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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
[X] THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED JUNE 30, 2000
OR
[ ] 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 1-14443
GARTNER GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-3099750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 10212 06904-2212
56 Top Gallant Road (Zip Code)
Stamford, CT
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 316-1111
Indicate by check mark whether the Registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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 X NO .
--- ---
The number of shares outstanding of the Registrant's capital stock as
of July 31, 2000 was 53,264,181 shares of Common Stock, Class A and 32,559,916
shares of Common Stock, Class B.
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS Page
Condensed Consolidated Balance Sheets at June 30, 2000 and
September 30, 1999 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS 15
PART II OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 15
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
GARTNER GROUP, INC.
Condensed Consolidated Balance Sheets
(Unaudited in thousands)
June 30, September 30,
2000 1999
--------- ------------
Assets
Current assets:
Cash and cash equivalents $ 53,304 $ 88,894
Marketable equity security 60,549 --
Fees receivable, net 277,569 282,047
Deferred commissions 23,854 31,332
Prepaid expenses and other current assets 72,672 29,911
--------- ---------
Total current assets 487,948 432,184
Property, equipment and leasehold improvements, net 79,719 63,592
Intangible assets, net 316,910 223,100
Other assets 59,549 84,568
--------- ---------
Total assets $ 944,126 $ 803,444
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 35,000 $ --
Accounts payable and accrued liabilities 164,837 95,869
Commissions payable 14,078 23,235
Deferred revenues 336,594 354,517
--------- ---------
Total current liabilities 550,509 473,621
--------- ---------
Long-term debt 302,686 250,000
Other liabilities 6,792 5,337
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 59 58
Additional paid-in capital 327,968 314,829
Unearned compensation (7,337) (8,280)
Accumulated other comprehensive income 19,982 (3,830)
Accumulated earnings 178,372 156,740
Treasury stock, at cost (434,905) (385,031)
--------- ---------
Total stockholders' equity 84,139 74,486
--------- ---------
Total liabilities and stockholders' equity $ 944,126 $ 803,444
========= =========
See accompanying notes
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GARTNER GROUP, INC.
Condensed Consolidated Statements of Operations
(Unaudited in thousands, except per share data)
For the three months ended For the nine months ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Revenues:
Research $ 125,531 $ 118,062 $ 381,134 $ 356,496
Services 53,087 40,796 140,700 103,550
Events 34,940 19,621 95,188 66,172
Other 8,953 7,179 21,779 21,148
--------- --------- --------- ---------
Total revenues 222,511 185,658 638,801 547,366
--------- --------- --------- ---------
Costs and expenses:
Costs of services and product development 111,879 74,427 289,971 214,154
Selling, general and administrative 86,515 63,489 246,180 180,473
Other charges -- 1,498 17,501 5,924
Depreciation 7,509 5,472 20,101 15,989
Amortization of intangibles 10,222 2,634 17,271 7,336
--------- --------- --------- ---------
Total costs and expenses 216,125 147,520 591,024 423,876
--------- --------- --------- ---------
Operating income 6,386 38,138 47,777 123,490
Gain on partial sale of investment 18,411 -- 31,479 --
Loss on sale of investment (13,300) -- (13,300) --
Interest income 1,313 2,572 1,789 7,648
Interest expense (7,397) -- (18,580) --
--------- --------- --------- ---------
Income before provision for income taxes 5,413 40,710 49,165 131,138
Provision for income taxes 3,031 14,294 27,533 45,793
--------- --------- --------- ---------
Net income $ 2,382 $ 26,416 $ 21,632 $ 85,345
========= ========= ========= =========
Earnings per common share:
Basic $ 0.03 $ 0.25 $ 0.25 $ 0.83
Diluted $ 0.03 $ 0.25 $ 0.24 $ 0.80
Weighted average common shares outstanding:
Basic 86,291 104,229 87,289 103,110
Diluted 88,757 106,838 89,984 106,054
See accompanying notes
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GARTNER GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited in thousands)
For the nine months ended
June 30,
-------------------------
2000 1999
--------- ---------
Operating activities:
Net income $ 21,632 $ 85,345
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 37,371 23,325
Restricted stock compensation 718 --
Provision for doubtful accounts 2,963 3,159
Equity in (income) losses of minority owned companies (229) 384
Deferred revenues (15,849) (3,748)
Deferred tax provision (benefit) 1,761 (1,604)
Gain on partial sale of investment (31,479) --
Loss on sale of investment 13,300 --
Accretion of interest and amortization of debt issuance costs 4,753 --
Changes in assets and liabilities, net of effects of acquisitions:
Decrease (increase) in fees receivable 353 (49)
Decrease in deferred commissions 6,723 8,898
(Increase) decrease in prepaid expenses and other current assets (7,962) 7,841
Increase in other assets (972) (4,628)
Increase (decrease) in accounts payable and accrued liabilities 32,333 (37,239)
Decrease in commissions payable (8,902) (12,600)
--------- ---------
Cash provided by operating activities 56,514 69,084
--------- ---------
Investing activities:
Payment for businesses acquired (excluding cash acquired) (110,074) (40,207)
Proceeds from partial sale of investment 40,242 --
Additions of property, equipment and leasehold improvements, net (35,325) (22,448)
Marketable debt securities sold, net -- 31,775
Investments in unconsolidated subsidiaries (20,352) (4,210)
--------- ---------
Cash used for investing activities (125,509) (35,090)
--------- ---------
Financing activities:
Issuance of common stock 6,242 14,505
Proceeds from employee stock purchase plan offering 2,528 2,469
Proceeds from issuance of debt 420,000 --
Payments on debt (335,000) --
Payments for debt issuance costs (3,327) --
Tax benefits of stock transactions with employees 3,269 13,024
Net cash settlement on forward purchase agreement (8,200) (8,438)
Purchase of treasury stock (49,878) (1,177)
--------- ---------
Cash provided by financing activities 35,634 20,383
--------- ---------
Net (decrease) increase in cash and cash equivalents (33,361) 54,377
Effects of foreign exchange rates on cash and cash equivalents (2,229) (917)
Cash and cash equivalents, beginning of period 88,894 157,744
--------- ---------
Cash and cash equivalents, end of period $ 53,304 $ 211,204
========= =========
See accompanying notes
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GARTNER GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Condensed Consolidated Financial Statements
These interim condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and should be read in
conjunction with the consolidated financial statements and related notes of
Gartner Group, Inc. (the "Company") on Form 10-K for the fiscal year ended
September 30, 1999. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation of
financial position, results of operations and cash flows at the dates and for
the periods presented have been included. The results of operations for the
three and nine month periods ended June 30, 2000 may not be indicative of the
results of operations for the remainder of fiscal 2000.
Note 2 - Recently Issued Accounting Standards
In December 1999,the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), which summarized certain views of the Commission in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company believes that its current revenue recognition
policies are consistent with the guidance of SAB 101.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of Accounting Principles Board ("APB") Opinion
No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25
regarding the definition of an employee for purposes of applying Opinion No. 25,
the criteria for determining whether a plan qualifies as a noncompensatory plan,
the accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. In general this interpretation is
effective July 1, 2000. The Company is currently evaluating the effect, if any,
that the adoption of FIN 44 will have on the Company's financial position and
results of operations.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue No.
00-2 "Accounting for Web Site Development Costs" ("EITF Issue No. 00-2"), which
applies to all web site development costs incurred for the quarters beginning
after June 30, 2000. The consensus states that the accounting for specific web
site development costs should be based on a model consistent with AICPA
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". The Company is currently evaluating the
effect, if any, that adoption of EITF Issue No. 00-2 will have on the Company's
financial position or results of operations.
Note 3 - Other Charges
During fiscal 1999, the Company's Board of Directors approved a special one-time
cash incentive plan designed to enhance retention of key personnel to be earned
and paid in three installments. The final installment of the retention incentive
plan was vested and paid during the second quarter of fiscal 2000. The total
amount incurred and paid under the retention incentive plan in fiscal 2000 was
approximately $17.5 million.
For the nine months ended June 30, 1999, the Company incurred $5.9 million in
other nonrecurring charges. Approximately one-half of the charges related to
severance benefits as a result of certain job eliminations associated with the
fiscal 1999 second quarter reorganization. The remainder of the charges
pertained to legal and advisory fees associated with the recapitalization of the
Company.
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Note 4 - Gain On Partial Sale of Investment
On October 7, 1999, Jupiter Communications, Inc. ("Jupiter") completed its
initial public offering at $21.00 per share of common stock. Upon completion of
Jupiter's initial public offering, the Company owned 4,028,503 shares of
Jupiter's outstanding common stock. The change in the Company's proportionate
share of Jupiter's equity resulted in the Company's write-up of the investment
by approximately $15.4 million and increases in deferred tax liability and
additional paid-in capital of approximately $6.2 million and $9.2 million,
respectively. During the quarter ended June 30, 2000, the Company sold 921,450
shares for net cash proceeds of $24.3 million at an average price of $26.42 per
share for a pre-tax gain of $18.4 million. For the nine months ended June 30,
2000 the Company sold 1,395,950 shares for net cash proceeds of $40.2 million at
an average price of $28.84 per share for a pre-tax gain of $31.5 million. At
June 30, 2000, the Company has 2,632,553 shares of Jupiter with a fair market
value of $60.5 million. During the quarter ended June 30, 2000, the Company's
investment decreased below 20% of Jupiter's outstanding common stock. Because
the Company has concluded it no longer exercises significant influence over
Jupiter, it has changed its method of accounting for this investment from the
equity method to the cost method during the quarter ended June 30, 2000 (see
Note 6 - Investment in Marketable Securities). The investment is recorded at
fair value as the Marketable equity security in the Condensed Consolidated
Balance Sheets at June 30, 2000.
Note 5 - Sale of Investment in NETg
On June 30, 2000, the Company sold its 8% investment in NETg, Inc. ("NETg"), a
subsidiary of Harcourt, Inc., for $36.0 million in cash to an affiliate of
Harcourt, Inc. resulting in a pre-tax loss of approximately $6.6 million. The
Company had acquired this investment as consideration for its sale of
GartnerLearning in September 1998. The sale price has been recorded as an other
receivable and included in Prepaid expenses and other current assets in the
Condensed Consolidated Balance Sheets at June 30, 2000. The Company received the
cash proceeds on July 7, 2000. In addition, the Company negotiated the
settlement of a joint venture agreement associated with the sale of
GartnerLearning for approximately $6.7 million.
Note 6 - Investment in Marketable Securities
At June 30, 2000, the Company owns investments in common stock of publicly
traded companies, primarily Jupiter. Under the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("FAS 115"), the investments have been classified as
available for sale securities. FAS 115 requires that an available for sale
security of a publicly traded entity be carried at fair value with unrealized
holding gains, net of tax, reported as Accumulated other comprehensive income, a
separate component of Stockholders' equity, until realized. As of June 30, 2000,
the Company recorded an unrealized holding gain, net of taxes, on marketable
securities of $31.5 million.
Note 7 - Long-Term Debt
On July 16, 1999, the Company entered into an unsecured Credit Agreement with
The Chase Manhattan Bank, as administrative agent for the participating
financial institutions thereunder, providing for a maximum of $500.0 million of
credit facilities, consisting of a $350.0 million term loan and a $150.0 million
senior revolving credit facility. On February 25, 2000, the Company modified
certain financial and other covenants to permit the TechRepublic, Inc.
acquisition and issuance of convertible debt. Loans under the revolving facility
will be available for five years, subject to certain customary conditions on the
date of any such loan. At June 30, 2000, the Company had $35.0 million
outstanding under the term loan. There were no amounts outstanding under the
revolving credit facility. The weighted average interest rate on these
borrowings was 7.6% for the nine months ended June 30, 2000. Interest paid in
cash for the three and nine months ended June 30, 2000 was approximately $4.0
million and $15.2 million, respectively. On July 17, 2000, the Company entered
into a second amendment to the Credit Agreement. Under this amendment, the
Company agreed to refinance all existing indebtedness and to repay in full and
terminate the term loans drawn under the existing Credit Agreement. Accordingly,
the Company has recorded the $35.0 million outstanding term loan as Current
portion of long-term debt in the Condensed Consolidated Balance Sheets at June
30, 2000. In addition, as part of the amended Credit Agreement, the Company
entered into a senior revolving credit facility totaling a maximum aggregate
principal amount of up to
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$200.0 million. In connection with the termination of the term loan, the Company
will write-off approximately $2.9 million of deferred debt issuance costs in the
fourth quarter of fiscal 2000.
In connection with the TechRepublic, Inc. acquisition entered into on March 21,
2000, the Company issued in a private placement transaction on April 17, 2000,
$300.0 million of 6% convertible subordinated notes (the "convertible notes") to
Silver Lake Partners, L.P. ("Silver Lake") and certain of Silver Lake's
affiliates. The convertible notes mature in April 2005. The convertible notes
accrue interest at 6% per annum. Interest accrues semiannually by a
corresponding increase in the face amount of the convertible notes commencing
September 15, 2000. The convertible notes are convertible into shares of the
Company's Class A Common Stock, commencing April 17, 2002, at an initial price
of $15.87 per share, subject to certain adjustments. At the Company's option,
the conversion rights can be settled in cash based on the market price of the
Class A Common Stock at the time of conversion. As part of the transaction, the
Company has granted Silver Lake certain preferential rights and antidilutive
protection and two Silver Lake nominees have been elected to the Company's ten
member Board of Directors. The Company may call the convertible notes for
redemption any time after April 17, 2003. On April 18, 2000, $200.0 million of
the proceeds were used to pay down term loan borrowings under the Credit
Agreement. The Company incurred $2.9 million of transaction and advisory fees
related to the transaction. These fees will be amortized over the life of the
debt using the effective interest method.
Note 8 - Computations of Earnings per Share of Common Stock
The following table sets forth the reconciliation of the basic and diluted
earnings per share computations (in thousands, except per share data):
For the three months ended For the nine months ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Numerator:
Net income $ 2,382 $ 26,416 $ 21,632 $ 85,345
======== ======== ======== ========
Denominator
Denominator for basic earnings per share - weighted average
number of common shares outstanding 86,291 104,229 87,289 103,110
Effect of dilutive securities:
Weighted average number of common shares under warrant
outstanding 102 267 86 226
Weighted average number of option shares outstanding 2,364 2,342 2,609 2,718
-------- -------- -------- --------
Dilutive potential common shares 2,466 2,609 2,695 2,944
-------- -------- -------- --------
Denominator for diluted earnings per share - adjusted
weighted average number of common shares outstanding 88,757 106,838 89,984 106,054
======== ======== ======== ========
Basic earnings per common share $ 0.03 $ 0.25 $ 0.25 $ 0.83
======== ======== ======== ========
Diluted earnings per common share $ 0.03 $ 0.25 $ 0.24 $ 0.80
======== ======== ======== ========
For the three and nine months ended June 30, 2000, options to purchase 14.7
million and 14.5 million shares of Class A Common Stock of the Company with
exercise prices greater than the average market price of $13.19 and $13.94, for
the respective periods, were not included in the computation of diluted net
income per share because the effect would have been antidilutive. For the three
and nine months ended June 30, 1999, options to purchase 12.7 million and 11.3
million shares of Class A Common Stock of the Company with exercise prices
greater than the average market price of $21.64 and $21.60, for the respective
periods, were not included in the computation of diluted net income per share
because the effect would have been antidilutive. Additionally, convertible notes
outstanding for the three and nine months ended June 30, 2000, representing
5,187 and 15,562 common shares, if converted, respectively, are not included in
the computation of diluted net income per share because the effect would have
been antidilutive.
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Note 9 - Comprehensive Income
Comprehensive income includes all changes in equity, except those resulting from
investments by owners and distributions to owners. The components of
comprehensive income for the three and nine months ended June 30, 2000 and 1999
are as follows (in thousands):
For the three months ended For the nine months ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net income $ 2,382 $ 26,416 $ 21,632 $ 85,345
Foreign currency translation adjustments (3,642) (1,360) (7,689) (2,697)
Unrealized holding gain on marketable securities 28,009 -- 31,501 --
-------- -------- -------- --------
Comprehensive income $ 26,749 $ 25,056 $ 45,444 $ 82,648
======== ======== ======== ========
Note 10 - Segment Information
The Company manages its business in four reportable segments organized on the
basis of differences in its related products and services: research, services,
events, and internet. Research consists primarily of subscription-based research
products. Services consists primarily of consulting and measurement engagements.
Events consists of vendor and user focused symposia, expositions, and
conferences. Internet consists of products and services sold through the
Company's e-commerce sales delivery channel TechRepublic.
The Company evaluates reportable segment performance and allocates resources
based on gross contribution margin. Gross contribution, as presented below, is
the profit or loss from operations before interest income and expense, certain
selling, general and administrative costs, income taxes, other charges, and
foreign exchange gains and losses. The accounting policies used by the
reportable segments are the same as those used by the Company.
The following tables present information about reportable segments (in
thousands). The "Other" column includes certain revenues and corporate and other
expenses (primarily selling, general and administrative) unallocated to
reportable segments, expenses allocated to operations that do not meet the
segment reporting quantitative threshold, and other charges. There are no
intersegment revenues:
Three months ended June 30, 2000 Research Services Events Internet Other Consolidated
- -----------------------------------------------------------------------------------------------------------------
Revenues $125,531 $ 53,087 $ 34,940 $ 1,686 $ 7,267 $ 222,511
Gross contribution 82,488 17,431 15,048 (7,474) -- 107,493
Corporate and other expenses (101,107) (101,107)
Gain on partial sale of investment 18,411
Loss on sale of investment (13,300)
Interest income 1,313
Interest expense (7,397)
Income before provision for income taxes 5,413
Three months ended June 30, 1999 Research Services Events Internet Other Consolidated
- ------------------------------------------------------------------------------------------------------------------
Revenues $118,062 $ 40,796 $ 19,621 $ -- $ 7,179 $ 185,658
Gross contribution 82,175 16,215 10,015 -- -- 108,405
Corporate and other expenses (70,267) (70,267)
Interest income 2,572
Interest expense --
Income before provision for income taxes 40,710
Nine months ended June 30, 2000 Research Services Events Internet Other Consolidated
- ------------------------------------------------------------------------------------------------------------------
Revenues $381,134 $140,700 $ 95,188 $ 1,761 $ 20,018 $ 638,801
Gross contribution 256,328 47,683 45,537 (8,965) -- 340,583
Corporate and other expenses (292,806) (292,806)
Gain on partial sale of investment 31,479
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Loss on sale of investment (13,300)
Interest income 1,789
Interest expense (18,580)
Income before provision for income taxes 49,165
Nine months ended June 30, 1999 Research Services Events Internet Other Consolidated
- ------------------------------------------------------------------------------------------------------------------
Revenues $356,496 $103,550 $ 66,172 $ -- $ 21,148 $ 547,366
Gross contribution 251,182 36,524 29,351 -- -- 317,057
Corporate and other expenses (193,567) (193,567)
Interest income 7,648
Interest expense --
Income before provision for income taxes 131,138
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below under
"Quarterly Operating Income Trends", "Other Factors That May Affect Future
Performance", "Euro Conversion" and elsewhere in this report or in the Company's
Annual Report on Form 10-K for the year ended September 30, 1999.
RESULTS OF OPERATIONS
The following table sets forth certain results of operations as a percentage of
total revenues:
For the three months ended For the nine months ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues:
Research 56.4% 63.6% 59.7% 65.1%
Services 23.9 22.0 22.0 18.9
Events 15.7 10.6 14.9 12.1
Other 4.0 3.8 3.4 3.9
------- ------- ------- -------
Total revenues 100.0 100.0 100.0 100.0
------- ------- ------- -------
Costs and expenses:
Costs of services and product development 50.3 40.1 45.4 39.1
Selling, general and administrative 38.9 34.2 38.5 33.0
Other charges 0.0 0.8 2.7 1.1
Depreciation 3.3 2.9 3.2 2.9
Amortization of intangibles 4.6 1.4 2.7 1.3
------- ------- ------- -------
Total costs and expenses 97.1 79.4 92.5 77.4
------- ------- ------- -------
Operating income 2.9 20.6 7.5 22.6
Gain on partial sale of investment 8.3 0.0 4.9 0.0
Loss on sale of investment (6.0) 0.0 (2.1) 0.0
Interest income 0.6 1.4 0.3 1.4
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Interest expense (3.3) 0.0 (2.9) 0.0
------- ------ ------ ------
Income before provision for income taxes 2.5 22.0 7.7 24.0
Provision for income taxes 1.4 7.7 4.3 8.4
------- ------ ------ ------
Net income 1.1% 14.3% 3.4% 15.6%
======= ====== ====== ======
TOTAL REVENUES increased 20% to $222.5 million for the third quarter of fiscal
2000 from $185.7 million for the third quarter of fiscal 1999. For the nine
months ended June 30, 2000, total revenues were $638.8 million, up 17% from
$547.4 million for the same period last fiscal year. Revenues from research
products increased 6% in the third quarter of fiscal 2000 to $125.5 million
compared to $118.1 million in the same period in fiscal 1999 and comprised
approximately 56% and 64% of total revenues in the third quarter of fiscal 2000
and 1999, respectively. For the nine months ended June 30, 2000, research
revenues were $381.1 million, up 7% from $356.5 million for the same period last
fiscal year. Services revenue, consisting primarily of consulting and
measurement engagements, increased 30% to $53.1 million for the third quarter of
fiscal 2000 as compared to $40.8 million for the third quarter of fiscal 1999,
and comprised approximately 24% of total revenue in the third quarter of fiscal
2000 versus 22% in the same period in fiscal 1999. For the nine months ended
June 30, 2000 services revenue was $140.7 million, up 36% from $103.6 million
for the same period last fiscal year. Events revenue was $34.9 million in the
third quarter of fiscal 2000, an increase of 78% over $19.6 million for the same
period in fiscal 1999. Events revenue comprised approximately 16% of total
revenue in the third quarter of fiscal 2000 and 11% in the third quarter of
fiscal 1999. For the nine months ended June 30, 2000, events revenue was $95.2
million, up 44% from $66.2 million for the same period last fiscal year.
Adjusting for the timing of the Spring Symposium held in the third quarter of
fiscal 2000, which has typically been held in the second quarter of the fiscal
year, the growth in events revenue would have been 35% for the three months
ended June 30, 2000. Other revenues, consisting principally of software
licensing fees, increased 25% to $9.0 million in the third quarter of fiscal
2000 from $7.2 million in the third quarter of fiscal 1999. For the nine months
ended June 30, 2000, other revenues were $21.8 million, up 3% from $21.1 million
for the same period last fiscal year. The increase in total revenues reflects
the ability of the Company to gain client acceptance of new products and
services, to increase sales penetration into new and existing clients and to
develop incremental revenues from current and prior year acquisitions. Ratable
contract value, which consists of the annualized value of all subscription-based
research products with ratable revenue recognition, was $556.0 million at June
30, 2000, an increase of 8% from $513.9 million at June 30, 1999. Services
backlog increased 55% to approximately $82.2 million at June 30, 2000 compared
to $53.1 million at June 30, 1999 and represents future revenues to be
recognized from in-process consulting and measurement engagements. Based upon
the continued strong demand in upcoming conferences and expositions, deferred
revenue for events increased 49% to $45.4 million at June 30, 2000 as compared
to $30.5 million at June 30, 1999.
OPERATING INCOME, net of other charges, decreased 83% to $6.4 million in the
third quarter of fiscal 2000 from $38.1 million in the third quarter of fiscal
1999. Operating income was $47.8 million for the nine months ended June 30,
2000, a decrease of 61% over the $123.5 million for the same period in the prior
fiscal year. Operating income was impacted, in part, by expenditures related to
planned strategic investments in rearchitecting the research process, the hiring
of analysts and consultants, higher growth in lower margin consultative services
and Web initiatives.
Costs and expenses, excluding other charges, increased to $216.1 million in the
third quarter of fiscal 2000 from $146.0 million in the third quarter of fiscal
1999. Year-to-date total costs and expenses, excluding other charges, were
$573.5 million compared to $418.0 million for the same period in the prior
fiscal year. The increase in costs and expenses over the third quarter of fiscal
1999 reflects the additional support required for the growing client base,
incremental costs associated with conferences, costs associated with acquired
businesses and planned strategic investments which included the hiring of
additional consultants, analysts, project executives and sales personnel, and
spending on sales productivity tools and interactive initiatives. Cost of
services and product development expenses were $111.9 million and $74.4 million
for the third quarters of fiscal 2000 and 1999, respectively, and $290.0 million
and $214.2 million for the nine months ended June 30, 2000 and 1999,
respectively. The increase in costs of services and product development
expenses, as a percentage of total revenues, is primarily attributable to
competitive pricing in research products, continuing growth in personnel costs
associated with the
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development and delivery of products and services and the hiring of personnel in
association with the planned strategic investments. Selling, general and
administrative expenses, which were $86.5 million and $63.5 million for the
third quarter of fiscal 2000 and 1999, respectively, and $246.2 million and
$180.5 million for the nine months ended June 30, 2000 and 1999, respectively,
increased as a result of the Company's continuing expansion of worldwide
distribution channels and additional general and administrative resources needed
to support the growing revenue base and the impact of acquisitions.
Other charges of $17.5 million for the nine months ended June 30, 2000, were
incurred in relation to a special one-time cash incentive plan designed to
enhance retention of key personnel in response to the recapitalization and
reorganization of the Company that was initiated in the prior fiscal year. In
fiscal 1999, the Company recorded pre-tax charges totaling approximately $5.9
million related to the Company's reorganization and recapitalization.
Depreciation expense for the third quarter of fiscal 2000 increased to $7.5
million compared to $5.5 million for the third quarter of fiscal 1999, primarily
due to capital spending required to support business growth. For the nine months
ended June 30, 2000, depreciation expense increased to $20.1 million compared to
$16.0 million for the same period in the prior fiscal year. Additionally,
amortization expense increased by $7.6 million in the third quarter of fiscal
2000 as compared to the same period in fiscal 1999, reflecting primarily
goodwill associated with fiscal 2000 acquisitions. Amortization expense
associated with the acquisition of TechRepublic was $6.9 million for the third
quarter of fiscal 2000.
GAIN ON PARTIAL SALE OF INVESTMENT in the third quarter of fiscal 2000 reflects
the sale of 921,450 shares of Jupiter Communication, Inc. for net cash proceeds
of $24.3 million ($26.42 per share) for a pre-tax gain of $18.4 million. For the
nine months ended June 30, 2000 the Company sold 1,395,950 shares of Jupiter
Communication, Inc. for net cash proceeds of $40.2 million at an average price
of $28.84 for a pre-tax gain of $31.5 million.
LOSS ON SALE OF INVESTMENT in the third quarter of fiscal 2000 reflects the sale
of the Company's investment in NETg, Inc. ("NETg"), a subsidiary of Harcourt,
Inc. The Company sold its 8% investment in NETg for $36.0 million in cash to an
affiliate of Harcourt, Inc. resulting in a pre-tax loss of approximately $6.6
million. The Company had acquired this investment as consideration for its sale
of GartnerLearning in September 1998. In addition, the Company negotiated the
settlement of a joint venture agreement associated with the sale of
GartnerLearning for approximately $6.7 million.
INTEREST EXPENSE of $7.4 million and $18.6 million for the three and nine months
ended June 30, 2000, respectively, related primarily to debt facility
borrowings, of which the proceeds were used primarily to fund the Company's
recapitalization. The decrease in interest income for the three and nine months
ended June 30, 2000 is attributable to a lower average balance of investable
funds as compared to the same periods in the prior fiscal year.
PROVISION FOR INCOME TAXES was $3.0 million in the third quarter of fiscal 2000,
down from $14.3 million in the same quarter of fiscal 1999. The effective tax
rate was 56% in the third quarter of fiscal 2000 which reflects the impact of
non-deductible goodwill related to the TechRepublic acquisition. The
year-to-date effective tax rate was 35% for the same period in the prior fiscal
year, including the effects of a one-time benefit resulting from the settlement
of certain Federal income tax examinations.
DILUTED EARNINGS PER COMMON SHARE decreased 89% to 3 cents per common share for
the third quarter of fiscal 2000, compared to 25 cents per common share for the
third quarter of fiscal 1999. For the nine months ended June 30, 2000 and 1999,
diluted earnings per common share were 24 cents and 80 cents, respectively, a
decrease of 70%. Excluding the impact of other charges, gain on partial sale of
investment, loss on sale of investment, diluted earnings per share were 0 cents
for the third quarter and 26 cents for the nine months ended June 30, 2000.
Basic earnings per common share decreased 89% to 3 cents for the third quarter
of fiscal 2000 from 25 cents for the third quarter of fiscal 1999. Basic
earnings per common share were 25 cents for the nine months ended June 30, 2000
compared to 83 cents for the same period last year.
QUARTERLY OPERATING INCOME TRENDS. Historically, the Company has realized
significant renewals and growth in contract value at the end of each quarter.
The fourth quarter of the fiscal year typically is the fastest growth quarter
for contract value and the first quarter of the fiscal year typically represents
the
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slowest growth quarter as it is the quarter in which the largest amount of
contract renewals are due. As a result of the quarterly trends in contract value
and overall business volume, fees receivable, deferred revenues, deferred
commissions and commissions payable reflect this activity and typically show
substantial increases at quarter end, particularly at fiscal year end. All
research contracts are billable upon signing, absent special terms granted on a
limited basis from time to time. All research contracts are noncancelable and
non-refundable, except for government contracts which have a 30-day cancellation
clause, but which have not produced material cancellations to date. The
Company's policy is to record at the time of signing of a research contract the
entire amount of the contract billable as deferred revenue and fees receivable.
The Company also records the related commission obligation upon the signing of
the contract and amortizes the corresponding deferred commission expense over
the contract period in which the related revenues are earned and amortized to
income.
Historically, research revenues have increased in the first quarter of each
fiscal year over the immediately preceding quarter primarily due to increased
contract value at the end of the prior fiscal year. Events revenues have
increased similarly due to annual conferences and exhibition events held in the
first quarter. Additionally, operating income margin (operating income as a
percentage of total revenues) typically improves in the first quarter of the
fiscal year versus the immediately preceding quarter due to the increase in
research revenue upon which the Company is able to further leverage its selling,
general and administrative expenses, plus operating income generated from the
first quarter Symposia and ITxpo exhibition events. Historically, operating
income margin improvement has not been as high in the remaining quarters of the
fiscal year because the Company has typically increased operating expenses for
required growth and because the operating income margins from the Symposia and
ITxpo exhibition events in the first fiscal quarter are higher than on
conferences held later in the fiscal year. In the current fiscal year, however,
the timing of costs related to the one-time cash retention incentive and planned
strategic investments has impacted the previous trend of the Company's quarterly
operating income margins. As a result, the operating income for the third
quarter of fiscal 2000 as well as prior year operating margin trends may not be
indicative of the fourth quarter operating results.
OTHER FACTORS THAT MAY AFFECT FUTURE PERFORMANCE. The Company's future operating
results will depend upon the Company's ability to continue to compete
successfully in the market for information products and services. The Company
faces competition from a significant number of independent providers of similar
services, as well as the internal marketing and planning organizations of the
Company's clients. The Company also competes indirectly against other
information providers, including electronic and print media companies and
consulting firms. In addition, there are limited barriers to entry into the
Company's market and additional new competitors could readily emerge. There can
be no assurance that the Company will be able to continue to provide the
products and services that meet client needs as the Information Technology
("IT") market rapidly evolves, or that the Company can otherwise continue to
compete successfully. In this regard, the Company's ability to compete is
largely dependent upon the quality of its staff of IT analysts and consultants.
Competition for such qualified professionals is intense. There can be no
assurance that the Company will be able to hire additional qualified IT analysts
and consultants as may be required to support the evolving needs of clients or
any growth in the Company's business. Any failure to maintain a premier staff of
IT professionals could adversely affect the quality of the Company's products
and services, and therefore its future business and operating results. There may
also be increased business risk as the Company expands product and service
offerings to smaller domestic companies. Additionally, the Company believes it
will need to make significant investments and rearchitect its Web capabilities,
including investments to expand and augment TechRepublic's initiatives. The
Company recognizes the value and utility of the Web as a delivery channel for
products and services and as a source of new revenue opportunities. Failure to
increase and improve the Company's Web capabilities could adversely impact
future business and operating results.
In connection with its recapitalization, the Company agreed to certain
restrictions on business activity in order to reduce the risk to IMS Health and
its stockholders of substantial tax liabilities associated with the spin-off by
IMS Health of its equity interest in the Company. The Company further agreed to
assume the risk of such tax liabilities if the Company were to undertake certain
business activities that give rise to the liabilities. As a result, the Company
may be limited in its ability to undertake acquisitions involving the issuance
of a significant amount of stock unless the Company can obtain a ruling from the
IRS that the transaction will not give rise to such tax liabilities.
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The Company has incurred a substantial amount of debt in connection with its
recapitalization transaction and acquisitions. The associated debt service could
impair future operating results. While certain risks inherent in this debt have
been mitigated by the recent issuance of convertible notes, the outstanding debt
could limit the additional credit available to the Company, which in turn could
restrain the Company's ability to pursue business opportunities involving
substantial investments of additional capital that may arise in the future. In
addition, the senior revolving credit facility contains certain restrictions and
limitations involving the purchase of common stock and the issuance of stock
which could have an impact on the management and growth of the Company.
The Company's operating results are subject to the risks inherent in
international sales, including changes in market demand as a result of exchange
rate fluctuations, tariffs and other barriers, challenges in staffing and
managing foreign sales operations, and higher levels of taxation on foreign
income than domestic income. Further expansion would also require additional
management attention and financial resources.
EURO CONVERSION. On January 1, 1999, eleven of the fifteen member countries of
the European Union established fixed conversion rates between their sovereign
currencies and a new currency called the "euro" and adopted the euro as their
common legal currency on that date. In the year 2002, participating countries
will adopt the euro as their single currency. Until that date, use of the euro
is optional.
The Company has not found the adoption of the euro to have an impact on the
competitive conditions in European markets and does not believe that the
translation of financial transactions into euros has had or will have a
significant effect on the Company's results of operations, liquidity, or
financial condition. Additionally, the Company does not anticipate any material
impact from the euro conversion on the Company's financial information systems
which currently accommodate multiple currencies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's continued focus on revenue growth and operating income performance
has contributed to its ability to continue to fund ongoing operations. Cash
provided by operating activities totaled $56.5 million for the nine months ended
June 30, 2000 (a decrease of 18% or $12.6 million compared to the nine months
ended June 30, 1999) resulting primarily from the impact of the decrease in net
income, the gain on partial sale of investment and the changes in balance sheet
accounts, particularly fees receivable, deferred revenues, accounts payable and
accrued liabilities, and commissions and accrued bonuses payable. Cash used for
investing activities was $125.5 million for the nine months ended June 30, 2000
(compared to $35.1 million for the nine months ended June 30, 1999) due to the
effect of cash used for property and equipment additions of $35.3 million and
acquisitions and investments in consolidated and unconsolidated subsidiaries of
$130.4 million, partially offset by proceeds from the partial sale of investment
of $40.2 million. Cash provided by financing activities totaled $35.6 million in
the nine months ended June 30, 2000 (compared to $20.4 million for the nine
months ended June 30, 1999). The cash provided by financing activities resulted
primarily from the $420.0 million in borrowings under the Credit Agreement and
issuance of the convertible notes offset by repayments of $335.0 million of
Credit Agreement borrowings. Additionally, the Company paid $49.9 million for
the repurchase of 2,493,500 shares of Class A Common Stock and 2,006,700 shares
of Class B Common Stock under the terms of the recapitalization, as well as the
settlement of a forward purchase agreement for $8.2 million. Cash provided by
financing activities include a $3.3 million credit to additional paid-in capital
for tax benefits received from stock transactions with employees and $6.2
million from the issuance of common stock upon the exercise of employee stock
options. The tax benefit of stock transactions with employees is due to a
reduction in the corporate income tax liability based on an imputed compensation
deduction equal to employees' gain upon the exercise of stock options at an
exercise price below fair market value. The forward purchase contracts on the
Company's common stock were originally established to facilitate the acquisition
of 1,800,000 shares of Class A Common Stock to offset a portion of the
shareholder dilution that will be created by the exercise of stock options
granted under the Company's 1996 Long Term Stock Option Plan.
The effect of exchange rates was limited and decreased cash and cash equivalents
by $2.2 million for the nine months ended June 30, 2000, and was due to the
strengthening of the U.S. dollar versus certain foreign currencies. As of June
30, 2000, the Company had outstanding letters of credit with The Chase Manhattan
Bank for $1.7 million and with The Bank of New York for $2.0 million.
Additionally, the
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Company issues letters of credit in the ordinary course of business. The Company
believes that its current cash balances, together with cash anticipated to be
provided by operating activities, the sale of marketable equity securities and
borrowings available under the existing senior revolving credit facility, will
be sufficient for the expected short-term and foreseeable long-term cash needs
of the Company in the ordinary course of business, including capital commitments
related to TechRepublic and its obligation to make open market purchases of its
common stock required as part of the recapitalization. If the Company were to
require substantial amounts of additional capital in the future to pursue
business opportunities that may arise involving substantial investments of
additional capital, there can be no assurances that such capital will be
available to the Company or will be available on commercially reasonable terms.
The Company's obligation to make open market purchases as part of the
recapitalization will require a significant amount of cash to fund the
repurchase of its common stock. As of June 30, 2000, the Company has a remaining
commitment to purchase an additional 662,363 shares of Class A Common Stock and
4,128 shares of Class B Common Stock in the open market by July 2001. The
Company intends to fund this remaining commitment either through borrowings
available under the senior revolving credit facility, existing cash balances and
cash anticipated from the sale of marketable equity securities and expected cash
to be provided from operations. The Company is subject to certain customary
affirmative, negative and financial covenants under the senior revolving credit
facility, and continued compliance with these covenants could preclude the
Company from borrowing the maximum amount of the credit facilities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's exposure to market risk for changes in interest rates relates
primarily to borrowings under the Company's unsecured senior revolving credit
facility with The Chase Manhattan Bank. These borrowings bear interest at
variable rates and the fair value of this indebtedness is not significantly
affected by changes in market interest rates. An increase or decrease of 10% in
the current effective interest rates under the Credit Agreement would not have a
material effect on the Company's results of operations.
In addition, the Company is exposed to market risk from a series of forward
purchase agreements on its Class A Common Stock. As of June 30, 2000, a forward
purchase agreement in place covered approximately $9.0 million or 729,745 shares
of Class A Common Stock having forward purchase prices established at $12.38 per
share. If the market priced portion of this agreement was settled based on the
June 30, 2000 market price of Class A Common Stock ($12.00 per share), the
Company would settle under the terms of the forward purchase agreement with a
payment of either $0.2 million in cash or 16,700 shares of Class A Common Stock.
Amounts invested in the Company's foreign operations are translated into U.S.
dollars at the exchange rates in effect at June 30, 2000. The resulting
translation adjustments are recorded as Accumulated other comprehensive income,
a component of Stockholders' equity, in the Condensed Consolidated Balance
Sheets.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description of Document
10.22 Employment Agreement between William R. McDermott and
Gartner Group, Inc. dated as of April 20, 2000
27.1 Financial Data Schedule
(b) Reports on Form 8-K
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On April 4, 2000, the Company filed a Current Report on Form 8-K dated
March 22, 2000 reporting in Item 2 thereof the acquisition, through an
indirect wholly owned subsidiary, of 90% of the equity of TechRepublic,
Inc., a Delaware corporation, by way of merger of its indirect
subsidiary with and into TechRepublic, which was the surviving
corporation in the merger.
On April 25, 2000 the Company filed a Current Report on Form 8-K dated
April 25, 2000 reporting in Item 5 thereof the Company's issuance and
sale of an aggregate of $300 million principal amount of its unsecured
6% Convertible Junior Subordinated Promissory Notes due April 17, 2005
to Silver Lake Partners, L.P. and certain of Silver Lake Partners,
L.P.'s affiliates.
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Gartner Group, Inc.
Date August 14, 2000 /s/ Regina M. Paolillo
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Regina M. Paolillo
Executive Vice President
And Chief Financial Officer
(Principal Financial and
Accounting Officer)
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