountingPronouncements**

 

InNovember 2002, the Emerging Issues Task Force reached a consensus on Issue No.00-21 "Revenue Arrangements with Multiple Deliverables," ("EITF00-21").  EITF 00-21 providesguidance on how to account for arrangements that involve the delivery orperformance of multiple products, services and rights to use assets.  The provisions of EITF 00-21 will apply torevenue arrangements entered into in the fiscal periods beginning after June15, 2003.  The Company has examined itscurrent Advisory Service offerings and has determined that the accountingcriteria set forth in EITF 00-21 will not impact the Company's currentaccounting treatment of its Advisory Service offerings.

 

InJanuary 2003, the FASB issued FASB Interpretation No. 46, *Consolidation of Variable Interest Entities*,an interpretation of ARB No. 51 (“FIN 46”). FIN 46 clarifies the application ofAccounting Research Bulletin No. 51, Consolidated Financial Statements, tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. FIN 46 explains how to identify variable interestentities and how an enterprise assesses its interest in a variable interestentity to decide whether to consolidate that entity. It requires existingunconsolidated variable interest entities to be consolidated by their primarybeneficiaries if the entities do not effectively disperse risks among partiesinvolved. It also requires certain disclosures by the primary beneficiary of avariable interest entity and by an enterprise that holds significant variableinterests in a variable interest entity where the enterprise is not the primarybeneficiary. FIN 46 is effective for variable interest entities created afterJanuary 31, 2003 and to variable interest entities in which an enterpriseobtains an interest after that date, and effective for the first fiscal year orinterim period beginning after June 15, 2003 to variable interest entities inwhich an enterprise holds a variable interest that it acquired before February1, 2003. FIN 46 requires an entity to disclose certain information regarding avariable interest entity, if, when the Interpretation becomes effective, it isreasonably possible that an enterprise will consolidate or have to discloseinformation about that variable interest entity, regardless of the date onwhich the variable interest entity was created.  The Company currently does not have any interest in anyunconsolidated entity for which variable interest entity accounting is requiredand therefore does not expect FIN 46 to have a material affect on the Company’sconsolidated financial statements.

 

**CERTAIN FACTORS THAT MAY AFFECT FUTURERESULTS**

 

From time to time, informationprovided by the Company or statements made by its employees may contain“forward-looking” statements.  Inparticular, this Form 10-Q contains forward-looking statements made pursuant tothe safe harbor provisions of the Private Securities Litigation Reform Act of1995.  Such forward-looking statementsinclude statements concerning:

 

•                  informationtechnology spending;

•                  generaleconomic conditions;

•                  competitivepricing pressure

•                  anticipatedexpense levels relative to the Company’s total revenues

•                  workingcapital;

•                  capitalexpenditures and capital requirements;

•                  cashflows and cash balances;

 

Forward-looking statements alsoinclude statements that are not historical facts or statements using words suchas “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “likely”,“may”, “opportunity”, “plan”, “potential”, “project”, “should” or “will”.

 

Forward-looking statements areneither promises nor guarantees, but involve risks and uncertainties that couldhave a material adverse effect on the Company’s business, results of operationsand financial condition or cause actual results to differ materially from thoseset forth in the forward-looking statements. These risks and uncertainties include:

 

•                                           theCompany’s ability to manage expense levels;

•                                           generaleconomic conditions;

•                                           decreasesand delays in information technology spending;

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

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

 

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

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

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

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

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

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

•                                           theCompany’s ability to anticipate changing market needs;

•                                           fluctuationsin the Company’s operating results

•                                           changesin competitive conditions in the Company’s industry;

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

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

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

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

•                                           goodwilland any impairment thereof;

•                                           strategicinvestments and any impairment thereof;

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

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

 

Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date the statements were made.  Readers are also advised to consider suchforward-looking statements in light of the risks and uncertainties discussedabove.  The Company undertakes noobligation to update any forward-looking statements contained in the QuarterlyReport on Form 10-Q.

 

**Item 3****.**                     **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company’s exposure tomarket risk for changes in interest rates relates primarily to borrowings underits $6 million amended and restated credit facility. As of June 30, 2003,there were no borrowings outstanding under this facility. In the event theCompany draws on the facility, interest is computed on outstanding borrowingsat the rate of LIBOR plus 1.5% or the higher of the Prime Rate or the FederalFunds Rate plus 0.5%. The Company believes that an increase or a decrease often percent in the effective interest rate on available borrowings on itsfacility, if fully utilized, would not have a material effect on future resultsof operations.

 

The Company isexposed to market risk as it relates to changes in the market value of itsstrategic investments. The Company made investments in and advances tocompanies in parallel or synergistic industries to that of the Company’s.During the six months ended June 30, 2002, the Company recorded $0.3 millionimpairment losses on certain of its investments. There were no impairmentlosses recognized during the six months ended June 30, 2003. As ofJune 30, 2003, the Company had investments and advances totaling $3.8million. These investments and advances are inherently risky because theinvestee companies are private companies that are typically in the earlydevelopment stages. Adverse changes in market conditions, like thoseexperienced during the latter half of the year ended December 31, 2000through 2002, and poor operating results of the underlying investments mayresult in the Company incurring additional losses or an inability to recoverthe remaining value of its investments and advances.

 

The Company isexposed to market risk as it relates to foreign currency exchange rates.

 

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Revenues and expenses inforeign currencies translate into higher or lower revenues and expenses in U.S.dollars as the U.S. dollar weakens or strengthens against foreign currencies.Changes in foreign currency exchange rates may therefore negatively affect theCompany’s consolidated revenues and expenses. Currency transaction gains orlosses arising from transactions in currencies other than the functionalcurrency of the Company’s foreign subsidiaries are included in the results ofoperations. Such gains and losses were not material to the Company’sconsolidated results of operations during the six months ended June 30,2003 and 2002. The Company has not entered into foreign currency forwardexchange contracts or other derivative financial instruments to hedge theeffects of adverse fluctuations in foreign currency exchange rates.

 

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

 

The Company evaluated the design and operation of its disclosure controlsand procedures to determine whether they are effective in ensuring that thedisclosure of required information is timely made in accordance with theExchange Act and the rules and forms of the Securities and Exchange Commission.This evaluation was made under the supervision and with the participation ofmanagement, including the Company’s principal executive officer and principalfinancial officer as of the end of the period covered by this report. Althoughthe Company believes its pre-existing disclosure controls and procedures wereadequate to enable it to comply with its disclosure obligations, as a result ofsuch review, the Company implemented minor changes, primarily to formalize anddocument procedures already in place. The Company also established a disclosurecommittee, which consists of certain members of the Company’s seniormanagement. The Company’s disclosure controls and procedures, as defined atExchange Act Rules 13a-15(e) and 15d-15(e), are effective to ensure thatinformation required to be disclosed by the Company in reports that it filesunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms.

 

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

*Therehave been no significant changes in the Company’s internal controls or otherfactors that could significantly affect internal controls subsequent to thedate the Company carried out this evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.*

* *

# **PART II**-OTHER INFORMATION

 

Item 1.             LegalProceedings.

 

*Other than ordinary routine litigation incidentalto the Company’s business that 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.*

* *

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

 

*On May 19, 2003, the Companyheld its Annual Meeting of Stockholders. At such Annual Meeting, thestockholders of the Company voted on (i) the election of three Class IIDirectors to serve for a three-year term and until their successors have beenduly elected and qualified and (ii) to ratify the appointment of Deloitte &Touche LLP as the Company’s independent public accountants for the fiscal yearending December 31, 2003.*

* *

The number of votes castfor the re-election of the Class II Directors listed below were as follows:

 

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|               |   | **Number of  Shares** |   |
|--------------------|--------|-----------------------|--------|
| **Nominees**       |   | **For**               |   | **Against** | ** ** | **Withhold  Authority** | ** ** |
| Gayl Doster        |   | 9,517,102             |   | — |   | 89,401 |   |
| Alfred  J. Amoroso |   | 9,601,203             |   | — |   | 5,300 |   |
| Harry Gruner       |   | 9,493,503             |   | — |   | 113,000 |   |

 

Each of Michael Simmons, GeorgeMcNamee, Howard Rubin, Dale Kutnick, Francis Saldutti and Monte Ford continuedas directors of the Company after the Annual Meeting of Stockholders.

 

*Thenumber of votes cast to ratify the appointment of Deloitte & Touche LLP asthe Company’s independent public accountants were as follows:*

* *
| **Number of Shares** |   |
|----------------------|--------|
| **For**              |   | **Against** |   | **Withhold Authority** |   |
| 9,601,042            |   | 5,161 |   | 300 |   |

 

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

 

(a)                                  Exhibits.

 
| **Exhibit  Number** |   | **Description**                                                                                                                      |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
| 3.1 (1)             |   | Amended and  Restated Certificate of Incorporation of the Company                                                                    |
| 3.2 (2)             |   | Amended and  Restated Bylaws of the Company (as of May 1, 2003)                                                                 |
| 11.1                |   | Statement  regarding computation of per-share earnings                                                                               |
| 31.1                |   | Certification  of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                             |
| 31.2                |   | Certification  of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                             |
| 32                  |   | Certification  of the Chief Executive Officer and Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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

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

 

(b)                                 Reportson Form 8-K.

 

On May 6,2003, the Company filed a report on Form 8-K dated May 5, 2003, inconnection with a release of the Company’s results of operations for thequarter ended March 31, 2003.

 

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**SIGNATURE**

 

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

 

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

 

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