1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED DECEMBER 31, 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 January 31, 2001 was 53,856,265 shares of Common Stock, Class A and
32,555,788 shares of Common Stock, Class B.
2
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS Page
Condensed Consolidated Balance Sheets at December 31, 2000 and
September 30, 2000 3
Condensed Consolidated Statements of Operations for the
Three Months ended December 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Three Months ended December 31, 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 9
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 17
PART II OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 18
2
3
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
GARTNER GROUP, INC.
Condensed Consolidated Balance Sheets
(Unaudited in thousands)
December 31, September 30,
2000 2000
----------- -------------
Assets
Current assets:
Cash and cash equivalents $ 24,320 $ 61,698
Marketable equity securities 15,036 35,404
Fees receivable, net 340,396 326,359
Deferred commissions 41,891 46,756
Prepaid expenses and other current assets 41,725 42,651
--------- -----------
Total current assets 463,368 512,868
Property, equipment and leasehold improvements, net 97,380 91,259
Intangible assets, net 311,524 315,197
Other assets 79,311 83,641
--------- -----------
Total assets $ 951,583 $ 1,002,965
========= ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 156,923 $ 201,407
Deferred revenues 350,840 385,932
Short-term debt 30,000 --
--------- -----------
Total current liabilities 537,763 587,339
--------- -----------
Long-term debt 311,909 307,254
Other liabilities 32,326 33,552
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 59 59
Additional paid-in capital 335,374 333,828
Unearned compensation (6,252) (6,451)
Accumulated other comprehensive loss (7,876) (1)
Accumulated earnings 186,183 182,286
Treasury stock, at cost (437,903) (434,901)
--------- -----------
Total stockholders' equity 69,585 74,820
--------- -----------
Total liabilities and stockholders' equity $ 951,583 $ 1,002,965
========= ===========
See accompanying notes
3
4
GARTNER GROUP, INC.
Condensed Consolidated Statements of Operations
(Unaudited in thousands, except per share data)
For the three months ended
December 31,
--------------------------
2000 1999
--------- ---------
Revenues:
Research $ 139,182 $ 132,279
Consulting 49,663 34,460
Events 62,465 48,909
Other 8,785 7,249
--------- ---------
Total revenues 260,095 222,897
--------- ---------
Costs and expenses:
Costs of services and product development 135,075 97,418
Selling, general and administrative 93,339 78,345
Depreciation 7,851 5,873
Amortization of intangibles 11,182 3,067
Other charge -- 6,051
--------- ---------
Total costs and expenses 247,447 190,754
--------- ---------
Operating income 12,648 32,143
Net gain on sale of investments 5,318 --
Interest income 378 732
Interest expense (5,511) (5,723)
Other expense (1,700) (1,173)
--------- ---------
Income before provision for income taxes 11,133 25,979
Provision for income taxes 7,236 9,517
--------- ---------
Net income $ 3,897 $ 16,462
========= =========
Net income per common share:
Basic $ 0.05 $ 0.19
Diluted $ 0.04 $ 0.18
Weighted average shares outstanding:
Basic 86,048 88,537
Diluted 86,816 90,672
See accompanying notes
4
5
GARTNER GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited in thousands)
For the three months ended
December 31,
--------------------------
2000 1999
-------- --------
Operating activities:
Net income $ 3,897 $ 16,462
Adjustments to reconcile net income to net cash (used) provided by operating
activities:
Depreciation and amortization of intangibles 19,033 8,940
Deferred compensation 198 193
Tax benefit associated with employee exercise of stock options 904 700
Provision for doubtful accounts 732 798
Equity in loss of minority owned companies 0 1,173
Deferred revenues (35,722) (61,032)
Deferred tax benefit 765 428
Net gain on sale of investments (5,318) --
Impairment loss on investment 1,700 --
Accretion of interest and amortization of debt issue costs 5,422 837
Changes in assets and liabilities, net of effects of acquisitions:
(Increase) decrease in fees receivable (12,026) 15,955
Decrease in deferred commissions 4,955 5,791
Decrease in prepaid expenses and other current assets 3,680 5,613
Decrease in other assets 4,229 1,119
(Decrease) increase in accounts payable and accrued liabilities (38,771) 9,857
-------- --------
Cash (used for) provided by operating activities (46,322) 6,834
-------- --------
Investing activities:
Payment for businesses acquired (excluding cash acquired) (8,842) (33,331)
Proceeds from sale of marketable securities 8,604 --
Addition of property, equipment and leasehold improvements (13,703) (8,381)
Payments for investments 0 (8,125)
-------- --------
Cash used for investing activities (13,941) (49,837)
-------- --------
Financing activities:
Proceeds from the issuance of stock options 641 1,305
Purchase of treasury stock (3,002) (29,910)
Proceeds from issuance of debt 30,000 60,000
Payments for debt issuance costs (5,000) --
Net cash settlement on forward purchase agreement -- (6,839)
-------- --------
Cash provided by financing activities 22,639 24,556
-------- --------
Net decrease in cash and cash equivalents (37,624) (18,447)
Effects of foreign exchange rates on cash and cash equivalents 246 (59)
Cash and cash equivalents, beginning of period 61,698 88,894
-------- --------
Cash and cash equivalents, end of period $ 24,320 $ 70,388
======== ========
See accompanying notes
5
6
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, 2000. 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 month period ended December 31, 2000 may not be indicative of the results
of operations for the remainder of fiscal 2001. In addition, certain
reclassifications have been made to our historical financial statements to
conform them to the current year presentation.
Note 2 - Acquisition
On October 2, 2000, the Company acquired all of the assets and assumed the
liabilities of Solista Global LLC ("Solista") for approximately $7.0 million in
cash. An additional $2.0 million of purchase price was paid in escrow and is
contingent based upon the achievement of certain financial targets in the
future. Solista is a provider of strategic consulting services that merge
technology and business expertise to help clients build strategies for the
digital world. The acquisition was accounted for by the purchase method and the
purchase price has been allocated to the assets acquired and the liabilities
assumed, based upon estimated fair values at the date of the acquisition. The
excess purchase price over the fair value of amounts assigned to the net
tangible assets acquired was approximately $6.5 million, of which $6.0 million
has been allocated to goodwill and is being amortized over 20 years. In
addition, $0.5 million of the purchase price was allocated to non-compete
agreements which are being amortized over three years.
Note 3 - Investments
A summary of the Company's investments in marketable equity securities and cost
based investments at December 31, 2000 is as follows (in thousands):
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------
Marketable equity securities
available for sale $10,794 $4,250 $ (8) $15,036
Other investments 17,650 -- -- 17,650
- ------------------------------------------------------------------------------------
Total $28,444 $4,250 $ (8) $32,686
====================================================================================
During the quarter ended December 31, 2000, the Company recognized a $1.7
million impairment loss related to an equity security owned by the Company
through SI Venture Associates, LLC, a wholly owned affiliate.
Also included in Other assets in the Condensed Consolidated Balance Sheet at
December 31, 2000 is the Company's equity method investment in SI Venture
Fund II, L.P. ("SI II") which amounted to $24.2 million.
6
7
The Company's share of equity loss in SI II as of December 31, 2000 amounted to
$0.1 million. In addition, for the quarter ended December 31, 2000, the Company
recorded $3.6 million of its share of net unrealized holding losses in available
for sale equity securities owned by SI II.
Note 4 - 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
December 31,
--------------------------
2000 1999
------- -------
Numerator:
Net income $ 3,897 $16,462
------- -------
Denominator
Denominator for basic earnings per share - weighted average
number of common shares outstanding 86,048 88,537
Effect of dilutive securities:
Weighted average number of common shares under warrant
outstanding -- 0
Weighted average number of option shares outstanding 768 2,135
------- -------
Dilutive potential common shares 768 2,135
------- -------
Denominator for diluted earnings per share - adjusted weighted
average number of common shares outstanding 86,816 90,672
======= =======
Basic earnings per common share $ 0.05 $ 0.19
======= =======
Diluted earnings per common share $ 0.04 $ 0.18
======= =======
For the three months ended December 31, 2000 and 1999, respectively, options to
purchase 29.1 million and 13.9 million shares of Class A Common Stock of the
Company with exercise prices greater than the average market price of $9.32 and
$13.47, 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 months ended December
31, 2000, representing 19.7 million common shares, if converted, and the related
interest expense of $4.6 million were not included in the computation of diluted
net income per share because the effect would have been antidilutive.
Note 5 - Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in equity, except those
resulting from investments by owners and distributions to owners. The components
of comprehensive income (loss) for the three months ended December 31, 2000 and
1999 are as follows (in thousands):
For the three months ended
December 31,
--------------------------
2000 1999
-------- --------
Net income $ 3,897 $ 16,462
Foreign currency translation adjustments 2,463 (2,323)
Unrealized holding loss on marketable securities (10,336) --
-------- --------
Comprehensive income (loss) $ (3,976) $ 14,139
======== ========
7
8
Note 6 - Employee Incentive Stock Options
In November 1999, the Company adopted the 1999 Stock Option Plan. Under the
terms of the plan, the Board of Directors may grant non-qualified and incentive
stock options and other awards to eligible employees and consultants. A total of
20,000,000 shares of Class A Common Stock was reserved for issuance under this
plan. Substantially all of the options currently granted under the plan vest and
become fully exercisable each year for three years in equal installments
following the date of grant, based on continued employment, and have a term of
ten years from the date of grant assuming continued employment. A total of
9,776,090 and 2,304,558 options to purchase common stock were available for
grant under the 1999 Stock Option Plan at September 30, 2000 and December 31,
2000, respectively.
Note 7 - Segment Information
The Company manages its business in four reportable segments organized on the
basis of differences in its related products and services: research, consulting,
events, and TechRepublic. Research consists primarily of subscription-based
research products. Consulting consists primarily of consulting and measurement
engagements. Events consist of various symposia, expositions, and conferences.
TechRepublic consists of an IT professional online destination with revenues
consisting primarily of Web based advertising.
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 Company does not identify or allocate assets, including capital
expenditures, by operating segment, with the exception of TechRepublic.
Accordingly, assets are not being reported by segment, other than TechRepublic,
because the information is not available by segment and is not reviewed in the
evaluation of performance or making decisions in the allocation of resources. At
December 31, 2000, TechRepublic had identifiable tangible assets of $10.2
million.
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 December 31, 2000 Research Consulting Events TechRepublic Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Revenues $ 139,182 $ 49,663 $ 62,465 $ 4,480 $ 4,305 $ 260,095
Gross contribution 91,250 5,853 35,626 (8,727) 1,319 125,321
Corporate and other expenses (112,673) (112,673)
Net gain on sale of investments 5,318
Interest income 378
Interest expense (5,511)
Other expense (1,700)
Income before provision for income taxes 11,133
Three months ended December 31, 1999 Research Consulting Events TechRepublic Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Revenues $ 132,279 $ 34,460 $ 48,909 -- $ 7,249 $ 222,897
Gross contribution 90,990 8,590 25,146 -- 3,472 128,198
Corporate and other expenses (96,055) (96,055)
Interest income 732
Interest expense (5,723)
Other expense (1,173)
Income before provision for income taxes 25,979
8
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In addition to historical information, this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those discussed in, or
implied by, the forward-looking statements as a result of the risk factors set
forth below under "Quarterly Operating Income Trends", "Factors That May Affect
Future Performance", "Euro Conversion" and elsewhere in this report and in the
Company's Annual Report on Form 10-K for the year ended September 30, 2000.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Factors That May Affect Future Results" below. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's opinion only as of the date hereof. The Company undertakes
no obligation to revise or update these forward-looking statements. Readers
should also carefully review the risk factors described in other documents the
Company files from time to time with the Commission.
Results of Operations
- ---------------------
The following table sets forth certain results of operations as a percentage of
total revenues:
For the three months ended
December 31,
--------------------------
2000 1999
------ ------
Revenues:
Research 53.5% 59.3%
Consulting 19.1 15.5
Events 24.0 21.9
Other 3.4 3.3
------ ------
Total revenues 100.0 100.0
------ ------
Costs and expenses:
Costs of services and product development 51.9 43.7
Selling, general and administrative 35.9 35.2
Depreciation 3.0 2.6
Amortization of intangibles 4.3 1.4
Other charge -- 2.7
------ ------
Total costs and expenses 95.1 85.6
------ ------
Operating income 4.9 14.4
Net gain on sale of investments 2.1 --
Interest income 0.1 0.3
Interest expense (2.1) (2.5)
Other expense (0.7) (0.5)
------ ------
Income before provision for income taxes 4.3 11.7
------ ------
Provision for income taxes 2.8 4.3
------ ------
Net income 1.5% 7.4%
====== ======
9
10
TOTAL REVENUES increased 17% to $260.1 million for the first quarter of fiscal
2001 from $222.9 million for the first quarter of fiscal 2000. Research revenues
increased 5% in the first quarter of fiscal 2001 to $139.2 million compared to
$132.3 million for the first quarter of fiscal 2000 and comprised approximately
54% and 59% of total revenues in the first quarter of fiscal 2001 and 2000,
respectively. Consulting revenue, consisting primarily of revenue from
consulting and measurement engagements, increased 44% to $49.7 million for the
first quarter of fiscal 2001 as compared to $34.5 million for the first quarter
of fiscal 2000, and comprised approximately 19% and 16% of total revenue in the
first quarter of fiscal 2001 and 2000, respectively. Events revenue was $62.5
million in the first quarter of fiscal 2001, an increase of 28% over the $48.9
million for the same period in fiscal 2000. Events revenue comprised
approximately 24% of total revenue in the first quarter of fiscal 2001 and 22%
in the first quarter of fiscal 2000. Other revenues, consisting principally of
software licensing fees and TechRepublic, increased 21% to $8.8 million in the
first quarter of fiscal 2001 from $7.2 million in the first quarter of fiscal
2000. The increase in total revenues reflects the ability of the Company to gain
client acceptance of new products and services, deliver high value consultative
services, increase sales penetration into new and existing clients and develop
incremental revenues from current and prior year acquisitions. Research contract
value, which consists of the annualized value of all subscription-based research
products with ratable revenue recognition, was $578.4 million at December 31,
2000, an increase of 5% from $551.6 million at December 31, 1999. Consulting
backlog increased 22% to approximately $91.5 million at December 31, 2000
compared to $75.2 million at December 31, 1999 and represents future revenues to
be recognized from in-process consulting and measurement engagements. Driven by
continued strong demand in upcoming conferences and expositions, deferred
revenue for events increased 100% to $37.8 million at December 31, 2000 as
compared to $18.9 million at December 31, 1999.
OPERATING INCOME decreased 66% to $10.9 million in the first quarter of fiscal
2001 from $32.1 million in the first quarter of fiscal 2000. Operating income
was impacted, in part, by continued expenditures related to the rearchitecture
of the Company's research methodology and delivery processes, the hiring of
analysts and consultants, higher growth in lower margin consultative services
and other business initiatives and investments, predominately TechRepublic. In
addition, TechRepublic's operating loss of $16.9 million in the first quarter of
fiscal 2001 impacted the Company's operating income.
COSTS AND EXPENSES, excluding the other charge, increased to $247.4 million in
the first quarter of fiscal 2001 from $184.7 million in the first quarter of
fiscal 2000. The increase in costs and expenses, excluding the other charge,
reflects the additional support required for the growing client base,
incremental costs associated with conferences, costs associated with acquired
businesses, the hiring of additional consultants, analysts, project executives
and sales personnel, and TechRepublic related operating costs. Cost of services
and product development expenses were $135.1 million and $97.4 million for the
first quarter of fiscal 2001 and 2000, respectively. Selling, general and
administrative expenses increased to $93.3 million in the first quarter of
fiscal 2001 from $78.3 million in the first quarter of fiscal 2000 as a result
of the Company's continuing expansion of worldwide distribution channels and
additional general and administrative resources needed to meet the expanding
infrastructure requirements of the growing revenue base and fiscal 2001 and
fiscal 2000 acquisitions. These infrastructure requirements involve information
systems support, telecommunication, facilities and human capital costs.
10
11
THE OTHER CHARGE of $6.1 million for the three months ended December 31, 1999
was paid in relation to a special one-time cash incentive plan designed to
enhance retention of key personnel in response to the Company's recapitalization
that occurred in fiscal 1999.
DEPRECIATION EXPENSE for the first quarter of fiscal 2001 increased to $7.9
million compared to $5.9 million for the first quarter of fiscal 2000, primarily
due to capital spending and internal use software development costs required to
support business growth. Additionally, amortization of intangibles increased by
$8.1 million, in the first quarter of fiscal 2001 as compared to the same period
in fiscal 2000, reflecting primarily amortization of $7.9 million of goodwill
associated with the TechRepublic and other fiscal 2000 acquisitions.
NET GAIN ON SALE OF INVESTMENTS in the first quarter of fiscal 2001 reflects the
sale of 361,000 shares of Jupiter Media Metrix for net cash proceeds of $4.0
million for a pre-tax gain of $1.5 million and the sale of equity securities
received by the Company from SI Venture Associates, LLC, ("SI I"), a wholly
owned affiliate as in-kind share distributions for net cash proceeds of $4.6
million for a pre-tax gain of $3.8 million.
INTEREST EXPENSE decreased to $5.5 million in the first quarter of fiscal 2001
from $5.7 million in the first quarter of fiscal 2000. This decrease related
primarily to lower debt facility borrowings under the Company's senior revolving
credit facility, primarily due to the issuance of the Company's convertible
subordinate notes. Interest income decreased in the first quarter of fiscal 2001
due to a lower average balance of investable funds as compared to the same
quarter in prior fiscal year.
OTHER EXPENSE of $1.7 million for the three months ended December 31, 2000, was
the result of a $1.7 million impairment loss related to an equity security owned
by the Company through SI I. The $1.2 million expense for the first quarter of
fiscal 2000 was the result of equity losses from minority-owned investments.
PROVISION FOR INCOME TAXES was $7.2 million in the first quarter of fiscal 2001,
down from $9.5 million in the same quarter of fiscal 2000. The effective tax
rate was 65% in the first quarter of fiscal 2001 which reflects the impact of
non-deductible goodwill related to the TechRepublic acquisition.
DILUTED EARNINGS PER COMMON SHARE decreased 78% to 4 cents per common share for
the first quarter of fiscal 2001, compared to 18 cents per common share for the
first quarter of fiscal 2000. Excluding the impact of the net gain on sale of
investments and an impairment loss, diluted earnings per share were 3 cents for
the first quarter of fiscal 2000. Basic earnings per common share decreased 74%
to 5 cents for the first quarter of fiscal 2001 from 19 cents for the first
quarter of fiscal 2000.
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 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 contract the entire
amount of the contract billable as deferred revenue and fees
11
12
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 increased operating expenses for required
growth and because the operating income margins from the Symposia and ITxpo
events in the first fiscal quarter are higher than on conferences held later in
the fiscal year. In addition, the prior fiscal year quarterly operating income
margins were impacted by the timing of costs related to the one-time cash
retention incentive and strategic investments. As a result, historical and prior
year operating income margin trends may not be indicative of the quarterly
operating results for the remainder of the year.
Liquidity and Capital Resources
- -------------------------------
Cash used for operating activities totaled $46.3 million for the three months
ended December 31, 2000 as compared to cash provided by operating activities of
$6.8 million for the three months ended December 31, 1999 resulting in a net
decrease of $53.2 million primarily from the impact of the decrease in net
income, the net gain on sale of investments and the changes in balance sheet
accounts, particularly fees receivable, deferred revenues, and accounts payable
and accrued liabilities. Cash used for investing activities was $13.9 million
for the three months ended December 31, 2000 (compared to $49.8 million for the
three months ended December 31, 1999) due to the effect of cash used for
property and equipment additions of $13.7 million and acquisitions and
investments in consolidated subsidiaries of $8.8 million, partially offset by
proceeds from the partial sale of investments of $8.6 million. Cash provided by
financing activities totaled $22.6 million in the three months ended December
31, 2000 (compared to $24.6 million for the three months ended December 31,
1999). The cash provided by financing activities resulted primarily from the
$30.0 million in borrowings under the senior revolving credit facility,
partially offset by $3.0 million the Company paid for the repurchase of 366,000
shares of Class A Common Stock and 4,128 shares of Class B Common Stock under
the terms of the recapitalization as well as $5.0 million paid by the Company in
debt origination costs related to the April 17, 2000 private placement of
convertible subordinated notes to Silver Lake Partners, L.P. and related
parties.
The effect of exchange rates was limited and increased cash and cash equivalents
by $0.2 million for the three months ended December 31, 2000, and was due to the
strengthening of the U.S. dollar versus certain foreign currencies. The Company
issues letters of credit in the ordinary course of business. As of December 31,
2000, the Company had letters of credit outstanding with Chase Manhattan Bank
for $0.5 million and with The Bank of New York for $2.0 million. 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 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
12
13
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. As of December 31, 2000, the Company
has a remaining commitment to purchase an additional 296,363 shares of Class A
Common Stock in the open market by July 2001. The Company intends to fund this
remaining commitment either through existing cash balances, cash proceeds
anticipated from the sale of marketable equity securities, cash expected to be
provided from operations or borrowings available under the senior revolving
credit facility. 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. As a result of these
covenants, the Company's borrowing availability at December 31, 2000 is $53.9
million of the $200.0 million senior revolving credit facility.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE. The Company operates in a very
competitive and rapidly changing environment that involves numerous risks and
uncertainties, some of which are beyond the Company's control. The following
section discusses many, but not all, of these risks and uncertainties.
Competitive Environment. The Company faces competition from a significant number
of independent providers of information products and services, as well as the
internal marketing and planning organizations of the Company's clients. The
Company also competes indirectly against consulting firms and other information
providers, including electronic and print media companies. These indirect
competitors could choose to compete directly with the Company in the future. In
addition, limited barriers to entry exist in the Company's market. As a result,
additional new competitors may emerge and existing competitors may start to
provide additional or complementary services. Increased competition may result
in loss of market share, diminished value in the Company's products and
services, reduced pricing and increased marketing expenditures. The Company may
not be successful if it cannot compete effectively on quality of research and
analysis, timely delivery of information, customer service, the ability to offer
products to meet changing market needs for information and analysis and price.
Hiring and Retention of Employees. The Company's future success depends heavily
upon the quality of its senior management, sales personnel, IT analysts,
consultants and other key personnel. The Company faces intense competition for
these qualified professionals from, among others, technology and Internet
companies, market research firms, consulting firms and electronic and print
media companies. Some of the personnel that the Company attempts to hire are
subject to non-competition agreements that could impede the Company's short-term
recruitment efforts. Any failure to retain key personnel or hire additional
qualified personnel, as may be required to support the evolving needs of clients
or growth in the Company's business, could adversely affect the quality of the
Company's products and services, and, therefore, its future business and
operating results.
Maintenance of Existing Products and Services. The Company operates in a rapidly
evolving market and the Company's success depends upon its ability to deliver
high quality and timely research and analysis to its clients and to anticipate
and understand the changing needs of its clients. Any failure to continue to
provide credible and reliable information that is useful to its clients could
have a material adverse effect on future business and operating results.
Further, if the Company's predictions prove to be wrong or are not substantiated
by appropriate research, the Company's reputation may suffer and demand for its
products and services may decline.
Introduction of New Products and Services. The market for the Company's products
and services are characterized by rapidly changing needs for information and
analysis. To maintain its competitive position, the Company must continue to
successfully enhance and improve its products and services,
13
14
develop or acquire new products and services in a timely manner, and
appropriately position and price products and services. Any failure to
successfully do so could have a material adverse effect on the Company's
business, results of operations or financial position. In addition, the Company
must continue to improve its methods for delivering its products and services.
For example, the Company believes that it needs to continue to invest in and
develop its ability to use the Web as a delivery channel for products and
services. Failure to increase and improve the Company's Web capabilities could
adversely affect the Company's future business and operating results.
Expanding Markets. The Company has recently begun to expand its product and
service offerings to smaller companies and to different user bases within
existing and potential larger company clients. These target market segments are
relatively new to the Company's sales and marketing personnel. As a result, the
Company may not be able to compete effectively or generate significant revenues
in these new market segments.
Internet Business Risks. The Company, through TechRepublic, operates a Web site
targeted to IT professionals that offers IT industry news, analysis, articles,
forums, event listings and job, peer and vendor directories. The majority of
revenues from this business are derived from advertising and subscriptions. The
Company's ability to continue to achieve and grow significant advertising
revenues depends upon growth of its user base, the user base being attractive to
advertisers, the ability to derive demographic and other information from users,
and acceptance by advertisers of the Web as an advertising medium. Similarly,
the Company's ability to generate significant subscription revenues depends on
its ability to continue to develop content and services that are attractive to
its user base. If the Company was unable to successfully adapt to the needs of
its users and advertisers, the Company's Internet business would be materially
and adversely affected.
International Operations. A substantial portion of the Company's revenues are
derived from international sales. As a result, the Company's operating results
are subject to the risks inherent in international business activities,
including general political and economic conditions in each country, changes in
market demand as a result of exchange rate fluctuations and tariffs, challenges
in staffing and managing foreign operations, changes in regulatory requirements,
compliance with numerous foreign laws and regulations, different or overlapping
tax structures, higher levels of United States taxation on foreign income, and
the difficulty of enforcing client agreements and protecting intellectual
property rights in international jurisdictions. Additionally, the Company relies
on local distributors or sales agents in some international locations. If any of
these arrangements are terminated, the Company may not be able to replace the
terminated arrangement on equally beneficial terms or on a timely basis or
clients of the local distributor or sales agent may not want to continue to do
business with the Company or its new agent.
Branding. The Company believes that its Gartner brand is critical to the
Company's efforts to attract and retain clients and that the importance of brand
recognition will increase as competition increases. The Company expects to
expand its marketing activities to promote and strengthen the Gartner brand and
may need to increase its marketing budget, hire additional marketing and public
relations personnel, expend additional sums to protect the brand and otherwise
increase expenditures to create and maintain brand loyalty among clients. If the
Company fails to effectively promote and maintain the Gartner brand, or incurs
excessive expenses in attempting to do so, the Company's future business and
operating results could be materially and adversely impacted.
Investment Activities. The Company maintains investments in equity securities in
private and publicly-traded companies through direct ownership and through
wholly and partially owned venture capital funds. The companies invested in are
primarily early to mid-stage IT-based and Internet-enabled businesses. It is
14
15
the Company's objective to seek financial returns from these investments as an
additional source of capital to fund strategic initiatives. The risks related to
such investments, due to their nature and the volatile public markets, include
the possibilities that anticipated returns may not materialize or could be
significantly delayed. As a result, the Company's financial results could be
materially impacted.
Significant Indebtedness. In connection with its recapitalization transactions
and strategic repositioning, which include the purchase and continued investment
in TechRepublic, the Company has incurred significant indebtedness. The
associated debt service could impair future operating results. Further, the
outstanding debt could limit the amount of cash or additional credit available
to the Company, which in turn, could restrain the Company's ability to expand or
enhance products and services, respond to competitive pressures or pursue
business opportunities that may arise in the future and involve substantial
investments of additional capital. In addition, the convertible notes issued by
the Company contain a reset provision allowing in fiscal 2001 for the possible
reduction of the conversion price under certain conditions. If the Company did
not elect to redeem the convertible notes in the event of a reset, the impact of
a reduction in the conversion price would result in additional shares of common
stock being issued (compared to the amount that would be issued based on the
original conversion price) if the notes are ultimately converted into shares.
Correspondingly, if the Company elected to redeem the convertible notes in the
event of a reset, there can be no assurances that the capital required to be
raised would be available on commercially reasonable or comparable terms which
in turn could impact future business and operating results.
Organizational and Product Integration Related to Acquisitions. The Company has
made and expects to continue to make acquisitions of, or significant investments
in, businesses that offer complementary products and services. The risks
involved in each acquisition or investment include the possibility of paying
more than the value the Company derives from the acquisition, the assumption of
undisclosed liabilities and unknown and unforeseen risks, the difficulty of
integrating the operations and personnel of the acquired business, the ability
to retain key personnel of the acquired company, the time to train the sales
force to market and sell the products of the acquired company, the potential
disruption of the Company's ongoing business and the distraction of management
from the Company's business. The Company may also incur additional debt or issue
equity securities to pay for future acquisitions.
Enforcement of the Company's Intellectual Rights. The Company relies on a
combination of copyright, patent, trademark, trade secrets, confidentiality
procedures and contractual procedures to protect its intellectual property
rights. Despite the Company's efforts to protect its intellectual property
rights, it may be possible for unauthorized third parties to obtain and use
technology or other information that the Company regards as proprietary. In
addition, the Company's intellectual property rights may not survive a legal
challenge to their validity or provide significant protection for the Company.
Furthermore, the laws of certain countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.
Accordingly, the Company may not be able to protect its intellectual property
against unauthorized third party copying or use, which could adversely affect
the Company's competitive position.
Agreements with IMS Health Incorporated. In connection with its
recapitalization, the Company agreed to certain restrictions on business
activity to reduce the risk to IMS Health and its stockholders of substantial
tax liabilities associated with the spinoff by IMS Health of its equity interest
in the Company. The Company also 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 were to seek and obtain a ruling from the IRS that
the transaction will not give rise to such tax liabilities. In
15
16
addition, the Company has certain limits in purchasing its common stock under
the terms of the recapitalization.
Possibility of Infringement Claims. Third parties may assert infringement claims
against the Company in the future. Regardless of the merits, responding to any
such claim could be time consuming, result in costly litigation and require the
Company to enter into royalty and licensing agreements which may not be offered
or available on terms acceptable to the Company. If a successful claim is made
against the Company and the Company fails to develop or license a substitute
technology, the Company's business, results of operations or financial position
could be materially adversely affected.
Potential Fluctuations in Operating Results. The Company's quarterly operating
income may fluctuate in the future as a result of a number of factors, including
the timing of the execution of research contracts, the performance of consulting
engagements, the timing of symposia and other events, the amount of new business
generated by the Company, the restructuring of the Company's sales force and the
change in territories of sales personnel at the end of each fiscal year, the mix
of domestic and international business, changes in market demand for the
Company's products and services, the timing of the development, introductions
and marketing of new products and services, the results of operations of
TechRepublic and competition in the industry. As a result, the Company's
operating results in any quarter are not necessarily a good predictor of its
operating results for any future period.
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. In 2002, participating countries will adopt the euro as
their single currency. Beginning that date, the participating countries will
issue new euro-denominated bills and coins for use in cash transactions. Legacy
currency will no longer be legal tender for any transactions beginning July 1,
2002, making conversion to the euro complete.
As of December 31, 2000, the Company has not found the impact of 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. Costs
associated with the adoption of the euro have not been and are not expected to
be significant and are being expensed as incurred.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("FAS 133") was issued. FAS
133, as amended by FAS 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" establishes a new model for accounting for
derivatives and hedging activities. The Statement requires all derivatives be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in fair value will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. In June 1999, Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133," was issued. Citing
concerns about the ability of companies to modify their information systems in
time to apply the new model for accounting for derivatives and
16
17
hedging activities, FAS 137 was issued to delay the effective date for one year
to fiscal years beginning after June 15, 2000, or October 1, 2000 for the
Company. The Company does not currently have any derivative instruments or
engage in any hedging activities. The adoption of this statement did not have a
material impact on the Company's financial position or results of operations.
In September 2000, Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities - a Replacement of FASB Statement No. 125" ("FAS 140") was
issued. FAS 140 replaces Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("FAS 125"). FAS 140 revises the standards of accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, and otherwise reiterates many of the provisions of
FAS 125. FAS 140 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001. FAS 140 is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The adoption of FAS 140 will not have a material impact
on the Company's financial position or results of operations.
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 senior revolving credit facility. 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 facility 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 December 31, 2000, a
forward purchase agreement in place covered approximately $9.5 million or
943,672 shares of Class A Common Stock having forward purchase prices
established at $10.02 per share. If the market priced portion of this agreement
was settled based on the December 31, 2000 closing market price of the Class A
Common Stock, which was $6.91 per share, the Company would settle under the
terms of the forward purchase agreement with a payment of either $2.9 million in
cash or 425,814 shares of Class A Common Stock at the Company's option.
Amounts invested in the Company's foreign operations are translated into U.S.
dollars at the exchange rates in effect at December 31, 2000. The resulting
translation adjustments are recorded as a component of Accumulated other
comprehensive loss in the Stockholders' equity section of the Condensed
Consolidated Balance Sheets.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on January 25, 2001. At the meeting,
the Class A stockholders re-elected Manuel A. Fernandez to the Board of
Directors as a Class II director and the Class B stockholders re-elected Anne
Sutherland Fuchs and Dennis G. Sisco to the Board of Directors as Class II
directors. The votes were as follows:
17
18
Total Vote
Total Vote Withheld from
for Each Director Each Director
----------------- -------------
Class A:
Manuel A. Fernandez 42,540,818 900,916
Class B :
Anne Sutherland Fuchs 24,265,229 901,920
Dennis G. Sisco 24,266,774 900,375
The stockholders approved an amendment to the Company's Certificate of
Incorporation to change its legal name from "Gartner Group, Inc." to "Gartner,
Inc." The vote was 67,869,814 for, 670,442 against, and 68,627 abstained.
The stockholders ratified the appointment of KPMG LLP as independent auditors
for the Company for the 2001 fiscal year. The vote was 68,356,093 for, 181,094
against, and 71,696 abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
The Company did not file a report on Form 8-K during the fiscal
quarter ended December 31, 2000.
Items 1, 2, 3 and 5 are not applicable and have been omitted.
18
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Gartner Group, Inc.
Date February 14, 2001 /s/ Regina M. Paolillo
-------------------------------
Regina M. Paolillo
Executive Vice President
And Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
