Document/Exhibit Description Pages Size
1: 10-K Annual Report 10 80K
4: EX-10.13 Gartner Group 1998 Long Term Stock Option Plan 16 62K
5: EX-10.15 Gartner Group 1996 Long Term Stock Option Plan 13 51K
6: EX-10.20 Employment Agreement 12 63K
7: EX-10.21 Employment Agreement 12 63K
2: EX-10.6 Gartner Group, Inc. 1991 Stock Option Plan 23 76K
3: EX-10.9 Gartner Group, Inc. Long Term Stock Option Plan 16 53K
8: EX-13.1 Annual Report 51 288K
9: EX-21.1 Subsidiaries of Registrant 2± 9K
10: EX-23.1 Independent Auditors' Report on Schedule 1 7K
11: EX-23.2 Independent Auditors' Consent 1 7K
12: EX-27.1 Financial Data Schedule 1 10K
1999 ANNUAL REPORT
FACE TO FACE
[GRAPHIC]
[GARTNERGROUP LOGO]
GartnerGroup helps clients achieve business success
through the intelligent and efficient use of technology.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE, EMPLOYEE AND CLIENT DATA)
[Enlarge/Download Table]
FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
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TOTAL REVENUES $734,234 $641,957 $511,239 $394,672 $295,146
ONGOING REVENUES (1) $734,234 $623,881 $489,925 $382,453 $293,845
NET INCOME (2) $107,386 $ 98,249 $ 73,130 $ 50,534 $ 30,001
DILUTED EARNINGS PER SHARE (2) $ 1.02 $ 0.93 $ 0.71 $ 0.51 $ 0.32
CASH PROVIDED BY OPERATIONS $128,819 $ 97,795 $ 87,157 $ 65,689 $ 66,966
EMPLOYEES 3,402 2,972 2,885 2,129 1,175
CLIENT ORGANIZATIONS (3) 9,692 9,144 8,124 7,241 5,500
--------------------------------------------------------------------------------------------
(1) EXCLUDES GARTNERLEARNING REVENUE, A UNIT SOLD DURING FISCAL 1998.
(2) NORMALIZED TO EXCLUDE OTHER CHARGES, ONE-TIME INCOME TAX BENEFIT AND
ACQUISITION AND DISPOSITION-RELATED CHARGES.
(3) EXCLUDES DATAPRO AND GARTNERLEARNING. FISCAL 1995 INFORMATION DOES NOT
INCLUDE DATAQUEST.
[PHOTO OF MICHAEL D. FLEISHER]
MICHAEL D. FLEISHER CHIEF EXECUTIVE OFFICER
LETTER TO OUR SHAREHOLDERS
Although this past fiscal year was a challenging and tumultuous time for
GartnerGroup, our ongoing revenues grew a solid 18 percent to $734 million.
Diluted earnings per share, excluding charges, rose 10 percent to $1.02 per
share.
These results were below Wall Street's expectations and triggered a decline in
our stock price. In addition, the complex spinoff of IMS Health's equity stake
in GartnerGroup, while positive for the company, was a cumbersome and difficult
process.
Despite these recent disappointments and distractions, GartnerGroup today faces
a huge market opportunity that it is exceptionally well positioned to exploit.
The impending explosion of business-to-business e-commerce will create
unprecedented market need for the research and services GartnerGroup can offer.
o Senior business executives -- and I mean all business executives in every
function, in every industry, around the globe -- have a tremendous need for
advice on how to use technology to build better businesses. At the same time,
information technology (IT) vendors require
2
advice on market and technology directions and the needs of their customers. We
are the best company in the world to supply this type of advice.
o As the early experiments with e-commerce have turned into substantive business
opportunities, building robust, scalable systems that connect with core legacy
systems has become an absolute imperative. Helping clients successfully meet
this challenge is one of GartnerGroup's greatest strengths.
o The pendulum has clearly swung from Web applications being built and
maintained in marketing organizations to their being built, maintained and made
robust by chief information officers and their teams -- the very people who
constitute the vast majority of our clients.
o The new business process of "build and adapt" has created tremendous demand
for timely, thought-leading research and personalized services that will enable
our clients to execute rapid go-to-market strategies.
The impending explosion of business-to-business e-commerce will create
unprecedented market need for GartnerGroup's research and services.
It is clear that the market is coming to us in a powerful way.
GartnerGroup is determined to take full advantage of this opportunity by
focusing on three strategic imperatives to support our future success in the
marketplace.
o Extend our world-class research capability
o Dramatically grow our services business
o Enhance our Internet delivery capability
In fiscal 2000, we will be making significant incremental investments over 1999
levels to drive these initiatives.
o Provocative thought leadership through world-class research will continue to
be the vital core that powers the rest of our business. To address the exploding
e-business opportunity,
3
we will continue to build on our current team of 245 e-business experts by
aggressively hiring additional analysts who possess the exceptional knowledge,
insight and experience that is our standard.
o Helping our clients move from strategy to results increasingly involves more
than just delivering research. We will meet this demand for higher levels of
personalized, face-to-face assistance by aggressively investing in and growing
our services business.
o Web technologies continue to revolutionize the delivery of content. To ensure
that we take full advantage of the powerful new methods made possible by the
Web, we will make significant investments in rearchitecting GartnerGroup's Web
delivery capability, and will redesign our research process to deliver into a
Web-based paradigm.
In 1979, GartnerGroup invented the IT advisory business. In the 20 years since
our founding, we have built a remarkable company that uniquely serves 9,600
worldwide client organizations that tremendously value our services. We have an
exploding market opportunity that we are well positioned to exploit. We have
3,400 passionate, dedicated and talented employees who are culturally diverse
and globally situated, and who all share a common mission: to help our clients
achieve business success through the intelligent and efficient use of
technology.
No other company in the world can do that as well as GartnerGroup, the business
technology advisor.
/s/ Michael D. Fleisher
Michael D. Fleisher
Chief Executive Officer
4
Face to Face
Today's IT and business executives look to GartnerGroup for customized advice
delivered face-to-face, through inquiries to our analysts, through on-site
engagements with our consultants, through participation in our conferences and
through gartner.com.
[PHOTOS]
5
GartnerGroup Research A Trusted Source of Provocative, Actionable Thought
Leadership
As sources of information about IT and business have proliferated in recent
years, GartnerGroup has remained the leader in the IT advisory services business
for a number of compelling reasons.
Our research is rigorously pursued through a dynamic process that frames issues,
forms hypotheses, challenges assumptions and draws conclusions. Findings are
presented in a form that is easily digested by clients, and that has been proven
to be highly accurate and actionable.
The breadth and depth of our research coverage enables our clients to remain on
the cutting edge of technology issues. In 1999, for example, GartnerGroup
identified the concept of zero latency, reported on the progress of Windows
2000, published the e-business Opportunity/Threat Model, identified the five
phases of e-business computing and defined the worldwide e-commerce market
opportunity. Our research products generated revenue of $479 million in fiscal
1999.
[PHOTO]
Business-to-business e-commerce will grow to $3.1 trillion in 2004.
Business-to-consumer e-commerce will grow to $380 billion by 2003.
Our 800 expert analysts provide our clients with a comprehensive and detailed
look at the entire IT landscape. We project industry and technology trends,
forecast and size IT markets, evaluate and comment on IT products and vendors,
share industry best practices, and translate hype into business reality. We
don't just follow today's latest fads. We track virtually everything our clients
want and need to know -- today and in the future -- about using IT to make their
businesses more successful.
GartnerGroup has delivered research to clients via electronic media since 1993.
As Web technologies evolve and improve, we will continue to upgrade our Internet
delivery capability to ensure that our clients gain faster and easier access to
our expertise.
Providing independent, objective advice is the core of our business. In a world
increasingly populated by self-serving information, our clients highly value the
simplicity of this agenda.
6
GartnerGroup Services Helping Clients Move From Strategy to Results
Nothing happens in business today without IT. Regardless of industry, function
or geography, the intelligent use of technology is at the top of every
executive's agenda.
This marriage of technology and business, the need for rapid decision-making,
and the complexity of the IT/business environment, have all combined to create
an explosive increase in the demand for personalized, face-to-face advice.
GartnerGroup Services enables our clients to apply our vast knowledge of IT to
their specific situation.
The services component of global IT spending is projected to grow to $722
billion by 2003.
For more than six years, GartnerGroup has provided personalized, customized
consulting that helps our clients to architect, evaluate and monitor IT
solutions. Three components
[PHOTOS]
7
80 global locations.
9,600 client organiza-
tions. 3,400 employ-
ees. 1,500 CIOs. 800
sales professionals.
1,200 analysts and
consultants who aver-
age 15 years of indus-
try experience. 15,000
Symposia attendees.
150,000 client inquiries.
[PHOTO OF RICHARD E. ELDH, JR.]
RICHARD E. ELDH, JR. EXECUTIVE VICE PRESIDENT WORLDWIDE SALES, EVENTS AND
MARKETING
9
of our services organization -- Performance Management, Strategic Workshops and
Consulting -- generated fiscal 1999 revenues of $150 million.
GartnerGroup Services possesses a number of unique competitive advantages that
enable it to thrive in this business:
o Its 400 consultants have immediate access to constantly refreshed,
up-to-the-minute research supplied by GartnerGroup analysts around the world.
This enables the consultants to bring GartnerGroup's knowledge and perspective
to every engagement without having to re-create it at a client's expense.
o Since less than 15 percent of our research clients are services clients, an
immediate prospect base exists of more than 8,000 enterprises.
o In fiscal 1999, GartnerGroup Services completed more than 2,000 engagements in
areas ranging from e-business strategy to measuring the effectiveness and
efficiency of manufacturing operations.
o GartnerGroup Services possesses an unmatched level of trust, independence and
objectivity that is derived from long-standing client relationships and the
absence of any hidden agenda.
GartnerGroup Events Clients and Analysts Face to Face
When IT professionals need in-depth, comprehensive knowledge, they attend
GartnerGroup events around the globe for industry-leading insight and actionable
advice on the most important developments in IT.
GartnerGroup Events, like GartnerGroup Services, is ultimately powered by the
vast knowledge base developed by our research organization. Delivering
conference content that is internally produced and controlled by GartnerGroup
research analysts enables our events to maintain a level of quality, clarity and
consistency that is unmatched in the industry. Our clients registered their
strong approval of our conferences by driving dramatic growth of 54 percent in
this business to a total of $76 million in revenue in fiscal 1999.
10
[PHOTO]
11
GartnerGroup Symposium/ITxpo, our flagship event, is the premier strategic
planning conference in the IT industry. Last year, 15,000 senior executives
attended Symposia in four international locations. They were able to choose from
scores of sessions, and received an unparalleled look into the future of IT.
Symposium attendees have described the experience as equivalent to "receiving an
MBA in IT."
Exhibit and sponsorship sales are also a strong growth component of GartnerGroup
Events. The high quality of our attendees as prospective customers makes a
compelling case for IT vendors to participate in our events. Vendor exhibit
opportunities are uniquely structured to add value for our attendees, while
fitting within our framework of independence and vendor neutrality.
GartnerGroup events deepen our client relationships and drive growth throughout
our business.
[PHOTO]
The GartnerGroup Difference The Power of Reach
Business, ultimately, is about relationships. Whether those relationships happen
face-to- face over a cup of coffee, or over a fiber-optic cable, it is the
depth, durabililty and dynamism of a company's relationships that ultimately
determine its power in the marketplace, and its future as a business.
GartnerGroup's strength stems from the enormously powerful web of relationships
we have built during our 20 years in business. Our 1,200 analysts and
consultants and 800 sales professionals form a critical core of knowledge and
experience. The long-standing and intimate relationship between these employees
and our clients creates the unique GartnerGroup difference.
In 1999, we answered more than 150,000 client inquiries. Each inquiry is an
opportunity for us to grow client relationships and to foster a two-way forum
that enables a sharing of information, perspective, insight and knowledge.
Our relationships with more than 1,500 chief information officers worldwide
provide a powerful endorsement for GartnerGroup as an essential element of their
decision-making
12
[PHOTO]
From our position, it is clear that the market is coming to us in a powerful
way.
13
[PHOTOS]
14
process. The feedback and input we receive from these executives provide
critical input into the ongoing development of our research agenda.
Web technology is providing important new ways to dramatically improve an
interactive flow of information between GartnerGroup and its clients. In the
coming months and years, clients will experience a significant improvement in
their ability to easily access our knowledge base. Enhanced search tools and
navigation will speed access to relevant research, while on-line client service
support will improve access to analysts for inquiries. The Web will also enable
important and revolutionary new means of interaction between GartnerGroup and
its community of clients and will give clients the tools to apply our knowledge
to their business objectives.
[PHOTO]
15
[PHOTO]
REGINA M. PAOLILLO CHIEF FINANCIAL OFFICER
INVESTING FOR GROWTH
This was a year of significant change for GartnerGroup. We took a number of
important steps focused on building the future of our business. As a result, we
will be a stronger, more dynamic corporation going forward.
We completed the long-planned spinoff of IMS Health's 47 percent equity stake in
GartnerGroup. Approved by GartnerGroup shareholders in July, the spinoff
resulted in a new capital structure, created a more diversified shareholder
base, and gave the company needed flexibility. Components of the transaction
included the payment of a special cash dividend, the creation of a new class of
stock -- Class B Common Stock -- and the repurchase of 19.9 percent of the total
outstanding shares of GartnerGroup. In August, we completed the repurchase of
approximately 16 million shares via a Dutch tender offer and plan to repurchase
an additional 5 million shares on the open market in fiscal 2000. To finance the
dividend and repurchases, GartnerGroup obtained a $500 million credit facility
led by Chase Manhattan Bank and Credit Suisse First Boston with the
participation of other financial institutions.
Our fiscal 2000 investments will support the strategic imperatives outlined in
Michael Fleisher's letter and will fuel our future plans for accelerated growth.
In our research unit, we will focus on retaining, attracting and recruiting the
finest analysts and e-business experts in the world. We plan to add more than
200 consultants to our services organization in response to growing client
demand, and will augment our sales force by expanding our product solutions
unit. Finally, we will enhance our Web capabilities by developing software and
tools that encourage clients to have a more interactive experience with our
research, the experts behind that research and the wider community of
GartnerGroup clients.
I am very excited about the opportunity to contribute to our success in the role
of chief financial officer. I am confident that our employees, through their
continued dedication, loyalty and support of our vision, will lead us to new
heights in 2000 and beyond.
/s/ Regina M. Paolillo
Regina M. Paolillo
Chief Financial Officer
16
FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS 18
CONSOLIDATED BALANCE SHEETS 26
CONSOLIDATED STATEMENTS OF OPERATIONS 27
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 28
CONSOLIDATED STATEMENTS OF CASH FLOWS 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31
REPORT BY MANAGEMENT 46
INDEPENDENT AUDITORS' REPORT 46
SELECTED CONSOLIDATED FINANCIAL DATA 47
CORPORATE DIRECTORY 48
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Total revenues for the Company for 1999 were $734.2 million, up 14% from $642.0
million for 1998. Current year revenue growth consisted of an 11% increase in
research revenue, a 35% increase in services revenue, a 54% increase in events
revenue and a 3% decrease in other revenue. Ongoing revenue, which is revenue
excluding GartnerLearning, increased $110.4 million or 18% in 1999 from the
prior year. During 1999, the Company changed its revenue presentation to the
above mentioned categories to better align revenue recognition methodologies and
reportable segments. Research encom- passes products which, on an ongoing basis,
highlight industry developments, review new products and technologies, provide
quantitative market research, and analyze industry trends within a particular
technology or market sector. The Company typically enters into annually
renewable subscription-based contracts for research products. Revenue from
research products is recognized as products are delivered and as the Company's
obligation to the client is completed over the contract period. Services
revenue, primarily derived from consulting and measurement engagements, is
recognized as work is performed on a contract by contract basis. Events revenue
is deferred and recognized upon the completion of the related symposium,
exposition or conference.
Given the new revenue presentation, the Company has developed the
following business measurements to complement its total contract value
measurement. The Company believes these business measurements reflect the volume
of business within each revenue category at a given point in time.
Revenue Category Business Measurement
Research Contract value attributable to all subscription-based
research products with ratable revenue recognition. Contract
value is calculated as the annualized value of the referred
to product or service contracts in effect at a given point
in time, without regard to the duration of such contracts
outstanding at such time. Research contract value increased
10% to approximately $560.8 million at September 30, 1999
from $511.4 million at September 30, 1998.
--------------------------------------------------------------------------------
Services Services backlog represents future revenue to be derived
from in-process consulting and measurement engagements.
Services backlog increased 68% to approximately $71.6
million at September 30, 1999 from $42.7 million at
September 30, 1998.
--------------------------------------------------------------------------------
Events Deferred revenue directly related to symposia, expositions
and conferences. Deferred revenue from events increased 66%
to approximately $51.4 million at September 30, 1999 from
$31.0 million at September 30, 1998, primarily due to
symposium and ITxpo events that will be held in the first
quarter of fiscal 2000.
--------------------------------------------------------------------------------
Total Company contract value, which includes subscription-based
research products, measurement and certain other products, increased 15% to
approximately $684.6 million at September 30, 1999 versus the same date last
year. The Company believes that total value has been a significant measure of
the Company's volume of business. Historically, a substantial portion of client
companies have renewed these services for an equal or higher level of total
payments each year. Total deferred revenues of $355.6 million and $291.1 million
at September 30, 1999 and 1998, respectively, as presented in the Company's
Consolidated Balance Sheets, represent unamortized revenues from billed research
products, services and events. Total 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
outstanding and billed contracts.
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 quarter for growth
in contract value as it is the quarter in which the largest amount of contact
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
contracts are billable upon signing, absent special terms granted on a limited
basis from time to time. All contracts are non-cancelable and non-refundable,
except for government contracts which have a 30-day cancellation clause, but
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 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
18 GARTNER GROUP, INC.
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. Operating income margin generally is not as high in 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
ITxpo conferences in the first fiscal quarter are higher than on conferences
held later in the fiscal year.
Operating income in 1999 was $131.0 million, net of $30.1 million in
other charges. Excluding the effect of other charges in 1999 and
acquisition-related and other charges in 1998, operating income increased 7% to
$161.1 million from $150.9 million. Operating income, excluding these charges,
has increased, in large part, due to revenue growth in consulting and events.
Diluted net income per common share was $0.84 in both 1999 and 1998.
Excluding other charges and a one-time tax benefit in 1999, and the loss on the
sale of GartnerLearning and other charges in 1998, diluted net income per common
share increased to $1.02 in 1999 from $0.93 in 1998, an increase of 10%.
Lastly, during 1999 the Company undertook a recapitalization which
effectively separated the Company from its significant shareholder, IMS Health
Incorporated. The recapitalization resulted in the creation of a new class of
common stock, the payment of a nonrecurring cash dividend of $125.0 million, the
purchase of approximately 15% of the Company's outstanding common stock under
the terms of a Dutch Auction tender offer and the requirement to purchase
5,166,691 additional shares in the open market by July 2001 and the assumption
of $250.0 million of long-term debt (see Note 2--Recapitalization in the Notes
to Consolidated Financial Statements).
ANALYSIS OF OPERATIONS
The following table sets forth certain results of operations as a percentage of
revenues:
FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997
-------------------------------------------------------------------------------
PERCENT OF REVENUES:
REVENUES:
RESEARCH 65% 68% 68%
SERVICES 21 17 17
EVENTS 10 8 7
OTHER 4 5 4
LEARNING -- 2 4
-------------------------------------------------------------------------------
TOTAL REVENUES 100 100 100
-------------------------------------------------------------------------------
COSTS AND EXPENSES:
COST OF SERVICES AND
PRODUCT DEVELOPMENT 40 39 40
SELLING, GENERAL AND
ADMINISTRATIVE 34 34 34
ACQUISITION-RELATED CHARGE -- 1 --
OTHER CHARGES 4 0 --
DEPRECIATION 3 3 2
AMORTIZATION OF INTANGIBLES 1 1 1
-------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 82 78 77
-------------------------------------------------------------------------------
OPERATING INCOME 18 22 23
INTEREST INCOME, NET 1 2 1
-------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 19 24 24
PROVISION FOR INCOME TAXES 7 10 10
-------------------------------------------------------------------------------
NET INCOME 12% 14% 14%
-------------------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1999 VERSUS
FISCAL YEAR ENDED SEPTEMBER 30, 1998
Total revenues increased 14% to $734.2 million in 1999 from $642.0 million in
1998. Revenues from research products increased 11% in 1999 to $479.0 million
compared to $433.1 million in 1998 and comprised approximately 65% and 68% of
total revenues in fiscal 1999 and 1998, respectively. Services revenue,
consisting primarily of consulting and measurement engagements, increased 35%,
to $149.8 million in 1999 as compared to $111.0 million in 1998 and comprised
approximately 21% of total revenue in 1999 versus 17% in 1998. Events revenue
was $75.6 million in 1999, an increase of 54% over $49.1 million in 1998. Other
revenues, consisting principally of software licensing fees, experienced a
slight decrease to $29.8 million in 1999 from $30.7 million in 1998. Although
the rate of growth in Company revenue slowed in 1999, the increase in total
revenues reflected the ability of the Company to gain client acceptance of new
products and services, increase sales penetration into new and existing clients
and develop incremental revenues from current and prior year acquisitions.
Pricing pressures in our traditional research products from smaller competitors
with lower profit margins and less robust product suites have contributed to the
slowed rev-
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
enue growth rate. Services backlog increased 68% to approximately $71.6 million
at September 30, 1999 and represents future revenues that will be recognized
from in-process consulting and measurement engagements. Recent acquisitions,
which include Griggs-Anderson, Inc. and The Warner Group, provide to our
consulting services both an increased strategic presence and an increased
capability to meet demand.
The Company has three defined geographic market areas: United States
and Canada, Europe and Other International. Revenues from sales to United States
and Canadian clients increased 14% to $471.8 million in fiscal 1999 from $415.6
million in fiscal 1998. Revenues from sales to European clients increased 22% to
$212.1 million in fiscal 1999 from $173.8 million in fiscal 1998. Sales to Other
International clients have decreased by 4% to $50.3 million in fiscal 1999 from
$52.6 million in fiscal 1998. This decrease was caused primarily by the general
unfavorable economic climate in the Asian markets. Revenue in Europe, primarily
in the Research area, increased as a result of continuing investments to expand
penetration of this market, off set in part by lower than expected growth in
measurement revenues.
The Company's sales strategy is to continue to extend the Company's
sales channels to clients with revenues ranging from $150 million to $2 billion,
maintain its focus on large customers and to expand total sales and services to
the Company's key clients. The Company continues to make investments in direct
sales personnel and distributor relationships in Europe and the Other
International markets and intends to pursue continued expansion of operations
outside of the United States in fiscal 2000. In addition, the Company will make
investments in its Web capabilities as a channel for growth and as a delivery
medium for products and services.
Operating income decreased 9% to $131.0 million in fiscal 1999 from
$143.5 million in fiscal 1998. Excluding acquisition-related and other charges,
operating income in fiscal 1999 increased 7%. Excluding such charges in 1999 and
1998, the United States and Canada experienced an increase of 7% and Europe
experienced a 19% growth rate. Other International markets experienced a decline
of 24% primarily from a decrease in revenue. Operating income has remained
favorable as a result of continuing revenue growth that has allowed the Company
to develop new products and services and to gain economies of scale through the
leveraging of its resources (additional revenues have been generated using
essentially the same resources). However, operating contribution margin,
excluding acquisition-related and other charges, decreased in fiscal 1999 to 22%
from 23% in fiscal 1998. This decrease was due to, in part, higher growth in
lower margin consultative services. In addition, operating contribution margin
from services in 1999 declined primarily from lower margin acquisitions.
Costs and expenses, excluding acquisition-related and other charges,
increased to $573.1 million in 1999 from $491.1 million in 1998, and increased
slightly as a percentage of total revenue to 78% in 1999 from 77% in 1998. Cost
of services and product development expenses were $289.1 million and $247.9
million for 1999 and 1998, respectively. This increase over the prior fiscal
year reflects the additional support required for the growing client base, costs
associated with acquired businesses and continued product development costs. The
increase in cost of services and product development expenses, as a percentage
of total revenues, is primarily attributable to increasing pricing pressure in
research products, continuing growth in personnel costs associated with the
development of new products and services and the delivery of products and
services to broader markets.
Selling, general and administrative expenses increased to $252.4
million from $215.9 million for fiscal 1999 and 1998, respectively, due to the
Company's continuing expansion of worldwide distribution channels and the
resulting commissions earned on the revenue generated. Although the Company has
added general and administrative resources to support the growing revenue base,
selling, general and administrative expenses have remained consistent at 34% of
total revenues for fiscal 1999 and 1998, respectively. Costs and expenses in
fiscal 2000 will be impacted both by the remaining amounts earned by employees
under the Company's retention incentive program as well as the fiscal 2000
performance-related variable compensation expense expected to be incurred.
Other charges in fiscal 1999 consisted of $9.2 million of legal and
advisory fees related to the recapitalization (see Note 2--Recapitalization in
the Notes to Consolidated Financial Statements), $14.2 million of costs,
primarily severance related, incurred as part of strategic reduction in force
initiatives and $6.7 million of bonuses paid in relation to a retention
incentive plan approved by the Board of Directors in response to the
recapitalization and reorganization. Costs and expenses were favorably impacted
in 1999 through the elimination of variable costs linked to financial
performance.
Depreciation expense increased to $21.6 million in fiscal 1999 from
$17.9 million in fiscal 1998, primarily due to capital spending required to
support business growth. Additionally, amortization of intangibles increased by
$0.7 million in fiscal 1999 as compared to fiscal 1998, reflecting primarily
goodwill associated with fiscal 1999 and 1998 acquisitions.
Interest income, net, decreased to $8.3 million in fiscal 1999 from
$9.6 million for fiscal 1998. This resulted primarily from interest expense of
$1.2 million on debt facility borrowings of $250.0 million related to the
recapitalization.
Provision for income taxes decreased by 19% or $11.8 million to $51.0
million in 1999 from $62.8 million in 1998. The effective tax rate was 37% and
42% for 1999 and 1998, respectively. In 1999,
20 GARTNER GROUP, INC.
the Company incurred $8.6 million of non-deductible recapitalization costs
during the year, the tax effect of which was approximately offset by a one-time
income tax benefit of $2.5 million related primarily to the settlement of
certain tax examinations in the second quarter. Absent nondeductible costs, the
one-time income tax benefit and additional taxes incurred in fiscal 1998 related
to the sale of GartnerLearning, the effective rate was 37% for 1999 and 39% for
1998. The decrease of two percentage points was achieved primarily through the
utilization of tax loss and credit carryforwards and ongoing tax planning
initiatives. A more detailed analysis of the changes in the provision for income
taxes is provided in Note 12 of the Notes to Consolidated Financial Statements.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 VERSUS
FISCAL YEAR ENDED SEPTEMBER 30, 1997
Total revenues increased 26% to $642.0 million in 1998 as compared to $511.2
million in 1997. Revenues from research products increased 24% in 1998 to $433.1
million compared to $349.6 million in 1997 and comprised approximately 68% of
total revenues in both 1998 and 1997. Services revenue increased 31% to $111.0
million in 1998 as compared to $84.6 million in 1997 and comprised approximately
17% of total revenues in both 1998 and 1997. Events revenue was $49.1 million in
1998, a 43% increase over $34.3 million in 1997. Revenue from the learning
business decreased 15% in 1998 to $18.1 compared to $21.3 in 1997 and comprised
approximately 3% of revenues in 1998 versus 4% in 1997. The increase in revenues
reflects continued client acceptance of new products and services, sales
penetration into new and existing clients and incremental revenue from
acquisitions completed in fiscal 1998 and fiscal 1997 (primarily Computer
&Communications Information Group, Inc. (dba Datapro Information Services)). The
decrease in learning revenue was primarily the result of the sale of
GartnerLearning in the fourth quarter of fiscal 1998. Other revenues, consisting
principally of software licensing fees, increased 43% to $30.7 million in 1998
as compared to $21.4 million in the prior year. The increase was primarily
attributable to the introduction of total cost of ownership software products
related to the Company's acquisition of Interpose, Inc. during 1998.
The rate of growth in research revenues continued to be strong in the
United States and Canada and in Europe. Revenues from sales to United States and
Canadian clients increased 22% to $415.6 million in 1998 from $339.3 million in
1997. Revenues from sales to European clients increased 31% to $173.8 million in
1998 from $132.2 million in 1997. Sales to Other International clients,
primarily in the Asian and South American markets areas, increased by 32% to
$55.2 million in 1998 from $39.7 million in 1997.
Operating income increased 23% to $143.5 million in 1998 compared to
$116.6 million in 1997. Excluding acquisition-related and other charges,
operating income in 1998 increased 29%. The Company experienced growth in
operating income in 1998 in each of the three defined geographic markets, United
States and Canada, Europe and Other International of 20%, 6% and 185%,
respectively. Lower growth rates in Europe reflect the contribution of lower
margin acquisitions. Operating income, as a percentage of total revenues was 23%
for 1998 and 1997, after excluding the above mentioned charges. The decrease in
Europe was caused primarily by an increase in operating costs incurred to
support operations as well as cost associated with acquisition integration.
Operating income increased as a result of solid revenue growth coupled with
controlled spending that allowed the Company to gain economies of scale through
the leveraging of its resources (additional revenues have been generated using
essentially the same resources). The Company's continued focus on margin
improvement favorably impacted operating results in 1998 compared to 1997.
Costs and expenses, excluding acquisition-related and other charges,
increased to $491.1 million in 1998 from $394.6 million in 1997 and was 77% of
total revenues in both fiscal years. Cost of services and product development
expenses were $247.9 million and $202.8 million for 1998 and 1997, respectively.
This increase in expenses over the prior fiscal year reflected the need to
provide additional support to the growing client base, costs associated with
acquired business and continued product development costs. The decrease in cost
of services and product development expenses, as a percentage of total revenues
was primarily attributable to improved gross margins on conferences, lower
delivery cost per dollar of revenue due to increased electronic delivery of
products, as well as controlled discretionary spending and reduced variable
costs linked to financial performance.
Selling, general and administrative expenses, which were $215.9 million
and $173.6 million for fiscal 1998 and 1997, respectively, increased as a result
of the Company's continuing expansion of worldwide distribution channels and
resulting commissions earned on the revenue generated 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 remained consistent at 34% of total revenues for fiscal
1998 and 1997, respectively.
During fiscal 1998, the Company incurred other charges that were
reflected in costs and expenses. In February 1998, the Company acquired the net
assets of Interpose Inc., a provider of total cost of ownership measurement and
analysis tools and training. In connection with the acquisition, the Company
recorded an acquisition-
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
related charge of $6.3 million for the write-off of purchased in-process
research and development costs. On December 10, 1998, the Company revised the
amount of expensed purchased in-process research and development costs from $6.3
million to $4.5 million. The change was in response to recently developed
guidance from the Securities and Exchange Commission. In the second quarter of
fiscal 1998, the Company recorded other charges, primarily consisting of
relocation and severance costs, totaling approximately $2.8 million related to
the Company's relocation of certain accounting and order processing operations
from Stamford, Connecticut to a new financial services center in Ft. Myers,
Florida.
Depreciation expense increased to $17.9 million in fiscal 1998 from
$11.8 million in fiscal 1997, primarily due to capital spending required to
support business growth. Additionally, amortization of intangibles increased by
$2.9 million in fiscal 1998 as compared to fiscal 1997, reflecting primarily
goodwill associated with fiscal 1998 and 1997 acquisitions.
On September 1, 1998, the Company sold GartnerLearning, a division of
the Company that provided technology based training and services for information
technology professionals to NETg Inc. ("NETg"), a subsidiary of Harcourt Brace &
Company, for $5.0 million in cash and an 8% equity interest in NETg. In
addition, the Company received a put option which allows the Company to sell its
8% equity interest to an affiliate of Harcourt Brace & Company for $48.0 million
in cash. This put option may be exercised for two years beginning on September
1, 2002 if certain conditions are met. The Company's 8% interest in NETg has an
independently appraised value of $42.5 million and is included in other assets
in the Consolidated Balance Sheets. Including related transaction costs of $3.8
million, the pre-tax loss on sale of GartnerLearning was approximately $2.0
million.
Interest income, net, increased to $9.6 million in fiscal 1998, versus
$7.3 million for fiscal 1997. This improvement resulted from interest income
accumulating on higher balances of cash, cash equivalents and marketable
securities ($262.3 million at September 30, 1998, versus $188.7 million at
September 30, 1997).
Provision for income taxes increased by 24% or $12.0 million to $62.8
million in fiscal 1998, from $50.7 million in fiscal 1997. The effective tax
rate was 42% and 41% for fiscal 1998 and 1997, respectively. As a result of the
sale of GartnerLearning, additional taxes of $4.2 million were incurred,
primarily due to the reversal of non-deductible goodwill. Excluding these
additional taxes, the Company's effective rate for fiscal 1998 was 39%, a
decrease of two percentage points from fiscal 1997. This decrease is due
primarily to on-going tax planning initiatives. A more detailed analysis of the
changes in the provision for income taxes is provided in Note 12 of the Notes to
Consolidated Financial Statements.
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.
The Company recognizes the value and utility of the Web as a delivery channel
for products and services. Failure to increase and improve the Company's Web
capabilities could adversely impact future business and operating results. The
Company's performance may also be affected by Year 2000 Issues as described on
the following pages.
The Company has recently entered into a substantial amount of debt in
connection with its recapitalization transactions (see Note 2 --Recapitalization
in the Notes to Consolidated Financial Statements). The associated debt service
could impair future operating results. In addition, 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 that may arise
in the future involving substantial investments of additional capital. In
addition, certain restrictions and limitations involving the purchase of common
stock and the issuance of stock could have an impact on the management and
growth of the Company.
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 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
22 GARTNER GROUP, INC.
that give rise to the liabilities. As a result, we may be limited in our ability
to undertake acquisitions involving the issuance of a significant amount of
stock unless we can obtain a ruling from the IRS that the transaction will not
give rise to such tax liabilities.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's continued focus on revenue and operating income increases has
contributed to its ability to continue building cash and utilizing it to make
strategic investments and acquisitions and to fund recapitalization-related
expenditures.
Cash provided by operating activities during fiscal 1999 was $128.8
million, compared to $97.8 million in the prior fiscal year, reflecting
primarily the impact of changes in balance sheet accounts, particularly fees
receivable, deferred revenues, and accounts payable and accrued liabilities.
Cash provided by investing activities totaled $1.1 million for fiscal
1999, compared to $145.2 million used for investing activities in fiscal 1998.
During fiscal 1999, the Company used $57.8 million in cash for acquisitions,
primarily for the purchase of The Warner Group for $18.0 million,
Griggs-Anderson, Inc. for $10.9 million and G2R, Inc. for $7.8 million.
Additionally, the Company used $14.0 million for investments in unconsolidated
businesses. Through the net sale of marketable securities, the Company generated
$104.6 million in fiscal 1999.
Cash used for financing activities totaled $198.7 million in fiscal
1999, compared to $62.9 million provided by financing activities for fiscal
1998. Financing activities in fiscal 1999 were primarily related to the
Company's recapitalization and included the repurchase of common stock for
$345.8 million, the one-time, nonrecurring dividend totaling $125.0 million and
$250.0 million in proceeds from the Credit Agreement with The Chase Manhattan
Bank and certain financial institutions. Cash provided by financing activities
include a $15.1 million credit to additional paid-in capital for tax benefits
received from stock transactions with employees and $18.0 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.
The effect of exchange rates reduced cash and cash equivalents by $0.1
million for the year ended September 30, 1999, and was due to the strengthening
of the U.S. dollar versus certain foreign currencies. In fiscal 1998 the effect
of exchange rates reduced cash and cash equivalents by $0.2 million. At
September 30, 1999, cash and cash equivalents and marketable securities totaled
$88.9 million. The Company issues letters of credit in the ordinary course of
business. The Company had outstanding letters of credit of $1.5 million with The
Chase Manhattan Bank and $2.0 million with The Bank of New York at September 30,
1999. Except as described below regarding the stock repurchases, the Company
believes that its current cash balances together with cash anticipated to be
provided by operating activities and borrowings available under the existing
credit facilities and lines of credit, will be sufficient for the expected
short-term and foreseeable long-term cash needs of the Company. The Company has
recently entered into a substantial amount of debt in connection with its
recapitalization transactions. 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 subsequent open
market purchases required as part of the recapitalization will require a
significant amount of cash to fund the repurchase of common shares. The Company
intends to fund the remaining commitments related to the recapitalization
through borrowings under the credit agreement with The Chase Manhattan Bank and
certain financial institutions, and existing cash balances and cash anticipated
to be provided from operations. The credit agreement provides for credit
facilities in a maximum aggregate principal amount of $500 million, consisting
of a $350 million term loan, of which the Company has borrowed $250 million as
of September 30, 1999, and a $150 million senior revolving credit facility.
Under the Credit Agreement, the Company and its subsidiaries are subject to
certain customary affirmative, negative and financial covenants.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Portions of the foregoing discussion include descriptions of the Company's
expectations regarding future trends affecting its business. The forward-looking
statements made in this annual report, as well as all other forward-looking
statements or information provided by the Company or its employees, whether
written or oral, are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements and
future results are subject to, and should be considered in light of risks,
uncertainties and other factors which may affect future results including, but
not limited to: challenges facing the Company as highlighted in the President's
report, as well as uncertainties set forth under "Factors that May Affect Future
Performance" such as competition, a rapidly evolving market for delivery of IT
analysis and advice, regulatory requirements and uncertainties of international
trade.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMMON STOCK INFORMATION
Since September 15, 1998 the Company's Class A Common Stock has been listed for
trading on the New York Stock Exchange under the symbol "IT". Prior to September
15, 1998, it was listed on the Nasdaq National Market. The Company effected
two-for-one stock splits by means of stock dividends on March 29, 1996, June 28,
1995 and August 26, 1994. All earnings per share and share data presented herein
have been restated retroactively to reflect such splits. On July 20, 1999, as
part of the Company's recapitalization, the Company's Class B Common Stock began
trading on the New York Stock Exchange under the symbol "IT/B" and traded within
a range of daily closing prices of $16.56 to $24.00 per share through September
30, 1999. During fiscal 1999, the Company's Class A Common Stock traded within a
range of daily closing prices of $16.00 to $25.63 per share.
Class A Common Stock Quarterly Common Stock Prices
FISCAL YEAR 1999 FISCAL YEAR 1998
---------------------------------------------------------------------
HIGH LOW HIGH LOW
---------------------------------------------------------------------
FIRST QUARTER ENDED
DECEMBER 31 $24.56 $17.88 $37.25 $26.75
SECOND QUARTER
ENDED MARCH 31 $25.63 $20.88 $40.81 $33.38
THIRD QUARTER
ENDED JUNE 30 $24.50 $19.00 $35.19 $30.44
FOURTH QUARTER
ENDED SEPTEMBER 30 $22.81 $16.00 $35.19 $20.88
---------------------------------------------------------------------
The Company, as required by the terms of the recapitalization, declared
a special, nonrecurring cash dividend of $1.1945 per share, payable to all
Company stockholders of record as of July 16, 1999. The cash dividend, totaling
approximately $125.0 million, was paid on July 22, 1999. The Company currently
intends to retain future earnings for use in its business and does not
anticipate that any additional cash dividends will be declared or paid on the
common stock in the foreseeable future.
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". There are two other issues that are generally
considered part of the Year 2000 problem: a) the fact that the year 2000 is a
special case leap year and b) certain dates over the next few years could be
misinterpreted as codes with special meanings (This is a simple description of
the most common cause of the Year 2000 problem. There are many complete
descriptions available, with examples, such as the Year 2000 Guide for
Practitioners.). The problem can manifest itself before, on or after January 1,
2000. The Year 2000 problem has often been described as a computer problem, but
there is a recognition that the issue extends beyond conventional computers and
affects virtually every facet of a modern company's operations and interfaces
with third parties.
The Company's Year 2000 efforts are organized around understanding and
addressing the business-critical functions in each of the six major areas that
could potentially be affected by Year 2000 issues (business-critical functions
are defined as those whose failure or significant disruption would have a
material adverse impact on the Company's business, financial condition or
results of operations or involve a safety risk to employees or clients):
o Supply Chain--suppliers, clients, financial affiliates, and government
agencies
o Products & Services--goods created by the Company for its clients
o Information Technology ("IT") Applications--in-house and vendor business
computer programs
o IT Infrastructure--computers, communications and call center systems
o Non-IT Process Systems--systems used to create and deliver the Company's
products & services
o Non-IT Facilities Systems--systems used to monitor and control the Company's
places of work and office equipment
The Company is on target 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. Should any date-related problems be revealed after that point, they will
be fixed by the Company at no extra charge to the client or replaced with a
product of equal value. The Company has tested and certified as Year 2000
compliant the majority of its internal custom applications. Additionally, the
Company expects to continue to take all prudent and reasonable steps to validate
the Year 2000-readiness of its direct supply chain interfaces and has developed
a contingency plan to deal with potential disruptions. The Company 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 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
24 GARTNER GROUP, INC.
$5.2 million for fiscal 1999 with forecasted costs for fiscal 2000 of $1.5
million. These costs have been predominantly for the budgeted replacement or
upgrades of the IT and non-IT systems, but also include personnel standard unit
costs. Budgeted costs are principally personnel related. The Company believes
that the Year 2000 problem may result in an increased percentage of IT
department budgets being directed toward Year 2000 remediation expenditures in
the near term. If this occurs, changes in customer buying practices could result
in either an increase or decrease in the demand for the Company's products and
services and, therefore, have the potential of benefiting or adversely impacting
future Company revenues and revenue patterns.
The Company has examined the business impact associated with each of
the six major areas described above. The Company believes that it has limited
products and services exposure due to the nature of those products and services,
as well as efforts expended to date. The area of potential greatest risk is the
Supply Chain. This risk is partially mitigated by the diverse and distributed
characteristics of both its suppliers and customers and the fact that the
Company has no material single vendor source suppliers. The Company has
contacted key suppliers and customers to ascertain Year 2000 readiness. The
Company has developed a "reasonably likely worst case scenario" based on
exploring a wide range of possible results from Year 2000 problems (note: it is
expected that there is a relatively small probability that the reasonably likely
worst case scenario would actually occur). The Company believes that this
scenario would be the result of a general economic downturn coupled with
sporadic problems with basic infrastructure services. This scenario would
probably affect the Company's revenues and could change demand for services. The
Company has been identifying potential variations of this scenario and is
continuing to develop business contingencies to deal with these situations.
Other undiscovered issues related to the Year 2000 issue have the potential for
an adverse impact on the Company's financial condition.
The Company's plans to address the Year 2000 problem have been based on
management's best judgments together with the information that is available to
date. Management's position is based on assumptions of future events including
the continued availability of certain resources, third party modification plans
and other factors. There can be no assurance that these estimates will prove to
be accurate, and actual results could differ materially from those currently
anticipated.
Unanticipated failures resulting from, but not limited to: a) essential
third parties, b) the Company's ability to complete the identification of all
date-sensitive systems, or c) the Company's ability to complete execution of its
own remediation efforts, could materially impact the Company's business and
financial condition.
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.
As of September 30, 1999, 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. Costs associated with the adoption of the euro
are not expected to be significant and will be 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 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. The Company is required to adopt FAS 133 in fiscal 2001. The Company
is currently evaluating the effect, if any, that adoption of FAS 133 will have
on the Company's financial position or results of operations.
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 Credit Agreement with The
Chase Manhattan Bank. The Company's unsecured Credit Agreement bears interest at
variable rates and the fair value of this instrument is not significantly
affected by changes in market interest rates. An effective increase or decrease
of 10% in interest rates under the Credit Agreement would not have a material
effect on the Company's results of operations. The Company is exposed to market
risk from a series of forward purchase agreements on its
Class A Common Stock (see Note 10 -- Stockholders' Equity, stock repurchases in
the Notes to the Consolidated Financial Statements).
Amounts invested in the Company's foreign operations are translated
into U.S. dollars at the exchange rates in effect at year end. The resulting
translation adjustments are recorded as a cumulative translation adjustment, a
component of stockholders' equity, in the Consolidated Balance Sheets.
25
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
(IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30, 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 88,894 $157,744
MARKETABLE SECURITIES -- 60,940
FEES RECEIVABLE, NET OF ALLOWANCES OF $4,938 IN 1999 AND $4,125 IN 1998 282,047 239,243
DEFERRED COMMISSIONS 31,332 28,287
PREPAID EXPENSES AND OTHER CURRENT ASSETS 29,911 24,865
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 432,184 511,079
LONG-TERM MARKETABLE SECURITIES -- 43,610
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 63,592 50,801
INTANGIBLE ASSETS, NET 223,100 155,786
OTHER ASSETS 84,568 71,595
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 803,444 $832,871
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 95,869 $106,400
COMMISSIONS PAYABLE 23,235 20,422
DEFERRED REVENUES 354,517 288,013
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 473,621 414,835
------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 250,000 --
OTHER LIABILITIES 5,337 3,098
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
$.01 PAR VALUE, AUTHORIZED 5,000,000 SHARES; NONE ISSUED OR OUTSTANDING -- --
COMMON STOCK:
$.0005 PAR VALUE, AUTHORIZED 166,000,000 SHARES OF CLASS A COMMON
STOCK AND 84,000,000 SHARES OF CLASS B COMMON STOCK; ISSUED 76,129,558
SHARES OF CLASS A COMMON STOCK (113,719,037 IN 1998) AND 40,689,648
SHARES OF CLASS B COMMON STOCK (NONE IN 1998) 58 57
ADDITIONAL PAID-IN CAPITAL 314,829 262,776
UNEARNED COMPENSATION (8,280) --
ACCUMULATED OTHER COMPREHENSIVE INCOME (3,830) (2,155)
ACCUMULATED EARNINGS 156,740 193,485
TREASURY STOCK, AT COST, 21,448,536 SHARES OF CLASS A COMMON STOCK
(12,540,576 IN 1998) AND 6,123,032 SHARES OF CLASS B COMMON STOCK
(NONE IN 1998) (385,031) (39,225)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 74,486 414,938
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 803,444 $832,871
====================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26 GARTNER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED SEPTEMBER 30, 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------------
REVENUES:
RESEARCH $479,045 $433,141 $349,600
SERVICES 149,840 110,955 84,631
EVENTS 75,581 49,121 34,256
OTHER 29,768 30,664 21,438
LEARNING -- 18,076 21,314
---------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 734,234 641,957 511,239
COSTS AND EXPENSES:
COST OF SERVICES AND PRODUCT DEVELOPMENT 289,053 247,913 202,815
SELLING, GENERAL AND ADMINISTRATIVE 252,423 215,928 173,610
ACQUISITION-RELATED CHARGE -- 4,494 --
OTHER CHARGES 30,130 2,819 --
DEPRECIATION 21,592 17,909 11,758
AMORTIZATION OF INTANGIBLES 10,041 9,357 6,443
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TOTAL COSTS AND EXPENSES 603,239 498,420 394,626
---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 130,995 143,537 116,613
LOSS ON SALE OF GARTNERLEARNING -- (1,973) --
INTEREST INCOME, NET 8,252 9,557 7,260
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INCOME BEFORE PROVISION FOR INCOME TAXES 139,247 151,121 123,873
PROVISION FOR INCOME TAXES 50,976 62,774 50,743
---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 88,271 $ 88,347 $ 73,130
===========================================================================================================================
NET INCOME PER COMMON SHARE:
BASIC $.86 $.88 $.77
===========================================================================================================================
DILUTED $.84 $.84 $.71
===========================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 102,226 100,194 94,742
===========================================================================================================================
DILUTED 104,948 105,699 102,751
===========================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
ACCUMULATED
ADDITIONAL OTHER TOTAL
PREFERRED COMMON PAID-IN UNEARNED COMPREHENSIVE ACCUMULATED TREASURY STOCKHOLDERS'
(IN THOUSANDS, EXCEPT SHARE DATA) STOCK STOCK CAPITAL COMPENSATION INCOME EARNINGS STOCK EQUITY
------------------------------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1996 $0 $52 $134,711 $0 $(2,965) $32,008 $(13,571) $150,235
NET INCOME -- -- -- -- -- 73,130 -- 73,130
FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS -- -- -- -- 1,867 -- -- 1,867
---------
COMPREHENSIVE INCOME -- -- -- -- -- -- -- 74,997
ISSUANCE OF 4,036,862 SHARES OF
CLASS A COMMON STOCK UPON
EXERCISE OF STOCK OPTIONS -- 2 13,594 -- -- -- -- 13,596
ISSUANCE FROM TREASURY STOCK OF
195,721 SHARES OF CLASS A COMMON
STOCK FOR PURCHASES BY EMPLOYEES -- -- 5,883 -- -- -- 330 6,213
CONVERSION OF 1,600,000 SHARES OF
CLASS B COMMON STOCK INTO CLASS A
COMMON STOCK -- -- -- -- -- -- -- --
TAX BENEFITS OF STOCK TRANSACTIONS
WITH EMPLOYEES -- -- 36,833 -- -- -- -- 36,833
NET SHARE SETTLEMENT OF 449,932
SHARES OF CLASS A COMMON STOCK
ON FORWARD PURCHASE AGREEMENT -- -- -- -- -- -- -- --
NET CASH SETTLEMENT PAID ON FORWARD
PURCHASE AGREEMENT -- -- (12,004) -- -- -- -- (12,004)
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BALANCE SEPTEMBER 30, 1997 0 54 179,017 0 (1,098) 105,138 (13,241) 269,870
NET INCOME -- -- -- -- -- 88,347 -- 88,347
FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS -- -- -- -- (1,057) -- -- (1,057)
---------
COMPREHENSIVE INCOME -- -- -- -- -- -- -- 87,290
ISSUANCE OF 5,370,690 SHARES OF
CLASS A COMMON STOCK UPON
EXERCISE OF STOCK OPTIONS -- 3 35,727 -- -- -- -- 35,730
ISSUANCE FROM TREASURY STOCK OF
195,904 SHARES OF CLASS A COMMON
STOCK FOR PURCHASES BY EMPLOYEES -- -- 5,885 -- -- -- 184 6,069
TAX BENEFITS OF STOCK TRANSACTIONS
WITH EMPLOYEES -- -- 47,273 -- -- -- -- 47,273
NET SHARE SETTLEMENT OF 365,949
SHARES OF CLASS A COMMON STOCK
ON FORWARD PURCHASE AGREEMENT -- -- -- -- -- -- -- --
NET CASH SETTLEMENT PAID ON
FORWARD PURCHASE AGREEMENT -- -- (12,045) -- -- -- -- (12,045)
ACQUISITION OF 655,800 SHARES
OF CLASS A COMMON STOCK -- -- -- -- -- -- (16,187) (16,187)
302,003 SHARES OF CLASS A COMMON
STOCK RECEIVED IN SETTLEMENT OF
OFFICER LOANS -- -- -- -- -- -- (9,985) (9,985)
ISSUANCE FROM TREASURY STOCK OF
225,927 SHARES OF CLASS A
COMMON STOCK RELATED TO
ACQUISITIONS -- -- 6,919 -- -- -- 4 6,923
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BALANCE SEPTEMBER 30, 1998 0 57 262,776 0 (2,155) 193,485 (39,225) 414,938
NET INCOME -- -- -- -- -- 88,271 -- 88,271
FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS -- -- -- -- (1,675) -- -- (1,675)
---------
COMPREHENSIVE INCOME -- -- -- -- -- -- -- 86,596
ISSUANCE OF 2,648,169 SHARES OF
CLASS A COMMON STOCK UPON
EXERCISE OF STOCK OPTIONS -- 1 18,032 -- -- -- -- 18,033
ISSUANCE FROM TREASURY STOCK OF
286,033 SHARES OF CLASS A
COMMON STOCK FOR PURCHASES BY
EMPLOYEES -- -- 4,842 -- -- -- 6 4,848
TAX BENEFITS OF STOCK
TRANSACTIONS WITH EMPLOYEES -- -- 15,096 -- -- -- -- 15,096
NET SHARE SETTLEMENT OF 155,962
SHARES OF CLASS A COMMON STOCK
ON FORWARD PURCHASE AGREEMENT -- -- -- -- -- -- -- --
NET CASH SETTLEMENT PAID ON
FORWARD PURCHASE AGREEMENT -- -- (10,900) -- -- -- -- (10,900)
SPECIAL CASH DIVIDEND PAID -- -- -- -- -- (125,016) -- (125,016)
RESTRICTED STOCK AWARD OF
452,000 SHARES OF CLASS A
COMMON STOCK, NET OF
FORFEITURES -- -- 9,940 (9,940) -- -- -- --
DUTCH AUCTION REPURCHASE OF
9,636,247 SHARES OF CLASS A
COMMON STOCK AND 6,123,032
SHARES OF CLASS B COMMON STOCK -- -- -- -- -- -- (344,633) (344,633)
ACQUISITION OF 65,500 SHARES OF
CLASS A COMMON STOCK -- -- -- -- -- -- (1,192) (1,192)
ISSUANCE OF 663,716 SHARES OF
CLASS A COMMON STOCK RELATED
TO ACQUISITIONS -- -- 15,043 -- -- -- 13 15,056
AMORTIZATION OF UNEARNED
COMPENSATION -- -- -- 1,660 -- -- -- 1,660
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BALANCE SEPTEMBER 30, 1999 $0 $58 $314,829 $(8,280) $(3,830) $156,740 $(385,031) $74,486
====================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28 GARTNER GROUP, INC. 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
(IN THOUSANDS) YEAR ENDED SEPTEMBER 30, 1999 1998 1997
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OPERATING ACTIVITIES:
NET INCOME $ 88,271 $ 88,347 $ 73,130
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION OF INTANGIBLES 31,633 27,266 18,201
RESTRICTED STOCK COMPENSATION 1,660 -- --
ACQUISITION-RELATED CHARGE -- 4,494 --
PROVISION FOR DOUBTFUL ACCOUNTS 5,128 4,051 3,421
EQUITY IN LOSSES OF MINORITY OWNED COMPANY 846 512 202
DEFERRED REVENUES 57,270 30,292 41,750
DEFERRED TAX EXPENSE 6,648 906 1,554
PRE-ACQUISITION TAX BENEFIT APPLIED TO REDUCE GOODWILL 327 -- 275
LOSS ON SALE OF GARTNERLEARNING -- 1,973 --
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF ACQUISITIONS:
INCREASE IN FEES RECEIVABLE (40,628) (39,737) (60,378)
INCREASE IN DEFERRED COMMISSIONS (3,186) (5,132) (4,262)
DECREASE (INCREASE) IN PREPAID EXPENSES AND OTHER CURRENT ASSETS 381 (10,645) (7,915)
INCREASE IN OTHER ASSETS (4,880) (5,100) (2,707)
(DECREASE) INCREASE IN ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (17,306) (2,998) 22,101
INCREASE IN COMMISSIONS PAYABLE 2,655 3,566 1,785
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CASH PROVIDED BY OPERATING ACTIVITIES 128,819 97,795 87,157
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INVESTING ACTIVITIES:
PAYMENT FOR BUSINESSES ACQUIRED (EXCLUDING CASH ACQUIRED) (57,769) (45,418) (33,306)
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES (13,960) (19,814) (9,089)
ADDITION OF PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS (31,747) (24,269) (21,513)
MARKETABLE SECURITIES SOLD (PURCHASED), NET 104,550 (58,220) (13,229)
LOANS TO OFFICERS -- (2,475) (7,163)
PROCEEDS FROM SALE OF GARTNERLEARNING -- 5,000 --
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CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 1,074 (145,196) (84,300)
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FINANCING ACTIVITIES
ISSUANCE OF COMMON STOCK AND WARRANTS 18,033 35,730 13,596
PROCEEDS FROM EMPLOYEE STOCK PURCHASE PLAN OFFERING 4,842 5,885 5,883
TAX BENEFITS OF STOCK TRANSACTIONS WITH EMPLOYEES 15,096 47,273 36,833
NET CASH SETTLEMENT ON FORWARD PURCHASE AGREEMENT (10,900) (12,045) (12,004)
(PURCHASE) SALE OF TREASURY STOCK (345,819) (13,931) 330
PROCEEDS FROM ISSUANCE OF DEBT 250,000 -- --
PAYMENTS FOR DEBT ISSUANCE COSTS (4,925) -- --
DIVIDENDS PAID (125,016) -- --
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CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (198,689) 62,912 44,638
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (68,796) 15,511 47,495
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (54) (182) (1,835)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 157,744 142,415 96,755
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 88,894 $ 157,744 $142,415
====================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD
FOR:
INTEREST $ 976 -- --
INCOME TAXES $ 47,045 $ 7,721 $ 6,597
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
COMMON STOCK RECEIVED IN SETTLEMENT OF OFFICER LOANS AND RELATED INTEREST -- $ 9,985 --
EQUITY INTEREST RECEIVED IN CONNECTION WITH SALE OF GARTNERLEARNING -- $ 42,500 --
STOCK ISSUED IN CONNECTION WITH ACQUISITIONS $ 15,056 $ 6,923 --
TREASURY STOCK TRANSACTIONS SETTLED SUBSEQUENT TO YEAR END -- $ 2,072 --
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 GARTNER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include the
accounts of Gartner Group, Inc. (the "Company") and its majority-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated. The results of operations for acquisitions of companies accounted
for using the purchase method have been included in the Consolidated Statements
of Operations beginning on the closing date of acquisition. The Company's
investments in 20% to 50% owned companies in which it has the ability to
exercise significant influence over operating and financial policies are
accounted for on the equity method. Investments of less than 20% are carried at
cost.
Revenue and commission expense recognition. Revenue from research products is
deferred and recognized as products are delivered, and as the Company's
obligation to the client is completed over the contract term. Services revenues,
primarily derived from consulting and measurement engagements, are recognized as
work is performed on a contract by contract basis. Events revenue is deferred
and recognized upon the completion of the related symposium, exposition or
conference. Other revenues includes software licensing fees which are recognized
when delivery has occurred and when collectibility is probable, and the fees are
fixed or determinable. The Company's policy is to record at the time of signing
of a research and measurement contract the fees receivable and related deferred
revenues for the full amount of the contract billable on that date. All research
and measurement 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. All research and
measurement contracts are billable upon signing, absent special terms granted on
a limited basis. 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. In addition, the Company defers direct event related costs
until completion of the related symposium, exposition or conference.
Cash equivalents and marketable securities. Marketable securities that mature
within three months of purchase are considered cash equivalents. Investments
with maturities of more than three months are classified as marketable
securities. During the year ended September 30, 1999, the Company sold all
investments with maturities of more than three months at approximately the
amortized cost of $43.2 million to finance a portion of the Company's
recapitalization (see Note 2 --Recapitalization). At September 30, 1999, all of
the Company's marketable securities mature within three months of purchase.
Property, equipment and leasehold improvements. Property, equipment and
leasehold improvements are stated at cost less accumulated depreciation and
amortization. Property and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized using the straight-line method over the shorter of the estimated
useful lives of the assets or the remaining term of the related leases.
Long-lived assets. The Company regularly reviews long-lived assets for
impairment. Management's policy regarding long-lived assets is to evaluate the
recoverability of its assets when the facts and circumstances suggest that these
assets may be impaired. Should events or circumstances indicate that the
carrying value may not be recoverable based on undiscounted future cash flows,
an impairment loss measured by the difference between the discounted future cash
flows (or another acceptable method for determining fair value) and the carrying
value of the long-lived assets would be recognized by the Company. This analysis
relies on a number of factors including operating results, business plans,
budgets, economic projections and changes in management's strategic direction.
Software development costs. Under Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," capitalization of computer software development costs is to
begin upon the establishment of technological feasibility, limited to the net
realizable value of the software product, and ceases when the software product
is available for general release to clients. Until these products reach
technological feasibility, all costs related to development efforts are charged
to expense. Once technological feasibility has been determined, additional costs
incurred in development, including coding, testing, and documentation, are
capitalized. Amortization of software development costs is provided on a
product-by-product basis over the estimated economic life of the software,
generally two years, using the straight-line method. Amortization of capitalized
computer software development costs begins when the products are available for
general release to customers.
Intangible assets. Intangible assets include goodwill, non-compete agreements,
tradenames and other intangibles. Goodwill represents the excess of the purchase
price of acquired businesses over the esti-
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
mated fair value of the tangible and identifiable intangible net assets
acquired. Amortization is recorded using the straight-line method over periods
ranging from seven to thirty years. These amounts have been and are subject to
adjustment in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109") (see
Note 12--Income Taxes). Non-compete agreements are being amortized on a
straight-line basis over the period of the agreement ranging from two to five
years. Tradenames are being amortized on a straight-line basis over their
estimated useful lives ranging from nine to twelve years.
Foreign currency translation. All assets and liabilities of foreign subsidiaries
are translated into U.S. dollars at year end exchange rates. Income and expense
items are translated at average exchange rates prevailing during the year. The
resulting translation adjustments are recorded as a component of stockholders'
equity.
Income taxes. Deferred tax assets and liabilities are recognized based on
differences between the book and tax basis of assets and liabilities using
presently enacted tax rates. The provision for income taxes is the sum of the
amount of income tax paid or payable for the year as determined by applying the
provisions of enacted tax laws to taxable income for that year and the net
changes during the year in the Company's deferred tax assets and liabilities.
Undistributed earnings of subsidiaries outside of the U.S. amounted to
approximately $18.1 million and will either be indefinitely reinvested or
remitted substantially free of tax. Accordingly, no material provision has been
made for taxes that may be payable upon remittance of such earnings, nor is it
practicable to determine the amount of this liability. The Company credits
additional paid-in capital for realized tax benefits arising from stock
transactions with employees. The tax benefit on a non-qualified stock option is
equal to the tax effect of the difference between the market price of a share of
the Company's common stock on the exercise and grant dates.
Comprehensive income. In the year ended September 30, 1999, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"). 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 accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
has disclosed its comprehensive income in the Consolidated Statement of Changes
in Stockholders' Equity. The Company's total comprehensive income for the years
ended September 30, 1999, 1998 and 1997 was $86.6, $87.3 and $75.0 million,
respectively, and consisted of net income and foreign currency translation
adjustments.
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 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. The Company is required to
adopt FAS 133 during the year ended September 30, 2001. The Company is currently
evaluating the effect, if any, that adoption of FAS 133 will have on the
Company's financial position or results of operations.
Fair value of financial instruments. Most of the Company's financial
instruments, including cash, marketable securities, trade receivables and
payables, and accruals are short-term in nature. Accordingly, the carrying
amounts of these financial instruments approximates their fair value (see Note
10 regarding forward purchase agreements).
The carrying amounts of long-term debt approximates fair value as the
rates of interest on these credit facilities approximate current market rates of
interest for similar instruments with comparable maturities.
Concentrations of credit risk. Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and fees
receivable. Concentrations of credit risk with respect to fees receivables are
limited due to the large number of clients comprising the Company's client base
and their dispersion across many different industries and geographic regions.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and
disclosures, if any, of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Estimates are used when accounting for such items as allowance for doubtful
accounts, depreciation, amortization, income taxes and certain accrued
liabilities.
Reclassifications. Certain reclassifications have been made in the prior years'
financial statements to conform with the year ended September 30, 1999
presentation.
32 GARTNER GROUP, INC.
2--RECAPITALIZATION
The Dun and Bradstreet Corporation ("D&B"), an investor in Information Partners
Capital Fund, L.P. ("Fund"), provided a portion of the financing in connection
with the acquisition of the Company in October 1990. In April 1993, D&B acquired
a majority of the outstanding voting securities of the Company in transactions
among the Company, D&B and persons and entities associated with the Fund. On
November 1, 1996, D&B transferred ownership of its common stock of the Company
to Cognizant Corporation ("Cognizant"), a spinoff of D&B and an independent
public company. At the date of transfer, these shares represented 51% of the
Company's outstanding common stock. During the year ended September 30, 1997,
Cognizant's ownership of the Company's outstanding common stock fell below 50%.
On June 30, 1998, Cognizant transferred its ownership in the Company to IMS
Health Incorporated ("IMS Health"), a spinoff of Cognizant and an independent
public company.
On July 16, 1999, the Company's stockholders approved a series of
transactions that resulted in the separation of the Company and IMS Health. This
was accomplished, in part, through the recapitalization of the Company's
outstanding common stock into two classes of Common Stock, consisting of Class A
Common Stock and Class B Common Stock, and the issuance of an aggregate of
40,689,648 shares of Class B Common Stock to IMS Health in exchange for a like
number of shares of Class A Common Stock held by IMS Health. The separation was
effected, in part, through the July 26, 1999 tax-free distribution by IMS Health
to its stockholders of the newly issued Class B Common Stock of the Company
owned by IMS Health. IMS Health is required by IRS regulations to monetize its
remaining interest of 6,900,000 shares and warrants for 599,400 shares in the
Company as quickly as feasible after the spinoff, subject to certain
restrictions agreed to by both companies. In addition, the Company's
stockholders approved an amendment to the Company's Certificate of Incorporation
to increase the authorized capital stock of the Company to a total of
250,000,000 shares of Common Stock (166,000,000 shares of Class A Common Stock
and 84,000,000 shares of Class B Common Stock) and 5,000,000 shares of Preferred
Stock. The Class B Common Stock is identical in all respects to the Class A
Common Stock, except that the Class B Common Stock is entitled to elect at least
80% of the members of the Company's Board of Directors. In addition, any Class B
Common Stock holder who owns more than 15% of the outstanding Class B Common
Stock, will not be able to vote all of his or her Class B Common Stock in the
election of directors unless such holder owns an equivalent percentage of Class
A Common Stock. The Company's stockholders also approved an amendment to the
Company's Certificate of Incorporation to create a classified Board of Directors
of three classes having staggered three-year terms.
In connection with the IMS Health transacti0n the Company declared a
special, nonrecurring cash dividend of $1.1945 per share, payable to all Company
stockholders of record as of July 16, 1999. The cash dividend, totaling
approximately $125.0 million, was paid on July 22, 1999 and was funded out of
existing cash.
Also in connection with the recapitalization, on July 27, 1999 the
Company commenced a tender offer in a Dutch Auction format to purchase
approximately 15% of its outstanding common stock at prices not less than $21.00
and not more than $24.00 per share. Under the terms of the Dutch Auction tender
offer, the Company repurchased shares of Class A Common Stock and Class B Common
Stock in the same proportion as the ratio of the number of shares of each class
outstanding on July 26, 1999. Pursuant to the tender offer, which expired on
August 31, 1999, the Company purchased a total of 15,759,279 shares, comprised
of 9,636,247 shares of Class A Common Stock at a purchase price of $21.75 per
share and 6,123,032 shares of Class B Common Stock at a purchase price of
$21.875 per share. These repurchases were funded in part through term borrowings
under the Company's $500 million credit facility (see Note 8 -- Long-Term Debt).
The Company also is required to purchase 5,166,691 shares, allocated between
Class A Common Stock and Class B Common Stock in the same proportion as in the
Dutch Auction, in the open market by July 2001 as part of the recapitalization
plan.
As a result of the special, nonrecurring cash dividend, the Board of
Directors approved a reduction in the exercise prices of stock options to
maintain the aggregate economic value of the stock options. Under the exercise
price reduction program, the exercise prices of all options that had an exercise
price below the fair market value of the stock on July 16, 1999 were reduced to
maintain the ratio of the exercise price to the fair market value of the stock
prior to the cash dividend. The exercise prices of options with an exercise
price equal to or greater than the fair market value of the stock on July 16,
1999 were reduced by an amount equal to the dividend per share paid by the
Company. No changes were made to either the number of shares of common stock
covered or the vesting schedule of the options.
Under the terms of the recapitalization agreement, the Company is
required to indemnify IMS Health for additional taxes, under certain
circumstances, if actions by the Company cause the distribution to become
taxable to IMS Health and its stockholders. These actions include the use of
stock for substantial acquisitions and the issuance, without regulatory
approval, of stock options over set limitations during a two-year period
following the recapitalization. In addition, the Company has indemnified IMS
Health for any tax liabilities associated with the spinoff that may result from
the acquisition of the Company. The Company monitors its actions for compliance
in this regard and believes that it is unlikely, within matters under the
Company's control, that it will incur any significant costs as a result of its
indemnity.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3--ACQUISITIONS
On August 1, 1997, the Company acquired all of the outstanding shares of
Computer and Communications Information Group, Inc. doing business as Datapro
Information Services ("Datapro"), a unit of McGraw-Hill Companies, for
consideration of approximately $25.0 million in cash. Datapro is a provider of
information on product specifications and pricing, product comparisons,
technology reports, market overviews, case studies and user ratings surveys.
Datapro's services and products provide feature and side-by-side comparisons of
computer hardware, software and communications products. 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 the 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 $33.5 million
and has been recorded as goodwill which is being amortized over 30 years. In
addition, $2.5 million of the purchase price was allocated to a non-compete
agreement which is being amortized over 4 years. If the acquisition of Datapro
had occurred at the beginning of 1997, consolidated total revenues on a pro
forma basis would have been $536.6 million for the year ended September 30,
1997. This revenue does not purport to be indicative of what would have occurred
had the acquisition been made as of that date or of total revenues which may
occur in the future. The pro forma effect on the Company's net income and net
income per common share for the year ended September 30, 1997 is not material.
On October 22, 1997, the Company acquired a 32% membership interest in
Jupiter Communications, LLC ("Jupiter") for $8.0 million in cash. On September
16, 1998, the Company increased its membership interest in Jupiter to 37% for an
additional $1.3 million in cash and on May 25, 1999 the Company made an
additional investment of $1.1 million in cash to maintain its 37% membership
interest in Jupiter. Jupiter is a provider of analyst-based research and
strategic planning services to the consumer and Internet and interactive
industries. This investment is accounted for under the equity method of
accounting. The excess of the cost of the investment over the underlying
proportionate share of net assets (goodwill) in Jupiter totaling $9.3 million is
being amortized over 30 years and is included in other assets in the
Consolidated Balance Sheets. On October 7, 1999 Jupiter completed its initial
public offering ("IPO") at $21.00 per share of common stock and, upon the
closing of the offering, exchanged membership units in Jupiter for shares of
common stock of Jupiter Communications, Inc. The Company owns 4,028,503 million
shares, or approximately 28.1%, of Jupiter Communications, Inc.'s outstanding
common stock.
On January 30, 1998, the Company acquired all the assets and assumed
the liabilities of Interpose, Inc. ("Interpose"), for $7.5 million in cash and
13,746 shares of Class A Common Stock of the Company which had an approximate
fair market value of $0.5 million. Interpose is a provider of total cost of
ownership measurement and analysis tools and training. The acquisition was
accounted for by the purchase method, and the purchase price has been allocated
to the assets acquired and 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 $8.3 million. Of such
amount, $4.5 million was expensed as purchased in-process research and
development costs and is presented as the acquisition-related charge in the
Consolidated Statements of Operations. Of the remaining excess purchase price,
$2.9 million was allocated to goodwill which is being amortized over 12 years
and $0.9 million was allocated to a non-compete agreement which is being
amortized over 5 years.
On May 18, 1998, the Company acquired all the assets and assumed the
liabilities of The Research Board, Inc., for $6.4 million in cash and 183,945
shares of Class A Common Stock of the Company which had an approximate fair
market value of $5.7 million. The Research Board, Inc. compiles and provides
information technology ("IT") research on suppliers and new technologies,
validated management practices and IT best practices to its membership, which
consist principally of senior IT executives. 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 $15.1 million, of which $14.5
million has been recorded as goodwill, which is being amortized over 30 years.
In addition, $0.6 million of the purchase price was allocated to a non-compete
agreement which is being amortized over 5 years.
On September 4, 1998, the Company acquired all of the outstanding
shares of Vision Events International, Inc., for $20.5 million in cash. Vision
Events International, Inc. produces premiere channel events that serve to bring
IT vendors, value-added resellers, and system integrators together with vendors
and distributors selling through these channels. 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 $24.0 million of which
$23.6 million has been recorded as goodwill which is being amortized over 30
years. In addition, $0.4 million of the purchase price was allocated to a
non-compete agreement which is being amortized over 3 years.
34 GARTNER GROUP, INC.
On October 7, 1998, the Company acquired all the assets and assumed the
liabilities of Griggs-Anderson, Inc., for $10.9 million in cash and 305,808
shares of Class A Common Stock of the Company, which had an approximate fair
market value of $7.3 million. Griggs-Anderson, Inc. 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 $16.9
million, of which $15.5 million has been recorded as goodwill, which is being
amortized over 30 years. In addition, $1.4 million of the purchase price was
allocated to a non-compete agreement and is being amortized over 5 years.
On November 13, 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 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 $10.5 million, of which $9.7 million has been
recorded as goodwill, which is being amortized over 30 years. In addition, $0.8
million of the purchase price was allocated to a non-compete agreement which is
being amortized over 2 years.
On January 1, 1999, the Company acquired all of the assets and assumed
the liabilities of G2R, Inc. ("G2R") for $7.8 million in cash and 358,333 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 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 $13.4 million, of which $12.6 million has been recorded as
goodwill, which is being amortized over 30 years. In addition, $0.8 million of
the purchase price was allocated to a non-compete agreement and is being
amortized over 4 years.
On July 30, 1999 the Company acquired all of the outstanding shares of
The Warner Group ("Warner") for $18.0 million in cash. Warner is a leading
management consulting firm specializing in information technology,
communications technology and performance improvement for government agency
clients. 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 $15.2 million, of which $14.3 million has been
recorded as goodwill, that is being amortized over 30 years. In addition, $0.9
million of the purchase price was allocated to non-compete agreements and is
being amortized over 2 and 5 years.
During 1999, the Company completed additional acquisitions for
consideration of $16.1 million in cash. During 1998, the Company completed
additional acquisitions for consideration of $12.8 million in cash and 28,236
shares of Class A Common Stock of the Company, which had an approximate fair
value of $0.7 million. These acquisitions have been accounted for under the
purchase method and substantially all of the purchase price has been assigned to
goodwill.
During 1999 and 1998 the Company made several investments totaling
$10.9 million and $10.5 million, respectively, that are accounted for on the
cost method. The Company also made investments totaling $3.1 million and $9.3
million in 1999 and 1998 respectively, that are accounted for on the equity
method. These investments totaled $14.0 million and $19.8 million and are
included in Other assets on the Consolidated Balance Sheets as of September 30,
1999 and 1998, respectively.
Total cost and equity investments of the Company were $75.2 million and
$61.9 million, respectively, and are included in Other assets on the
Consolidated Balance Sheets at September 30, 1999 and 1998, respectively. The
pro forma results of operations for the year ended September 30, 1999 and 1998,
assuming the 1999 acquisitions were made at the beginning of each year, would
not differ significantly from the historical results.
4--SALE OF GARTNERLEARNING
On September 1, 1998, the Company sold GartnerLearning, a division of the
Company that provides technology based training and services for information
technology professionals to NETg Inc. ("NETg"), a subsidiary of Harcourt Brace &
Company, for $5.0 million in cash and an 8% equity interest in NETg. In
addition, the Company received a put option which allows the Company to sell its
8% equity interest to an affiliate of Harcourt Brace & Company for $48.0 million
in cash.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
This put option may be exercised for two years beginning on September 1, 2002,
if certain conditions are met. The Company's 8% interest in NETg was
independently appraised at $42.5 million on the date of sale and is included in
Other assets in the Consolidated Balance Sheets. Including transaction costs
related to the sale of $3.8 million, the pre-tax loss on sale of GartnerLearning
was approximately $2.0 million.
5--OTHER CHARGES
During 1999, the Company recorded other charges related to reorganization and
recapitalization of approximately $30.1 million on a pre-tax basis.
Approximately $14.2 million of the charge related to certain job eliminations
associated with strategic reduction in force initiatives. Approximately $9.2
million of the other charge pertained to legal and advisory fees associated with
the Company's recapitalization (see Note 2--Recapitalization). In relation to
the Company's recapitalization, the Company's board of directors approved a
special one-time cash incentive plan to be earned and paid in three installments
and designed to enhance retention of key personnel. Approximately twenty-five
percent of the retention incentive, or $6.7 million, was vested in 1999 and was
paid on October 15, 1999. The second payment will be made on or before December
31, 1999 and the third payment will be made on or before April 15, 2000.
During 1998, the Company recorded other charges, primarily consisting
of relocation and severance costs, totaling approximately $2.8 million related
to the Company's relocation of certain accounting and order processing
operations from Stamford, Connecticut to a new financial services center in Ft.
Myers, Florida. These expenses are presented as other charges in the
Consolidated Statements of Operations.
--------------------------------------------------------------------------------
6--PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, carried at cost, less
accumulated depreciation and amortization consist of the following
(in thousands):
[Enlarge/Download Table]
SEPTEMBER 30,
----------------------------------
USEFUL LIFE (YEARS) 1999 1998
-----------------------------------------------------------------------------------------------------------
FURNITURE AND EQUIPMENT 3-8 $ 42,737 $ 27,278
COMPUTER EQUIPMENT 2-3 75,780 60,809
LEASEHOLD IMPROVEMENTS 2-15 23,955 21,916
-----------------------------------------------------------------------------------------------------------
142,472 110,003
LESS--ACCUMULATED DEPRECIATION AND AMORTIZATION (78,880) (59,202)
-----------------------------------------------------------------------------------------------------------
$ 63,592 $ 50,801
===========================================================================================================
7--INTANGIBLE ASSETS, NET
Intangible assets, net, carried at cost, less accumulated amortization consist
of the following (in thousands):
[Enlarge/Download Table]
SEPTEMBER 30,
------------------------------------
AMORTIZATION PERIOD (YEARS) 1999 1998
-----------------------------------------------------------------------------------------------------------------------
GOODWILL 7-30 $237,933 $168,936
NON-COMPETE AGREEMENTS 2-5 10,600 5,489
TRADENAMES 9-12 3,140 778
-----------------------------------------------------------------------------------------------------------------------
251,673 175,203
LESS--ACCUMULATED AMORTIZATION (28,573) (19,417)
-----------------------------------------------------------------------------------------------------------------------
$223,100 $155,786
=======================================================================================================================
36 GARTNER GROUP, INC.
8--LONG TERM DEBT
On July 16, 1999, ("the closing date") 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
million of credit facilities, consisting of a $350 million term loan and a $150
million senior revolving credit facility. The term loan can be advanced in
multiple drawings during the first year after the closing date. Amounts repaid
under the term loan may not be reborrowed. As of September 30, 1999, the Company
had borrowed $250 million under the term loan, and had not made any borrowings
under the revolving credit facility. Loans under the revolving facility will be
available for five years, subject to certain customary conditions on the date of
any such loan. A quarterly commitment fee of between 0.25% and 0.35% per annum
is payable on the unborrowed balance of the revolving credit facility.
Borrowings under the credit facility will accrue interest based on one or more
rates selected by the Company plus an applicable margin. The base rate shall be
LIBORor alternatively, the higher of the prime commercial lending rate of The
Chase Manhattan Bank, the Federal Funds Rate or the secondary market rate for
certificates of deposit. The applicable margin for the base rate can range from
0% to 0.50% per annum based upon an applicable calculated ratio and is initially
0.25% per annum. The interest rate paid on long-term debt as of September 30,
1999 was 7.5%
Loans made under the term loan will mature five years after the closing
date and will amortize in eight equal semi-annual installments commencing
eighteen months after the closing date. Loans made under the revolving credit
facility will mature five years after the closing date. Maturities of long-term
debt for the next five fiscal years are approximately $31.3 million in 2000,
$62.5 million for each year 2001 through 2003 and $31.3 million in 2004. Under
the Credit Agreement, the Company and its subsidiaries are subject to certain
customary affirmative, negative and financial covenants.
Letters of credit are issued by the Company in the ordinary course of
business. As of September 30, 1999, the Company had outstanding letters of
credit with Chase Manhattan Bank for $1.5 million and with The Bank of New York
for $2.0 million.
9--COMMITMENTS AND CONTINGENCIES
The Company leases various facilities, furniture and computer equipment under
lease arrangements expiring between 2000 and 2026. Future minimum annual
payments under operating lease agreements as of September 30, 1999 are as
follows (in thousands):
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2000 $ 15,486
2001 12,933
2002 10,794
2003 9,847
2004 7,600
THEREAFTER 45,252
------------------------------------------------------------------------
TOTAL MINIMUM LEASE PAYMENTS $101,912
========================================================================
Rental expense for operating leases, net of sublease income, was $24.4,
$21.3 and $16.8 million for the years ended September 30, 1999, 1998 and 1997,
respectively. The Company has commitments with two facilities management
companies for printing, copying, mailroom and other related services. The
minimum annual obligations under these service agreements are $4.8 million for
1999, $4.9 million for 2000, $4.1 million for 2001, $4.1 million for 2002, and
$1.0 million for year 2003.
The Company is required to repurchase 5,166,691 additional shares of
its common stock on the open market by July 2001 as part of its recapitalization
(see Note 2 - Recapitalization).
The Company is involved in legal proceedings and litigation arising in
the ordinary course of business. The Company believes the outcome of all current
proceedings, claims and litigation will not have a material effect on the
Company's financial position or results of operations when resolved in a future
period.
10--STOCKHOLDERS' EQUITY
Capital stock. Class A Common Stock and Class B Common Stock stockholders are
entitled to one vote per share on all matters to be voted by stockholders, other
than the election of directors. Class A Common Stock stockholders are entitled
to one vote per share on the election of Class A directors, which constitute not
more than 20% of the directors and Class B Common Stock stockholders are
entitled to one vote per share on the election of Class B directors, which
constitute at least 80% of the directors. In addition, any Class B Common Stock
holder who owns more than 15% of the outstanding Class B Common Stock, will not
be able to vote all of his or her Class B Common Stock in the election of
directors unless such holder owns an equivalent percentage of Class A Common
Stock.
On June 4, 1997, with the Board of Directors approval, the Company
provided loans totaling $7.2 million to certain officers to facilitate the
purchase of common stock arising out of the exercise of stock options. The loan
proceeds were not used to fund the option exercise price of the common stock
acquired. The loans were full recourse obligations to the officers and were
secured by shares of the Company's stock. The loans bore interest at an annual
rate of 6.1%. On December 18, 1997, with the Board of Directors approval, the
Company provided additional loans for the same purpose to certain officers
totaling $2.5 million. The loans bore interest at an annual
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
rate of 5.6%. On July 23, 1998, with the Board of Directors' approval, the
Company received 302,003 shares of Class A Common Stock in settlement of the
loan balances and accrued interest.
Stock option plans and warrants. Under the terms of the 1991 Stock Option Plan,
the Board of Directors may grant non-qualified and incentive options, entitling
employees to purchase shares of the Company's common stock at the fair market
value on the date of grant. The Board can determine the date on which options
vest and become exercisable. A total of 32,800,000 shares of Class A Common
Stock have been reserved for issuance under this plan. At September 30, 1999 and
1998, 5,948,420 and 9,001,508 options were available for grant, respectively.
In January 1993, the Company adopted the 1993 Director Option Plan, a
stock option plan for directors, and reserved an aggregate of 1,200,000 shares
of Class A Common Stock for issuance under this plan. The plan currently
provides for the automatic grant of 15,000 options to purchase shares of Class A
Common Stock to each director upon first becoming an outside director and the
automatic grant of an option to purchase an additional 7,000 shares of Class A
Common Stock annually based on continuous service as an outside director. The
exercise price of each option granted under the plan is equal to the fair market
value of the Class A Common Stock at the date of grant. Options granted are
subject to cumulative yearly vesting over a three year period after the date of
grant. At September 30, 1999 and 1998, 526,000 and 603,000 options were
available for grant, respectively.
In October 1994, the Board of Directors and stockholders of the Company
approved the adoption of a Long-Term Stock Option Plan and the reservation of an
aggregate of 6,560,000 shares of Class A Common Stock for issuance thereunder.
The purpose of the plan is to provide to senior personnel long-term equity
participation in the Company as an incentive to promote the long-term success of
the Company. The exercise price of each option granted under the plan is equal
to the fair value of the Class A Common Stock at the date of grant. All options
granted under the plan vest and become fully exercisable five years following
the date of grant, based on continued employment, and have a term of ten years
from the date of grant assuming continued employment. Vesting and exercisability
accelerates upon achievement of certain financial performance targets determined
by the Board of Directors. If the financial performance targets are met for the
year of grant in accordance with parameters as set by the Board in its sole
discretion, 25% of the shares granted become exercisable on the first
anniversary date following the date of grant and, if cumulative financial
performance targets are met for both the first and second years following the
date of grant, a second 25% become exercisable three years following the date of
grant. If cumulative financial performance targets are met for all three years
following the date of grant, a third 25% become exercisable on the fourth
anniversary date following the date of grant and the final 25% become
exercisable on the fifth anniversary following the date of grant. Based on
cumulative performance through 1999, 1,487,070 shares were exercisable on
September 30, 1999. At September 30, 1999 and 1998, 624,000 and 287,500 options
were available for grant, respectively.
In October 1996, the Company adopted the 1996 Long Term Stock Option
Plan. Under the terms of the plan, the Board of Directors may grant
non-qualified and incentive options, entitling employees to purchase shares of
the Company's common stock at the fair market value at the date of option grant.
A total of 1,800,000 shares of Class A Common Stock was reserved for issuance
under this plan. All options granted under the plan vest and become fully
exercisable six years following the date of grant, based on continued
employment, and have a term of ten years from the date of grant assuming
continued employment. Vesting and exercisability accelerates upon achievement of
certain financial performance targets determined by the Board of Directors. If
financial performance targets are met in the year of grant in accordance with
parameters as set by the Board in its sole discretion, 25% of the shares granted
become exercisable on the third anniversary date following the date of grant. If
cumulative financial performance targets are met for both the first and second
years following the date of grant, a second 25% become exercisable three years
following the date of grant. If financial performance targets are met
cumulatively for all three years following the date of grant, a third 25% become
exercisable on the fourth anniversary date following the date of grant and the
final 25% become exercisable on the fifth anniversary following the date of
grant. Based on 1997 and 1998 performance, 815,250 options will be exercisable
on February 24, 2000. At September 30, 1999 and 1998, 473,000 and 169,500
options to purchase common stock were available for grant.
In October 1998, the Company adopted the 1998 Long Term Stock Option
Plan. Under the terms of the plan, the Board of Directors may grant
non-qualified and incentive options, entitling employees to purchase shares of
the Company's common stock at the fair market value at the date of option grant
and restricted stock. A total of 2,500,000 shares of Class A Common Stock was
reserved for issuance under this plan. All options currently granted under the
plan vest and become fully exercisable six years following the date of grant,
based on continued employment, and have a term of ten years from the date of
grant assuming continued employment. Vesting and exercisability accelerates upon
achievement of certain financial performance targets determined by the Board of
Directors. If financial performance targets are met in the year of grant in
accordance with parameters as set by the Board in its sole discretion, 25% of
the shares granted become exercisable in the third anniversary date following
the date of grant. If cumulative financial performance targets are met for both
the first and second years following the date of grant, a second 25%
38 GARTNER GROUP, INC.
become exercisable three years following the date of grant. If financial
performance targets are met cumulatively for all three years following the date
of grant, a third 25% become exercisable on the fourth anniversary date
following the date of grant and the final 25% become exercisable on the fifth
anniversary following the date of grant. Based on 1999 performance, no vesting
has accelerated; however, if cumulative financial performance targets are met
for 1999 and 2000 or 1999, 2000 and 2001, vesting may still accelerate. At
September 30, 1999, 176,000 options to purchase common stock were available for
grant.
On April 4, 1997, the Company adopted an option exchange program that
allowed the exchange of certain stock options granted from October 1995 through
January 1997 under the 1991 Option Plan and the 1994 Long-Term Plan for options
with an exercise price of $21.09 per share. In total, options to purchase
1,647,000 shares of common stock were exchanged under this program. The original
vesting schedules and expiration dates associated with these stock options were
also amended to commence with the stock option exchange program date. These
amounts have been included as granted and canceled options during 1997 in the
summary activity table shown below.
On December 15, 1998, the Company adopted another option exchange
program that allowed the exchange of certain stock options granted from April
1997 through July 1998 for options with an exercise price of $20.46. In total,
options to purchase 4,737,400 shares of common stock were exchanged under this
program. The original vesting schedules and expiration dates associated with
these stock options were also amended to commence with the stock option exchange
program date. These amounts have been included as granted and canceled options
during 1999 in the summary activity table shown below.
In connection with the recapitalization (see Note 2--Recapitalization),
substantially all options with an exercise price below the fair market value of
the stock on the effective date were reduced to maintain the ratio of the
exercise price to the fair market value of the stock prior to the special,
nonrecurring cash dividend, which was $1.1945 per share. The exercise prices of
options with an exercise price equal to or greater than the fair market value of
the stock on the effective date were reduced by an amount equal to the dividend
per share paid by the Company. No changes were made in either the number of
shares of common stock covered or in the vesting schedule of the options.
A summary of stock option activity under the plans and agreement
through September 30, 1999 follows:
CLASS A WEIGHTED
COMMON AVERAGE
STOCK UNDER EXERCISE
OPTION PRICE
-----------------------------------------------------------------------------
OUTSTANDING AT SEPTEMBER 30, 1996 18,786,597 $ 6.922
GRANTED 5,694,814 $23.023
EXERCISED (4,036,862) $ 3.385
CANCELED (2,623,199) $26.416
-----------------------------------------------------------------------------
OUTSTANDING AT SEPTEMBER 30, 1997 17,821,350 $11.462
GRANTED 5,060,949 $33.329
EXERCISED (5,370,690) $ 6.716
CANCELED (1,380,577) $20.539
-----------------------------------------------------------------------------
OUTSTANDING AT SEPTEMBER 30, 1998 16,131,032 $19.086
GRANTED 11,818,259 $20.946
EXERCISED (2,648,169) $ 6.810
CANCELED (7,511,554) $21.637
-----------------------------------------------------------------------------
OUTSTANDING AT SEPTEMBER 30, 1999 17,789,568 $17.475
=============================================================================
Options for the purchase of 4,417,986 and 4,317,310 Class A Common
Stock were exercisable at September 30, 1999 and 1998, respectively.
The following table summarizes information about stock options
outstanding at September 30, 1999:
[Enlarge/Download Table]
WEIGHTED AVERAGE
REMAINING
NUMBER NUMBER WEIGHTED AVERAGE CONTRACTUAL
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISABLE EXERCISE PRICE LIFE (YEARS)
---------------------------------------------------------------------------------------------------------------------
$0.88-4.83 641,640 603,140 $ 2.78 1.4
$5.51-13.08 3,226,240 2,066,240 $ 7.53 4.9
$15.67-19.90 8,989,865 1,315,215 $18.18 8.5
$20.46-24.49 4,419,323 222,179 $24.12 9.2
$25.18-26.81 36,000 32,000 $25.59 1.8
$30.47-37.29 476,500 179,212 $32.61 7.6
---------------------------------------------------------------------------------------------------------------------
17,789,568 4,417,986
========================================================================
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IMS Health has a warrant expiring December 1, 2000
to purchase 599,400 shares of Class A Common Stock at a price of $16.42 per
share.
Employee stock purchase plan. In January 1993, the Company adopted an employee
stock purchase plan (the "1993 Employee Stock Purchase Plan"), and reserved an
aggregate of 4,000,000 shares of Class A Common Stock for issuance under this
plan. The plan permits eligible employees to purchase Class A Common Stock
through payroll deductions, which may not exceed 10% of an employee's
compensation (or $21,250 in any calendar year), at a price equal to 85% of the
Class A Common Stock price as reported by NYSE at the beginning or end of each
offering period, whichever is lower. During the year ended September 30, 1999,
286,033 shares were issued from treasury stock at an average purchase price of
$17.68 per share. At September 30, 1999, 1,792,900 shares were available for
offering under the plan.
Restricted stock awards. During the year ended September 30, 1999, the Company
granted restricted stock awards under the 1991 Stock Option Plan and the 1998
Long Term Stock Option Plan. The restricted stock awards will vest in six equal
installments with the first installment vesting two years after the grant and
then annually thereafter. Recipients are not required to provide consideration
to the Company other than rendering service and have the right to vote the
shares and receive dividends. The restricted stock may not be sold by the
employee during the vesting period. A total of 538,000 restricted shares of
Class A Common Stock were issued at a weighted average market value of $23.09
per share, of which 86,000 have been forfeited as of September 30, 1999. In
addition, the Company granted 35,000 stock options under the 1998 Long Term
Stock Option Plan with an exercise price of $1.00 per share that vest on the
same basis as the restricted stock awards. Such stock options had a fair market
value of $23.25 per stock option on the date of grant. The aggregate market
value of the restricted stock awards and stock option grants was $9.9 million.
Total compensation expense recognized for the restricted stock awards and option
grants was approximately $1.7 million for 1999.
Stock repurchases. Beginning in the year ended September 30, 1997, the Company
has entered into a series of forward purchase agreements on its Class A Common
Stock. These agreements are settled quarterly at the Company's option on a net
basis in either shares of its own Class A Common Stock or cash. To the extent
that the market price of the Company's Class A Common Stock on a settlement date
is higher (lower) than the forward purchase price, the net differential is
received (paid) by the Company. During the year ended September 30, 1998, four
settlements resulted in the Company receiving 365,949 shares of Class A Common
Stock (recorded in Treasury stock at no cost) and paying approximately $12.0
million in cash (recorded as a reduction of additional paid-in capital). During
the year ended September 30, 1999, four settlements resulted in the Company
receiving 155,962 shares of Class A Common Stock and paying approximately $10.9
million in cash. As of September 30, 1999, a forward purchase agreement in place
covered approximately $17.6 million or 828,157 shares of Class A Common Stock
having forward purchase prices established at $21.25 per share. If the market
priced portion of this agreement was settled based on the September 30, 1999
market price of Class A Common Stock ($16.00 per share), the Company would
settle under the terms of the forward purchase agreement with a payment of
either $4.3 million in cash or 271,739 shares of Class A Common Stock.
On August 24, 1998, the Company's Board of Directors approved the
repurchase of up to 2,500,000 shares of Class A Common Stock in an effort to
offset the dilutive effect of the Company's stock-based employee compensation
plans. To date, the Company has repurchased 721,300 shares of Class A Common
Stock at a cost of approximately $17.4 million. There are no open commitments to
repurchase stock under this approval. No additional repurchases under this
approval are anticipated due to the open market repurchase limitations under the
terms of the recapitalization.
Stock based compensation. The Company applies the provisions of APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock-based compensation plans. Accordingly, no compensation cost
has been recognized for the fixed stock option plans. Pursuant to the
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" the following are the pro forma net income and net
income per share for the years ended September 30, 1999, 1998 and 1997 had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant date for grants under those
plans:
YEAR ENDED SEPTEMBER 30, 1999 1998 1997
--------------------------------------------------------------------------
NET INCOME
AS REPORTED $88,271 $88,347 $73,130
PRO FORMA $67,128 $58,480 $62,497
NET INCOME PER DILUTED
COMMON SHARE
AS REPORTED $ 0.84 $ 0.84 $ 0.71
PRO FORMA $ 0.64 $ 0.55 $ 0.61
--------------------------------------------------------------------------
40 GARTNER GROUP, INC.
The pro forma disclosures shown above reflect options granted after the
year ended September 30, 1995 and are not likely to be representative of the
effects on net income and net income per common share in future years.
The fair value of the Company's stock plans used to compute pro forma
net income and diluted earnings per share disclosures is the estimated fair
value at grant date using the Black-Scholes option pricing model. The following
weighted-average assumptions were utilized for stock options granted or
modified:
1999 1998 1997
-----------------------------------------------------------------------
EXPECTED LIFE (IN YEARS) 3.1-5.0 2.4-6.4 2.4-6.4
EXPECTED VOLATILITY .40 .40 .40
RISK FREE INTEREST RATE 4.93%-5.82% 4.22%-4.39% 6.00%-6.09%
EXPECTED DIVIDEND YIELD 0.00% 0.00% 0.00%
-----------------------------------------------------------------------
The weighted average fair values of the Company's stock options granted
in the years ended September 30, 1999, 1998 and 1997 are $10.19, $12.00 and
$12.32, respectively.
--------------------------------------------------------------------------------
11--COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share ("EPS") is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution of securities that
could share in earnings, including stock options and warrants. When the exercise
of stock options is antidilutive they are excluded from the calculation.
The following table sets forth the required disclosures of the
reconciliation of the basic and diluted net earnings per share computations.
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30, 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------
NUMERATOR:
NET INCOME $ 88,271 $ 88,347 $ 73,130
=====================================================================================================================
DENOMINATOR :
DENOMINATOR FOR BASIC EARNINGS PER SHARE--
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 102,226 100,194 94,742
EFFECT OF DILUTIVE SECURITIES:
WEIGHTED AVERAGE NUMBER OF COMMON SHARES UNDER
WARRANT OUTSTANDING 155 298 274
WEIGHTED AVERAGE NUMBER OF OPTION SHARES OUTSTANDING 2,567 5,207 7,735
---------------------------------------------------------------------------------------------------------------------
DILUTIVE POTENTIAL COMMON SHARES 2,722 5,505 8,009
---------------------------------------------------------------------------------------------------------------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE--
ADJUSTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 104,948 105,699 102,751
=====================================================================================================================
BASIC EARNINGS PER COMMON SHARE $ 0.86 $ 0.88 $ 0.77
=====================================================================================================================
DILUTED EARNINGS PER COMMON SHARE $ 0.84 $ 0.84 $ 0.71
=====================================================================================================================
For the years ended September 30, 1999 and 1998, options to purchase
4.3 million and 2.2 million shares of Class A Common Stock of the Company with
exercise prices greater than the average fair market value of $21.32 and $32.67,
for the respective periods, were not included in the computation of diluted
net income per share because the effect would have been antidilutive. All
outstanding options for the year ended September 30, 1997 were dilutive and were
included in the calculation of diluted earnings per share.
12--INCOME TAXES
Following is a summary of the components of income before provision for income
taxes (in thousands):
YEAR ENDED SEPTEMBER 30, 1999 1998 1997
-------------------------------------------------------------------------
U.S. $107,243 $113,589 $ 93,758
NON-U.S. 32,004 37,532 30,115
-------------------------------------------------------------------------
CONSOLIDATED $139,247 $151,121 $123,873
=========================================================================
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income tax on the above income consists of the
following components (in thousands):
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30, 1999 1998 1999
---------------------------------------------------------------------------------------------------------------------
CURRENT TAX EXPENSE:
U.S. FEDERAL $18,613 $ 2,081 $ 797
STATE AND LOCAL 2,977 2,257 1,872
FOREIGN 6,533 8,927 8,208
---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT 28,123 13,265 10,877
DEFERRED TAX EXPENSE (BENEFIT):
U.S. FEDERAL 4,286 921 434
STATE AND LOCAL 1,052 552 912
FOREIGN 1,310 (567) 208
---------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED 6,648 906 1,554
---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT AND DEFERRED 34,771 14,171 12,431
BENEFIT OF STOCK TRANSACTIONS WITH EMPLOYEES
ALLOCATED TO ADDITIONAL PAID-IN CAPITAL 15,878 48,603 38,037
BENEFIT OF PURCHASED TAX BENEFITS CREDITED TO GOODWILL 327 -- 275
---------------------------------------------------------------------------------------------------------------------
TOTAL PROVISION FOR INCOME TAXES $50,976 $62,774 $50,743
=====================================================================================================================
Current and long-term deferred tax assets and liabilities are comprised
of the following (in thousands):
SEPTEMBER 30, 1999 1998
----------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION $ 1,585 $ 666
EXPENSE ACCRUALS FOR BOOK PURPOSES 7,495 4,285
LOSS AND CREDIT CARRYFORWARDS 4,622 11,456
INTANGIBLE ASSETS 1,668 1,814
OTHER 1,210 1,104
----------------------------------------------------------------------------
GROSS DEFERRED TAX ASSET 16,580 19,325
----------------------------------------------------------------------------
INTANGIBLE ASSETS (8,457) (2,299)
EQUITY INTEREST (2,478) (2,477)
OTHER (1,577) (89)
----------------------------------------------------------------------------
GROSS DEFERRED TAX LIABILITY (12,512) (4,865)
----------------------------------------------------------------------------
VALUATION ALLOWANCE (3,559) (6,444)
----------------------------------------------------------------------------
NET DEFERRED TAX ASSET $ 509 $ 8,016
============================================================================
Current and long-term net deferred tax assets are $5.7 million and $0
million as of September 30, 1999 and are $1.8 million and $6.2 million as of
September 30, 1998, respectively, and are included in Prepaid expenses and other
current assets and Other assets in the Consolidated Balance Sheets. Current and
long-term net deferred tax liabilities are $0.9 million and $4.3 million as of
September 30, 1999 and are included in Accounts payable and accrued liabilities
and Other liabilities in the Consolidated Balance Sheets. There were no deferred
tax liabilities as of September 30, 1998.
The valuation allowance relates to state and foreign tax loss
carryforwards that more likely than not will expire unutilized. The net decrease
in the valuation allowance of approximately $2.9 million in the current year
results primarily from the utilization of U.S. federal tax loss carryforwards of
approximately $5.0 million and state tax loss carryforwards of approximately
$11.0 million. The net increase in the valuation allowance of approximately $1.5
million in the year ended September 30, 1998 was due primarily from the increase
in the state tax carryforwards of approximately $2.0 million and the net
utilization of foreign tax loss carryforwards of approximately $0.5 million. The
tax benefits from such tax loss carryforwards were $2.5, $1.2 and $1.7 million
for the years ended September 30, 1999, 1998 and 1997, respectively.
Approximately $2.7 million of the valuation allowance would reduce
paid-in-capital upon subsequent recognition of any related tax benefits.
42 GARTNER GROUP, INC.
The differences between the U.S. federal statutory income tax rate and
the Company's effective rate are:
YEAR ENDED SEPTEMBER 30, 1999 1998 1997
------------------------------------------------------------------------
STATUTORY TAX RATE 35.0% 35.0% 35.0%
STATE INCOME TAXES,
NET OF FEDERAL BENEFIT 3.1 4.3 4.5
FOREIGN INCOME TAXED
AT A DIFFERENT RATE 1.7 0.7 0.6
NON-DEDUCTIBLE GOODWILL
AND DIRECT ACQUISITION COSTS 1.1 3.5 0.9
NON-TAXABLE INCOME (1.3) (1.3) (0.9)
EXEMPT FOREIGN TRADING
GROSS RECEIPTS (2.3) (1.4) (1.0)
NON-DEDUCTIBLE RECAPITALIZATION
COSTS 2.2 -- --
SETTLEMENT OF TAX EXAMS (1.8) -- --
BENEFIT OF OPERATING LOSS AND
TAX CREDIT CARRYFORWARDS (2.0) -- --
OTHER ITEMS 0.9 0.7 1.9
------------------------------------------------------------------------
EFFECTIVE TAX RATE 36.6% 41.5% 41.0%
=========================================================================
As of September 30, 1999, the Company had state and local tax loss
carryforwards of $40.6 million, the majority of which will expire in two to four
years. In addition, the Company had foreign tax loss carryforwards of $4.5
million, of which $0.6 million will expire within three to five years, and $3.9
million can be carried forward indefinitely. In 1999, the Company incurred $8.6
million of non-deductible recapitalization costs during the year, the tax effect
of which was approximately offset by a one-time income tax benefit of $2.5
million related primarily to the settlement of certain tax examinations in the
second quarter. In 1998, the sale of GartnerLearning resulted in an additional
tax provision of $4.2 million primarily due to the reversal of non-deductible
goodwill. The effective tax rate, less the impact of the above mentioned items,
was 37% and 39% for 1999 and 1998, respectively.
13--EMPLOYEE BENEFITS
The Company has a savings and investment plan covering substantially all
domestic employees. The Company contributes amounts to this plan based upon the
level of the employee contributions. In addition, the Company also contributes
fixed and discretionary amounts based on employee participation and attainment
of operatiing margins set by the Board of Directors. Amounts expensed in
connection with the plan totaled $6.6, $5.4 and $4.6 million for the years ended
September 30, 1999, 1998 and 1997, respectively.
14--SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 supercedes Statement of
Financial Accounting Standards No 14, "Financial Reporting for Segments of a
Business Enterprise", replacing the "industry segment" with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. FAS 131 also requires
additional disclosures with respect to products and services, geographic areas
and major customers.
In the fourth quarter of 1999, the Company adopted FAS 131. In relation
to the reorganization in the fourth quarter of 1999, the Company began managing
its business in three reportable segments organized on the basis of differences
in its related products and services: research, services and events. 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.
The Company earns revenue from clients in many countries. Other than
the United States, the Company's country of domicile, there is no individual
country in which revenues from external clients represent 10% or more of the
Company's consolidated revenues. Additionally, no single client accounted for
10% or more of total revenue and the loss of a single client, in management's
opinion, would not have a material adverse effect on revenues.
The Company evaluates performance and allocates resources based on 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 as described in
Note 1 - Summary of Significant Accounting Policies.
The Company does not identify or allocate assets, including capital
expenditures, by operating segment. Accordingly, assets are not being reported
by segment 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.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables present information about reportable segments (in
thousands). Operating income in the "Other" column includes expenses unallocated
to reportable segments, expenses allocated to operations that do not meet the
quantitative threshold of FAS 131, and other charges. There are no intersegment
revenues:
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30, 1999 RESEARCH SERVICES EVENTS OTHER CONSOLIDATED
------------------------------------------------------------------------------------------------------------------------------------
REVENUES $479,045 149,840 75,581 29,768 $734,234
OPERATING INCOME $336,919 55,857 32,532 (294,313) $130,995
INTEREST INCOME, NET $ 8,252
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES $139,247
------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1998 RESEARCH SERVICES EVENTS OTHER CONSOLIDATED
------------------------------------------------------------------------------------------------------------------------------------
REVENUES $433,141 110,955 49,121 48,740(1) $641,957
OPERATING INCOME $312,855 50,787 19,546 (239,651) $143,537
LOSS ON SALE OF GARTNERLEARNING $ (1,973)
INTEREST INCOME, NET $ 9,557
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES $151,121
------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1997 RESEARCH SERVICES EVENTS OTHER CONSOLIDATED
------------------------------------------------------------------------------------------------------------------------------------
REVENUES $349,600 84,631 34,256 42,752(1) $511,239
OPERATING INCOME $248,825 40,409 10,319 (182,940) $116,613
INTEREST INCOME, NET $ 7,260
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES $123,873
------------------------------------------------------------------------------------------------------------------------------------
(1)REPRESENTS THE SUM OF OTHER AND LEARNING REVENUES FOR YEARS ENDED SEPTEMBER
30, 1998 AND 1997.
The Company's consolidated revenues are generated primarily through
direct sales to clients by domestic and international sales forces and a network
of independent international distributors. The Company defines "Europe Revenues"
as revenues attributable to clients located in England and the European region
and "Other International Revenues" as revenues attributable to all areas located
outside of the United States, Canada and Europe. Most products and services of
the Company are provided on an integrated worldwide basis. Because of the
integration of products and services delivery, it is not practical to separate
precisely the revenues and operating income of the Company by geographic
location. Accordingly, the separation set forth in the table below is based upon
internal allocations, which involve certain management estimates and judgments.
Fiscal 1998 and 1997 revenues and operating income by geographic location have
been restated to be more comparable to the 1999 revenues allocation methodology.
European identifiable tangible assets consist primarily
of the assets of the European subsidiaries and include the accounts receivable
balances carried directly by the subsidiaries located in England, France and
Germany. All other European client receivables are maintained by, and therefore
are included as identifiable assets of, the United States operations.
Summarized information by geographic location is as follows (in
thousands):
YEAR ENDED SEPTEMBER 30, 1999 1998 1997
-------------------------------------------------------------------------
UNITED STATES AND CANADA:
REVENUES $471,783 $415,622 $339,318
OPERATING INCOME $ 70,139 $ 81,894 $ 68,482
IDENTIFIABLE TANGIBLE ASSETS $437,452 $551,030 $407,262
LONG-LIVED ASSETS $318,509 $285,125 $189,304
EUROPE:
REVENUES $212,131 $173,762 $132,229
OPERATING INCOME $ 48,433 $ 44,455 $ 42,090
IDENTIFIABLE TANGIBLE ASSETS $110,472 $ 93,409 $ 73,974
LONG-LIVED ASSETS $ 41,233 $ 25,533 $ 20,950
OTHER INTERNATIONAL:
REVENUES $ 50,320 $ 52,573 $ 39,692
OPERATING INCOME $ 12,423 $ 17,188 $ 6,041
IDENTIFIABLE TANGIBLE ASSETS $ 32,420 $ 31,888 $ 27,654
LONG-LIVED ASSETS $ 11,518 $ 11,134 $ 10,331
-------------------------------------------------------------------------
Excluding other charges, operating income was $95.1 million, $52.9
million and $13.1 million in the United States and Canada, Europe and Other
International, respectively, for the year ended September 30, 1999. Excluding
acquisition-related and other charges, operating income in the United States and
Canada was $89.2 million for the year ended September 30, 1998.
44 GARTNER GROUP, INC.
15--QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
YEAR ENDED SEPTEMBER 30, 1999 1ST 2ND 3RD 4TH
---------------------------------------------------------------------------------------------------
REVENUES $190,380 $171,328 $185,658 $186,868
OPERATING INCOME(1) $ 45,742 $ 39,610 $ 38,138 $ 7,505
NET INCOME $ 30,088 $ 28,841 $ 26,416 $ 2,926
DILUTED EARNINGS PER COMMON SHARE $ 0.29 $ 0.27 $ 0.25 $ 0.03
---------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1998 1ST 2ND 3RD 4TH
---------------------------------------------------------------------------------------------------
REVENUES $162,667 $149,565 $160,992 $168,733
OPERATING INCOME $ 41,145 $ 31,083 $ 35,462 $ 35,847
NET INCOME $ 25,644 $ 20,099 $ 22,982 $ 19,622
DILUTED EARNINGS PER COMMON SHARE $ 0.25 $ 0.19 $ 0.22 $ 0.19
---------------------------------------------------------------------------------------------------
(1)INCLUDES OTHER CHARGES OF $4.4 MILLION, $1.5 MILLION, AND $24.2 MILLION IN
THE QUARTERS ENDED MARCH 31, 1999, JUNE 30, 1999 AND SEPTEMBER 30, 1999,
RESPECTIVELY.
45
REPORT BY MANAGEMENT
Management's Responsibility for Financial Reporting
Management has prepared and is responsible for the integrity and objectivity of
the consolidated financial statements and related information included in the
Annual Report. The consolidated financial statements, which include amounts
based on management's best judgments and estimates, were prepared in conformity
with generally accepted accounting principles. Financial information elsewhere
in this Annual Report is consistent with that in the consolidated financial
statements.
The Company maintains a system of internal controls de- signed to
provide reasonable assurance at reasonable cost that assets are safeguarded and
transactions are properly executed and recorded for the preparation of financial
information. The internal control system is augmented with an organizational
structure providing division of responsibilities, careful selection and training
of qualified financial people and a program of internal audits.
The Audit Committee of the Board of Directors, composed solely of
outside directors, meets regularly with management, internal auditors and our
independent accountants to ensure that each is meeting its responsibilities and
to discuss matters concerning internal controls and financial reporting. Both
the independent and internal auditors have unrestricted access to the Audit
Committee.
The independent auditors for fiscal 1999, 1998 and 1997, KPMG LLP,
audit and render an opinion on the financial statements in accordance with
generally accepted auditing standards. These standards include an assessment of
the systems of internal controls and tests of transactions to the extent
considered necessary by them to support their opinion.
/s/ Manuel A. Fernandez
Manuel A. Fernandez
Chairman
/s/ Michael D. Fleisher
Michael D. Fleisher
President and Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders--Gartner Group, Inc.:
We have audited the accompanying consolidated balance sheets of Gartner Group,
Inc. and subsidiaries as of September 30, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gartner
Group, Inc. and subsidiaries as of September 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
KPMG LLP
St. Petersburg, Florida
October 28, 1999
46 GARTNER GROUP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
[Enlarge/Download Table]
(IN THOUSANDS EXCEPT PER SHARE DATA) FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
REVENUES:
RESEARCH $479,045 $433,141 $349,600 $279,629 $222,394
SERVICES 149,840 110,955 84,631 61,348 40,781
EVENTS 75,581 49,121 34,256 26,449 16,498
OTHER 29,768 30,664 21,438 15,027 14,172
LEARNING -- 18,076 21,314 12,219 1,301
------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 734,234 641,957 511,239 394,672 295,146
------------------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 603,239 498,420 394,626 345,232 251,406
OPERATING INCOME 130,995 143,537 116,613 49,440 43,740
MINORITY INTEREST -- -- -- 25 98
LOSS ON SALE OF GARTNERLEARNING (1,973) -- -- --
INTEREST INCOME, NET 8,252 9,557 7,260 3,665 2,271
------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 139,247 151,121 123,873 53,130 46,109
PROVISION FOR INCOME TAXES 50,976 62,774 50,743 36,692 20,948
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 88,271 $ 88,347 $ 73,130 $ 16,438 $ 25,161
====================================================================================================================================
NET INCOME PER COMMON SHARE:
BASIC $ 0.86 $ 0.88 $ 0.77 $ 0.18 $ 0.29
DILUTED $ 0.84 $ 0.84 $ 0.71 $ 0.17 $ 0.26
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
CASH AND CASH EQUIVALENTS, AND MARKETABLE SECURITIES $ 88,894 $218,684 $171,054 $126,809 $ 95,414
FEES RECEIVABLE, NET 282,047 239,243 205,760 143,762 112,159
OTHER CURRENT ASSETS 61,243 53,152 48,794 39,579 28,655
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 432,184 511,079 425,608 310,150 236,228
INTANGIBLES AND OTHER ASSETS 371,260 321,792 219,704 133,958 96,678
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $803,444 $832,871 $645,312 $444,108 $332,906
====================================================================================================================================
DEFERRED REVENUES $354,517 $288,013 $254,071 $198,952 $161,001
OTHER CURRENT LIABILITIES 119,104 126,822 118,112 92,456 94,208
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 473,621 414,835 372,183 291,408 255,209
LONG-TERM DEBT 250,000 -- -- -- --
OTHER LIABILITIES 5,337 3,098 3,259 2,465 3,446
STOCKHOLDERS' EQUITY 74,486 414,938 269,870 150,235 74,251
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $803,444 $832,871 $645,312 $444,108 $332,906
====================================================================================================================================
SEPTEMBER 30, 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------------------
RESEARCH CONTRACT VALUE (1) $560,779 $511,422 $450,276 $344,106 $270,716
TOTAL CONTRACT VALUE (2) $684,611 $596,736 $505,162 $387,228 $303,231
CLIENT ORGANIZATIONS (3) 9,692 9,144 8,124 7,241 5,500
------------------------------------------------------------------------------------------------------------------------------------
(1) RESEARCH CONTRACT VALUE IS CALCULATED AS THE ANNUALIZED VALUE OF ALL
SUBSCRIPTION-BASED RESEARCH PRODUCT CONTRACTS WITH RATABLE REVENUE RECOGNITION
IN EFFECT AT A GIVEN POINT IN TIME, WITHOUT REGARD TO THE DURATION OF THE
CONTRACTS OUTSTANDING AT SUCH TIME.
(2) TOTAL CONTRACT VALUE IS CALCULATED AS THE ANNUALIZED VALUE OF ALL
SUBSCRIPTION-BASED RESEARCH PRODUCT, MEASUREMENT AND CERTAIN OTHER PRODUCT
CONTRACTS IN EFFECT AT A GIVEN POINT IN TIME, WITHOUT REGARD TO THE DURATION OF
THE CONTRACTS OUTSTANDING AT SUCH TIME. CONTRACT VALUE FOR 1997, 1996 AND 1995
HAS BEEN RESTATED TO EXCLUDE GARTNERLEARNING CONTRACTS.
(3) INFORMATION PROVIDED FOR FISCAL 1995 DOES NOT INCLUDE DATAQUEST,
INCORPORATED. INFORMATION PROVIDED FOR 1997 AND 1998 EXCLUDES DATAPRO.CLIENT
ORGANIZATIONS HAVE BEEN RESTATED FOR 1997, 1996 AND 1995 TO EXCLUDE
GARTNERLEARNING CLIENT ORGANIZATIONS.
47
CORPORATE DIRECTORY
BOARD OF DIRECTORS
Manuel A. Fernandez (1)
Chairman
Gartner Group, Inc.
Michael D. Fleisher (1)
President and CEO
Gartner Group, Inc.
Anne Sutherland Fuchs (3)
Senior Vice President and
Group Publishing Director,
Hearst Magazines
William O. Grabe (3)
General Partner
General Atlantic Partners
Max D. Hopper (2) (4)
Retired Chairman
SABRE Technology Group
John P. Imlay, Jr. (3)
Chairman
Imlay Investments, Inc.
Charles B. McQuade (2)
President and CEO
Securities Industry Automation
Corporation
Stephen G. Pagliuca (2)
Managing Director
Bain Capital
Kenneth Roman (4)
Former Chairman and CEO
Ogilvy & Mather Worldwide
Dennis G. Sisco (4)
Partner
Behrman Capital
LEADERSHIP TEAM
Michael D. Fleisher (1)
President and CEO
Karen T. Cone
Senior Vice President and
General Manager,
GartnerGroup Interactive
Channel
Richard E. Eldh, Jr. (1)
Executive Vice President
Worldwide Sales, Events and
Marketing
Patricia L. Higgins (1)
Executive Vice President and
CEO of The Research Board
Masahiro Miyagawa
President and CEO
GartnerGroup, Japan
Graham P. Norton-Standen
Senior Vice President and
General Manager,
GartnerGroup International
Regina M. Paolillo (1)
Chief Financial Officer and
Executive Vice President
Finance and Administration
Henry B. Satterthwaite
Senior Vice President and
General Manager,
GartnerGroup Services
Maxwell B. Smith
Senior Vice President
Business Development
David R. Whitten
Senior Vice President and
General Manager,
GartnerGroup Research
(1) Corporate Officer
(2) Audit committee
(3) Compensation committee
(4) Corporate Governance committee
WORLDWIDE OFFICES
Corporate Headquarters
56 Top Gallant Road
Stamford, CT 06904 USA
Phone: 203-316-1111
West Coast Headquarters
San Jose, CA USA
European Headquarters
Egham, United Kingdom
Asia Headquarters
Tokyo, Japan
Pacific Headquarters
Milsons Point, Australia
GartnerGroup is located in
50 countries worldwide.
Addresses, phone and fax
numbers are listed on the
GartnerGroup Web site at
gartner.com
SHAREHOLDER INFORMATION
Notice of Annual Meeting
56 Top Gallant Road
Stamford, CT 06904
February 1, 2000
10:00 a.m. Eastern Time
Investor Relations
For further information on the company, additional copies of this report, Form
10-K, or other financial information, contact:
Investor Relations
Gartner Group, Inc.
56 Top Gallant Road
Stamford, CT 06904
203-316-1111
You may also contact us by sending an e-mail to investorrelations@gartner.com or
by visiting Investor Information at www.gartnerweb.com/investor
Exchange Information
The Company's Class A and Class B Common Stock is traded on the New York Stock
Exchange under the symbols IT and IT/B, respectively.
Legal Counsel
Wilson, Sonsini, Goodrich
& Rosati, P.C.
Palo Alto, CA
Independent Auditors
KPMG LLP
St. Petersburg, FL
Transfer Agent
BankBoston, N.A.
c/o EquiServe
PO Box 8040
Boston, MA 02266-8040
Phone: 781-575-3120
Internet: www.equiserve.com
48 GARTNER GROUP, INC.
GartnerGroup's 1999 annual report was photographed at the company's flagship
U.S. conference, Symposium/ITxpo, held in Orlando, FL.
Entire contents (C) 1999 Gartner Group, Inc. All rights reserved. Reproduction
of this publication in any form without prior written permission is forbidden.
This annual report includes trademarks of Gartner Group, Inc. and other
companies.
Design: SVP Wilton, CT
[PHOTO]
gartner.com
GARTNERGROUP
56 TOP GALLANT ROAD
P.O. BOX 10212
STAMFORD, CT
06904-2212
203-316-1111
Dates Referenced Herein and Documents Incorporated by Reference
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