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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 DECEMBER 31, 1998
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 0-015144
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 December 31, 1998 was 102,065,401 shares of Common Stock, Class A.
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS Page
Condensed Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1998 3
Condensed Consolidated Statements of Operations for the Three
Months ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for
the Three Months ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
PART II OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USES OF PROCEEDS 13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY 13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 14
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
GARTNER GROUP, INC.
Condensed Consolidated Balance Sheets
(In thousands)
December 31, September 30,
1998 1998
ASSETS
Current assets:
Cash and cash equivalents $ 143,083 $ 157,744
Marketable securities 79,001 60,940
Fees receivable, net 244,025 239,243
Deferred commissions 23,654 28,287
Prepaid expenses and other current assets 22,094 24,865
--------- ---------
Total current assets 511,857 511,079
Long-term marketable securities 18,848 43,610
Property, equipment and leasehold improvements, net 53,808 50,801
Intangible assets, net 180,348 155,786
Other assets 75,319 71,595
--------- ---------
Total assets $ 840,180 $ 832,871
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 108,265 $ 106,400
Commissions payable 8,991 20,422
Deferred revenues 269,272 288,013
--------- ---------
Total current liabilities 386,528 414,835
--------- ---------
Long-term deferred revenues 888 3,098
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock -- --
Common stock 57 57
Additional paid-in capital 270,750 262,776
Cumulative translation adjustment (1,222) (2,155)
Accumulated earnings 223,573 193,485
Treasury stock, at cost (40,394) (39,225)
--------- ---------
Total stockholders' equity 452,764 414,938
--------- ---------
Total liabilities and stockholders' equity $ 840,180 $ 832,871
========= =========
See accompanying notes.
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GARTNER GROUP, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
For the three months ended
December 31,
---------------------
1998 1997
-------- --------
Revenues:
Advisory and measurement $133,123 $115,989
Learning -- 4,963
Other, principally consulting and conferences 57,257 41,715
-------- --------
Total revenues 190,380 162,667
-------- --------
Costs and expenses:
Cost of services and product development 79,350 66,403
Selling, general and administrative 57,852 48,995
Depreciation 5,233 3,940
Amortization of intangibles 2,203 2,184
-------- --------
Total costs and expenses 144,638 121,522
-------- --------
Operating income 45,742 41,145
Interest income, net 2,476 2,202
-------- --------
Income before provision for income taxes 48,218 43,347
Provision for income taxes 18,130 17,703
-------- --------
Net income $ 30,088 $ 25,644
======== ========
Earnings per common share:
Basic $ 0.30 $ 0.26
Diluted $ 0.29 $ 0.25
Weighted average common shares outstanding:
Basic 101,479 97,838
Diluted 104,516 104,412
See accompanying notes.
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GARTNER GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
For the three months ended
December 31,
----------------------
1998 1997
--------- ---------
Operating activities:
Net income $ 30,088 $ 25,644
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization of intangibles 7,436 6,124
Provision for doubtful accounts 923 13
Equity losses of minority owned companies 274 202
Deferred revenues (23,888) (7,853)
Changes in assets and liabilities, net of effects of acquisitions:
Increase in fees receivable (2,982) (10,465)
Decrease in deferred commissions 4,654 3,842
Decrease (increase) in prepaid expenses and other current assets 3,061 (1,188)
Increase in other assets (861) (1,230)
Decrease in accounts payable and accrued liabilities (1,159) (19,019)
Decrease in commissions payable (11,449) (6,346)
--------- ---------
Cash provided by (used in) operating activities 6,097 (10,276)
--------- ---------
Investing activities:
Payment for businesses acquired (excluding cash acquired) (19,254) (6,537)
Additions of property, equipment and leasehold improvements, net (6,063) (4,359)
Marketable securities sale (purchase), net 6,701 (814)
Investments in unconsolidated subsidiaries (2,250) (10,507)
Loans to officers -- (2,475)
--------- ---------
Cash used in investing activities (20,866) (24,692)
--------- ---------
Financing activities:
Issuance of common stock 3,208 16,165
Proceeds from employee stock purchase plan offering 2,469 --
Net cash settlement on forward purchase agreement (8,438) --
Purchase of treasury stock (1,177) --
Tax benefits of stock transactions with employees 3,463 24,131
--------- ---------
Cash (used in ) provided by financing activities (475) 40,296
--------- ---------
Net (decrease) increase in cash and cash equivalents (15,244) 5,328
Effects of foreign exchange rates on cash and cash equivalents 583 (469)
Cash and cash equivalents, beginning of period 157,744 142,415
--------- ---------
Cash and cash equivalents, end of period $ 143,083 $ 147,274
========= =========
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, 1998. 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 as of the dates and for
the periods presented have been included. The results of operations for the
three month period ended December 31, 1998 may not be indicative of the results
of operations for the remainder of fiscal 1999.
Note 2 - Acquisitions
In October 1998, the Company acquired all of the assets and assumed the
liabilities of Griggs-Anderson, Inc. ("Griggs-Anderson") for $10.9 million in
cash and 306,475 shares of Class A Common Stock of the Company which had an
approximate fair market value of $7.3 million. Griggs-Anderson provides custom
market research to vendors in the technology marketplace, research and surveys
for the evaluation of web sites for effectiveness of content, technical
performance, ease of navigation, impact of graphics, and demographic profiles of
users. 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 acquisition. The excess
purchase price over the fair value of amounts assigned to the net tangible
assets acquired was approximately $16.3 million.
In November 1998, the Company acquired all of the outstanding shares of
Wentworth Research, Limited ("Wentworth") for $8.3 million in cash. Wentworth
provides research and advisory services to chief information officers and the
senior information technology ("IT") management community in the United Kingdom
and Hong Kong. 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 acquisition. The excess
purchase price over the fair value of amounts assigned to the net tangible
assets acquired was approximately $10.4 million.
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Note 3 - Computations of Income per Share of Common Stock
The following table sets forth the required disclosures of the reconciliation of
the basic and diluted net earnings per share computations.
For the three months ended,
December 31,
---------------------------
1998 1997
------- -------
Numerator:
Net income $30,088 $25,644
======= =======
Denominator
Denominator for basic earnings per share - weighted average
number of common shares outstanding 101,479 97,838
Effect of dilutive securities:
Weighted average number of common shares under warrant
outstanding 119 288
Weighted average number of option shares outstanding 2,918 6,286
------- -------
Dilutive potential common shares 3,037 6,574
------- -------
Denominator for diluted earnings per share - adjusted
weighted average number of common shares outstanding 104,516 104,412
======= =======
Basic earnings per common share $ 0.30 $ 0.26
======= =======
Diluted earnings per common share $ 0.29 $ 0.25
======= =======
Note 4 - Comprehensive Income
In June 1997, Statement of Financial Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"), was issued. FAS 130 establishes standards for reporting and
disclosure of comprehensive income and its components in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under generally accepted accounting
principles as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. FAS 130 requires foreign currency translation adjustments, which is
reported separately in stockholders' equity, to be included in comprehensive
income. The Company has adopted the disclosure provisions of FAS 130 effective
October 1, 1998. Comprehensive income for the three months ended December 31,
1998 and 1997, respectively, are as follows:
For the three months ended
December 31,
----------------------
1998 1997
-------- --------
Net income $ 30,088 $ 25,644
Foreign currency translation adjustments 933 (1,191)
======== ========
Comprehensive income $ 31,021 $ 24,453
======== ========
Note 5 - Subsequent Event, Acquisition of G2R, Inc.
In January 1999, the Company acquired all of the assets and assumed the
liabilities of G2R, Inc. ("G2R") for $7.8 million in cash and 351,268 shares of
Class A Common Stock of the Company which had an approximate fair market value
of $7.8 million. G2R is a provider of research and consulting services to IT
product vendors and professional services and outsourcing firms. The acquisition
will be accounted for by the purchase method.
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 the Private Securities
Litigation Reform Act of 1995 and speak only as of the date made. Actual results
could differ materially from those projected in the forward-looking statements
as a result of
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the risk factors set forth below under "Quarterly Operating Income Trends,"
"Factors that May Affect Future Performance", "Year 2000 Issues" and elsewhere
in this report.
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,
---------------
1998 1997
----- -----
Revenues:
Advisory and measurement 69.9% 71.3%
Learning -- 3.1
Other, principally consulting and conferences 30.1 25.6
----- -----
Total revenues 100.0 100.0
----- -----
Costs and expenses:
Cost of services and product development 41.7 40.8
Selling, general and administrative 30.4 30.1
Depreciation 2.7 2.4
Amortization of intangibles 1.2 1.4
----- -----
Total costs and expenses 76.0 74.7
----- -----
Operating income 24.0 25.3
Interest income, net 1.3 1.4
----- -----
Income before provision for income taxes 25.3 26.7
Provision for income taxes 9.5 10.9
----- -----
Net income 15.8% 15.8%
===== =====
TOTAL REVENUES increased 17% to $190.4 million for the first quarter of fiscal
1999 from $162.7 million for the first quarter of fiscal 1998. Excluding
revenues from the Company's learning business, GartnerLearning, which was sold
in September 1998, ongoing business revenue increased 21% for the first quarter
of fiscal 1999 as compared to the same period in fiscal 1998. The Company enters
into annual renewable contracts for advisory (excluding consulting) and
measurement services. Advisory and measurement services encompass services
which, on an ongoing basis, highlight industry developments, review new products
and technologies, provide quantitative market research, analyze industry trends
within a particular technology or market sector and provide comparative analysis
of the information technology operations of organizations. Revenues from
advisory and measurement services are recognized as services and products are
delivered, and as the Company's obligation to the client is completed over the
contract period. Revenues from advisory and measurement services for the three
months ended December 31, 1998 increased by 15% to $133.1 million from $116.0
million for the same period in fiscal 1998. The increase in revenues from
advisory and measurement services reflects continuing client acceptance of new
products and services, sales penetration into new and existing clients and
incremental revenue from current and prior year acquisitions.
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Contract value increased 19% to $591.8 million at December 31, 1998 versus
$499.3 million at December 31, 1997. The Company believes that contract value,
which is calculated as the annualized value of all advisory and measurement
contracts in effect at a given point in time, without regard to the duration of
the contracts outstanding at such time, is a significant measure of the
Company's volume of business. Historically, a substantial portion of client
companies have renewed these services and products for an equal or higher level
of total value each year, and annual revenues from these services in any fiscal
year have approximated contract value at the beginning of the fiscal year. As of
December 31, 1998, approximately 85% of the Company's clients had renewed one or
more services in the last twelve months. However, this renewal rate is not
necessarily indicative of the rate of retention of the Company's revenue base,
and contract value at any time may not be indicative of future advisory and
measurement revenues or cash flows if the rate of renewal of contracts, or the
timing of new business, were to significantly change during the following twelve
months compared to historic patterns. Total deferred revenues of $270.2 million
and $291.1 million at December 31, 1998 and September 30, 1998, respectively, as
presented in the Company's Condensed Consolidated Balance Sheets, represent
unamortized revenues from advisory and measurement services and products plus
unamortized revenues of certain other business products and services not
included in advisory and measurement services and products. Deferred revenues
do not directly correlate to contract value as of the same date, since contract
value represents an annualized value of all outstanding contracts without
regard to the duration of such contracts, and deferred revenue represents
unamortized revenue remaining on all outstanding contracts including advisory
and measurement and certain other services and products not included in
advisory and measurement revenue.
Other revenues for the first quarter of fiscal 1999 increased 37% to $57.3
million compared to $41.7 million for the first quarter of fiscal 1998. Other
revenues consist principally of revenues from consulting engagements and
conferences. The increase of $15.6 million for the first quarter of fiscal 1999
over the first quarter of fiscal 1998 was primarily the result of continued
expansion of consulting services, incremental revenue from current and prior
year acquisitions and increased revenues from the Company's Symposia conferences
and ITxpo exhibition events held annually during the first quarter of the fiscal
year.
OPERATING INCOME increased 11% to $45.7 million, or 24% of total revenues, for
the first quarter of fiscal 1999, from $41.1 million, or 25% of total revenues,
for the first quarter of fiscal 1998. Operating income increased due to growth
in revenues. Operating margins were impacted by the higher proportion of other
revenues to total revenues in the first quarter of 1999 as compared to the first
quarter of 1998. Historically, other revenues carry a lower margin than advisory
and measurement revenues. The effect of fluctuations in foreign exchange rates
did not have a significant impact on operating income during the first quarter
of either fiscal 1999 or 1998.
Costs and expenses increased to $144.6 million in the first quarter of fiscal
1999 from $121.5 million in the first quarter of fiscal 1998. The increase in
costs and expenses over the prior fiscal year for the three month period ended
December 31, 1998 resulted from the additional staffing hired to support the
advisory, measurement and consulting services, incremental costs associated with
conferences and additional costs associated with acquisitions. Cost of services
and product development expenses were $79.4 million and $66.4 million for the
first quarter of fiscal 1999 and 1998, respectively. Costs related to the
delivery of advisory and measurement services are treated as period costs which
are expensed as incurred. The increase in expenses over the prior fiscal year
reflects the need to provide additional support to the growing client base,
costs associated with acquired businesses and continued product development
costs. Selling, general and administrative expenses, which were $57.9 million
and $49.0 million for the first quarter of fiscal 1999 and 1998, respectively,
increased as a result of the Company's continuing expansion of worldwide
distribution channels, additional general and administrative resources needed to
support the growing revenue base and the impact of acquisitions. Although the
Company has added general and administrative resources to support the growing
revenue base, selling, general and administrative expenses
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have remained flat as a percentage of total revenues at approximately 30% for
the quarters ended December 31, 1998 and 1997, respectively.
Depreciation expense increased by $1.3 million for the first quarter of fiscal
1999 as compared to the same period in fiscal 1998 as a result of capital
spending required to support business growth. Amortization expense remained flat
as a result of increased amortization expense related to recent acquisitions
offset by the reduction of amortization expense resulting from the sale of
GartnerLearning in September 1998.
INTEREST INCOME, NET was $2.5 million for the first quarter of fiscal 1999 and
$2.2 million for the first quarter of fiscal 1998. The increase was attributable
to a higher balance of investable funds during the first quarter of 1999 as
compared to the same period in the prior fiscal year, partially offset by
changes in the mix of investable funds to principally tax-free and
tax-advantaged investments, which generally have lower interest rates compared
to taxable investments.
PROVISION FOR INCOME TAXES increased to $18.1 million compared to $17.7 million
for the first quarter of fiscal 1998. The effective tax rate for the first
quarter was approximately 38% and 41% for the same period in the prior fiscal
year. The effective tax rate for the quarter decreased one percentage point from
fiscal 1998. This decrease is primarily the result of on-going tax planning
initiatives.
DILUTED EARNINGS PER COMMON SHARE increased 16% to 29 cents per common share for
the first quarter of fiscal 1999, compared to 25 cents per common share for the
first quarter of fiscal 1998. Basic earnings per common share increased 15% to
30 cents per common share for the first quarter of fiscal 1999 from 26 cents for
the first quarter of fiscal 1998.
PROPOSED RECAPITALIZATION, SPECIAL CASH DIVIDEND AND SHARE REPURCHASE. The
Company's Board of Directors has approved an agreement in principle with IMS
Health Inc. ("IMS Health") which owns 47.6 million shares or 47% of the
Company's Class A Common Stock to undertake a recapitalization of the Company
and facilitate a tax-free spin-off by IMS Health to its shareholders of its
equity position in Gartner Group, Inc. As part of the recapitalization, IMS
Health will exchange 40.7 million shares of Class A Common Stock for an equal
number of shares of new Class B Common Stock of the Company prior to the
spin-off. This new class of common stock will be entitled to elect at least 80%
of the Company's Board of Directors, but will otherwise be substantially
identical to existing Class A Common Stock. The Class B Common Stock will be
distributed to IMS Health shareholders in a tax-free distribution. IMS Health
will continue to hold 6.9 million shares of Class A Common Stock after the
spin-off. It is the intention of IMS Health to sell these shares within one year
of the spin-off, subject to certain conditions. In addition, the Company agreed
that it would pay a one-time special cash dividend of $300.0 million to its
shareholders of record immediately prior to the IMS Health spin-off. Further,
the Company also agreed that it would repurchase the lesser of 20% or $300.0
million of its common stock in total on the open market after the spin-off. The
exchange, spin-off and special cash dividend are subject to approval by the IRS
of the tax-free status of the spin-off and approval of the recapitalization plan
by the non-IMS Health shareholders of the Company. The share repurchase program
will commence after the spin-off and is expected to be completed within one
year.
QUARTERLY OPERATING INCOME TRENDS. Historically, the Company has realized
significant renewals and growth in contract value at the end of quarters. 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
advisory and measurement contracts are billable upon signing, absent special
terms granted on a limited basis from time to time. All
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such contracts are non-cancelable and non-refundable, except for government
contracts which have a 30-day cancellation clause. Government contracts have not
produced material cancellations to date. The Company's policy is to record at
the time of signing of an advisory or measurement contract the portion of the
contract that is 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 advisory and measurement revenues are earned and
amortized to income.
Historically, advisory and measurement revenues have increased significantly in
the first quarter of the ensuing fiscal year over the immediately preceding
quarter. Other 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. The operating income margin improvement in the first quarter of the
fiscal year is due to the increase in operating income generated on the first
quarter Symposia and ITxpo exhibition events plus an increase in advisory and
measurement revenue upon which the Company is able to further leverage its
selling, general and administrative expenses. The Company does not expect the
operating income improvement realized in the first quarter of fiscal 1999 as
compared to the fourth quarter of fiscal 1998 to be as significant in the next
three quarters of the fiscal year as the operating margins on the ITxpo event
held in the first quarter are higher than the conferences and other events held
later in the fiscal year. Therefore, the operating income for the first quarter
of fiscal 1999 may not be indicative of the quarterly operating income results
for the remainder of fiscal 1999. In addition, operating expenses typically lag
behind growth in revenue within a given year, and operating income margin is
generally higher in the earlier quarters of the fiscal year.
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 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 personnel, including, its senior management team, sales staff and IT
analysts. Competition for qualified personnel is intense. There can be no
assurance that the Company will be able to attract and retain additional
qualified personnel, including IT staff, as may be required to support the
evolving needs of customers or any growth in the Company's business. Any failure
to maintain a premier staff of IT analysts could adversely affect the quality of
the Company's products and services, and therefore its future business and
operating results. Additionally, there may be increased credit risk and turnover
of accounts as the Company expands product and service offerings to smaller
companies.
The Company's operating results are also subject to 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 require additional
management attention and financial resources.
YEAR 2000 ISSUES. The Year 2000 problem results from the fact that many
technology systems have been designed using only a two-digit representation of
the year portion of the date. This has the potential to cause errors or
failures in those systems that depend on correct interpretation of the year,
but cannot necessarily correctly interpret "00" as the year "2000". While the
potential ramifications of the Year 2000 issue are significant, the Company
believes that it is taking full advantage of its internal resources and all
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necessary external resources to understand, identify and correct all Year 2000
issues within its control. The Company recognizes that there are significant
unknowns, hence potential risks, that are outside its control and will take all
reasonable steps to minimize the impact of those exposures.
The Company expects to have made all essential IT and non-IT systems Year 2000
ready before their known failure dates or January 1, 2000, whichever is sooner.
All products of the Company are, or are expected to be, Year 2000 ready before
their known failure dates or by January 1, 2000, whichever is sooner, and should
any date-related problems be revealed after that point, they will be fixed at no
extra charge to the customer or replaced with a product of equal value. The
Company has established a global inquiry response process to ensure timely,
accurate and documented responses to all requests for information about its
products and services.
The Company further expects to take all prudent and reasonable steps to validate
the Year 2000-readiness of its direct supply chain interfaces, but believes that
this area does and will continue to represent a significant level of uncertainty
and business risk at least through the first half of the year 2000.
The Company has established a separate Year 2000 account to budget and track
significant fiscal 1999 Year 2000 expenditures. All maintenance and modification
costs are expensed as incurred, while the cost of new systems is being
capitalized according to generally accepted accounting principles. Identified
Year 2000 expenses were $1.9 million in fiscal 1998, $0.6 for the three months
ended December 31, 1998, and are forecast to be $4.6 million for the remaining
nine months of fiscal 1999. These costs are predominantly for the budgeted
replacement or upgrades of IT and non-IT systems, but also include pro-rated
personnel standard unit costs. Additional information on year 2000 issues can be
found in the Company's Form 10-K for the fiscal year ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's continued focus on revenue and operating margin improvement has
contributed to its ability to continue building cash and utilizing it to make
strategic investments and acquisitions. As of December 31, 1998, total cash and
cash equivalents and marketable securities (including both current and long-term
maturities) decreased to $240.9 million from $262.3 million as of September 30,
1998. Cash provided by operating activities totaled $6.1 million for the first
three months of fiscal 1999 (compared to $10.3 million used in operating
activities for the first three months of fiscal 1998) reflecting primarily the
impact of increased revenues and related changes in the balance sheet accounts.
Cash used in investing activities was $20.9 million for the first three months
of fiscal 1999 (compared to $24.7 million of cash used in the first three months
of fiscal 1998) due primarily to the effect of cash used in acquisitions and
investments in consolidated and unconsolidated subsidiaries of $21.5 million.
Cash used in financing activities totaled $0.5 million for the three months
ended December 31, 1998 (compared to $40.3 million of cash provided for the
three months ended December 31, 1997). The cash used in financing activities was
primarily due to the offsetting effect of $8.4 million of cash used in the
settlement of forward purchase agreements, a $3.5 million credit to additional
paid in capital for tax benefits received from stock transactions with employees
and $3.2 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
the 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 value. 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 necessary to offset a portion of the
shareholder dilution that will be created by the exercise of stock options
reserved for issuance and granted under the Company's 1996 Long Term Stock
Option Plan.
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The effect of exchange rates increased cash and cash equivalents by $0.6 million
through the three months ended December 31, 1998, and was due to the
strengthening of certain European currencies versus the U.S. dollar. The Company
has available two unsecured credit lines, with Chase Manhattan Bank and The Bank
of New York for $25.0 million and $5.0 million, respectively. These lines may be
canceled by the banks at any time without prior notice or penalty. Additionally,
the Company issues letters of credit in the ordinary course of business. The
Company had outstanding letters of credit with Chase Manhattan Bank of
approximately $4.1 million and $2.0 million with The Bank of New York at
December 31, 1998. Except as described below regarding the proposed
recapitalization, the Company believes that its current cash balances and
maturing marketable debt securities, together with cash anticipated to be
provided by operating activities and borrowings available under the existing
lines of credit, will sufficient for the expected short term and foreseeable
long term cash needs of the Company.
If completed the Company's proposed recapitalization would require a significant
amount of cash to fund the payment of the special dividend and the repurchase of
common shares. The Company intends to fund the recapitalization through
borrowings beyond the current lines of credit and, in lesser part, through
existing cash balances and marketable securities and anticipated funds from
operations. The Company currently believes that it will need to borrow between
$200.0 million to $400.0 million in order to fund the payment of the special
dividend and the share repurchase. There can be no assurance that such financing
will be available to the Company on commercially reasonable terms, or at all. If
the Company obtains such financing, there can also be no assurance that the
Company's debt service obligations will not have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company currently has no other material capital commitments.
PART II OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
On October 7, 1998, the Company issued 306,475 shares of Class A Common Stock as
partial consideration for the assets of Griggs-Anderson as more fully described
in Note 2 of the Notes to Condensed Consolidated Financial Statements. The
securities were not registered under the Securities Act of 1933 as amended (the
"Act"), in reliance on the exemption from registration provided by Rule 506
under the Act and Section 4(2) of the Act.
Item 4. Submission of Matters to a Vote of Security
The Annual Meeting of Stockholders was held on January 28, 1998. At such
meeting, the stockholders elected the following persons to the Board of
Directors by the following votes:
Total Vote
Total Vote for Withheld from
Each Director Each Director
Manual A. Fernandez 87,715,771 937,179
William T. Clifford 87,723,126 929,824
William O. Grabe 87,632,923 1,020,027
John P. Imlay 81,007,665 7,645,285
Max D. Hopper 87,630,473 1,022,477
Stephen G. Pagliuca 87,604,987 1,047,963
Dennis G. Sisco 87,605,362 1,047,588
Robert E. Weissman 80,924,265 7,728,685
13
14
The stockholders approved the amendment to the Company's 1991 Stock Option Plan
to increase the number of shares of Class A Common Stock available for issuance.
The vote was 63,886,056 for and 14,983,417 against with 121,809 abstained and
9,661,668 shares broker non-vote.
The stockholders approved the Company's 1998 Long Term Stock Option Plan with a
vote of 62,876,421 for and 15,989,996 against with 124,865 abstained and
9,661,668 shares broker non-vote.
The stockholders ratified the appointment of KPMG Peat Marwick LLP as
independent auditors for the Company for the 1999 fiscal year. The vote was
88,456,108 for, 105,790 against and 91,052 abstained.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description of Document
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Registrant during the fiscal
quarter ended December 31, 1998.
Items 1, 3, and 5 are not applicable and have been omitted.
14
15
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 February 12, 1999 /s/ Michael D. Fleisher
------------------ ------------------------------
Michael D. Fleisher
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
5
1,000
U.S. DOLLARS
3-MOS
SEP-30-1999
OCT-01-1998
DEC-31-1998
1
143,083
79,001
244,025
4,368
0
511,857
116,670
62,862
840,180
386,528
0
0
0
57
452,707
840,180
190,380
190,380
79,350
79,350
65,288
923
0
48,218
18,130
30,088
0
0
0
30,088
0.30
0.29
Amount reported is EPS-BASIC.
