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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________.
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COMMISSION FILE NUMBER 001-12275.
COGNIZANT CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1450569
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(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
200 NYALA FARMS, WESTPORT, CONNECTICUT 06880
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (203) 222-4200.
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 per share ................ New York Stock Exchange
Preferred Stock Purchase Rights ....................... New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of February 28, 1998, 162,514,227 shares of Common Stock of Cognizant
Corporation were outstanding and the aggregate market value of such Common Stock
held by nonaffiliates (based upon its closing transaction price on the Composite
Tape on such date) was approximately $8,116 million.
(Continued)
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DOCUMENTS INCORPORATED BY REFERENCE
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PART I
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ITEM 1 --Business Cognizant Business Segments, 1997, Pages 24 and 25, Note 19.
Operations by Business Segments, of the 1997 Annual Report
to Shareholders.
ITEM 3 --Legal Proceedings Pages 22 and 23, Note 17. Litigation, of the 1997 Annual
Report to Shareholders.
PART II
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ITEM 5 --Market for the Registrant's Pages 6 and 7, Financial Review, of the 1997 Annual Report
Common Equity and Related to Shareholders.
Stockholders Matters
ITEM 6 --Selected Financial Data Page 27, Five-Year Selected Financial Data, of the 1997
Annual Report to Shareholders.
ITEM 7 --Management's Discussion and Pages 1 to 7, Financial Review, of the 1997 Annual Report to
Analysis of Financial Shareholders.
Condition and Results of
Operations
ITEM 8 --Financial Statements and Pages 9 to 27 of the 1997 Annual Report to Shareholders;
Supplementary Data Pages 13 to 37 of the Gartner Group, Inc. 1997 Annual Report
to Shareholders.
PART III
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ITEM 10 --Directors and Executive Section entitled "Election of Directors" of the Company's Proxy
Officers of the Registrant Statement dated March 13, 1998.
ITEM 11 --Executive Compensation Section entitled "Compensation of Executive Officers and
Directors" of the Company's Proxy Statement dated March 13,
1998.
ITEM 12 --Security Ownership of Section entitled "Security Ownership of Management and
Certain Beneficial Others" of the Company's Proxy Statement dated March 13, 1998.
Owners and Management
ITEM 13 --Certain Relationships and Not applicable.
Related Transactions
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The Index to Exhibits is located on Pages 18-19
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PART I
As used in this report, except where the context indicates otherwise, the
term "Company" means Cognizant Corporation and all subsidiaries consolidated in
the financial statements contained or incorporated by reference herein.
ITEM 1. BUSINESS
Cognizant Corporation was incorporated under the laws of the State of
Delaware on January 2, 1996. The Company began operating as an independent
publicly held company on November 1, 1996 (the "Distribution Date") as a result
of its spin-off (the "D&B Spin-off") from The Dun & Bradstreet Corporation ("Dun
& Bradstreet"). Prior to the D&B Spin-off, the Company was owned by Dun &
Bradstreet.
On January 15, 1998, the Company announced a plan to separate into two
independent, publicly traded companies--IMS Health Incorporated ("IMS Health")
and Nielsen Media Research, Inc. The transaction, which has been structured as a
tax-free dividend of one share of IMS Health common stock for each share of
Cognizant Corporation common stock, is targeted for completion by the middle of
1998. Concurrent with the transaction, Cognizant Corporation will change its
name to Nielsen Media Research, Inc. The separation would create IMS Health as
the premier global provider of information solutions to the pharmaceutical and
healthcare industries, and establish an independent Nielsen Media Research,
Inc., the leader in electronic measurement services. The distribution is subject
to final approval by the Company's board of directors and obtaining a ruling
from the Internal Revenue Service with respect to the tax-free treatment of the
transaction. IMS Health consists of IMS International, Inc., Erisco, Inc.,
Cognizant Enterprises, Inc., Cognizant Technology Solutions Corporation, SSJ
K.K., and an equity investment in Gartner Group, Inc.
Cognizant Corporation integrates information and technology to create
business insight. Its principal operating units are I.M.S. International, Inc.,
which offers global information solutions to the pharmaceutical and healthcare
industries, and Nielsen Media Research, Inc., the leader in audience measurement
information for electronic media. The Company also is the largest shareholder of
Gartner Group, Inc., the premier provider of research and advisory services to
the information technology industry. The Company operates in approximately 80
countries. The number of full-time equivalent employees at December 31, 1997 was
approximately 10,500.
The Company's operations are grouped into the following business segments:
IMS, Nielsen Media Research and Emerging Markets.
IMS
I.M.S. INTERNATIONAL, INC.
I.M.S. International, Inc. ("IMS"), the largest operating unit of IMS
Health, provides information and decision-support services to the worldwide
pharmaceutical and healthcare industries. These services broadly include market
research services, sales management services, and other related professional,
software, marketing and research and development services. IMS provides
information services covering 94 countries and maintains offices in 74 countries
on six continents, with significant revenue generated outside the United States
in 1997. In 1997, IMS continued its expansion in developing markets in Eastern
Europe, Asia and Sub-Saharan Africa.
Market research services represented approximately 41% of IMS's worldwide
revenue in 1997. The principal market research services are syndicated
pharmaceutical, medical, hospital, promotional and self-medication audits.
Market research services are utilized by clients for various strategic and
tactical purposes, including analyzing market shares, therapeutic prescribing
trends and price movements. The information reported in these services is
generated or derived from data collected primarily from pharmaceutical
wholesalers, pharmacies, hospitals and doctors. Market research services are
delivered to clients through hardcopy reports, workstations, CD-ROMs and
computer on-line services.
* Pharmaceutical audits measure the sales of pharmaceutical products through
pharmacies, supplemented in some countries by data collected from
prescribing physicians, retail chains and discount stores. The reports
contain data projected to national estimates, showing product sales by
therapeutic class broken down by package size and dosage form.
Pharmaceutical audits are available in over 84 countries.
* Medical audits are based on information collected from panels of practicing
physicians. The reports contain projected national estimates of the number
of consultations for each diagnosed disease with details of the therapy
prescribed, and analyze the use physicians make of individual drugs by
listing the diseases for which they are prescribed, the potential
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therapeutic action the physician is expecting, other drugs prescribed at
the same time and estimates of the total number of drugs used for each
disease. Medical audits are available in over 47 countries.
* Hospital audits contain data projected to national estimates and show the
sales of pharmaceutical products to hospitals by therapeutic class. IMS
publishes hospital audits for 37 countries.
* Promotional audits measure pharmaceutical promotion for a particular
market, including sales force promotion and journal and mail advertising,
based on information received from panels of physicians and from monitoring
medical journals and direct mail. IMS publishes promotional reports for 27
countries.
* Self-medication services provide detailed product movement, market share
and pricing information for over-the-counter, personal care, and patient
care products. These services are currently available in 22 European
countries.
* IMS is developing in certain countries databases which contain data (with
patient identification deleted in order to protect privacy) about the
treatment of specific diseases over the life of a patient. This type of
information will give many of the participants in the healthcare industry
new insights into the development and treatment of diseases.
Sales management services revenue totaled approximately 45% of IMS's
worldwide revenue in 1997. Sales management products include sales territory
reports, prescription tracking reports, call reporting services and doctor
profiling services. Sales management services are used principally by
pharmaceutical manufacturers to measure the effectiveness and efficiency of
sales forces and to target market products and services. Sales management
services are delivered to clients primarily through work stations and customized
data warehouse and database software tools.
The remaining 14% of IMS's 1997 revenue was derived primarily through
professional consulting, software, direct marketing, and research and
development services. Professional consulting services are provided to assist
clients in analysis and evaluation of market trends, strategies and tactics, and
to assist in the development and implementation of customized software
applications and data warehouse tools. Software services include the
development, licensing and implementation of healthcare information systems,
including electronic territory management systems provided by IMS's Sales
Technologies business unit primarily in North America; pharmacy dispensing and
point-of-sale systems by IMS's Amfac/Chemdata business unit in Australia; and
various direct marketing businesses located throughout the world. Research and
development services provide clients with information and workstation tools
intended to improve the effectiveness and speed of clinical research and
subsequent regulatory approvals.
The raw data for IMS's services are derived either from statistically
selected panels of pharmacies, hospitals, physicians and other sources, or from
activities such as warehouse shipments or wholesalers' sales data. To protect
privacy, no individual patient is identified in any IMS medical database. IMS
generally has well-established relationships with the sources required to create
its databases and in many cases has historical connections with the trade
associations and professional associations involved.
All major pharmaceutical companies are customers of IMS, and many of the
companies subscribe to reports and services in several countries. The scope of
IMS's customer base enables it to avoid dependence on any single customer,
although it is somewhat dependent on the pharmaceutical industry.
While no competitor provides the geographical reach or breadth of IMS's
services, IMS does have competition in many of the countries in which it
operates from other information services companies, as well as the in-house
capabilities of its customers. Generally, competition has arisen on a
country-by-country basis. In the United States, certain of IMS's sales
management services, including its sales territory reports, representing
approximately 60% of the annual revenue of the IMS America unit, compete with
the services of National Data Corp. Quality, completeness and speed of delivery
of information services and products are the principal methods of competition in
IMS's market.
NIELSEN MEDIA RESEARCH
NIELSEN MEDIA RESEARCH, INC.
Nielsen Media Research, Inc. ("Nielsen Media Research") currently conducts
media measurement and related business in the United States and, through a
wholly owned subsidiary, Nielsen Media Research, Ltd., in Canada.
Nielsen Media Research estimates television audiences and reports this and
related information to advertisers, advertising agencies, syndicators, broadcast
networks, cable networks, cable operators, television stations, station
representatives and others in order to increase the effectiveness of television
advertising and programming. This syndicated information is offered on a
subscription basis. Custom or ad-hoc analyses of the data are also offered. The
information is then used by subscribers to buy, sell, plan and price television
time and to make programming and scheduling decisions.
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In 1997, advertisers spent approximately $42 billion in the United States
on national and local television advertising, according to McCann-Erickson
Worldwide, to bring a variety of programs and advertising messages to
approximately 98 million U.S. television households. These data underscore the
need for television stations, networks, advertisers, advertising agencies and
others to understand how many households and types of people are reached by such
programming.
Nielsen Media Research estimates television audiences and reports data in
the United States through seven services: Nielsen Television Index, Nielsen
Syndication Services, Nielsen Homevideo Index, Nielsen Station Index, Nielsen
Hispanic Television Index, Nielsen Hispanic Station Index and Nielsen Sports
Marketing Service. In Canada, Nielsen Media Research measures television
audiences and reports data through two services: Nielsen Television Index and
Local Market People Meter Service. In the U.S., Nielsen Television Index
provides daily audience total and demographic estimates for all national
broadcast network television programs through the use of the Nielsen People
Meter. Nielsen Syndication Services provides reports and services on both the
local and national levels to the program syndication segment of the television
industry. Nielsen Homevideo Index provides viewing estimates of cable, pay cable
and other newer television technologies. Nielsen Station Index provides
television audience estimate information in over 200 local markets and daily
information in 38 metered markets. In these 38 local metered markets, which
represent about 59% of television households in the U.S., household audience
estimates are obtained daily through the use of television set meters. Written
diaries are used, during designated measurement periods, to collect audience
demographic estimates for integration with the metered tuning data. Diaries are
used in the balance of local markets to collect both tuning and persons-viewing
information during survey periods. Nielsen Media Research has announced plans to
meter six additional markets during 1998 bringing the total number of local
metered markets to 44. Nielsen Hispanic Television Index provides viewing
estimates of national Hispanic audiences, while Nielsen Hispanic Station Index
provides viewing estimates of local Hispanic audiences. Nielsen Sports Marketing
Service provides viewing estimates of national and local sports programs. In
Canada, Nielsen Media Research provides a national people meter service, as well
as regional and local people meter services. In January 1998, the Canadian
operation launched its most recent people meter service in Vancouver, British
Columbia.
During 1997, Nielsen Media Research again expanded its local market
television services and continued to invest to enhance product value, technical
competencies and data quality. Significant investments are being made as Nielsen
Media Research continues to transition from its present mainframe-based systems
to a new flexible client/server architecture for data collection, processing and
delivery. In addition, Nielsen Media Research is developing a new metering
system to enable measurement of program viewing in the emerging digital
television environment. This new system will use codes, which are imperceptible
to the viewer, inserted in the audio and/or video portions of programs and
commercials that can be detected by metering equipment installed in the sample
households. The system also will have a passive back-up capability. There can be
no assurance that the coding used by this system will be adopted by the
television industry, be approved by the Federal Communications Commission, or be
compatible with signal compression techniques implemented by the industry in the
future.
In March 1996, Nielsen Media Research announced plans to implement the
largest increase in diary samples in the history of television audience
measurement. Beginning in May 1996, diary samples were increased by 10%, and by
an additional 5% in October 1996. During 1997, Nielsen Media Research increased
diary samples by an additional 35% in 88 markets where stations financially
supported the increase.
Nielsen Media Research's Monitor-Plus Service links television ratings to
commercial occurrence data and tracks share of spending and share of voice by
company, by brand, and by product category across fifteen monitored media. These
include print, outdoor, radio and free-standing inserts, as well as television,
for which it also reports at the creative execution and campaign level.
Customers use the data to determine competitive advertising trends within
markets of interest. Effective January 1997, Monitor-Plus expanded service to 75
markets from 50, thereby matching the coverage of its principal competitor and
market leader Competitive Media Reports ("CMR"). Monitor-Plus plans to deploy
new digital data collection and processing technology in 1998.
During 1995, Nielsen Media Research entered into a strategic relationship
with Internet Profiles Corporation ("I/PRO") to measure Internet usage. Under
the terms of the agreement, Nielsen Media Research and I/PRO jointly market and
brand two I/PRO products: NetLine, formerly I/COUNT (monitors Web site usage);
and I/AUDIT (audits and verifies audience usage and characteristics). Additional
products may also be jointly developed and marketed under the agreement. In
November 1997, Nielsen Media Research and I/PRO announced the introduction of a
new system to measure content or advertising each time it is exposed on a PC
screen, ensuring accurate counting of impressions and" click throughs". This new
technology will enable the Web site to report all content viewed, regardless of
whether it was retrieved from the Web site, proxy server, local PC browser cache
or PC RAM. In December 1997, Nielsen Media Research purchased approximately 5%
of the outstanding shares in I/PRO.
In addition, separate from its agreement with I/PRO, Nielsen Media Research
plans to establish a panel to monitor computer usage and activity in households.
The panel will provide high quality research to computer and Internet industry
participants (media, advertisers, agencies, hardware manufactures, software
developers, etc.). Roll-out of the service is expected in 1998.
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In January 1998, Nielsen Media Research announced the development of a new
metering system to track television viewing within Microsoft Corporation's
Windows 98(TM). This new technology, developed jointly by Nielsen Media Research
and Microsoft engineers, will be used to capture audience for those sample
households where television programming is viewed using this Microsoft operating
system.
Nielsen Media Research has maintained a strong leadership position in
relation to its competitors. Arbitron, a former competitor, discontinued its
syndicated broadcast and cable television ratings service as of December31,
1993. A television ratings project funded by the Committee on Nationwide
Television Audience Measurement ("CONTAM") and designed and operated by
Statistical Research, Inc. ("SRI"), is operating a national television ratings
laboratory in Philadelphia as a test market for a national ratings service. SRI
has recently announced plans to produce program level data during 1998. This
data will be derived from a subset of its current 500 installed test households.
Funding for the entire effort has been contributed primarily by the three major
broadcast networks, ABC, CBS, and NBC. The NBC and CBS broadcast television
networks have asked SRI for a business plan for the creation of a national
measurement system that could provide an alternative to the Nielsen Television
Index service. This effort could give rise to a national competitor in the next
few years.
On the local level, ADCOM offers individual cable system measurement. It is
currently collecting and issuing local cable measurement data in Jacksonville,
Florida. Arbitron continues to develop its passive people meter technology and
could use this to re-enter the television audience measurement business.
Indirectly, on both a national and local basis, competition stems from other
marketing research services offering product movement and television audience
data and services.
EMERGING MARKETS
ERISCO, INC.
Erisco, Inc. ("Erisco") develops and markets proprietary software
applications and services used primarily in the administration of healthcare
benefits and the support of managed care services. Its primary markets include
managed care organizations, insurance carriers, third-party administrators and
self-administered corporations. Erisco has successfully completed the
development of the core applications for its newest product, Facets, which is a
managed care information system built using client/server technology. The target
market for Facets is managed care companies such as health maintenance or
preferred provider organizations. This highly advanced, state-of-the-art system
is unique in the marketplace as it combines the latest technology with advanced
managed care business functionality. Erisco faces competition from a variety of
software vendors in both the traditional indemnity market, as well as the new
managed care market. Erisco will benefit from the continuing growth in managed
care membership and the acceptance of enterprise-wide client/server system
architecture.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
Cognizant Technology Solutions Corporation ("CTS") delivers high-quality,
cost-effective, full life-cycle software solutions to complex IT problems
through integrated project teams located in its four development centers in
India and on-site at customer locations in North America and Europe. These
solutions include application development and mainframe services, Year 2000 and
Eurocurrency compliance services, testing and quality assurance services, and
re-hosting and reengineering services.
COGNIZANT ENTERPRISES, INC.
Cognizant Enterprises, Inc., invests in emerging and established
businesses, primarily in the healthcare information industry. It invests as a
limited partner in Information Partners Capital Fund, Information Associates,
L.P. and Information Associates II, L.P., venture capital limited partnerships,
as well as through direct investments.
The Emerging Markets segment also consists of Pilot Software, Inc., which
was sold on July 31, 1997, and SSJ K.K. ("SSJ"). SSJ, based in Japan, which
markets financial application software products and services tailored for the
Japanese market.
RESOURCE GROUP
COGNIZANT SHARED SERVICES
Cognizant Shared Services began operations in 1994 as an internal services
business in the functions of accounting, procurement, payroll, and financial
systems. The shared services center in Allentown, Pennsylvania provides
centralized services formerly supplied within each Cognizant division, in the
U.S. and Canada, but at lower cost with higher levels of service.
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RELATIONSHIP AMONG THE COMPANY, DUN & BRADSTREET AND ACNIELSEN
Prior to the D&B Spin-off, the Company, Dun & Bradstreet and ACNielsen
Corporation ("ACNielsen") entered into certain agreements governing their
relationship subsequent to the D&B Spin-off and providing for the allocation of
certain liabilities and obligations arising from periods prior to the D&B
Spin-off. The following description summarizes certain terms of such agreements,
but is qualified by reference to the texts of such agreements, which are
incorporated by reference to the Exhibits to this Form 10-K.
DISTRIBUTION AGREEMENT
The Company, Dun & Bradstreet and ACNielsen entered into the Distribution
Agreement providing for, among other things, certain corporate transactions
required to effect the D&B Spin-off and other arrangements subsequent to the D&B
Spin-off. In particular, the Distribution Agreement defines the assets and
liabilities of Dun & Bradstreet which were allocated to and assumed by the
Company and those which were allocated to and assumed by ACNielsen. All assets
were transferred without any representation or warranty, "as is-where is", and
the relevant transferee bears the risk that any necessary consent to transfer is
not obtained.
The Distribution Agreement provides for, among other things, assumptions of
liabilities and cross-indemnities designed to allocate, effective as of the
Distribution Date, financial responsibility for the liabilities arising out of
or in connection with (i) the businesses conducted by various businesses
including IMS and Nielsen Media Research to the Company, (ii) the businesses
conducted by A.C. Nielsen Company, other than those conducted by Nielsen Media
Research, to ACNielsen and (iii) all other liabilities to Dun & Bradstreet.
The Distribution Agreement provides that neither the Company, Dun &
Bradstreet nor ACNielsen will take any action that would jeopardize the intended
tax consequences of the D&B Spin-off. Specifically, each company agrees to
maintain its status as a company engaged in the active conduct of a trade or
business, as defined in Section 355(b) of the Internal Revenue Code, until the
second anniversary of the Distribution Date. As part of the request for a ruling
that the Distribution will be tax free for Federal income tax purposes, each
company represented to the Internal Revenue Service that, subject to certain
exceptions, it has no plan or intent to liquidate, merge or sell all or
substantially all of its assets. As a result, the Company may not initiate any
action leading to a change of control, and in the case of a change in control,
the foregoing representations, and the ruling based thereon, could be called
into question. As a result, the acquisition of control of the Company prior to
November 1, 1998 may be more difficult or less likely to occur because of the
potential substantial contractual damages associated with a breach of such
provisions of the Distribution Agreement.
The Distribution Agreement further requires that if any of the parties
spins off any part of its business to its shareholders, the spun-off entity must
remain jointly and severally liable to the other two parties for all liabilities
of its former parent under the Distribution Agreement.
TAX ALLOCATION AGREEMENT
The Company, Dun & Bradstreet and ACNielsen entered into a Tax Allocation
Agreement to the effect that Dun & Bradstreet will pay its entire consolidated
tax liability for the tax years that the Company and ACNielsen were included in
Dun & Bradstreet's consolidated Federal income tax return. For periods prior to
the Distribution Date, Dun & Bradstreet will generally be liable for state and
local taxes measured by income or imposed in lieu of income taxes. The Tax
Allocation Agreement allocates liability to each company for its respective
share of state, local and foreign taxes attributable to periods prior to the
Distribution Date, as well as certain other matters.
EMPLOYEES BENEFITS AGREEMENT
The Company, Dun & Bradstreet and ACNielsen entered into an Employee
Benefits Agreement, which allocates responsibility for certain employee benefits
matters on and after the Distribution Date. Among other things the Employee
Benefits Agreement provides that Dun & Bradstreet will be required to retain the
liability for all benefits under Dun & Bradstreet's nonqualified supplemental
pension plans that were vested prior to the Distribution Date, but the Company
and ACNielsen will guarantee payment of these benefits to their respective
employees in the event that Dun & Bradstreet is unable to satisfy its
obligations. In addition, the Company and ACNielsen will provide retiree welfare
benefits to their continuing employees who would have been eligible to receive
these benefits from Dun & Bradstreet had they retired on or prior to the
Distribution Date. If Cognizant or ACNielsen fails to provide any retiree
welfare benefits, Dun & Bradstreet will provide such continuing employees with
the same level of retiree welfare benefits that it provides to its retirees
generally.
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INDEMNITY AND JOINT DEFENSE AGREEMENT
The Company, Dun & Bradstreet and ACNielsen entered into an Indemnity and
Joint Defense Agreement pursuant to which they agreed to certain arrangements
allocating potential liabilities (the "IRI Liabilities") under, and to conduct a
joint defense of, the action filed by Information Resources, Inc. described in
Note 17 of Notes to Consolidated Financial Statements in the 1997 Annual Report
to Shareholders, referred to in Item 3. Legal Proceedings (the "IRI Action").
In particular, the Indemnity and Joint Defense Agreement provides that
ACNielsen will assume exclusive liability for IRI Liabilities up to the ACN
Maximum Amount, which is to be calculated at the time such liabilities, if any,
become payable, and that the Company and Dun & Bradstreet will share liability
equally for any amounts in excess of the ACN Maximum Amount. The ACN Maximum
Amount will be determined by an investment banking firm as the maximum amount
which ACNielsen is able to pay after giving effect to (i) any plan submitted by
such investment bank which is designed to maximize the claims-paying ability of
ACNielsen without impairing the investment banking firm's ability to deliver a
viability opinion (but which will not require any action requiring stockholder
approval), and (ii) payment of related fees and expenses. For these purposes,
financial viability means the ability of ACNielsen, after giving effect to such
plan, the payment of related fees and expenses and the payment of the ACN
Maximum Amount, to pay its debts as they become due and to finance the current
and anticipated operating and capital requirements of its business, as
reconstituted by such plan, for two years from the date any such plan is
expected to be implemented.
In addition, ACNielsen has agreed to certain restrictions on payments of
dividends and share repurchases above specified levels. ACNielsen also agreed
not to engage in mergers, acquisitions or dispositions, including joint venture
investments, if, after giving effect to any such transaction, ACNielsen would be
unable to meet a specified fixed charge coverage ratio, and, if any such
transaction involves aggregate consideration in excess of $50 million, then
ACNielsen will also be required to receive and to cause to be delivered to the
Company and Dun & Bradstreet an investment banker's fairness opinion.
The Indemnity and Joint Defense Agreement also sets forth certain
provisions governing the defense of the IRI Action pursuant to which the parties
agreed to be represented by the same counsel. Legal expenses are to be shared
equally by the three parties.
Both the Company and Dun & Bradstreet have announced that they will spin
off certain businesses to their shareholders later in 1998. Pursuant to the
Distribution Agreement, each spun-off company will remain jointly and severally
liable with its former parent for its share of the IRI Liabilities and related
expenses.
TAM MASTER AGREEMENT
The Company and ACNielsen entered into the TAM Master Agreement relating to
the conduct of the television audience measurement business (the "TAM
Business").
The TAM Master Agreement, together with certain ancillary trademark and
technology licensing agreements, provides that the Company or a newly
established entity will license to ACNielsen a nonexclusive right to use certain
trademarks in connection with the TAM Business outside the United States and
Canada for five years. The Company will also license to ACNielsen a nonexclusive
right to use specified technology in Australia, Ireland and India in connection
with the TAM Business for five years or such longer period as is required to
fulfill contractual obligations existing on the Distribution Date.
In the event that on or prior to the third anniversary of the Distribution
Date, ACNielsen determines to sell all or substantially all of (i) its assets or
the assets of the TAM Business (as defined in the TAM Master Agreement), or (ii)
its assets that generate more than 50% of the TAM business, or ACNielsen takes
action to be acquired or is acquired by a third party, the Company will have the
right to require ACNielsen to sell all of ACNielsen's TAM Business to the
Company at book value (as calculated in accordance with the TAM Master
Agreement) plus certain transfer costs. In addition, in the event that prior to
the third anniversary of the Distribution Date, ACNielsen determines to sell all
or substantially all of its TAM Business in a particular country, the Company
will have the right to require ACNielsen to sell such business to the Company at
book value (as calculated in accordance with the TAM Master Agreement) plus
certain transfer costs.
INTELLECTUAL PROPERTY AGREEMENT
The Company, Dun & Bradstreet and ACNielsen entered into an Intellectual
Property Agreement which provides for the allocation and recognition by and
among these companies of rights under patents, copyrights, software, technology,
trade secrets and certain other intellectual property owned by them and their
respective subsidiaries as of the Distribution Date. The Intellectual Property
Agreement also contains various provisions governing the future use of certain
trademarks owned by ACNielsen prior to the Distribution Date, including
limitations upon both the Company's and ACNielsen's use of the "Nielsen" name,
standing alone or as part of a name describing any new product or service to be
offered.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information and statements provided by the Company may
contain "forward-looking statements" as defined by the Private Securities
Litigation Reform Act of 1995. The Company cautions shareholders and investors
that actual results may differ materially from those projected or suggested in
any forward-looking statement as the result of a wide variety of factors,
including but not limited to the factors set forth below:
* The Company operates globally, deriving a significant portion of its
operating income from non-U.S. operations. As a result, fluctuations in the
value of foreign currencies relative to the U.S. dollar may increase the
volatility of U.S. dollar-denominated operating results. The Company's
geographic expansion in emerging markets such as Eastern Europe, Africa and
Asia Pacific is expected to continue. Emerging markets tend to be
considerably less stable than established markets which may further
contribute to volatility in operating results. In addition, the Company is
subject to the usual risks inherent in carrying on business in certain
countries outside the U.S., including possible nationalization,
expropriation, price controls or other restrictive government actions.
Management believes that the risk of nationalization or expropriation is
reduced because its basic service is the delivery of information, rather
than the production of products which require manufacturing facilities or
use of natural resources.
* To the extent the Company seeks growth through acquisitions, there can be
no assurance that management of the Company will be able to identify and
consummate acquisitions on satisfactory terms. Furthermore, every
acquisition will entail some degree of uncertainty and risk, and even if
consummated, may not produce the operating results or increases in value
over time which were expected at the time of acquisition.
* The Company competes in businesses which demand or sell sophisticated
information systems, software and other technology. The types of systems
which the Company's businesses require or sell can be expected to be
subject to refinements as such systems and underlying technologies are
upgraded and advanced, and there can be no guarantee that as various
systems and technologies become outdated, the Company will be able to
replace them, to replace them as quickly as the Company's competition or to
develop and market new and better products and services in the future on a
cost-effective basis.
* Many existing computer systems and software applications use two digits,
rather than four, to record years. Unless modified, such systems will not
properly record or interpret years after 1999, which could lead to business
disruptions (the "Year 2000 issue"). The Company depends on systems and
software both for its internal operations as well as for the receipt of
data used in its information products and the transmission of those
products to its customers. The Company began to address the Year 2000 issue
in 1996. It expects to complete upgrading or replacing affected programs
during 1998, with testing to be done during 1999. The Company's expected
costs of upgrading or replacing affected programs and the date on which the
Company expects to complete Year 2000 compliance are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events.
* In the third quarter of 1997, the Company's voting interest in Gartner
Group fell below 50% to 49.5% based upon the exercise of Gartner Group
employee stock options and employee stock purchases. Accordingly, as of
September 30, 1997 the Company has deconsolidated Gartner Group and is
accounting for its ownership interest on the equity basis. Gartner Group's
common stock has historically traded at higher multiples than market
averages and has generally experienced greater price volatility than the
market as a whole. It can be expected that variations in the market value
of the Gartner Group shares held by the Company will have an impact on the
trading prices of the Company's Common Stock. Gartner Group's results and
operations may also be subject to the various factors described in Gartner
Group's reports filed from time to time with the Securities and Exchange
Commission.
* Each of the Company's businesses is subject to significant or potential
competition which is likely to intensify in the future. In particular, a
television rating project being funded by the Committee on Nationwide
Television Audience Measurement and designed and operated by Statistical
Research Inc., which is currently in a testing phase in Philadelphia, has
received support from the three major broadcast networks and a number of
large advertising agencies and advertisers. This could give rise to a
national competitor to Nielsen Media Research in the next few years.
* A number of countries in the which the Company operates have enacted
regulations limiting the prices pharmaceutical companies may charge for
drugs. The Company believes that such cost containment measures will cause
pharmaceutical companies to seek more effective means of marketing their
products (which will benefit IMS in the medium and long term). However,
such governmental regulation may cause pharmaceutical companies to revise
or reduce their marketing programs in the near term.
* Certain of the data services provided by IMS relate to the diagnosis and
treatment of disease. The use of patient-specific information is
anticipated to be an increasingly important tool in the design, development
and marketing of
7
<PAGE>
pharmaceuticals. To protect privacy, no individual patient is identified in
any IMS database. Recently, there have been a number of regulatory and
legislative initiatives in the area of medical privacy at the Federal,
state and foreign government levels. There can be no assurance that such
initiatives will not adversely affect IMS's ability to generate or assemble
data or to develop or market current or future products and services.
* Results could be affected by the costs and other effects of litigation
involving the Company. In particular, management of the Company is unable
to predict at this time the final outcome of the IRI Action described in
"Note 17. Litigation" of the Notes to Consolidated Financial Statements in
the 1997 Annual Report to Shareholders, or whether the resolution of this
matter could materially affect the Company's results of operations, cash
flows or financial position.
* The Company's results could be adversely affected by general or specific
weakening of economic conditions, including weak economic conditions in the
pharmaceutical, healthcare, media, information technology or other
industries in which the Company's customers operate.
------------------
The names of the Company's products used in this report are trademarks or
registered trademarks of Cognizant Corporation or one of its subsidiaries.
Additional information is incorporated by reference to Note 19. Operations
by Business Segment on Pages 24-25 of the 1997 Annual Report to Shareholders.
8
<PAGE>
ITEM 2. PROPERTIES
The principal properties of the Company are set forth below.
The executive offices of Cognizant Corporation are located at 200 Nyala
Farms, Westport, Connecticut in a leased property. Property of the Company
is geographically distributed to meet sales and operating requirements
worldwide. The properties of the Company are generally considered to be
both suitable and adequate to meet current operating requirements and
virtually all space is being utilized.
IMS
Owned properties located within the U.S. include three facilities. The
properties are located in Totowa, New Jersey; and Plymouth Meeting and West
Norriton, Pennsylvania.
Owned properties located outside the U.S. include nine facilities: one
property each in Buenos Aires, Argentina; Crows Nest, Australia; Innsbruck,
Austria; Brussels, Belgium; Santiago, Chile; Lisbon, Portugal; London and
Pinner, England; and Caracas, Venezuela.
The operations of this business unit are also conducted from eighteen
leased offices located throughout the U.S. and sixty-eight non-U.S.
locations.
NIELSEN MEDIA RESEARCH
Owned properties located within the U.S. include one facility. The property
is located in Dunedin, Florida.
Operations are conducted from thirty-three leased office locations
throughout the U.S. and three non-U.S. locations.
EMERGING MARKETS
Operations are conducted from four leased office locations throughout the
U.S. and six non-U.S. locations.
RESOURCE GROUP/CORPORATE
Operations are conducted from two leased office locations in Allentown,
Pennsylvania and Westport, Connecticut.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note 17. of Notes to Consolidated Financial Statements
on Pages 22 and 23 of the 1997 Annual Report to Shareholders which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT*
Officers are elected by the Board of Directors to hold office until their
respective successors are chosen and qualified.
Listed below are the executive officers of the registrant at March 1, 1998
and brief summaries of their business experience during the past five
years.
NAME TITLE AGE
---- ----- ---
Robert E. Weissman Chairman and Chief Executive Officer** 57
Victoria R. Fash Executive Vice President and Chief Financial Officer 46
Alan J. Klutch Senior Vice President-Finance 53
James C. Malone Senior Vice President-Finance and Controller 49
Kenneth S. Siegel Senior Vice President, General Counsel and Secretary 42
Leslye G. Katz Vice President and Treasurer 43
Craig S. Kussman Vice President-Corporate Development 39
*Set forth as a separate item pursuant to Items 401(b) and (e) of Regulation
S-K.
**Member of the Board of Directors.
Mr. Weissman was elected Chairman and Chief Executive Officer of Cognizant
Corporation in September 1996. He was previously Chairman and Chief Executive
Officer of Dun & Bradstreet (April 1995), after serving as President and Chief
Executive Officer (January 1994). He was named Dun & Bradstreet's President and
Chief Operating Officer in January 1985.
Ms. Fash was appointed Executive Vice President and Chief Financial Officer
of Cognizant Corporation in September 1996 and Chairman and Chief Executive
Officer of IMS in December 1997. Ms. Fash was elected Senior Vice
President-Business Strategy of Dun & Bradstreet in April 1995 and elected Vice
President-Business Operations Planning of Dun & Bradstreet, effective May 1994.
Previously, she had served as Assistant to the President of Dun & Bradstreet
(September 1991).
Mr. Klutch was appointed Senior Vice President-Finance of Cognizant
Corporation in September 1996. Mr. Klutch previously was Vice
President-Financial Planning of Dun & Bradstreet (October 1984).
Mr. Malone was appointed Senior Vice President-Finance and Controller of
Cognizant Corporation in December 1996. He had been appointed Vice
President-Finance and Controller, effective September 1996. Previously, he had
served as Assistant Vice President and Leader-North American Shared Transaction
Services Center (February 1995) and as Vice President and Controller of Reuben
H. Donnelley Corporation, subsidiaries of Dun & Bradstreet (1990).
Mr. Siegel was appointed Senior Vice President and General Counsel of
Cognizant Corporation in February 1997 and Secretary of Cognizant Corporation in
July 1997. Mr. Siegel was a partner with the law firm of Baker & Botts, L.L.P.
from September 1994 to February 1997. Previously, he was a partner at the law
firm of O'Sullivan Graev & Karabell (July 1987).
Ms. Katz was appointed Vice President and Treasurer of Cognizant
Corporation in September 1996. Ms. Katz was appointed Senior Vice President and
Chief Financial Officer for Reuben H. Donnelley, a subsidiary of Dun &
Bradstreet, in September 1992. Previously, she was appointed Vice
President-Strategic and Financial Planning (August 1991) and Vice
President-Finance and Planning (February 1991) for Reuben H. Donnelley.
Mr. Kussman was appointed Vice President--Corporate Development of
Cognizant Corporation in October 1997. He had been appointed Vice
President--Mergers and Acquisitions, effective November 1996. Previously, he had
served as Assistant Vice President-Financial Planning of Dun & Bradstreet (May
1991).
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information in response to this Item is set forth under Dividends and
Common Stock Information in the "Financial Review" on Page 7 of the 1997 Annual
Report to Shareholders, which information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data required by this Item is incorporated herein by
reference to the information relating to the years 1993 through 1997 set forth
in the "Five-Year Selected Financial Data" on Page 27 of the 1997 Annual Report
to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information in response to this Item is set forth in the "Financial Review"
on Pages 1 to 7 of the 1997 Annual Report to Shareholders, which information is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules under Item 14 on Page 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference to
the section entitled "Election of Directors" in the Company's proxy statement to
be filed on or about March 13, 1998 with the Securities and Exchange Commission,
except that "Executive Officers of the Registrant" on Page 10 of this report
responds to Items 401(b) and (e) of Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference to
the section entitled "Compensation of Executive Officers and Directors" in the
Company's proxy statement dated March 13, 1998 with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference to
the section entitled "Security Ownership of Management and Others" in the
Company's proxy statement dated March 13, 1998 with the Securities and Exchange
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference to
the section entitled "Security Ownership of Management and Others" in the
Company's proxy statement dated March 13, 1998 with the Securities and Exchange
Commission.
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
(1) Financial Statements.
See Index to Financial Statements and Schedule on Page 15.
(2) Financial Statement Schedule.
See Index to Financial Statements and Schedule on Page 15.
(3) Other Financial Information.
Business Segments, 1997. See Index to Financial Statements and
Schedule on Page 15.
Five-year Selected Financial Data. See Index to Financial
Statements and Schedule on Page 15.
(4) Exhibits.
See Index to Exhibits on Pages 18-19, which indicates which
Exhibits are management contracts or compensatory plans required
to be filed as Exhibits. Only responsive information appearing on
pages 1 to 27 to Exhibit 13 is incorporated herein by reference,
and no other information appearing in Exhibit 13 is or shall be
deemed to be filed as part of this Form 10-K.
(b) Reports on Form 8-K.
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COGNIZANT CORPORATION
(REGISTRANT)
By: ROBERT E. WEISSMAN
---------------------------------
(ROBERT E. WEISSMAN,
CHAIRMAN & CHIEF EXECTIVE OFFICER
AND DIRECTOR)
By: VICTORIA R. FASH
---------------------------------
(VICTORIA R. FASH,
EXECUTIVE VICE PRESIDENT
& CHIEF FINANCIAL OFFICER)
By: JAMES C. MALONE
---------------------------------
(JAMES C. MALONE,
SENIOR VICE PRESIDENT-FINANCE
& CONTROLLER)
Date: February 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
CLIFFORD L. ALEXANDER, JR. H. EUGENE LOCKHART
- - ------------------------------- -------------------------------
(CLIFFORD L. ALEXANDER, JR., (H. EUGENE LOCKHART, DIRECTOR)
DIRECTOR)
JAMES R. PETERSON
JOHN P. IMLAY, JR. -------------------------------
- - ------------------------------- (JAMES R. PETERSON, DIRECTOR)
(JOHN P. IMLAY, JR., DIRECTOR)
M. BERNARD PUCKETT
ROBERT KAMERSCHEN -------------------------------
- - ------------------------------- (M. BERNARD PUCKETT, DIRECTOR)
(ROBERT KAMERSCHEN, DIRECTOR)
ROBERT J. LANIGAN
- - -------------------------------
(ROBERT J. LANIGAN, DIRECTOR)
Date: February 17, 1998
14
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
FINANCIAL STATEMENTS:
The Company's consolidated financial statements, the notes thereto and the
related report thereon of Coopers & Lybrand L.L.P., independent accountants, for
the years ended December 31, 1997, 1996, and 1995, appearing on pages 6 to 25 of
the accompanying 1997 Annual Report to Shareholders, are incorporated by
reference into this Annual Report on Form 10-K (see below). The additional
financial data indicated below should be read in conjunction with such
consolidated financial statements.
<TABLE>
<CAPTION>
PAGE
-------------------------------------
1997 ANNUAL REPORT
10-K TO SHAREHOLDERS
--------------- ------------------
<S> <C> <C>
Report of Independent Accountants .................................................... Exhibit 13 Pg 8 8
Statement of Managements Responsibility for Financial Statements ..................... Exhibit 13 Pg 8 8
As of December 31, 1997 and 1996:
Consolidated Statements of Financial Position ....................................... Exhibit 13 Pg 10 10
For the years ended December 31, 1997, 1996 and 1995:
Consolidated Statements of Income ................................................... Exhibit 13 Pg 9 9
Consolidated Statements of Cash Flows ............................................... Exhibit 13 Pg 11 11
Consolidated Statements of Shareholders' Equity ..................................... Exhibit 13 Pg 12 12
Notes to Consolidated Financial Statements ........................................... Exhibit 13
Pgs 13-26 13 - 26
Quarterly Financial Data (Unaudited) for the years ended
December 31, 1997 and 1996 .......................................................... Exhibit 13 Pg 26 26
Managements Discussion and Analysis of Financial ..................................... Exhibit 13
Condition and Results of Operations ................................................. Pgs 1- 4 1 - 4
Other Financial Information:
Business Segments, 1997, 1996 and 1995 .............................................. Exhibit 13 Pg 24-25 24 - 25
Five-Year Selected Financial Data ................................................... Exhibit 13 Pg 27 27
SCHEDULE:
Report of Independent Accountants .................................................... 16 --
Cognizant Corporation and Subsidiaries ............................................... Exhibit 21 --
II. Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996, and 1995 ................................................. 17 --
</TABLE>
Schedules other than the one listed above are omitted as not required or
inapplicable or because the required information is provided in the consolidated
financial statements, including the notes thereto.
The consolidated financial statements of Gartner Group, Inc. and the notes
thereto for the years ended September 30, 1997, 1996, and 1995, and the related
report thereon for the years ended September 30, 1997 and 1996 appearing on
Pages 13 to 37 of the Gartner Group, Inc. Annual Report to Shareholders filed
hereunder as Exhibit 99.3, are incorporated by reference into this Annual Report
on Form 10-K.
The report of Price Waterhouse LLP, previous independent accountants for
Gartner Group, Inc., on the consolidated financial statements of Gartner Group,
Inc., for the year ended September 30, 1995, appearing as Exhibit 23.3 to the
Gartner Group, Inc. Annual Report on Form 10-K for the year ended September 30,
1997 and filed hereunder as Exhibit 99.4, is incorporated by reference into this
Annual Report on Form 10-K.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors of Cognizant Corporation:
Our report on the consolidated financial statements of Cognizant
Corporation as of December 31, 1997 and 1996, and for each of the three years in
the period ended December 31, 1997, has been incorporated by reference in this
Form 10-K from page 8 of the 1997 Annual Report to Shareholders of Cognizant
Corporation. In connection with our audits of such financial statements, we have
also audited the related financial statement schedule listed in the index on
page 15 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 17, 1998
16
<PAGE>
COGNIZANT CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- - ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(A) OF PERIOD
----------- --------- ---------- ------------- ---------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
For the Year Ended December 31, 1997 .................... $15,470 $ 790 $9,061 $ 7,199
======= ====== ====== =======
For the Year Ended December 31, 1996 .................... $11,446 $4,993 $ 969 $15,470
======= ====== ====== =======
For the Year Ended December 31, 1995 .................... $10,839 $3,310 $2,703 $11,446
======= ====== ====== =======
</TABLE>
NOTE:
(a) Primarily represents the deconsolidation of Gartner Group and the recovery
of accounts in 1997; and the charge-off of uncollectible accounts for which
a reserve was provided in 1996 and 1995.
17
<PAGE>
INDEX TO EXHIBITS
REGULATION S-K
EXHIBIT NUMBER DESCRIPTION
- - -------------- -----------
3 Articles of Incorporation and By-laws:
.1 Restated Certificate of Incorporation of Cognizant Corporation dated
October 7, 1996 (incorporated by reference to Exhibit 3.1 to
Registrant's Registration Statement on Form 10 filed October 7, 1996,
file number 001-12275).
.2 Amended and Restated By-laws of Registrant (incorporated by reference
to Exhibit 3.2 to Registrant's Registration Statement on Form 10 filed
October 7, 1996, file number 001-12275).
10 Material Contracts:
.1 Distribution Agreement among Cognizant Corporation, The Dun &
Bradstreet Corporation and ACNielsen Corporation dated as of October
28, 1996 (incorporated by reference to Exhibit 10.1 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, filed
March 27, 1997, file number 001-12275).
.2 Tax Allocation Agreement among Cognizant Corporation, The Dun &
Bradstreet Corporation and ACNielsen Corporation dated as of October
28, 1996 (incorporated by reference to Exhibit 10.2 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, filed
March 27, 1997, file number 001-12275).
.3 Employee Benefits Agreement among Cognizant Corporation, The Dun &
Bradstreet Corporation and ACNielsen Corporation dated as of October
28, 1996 (incorporated by reference to Exhibit 10.3 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, filed
March 27, 1997, file number 001-12275).
.4 Indemnity and Joint Defense Agreement among Cognizant Corporation, The
Dun & Bradstreet Corporation and ACNielsen Corporation dated as of
October 28, 1996 (incorporated by reference to Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for the year ended December
31, 1996, filed March 27, 1997, file number 001-12275).
.5 TAM Master Agreement between Cognizant Corporation and ACNielsen
Corporation dated as of October 28, 1996 (incorporated by reference to
Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, filed March 27, 1997, file number 001-12275).
.6 Intellectual Property Agreement among Cognizant Corporation, The Dun &
Bradstreet Corporation and ACNielsen Corporation dated as of October
28, 1996 (incorporated by reference to Exhibit 10.6 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, filed
March 27, 1997, file number 001-12275).
.7 1996 Cognizant Corporation Non-Employee Directors Stock Incentive
Plan, as adopted effective November 1, 1996 (incorporated by reference
to Exhibit 10.7 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, filed March 27, 1997, file number
001-12275)*.
.8 1996 Cognizant Corporation Non-Employee Directors' Deferred
Compensation Plan, as adopted effective October 15, 1996 (incorporated
by reference to Exhibit 10.8 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, filed March 27, 1997, file
number 001-12275)*.
.9 1996 Cognizant Corporation Key Employees' Stock Incentive Plan, as
amended December 16, 1997*.
.10 1996 Cognizant Corporation Replacement Plan for Certain Employees
Holding the Dun & Bradstreet Corporation Equity-Based Awards, as
adopted effective November 1, 1996 (incorporated by reference to
Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, filed March 27, 1997, file number
001-12275)*.
.11 1996 Cognizant Corporation Replacement Plan for Certain Employees
Holding I.M.S. International, Inc. Stock Options, as adopted November
1, 1996 (incorporated by reference to Exhibit 10.11 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, filed
March 27, 1997, file number 001-12275)*.
.12 Form of Non-Employee Directors' Stock Option Agreement (incorporated
by reference to Exhibit 10.12 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, filed March 27, 1997, file
number 001-12275)*.
.13 Form of Non-Employee Directors' Restricted Stock Agreement
(incorporated by reference to Exhibit 10.13 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996, filed March
27, 1997, file number 001-12275)*.
.14 Forms of Stock Option Agreement (incorporated by reference to Exhibit
10.14 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, filed March 27, 1997, file number 001-12275)*.
.15 Forms of Purchased Option Agreement (incorporated by reference to
Exhibit 10.15 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, filed March 27, 1997, file number
001-12275)*.
.16 Forms of Limited Stock Appreciation Right Agreement (incorporated by
reference to Exhibit 10.16 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, filed March 27, 1997, file
number 001-12275)*.
18
<PAGE>
INDEX TO EXHIBITS--(CONTINUED)
REGULATION S-K
EXHIBIT NUMBER DESCRIPTION
.17 Forms of Change-in-Control Agreement for Certain Executives of
Cognizant Corporation, as adopted October 15, 1996 (incorporated by
reference to Exhibit 10.17 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, filed March 27, 1997, file
number 001-12275)*.
.18 Cognizant Corporation Executive Transition Plan, as adopted effective
November 1, 1996 (incorporated by reference to Exhibit 10.18 to
Registrant's Annual Report on Form 10-K for the year ended December
31, 1996, filed March 27, 1997, file number 001-12275)*.
.19 Cognizant Corporation Executive Annual Incentive Plan, as adopted
effective January 1, 1997 (incorporated by reference to Exhibit 10.19
to Registrant's Annual Report on Form 10-K for the year ended December
31, 1996, filed March 27, 1997, file number 001-12275)*.
.20 Cognizant Corporation Supplemental Executive Retirement Plan, as
adopted effective November 1, 1996 (incorporated by reference to
Exhibit 10.20 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, filed March 27, 1997, file number
001-12275)*.
.21 Rights Agreement dated as of October 15, 1996 between Cognizant
Corporation and First Chicago Trust Company of New York (incorporated
by reference to Exhibit 1 to Registrant's Current Report on Form 8-K
filed October 15, 1996, file number 001-12275)
.22 Cognizant Corporation Retirement Excess Plan, as adopted effective
January 1, 1997 (incorporated by reference to Exhibit 10.22 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997, filed May 13, 1997, file number 001-12275).*
.23 Cognizant Corporation Savings Equalization Plan, as adopted effective
November 1, 1996 (incorporated by reference to Exhibit 10.22 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997, filed May 13, 1997, file number 001-12275).*
.24 Severance Agreement and Release between Cognizant Corporation and
Dennis G. Sisco dated as of February 28, 1997 (incorporated by
reference to Exhibit 10.24 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, filed November 14,
1997, file number 001-12275).
13 1997 Annual Report to Shareholders.
21 List of Active Subsidiaries as of January 31, 1997.
23 Consent of Independent Accountants.
27 Financial Data Schedules.
99 Additional Exhibits
.1 Consent of KPMG Peat Marwick LLP, independent accountants for Gartner
Group, Inc.
.2 Consent of Price Waterhouse LLP, previous independent accountants for
Gartner Group, Inc.
.3 Pages 13 to 37 of the Gartner Group, Inc. 1997 Annual Report to
Shareholders
.4 Report of Price Waterhouse LLP on consolidated financial statements of
Gartner Group, Inc. for the year ended September 30, 1995.
- - --------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement
19
1996 COGNIZANT CORPORATION
KEY EMPLOYEES' STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of the Plan is to aid the Company and its Subsidiaries in
securing and retaining key employees of outstanding ability and to motivate such
employees to exert their best efforts on behalf of the Company and its
Subsidiaries by providing incentives through the granting of Awards. The Company
expects that it will benefit from the added interest which such key employees
will have in the welfare of the Company as a result of their proprietary
interest in the Company's success.
2. DEFINITIONS
The following capitalized terms used in the Plan have the respective
meanings set forth in this Section:
(a) Act: The Securities Exchange Act of 1934, as amended, or any successor
thereto.
(b) Award: An Option, Stock Appreciation Right or Other Stock-Based Award
granted pursuant to the Plan.
(c) Beneficial Owner: As such term is defined in Rule 13d-3 under the Act
(or any successor rule thereto).
(d) Board: The Board of Directors of the Company.
(e) Change in Control: The occurrence of any of the following events:
(i) any Person (other than the Company, any trustee or other
fiduciary holding securities under an employee benefit plan of
the Company, or any company owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions
as their ownership of stock of the Company), becomes the
Beneficial Owner, directly or indirectly, of securities of the
Company representing 20% or more of the combined voting power of
the Company's then-outstanding securities;
<PAGE>
(ii) during any period of twenty-four months (not including any period
prior to the Effective Date), individuals who at the beginning of
such period constitute the Board, and any new director (other
than (A) a director nominated by a Person who has entered into an
agreement with the Company to effect a transaction described in
Sections 2(e) (i), (iii) or (iv) of the Plan, (B) a director
nominated by any Person (including the Company) who publicly
announces an intention to take or to consider taking actions
(including, but not limited to, an actual or threatened proxy
contest) which if consummated would constitute a Change in
Control or (C) a director nominated by any Person who is the
Beneficial Owner, directly or indirectly, of securities of the
Company representing 10% or more of the combined voting power of
the Company's securities) whose election by the Board or
nomination for election by the Company's stockholders was
approved in advance by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the
beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to
constitute at least a majority thereof;
(iii) the stockholders of the Company approve any transaction or series
of transactions under which the Company is merged or consolidated
with any other company, other than a merger or consolidation (A)
which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 66 2/3% of
the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such
merger or consolidation and (B) after which no Person holds 20%
or more of the combined voting power of the then-outstanding
securities of the Company or such surviving entity; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the
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Company of all or substantially all of the Company's assets.
(f) Code: The Internal Revenue Code of 1986, as amended, or any successor
thereto.
(g) Committee: The Compensation and Benefits Committee of the Board.
(h) Company: Cognizant Corporation, a Delaware corporation.
(i) D&B: The Dun & Bradstreet Corporation, a Delaware corporation.
(j) Disability: Inability to engage in any substantial gainful activity by
reason of a medically determinable physical or mental impairment which
constitutes a permanent and total disability, as defined in Section
22(e) (3) of the Code (or any successor section thereto). The
determination whether a Participant has suffered a Disability shall be
made by the Committee based upon such evidence as it deems necessary
and appropriate. A Participant shall not be considered disabled unless
he or she furnishes such medical or other evidence of the existence of
the Disability as the Committee, in its sole discretion, may require.
(k) Effective Date: The date on which the Plan takes effect, as defined
pursuant to Section 17 of the Plan.
(l) Fair Market Value: On a given date, the arithmetic mean of the high
and low prices of the Shares as reported on such date on the Composite
Tape of the principal national securities exchange on which such
Shares are listed or admitted to trading, or, if no Composite Tape
exists for such national securities exchange on such date, then on the
principal national securities exchange on which such Shares are listed
or admitted to trading, or, if the Shares are not listed or admitted
on a national securities exchange, the arithmetic mean of the per
Share closing bid price and per Share closing asked price on such date
as quoted on the National Association
3
<PAGE>
of Securities Dealers Automated Quotation System (or such market in
which such prices are regularly quoted), or, if there is no market on
which the Shares are regularly quoted, the Fair Market Value shall be
the value established by the Committee in good faith. If no sale of
Shares shall have been reported on such Composite Tape or such
national securities exchange on such date or quoted on the National
Association of Securities Dealers Automated Quotation System on such
date, then the immediately preceding date on which sales of the Shares
have been so reported or quoted shall be used.
(m) LSAR: A limited stock appreciation right granted pursuant to Section
8(d) of the Plan.
(n) Other Stock-Based Awards: Awards granted pursuant to Section 9 of the
Plan.
(o) Option: A stock option granted pursuant to Section 7 of the Plan.
(p) Option Price: The purchase price per Share of an Option, as determined
pursuant to Section 7(a) of the Plan.
(q) Participant: An individual who is selected by the Committee to
participate in the Plan pursuant to Section 5 of the Plan.
(r) Performance-Based Awards: Certain Other Stock-Based Awards granted
pursuant to Section 9(b) of the Plan.
(s) Person: As such term is used for purposes of Section 13(d) or 14(d) of
the Act (or any successor section thereto).
(t) Plan: The 1996 Cognizant Corporation Key Employees' Stock Incentive
Plan.
(u) Post-Retirement Exercise Period: As such term is defined in Section
7(e) of the Plan.
4
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(v) Retirement: Termination of employment with the Company or a Subsidiary
after such Participant has attained age 55 and five years of service
with the Company; or, with the prior written consent of the Committee
that such termination be treated as a Retirement hereunder,
termination of employment under other circumstances.
(w) Shares: Shares of common stock, par value $0.01 per Share, of the
Company.
(x) Special Exercise Period: As such term is defined in Section 7(e) of
the Plan.
(y) Spinoff Date: The date on which the Shares that are owned by D&B are
distributed to the holders of record of shares of D&B.
(z) Stock Appreciation Right: A stock appreciation right granted pursuant
to Section 8 of the Plan.
(aa) Subsidiary: A subsidiary corporation, as defined in Section 424(f) of
the Code (or any successor section thereto).
3. SHARES SUBJECT TO THE PLAN
The total number of Shares which may be issued under the Plan is
30,000,000. The maximum number of Shares for which Awards may be granted during
a calendar year to any Participant shall be 1,000,000. The Shares may consist,
in whole or in part, of unissued Shares or treasury Shares. The issuance of
Shares or the payment of cash upon the exercise of an Award shall reduce the
total number of Shares available under the Plan, as applicable. Shares which are
subject to Awards which terminate or lapse may be granted again under the Plan.
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4. ADMINISTRATION
The Plan shall be administered by the Committee, which may delegate its
duties and powers in whole or in part to any subcommittee thereof consisting
solely of at least two individuals who are each "non-employee directors" within
the meaning of Rule 16b-3 under the Act (or any successor rule thereto) and
"outside directors" within the meaning of Section 162(m) of the Code (or any
successor section thereto). The Committee is authorized to interpret the Plan,
to establish, amend and rescind any rules and regulations relating to the Plan,
and to make any other determinations that it deems necessary or desirable for
the administration of the Plan. The Committee may correct any defect or supply
any omission or reconcile any inconsistency in the Plan in the manner and to the
extent the Committee deems necessary or desirable. Any decision of the Committee
in the interpretation and administration of the Plan, as described herein, shall
lie within its sole and absolute discretion and shall be final, conclusive and
binding on all parties concerned (including, but not limited to, Participants
and their beneficiaries or successors). The Committee shall require payment of
any amount it may determine to be necessary to withhold for federal, state,
local or other taxes as a result of the exercise of an Award. If the chief
executive officer of the Company is a member of the Board, the Board by specific
resolution may constitute such chief executive officer as a committee of one
which shall have the authority to grant Awards of up to an aggregate of 50,000
Shares in each calendar year to each Participant who is not subject to the rules
promulgated under Section 16 of the Act (or any successor section thereto);
provided, however, that such chief executive officer shall notify the Committee
of any such grants made pursuant to this Section 4.
5. ELIGIBILITY
Key employees (but not members of the Committee or any person who serves
only as a director) of the Company and its Subsidiaries, who are from time to
time responsible for the management, growth and protection of the business of
the Company and its Subsidiaries, are eligible to be granted Awards under the
Plan. Participants shall be selected from time to time by the Committee, in its
sole discretion, from among those eligible, and the Committee shall determine,
in its sole discretion, the number of Shares to be covered by the Awards granted
to each Participant.
6. LIMITATIONS
No Award may be granted under the Plan after the tenth anniversary of the
Effective Date, but Awards theretofore granted may extend beyond that date.
6
<PAGE>
7. TERMS AND CONDITIONS OF OPTIONS
Options granted under the Plan shall be, as determined by the Committee,
non-qualified, incentive or other stock options for federal income tax purposes,
as evidenced by the related Award agreements, and shall be subject to the
foregoing and the following terms and conditions and to such other terms and
conditions, not inconsistent therewith, as the Committee shall determine:
(a) Option Price. The Option Price per Share shall be determined by the
Committee, but shall not be less than 100% of the Fair Market Value of the
Shares on the date an Option is granted.
(b) Exercisability. Options granted under the Plan shall be exercisable at
such time and upon such terms and conditions as may be determined by the
Committee, but in no event shall an Option be exercisable more than ten years
after the date it is granted.
(c) Exercise of Options. Except as otherwise provided in the Plan or in an
Award agreement, an Option may be exercised for all, or from time to time any
part, of the Shares for which it is then exercisable. For purposes of Section 7
of the Plan, the exercise date of an Option shall be the later of the date a
notice of exercise is received by the Company and, if applicable, the date
payment is received by the Company pursuant to clauses (i), (ii) or (iii) in the
following sentence. The purchase price for the Shares as to which an Option is
exercised shall be paid to the Company in full at the time of exercise at the
election of the Participant (i) in cash, (ii) in Shares having a Fair Market
Value equal to the aggregate Option Price for the Shares being purchased and
satisfying such other requirements as may be imposed by the Committee, (iii)
partly in cash and partly in such Shares, or (iv) through the delivery of
irrevocable instructions to a broker to deliver promptly to the Company an
amount equal to the aggregate Option Price for the Shares being purchased. The
Award agreement shall, unless otherwise provided by the Committee, permit the
Participant to elect, subject to such terms and conditions as the Committee
shall determine, to have the number of Shares deliverable to the Participant as
a result of the exercise reduced by a number sufficient to pay the amount the
Company determines to be necessary to withhold for federal, state, local or
other taxes as a result of the exercise of the Option. No Participant shall have
any rights to dividends or other rights of a stockholder with respect to Shares
subject to an Option until the Participant has given written notice of exercise
of the Option, paid in full for such Shares and, if applicable, has satisfied
any other conditions imposed by the Committee pursuant to the Plan.
(d) Exercisability Upon Termination of Employment by Death or Disability.
If a Participant's employment with the Company and its Subsidiaries terminates
by reason of death or Disability after the date of grant of an Option,
7
<PAGE>
(i) the unexercised portion of such Option shall immediately vest in full and
(ii) such portion may thereafter be exercised during the shorter of (A) the
remaining stated term of the Option or (B) five years after the date of death or
Disability.
(e) Exercisability Upon Termination of Employment by Retirement. If a
Participant's employment with the Company and its Subsidiaries terminates by
reason of Retirement after the date of grant of an Option, an unexercised Option
may thereafter be exercised during the shorter of (i) the remaining stated term
of the Option or (ii) five years after the date of such termination of
employment (the "Post-Retirement Exercise Period"), but only to the extent to
which such Option was exercisable at the time of such termination of employment
or becomes exercisable during the Post-Retirement Exercise Period; provided,
however, that if a Participant dies within a period of five years after such
termination of employment, an unexercised Option may thereafter be exercised,
during the shorter of (i) the remaining stated term of the Option or (ii) the
period that is the longer of (A) five years after the date of such termination
of employment or (B) one year after the date of death (the "Special Exercise
Period"), but only to the extent to which such Option was exercisable at the
time of such termination of employment or becomes exercisable during the Special
Exercise Period.
(f) Effect of Other Termination of Employment. If a Participant's
employment with the Company and its Subsidiaries terminates for any reason other
than death, Disability or Retirement after the date of grant of an Option as
described above, an unexercised Option may thereafter be exercised during the
period ending 90 days after the date of such termination of employment, but only
to the extent to which such Option was exercisable at the time of such
termination of employment. Notwithstanding the foregoing, the Committee may, in
its sole discretion, accelerate the vesting of unvested Options held by a
Participant if such Participant is terminated from employment without "cause"
(as such term is defined by the Committee in its sole discretion) by the
Company.
8. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
(a) Grants. The Committee also may grant (i) a Stock Appreciation Right
independent of an Option or (ii) a Stock Appreciation Right in connection with
an option, or a portion thereof. A Stock Appreciation Right granted pursuant to
clause (ii) of the preceding sentence (A) may be granted at the time the related
Option is granted or at any time prior to the exercise or cancellation of the
related Option, (B) shall cover the same Shares covered by an Option (or such
lesser number of Shares as the Committee may determine) and (C) shall be subject
to the same terms and conditions as such Option except for such additional
limitations as are contemplated by this Section 8 (or such additional
limitations as may be included in an Award agreement).
8
<PAGE>
(b) Terms. The exercise price per Share of a Stock Appreciation Right shall
be an amount determined by the Committee but in no event shall such amount be
less than the greater of (i) the Fair Market Value of a Share on the date the
Stock Appreciation Right is granted or, in the case of a Stock Appreciation
Right granted in conjunction with an Option, or a portion thereof, the Option
Price of the related Option and (ii) an amount permitted by applicable laws,
rules, by-laws or policies of regulatory authorities or stock exchanges. Each
Stock Appreciation Right granted independent of an Option shall entitle a
Participant upon exercise to an amount equal to (i) the excess of (A) the Fair
Market Value on the exercise date of one Share over (B) the exercise price per
Share, times (ii) the number of Shares covered by the Stock Appreciation Right.
Each Stock Appreciation Right granted in conjunction with an Option, or a
portion thereof, shall entitle a Participant to surrender to the Company the
unexercised Option, or any portion thereof, and to receive from the Company in
exchange therefor an amount equal to (i) the excess of (A) the Fair Market Value
on the exercise date of one Share over (B) the Option Price per Share, times
(ii) the number of Shares covered by the Option, or portion thereof, which is
surrendered. The date a notice of exercise is received by the Company shall be
the exercise date. Payment shall be made in Shares or in cash, or partly in
Shares and partly in cash, valued at such Fair Market Value, all as shall be
determined by the Committee. Stock Appreciation Rights may be exercised from
time to time upon actual receipt by the Company of written notice of exercise
stating the number of Shares subject to an exercisable Option with respect to
which the Stock Appreciation Right is being exercised. No fractional Shares will
be issued in payment for Stock Appreciation Rights, but instead cash will be
paid for a fraction or, if the Committee should so determine, the number of
Shares will be rounded downward to the next whole Share.
(c) Limitations. The Committee may impose, in its discretion, such
conditions upon the exercisability or transferability of Stock Appreciation
Rights as it may deem fit.
(d) Limited Stock Appreciation Rights. The Committee may grant LSARs that
are exercisable upon the occurrence of specified contingent events. Such LSARs
may provide for a different method of determining appreciation, may specify that
payment will be made only in cash and may provide that any related Awards are
not exercisable while such LSARs are exercisable. Unless the context otherwise
requires, whenever the term "Stock Appreciation Right" is used in the Plan, such
term shall include LSARs.
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<PAGE>
9. OTHER STOCK-BASED AWARDS
(a) Generally. The Committee, in its sole discretion, may grant Awards of
Shares, Awards of restricted Shares and Awards that are valued in whole or in
part by reference to, or are otherwise based on the Fair Market Value of, Shares
("Other Stock-Based Awards"). Such Other Stock-Based Awards shall be in such
form, and dependent on such conditions, as the Committee shall determine,
including, without limitation, the right to receive one or more Shares (or the
equivalent cash value of such Shares) upon the completion of a specified period
of service, the occurrence of an event and/or the attainment of performance
objectives. Other Stock-Based Awards may be granted alone or in addition to any
other Awards granted under the Plan. Subject to the provisions of the Plan, the
Committee shall determine to whom and when Other Stock-Based Awards will be
made, the number of Shares to be awarded under (or otherwise related to) such
Other Stock-Based Awards; whether such Other Stock-Based Awards shall be settled
in cash, Shares or a combination of cash and Shares; and all other terms and
conditions of such Awards (including, without limitation, the vesting provisions
thereof).
(b) Performance-Based Awards. Notwithstanding anything to the contrary
herein, certain Other Stock-Based Awards granted under this Section 9 may be
granted in a manner which is deductible by the Company under Section 162(m) of
the Code (or any successor section thereto) ("Performance-Based Awards"). A
Participant's Performance-Based Award shall be determined based on the
attainment of written performance goals approved by the Committee for a
performance period established by the Committee (i) while the outcome for that
performance period is substantially uncertain and (ii) no more than 90 days
after the commencement of the performance period to which the performance goal
relates or, if less, the number of days which is equal to 25 percent of the
relevant performance period. The performance goals, which must be objective,
shall be based upon one or more of the following criteria: (i) consolidated
earnings before or after taxes (including earnings before interest, taxes,
depreciation and amortization); (ii) net income; (iii) operating income; (iv)
earnings per share; (v) book value per share; (vi) return on stockholders'
equity; (vii) expense management; (viii) return on investment; (ix) improvements
in capital structure; (x) profitability of an identifiable business unit or
product; (xi) maintenance or improvement of profit margins; (xii) stock price;
(xiii) market share; (xiv) revenues or sales; (xv) costs; (xvi) cash flow;
(xvii) working capital and (xviii) return on assets. The foregoing criteria may
relate to the Company, one or more of its Subsidiaries or one or more of its
divisions or units, or any combination of the foregoing, and may be applied on
an absolute basis and/or be relative to one or more peer group companies or
indices, or any combination thereof, all as the Committee shall determine. In
addition, to the degree consistent with Section 162(m) of the Code (or any
successor section thereto), the performance goals may be
10
<PAGE>
calculated without regard to extraordinary items. The maximum amount of a
Performance-Based Award to any Participant with respect to a fiscal year of the
Company shall be $5,000,000. The Committee shall determine whether, with respect
to a performance period, the applicable performance goals have been met with
respect to a given Participant and, if they have, to so certify and ascertain
the amount of the applicable Performance-Based Award. No Performance-Based
Awards will be paid for such performance period until such certification is made
by the Committee. The amount of the Performance-Based Award actually paid to a
given Participant may be less than the amount determined by the applicable
performance goal formula, at the discretion of the Committee. The amount of the
Performance-Based Award determined by the Committee for a performance period
shall be paid to the Participant at such time as determined by the Committee in
its sole discretion after the end of such performance period; provided, however,
that a Participant may, if and to the extent permitted by the Committee and
consistent with the provisions of Section 162(m) of the Code, elect to defer
payment of a Performance-Based Award.
10. ADJUSTMENTS UPON CERTAIN EVENTS
Notwithstanding any other provisions in the Plan to the contrary, the
following provisions shall apply to all Awards granted under the Plan:
(a) Generally. In the event of any change in the outstanding Shares after
the Effective Date by reason of any Share dividend or split, reorganization,
recapitalization, merger, consolidation, spin-off, combination or exchange of
Shares of other corporate exchange, or any distribution to stockholders of
Shares other than regular cash dividends, the Committee in its sole discretion
and without liability to any person may make such substitution or adjustment, if
any, as it deems to be equitable, as to (i) the number or kind of Shares or
other securities issued or reserved for issuance pursuant to the Plan or
pursuant to outstanding Awards, (ii) the Option Price and/or (iii) any other
affected terms of such Awards.
(b) Change in Control. Except as otherwise provided in an Award agreement,
in the event of a Change in Control, the Committee in its sole discretion and
without liability to any person may take such actions, if any, as it deems
necessary or desirable with respect to any Award (including, without limitation,
(i) the acceleration of an Award, (ii) the payment of a cash amount in exchange
for the cancellation of an Award and/or (iii) the requiring of the issuance of
substitute Awards that will substantially preserve the value, rights and
benefits of any affected Awards previously granted hereunder) as of the date of
the consummation of the Change in Control.
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11. NO RIGHT TO EMPLOYMENT
The granting of an Award under the Plan shall impose no obligation on the
Company or any Subsidiary to continue the employment of a Participant and shall
not lessen or affect the Company's or Subsidiary's right to terminate the
employment of such Participant.
12. SUCCESSORS AND ASSIGNS
The Plan shall be binding on all successors and assigns of the Company and
a Participant, including without limitation, the estate of such Participant and
the executor, administrator or trustee of such estate, or any receiver or
trustee in bankruptcy or representative of the Participant's creditors.
13. NONTRANSFERABILITY OF AWARDS
An Award shall not be transferable or assignable by the Participant
otherwise than by will or by the laws of descent and distribution. During the
lifetime of a Participant, an Award shall be exercisable only by such
Participant. An Award exercisable after the death of a Participant may be
exercised by the legatees, personal representatives or distributees of the
Participant. Notwithstanding anything to the contrary herein, the Committee, in
its sole discretion, shall have the authority to waive this Section 13 (or any
part thereof) to the extent that this Section 13 (or any part thereof) is not
required under the rules promulgated under any law, rule or regulation
applicable to the Company.
14. AMENDMENTS OR TERMINATION
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which, (a) without the approval of
the stockholders of the Company, would (except as is provided in Section 10 of
the Plan), increase the total number of Shares reserved for the purposes of the
Plan or change the maximum number of Shares for which Awards may be granted to
any Participant or (b) without the consent of a Participant, would impair any of
the rights or obligations under any Award theretofore granted to such
Participant under the Plan; provided, however, that the Committee may amend the
Plan in such manner as it deems necessary to permit the granting of Awards
meeting the requirements of the Code or other applicable laws. Notwithstanding
anything to the contrary herein, the Board may not amend, alter or discontinue
the provisions relating to Section 10(b) of the Plan after the occurrence of a
Change in Control.
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15. INTERNATIONAL PARTICIPANTS
With respect to Participants who reside or work outside the United States
of America and who are not (and who are not expected to be) "covered employees"
within the meaning of Section 162(m) of the Code, the Committee may, in its sole
discretion, amend the terms of the Plan or Awards with respect to such
Participants in order to conform such terms with the requirements of local law.
16. CHOICE OF LAW
The Plan shall be governed by and construed in accordance with the laws of
the State of New York applicable to contracts made and to be performed in the
State of New York.
17. EFFECTIVENESS OF THE PLAN
The Plan shall be effective as of the Spinoff Date.
13
COGNIZANT CORPORATION
----------------------------------------------------
1997 Annual Report to Shareholders
[COGNIZANT LOGO]
<PAGE>
COGNIZANT CORPORATION
1997 ANNUAL REPORT TO SHAREHOLDERS
TABLE OF CONTENTS
Financial Review ....................................................... 1-7
Statement of Management's Responsibility for Financial Statements ...... 8
Report of Independent Accountants ...................................... 8
Consolidated Financial Statements ...................................... 9-12
Notes to Consolidated Financial Statements ............................. 13-26
Five-Year Selected Financial Data ...................................... 27
<PAGE>
COGNIZANT CORPORATION
FINANCIAL REVIEW
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
On January 15, 1998, Cognizant Corporation (the "Company") announced a plan
to separate into two independent, publicly traded companies--IMS Health
Incorporated ("IMS Health") and Nielsen Media Research, Inc. ("Nielsen Media
Research"). The transaction, which has been structured as a tax-free dividend of
one share of IMS Health common stock for each share of Cognizant Corporation
common stock, is targeted for completion by the middle of 1998. Concurrent with
the transaction, Cognizant Corporation will change its name to Nielsen Media
Research, Inc. The separation would create IMS Health as the premier global
provider of information solutions to the pharmaceutical and healthcare
industries, and establish an independent Nielsen Media Research, the leader in
electronic audience measurement services. The transaction is subject to final
approval by the Company's board of directors and obtaining a ruling from the
Internal Revenue Service with respect to the tax-free treatment of the
transaction. IMS Health consists of IMS International, Inc. ("IMS"), Erisco,
Inc. ("Erisco"), Cognizant Enterprises, Inc. ("Enterprises"), Cognizant
Technology Solutions Corporation ("CTS"), SSJ K.K. ("Super Systems Japan"), and
an equity investment in Gartner Group, Inc. ("Gartner").
YEAR-ENDED DECEMBER 31, 1997 COMPARED WITH
YEAR-ENDED DECEMBER 31, 1996
In September 1997, the Company's voting interest in Gartner fell below 50%
as a result of the exercise of Gartner employee stock options and employee stock
purchases. Accordingly, in the third quarter, the Company deconsolidated Gartner
(the "Gartner Deconsolidation") as of January 1, 1997 and is accounting for its
ownership interest on the equity basis.
Revenue in 1997 decreased 18.1% to $1,418,153 from $1,730,596 in 1996. This
decrease primarily reflects the impact of the Gartner Deconsolidation. Revenue
in 1997 increased by 10.7%, excluding Gartner revenue from both years and the
impact of a stronger U.S. dollar. The increase reflects double-digit revenue
performance at IMS and Nielsen Media Research, partially offset by Pilot
Software, Inc. ("Pilot"), which was sold in the third quarter of 1997. IMS
revenue growth benefited from strong performance of its core business services,
geographic expansion and excellent growth of its electronic territory management
product. The growth at Nielsen Media Research was driven by the addition of new
cable and broadcast customers, new products and services, and continued service
expansion to existing customers. The impact of a stronger U.S. dollar in 1997
decreased reported revenue by approximately 2.0%.
Operating costs and selling and administrative expenses in 1997 were
$965,497 compared with $1,253,567 in 1996, a decrease of 23.0%. This decrease
primarily reflects the impact of the Gartner Deconsolidation. Excluding Gartner
expenses from both years and discontinued business units in 1996, operating
costs and selling and administrative expenses increased 7.1% to $965,497 in 1997
from $901,454 in 1996. This increase reflects the Company's increased spending
on new revenue growth initiatives which contributed to revenue growth of 10.7%
in 1997. The impact of a stronger U.S. dollar in 1997 decreased operating costs
and selling and administrative expenses by approximately 2.0%.
Operating income in 1997 decreased 2.3% to $335,342 from $343,168 in 1996.
This decrease primarily reflects the impact of the Gartner Deconsolidation.
Excluding Gartner operating income in both years and discontinued business units
in 1996, operating income increased 17.1% to $335,342 in 1997 from $286,332 in
1996. Operating income growth outpaced revenue growth primarily due to IMS's
ability to leverage its resources. The impact of a stronger U.S. dollar in 1997
decreased reported operating income by less than 1.0%. The sale of Pilot, which
had been generating an operating loss, enabled the Company to redeploy resources
to strategic technology investments, including the initiative to accelerate Year
2000 compliance. The impact on operating income of Year 2000 compliance was
$12,500 in 1997.
Operating margin in 1997 was 23.6%, compared with 19.8% in 1996. Excluding
Gartner results from both years, and discontinued business units in 1996,
operating margin was 23.6% in 1997 compared with 21.9% in 1996.
Non-operating income-net in 1997 was $94,893, compared with $5,853 in 1996.
The increase was due principally to recording $65,120 of Gartner equity income
in 1997 as a result of the Gartner Deconsolidation. The Company also recognized
a pre-tax unrealized gain on its investment in Gartner ("SAB 51 Gain") of
$14,689 (included in other income/expense-net) corresponding to the net increase
in the underlying value of its investment in Gartner. In addition, non-operating
income-net for 1997 includes gains of $39,336 related to the disposition of
Cognizant Enterprises' investment in WEFA Group, Inc. and a portion of its
investment in TSI International, Inc. and Aspect Development, Inc., and a
$29,945 loss on the sale of Pilot (included in gains from dispositions-net).
The Company's consolidated 1997 effective tax rate was 27.4%, compared with
44.0% in 1996. The Company's lower tax rate in 1997 is due to the benefits of
global tax planning strategies.
Net income in 1997 was $312,350, compared with $195,451 in 1996, an
increase of 59.8%. This increase principally reflects gains from
dispositions-net and SAB 51 gains in 1997 and a reduction in the tax rate from
44.0% in 1996 to 27.4% in 1997 due to global tax-planning actions. It
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also reflects a one-time after-tax acquisition-related charge of $32,778 for
in-process research and development costs associated with Gartner's acquisition
of J3 Learning Corporation (the "J3 charge") in 1996. Excluding these items, net
income increased 17.9% to $294,850 in 1997 from $250,079 in 1996.
RESULTS BY BUSINESS SEGMENT
IMS
The IMS segment consists of IMS, the leading global provider of market
information and decision-support services to the pharmaceutical and healthcare
industries, and Sales Technologies, Inc. ("Sales Technologies"), a leading U.S.
provider of automated sales support technologies to the pharmaceutical industry.
IMS revenue increased 8.4% in 1997 to $980,521 from $904,444 in 1996. This
growth reflected strong performance of core business services, new product
introductions, geographic expansion and strong revenue growth at Sales
Technologies. Excluding the impact of a stronger U.S. dollar, revenue growth was
11.4%. Operating income grew 14.0% to $265,351 in 1997 from $232,827 in 1996 due
to the factors described above. Operating income growth outpaced revenue growth
primarily due to IMS's ability to leverage its resources. Excluding the impact
of Year 2000 compliance and a stronger U.S. dollar in 1997, and discontinued
business units in 1996, operating income grew 18.2%.
NIELSEN MEDIA RESEARCH
Nielsen Media Research is the leading provider of television audience
measurement services, both nationally and locally, in the United States and
Canada. Nielsen Media Research revenue increased 12.3% in 1997 to $358,594 from
$319,404 in 1996. Revenue growth resulted from additional cable customers,
entrance into three new metered markets, an increase in the level of special
analyses and the continued growth of the Hispanic service. 1997 operating income
for the Nielsen Media Research segment was $107,732, compared with $99,461 in
1996, an increase of 8.3%. Excluding the impact of Year 2000 compliance,
operating income increased 11.0% to $110,413 in 1997, from $99,461 in 1996.
GARTNER
Gartner is the world's leading independent provider of research and
analysis on the computer hardware, software, communications and related
information technology industries. As discussed earlier, the Company's voting
interest in Gartner fell below 50% in September 1997. Accordingly, the Company
has deconsolidated Gartner and is accounting for its ownership interest on the
equity basis as of January 1, 1997. In 1997, the income statement impact of the
Company's ownership interest appears in non-operating income-net as Gartner
equity income and as a pre-tax unrealized gain on Gartner stock (included in
other income/expense-net). 1996 revenue and operating income for Gartner were
$424,382 and $60,114, respectively. Operating income was adversely affected by
the J3 charge. Excluding this item, operating income was $93,347.
EMERGING MARKETS
The Emerging Markets segment consists of Erisco, CTS, Enterprises, Pilot
and Super Systems Japan. In the third quarter, the Company sold Pilot and
recorded a non-cash pre-tax loss of $29,945. The segment had a 4.0% decrease in
1997 revenue to $79,038 from $82,366 in 1996, reflecting the sale of Pilot.
Erisco, CTS and Super Systems Japan posted high revenue growth through the
addition of new customers and new product introductions. The 1997 operating loss
for the segment was $9,752, compared with $12,903 in 1996, reflecting the sale
of Pilot.
RESULTS BY GEOGRAPHIC AREA
Revenue in the United States decreased by 20.1% to $759,070 in 1997 from
$950,526 in 1996. This decrease is primarily the result of the Gartner
Deconsolidation. Excluding Gartner revenue in both years, 1997 revenue in the
United States increased by 12.0.%. The increase reflected Nielsen Media
Research's addition of new customers and service expansions; and new product
introductions and a strong performance of core business services by IMS,
partially offset by Pilot. Non-U.S. revenue decreased 15.5% to $659,083 in 1997
from $780,070 in 1996. The decrease is primarily the result of the Gartner
Deconsolidation. Excluding Gartner revenue in both years, 1997 revenue for
non-U.S. increased by 4.9%, and rose 9.4%, excluding the impact of a stronger
U.S. dollar. The non-U.S. revenue growth is due to new product introductions and
geographic expansion by IMS.
YEAR-ENDED DECEMBER 31, 1996 COMPARED WITH
YEAR-ENDED DECEMBER 31, 1995
Revenue in 1996 increased 12.2% to $1,730,596 from $1,542,340 in 1995.
Revenue growth was held down principally by the one-time impact in 1995 of
conforming fiscal quarters between the Company and Gartner ("the Gartner fiscal
quarter change") and by the impact of discontinued business units not in the
portfolio in 1996. Excluding these items, revenue growth was 14.8%. The increase
reflected continued high growth at Gartner, principally from the introduction of
new products and delivery options, and double-digit revenue performance at IMS
and Nielsen Media Research, partially offset by declining revenue at Pilot. The
growth at Nielsen Media Research was driven by the addition of new cable and
broadcast customers,
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new products and services and continued service expansion to existing customers.
The impact of a stronger U.S. dollar in 1996 decreased revenue growth for the
Company by approximately 1%.
Operating costs and selling and administrative expenses in 1996 were
$1,253,567, compared with $1,242,331 in 1995, an increase of 0.9%. Operating
costs and selling and administrative expenses in 1995 include a non-recurring
charge of $90,070 ($49,268 after-tax) for costs principally associated with
asset impairments, software write-offs and contractual obligations that have no
future economic benefit; an incremental provision for postemployment benefit
expense of $32,500 ($17,778 after tax); the Gartner fiscal quarter change and
the impact of discontinued business units not in the portfolio in 1996.
Operating costs and selling and administrative expenses in 1996 also include the
J3 charge. Excluding the above-mentioned 1995 and 1996 items, operating costs
and selling and administrative expenses increased 13.4% to $1,217,056 in 1996
from $1,072,980 in 1995, reflecting the Company's increased spending in new
revenue growth initiatives which contributed to revenue growth of 14.8% in 1996.
The impact of a stronger U.S. dollar in 1996 decreased operating costs and
selling and administrative expense growth by approximately 1%.
Operating income in 1996 increased 121.9% to $343,168 from $154,677 in
1995. The increase reflects the impact of the 1995 and 1996 items discussed
above, as well as 1995 restructuring expense of $12,800 ($7,002 after-tax).
Excluding these 1995 and 1996 items, operating income increased 25.5% to
$379,679 in 1996 from $302,438 in 1995. Operating income growth outpaced revenue
growth, primarily due to Gartner's ability to take advantage of economies of
scale and IMS's ability to leverage its resources. The impact of a stronger U.S.
dollar in 1996 decreased operating income growth by approximately 2%.
Operating margin in 1996 was 19.8%, compared with 10.0% in 1995. The
increase reflects the impact of the 1995 and 1996 items described above.
Excluding these items in both years, operating margin was 21.9% in 1996,
compared with 20.1% in 1995.
Non-operating income-net in 1996 was $5,853, compared with $7,880 in 1995,
a decrease of 25.7%. The decrease was due principally to lower disposition gains
in 1996, partially offset by lower minority interest expense related to Gartner
due to the J3 charge, and the impact in 1996 of a foreign exchange hedge gain.
The Company's consolidated 1996 effective tax rate was 44.0%, compared with
45.3% in 1995. The tax rates were computed on a separate-company basis.
Net income in 1996 was $195,451, compared with $88,881 in 1995, an increase
of 119.9%. Excluding the after-tax impact of the items discussed in operating
and non-operating income, net income increased 28.0% to $208,075 in 1996, from
$162,593 in 1995.
RESULTS BY BUSINESS SEGMENT
IMS
IMS revenue increased 8.3% in 1996 to $904,444 from $835,422 in 1995. The
growth reflected strong performance of core business services, new product
introductions and geographic expansion at IMS; and strong revenue growth at
Sales Technologies. Excluding the impact of a stronger U.S. dollar in 1996 and
discontinued business units in both years, revenue growth was 11.2%. Operating
income grew 160.6% to $232,827 in 1996 from $89,335 in 1995. The increase was
primarily due to the absence in 1996 of: $53,630 of the 1995 non-recurring
charge, $24,300 of the 1995 incremental provision for postemployment benefits
expense, and 1995 restructuring expense of $12,800. Excluding these items,
discontinued business units in 1996, and the impact of a stronger U.S. dollar,
operating income growth was 21.3%. Operating income growth outpaced revenue
growth primarily due to IMS's ability to leverage its resources.
NIELSEN MEDIA RESEARCH
Nielsen Media Research revenue increased 10.7% in 1996 to $319,404 from
$288,652 in 1995. Revenue growth resulted from the expansion of network
schedules, increased demand for special analyses, addition of cable customers
and entrance into two new metered markets. 1996 operating income for the segment
was $99,461, compared with $87,068 in 1995, an increase of 14.2%. The increase
was due, in part, to the absence in 1996 of $2,300 of the 1995 non-recurring
charge. Excluding this item, operating income growth for Nielsen Media Research
was 11.3%, reflecting the revenue factors described above.
GARTNER
Gartner, a majority-owned subsidiary in 1995 and 1996, had 1996 revenue of
$424,382, up 25.7% from $337,639 in 1995. Revenue growth was held down by the
impact of a Gartner fiscal quarter change. Excluding this impact, revenue growth
was 31.9%. This growth principally reflected strong gains from symposium events,
consulting and technology-based training businesses.
Operating income for Gartner increased 17.5% to $60,114 in 1996 from
$51,180 in 1995. This growth was held down by the J3 charge. In addition, 1995
results include $8,200 of the incremental provision for postemployment benefits
expense and the impact of the Gartner fiscal quarter change. Excluding these
items, operating income grew 67.2% to $93,347 in 1996 from $55,818 in 1995. The
growth in
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operating income was primarily due to revenue growth and Gartner's ability to
take advantage of economies of scale.
EMERGING MARKETS
Emerging Markets had a 2.2% increase in 1996 revenue to $82,366 from
$80,607 in 1995. The increase reflected strong growth at CTS and the addition of
new customers at Erisco and Super Systems Japan, partially offset by declining
revenue at Pilot. The 1996 operating loss for the segment was $12,903, compared
with $18,366 in 1995. The 1996 operating loss was due to Pilot. 1995 results
include $16,940 of the 1995 non-recurring charge.
RESULTS BY GEOGRAPHIC AREA
Revenue in the United States increased by 13.9% to $950,526 in 1996 from
$834,786 in 1995. The increase reflected Gartner's introduction of new products
and delivery options, Nielsen Media Research's addition of new customers and
service expansions; and new product introductions by IMS, partially offset by
declining revenue at Pilot, the impact of the Gartner fiscal quarter change and
the absence of revenue from discontinued business units no longer in the
portfolio. Non-U.S. revenue increased 10.3% to $780,070 in 1996 from $707,554 in
1995, principally reflecting expansion into new global markets at IMS and
Gartner's increased subscription services revenue and geographic expansion.
Excluding the 1996 and 1995 items discussed previously and the impact of a
stronger U.S. dollar, non-U.S. revenue growth was 11.8%.
CHANGES IN FINANCIAL POSITION AT DECEMBER 31, 1997
COMPARED WITH DECEMBER 31, 1996
Cash and Cash Equivalents decreased to $318,435 at December 31, 1997 from
$428,520 at December 31, 1996, primarily due to the purchase of 9,074,600 shares
of the Company's common stock and the absence of Gartner's cash balance as a
result of the Gartner Deconsolidation. Offsetting the above were strong
operating cash flows from IMS and Nielsen Media Research and proceeds from
minority interest financing in 1997.
Accounts Receivable-Net decreased to $303,609 at December 31, 1997 from
$453,791 at December 31, 1996, principally due to the Gartner Deconsolidation.
Investment in Gartner Group of $195,695 at December 31, 1997 represents the
accounting for Gartner on an equity basis, compared with consolidating Gartner
results in 1996.
Goodwill decreased to $87,430 at December 31, 1997 from $251,483 at
December 31, 1996, principally due to the Gartner Deconsolidation and the sale
of Pilot.
Accrued and Other Current Liabilities decreased to $212,944 at December 31,
1997 from $266,932 at December 31, 1996, principally due to the Gartner
Deconsolidation.
Deferred Revenue decreased to $111,921 at December 31, 1997 from $292,970
at December 31, 1996, principally due to the Gartner Deconsolidation.
Minority Interests increased to $101,209 at December 31, 1997 from $90,635
at December 31, 1996, principally due to minority interest financing offset by
the Gartner Deconsolidation.
Shareholders' Equity decreased to $801,570 at December 31, 1997 from
$872,613 at December 31, 1996, principally due to the purchase of the Company's
common stock, payment of dividends and the change in cumulative translation
adjustment, partially offset by net income.
ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING
STANDARDS
In 1995, the Company recorded a pre-tax charge of $90,070 that included an
impairment loss of $40,570 related to long-lived assets for which management,
having the authority to approve such business decisions, committed to a plan to
discontinue certain product lines and dispose of certain real property.
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" requires that long-lived assets and certain intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In general, this statement
requires recognition of an impairment loss when the sum of undiscounted expected
future cash flows is less than the carrying amount of such assets. The
measurement for such impairment loss is then based on the fair value of the
asset. While SFAS No. 121 affected the measurement of the impairment charge
noted above, it had no effect on the timing of recognition of the impairment.
The 1995 charge principally reflected an impairment loss of $40,570
reflecting the revaluation of certain fixed assets, administrative and
production systems and other intangibles that were replaced or no longer used.
In addition, the Company recorded a charge of $20,300, principally related to
the write-off of certain computer software product lines at Pilot. (See Note 3
to the Consolidated Financial Statements.)
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 "Accounting for Stock-Based Compensation", which requires that
companies with stock-based compensation plans either recognize compensation
expense based on the fair value of options granted or continue to apply the
existing accounting rules and disclose pro forma net income and earnings per
share assuming the fair value method had been applied. The Company has chosen to
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- - --------------------------------------------------------------------------------
continue applying Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for the fixed stock option plans. Had compensation cost for
the Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans, consistent with the
method of SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts as disclosed in Note 12 to the
Consolidated Financial Statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
simplifies existing computational guidelines, revises disclosure requirements
and increases the comparability of earnings-per-share data on an international
basis. Basic earnings per common share are based on the weighted average number
of common shares outstanding in each year. Diluted earnings per common share
assume that outstanding common shares were increased by shares issuable upon
exercise of those stock options for which market price exceeds exercise price,
less shares which could have been purchased by the Company with related
proceeds. This statement, which has been adopted by the Company, requires
restatement of all prior period earnings-per-share data presented. (See Note 2
to the Consolidated Financial Statements.)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for periods beginning after
December 15, 1997. The Company is in the process of determining its preferred
disclosure format.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information", which changes the way public companies
report information about segments. SFAS No. 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues. This statement is effective for
financial statements for periods beginning after December 15, 1997. Management
has decided to early adopt this Statement. (See Note 19 to the Consolidated
Financial Statements.)
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions And Other Postretirement Benefits", which changes current
financial statement disclosure requirements from those required under SFAS No.
87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The statement does not change the
existing measurement or recognition provisions of SFAS Nos. 87, 88 or 106, and
is effective for the fiscal years beginning after December 15, 1997. The Company
is in the process of evaluating the disclosure requirements under this standard.
RESTRUCTURING
In 1995, the Company recorded a $12,800 restructuring provision, primarily
to write off software for product lines that were discontinued at Sales
Technologies, a unit of IMS.
NON-U.S. OPERATING AND MONETARY ASSETS
The Company operates globally, deriving a significant portion of its
operating income from non-U.S. operations. As a result, fluctuations in the
value of foreign currencies relative to the U.S. dollar may increase the
volatility of U.S. dollar operating results. In 1997, foreign currency
translation decreased U.S. dollar revenue growth and operating income growth by
approximately 2% and 1%, respectively. In 1996, foreign currency translation
decreased U.S. dollar revenue growth and operating income growth by
approximately 1% and 2%, respectively.
Non-U.S. monetary assets are maintained in currencies other than the U.S.
dollar, principally in Switzerland, Japan and Spain. Changes in the value of
these currencies relative to the U.S. dollar are charged or credited to
shareholders' equity. The effect of exchange rate changes during 1997 decreased
the U.S. dollar amount of cash and cash equivalents by $11,222.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, cash and cash equivalents totaled $318,435. At
December 31, 1996, cash and cash equivalents totaled $428,520 (including
$123,697 of Gartner cash). The decrease in cash of $110,085 was primarily due to
the Gartner Deconsolidation.
Net cash provided by operating activities was $357,014, $352,023 and
$288,539 in 1997, 1996 and 1995, respectively. The increase of $4,991 in
operating activities in 1997 primarily reflected increased cash from operations,
improved collections of accounts receivable, the absence in 1997 of
restructuring payments, and a lower level of postemployment benefit and
non-recurring charge payments. These increases were partially offset by payment
of income taxes in 1997 of $72,827. The increase of $63,484 in net cash provided
by operating activities in 1996 primarily reflected increased cash from
operations, improved collections of accounts receivable and lower postemployment
benefit payments, partially offset
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FINANCIAL REVIEW (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
by lower other working capital items ($75,459), lower deferred revenue
($30,512), higher income tax payments ($21,416) and payments related to the 1995
non-recurring charge of ($13,125).
Net cash used in investing activities totaled $240,679 for 1997, compared
with $158,065 and $148,169 in 1996 and 1995, respectively. The increase in cash
usage in 1997 of $82,614 primarily reflected the change in Gartner to an equity
basis ($123,697), the absence of net proceeds from marketable securities
($27,601) offset in part by higher proceeds from the sale of businesses and
investments ($43,336) and the absence of purchases of Gartner common stock
($49,419). The increase in cash usage in 1996 of $9,896 primarily reflected the
purchase of Gartner common stock, higher payments for acquisitions and equity
investments, offset in part by higher net proceeds for marketable securities and
lower additions to computer software.
Net cash (used in)/provided by financing activities totaled ($215,198) for
1997, compared with $80,531 and ($116,095) in 1996 and 1995, respectively. The
increase in 1997 of cash used in financing activities primarily reflected the
purchase of shares of the Company's common stock ($324,767) and dividend
payments ($19,883); partially offset by minority interest financing $100,000 and
proceeds from exercise of stock options $26,409.
The increase in 1996 cash provided by financing activities principally
reflected a net amount transferred from The Dun & Bradstreet Corporation ("D&B")
as a result of the Company's spin-off (the "D&B spin-off") from D&B, compared
with net transfers to D&B in 1995 and long-term liabilities assumed with the D&B
spin-off related to prior business transactions, offset in part by the payment
of short-term debt assumed with the D&B spin-off. The increase in cash usage in
1995 of $10,035 primarily reflected short and long-term debt payments, included
in Other financing activities.
On February 18, 1997 the Company announced that its board of directors had
authorized a systematic stock repurchase program to buy up to 8,500,000 shares
of the Company's outstanding common stock. The stock purchases are held in
Treasury and reissued upon exercise of employee stock options. This program was
completed on September 5, 1997 at a total cost of $299,737.
On October 21, 1997 the Company announced that its board of directors had
authorized a second systematic stock repurchase program to buy up to 10,000,000
shares of the Company's outstanding common stock. A portion of this program is
intended to cover option exercises. Through December 31, 1997, 574,600 shares
have been acquired at a total cost of $22,756.
The Company's existing balances of cash, cash equivalents and marketable
securities, and cash generated from operations and debt capacity are expected to
be sufficient to meet the Company's long-term and short-term cash requirements
including dividends, acquisitions and the stock repurchase programs.
YEAR 2000
Many existing computer systems and software applications use two digits,
rather than four, to record years, e.g., "98" instead of "1998." Unless
modified, such systems will not properly record or interpret years after 1999,
which could lead to business disruptions. This is known as the Year 2000 issue.
The Company depends on systems and software both for its internal
operations as well as for the receipt of data used in its information products
and the transmission of those products to its customers. The Company began to
address the Year 2000 issue in 1996. It expects to complete upgrading or
replacing affected programs during 1998, with testing to be done during 1999.
The operating income impact of Year 2000 compliance was $12,500 in 1997. Based
on current information, the operating income impact of Year 2000 compliance in
1998 is expected to be in the range of $50,000 to $55,000.Year 2000 compliance
expenditures for 1999, the final year of the project, are in the process of
being determined; however, they are expected to be significantly less than in
1998. These costs are being expensed as incurred.
MARKET RISK
The Company's primary market risks are the impact of foreign exchange
fluctuations on non-dollar-denominated revenue and price fluctuations on equity
securities.
In the normal course of business, the Company employs established practices
and procedures to manage its exposure to fluctuations in the value of foreign
currencies using a variety of financial instruments.
The Company's objective in managing the exposure to foreign currency
fluctuations is to reduce earnings and cash flow volatility associated with
foreign exchange rate changes to allow management to focus its attention on its
core business activities. Accordingly, the Company enters into various contracts
which change in value as foreign exchange rates change to protect the value of a
portion of committed and anticipated foreign currency revenues and
non-functional currency assets and liabilities. The principal currencies hedged
are the Japanese yen, Swiss franc, German mark and Italian lira. By policy, the
Company maintains hedge coverage between minimum and maximum percentages of its
anticipated foreign exchange exposures over the next year. The gains and losses
on these hedges offset changes in the value of the related exposures.
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FINANCIAL REVIEW (CONTINUED)
Dollar amounts in thousands, except per share data
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It is the Company's policy to enter into foreign currency transactions only
to the extent necessary to meet its objectives as stated above. The Company does
not enter into foreign currency transactions for speculative purposes.
The fair value of the Company's hedging instruments are subject to change
as a result of potential changes in foreign exchange rates. The potential loss
in fair value for foreign exchange rate-sensitive instruments, based on a
hypothetical 10% decrease in the value of U.S. dollar or, in the case of
non-dollar-related instruments, the currency being purchased, was $2,600 at
December 31, 1997. The estimated fair values of the foreign exchange risk
management contracts were determined based on quoted market prices.
The Company also invests in marketable securities and is subject to equity
price risk. These investments are classified as available for sale and
consequently, carried at fair value, with unrealized gains and losses, net of
income taxes, reported as a component of shareholders' equity. The Company does
not hedge this market risk exposure. A 10% decline in the market price of these
equity securities would cause the fair value of the securities to decrease by
$4,800 at December 31, 1997.
DIVIDENDS
The payment and level of cash dividends by the Company are subject to the
discretion of the board of directors of the Company. Although the Company has
declared and anticipates that it will declare quarterly dividends in the range
of 5% to 8% of net earnings, dividend decisions will be based on, and affected
by, a number of factors, including the operating results and financial
requirements of the Company.
COMMON STOCK INFORMATION
The Company's common stock (symbol CZT) is listed on the New York Stock
Exchange. The number of shareholders of record and shares issued and outstanding
on December 31, 1997 were 11,286 and 162,093,621, respectively. The high and low
price per share during 1997 was $44 13/16 and $28 1/2, respectively.
Approximately 76% of shares were held by institutions.
DIVIDENDS
PRICE PER SHARE ($) PAID
- - --------------------------------------------------------------------------------
1997 1996 PER SHARE($)
- - --------------------------------------------------------------------------------
HIGH LOW HIGH LOW 1997 1996
- - --------------------------------------------------------------------------------
First Quarter 34 7/8 29 1/8 -- -- 0.03 --
Second Quarter 40 28 1/2 -- -- 0.03 --
Third Quarter 44 5/8 38 3/8 -- -- 0.03 --
Fourth Quarter 44 13/16 35 1/16 36 7/8 31 3/8 0.03 --
- - --------------------------------------------------------------------------------
Year 44 13/16 28 1/2 36 7/8 31 3/8 0.12 --
- - --------------------------------------------------------------------------------
7
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STATEMENT OF MANAGEMENT'S
RESPONSIBILITY FOR FINANCIAL
STATEMENTS
- - --------------------------------------------------------------------------------
To the Shareholders of Cognizant Corporation:
Management is responsible for the preparation of the consolidated financial
statements and related information that are presented in this report. The
consolidated financial statements, which include amounts based on management's
estimates and judgments, have been prepared in conformity with generally
accepted accounting principles. Other financial information in the report to
shareholders is consistent with that in the consolidated financial statements.
The Company maintains accounting and internal control systems to provide
reasonable assurance at reasonable cost that assets are safeguarded against loss
from unauthorized use or disposition, and that the financial records are
reliable for preparing financial statements and maintaining accountability for
assets. These systems are augmented by written policies, an organizational
structure providing division of responsibilities, careful selection and training
of qualified personnel and a program of internal audits.
The Company engaged Coopers & Lybrand L.L.P., independent accountants, to
audit and render an opinion on the consolidated 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.
The Board of Directors, through its Audit Committee consisting solely of
outside directors of the Company, 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. Coopers & Lybrand and the internal auditors each have full
and free access to the Audit Committee.
/s/ ROBERT E. WEISSMAN
- - --------------------------------
Robert E. Weissman
Chairman &
Chief Executive Officer
/s/ VICTORIA R. FASH
- - --------------------------------
Victoria R. Fash
Executive Vice President
& Chief Financial Officer
REPORT OF INDEPENDENT
ACCOUNTANTS
- - --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of Cognizant Corporation:
We have audited the accompanying consolidated statements of financial
position of Cognizant Corporation as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 the 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cognizant
Corporation as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, in 1995,
the Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of".
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
February 17, 1998
8
<PAGE>
COGNIZANT CORPORATION
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
Dollar amounts in thousands, except per share data 1997 1996 1995
====================================================================================================================================
<S> <C> <C> <C>
OPERATING REVENUE $1,418,153 $1,730,596 $1,542,340
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating Costs 597,199 746,781 753,466
Selling and Administrative Expenses 368,298 506,786 488,865
Depreciation and Amortization 117,314 133,861 132,532
Restructuring Expense 0 0 12,800
- - ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 335,342 343,168 154,677
- - ------------------------------------------------------------------------------------------------------------------------------------
Interest Income 12,775 9,456 10,325
Interest Expense (2,293) (1,338) (540)
Gartner Equity Income 65,120 0 0
Gains from Dispositions--Net 9,391 200 15,124
Other Income/(Expense)--Net 9,900 (2,465) (17,029)
- - ------------------------------------------------------------------------------------------------------------------------------------
Non-Operating Income--Net 94,893 5,853 7,880
- - ------------------------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 430,235 349,021 162,557
Provision for Income Taxes (117,885) (153,570) (73,676)
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 312,350 $ 195,451 $ 88,881
====================================================================================================================================
BASIC EARNINGS PER SHARE OF COMMON STOCK $ 1.89 $ 1.15 $ .52
====================================================================================================================================
DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 1.86 $ 1.15 $ .52
====================================================================================================================================
Average Number of Shares Outstanding--Basic 165,163,000 169,944,000 169,522,000
Dilutive Effect of Shares Issuable as of Year-End Under Stock
Option Plans 1,667,000 187,000 2,061,000
Adjustment of Shares Applicable to Exercised Stock Options
and Restricted Stock 660,000 369,000 25,000
- - ------------------------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding--Diluted 167,490,000 170,500,000 171,608,000
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
9
<PAGE>
COGNIZANT CORPORATION
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
December 31,
--------------------------------
Dollar amounts in thousands, except per share data 1997 1996
====================================================================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 318,435 $ 428,520
Accounts Receivable-Net 303,609 453,791
Other Current Assets 72,368 112,151
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 694,412 994,462
- - ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT IN GARTNER GROUP 195,695 0
- - ------------------------------------------------------------------------------------------------------------------------------------
NOTES RECEIVABLE AND OTHER INVESTMENTS 109,712 117,706
- - ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT-NET 233,583 268,888
- - ------------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS-NET
Computer Software 142,268 139,040
Goodwill 87,430 251,483
Other Assets 116,420 103,403
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Other Assets-Net 346,118 493,926
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,579,520 $1,874,982
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts and Notes Payable $ 58,796 $ 46,923
Accrued and Other Current Liabilities 212,944 266,932
Accrued Income Taxes 57,549 63,416
Deferred Revenues 111,921 292,970
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 441,210 670,241
- - ------------------------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS 49,927 60,269
DEFERRED INCOME TAXES 113,749 105,074
MINORITY INTERESTS 101,209 90,635
OTHER LIABILITIES 71,855 76,150
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 777,950 1,002,369
====================================================================================================================================
COMMITMENTS AND CONTINGENCIES
- - ------------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $.01 Per Share, Authorized--
10,000,000 Shares; Outstanding--None
Series Common Stock, Par Value $.01 Per Share, Authorized--
10,000,000 Shares; Outstanding--None
Common Stock, Par Value $.01 Per Share, Authorized--400,000,000 Shares;
Issued 171,120,069 and 171,082,301 Shares in 1997 and 1996, respectively 1,711 1,711
Capital Surplus 808,550 805,170
Retained Earnings 358,456 65,989
Treasury Stock, at cost, 9,026,448 and 800,000 Shares
in 1997 and 1996, respectively (323,026) (25,200)
Cumulative Translation Adjustment (76,771) (11,752)
Unrealized Gains on Investments 32,650 36,695
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 801,570 872,613
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,579,520 $ 1,874,982
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
10
<PAGE>
COGNIZANT CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
Dollar amounts in thousands 1997 1996 1995
====================================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $312,350 $195,451 $ 88,881
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 117,314 133,861 132,532
Net Gains from Dispositions (9,391) (200) (15,124)
Write-Off of Purchased In-Process Research and Development -- 33,233 --
Restructuring Provisions -- -- 12,800
Restructuring Payments -- (11,515) (15,544)
Postemployment Benefit Expense -- 666 37,632
Postemployment Benefit Payments (7,129) (11,045) (18,480)
Non-Recurring Charge -- -- 90,070
Non-Recurring Charge Payments (5,255) (13,125) --
Net Increase in Accounts Receivable (1,378) (19,576) (83,035)
Net Increase in Deferred Revenue 9,973 23,276 53,788
Equity Income, Net of Taxes (38,040) -- --
Minority Interests 4,797 11,710 14,696
Deferred Income Taxes 38,562 16,566 (13,392)
Net (Decrease) Increase in Accrued Income Taxes (21,352) 23,606 (35,994)
Net (Increase) Decrease in Other Working Capital Items (43,437) (30,885) 39,709
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 357,014 352,023 288,539
- - ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Maturities of Marketable Securities -- 193,392 40,338
Payments for Marketable Securities -- (165,791) (70,546)
Payments for Acquisitions of Businesses -- (24,386) (10,916)
Proceeds from Sale of Businesses and Investments 44,901 1,565 11,349
Capital Expenditures (71,894) (74,963) (77,032)
Additions to Computer Software (66,673) (49,395) (70,565)
Additions to Other Assets (32,905) (19,187) (4,694)
Increase in Other Investments-Net (16,705) (24,423) (8,232)
Change of Gartner Group to Equity Basis (123,697) -- --
Payments for Purchase of Gartner Group Common Stock -- (49,419) (8,372)
Other 26,294 54,542 50,501
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (240,679) (158,065) (148,169)
- - ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for Purchase of Treasury Stock (324,767) -- --
Proceeds from Exercise of Stock Options 26,409 557 --
Dividends Paid (19,883) -- --
Proceeds from Employee Stock Purchase Plan 1,683 -- --
Other Stock Transactions with Employees -- 14,377 5,149
Proceeds from Issuance of Purchased Stock Options -- 8,699 --
Net Transfers from (to) The Dun & Bradstreet Corporation -- 44,880 (113,051)
Minority Interest Financing 100,000 -- --
Payment of Short-Term Debt -- (50,000) --
Other 1,360 62,018 (8,193)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (215,198) 80,531 (116,095)
- - ------------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (11,222) (3,074) 4,846
- - ------------------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (110,085) 271,415 29,121
Cash and Cash Equivalents, Beginning of Year 428,520 157,105 127,984
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $318,435 $428,520 $157,105
====================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Year for Interest $ 2,293 $ 1,463 $ 425
Cash Paid during the Year for Income Taxes $ 72,827 $ 48,372 $ 26,956
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
11
<PAGE>
COGNIZANT CORPORATION
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Dollar amounts in thousands, except per share data
====================================================================================================================================
UNREALIZED
CUMULATIVE GAINS
THREE YEARS ENDED DIVISIONAL COMMON CAPITAL RETAINED TREASURY TRANSLATION (LOSSES) ON
DECEMBER 31, 1997 EQUITY STOCK SURPLUS EARNINGS STOCK ADJUSTMENT INVESTMENTS TOTAL
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 622,253 $ -- $ -- $ -- $ -- $ (15,770) $ -- $ 606,483
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income 88,881 88,881
Net Transfers to The Dun &
Bradstreet Corporation (113,051) (113,051)
Change in Cumulative
Translation Adjustment 22,275 22,275
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 598,083 -- -- -- -- 6,505 -- 604,588
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income 129,462 129,462
Net Transfers from The Dun &
Bradstreet Corporation 44,880 44,880
Change in Cumulative
Translation Adjustment (16,817) (16,817)
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 1, 1996 -- 1,711 795,914 -- (25,200) (10,312) -- 762,113
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income 65,989 65,989
Exercise of Stock Options (18,467) 557 557
Restricted Stock Plan (6,286) 210 210
Less: Unearned Portion (210) (210)
Purchase of Stock Options
(2,692,700) 8,699 8,699
Change in Cumulative
Translation Adjustment (1,440) (1,440)
Unrealized Gains on
Investments--Net 36,695 36,695
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 -- 1,711 805,170 65,989 (25,200) (11,752) 36,695 872,613
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income 312,350 312,350
Cash Dividends ($.12 per
share) (19,883) (19,883)
Exercise of Stock Options
(37,768) 1,151 1,151
Treasury Stock Reissued Under:
Exercise of Stock Options
(818,925) 2,187 25,258 27,445
Restricted Stock Plan
(41,400) 1,741 1,741
Less: Unearned Portion (1,741) (1,741)
Plus: Earned Portion 42 42
Employee Stock Purchase Plan
(46,645) 1,683 1,683
Treasury Shares Acquired
(9,133,418) (324,767) (324,767)
Change in Cumulative
Translation Adjustment (65,019) (65,019)
Unrealized Loss on
Investments--Net (4,045) (4,045)
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ -- $ 1,711 $808,550 $358,456 $(323,026) $ (76,771) $ 32,650 $ 801,570
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
12
<PAGE>
COGNIZANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Note 1. Basis of Presentation
Cognizant Corporation (the "Company") integrates information and technology
to create business insight. The Company includes IMS International, Inc.
("IMS"), Nielsen Media Research, Inc. ("Nielsen Media Research"), Erisco Inc.
("Erisco"), Cognizant Technology Solutions Corporation ("CTS"), Cognizant
Enterprises, Inc. ("Enterprises"), SSJ K.K. ("Super Systems Japan"), and Pilot
Software, Inc. ("Pilot"), which was divested in July 1997. During 1997,the
Company's voting interest in Gartner Group, Inc. ("Gartner") fell below 50% due
principally to Gartner stock option exercises. Accordingly, the Company has
deconsolidated its investment in Gartner and accounted for its interest on an
equity basis for the year-ended December 31, 1997. The prior years' financial
statements, however, continue to account for Gartner as a consolidated
subsidiary.
On November 1, 1996 (the "Distribution Date"), The Dun & Bradstreet
Corporation ("D&B") distributed to its shareholders all of the outstanding
shares of common stock of the Company, then a wholly-owned subsidiary of D&B
(the "Distribution"). In the Distribution, holders of D&B common stock received
one share of the Company's common stock for every share of D&B common stock
held.
These financial statements reflect the financial position, results of
operations and cash flows of the Company as if it were a separate entity for all
periods presented. D&B's historical basis in the assets and liabilities of the
Company has been carried over.
The financial statements for 1996 and 1995 also include allocations of
certain D&B corporate headquarters assets (including prepaid pension assets),
liabilities (including pension and postretirement benefits) and expenses
(including cash management, legal, accounting, tax, employee benefits, insurance
services, data services and other D&B corporate overhead) relating to the
Company's businesses that were transferred to the Company from D&B. Management
believes these allocations are reasonable. However, the financial information
included herein for 1996 and 1995 may not necessarily reflect the financial
position, results of operations, and cash flows had the Company been a separate
entity.
- - --------------------------------------------------------------------------------
Note 2. Summary of Significant Accounting Policies
Consolidation. The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries after elimination of all material
intercompany accounts and transactions. Investments in companies over which the
Company has significant influence but not a controlling interest are accounted
for under the equity method of accounting. The Company recognizes as income any
gains or losses related to the sale or issuance of stock by a consolidated
subsidiary or a company accounted for under the equity basis. The financial
statements of IMS and its affiliates reflect a fiscal year ending November 30 to
facilitate timely reporting of the Company's financial results.
Cash Equivalents. The Company considers all highly liquid investments with a
maturity of 90 days or less at the time of purchase to be cash equivalents.
Marketable Securities. The Company values all marketable securities that mature
in more than 90 days at amortized cost (which approximates market value) as it
is management's intent to hold these instruments to maturity. Other marketable
securities, principally consisting of equity securities, are classified as
available-for-sale. Such securities are carried at fair value, with the
unrealized gains and losses, net of income taxes, reported as a component of
shareholders' equity.
Property, Plant and Equipment. Buildings and machinery and equipment are
depreciated over their estimated useful lives using principally the
straight-line method. Leasehold improvements are amortized on a straight-line
basis over the shorter of the term of the lease or the estimated useful life of
the improvement.
Computer Software. Direct costs incurred in the development of computer software
are capitalized in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed". Costs incurred to establish technological
feasibility of a computer software product are expensed in the periods in which
they are incurred. Capitalization ceases and amortization starts when the
product is available for general release to customers. Computer software costs
are being amortized, on a product by product basis, generally over three to five
years. Annual amortization is the greater of the amount computed using (a) the
ratio that gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product, or (b) the straight-line
method over the remaining estimated economic life of the product. At each
balance sheet date, the Company reviews the recoverability of the unamortized
capitalized costs of computer software products by comparing the carrying value
of computer software with its estimated net realizable value.
Goodwill represents the excess purchase price over the fair value of
identifiable net assets of businesses acquired and is amortized on a
straight-line basis over seven to forty years. At each balance sheet date, the
Company reviews the recoverability of goodwill, not identified with impaired
long-lived assets, based on estimated undiscounted future cash flow from
operating activities compared with the carrying value of goodwill and recognizes
any impairment on the basis of such comparison. The recognition and measurement
of goodwill impairment is assessed at the business unit level.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Other Assets. Other intangibles result from acquisitions and database
development and are included in other assets. Other intangibles are being
amortized, using principally the straight-line method, over three to seven
years.
The Company adopted the provisions of SFAS No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in
1995. This statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In general, this statement requires recognition of an
impairment loss when the sum of undiscounted expected future cash flow is less
than the carrying amount of such assets. The measurement for such impairment
loss is then based on the fair value of the asset. See Note 6 to the
Consolidated Financial Statements.
Revenue Recognition. The Company recognizes revenue as earned, which is over the
contract period or as the information is delivered or related services are
performed. Amounts billed for service and subscriptions are credited to deferred
revenues and reflected in operating revenue over the subscription term, which is
generally one year. Software license revenue is recognized upon delivery of the
software and documentation when there are no significant remaining related
obligations. Revenue from post-contract customer support (maintenance) is
recognized on a straight-line basis over the term of the contract.
Foreign Currency Translation. The Company has significant investments in
non-U.S. countries. Therefore, changes in the value of foreign currencies affect
the Company's consolidated financial statements when translated into U.S.
dollars.
For all operations outside the United States where the Company has
designated the local currency as the functional currency, assets and liabilities
are translated using end-of-period exchange rates; revenues and expenses are
translated using average rates of exchange. For these countries, currency
translation adjustments are accumulated in a separate component of shareholders'
equity whereas realized transaction gains and losses are recognized in other
expense--net. For operations in countries that are considered to be highly
inflationary, where the U.S. dollar is designated as the functional currency,
monetary assets and liabilities are translated using end-of-period exchange
rates, non-monetary accounts are translated using historical exchange rates, and
all translation and transaction adjustments are recognized in other
expense--net.
Income Taxes. Prior to the Distribution, the Company was included in the Federal
and certain state and non-U.S. income tax returns of D&B. The provision for
income taxes in the Company's financial statements has been calculated on a
separate-company basis. Income taxes paid on behalf of the Company by D&B, prior
to the Distribution, are included in Divisional Equity.
Divisional Equity. Divisional Equity includes historical investments and
advances from D&B prior to the Distribution, including net transfers to/from
D&B, third-party liabilities paid on behalf of the Company by D&B and amounts
due to/from D&B for services and other charges, as well as current-period income
through the Distribution Date.
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, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates. Estimates are used for, but not
limited to, the accounting for: allowance for uncollectible accounts receivable,
depreciation and amortization, capitalized software costs, employee benefit
plans, taxes, restructuring reserves and contingencies.
Earnings Per Share. In 1997, the Company adopted SFAS No. 128, "Earnings Per
Share". Previously reported earnings per share amounts have been restated. Basic
earnings per share are calculated by dividing net income by weighted average
common shares. Diluted earnings per share are calculated by dividing net income
by dilutive potential common shares. Dilutive potential common shares are
calculated in accordance with the Treasury stock method, which assumes that
proceeds from the exercise of all options are used to repurchase common stock at
market value. The amount of shares remaining after the proceeds are exhausted
represent the potentially dilutive effect of the securities. The computation
includes the weighted average number of shares of D&B common stock outstanding
through the Distribution Date, reflecting the one-for-one distribution ratio,
and the weighted average number of shares of Cognizant common stock outstanding
since the Distribution.
Concentrations of Credit Risk. IMS maintains accounts receivable balances
($228,284 and $237,279 at December 31, 1997 and 1996, respectively), principally
from customers in the pharmaceutical industry.
Reclassifications. Certain prior-year amounts have been reclassified to conform
with the 1997 presentation.
Recently Issued Accounting Standards: In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income",
which requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. This statement is effective for periods beginning after December 15,
1997. The Company is in the process of determining its preferred disclosure
format.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions And Other Postretirement Benefits", which changes current
financial statement disclosure requirements from those required under SFAS No.
87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The statement does not change the
existing measurement or recognition provisions of SFAS Nos. 87, 88 or 106, and
is effective for the fiscal years beginning after December 15, 1997. The Company
is in the process of evaluating the disclosure requirements under this standard.
- - --------------------------------------------------------------------------------
Note 3. Investment in Gartner
In the third quarter of 1997, the Company's voting interest in Gartner fell
below 50% as a result of the exercise of Gartner employee stock options and
employee stock purchases. Accordingly, the Company has deconsolidated Gartner
and is accounting for its ownership interest on the equity basis.
The Company has restated the first and second quarter Statements of Income
to reflect the change to equity accounting as of January 1, 1997. Generally
accepted accounting principles do not permit the restatement of prior-year
financial results.
During the third and fourth quarters of 1997, the proceeds from the
issuance of shares to Gartner employees, including associated tax benefits,
increased Gartner's equity and reduced the Company's ownership interest by
slightly less than 2%. This reduction in ownership was partially offset by an
increase in Gartner treasury stock. As a result, the Company recognized within
other income/expense-net, a pre-tax unrealized gain on its investment in Gartner
("SAB 51 Gain") of $14,689 corresponding to the net increase in the underlying
value of its investment in Gartner.
Selected financial information regarding the results of operations and
financial position of Gartner is summarized below:
(Unaudited)
Years Ended December 31,
- - --------------------------------------------------------------------------------
1997 1996
- - --------------------------------------------------------------------------------
Condensed Income Statement Information
Operating Revenue $548,539 $423,565
Operating Income $126,239 $ 61,624
Income Before Provision for Taxes $134,385 $ 65,803
Net Income $ 79,732 $ 23,987
Condensed Balance Sheet Information
Current Assets $439,356 $325,904
Non-current Assets $237,284 $133,031
Current Liabilities $338,087 $273,616
Non-current Liabilities $ 3,933 $ 2,871
================================================================================
Note 4. Dispositions
During 1997, the Company recorded a $39,336 pre-tax gain on the sale of its
investment in WEFA Group, Inc. and a portion of its investment in TSI
International, Inc. and Aspect Development, Inc. These investments, which were
part of Enterprises' portfolio, generated cash proceeds of $43,601.
Additionally, in the third quarter, the Company sold Pilot and recorded a
non-cash pre-tax loss of $29,945.
- - --------------------------------------------------------------------------------
Note 5. Investment Partnership
Three of the Company's subsidiaries have contributed assets to, and
participate in, a limited partnership. One subsidiary serves as general partner,
and all other partners hold limited partnership interests. The partnership,
which is a separate and distinct legal entity, is in the business of licensing
database assets and computer software. In the second quarter of 1997,
third-party investors contributed $100,000 to the partnership in exchange for
limited partnership interests. For financial reporting purposes, the assets,
liabilities, results of operations and cash flows of the partnership are
included in the Company's consolidated financial statements. The third-parties'
investments in this partnership are reflected in minority interests.
- - --------------------------------------------------------------------------------
Note 6. Non-Recurring Charges
In the fourth quarter of 1995, the Company recorded within operating costs
a charge of $90,070. This charge primarily reflected an impairment loss in
connection with the adoption of the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ($40,570), the write-off of certain computer software ($20,300), a provision
for postemployment benefits ($7,400) under the Company's severance plan and an
accrual for contractual obligations that have no future economic benefits
($21,800).
SFAS No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In connection with
this review, the Company recorded an impairment loss of $40,570 reflecting the
revaluation of certain fixed assets, administrative and production systems and
other intangibles that were replaced or no longer used. In addition, the Company
recognized a charge of $20,300, principally related to the write-off of certain
computer software product lines at Pilot.
The provision for postemployment benefits of $7,400 represented the cost of
workforce reductions. The accrual for contractual obligations that have no
future economic benefits of $21,800 related to the acquisition of certain
information and other services that were no longer used by the Company.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
This 1995 non-recurring charge evolved from D&B's annual budget and
strategic planning process, which included a review of D&B's underlying cost
structure, products and services and assets used in the business. Based upon
such analysis, management, having the authority to approve such business
decisions, committed in December 1995 to a plan to discontinue certain product
lines and dispose of certain other assets, resulting in the charge. These
decisions were not reversed or modified as a result of D&B's reorganization plan
relating to the Distribution, which was reviewed and, subject to certain
conditions, approved by the Board of Directors of D&B on January 9, 1996.
- - --------------------------------------------------------------------------------
Note 7. Restructuring
In 1995, the Company recorded a $12,800 restructuring provision primarily
to write-off software for product lines that were discontinued at Sales
Technologies. All restructuring actions were completed in 1996.
DECEMBER 31, CASH DECEMBER 31,
CATEGORY 1995 ITEMS 1996
- - --------------------------------------------------------------------------------
Real Estate Cost Reductions $ 1,059 $ (1,059) --
Discontinued Production
and Data Collection Systems
and Products 4,400 (4,400)
Other 6,056 (6,056) --
- - --------------------------------------------------------------------------------
Total $11,515 $(11,515) --
================================================================================
Note 8. Acquisitions
In 1996 and 1995, the Company acquired various companies in separate
transactions that were accounted for as purchases.
The aggregate cash purchase price of such acquisitions totaled $24,386 in
1996. The largest acquisition during 1996 was Gartner's acquisition of J3
Learning Corporation ("J3"), a leading provider of software educational
materials for corporate and individual training. Gartner acquired all of the
outstanding shares of J3 for consideration of $8,000 in cash, approximately
$35,400 in Gartner Group Class A Common Stock, and options to purchase Gartner
Group Class A Common Stock, which had a value of $1,300. Operating costs and
selling and administrative expenses in 1996 include a one-time acquisition
related charge of $33,233 for in-process research and development costs
associated with J3.
The aggregate purchase price of such acquisitions totaled $10,916 in 1995.
The results of operations of all purchases are included in the Consolidated
Statements of Income from the date of acquisition. Had the acquisitions made in
1995 and 1996 been consummated on January 1 of the year preceding the year of
acquisition, the results of these acquired operations would not have had a
significant impact on the Company's consolidated results of operations for any
of the years presented.
Note 9. Marketable Securities and Other
Investments
Amounts included below are classified in the consolidated statements of
financial position as marketable securities and other investments. Cash
equivalents have been excluded from these disclosures.
December 31,
------------------------------------------
1997 1996
- - --------------------------------------------------------------------------------
FAIR Fair
COST VALUE Cost Value
- - --------------------------------------------------------------------------------
Debt Securities of States
and Other Subdivisions
of the U.S.
Government -- -- $23,317 $23,317
Equity Securities $3,491 $48,463 4,357 58,320
- - --------------------------------------------------------------------------------
Total $3,491 $48,463 $27,674 $81,637
================================================================================
Note 10. Financial Instruments
Foreign Exchange Risk Management
The Company transacts business in virtually every part of the world and is
subject to risks associated with changing foreign exchange rates. The Company's
objective is to reduce earnings and cash flow volatility associated with foreign
exchange rate changes to allow management to focus its attention on its core
business activities. Accordingly, the Company enters into various contracts
which change in value as foreign exchange rates change to protect the value of a
portion of committed and anticipated foreign currency revenues and
non-functional currency assets and liabilities. By policy, the Company maintains
hedge coverage between minimum and maximum percentages of its anticipated
foreign exchange exposures over the next year. The gains and losses on these
hedges offset changes in the value of the related exposures.
It is the Company's policy to enter into foreign currency transactions only
to the extent necessary to meet its objectives as stated above. The Company does
not enter into foreign currency transactions for speculative purposes.
The Company uses forward contracts and purchased currency options to hedge
committed and anticipated foreign currency denominated revenues, respectively.
The principal currencies hedged are the Japanese yen, Swiss franc, German mark
and Italian lira. The Company also uses forward contracts to hedge
non-functional currency assets and liabilities.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
At December 31, 1997, the notional amounts of the Company's risk management
contracts were $212,000 and all contracts mature in 1998.
Gains and losses on contracts hedging anticipated and committed foreign
currency revenues are deferred until such revenues are recognized, and offset
changes in the value of such revenues. At December 31, 1997, the Company had
unrealized deferred gains of $2,768 related to foreign currency hedge
transactions. Deferred amounts to be recognized can change with market
conditions and will substantially be offset by changes in the value of the
related hedged transactions. The impact of foreign exchange risk management
activities on operating income in 1997 was a net gain of $15,617. Gains and
losses on contracts hedging non-functional currency assets and liabilities are
not deferred and are included in current income in other income/expense--net.
Fair Value of Financial Instruments
At December 31, 1997, the Company's financial instruments included cash,
cash equivalents, receivables, accounts payable and foreign exchange risk
management contracts. At December 31, 1997, the fair values of cash, cash
equivalents, receivables and accounts payable approximated carrying values due
to the short-term nature of these instruments. The estimated fair values of the
foreign exchange risk management contracts were determined based on quoted
market prices.
Credit Concentrations
The Company continually monitors its positions with, and the credit quality
of, the financial institutions which are counterparties to its financial
instruments and does not anticipate non-performance by the counterparties. The
Company would not realize a material loss as of December 31, 1997 in the event
of non-performance by any one counterparty. The Company enters into transactions
only with financial institution counterparties which have a credit rating of A
or better. In addition, the Company limits the amount of credit exposure with
any one institution.
IMS maintains accounts receivable balances ($228,284 and $237,279 at
December 31, 1997 and 1996, respectively), principally from customers in the
pharmaceutical industry. The Company's trade receivables do not represent
significant concentrations of credit risk at December 31, 1997 due to the high
quality of its customers and their dispersion across many geographic areas.
- - --------------------------------------------------------------------------------
Note 11. Pension and Postretirement Benefits
Pension Plans. The Company has a defined benefit pension plan covering all
employees in the United States in certain of the Company's businesses. The plan
is a cash balance pension plan under which 6% of creditable compensation plus
interest is credited to eligible employee retirement accounts on a monthly
basis. At the time of retirement, the vested employee's account balance is
actuarially converted into an annuity. Pension costs are determined actuarially
and are funded to the extent allowable under the Internal Revenue Code.
Supplemental plans in the United States are maintained to provide retirement
benefits in excess of levels allowed by ERISA. The Company's non-U.S.
subsidiaries provide retirement benefits for employees consistent with local
practices, primarily using defined benefit or termination indemnity plans.
Consolidated pension costs are summarized as follows:
1997 1996 1995
- - --------------------------------------------------------------------------------
U.S. Plans--D&B Allocation $ -- $2,230 $1,241
U.S. Plans--Post Distribution 2,145 291 --
Non-U.S. Plans 4,837 4,364 4,078
- - --------------------------------------------------------------------------------
Total Pension Cost $6,982 $6,885 $5,319
================================================================================
The components of net periodic pension cost for 1997 (1996 and 1995 are
unavailable) are summarized as follows:
1997
- - ----------------------------------------
Service Cost $ 9,959
Interest Cost 10,503
Actual Return on Plan Assets (20,357)
Net Amortization and Deferral 6,877
- - ----------------------------------------
Net Periodic Pension Cost $ 6,982
========================================
In addition, during 1996 the Company recognized a pension curtailment gain
of $1,895 relating to a reduced level of participation in the Company's
supplemental plan and workforce reductions.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
The status of all defined benefit pension plans at December 31, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
Funded Unfunded
- - -------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair Value of Plan Assets $ 157,643 $ 151,724 $ -- $ --
- - -------------------------------------------------------------------------------------------------------------------
Actuarial Present Value of Accumulated Benefit Obligation:
Vested (112,663) (120,602) (5,607) (4,857)
Nonvested (1,900) (1,611) -- (296)
- - -------------------------------------------------------------------------------------------------------------------
Accumulated Benefit Obligation (114,563) (122,213) (5,607) (5,153)
Effect of Projected Future Salary Increases (11,650) (12,088) (9,534) (7,100)
- - -------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation (126,213) (134,301) (15,141) (12,253)
- - -------------------------------------------------------------------------------------------------------------------
Plan Assets in Excess of (Less Than) Projected Benefit Obligation 31,430 17,423 (15,141) (12,253)
Unrecognized Net (Gain) Loss (11,306) 3,652 3,135 478
Unrecognized Prior Service Cost (Credit) (6,476) (6,547) 639 833
Unrecognized Net Transition (Asset) Obligation (1,818) (1,226) 49 49
Adjustment to Recognize Minimum Liability -- -- -- (123)
- - -------------------------------------------------------------------------------------------------------------------
Prepaid (Accrued) Pension Cost $ 11,830 $ 13,302 $(11,318) $(11,016)
===================================================================================================================
</TABLE>
The weighted average expected long-term rate of return on pension plan
assets was 9.28%, 9.31% and 9.82% for 1997, 1996 and 1995, respectively. At
December 31, 1997 and 1996, the projected benefit obligation was determined
using weighted average discount rates of 7.56% and 7.59%, respectively, and
weighted average rates of increase in future compensation levels of 4.66% and
4.59%, respectively. Plan assets are invested in diversified portfolios that
consist primarily of equity and debt securities.
Certain employees of the Company in the United States also are eligible to
participate in the Company-sponsored defined contribution plan. The Company's
businesses make a matching contribution of up to 50% of the employee's
contribution based on specified limits of the employee's salary. The Company's
expense related to this plan was $4,666, $4,075 and $3,178 for the years 1997,
1996 and 1995, respectively.
Postretirement Benefits. In addition to providing pension benefits, the Company
provides various healthcare and life insurance benefits for retired employees.
Employees at certain businesses of the Company in the United States become
eligible for these benefits if they reach normal retirement age while working
for the Company. Certain of the Company's subsidiaries outside the United States
have postretirement benefit plans, although most participants are covered by
government-sponsored or administered plans. The cost of Company-sponsored
postretirement benefit plans outside the U.S. is not significant.
The Company has recorded postretirement benefits costs totaling $1,200,
$2,619 and $3,447 for the years 1997, 1996 and 1995, respectively.
The status of postretirement benefit plans other than pensions at December
31, 1997 and 1996 is as follows:
1997 1996
- - --------------------------------------------------------------------------------
Accumulated Postretirement
Benefit Obligation:
Active Employees--Eligible $ (8,110) $ (8,350)
Active Employees--Not Yet Eligible (6,830) (6,530)
- - --------------------------------------------------------------------------------
Accumulated Postretirement
Benefit Obligation (14,940) (14,880)
Unrecognized Net Loss 540 300
Unrecognized Prior Service Credit (2,110) (850)
- - --------------------------------------------------------------------------------
Accrued Postretirement Benefit Cost $(16,510) $(15,430)
================================================================================
At December 31, 1997 and 1996 the accumulated postretirement benefit
obligation was determined using a discount rate of 7.0% and 7.5%, respectively.
The assumed rate of future increases in per capita cost of covered healthcare
benefits is 7.3% in 1998, decreasing gradually to 5.0% for the year 2021 and
remaining constant thereafter. Increasing the assumed healthcare cost trend rate
by one percentage point in each year would increase the accumulated
postretirement benefit obligation by $2,007 and would increase annual aggregate
service and interest costs by $257.
- - --------------------------------------------------------------------------------
Note 12. Employee Stock Plans
The Company has a Key Employees Stock Incentive Plan which provides for the
grant of stock options and restricted stock to eligible employees. In addition
it provides an opportunity for the purchase of stock options with a prepayment
equal to ten percent of the exercise price, with the remaining payment due when
the options are exercised. All options have a life of ten years, vest
proportionally over six years and have an exercise price equal to the fair
market value of the common stock on the grant date.
The Company adopted an Employee Stock Purchase Plan in 1997 which allows
eligible employees to purchase a limited amount of common stock at the end of
each quarter at
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
a price equal to the lesser of 90% of fair market value on (a) the first trading
day of the quarter, or (b) the last trading day of the quarter. Fair market
value is defined as the average of the high and low prices of the shares on the
relevant day.
Gartner has several stock option and stock purchase plans. The exercise
price of options granted under the plans is equal to the fair market value at
the date of grant of Gartner stock. Options outstanding and exercisable were
15,496,068 and 6,670,813, respectively, at December 31, 1997, at prices ranging
from $0.02 to $35.38 per share.
In July 1997, CTS adopted a Key Employees Stock Option Plan which provides
for the grant of stock options to eligible employees. Options granted under this
plan may not be granted at an exercise price less than fair market value of the
underlying shares on the date of grant. All such options become exercisable in
April 2006 with certain acceleration provisions of the vesting period to 25% per
year over four years from the grant date should an initial public offering or
change in control occur. At December 31, 1997, 800,500 options were outstanding
at a weighted average exercise price of $2.50 per share. None were exercisable.
CTS also has a Key Employees' Restricted Stock Purchase Plan which allows
eligible employees to purchase a limited amount of restricted common stock at
the time of grant at a price equal to the fair market value on the effective
date of the award. At December 31, 1997, 175,000 shares have been purchased at
an average exercise price of $2.50. The restrictions lapse should an initial
public offering or change in control occur.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which requires that companies with stock-based compensation plans
either recognize compensation expense based on the fair value of options granted
or continue to apply the existing accounting rules and disclose pro forma net
income and earnings per share assuming the fair value method had been applied.
The Company has chosen to continue applying Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for the fixed stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans, consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
Years Ended December 31,
-------------------------------
1997 1996 1995
- - --------------------------------------------------------------------
Net Income As reported $312,350 $195,451 $88,881
Pro forma $284,634 $188,705 $88,120
Earnings Per Share:
Basic As reported $1.89 $1.15 $.52
Pro forma $1.72 $1.11 $.52
Diluted As reported $1.86 $1.15 $.52
Pro forma $1.70 $1.11 $.52
===================================================================
Note: The pro forma disclosures shown above are not representative of the
effects on net income and earnings per share in future years.
The fair value of the Company's stock options used to compute pro forma net
income and earnings per share disclosures is the estimated present value at
grant date using the Black-Scholes option pricing model. The following
weighted-average assumptions were used for 1997, 1996 and 1995: dividend yield
of 0.3%; expected volatility of 25%; a risk-free interest rate of 5.9%; and an
expected term of 4.5 years. The weighted average fair value of the Company's
stock options granted in 1997, 1996 and 1995 are $13.12, $9.76 and $7.61,
respectively.
The fair value of Gartner stock options used to compute the Company's pro
forma net income and earnings per share disclosures was computed in the same
manner with the following weighted-average assumptions for 1997, 1996 and 1995:
dividend yield of 0%; expected volatility of 40%; a risk-free interest rate of
6.0%; and an expected term of 3.5 years. The weighted average fair value of
Gartner stock options granted in 1997, 1996 and 1995 are $10.12, $11.80 and
$5.82, respectively.
Immediately following the Distribution, outstanding awards under the D&B
Key Employees Stock Option Plans held by company employees were cancelled and
replaced by substitute awards under the Company's Key Employees Stock Incentive
Plan. The substitute awards had the same ratio of the exercise price per option
to the market value per share, the same aggregate difference between market
value and exercise price and the same vesting provisions, option periods and
other terms and conditions as the options they replaced.
At December 31, 1997, outstanding options for Cognizant common stock held
by Company employees, including the substitute awards mentioned above, totaled
21,922,390, of which 4,386,181 had vested and were exercisable. The option
prices range from $22.99 to $44.47 per share and are exercisable over periods
ending no later than 2007. At December 31, 1996, outstanding options for
Cognizant common stock held by Company employees totaled 20,226,749, of which
2,168,714 had vested and were exercisable. The option prices ranged from $22.99
to $35.31 per share.
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
- - ----------------------------------------------------------
Options Outstanding,
November 1, 1996 3,340,778 $31.13
Granted 14,209,500 $33.37
Purchased 2,702,700 $33.37
Exercised (18,467) $30.17
Expired (7,762) $33.75
- - ----------------------------------------------------------
Options Outstanding,
December 31, 1996 20,226,749 $33.00
==========================================================
Granted 3,878,237 $42.35
Exercised (856,693) $30.78
Expired (1,325,903) $33.19
- - ----------------------------------------------------------
Options Outstanding,
December 31, 1997 21,922,390 $34.75
==========================================================
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
DECEMBER 31, 1997 -----------------------------------------------------
RANGE OF -------------------------------- REMAINING OPTION EXERCISE PRICES
EXERCISE NUMBER NUMBER CONTRACTUAL -------------------------------
PRICES OUTSTANDING EXERCISABLE LIFE OUTSTANDING EXERCISABLE
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$40.00 - $44.47 3,095,250 0 9.8 years $44.25 $44.25
$37.56 - $38.88 338,000 0 9.5 years $37.58 $37.58
$30.31 - $35.31 17,285,856 3,368,490 7.7 years $33.43 $33.50
$22.99 - $29.91 1,203,284 1,017,691 4.5 years $28.07 $27.75
-------------------------------
21,922,390 4,386,181
========================================================================================================================
</TABLE>
Note 13. Income Taxes
Income before provision for income taxes consisted of:
1997 1996 1995
- - --------------------------------------------------------
U.S. $230,717 $162,128 $ 43,495
Non-U.S. 199,518 186,893 119,062
- - --------------------------------------------------------
$430,235 $349,021 $162,557
========================================================
The provision (benefit) for income taxes consisted of:
1997 1996 1995
- - --------------------------------------------------------
U.S. Federal and State:
Current $ 55,647 $ 53,489 $ 57,596
Deferred (8,437) 31,178 (23,871)
- - --------------------------------------------------------
47,210 84,667 33,725
- - --------------------------------------------------------
Non-U.S.:
Current 57,949 61,880 33,632
Deferred 12,726 7,023 6,319
- - --------------------------------------------------------
70,675 68,903 39,951
- - --------------------------------------------------------
Total $117,885 $153,570 $73,676
========================================================
The following table summarizes the significant differences between the U.S.
Federal statutory taxes and the Company's provision for income taxes for
consolidated financial statement purposes.
1997 1996 1995
- - --------------------------------------------------------------------------------
Tax Expense at Statutory Rate $ 150,582 $122,157 $ 56,895
State and Local Income Taxes,
net of Federal Tax Benefit 13,704 12,729 13,079
Non-U.S. Taxes (623) 2,939 (3,684)
Purchased In-Process R&D Costs -- 11,632 --
Goodwill 1,396 3,709 4,457
Amortization of Intangibles (48,612) -- --
Other 1,438 404 2,929
- - --------------------------------------------------------------------------------
Total Taxes $ 117,885 $153,570 $ 73,676
================================================================================
The Company's deferred tax assets (liabilities) are comprised of the
following at December 31:
1997 1996
- - ------------------------------------------------------
Deferred Tax Assets:
Operating Losses $ 23,236 $ 34,225
Intangibles 31,552 --
Postretirement Benefits 6,009 5,274
Non-Recurring Charges 4,073 5,440
Postemployment Benefits 3,923 4,969
Bad Debts 1,599 2,488
Other 4,706 9,006
- - ------------------------------------------------------
75,098 61,402
Valuation Allowance (21,826) (29,784)
- - ------------------------------------------------------
53,272 31,618
- - ------------------------------------------------------
Deferred Tax Liabilities:
Intangibles (66,322) (67,818)
Deferred Revenue (37,274) (16,966)
Marketable Securities (20,522) (17,268)
Depreciation (17,522) (12,223)
Other (14,535) (7,442)
- - ------------------------------------------------------
(156,175) (121,717)
- - ------------------------------------------------------
Net Deferred Tax Liability $(102,903) $(90,099)
======================================================
The 1997 net deferred tax liability consists of a non-current deferred tax
liability of $113,749, offset by a current deferred tax asset of $10,846
included in Other Current Assets. (See Note 18 to the Consolidated Financial
Statements).
The Company has established a valuation allowance attributable to deferred
tax assets in certain U.S. state and non-U.S. tax jurisdictions where, based on
available evidence, it is more likely than not that such assets will not be
realized.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Undistributed earnings of non-U.S. subsidiaries aggregated approximately
$479,960 at December 31, 1997. Deferred tax liabilities have not been recognized
for these undistributed earnings because it is the Company's intention to
permanently reinvest such undistributed earnings outside the U.S. If such
earnings are repatriated in the future, or are no longer deemed to be
permanently reinvested, applicable taxes will be provided for on such amounts.
It is not currently practicable to determine the amount of applicable taxes.
- - --------------------------------------------------------------------------------
Note 14. Commitments
Certain of the Company's operations are conducted from leased facilities,
which are under operating leases. Rental expense under real estate operating
leases for the years 1997, 1996 and 1995 was $28,298, $37,805, and $34,997,
respectively. The totals include $387 and $446 in 1996, and 1995 respectively,
for facilities usage charged by D&B or an affiliate. The minimum annual rental
expense for real estate operating leases that have remaining noncancelable lease
terms in excess of one year, net of sublease rentals, at December 31, 1997 was:
1998--$27,896; 1999--$26,849; 2000--$25,901; 2001--$24,522; 2002--$18,639 and an
aggregate of $24,411 thereafter.
The Company also leases or participates in leases of certain computer and
other equipment under operating leases. These leases are frequently renegotiated
or otherwise changed as advancements in computer technology produce
opportunities to lower costs and improve performance. Rental expense under
computer and other equipment leases was $30,286, $25,304, and $21,864 for 1997,
1996 and 1995, respectively. At December 31, 1997, the minimum annual rental
expense for computer and other equipment under operating leases that have
remaining noncancelable lease terms in excess of one year was: 1998--$27,069;
1999--$24,977; 2000--$13,425; 2001--$6,836 and 2002--$5,898.
The Company has agreements with various third parties to purchase certain
data processing and telecommunications services, extending beyond one year. At
December 31, 1997, the purchases covered by these agreements aggregated:
1998--$13,578; 1999--$13,638; and 2000--$5,880.
- - --------------------------------------------------------------------------------
Note 15. Other Transactions with Affiliates
Prior to the Distribution, D&B provided certain centralized services (see
Note 1 to the Consolidated Financial Statements) to the Company. Expenses
related to these services were allocated to the Company based on utilization of
specific services or, where not estimable, based on assets employed by the
Company in proportion to D&B's total assets. Management believes these
allocation methods are reasonable. These allocations (including data service
charges beginning in 1995) were $107,200 and $116,900 in 1996 and 1995,
respectively, and are included in operating costs and selling and administrative
expenses in the Consolidated Statements of Income. Amounts due to D&B for these
expenses are included in Divisional Equity.
Net transfers to or from D&B, included in Divisional Equity, include
advances and loans from affiliates, net cash transfers to or from D&B,
third-party liabilities paid on behalf of the Company by D&B, amounts due to or
from D&B for services and other charges, and income taxes paid on behalf of the
Company by D&B. No interest has been charged on these transactions. The weighted
average balance due from D&B was $466,938, and $452,693 for 1996 and 1995,
respectively.
The activity in the net transfers from (to) D&B account for the periods
through the Distribution Date included in Divisional Equity in the Consolidated
Statements of Shareholders' Equity is summarized as follows:
TEN MONTHS
ENDED Year Ended
OCTOBER 31, December 31,
1996 1995
- - -----------------------------------------------------------
D&B Services and Other Charges $ 111,806 $ 121,673
Loans and Advances--Net 137,639 44,917
U.S. Income Taxes 35,434 57,596
Cash Transfers--Net (239,999) (337,237)
- - -----------------------------------------------------------
Net Transfers from (to) D&B $ 44,880 $(113,051)
===========================================================
In connection with the Distribution, the Company received 800,000 shares of
new D&B common stock and 266,666 shares of ACNielsen Corporation ("ACNielsen")
common stock. In December 1996 the Company sold such shares to D&B and
ACNielsen, at fair market value, for $18,560 and $3,967, respectively. In
addition, the Company assumed $69,000 of liabilities (included in Other
Liabilities) which are subject to adjustment in accordance with the Distribution
Agreement, related to certain prior business transactions, and $50,000 of
short-term debt, which was repaid in December 1996.
For purposes of governing certain of the ongoing relationships between the
Company, D&B and ACNielsen after the Distribution and to provide for an orderly
transition, the Company, D&B and ACNielsen have entered into various agreements
including a Distribution Agreement, Tax Allocation Agreement, Employee Benefits
Agreement, Indemnity and Joint Defense Agreement, Television Audience
Measurement Master Agreement, Intellectual Property Agreement, Shared
Transaction Services Agreement, Data Services Agreement and Transition Services
Agreement. Among other things, the agreements set forth principles to be applied
in allocating certain Distribution-related costs and specify portions of
contingent liabilities to be shared if certain amounts are exceeded.
- - --------------------------------------------------------------------------------
Note 16. Capital Stock
On February 18, 1997 the Company announced that its board of directors had
authorized a systematic stock repurchase program to buy up to 8,500,000 shares
of the
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Company's outstanding common stock. The stock purchases are held in Treasury and
reissued upon exercise of employee stock options. This program was completed on
September 5, 1997 at a total cost of $299,737.
On October 21, 1997 the Company announced that its board of directors had
authorized a second systematic stock repurchase program to buy up to 10,000,000
shares of the Company's outstanding common stock. A portion of this program is
intended to cover option exercises. Through December 31, 1997, 574,600 shares
have been acquired at a total cost of $22,756.
Under a Shareholder Rights Plan adopted by the Board of Directors, each
certificate for a share of the Company's common stock also represents one
Preferred Share Purchase Right (a "Right"). In the event a person or group (an
"Acquiring Person") acquires beneficial ownership of, or commences or announces
an intention to make a tender offer for more than 15% of the outstanding shares
of common stock, each Right entitles the holder to purchase one one-thousandth
of a share of Series A Junior Participating Preferred Stock at $210 per each one
one-thousandth of a share (the "Purchase Price"). In the event a person or group
becomes an Acquiring Person, or the Company is acquired in a merger or other
business combination or 50% or more of its assets or earning power are sold,
each holder of a Right (other than an Acquiring Person) has the right to receive
common stock of the Company or the entity that engaged in such transaction, as
applicable, which has a market value of two times the Purchase Price. The
Rights, which do not have voting rights and are subject to adjustment in certain
circumstances, expire on October 23, 2006 and are redeemable by the Company at a
price of $.01 per Right under certain circumstances.
- - --------------------------------------------------------------------------------
Note 17. Litigation
The Company and its subsidiaries are involved in legal proceedings and
litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such current legal proceedings and litigation, if
decided adversely, could have a material effect on quarterly or annual operating
results or cash flows when resolved in a future period. However, in the opinion
of management, these matters will not materially affect the Company's
consolidated financial position.
In addition, on July 29, 1996, Information Resources, Inc. ("IRI") filed a
complaint in the United States District Court for the Southern District of New
York, naming as defendants D&B, A.C. Nielsen Company and IMS (the "IRI Action").
The complaint alleges various violations of the United States antitrust
laws, including alleged violations of Sections 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
latter claims relate to the acquisition by defendants of Survey Research Group
Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with IRI
when it agreed to be acquired by defendants and that the defendants induced SRG
to breach that agreement.
IRI's complaint alleges damages in excess of $350,000, which amount IRI has
asked to be trebled under the antitrust laws. IRI also seeks punitive damages in
an unspecified amount.
On October 15, 1996, defendants moved for an order dismissing all claims in
the complaint. On May 6, 1997 the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within sixty days.
The Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim
alleging that IRI has made false and misleading statements about its services
and commercial activities. On July 7, 1997, IRI filed an amended and restated
complaint repleading its alleged claim of attempted monopolization in the United
States and realleging its other claims. On August 18, 1997, defendants moved for
an order dismissing the amended claims. On December 1, 1997, the court denied
the motion and, on December 16, 1997, defendants filed a supplemental answer
denying the remaining material allegations of the amended complaint.
In connection with the IRI Action, D&B, ACNielsen Corporation ("ACNielsen")
(the parent company of A.C. Nielsen Company) and the Company have entered into
an Indemnity and Joint Defense Agreement (the "Indemnity and Joint Defense
Agreement") pursuant to which they agree (i) to certain arrangements allocating
potential liabilities ("IRI Liabilities") that may arise out of or in connection
with the IRI Action, and (ii) to conduct a joint defense of such action. In
particular, the Indemnity and Joint Defense Agreement provides that ACNielsen
will assume exclusive liability for IRI Liabilities up to a maximum amount to be
calculated at the time such liabilities, if any, become payable (the "ACN
Maximum Amount"), and that the Company and D&B will share liability equally for
any amounts in excess of the ACN Maximum Amount. The ACN Maximum Amount will be
determined by an investment banking firm as the maximum amount which ACNielsen
is able to pay after giving effect to (i) any plan submitted by such investment
bank which is designed to maximize the claims paying ability of ACNielsen
without impairing the investment banking firm's ability to deliver a viability
opinion (but which will not require any action requiring shareholder approval),
and (ii) payment of related fees and expenses. For these purposes, financial
viability means the ability of ACNielsen, after giving effect to such plan, the
payment of related fees and expenses and the payment of the ACN Maximum Amount,
to pay its debts as they become due and to finance the current and anticipated
operating and capital requirements of its business, as
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
reconstituted by such plan, for two years from the date any such plan is
expected to be implemented.
Management of the Company is unable to predict at this time the final
outcome of this matter or whether the resolution of this matter could materially
affect the Company's results of operations, cash flows or financial position.
Note 18. Supplemental Financial Data
Accounts Receivable--Net:
1997 1996
- - ------------------------------------------------------
Trade $250,899 $401,224
Less: Allowance for Doubtful
Accounts (7,199) (15,470)
Unbilled Receivables 41,291 35,383
Other 18,618 32,654
- - ------------------------------------------------------
$303,609 $453,791
======================================================
Other Current Assets:
1997 1996
- - ------------------------------------------------------
Deferred Income Taxes $ 10,846 $ 14,975
Prepaid Expenses 35,059 48,531
Inventories 26,463 26,369
Marketable Securities -- 22,276
- - ------------------------------------------------------
$ 72,368 $112,151
======================================================
Property, Plant and Equipment--Net, Carried at Cost, Less Accumulated
Depreciation and Amortization:
1997 1996
- - ------------------------------------------------------
Buildings $113,845 $118,122
Machinery and Equipment 355,624 402,424
Less: Accumulated Depreciation (260,400) (287,200)
Leasehold Improvements, less:
Accumulated Amortization of
$14,095 and $20,199 16,879 23,282
Land 7,635 12,260
- - ------------------------------------------------------
$233,583 $268,888
======================================================
Computer Software and Goodwill:
COMPUTER
SOFTWARE GOODWILL
- - ------------------------------------------------------
January 1, 1996 $ 137,700 $230,888
Additions at Cost 49,395 60,484
Amortization (39,802) (17,094)
Other Deductions, Additions
and Reclassifications (8,253) (22,795)
- - ------------------------------------------------------
December 31, 1996 139,040 251,483
Additions at Cost 58,707 1,554
Amortization (42,426) (8,810)
Other Deductions and
Reclassifications (1) (13,053) (156,797)
- - ------------------------------------------------------
DECEMBER 31, 1997 $142,268 $ 87,430
======================================================
(1) The significant decrease in Goodwill during 1997 is primarily related
to the deconsolidation of Gartner.
Accumulated amortization of Computer Software was $180,106 and $150,481 at
December 31, 1997 and 1996, respectively. Accumulated amortization of Goodwill
was $40,399 and $67,366 at December 31, 1997 and 1996, respectively.
Accounts and Notes Payable:
1997 1996
- - ------------------------------------------------------
Trade $33,708 $25,763
Taxes Other Than Income Taxes 16,377 15,587
Notes 458 464
Other 8,253 5,109
- - ------------------------------------------------------
$58,796 $46,923
======================================================
The Company has short-term borrowing arrangements with several banks to
provide up to $39,400 of borrowings at December 31, 1997. None of these
arrangements had material commitment fees or compensating balance requirements.
Accrued and Other Current Liabilities:
1997 1996
- - ------------------------------------------------------
Salaries, Wages, Bonuses and
Other Compensation $ 68,717 $ 78,676
Postemployment Benefits 4,073 7,995
Other 140,154 180,261
- - ------------------------------------------------------
$212,944 $266,932
======================================================
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Note 19. Operations by Business Segment
In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information". The Company has adopted SFAS No. 131 for
the year ended December 31, 1997, and as required has restated the prior years
in order to conform to the 1997 presentation. The Company, operating globally in
approximately 80 countries, delivers information, software and related services
principally through these strategic business segments referenced below.
IMS is the leading global provider of market information and decision-support
services to the pharmaceutical and healthcare industries.
Nielsen Media Research is the leading provider of television audience
measurement services, both nationally and locally, in the United States and
Canada.
Gartner is the world's leading independent provider of research and analysis on
the computer hardware, software, communications and related information
technology (IT) industries. The company's subscribers receive research and
analysis about significant IT industry development and trends.
Emerging Markets includes Erisco, the premier supplier of software-based
administrative and analytical solutions to the managed care industry; CTS, an
outsourcer of software applications and development services specializing in
Year 2000 conversion services; Super Systems Japan, a marketer of financial
application software products to the Japanese market; Enterprises, the Company's
venture capital unit, focused on investments in emerging healthcare businesses;
and Pilot, which was sold on July 31, 1997.
The accounting policies of these reportable segments are the same as those
described for the consolidated entity. The Company evaluates the performance of
its operating segments based on revenue and income from operations.
<TABLE>
<CAPTION>
NIELSEN EMERGING
YEAR ENDED DECEMBER 31, 1997 IMS MEDIA RESEARCH GARTNER(1) MARKETS(2) TOTAL
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE $980,521 $358,594 $ 79,038 $1,418,153
SEGMENT OPERATING INCOME $265,351 $107,732 ($ 9,752) $ 363,331
General Corporate Expenses 27,989
Interest Income (3) 4,441 140 4,581
Non-Operating Income--Net
Gartner Equity Income (1) 65,120
Gains from Dispositions--Net 9,391 9,391
Other--Net 15,801
====================================================================================================================================
Income Before Provision for Income Taxes $ 430,235
Segment Depreciation and Amortization $ 76,375 $ 28,663 $ 11,139 $ 116,177
Segment Capital Expenditures $ 41,932 $ 24,874 $ 4,304 $ 71,110
IDENTIFIABLE ASSETS AT DECEMBER 31, 1997 (4) $855,789 $182,642 $147,628 $1,186,059
====================================================================================================================================
Year Ended December 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE $904,444 $319,404 $424,382 $ 82,366 $1,730,596
SEGMENT OPERATING INCOME $232,827 $ 99,461 $ 60,114 ($ 12,903) $ 379,499
General Corporate Expenses 36,331
Interest Income (3) 3,597 3,982 221 7,800
Non-Operating Expense--Other--Net 2,147
Gains from Dispositions--Net 200 200
====================================================================================================================================
Income Before Provision for Income Taxes $ 349,021
Segment Depreciation and Amortization $ 80,313 $ 25,229 $ 15,934 $ 12,181 $ 133,657
Segment Capital Expenditures $ 37,862 $ 17,929 $ 15,918 $ 3,254 $ 74,963
IDENTIFIABLE ASSETS AT DECEMBER 31, 1996 (4) $756,966 $152,307 $497,242 $206,825 $1,613,340
====================================================================================================================================
Year Ended December 31, 1995
- - ------------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUE $835,442 $288,652 $337,639 $ 80,607 $1,542,340
Restructuring Expense $ 12,800 $ 12,800
SEGMENT OPERATING INCOME $ 89,335 $ 87,068 $ 51,180 ($ 18,366) $ 209,217
General Corporate Expenses 54,540
Interest Income (3) 6,005 2,761 330 9,096
Non-Operating Expense--Other--Net 16,340
Gains from Dispositions--Net 4,524 10,600 15,124
====================================================================================================================================
Income Before Provision for Income Taxes $ 162,557
Segment Depreciation and Amortization $ 84,641 $ 24,343 $ 11,987 $ 11,561 $ 132,532
Segment Capital Expenditures $ 29,935 $ 13,508 $ 19,657 $ 2,532 $ 65,632
IDENTIFIABLE ASSETS AT DECEMBER 31, 1995 (4) $768,684 $124,535 $355,088 $132,568 $1,380,875
====================================================================================================================================
</TABLE>
(1) The Company maintained a majority interest in Gartner during 1995 and 1996
and accordingly, reflected Gartner on a consolidated basis. During 1997,
The Company's voting interest in Gartner fell below 50%. Gartner's results
for 1997 are therefore reflected as Gartner Equity Income and included in
Non-Operating Income--Net.
(2) Intersegment sales of $11,092, $8,877 and $7,929 in 1997, 1996 and 1995,
respectively, consisting primarily of sales from CTS to IMS and Nielsen
Media Research, have been excluded.
(3) Interest income excludes amounts recorded at corporate of $8,194, $1,656
and $1,229 for 1997, 1996 and 1995, respectively.
(4) Assets of $393,461, $261,642 and $61,215 at December 31, 1997, 1996 and
1995, respectively, include cash and cash equivalents, investment in
Gartner and Property, Plant and Equipment not identified with business
segments and represent the reconciling items between total identifiable
assets shown and the Company's total assets.
24
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
====================================================================================================================================
Note 19. Operations by Business Segment (continued)
Financial information by country:
UNITED STATES (1) ALL OTHER TOTAL
- - ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE (2) $759,070 $659,083 $1,418,153
LONG-LIVED ASSETS $363,478 $190,657 $ 554,135
====================================================================================================================================
Year Ended December 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenue (2) $950,526 $780,070 $1,730,596
Long-Lived Assets $554,795 $192,472 $ 747,267
====================================================================================================================================
Year Ended December 31, 1995
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenue (2) $834,786 $707,554 $1,542,340
Long-Lived Assets $488,730 $198,554 $ 687,284
====================================================================================================================================
</TABLE>
(1) The above table reflects the deconsolidation of Gartner and the sale of
Pilot, in 1997.
(2) Revenue relates to external customers and is primarily attributable to the
country of domicile.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
Note 20. Reorganization Plan
On January 15, 1998, the Company announced a plan to separate into two
independent, publicly traded companies--IMS Health and Nielsen Media Research.
The transaction, which has been structured as a tax-free dividend of one share
of IMS Health common stock for each share of Cognizant Corporation common stock,
is targeted for completion by the middle of 1998. Concurrent with the
transaction, Cognizant Corporation will change its name to Nielsen Media
Research. The separation would create IMS Health as the premier global provider
of information solutions to the pharmaceutical and healthcare industries, and
establish an independent Nielsen Media Research, the leader in electronic
audience measurement services. The transaction is subject to final approval by
the Company's board of directors and obtaining a ruling from the Internal
Revenue Service with respect to the tax-free treatment of the transaction.
Note 21. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31 (1) JUNE 30 (1) SEPTEMBER 30 DECEMBER 31 FULL YEAR
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
1997
OPERATING REVENUE $315,576 $338,260 $341,041 $423,276 $1,418,153
OPERATING INCOME $ 47,887 $ 66,701 $ 87,163 $133,591 $ 335,342
NET INCOME $ 52,905 $ 60,055 $ 77,066 $122,324 $ 312,350
BASIC EARNING PER SHARE OF
COMMON STOCK $ 0.31 $ 0.36 $ 0.47 $ 0.75 $ 1.89
DILUTED EARNINGS PER SHARE OF
COMMON STOCK $ 0.31 $ 0.36 $ 0.46 $ 0.73 $ 1.86
====================================================================================================================================
====================================================================================================================================
1996
Operating Revenue $370,019 $415,703 $424,188 $520,686 $1,730,596
Operating Income(2) $ 58,978 $ 81,912 $ 60,195 $142,083 $ 343,168
Net Income $ 33,277 $ 42,875 $ 39,858 $ 79,441 $ 195,451
Basic Earnings Per Share $ 0.20 $ 0.25 $ 0.23 $ 0.47 $ 1.15
Diluted Earnings Per Share $ 0.20 $ 0.25 $ 0.23 $ 0.47 $ 1.15
====================================================================================================================================
</TABLE>
(1) 1997 quarterly results have been restated to reflect the deconsolidation of
Gartner.
(2) Includes a one-time acquisition-related charge of $33,233 related to
Gartner's acquisition of J3 Learning Corporation in the third quarter.
26
<PAGE>
FIVE-YEAR SELECTED FINANCIAL DATA (UNAUDITED)
Dollar amounts in thousands, except per share data
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating Revenue $1,418,153 $1,730,596 $1,542,340 $1,257,415 $1,039,259
Costs and Expenses(1)(2) 1,082,811 1,387,428 1,387,663 1,030,780 897,909
- - -----------------------------------------------------------------------------------------------------------------------------------
Operating Income(1)(2) 335,342 343,168 154,677 226,635 141,350
Non-Operating Income--Net(3) 94,893 5,853 7,880 18,853 25,982
- - -----------------------------------------------------------------------------------------------------------------------------------
Income Before Provision for
Income Tax 430,235 349,021 162,557 245,488 167,332
Provision For Income Taxes (117,885) (153,570) (73,676) (99,083) (58,475)
- - -----------------------------------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect of
Accounting Changes 312,350 195,451 88,881 146,405 108,857
Cumulative Effect of Accounting
Changes, Net of Income Taxes(4) -- -- -- -- (41,143)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 312,350 $ 195,451 $ 88,881 $ 146,405 $ 67,714
- - -----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share of Common
Stock $ 1.89 $ 1.15 $ 0.52 $ 0.86 $ --
- - -----------------------------------------------------------------------------------------------------------------------------------
Basic Average Number of
Shares Outstanding 165,163,000 169,944,000 169,522,000 169,946,000 --
- - -----------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share of
Common Stock $ 1.86 $ 1.15 $ -- $ -- $ --
- - -----------------------------------------------------------------------------------------------------------------------------------
Diluted Average Number of
Shares Outstanding 167,490,000 170,500,000 -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
As a % of Operating Revenue:
Operating Income 23.6% 19.8% 10.0% 18.0% 13.6%
Income Before Cumulative Effect
of Accounting Changes 22.0% 11.3% 5.8% 11.6% 10.5%
- - -----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY $ 801,570 $ 872,613 $ 604,588 $ 606,483 $ 540,833
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,579,520 $1,874,982 $1,442,090 $1,331,038 $1,158,764
===================================================================================================================================
</TABLE>
(1) 1996 includes a one-time acquisition-related charge of $33,233 related to
Gartner's acquisition of J3 Learning Corporation.
(2) 1995 includes a non-recurring charge of $90,070 (see Note 6 to the
Consolidated Financial Statements) and an incremental provision for
postemployment benefits of $32,500. Also includes restructuring expense of
$12,800, $7,957, and $46,408 in 1995, 1994 and 1993, respectively (See Note
7 to the Consolidated Financial Statements).
(3) Non-Operating Income in 1997 includes Gartner equity income of $65,120, SAB
51 gains of $14,689, and gains from dispositions--net of $9,391. Results
for prior years include gains from dispositions--net of $200, $15,124,
$21,473 and $21,022 in non-operating income in 1996, 1995, 1994 and 1993,
respectively.
(4) 1993 includes the impact of $28,303 for the adoption of SFAS No. 112 and
$12,840 for the adoption of SFAS No. 106.
27
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
COGNIZANT CORPORATION
================================================================================
DIRECTORS
================================================================================
CLIFFORD L. ALEXANDER, JR. (1)
President
Alexander & Associates, Inc.
(Consulting Firm specializing in work force
inclusiveness)
JOHN P. IMLAY, JR. (2)
Chairman
Imlay Investments, Inc.
(Private Venture Capital Investments)
ROBERT KAMERSCHEN (2)
Chairman & Chief Executive Officer
ADVO, Inc.
(Direct Mail Marketing Services)
ROBERT J. LANIGAN (1)
Chairman Emeritus
Former Chairman & Chief Executive Officer
Owens-Illinois, Inc.
(Glass, Paper, Plastics and Other Packaging Products)
H. EUGENE LOCKHART (1)
President
BankAmerica Corp.
Retail Banking Division
(Financial Services)
JAMES R. PETERSON (2)
Former President & Chief Executive Officer
The Parker Pen Company
(Writing Instruments and Temporary Help Services)
M. BERNARD PUCKETT (2)
Private Investor
ROBERT E. WEISSMAN
Chairman & Chief Executive Officer
Cognizant Corporation
Board Committees
(1) Audit Committee
(2) Compensation and Benefits Committee
OFFICERS
================================================================================
Chairman & Chief Executive Officer
ROBERT E. WEISSMAN
- - --------------------------------------------------------------------------------
Executive Vice President
VICTORIA R. FASH
Chief Financial Officer
- - --------------------------------------------------------------------------------
Senior Vice Presidents
ALAN J. KLUTCH
Finance
JAMES C. MALONE
Finance & Controller
KENNETH S. SIEGEL
General Counsel & Secretary
- - --------------------------------------------------------------------------------
Vice Presidents
LESLYE G. KATZ
Treasurer
CRAIG S. KUSSMAN
Corporate Development
OFFICERS OF OPERATING UNITS
================================================================================
IMS INTERNATIONAL
VICTORIA R. FASH
Chairman & Chief Executive Officer
TOMMY BOHMAN
Vice Chairman & President, IMS America
GILLES PAJOT
Vice Chairman & President, IMS Europe Region
SHUNSUKE KEIMATSU
Chairman & Chief Executive Officer, IMS Japan
HANS BIEDERMANN
President, Emerging Markets
JAMES C. NEWELL
President, Global Services
Erisco
ANTHONY BELLOMO
President
Cognizant Technology Solutions
WIJEYARAJ A. MAHADEVA
Chairman & Chief Executive Officer
Cognizant Enterprises
VENETIA KONTOGOURIS
President
Nielsen Media Research
WILLIAM G. JACOBI
Chairman
JOHN A. DIMLING
President & Chief Operating Officer
<PAGE>
[COGNIZANT LOGO]
TRANSFER AGENT
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Telephone: (201) 324-1225
CORPORATE CENTER
200 Nyala Farms
Westport, Connecticut 06880
Telephone: (203) 222-4200
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
1301 Avenue of Americas
New York, N.Y. 10019
FORM 10-K
Your Company will file its report to shareholders on Form 10-K with the
Securities and Exchange Commission by March 31, 1998. Many of the SEC's 10-K
information requirements are satisfied by this 1997 Annual Report to
Shareholders. However, a copy of the Form 10-K will be available without charge
after March 31, 1998, upon request to the Investor Relations Department at the
Corporate Center address.
COMMON STOCK INFORMATION
The Company's common stock (symbol CZT) is listed on the New York Stock
Exchange.
EXHIBIT 21
<TABLE>
<CAPTION>
COGNIZANT CORPORATION
ACTIVE SUBSIDIARIES
AS OF JANUARY 31, 1998
STATE OR OTHER % OWNERSHIP
JURISDICTION 100% EXCEPT
NAME INCORPORATION AS NOTED
---- -------------- ------------
<S> <C> <C>
COGNIZANT ENTERPRISES, INC. Delaware
COGNIZANT INDIA HOLDING CORPORATION Delaware
CZT India Corporation Delaware
Dun & Bradstreet India Private Limited India
COGNIZANT SOFTWARE SOLUTIONS CORPORATION Delaware 98.28
Cognizant Technology Solutions Corporation Delaware
Cognizant Technology Solutions Canada, Inc. Ontario
Cognizant Technology Solutions India Limited India
Cognizant Technology Solutions UK Limited United Kingdom
CSS Investment Corporation Delaware
COGNIZANT TRANSPORTATION SERVICES CORPORATION Delaware
DBHC, INC. Delaware
LexHealth, Inc. Illinois
ERISCO, INC. New York
IMS COGNIZANT JAPAN K.K. Japan
SSJ K.K. Japan
IMS HOLDINGS (U.K.) LIMITED United Kingdom
Intercontinental Medical Statistics Ltd. United Kingdom
Imsworld Publications Ltd. United Kingdom
Medical Direct Mail Organisation Ltd. United Kingdom
PMS International Limited United Kingdom
Pharma Strategy Group Limited United Kingdom
I.M.S. INTERNATIONAL, INC. Delaware
IMS Australia Pty. Ltd. Australia
Amfac Pty. Limited Australia
Chemdata Pty. Limited Australia
Data Design Hisoft Pty. Limited Australia
Medrecord Australia Pty. Limited Australia
Permail Pty. Limited Australia
Healthnet Pty. Limited Australia
Informations Medicales Et Statistiques S.A. France
IMS of Canada, Ltd. Nova Scotia
IMS Taiwan Company Ltd. Taiwan 99.99
IMS Philippines, Inc. Philippines 99.96
IMS Pacific Limited Hong Kong
IMS Korea Ltd. Korea
IMS (NZ) Limited New Zealand
I.M.S. Portugal--Consultores Internacionais de Marketung Farmaceutico, Lda. Portugal
IMS International (South Africa) (Pty.) Ltd. South Africa
Decision Surveys International (Pty.) Ltd. South Africa
I.M.S. Financial, Inc. Delaware
21-1
<PAGE>
<CAPTION>
COGNIZANT CORPORATION
ACTIVE SUBSIDIARIES
AS OF JANUARY 31, 1998
STATE OR OTHER % OWNERSHIP
JURISDICTION 100% EXCEPT
NAME INCORPORATION AS NOTED
---- -------------- ------------
<S> <C> <C>
I.M.S. INTERNATIONAL, INC. (CONTINUED)
IMS Software Services, Ltd. Delaware
Dun & Bradstreet Germany Holding GmbH Germany
IMS-MIDOC Medizinische Informations, Dokumentations
und Consultinggesellschaft mbH Germany
IMS Holding Deutschland GmbH Germany
IFNS Marktforschung GmbH Germany
IMS GmbH Institut fur Medizinische Germany
Statistik
IMS Data GmbH Germany
IMS Hellas Ltd. Greece
GPI Krankenhausforschung Germany 60.00
Gesellschaft Fur Pharma-
Informations-systeme m.b.H.
MedVantage GmbH Integriertes Germany 60.00
Datenmanagement im Health Care-Markt
Medicare Audit Limited United Kingdom 50.00
Intercontinental Medical Statistics Ireland Limited Ireland 99.99
IMS Information Medical Statistics (Israel) Ltd. Israel
IMS Asia (1989) Pte. Ltd. Singapore
IMS Pharminform Holding AG Switzerland
Cognizant Licensing Associates, L.P. Delaware 83.00
Athenian Leasing Corporation Delaware
Spartan Leasing Corporation Delaware
Pharmadat Marktforschungs-Gesellschaft m.b.H. Austria
Pharmacall Statistik Ges. m.b.H. Austria
Informations Medicales Et Statistiques S.A. Belgium
Pharma Data Boliviana S.R.L. Bolivia
IMS Servicos Ltda. Brazil
Intercomunicaciones y Servicio de Datos S.A. Colombia 98.96
IMS Medinform A.S. Czech Republic
IMS Republica Dominicana, S.A. Dominican Republic
Datandina Ecuador S.A. Ecuador
IMS Egypt Limited Egypt
Institute for Medical Statistics Oy Finland
Asserta Centroamerica Medicion de Mercados, S.A. Guatemala
IMS Medinform Hungaria Market Research Services Ltd. Hungary
IMS Data (M) Sdn. Bhd. Malaysia
Interdata S.A. de C.V. Mexico
Informations Medicales & Statistiques S.A.R.L. Morocco
I.M.S. (Nederland) B.V. Netherlands
IMS Denmark ApS Denmark
I.M.S. Finance (Nederland) B.V. Netherlands
Institute for Medical Statistics Norge A/S Norway
Pharma Data Paraguaya S.R.L. Paraguay
IMS Lanka (Private) Limited Sri Lanka
Datandina S.A. Peru
Intercontinental Marketing Services Iberica, S.A. Spain
Mercados y Analisis, S.A. Spain
21-2
<PAGE>
<CAPTION>
COGNIZANT CORPORATION
ACTIVE SUBSIDIARIES
AS OF JANUARY 31, 1998
STATE OR OTHER % OWNERSHIP
JURISDICTION 100% EXCEPT
NAME INCORPORATION AS NOTED
---- -------------- ------------
<S> <C> <C>
I.M.S. INTERNATIONAL, INC. (CONTINUED)
Data Coordination AG Switzerland
PMA Sociedad Anonima Argentina
IMS AG Switzerland
IMS Information Medical Statistics AG Switzerland
IMS Poland Limited Sp. z.o.o. Poland
IMS Institute for Medical Statistics Sweden AB Sweden
RCI Research Consultants AG Switzerland
Marketing y Datos Limitada Chile
Interstatistik AG Switzerland
IMS Ges m.b.H. Austria
Datec Industria e Comercio, Distribuidora Grafica Brazil
e Mala Direta Ltda.
IMS Tunisia Tunisia
IMS Tibbi Istatistik Ticaret ve Musavirlik Ltd Sirketi Turkey
Pharma Data Uruguaya S.A. Uruguay
PMV de Venezuela, C.A. Venezuela
Clark-O'Neill, Inc. New Jersey
IMS America, Ltd. New Jersey
Coordinated Management Systems, Inc. Delaware
Intercontinental Medical Statistics International, Ltd. Delaware
Diogenes.com, Inc. Delaware
Cognizant Trading Corporation Delaware
IMS South Africa (Pty.) Ltd. South Africa
IMSA (Pty.) Ltd. South Africa
IPRA (Pty.) Ltd. South Africa
PMSA (Pty.) Ltd. South Africa
IMS SERVICES NEDERLAND B.V. Netherlands
IMS ITALIA S.P.A. Italy
IMS Holding (Belgium) S.A. Belgium
NIELSEN MEDIA RESEARCH, INC. Delaware
Media Licensing Associates, Inc. Delaware
CZT/ACN Trademarks, L.L.C. Delaware 50.00
NIELSEN MEDIA RESEARCH LTD. Nova Scotia
SALES TECHNOLOGIES, INC. Georgia
</TABLE>
21-3
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Cognizant Corporation on Forms S-8 (File Nos. 333-13889, 333-14763 and
333-29995) of our reports dated February 17, 1998 on our audits of the
consolidated financial statements and financial statement schedule of Cognizant
Corporation as of December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997, which reports are incorporated by reference
or included in this Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
March 18, 1998
23-1
EXHIBIT 99.1
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS GARTNER GROUP, INC.:
We consent to the incorporation by reference of our report dated October
31, 1997, with respect to the consolidated balance sheets of Gartner Group, Inc.
and subsidiaries as of September 30, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders equity, and cash flows for the
years then ended, which report appears in the September 30, 1997 Form 10-K
Gartner Group, Inc., in the December 31, 1997 Form 10-K of Cognizant
Corporation.
KPMG Peat Marwick LLP
Stamford, Connecticut
March 18, 1998
99.1-1
EXHIBIT 99.2
Consent of Independent Accountants:
We hereby consent to the incorporation by reference of our report dated
November 1, 1995, except as to the Dataquest acquisition discussed in Note 3,
which as of January 25, 1996 and the stock split discussed in Note 10, which is
as of March 29, 1996, with respect to the consolidated statement of operations,
of changes in stockholders equity, and cash flows of Gartner Group, Inc. and its
subsidiaries for the year ended September 30, 1995, which appears in the
September 30, 1997 Form 10-K of Gartner Group, Inc., in the December 31, 1997
Form 10-K of Cognizant Corporation.
PriceWaterhouse LLP
Stamford, Connecticut
March 18, 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
[X] THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15144
GARTNER GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-3099750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 10212 06904-2212
56 Top Gallant Road (Zip Code)
Stamford, CT
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 316-1111
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Title of Class
Common Stock, Class A, $.0005 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by persons other
than those who may be deemed affiliates of the Company, as of November 30, 1997,
was approximately $1.5 billion. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may under certain
circumstances be deemed to be affiliates. This determination of executive
officer or affiliate status is not necessarily a conclusive determination for
other purposes.
The number of shares outstanding of the Registrant's capital stock as
of November 30, 1997 was 97,565,408 shares of Common Stock, Class A.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for the Annual Meeting of Stockholders of Registrant to
be held on January 20, 1998. Certain information therein is
incorporated by reference into Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Gartner Group, Inc. ("Gartner Group" or the "Company"), founded in 1979, is the
world's leading independent provider of research and analysis on the computer
hardware, software, communications and related information technology ("IT")
industries. The Company is organized into three business units: GartnerAdvisory,
GartnerMeasurement and GartnerLearning. Advisory services encompass products
which provide research and analysis of significant IT industry trends and
developments. Measurement services encompass products which provide
comprehensive assessments of cost performance, efficiency and quality for all
areas of IT. The Company enters into annual renewable contracts for advisory and
measurement services and learning products, and distributes such services
through print and electronic media. GartnerLearning develops and publishes more
than 600 software education training products and services for computer desktop
and technical applications professionals. The Company's primary clients are
business professional users, purchasers and vendors of IT products and services.
With more then 600 sales professionals in 80 locations, Gartner Group product
offerings collectively provide comprehensive coverage of the IT industry to over
9,000 client organizations.
MARKET OVERVIEW
The explosion of complex IT products and services creates a growing demand for
independent research and analysis. Furthermore, IT is increasingly important to
organizations' business strategies as the pace of technological change has
accelerated and the ability of an organization to integrate and deploy new
information technologies is critical to its competitiveness. Companies planning
their IT needs must stay abreast of rapid technological developments in a
dynamic market where vendors continually introduce new products with a wide
variety of standards and ever-shorter life cycles. As a result, IT professionals
are making substantial financial commitments to IT systems and products and
require independent, third-party research in order to make purchasing and
planning decisions for their organization.
BUSINESS STRATEGY
The Company's objective is to maintain and enhance its market position as a
leading provider of in-depth, value-added, proprietary research and analysis of
the IT industry. The Company has adopted the following strategies to maintain
its market position and expand its core business:
Focus on the IT market. The Company targets as its clients corporate entities
and other large users and vendors of information technologies. Users of Gartner
Group's products and services include senior decision makers in information
systems organizations and other IT professionals such as purchasing and data
center managers. Vendors use market research data in order to evaluate
competitive products and market opportunities.
Maintain Research and Analysis Excellence. Gartner Group's global network of
research analysts is comprised of more than 750 professionals averaging ten
years of industry experience. Clients rely on Gartner Group's proven research
methodology to ensure consistent and comprehensive analysis in all areas of IT.
The Company maintains five primary research centers located in Stamford, CT,
Santa Clara, CA, Windsor, England, Brisbane, Australia, Tokyo, Japan and a
number of smaller, satellite research centers throughout the world.
Emphasize New Product Development and Strategic Acquisitions. The Company
introduces new research and advisory products each year. New product ideas
evolve from client inquiries, market need and through a multi-functional product
strategy committee. Fiscal 1997 investments and acquisitions include: Datapro
Information Services (7/97), a research firm specializing in products that
compare feature and functions of computer hardware, software and communications
products; Bouhot and Le Gendre (6/97), a publisher of French-based IT journals
and provider of conferences, events, custom consulting and IT executive
programs; and SPG Research and East Consulting (2Q97), strategic acquisitions in
the Asia/Pacific IT marketplace adding demand-side data and network and
telecommunications expertise, respectively, to the GartnerAdvisory product line.
Additionally, the Company has made minority investments in KnowledgeSoft (3/97),
whose products provide a tracking and administration system to GartnerLearning
training titles and in EC Cubed (12/96), a Web solutions and Internet content
provider.
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<PAGE> 3
Increase Market Penetration. The Company has made substantial investments
developing new markets and establishing a global network of direct sales
personnel, independent sales representatives, distributors and joint venture
partners. This initiative is on-going and will continue to evolve with the
expansion of the Company's product and service offerings and delivery options.
Electronic delivery formats include CD-ROM, lotus Notes, intranets and the
Internet.
The Company believes that successful execution of these strategies will enable
the Company to expand its client base in domestic and international markets and
to penetrate its client base more effectively through a broader range of product
offerings.
PRODUCTS AND SERVICES
Advisory and Measurement services
The Company's principal products are annually renewable contracts for advisory
and measurement services, which encompass products which, on an ongoing basis,
highlight industry developments, review new products and technologies, provide
quantitative market research, analyze industry trends within a particular
technology or market sector and provide comparative analysis of the information
technology operations of organizations.
GartnerAdvisory provides qualitative and quantitative research and analysis that
clarifies decision-making for IT buyers, users and vendors. Advisory consists of
GartnerAnalytics, a provider of objective analysis that helps clients stay ahead
of IT trends, directions and vendor strategies; and GartnerMarketDynamics, a
provider of worldwide coverage of research, statistical analysis, growth
projections and market share rankings of suppliers and vendors to IT
manufacturers and the financial community. GartnerMeasurement provides
benchmarking, continuous improvement and best practices services. The Company
currently offers over 250 principal advisory and measurement services products.
Each service is supported by a team of research staff members with substantial
experience in the covered segment or topic of the IT industry. The Company's
staff researches and prepares published reports and responds to telephone and
E-mail inquiries from clients. Clients receive Gartner Group research and
analysis on paper and through a number of electronic delivery formats.
Learning
GartnerLearning publishes software education training products for computer
desktop and technical applications professionals. With more than 650 existing
titles, the Company will focus on the addition of training titles in the next
few years by investing significantly in product development and strategic
alliances with IT vendors and industry experts.
The Company provides a number of other complementary products and services
principally:
GartnerConsulting. Consulting services provide customized project
consulting on the delivery, deployment and management of high-tech
products and services. Principal practices of consulting services
include Technical Architecture, Outsourcing Decision Support, Evolving
High Technology Areas, Retainer Consulting Services and Vendor
Consulting.
GartnerEvents. Industry conferences and events provide comprehensive
coverage of IT issues and forecasts of key IT industry segments. The
conference season begins each year with Symposia, held in the United
States, Europe and the Asia/Pacific rim. These events are held in
conjunction with ITxpo(TM), a high technology learning lab.
Additionally, the Company sponsors other conferences, seminars and
briefings. Certain events are offered as part of a continuous services
subscription, however, the majority of events are individually paid for
prior to attendance.
The Company measures the volume of its advisory, measurement and learning
("AML") business based on contract value. The Company calculates contract value
as the annualized value of all AML contracts in effect at a given point in time,
without regard to the duration of the contracts outstanding at such time.
Historically, the Company has experienced that a substantial portion of client
companies have renewed these services for an equal or higher level of total
payments each year, and annual revenues from these services in any fiscal year
have closely correlated to contract value at the beginning of the fiscal year.
As of September 30, 1997, approximately 85 percent of the Company's clients have
renewed one or more of these services in the last twelve months. However, this
renewal rate is not necessarily indicative of the rate of retention of the
Company's revenue base, and contract value at any time may not be indicative of
future AML revenues or cash flows if the rate of renewal of AML services and
products or the timing of new business were to significantly change during the
following twelve months compared to historic patterns. Deferred revenues, as
presented in the Company's balance sheets, represent unamortized revenues from
AML services and products plus unamortized revenues of certain other services
and products not included in AML. Therefore, deferred revenues do not directly
correlate to contract value as of the same date since contract value represents
an annualized value of all outstanding AML contracts without regard to
3
<PAGE> 4
the duration of such contracts, and deferred revenues represents unamortized
revenue remaining on all outstanding AML contracts including AML services and
products and certain other services and products not included in AML revenue.
There can be no assurance that the Company will be able to sustain such high
renewal rates. Any deterioration in the Company's ability to generate
significant new business would impact future growth in the Company's business.
Moreover, a significant portion of the Company's new business in any given year
has historically been generated in the last portion of the fiscal year.
Accordingly, any such situation might not be apparent until late in the
Company's fiscal year.
COMPETITION
The Company believes that the principal competitive factors in its industry are
quality of research and analysis, timely delivery of information, customer
service, the ability to offer products that meet changing market needs for
information and analysis and price. The Company believes it competes favorably
with respect to each of these factors.
The Company experiences competition in the market for information products and
services from other 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 technology providers,
including electronic and print media companies and consulting firms. The
Company's indirect competitors, many of whom have substantially greater
financial, information gathering and marketing resources than the Company, could
choose to compete directly against the Company in the future. In addition,
although the Company believes that it has established a significant market
presence, there are few barriers to entry into the Company's market and new
competitors could readily seek to compete against the Company in one or more
market segments addressed by the Company's AML services and products. Increased
competition, direct and indirect, could adversely affect the Company's operating
results through pricing pressure and loss of market share. There can be no
assurance that the Company will be able to continue to provide the products and
services that meet client needs as the IT market rapidly evolves, or that the
Company can otherwise continue to compete successfully.
The Company has expanded its presence in the technology-based training industry
(GartnerLearning). The success of the Company in the technology-based training
industry will depend on its ability to compete with vendors of IT products and
services which include a range of education and training specialists, hardware
and system manufacturers, software vendors, system integrators, dealers,
value-added resellers and network/communications vendors, certain of whom have
significantly greater product breadth and market presence in the
technology-based training sector. There can be no assurance that the Company
will be able to provide products that compare favorably with new competitive
products or that competitive pressures will not require the Company to reduce
prices. Future success will also depend on the Company's ability to develop new
training products that are released timely with the introductions of the
underlying software products.
EMPLOYEES
As of September 30, 1997, the Company employed 2,885 persons. Of the 2,885
employees, 903 are located at the Company's headquarters in Stamford, CT area,
1,163 are located at other domestic facilities and 819 are located outside of
the United States. None of the Company's employees are represented by a
collective bargaining arrangement. The Company has experienced no work stoppages
and considers its relations with employees to be favorable.
The Company's future success will depend in large measure upon the continued
contributions of its senior management team, professional analysts, and
experienced sales personnel. Accordingly, future operating results will be
largely dependent upon the Company's ability to retain the services of these
individuals and to attract additional qualified personnel. The Company
experiences intense competition for professional personnel with, among others,
producers of IT products, management consulting firms and financial services
companies. Many of these firms have substantially greater financial resources
than the Company to attract and compensate qualified personnel. The loss of the
services of key management and professional personnel could have a material
adverse effect on the Company's business.
ITEM 2. PROPERTIES
The Company's headquarters are located in approximately 244,000 square feet of
leased office space in five buildings located in Stamford, CT. These facilities
accommodate research and analysis, marketing, sales, client support, production
and corporate administration. The leases on these facilities expire in 2010. The
Company also leases office space in 39 domestic and 36 international locations
to support its research and analysis, domestic and international sales efforts
and other functions. The Company believes its existing facilities and expansion
options are adequate for its current needs and that additional facilities are
available for lease to meet future needs.
4
<PAGE> 5
ITEM 3. LEGAL PROCEEDINGS.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
Listed below are the executive officers of the Company as of November 30, 1997:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Manuel A. Fernandez 51 Chairman and Chief Executive Officer
William T. Clifford 51 President and Chief Operating Officer
E. Follett Carter 55 President, Gartner Group Distribution, Executive
Vice President, Sales and Marketing and
Chief Marketing Officer
John F. Halligan 50 Executive Vice President, Chief Financial
Officer, Treasurer and Corporate Secretary
Michael D. Fleisher 32 Executive Vice President and President,
Emerging Businesses
</TABLE>
Mr. Fernandez has served as Chairman of the Board since April 1996, as Chief
Executive Officer since April 1991, and as a Director since January 1991. Mr.
Fernandez also held the title of President from January 1991 through September
30, 1997. Prior to joining the Company, he was President and Chief Executive
Officer of Dataquest, Inc. Before joining Dataquest, Mr. Fernandez was President
and Chief Executive Officer of Gavilan Computer Corporation, a laptop computer
manufacturer, and Zilog, Incorporated, a semiconductor manufacturing company.
Mr. Fernandez holds a bachelor's degree in electrical engineering from
University of Florida, and completed post-graduate work in solid state
engineering at University of Florida and in business administration at the
Florida Institute of Technology. Mr. Fernandez is also on the board of directors
of the Brunswick Corporation, Getty Communications P.L.C., SACIA (The Business
Council of Southwestern Connecticut) and Norwalk Community Technical College
(Norwalk, Connecticut).
Mr. Clifford has been President of Gartner Group since October 1997, Chief
Operating Officer of the Company since April 1995 and Executive Vice President,
Operations of the Company since October 1993. From October 1995 to September
1997, Mr. Clifford was president Gartner Group Research. Prior to joining
Gartner Group, Mr. Clifford served as President, Central Division and Senior IT
Executive for Product Development for ADP Corp., a payroll service provider.
Previously, Mr. Clifford was Executive Vice President and Chief Operating
Officer of Applied Data Research, a supplier of computer software. Mr. Clifford
holds a bachelor's degree in economics from the University of Connecticut.
Mr. Carter has been with the Company since November 1988 and has been President,
Gartner Group Distribution since October 1995, Chief Marketing Officer since
April 1995 and Executive Vice President, Sales and Marketing since July 1993.
From April 1991 to July 1993, he was Senior Vice President, Sales and Marketing;
from May 1990 to March 1991, he was Vice President, Sales; and from November
1988 to April 1990, he was Vice President and Service Director of Electronic
Output Strategies. Mr. Carter holds a bachelor's degree from Case Western
Reserve, and an M.B.A. degree in finance and marketing from Columbia University.
Mr. Halligan has been Executive Vice President, Chief Financial Officer,
Treasurer and Corporate Secretary since September 1991. Prior to joining Gartner
Group, Mr. Halligan spent more than 22 years at General Electric Company in a
variety of financial management roles, including Staff Vice President, Finance
at GE Communications and Services from May 1988 to September 1991. Mr. Halligan
holds a bachelor's degree in economics from Providence College. Mr. Halligan
currently serves on the board of directors of the Stamford Chapter of the
American Red Cross.
Mr. Fleisher has been Executive Vice President of the Company and President,
Gartner Group Emerging Businesses since November 1996. From October 1995, he was
Senior Vice President, Emerging Businesses; from October 1994 to October
5
<PAGE> 6
1995, he was Vice President Worldwide Events; from April 1993 to October 1995 he
was Vice President of Business Development. Mr. Fleisher's previous business
experience includes working as an associate at Information Partners, a venture
capital firm, from 1990 to 1993. Mr. Fleisher holds a bachelor's degree in
economics from Wharton School of Business.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company effected an initial public offering of its Class A Common Stock in
October 1993 at a price to the public of $2.75 per share. As of November 30,
1997, there were approximately 234 holders of record of the Company's Class A
Common. The Company's Class A Common Stock is listed for quotation in the Nasdaq
National Market under the symbol "GART."
The Company has not paid any cash dividends on its common stock and currently
intends to retain any future earnings for use its business. Accordingly, the
Company does not anticipate that any cash dividends will be declared or paid on
the common stock in the foreseeable future.
The quarterly market price is included in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Common Stock
Information.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The presentation under "Selected Consolidated Financial Data" is included in
Item 8. Consolidated Financial Statements and Supplementary Data - Selected
Financial Data.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained on pages 13 through 19 of the 1997 Annual Report to
Stockholders of Registrant is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED FINANCIAL STATEMENTS
The Company's consolidated financial statements for the fiscal years ended
September 30, 1997 and 1996, together with the report thereon of KPMG Peat
Marwick LLP, independent auditors, dated October 31, 1997, on page 35 of the
1997 Annual Report to Stockholders of Registrant is incorporated herein by
reference. The Company's consolidated financial statements for the fiscal year
ended September 30, 1995, together with the report thereon of Price Waterhouse
LLP, independent accountants, dated November 1, 1995, except as to the Dataquest
acquisition discussed in Note 3, which is as of January 25, 1996) and the stock
split discussed in Note 10, which is as of March 29, 1996, is included as
Exhibit 23.4 to this Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None in the fiscal year ended September 30, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to Directors is set forth under the caption "Proposal One:
Election of Directors" on pages 3 through 10 in the Proxy Statement for Annual
Meeting of Stockholders of Registrant to be held January 20, 1998 and is
incorporated herein by reference. Certain information regarding Executive
Officers of the Registrant is presented after Item 4 in Part I of this 1997
Annual Report on Form 10-K.
Information relating to Section 16(a) of the Exchange Act is set forth under the
caption "Section 16(a) Reporting Delinquencies " on page 14 in the Proxy
Statement for Annual Meeting of Stockholders of Registrant to be held January
20, 1998 and is incorporated herein by reference.
6
<PAGE> 7
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to Executive Compensation is set forth under the caption
"Executive Compensation" on pages 5 through 9 of the Proxy Statement for Annual
Meeting of Stockholders of Registrant to be held January 20, 1998 and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to Security Ownership of Certain Beneficial Owners and
Management is set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" on page 11 in the Company's Proxy Statement
for Annual Meeting of Stockholders of Registrant to be held January 20, 1998 and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to Certain Relationships and Related Transactions is set
forth under the caption "Certain Relationships and Transactions" of the Proxy
Statement for Annual Meeting of Stockholders of Registrant to be held January
20, 1998 on page 12 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The presentation under "Financial Statements" is included in
Item 8. Consolidated Financial Statements and Supplementary
Data.
2. Financial Statement Schedule
II. Valuation and qualifying accounts
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable
or is shown in the financial statements or notes thereto.
3. Exhibits
Exhibit
Number Description of Document
------ -----------------------
3.1(a)(2) Restated Certificate of Incorporation
3.1(b)(5) Amendment dated March 18, 1996 to Restated
Certificate of Incorporation
3.2(5) Amended Bylaws, as of April 24, 1997
4.1 Article IV and V of Restated Certificate
of Incorporation (see Exhibits 3.1(a)
and (b))
4.2(1) Form of Certificate for Common Stock
10.1(1) Form of Indemnification Agreement
10.2(1) Amended and Restated Registration Rights
Agreement dated March 19, 1993 among the
Registrant, Dun & Bradstreet Corporation
and D&B Enterprises, Inc.
10.3(1) Stockholder's Agreement dated as of March
19, 1993 by and between the Registrant
and Dun & Bradstreet Corporation
10.4(2) Lease dated December 29, 1994 by and between
Soundview Farms and the Registrant
related to premises at 56 Top Gallant
Road, 70 Gatehouse Road, and 88 Gatehouse
Road, Stamford, Connecticut
10.5 Lease dated May 16, 1997 by and between
Soundview Farms and the Registrant
related to premises at 56 Top Gallant
Road, 70 Gatehouse Road, 88 Gatehouse
Road and 10 Signal Road, Stamford,
Connecticut (amendment to lease dated
December 29, 1994, see exhibit 10.4)
10.6(1)* Long Term Incentive Plan (Tenure Plan),
including form of Employee Stock Purchase
Agreement
10.7(4)* 1991 Stock Option Plan, as amended and
restated on February 24, 1997
7
<PAGE> 8
10.8(1)* 1993 Director Stock Option Plan
10.9(1)* Employee Stock Purchase Plan
10.10(4)* 1994 Long Term Stock Option Plan, as amended
and restated on February 24, 1997
10.11(2) Forms of Master Client Agreement
10.12(1) Commitment Letter dated July 16, 1993 from
The Bank of New York
10.13(1) Indemnification Agreement dated April 16,
1993 by and among the Registrant, Cognizant
(as successor to the Dun & Bradstreet
Corporation) and the Information
Partners Capital Fund
10.15 (3) Commitment Letter dated September 30, 1996
from Chase Manhattan Bank
10.16(4)* 1996 Long Term Stock Option Plan, as amended
and restated on February 24, 1997
10.17* Promissory Note from Manuel A. Fernandez
dated June 4, 1997
10.18* Promissory Note from William T. Clifford
dated June 4, 1997
10.19* Promissory Note from E. Follett Carter dated
June 4, 1997
10.20* Promissory Note from John F. Halligan dated
June 4, 1997
10.21* Employment Agreement by and between
Manuel A. Fernandez and Gartner Group, Inc.
as of April 1, 1997
11.1 Computation of Net Income per Common Share
13.1 Annual report to stockholders
21.1 Subsidiaries of Registrant
23.1 Auditors' Report on Schedule and Consent
23.2 Accountants' Consent
23.3 Report of Independent Accountants
23.4 Report of Independent Accountants on
Financial Statement Schedule
24.1 Power of Attorney (see Signature Page)
27.1 Financial Data Schedules
* Management contract or compensation plan or
arrangement required to be filed as an exhibit to
this report on Form 10-K pursuant to Item 14(c) this
report.
(1) Incorporated by reference from the Registrant's
Registration Statement on Form S-1 (File No.
33-67576), as amended, effective October 4, 1993.
(2) Incorporated by reference from the Registrant's
Annual Report on Form 10-K as filed on December 21,
1995.
(3) Incorporated by reference from the Registrant's
Annual Report on Form 10-K as filed on December 17,
1996.
(4) Incorporated by reference from Registrant's Quarterly
Report on Form10-Q as filed on August 14, 1997.
(5) Incorporated by reference from Registrant's
Registration Statement on Form S-8 (File No.
333-35169) as filed on September 8, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the fiscal
quarter ended September 30, 1997.
(c) Exhibits
See (a) above.
(d) Financial Statement Schedule
See (a) above.
8
<PAGE> 9
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Stamford, State of Connecticut, on the 12th day of December, 1997.
GARTNER GROUP, INC.
By: /s/ MANUEL A. FERNANDEZ
--------------------------------
Manuel A. Fernandez
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Manuel A. Fernandez and John F. Halligan,
and each of them acting individually, as his attorney-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ MANUEL A. FERNANDEZ Director, Chairman of the Board and December 12, 1997
- - ------------------------ Chief Executive Officer (Principal
Manuel A. Fernandez Executive Officer)
/s/ JOHN F. HALLIGAN Executive Vice President and Chief December 12, 1997
- - -------------------- Financial Officer (Principal Financial
John F. Halligan and Accounting Officer)
/s/ MAX HOPPER Director December 12, 1997
- - ---------------
Max Hopper
/s/ JOHN P. IMLAY Director December 12, 1997
- - ------------------
John P. Imlay
/s/ STEPHEN G. PAGLIUCA Director December 12, 1997
- - ------------------------
Stephen G. Pagliuca
/s/ DENNIS G. SISCO Director December 12, 1997
- - --------------------
Dennis G. Sisco
/s/ WILLIAM O. GRABE Director December 12, 1997
- - ---------------------
William O. Grabe
/s/ ROBERT E. WEISSMAN Director December 12, 1997
- - -----------------------
Robert E. Weissman
By:/s/ JOHN F. HALLIGAN December 12, 1997
--------------------
John F. Halligan
Attorney-in-fact
</TABLE>
9
<PAGE>
EXHIBIT 11.1
GARTNER GROUP, INC.
COMPUTATION OF INCOME PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
----------------------------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Primary:
Net income ............................................................. $ 73,130 $16,438 $25,161
======== ======= =======
Shares:
Weighted average number of common shares outstanding ................. 94,742 89,739 87,808
Weighted average number of warrants outstanding ...................... 274 301 --
Weighted average number of option shares outstanding ................. 7,443 8,572 6,954
-------- ------- -------
Weighted average number of common shares outstanding as adjusted ..... 102,459 98,612 94,762
======== ======= =======
Net income per common share ............................................ $ 0.71 $ 0.17 $ 0.27
======== ======= =======
Fully diluted:
Net income ............................................................. $ 73,130 $16,438 $25,161
======== ======= =======
Shares:
Weighted average number of common shares outstanding ................. 94,742 89,739 87,808
Weighted average number of warrants outstanding ...................... 274 301 --
Weighted average number of option shares outstanding ................. 7,735 8,805 7,404
-------- ------- -------
Weighted average number of common shares outstanding as adjusted ..... 102,751 98,854 95,212
======== ======= =======
Net income per common share ............................................ $ 0.71 $ 0.17 $ 0.26
======== ======= =======
</TABLE>
10
<PAGE>
Exhibit 27.1
GARTNER GROUP, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(all amounts in thousands)
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged Charged Deductions
Beginning to Costs to Other From Balance at
of Year and Expenses Accounts (1) Reserve End of Year
---------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1995
Allowance for doubtful accounts and
returns and allowances ............................... $3,431 $1,862 $ 27 $1,630 $3,690
---------- ------------ ------------ ---------- -----------
$3,431 $1,862 $ 27 $1,630 $3,690
========== ============ ============ ========== ===========
YEAR ENDED SEPTEMBER 30, 1996
Allowance for doubtful accounts and
returns and allowances ............................... $3,690 $3,295 $ 121 $2,646 $4,460
---------- ------------ ------------ ---------- -----------
$3,690 $3,295 $ 121 $2,646 $4,460
========== ============ ============ ========== ===========
YEAR ENDED SEPTEMBER 30, 1997
Allowance for doubtful accounts and
returns and allowances ............................... $4,460 $3,421 $ 319 $2,860 $5,340
---------- ------------ ------------ ---------- -----------
$4,460 $3,421 $ 319 $2,860 $5,340
========== ============ ============ ========== ===========
</TABLE>
(1) Allowances of $319,000, $121,000 and $27,000 assumed upon acquisitions of
entities in fiscal 1997, 1996 and 1995, respectively.
11
<PAGE>
FINANCIAL STATEMENTS AND OTHER INFORMATION
13 Management's Discussion and Analysis of Financial Conditions and Results
of Operations
20 Consolidated Balance Sheets
21 Consolidated Statements of Operations
22 Consolidated Statements of Change in Stockholders' Equity
23 Consolidated Statements of Cash Flows
24 Notes to Consolidated Financial Statements
35 Report by Management
35 Report of Independent Auditors
36 Selected Consolidated Financial Data
37 Quarterly Financial Data
12
<PAGE>
GARTNER GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Fiscal 1997 marked the eighteenth consecutive year of record revenue growth for
Gartner Group, Inc. (the "Company"). Total revenues for fiscal 1997 were $511.2
million, up 30% from $394.7 million for fiscal 1996. Current year revenue growth
consisted of a 29% increase in advisory (excluding consulting) and measurement
services, a 74% increase in learning revenue and a 23% increase in other revenue
(principally from consulting services and conferences). Advisory and measurement
services encompass services which, on an ongoing basis, highlight industry
developments, review new products and technologies, provide quantitative market
research, analyze industry trends within a particular technology or market
sector and provide comparative analysis of the information technology operations
of organizations. Learning represents technology-based training products and
related services. The Company enters into annual renewable contracts for
advisory and measurement services and learning products. Revenues from advisory
and measurement services as well as learning are recognized as services and
products are delivered and as the Company's obligation to the client is
completed over the contract period. Along with the increased penetration of the
existing client base, overall revenue increases in fiscal 1997 came from the
combined successes of numerous new product introductions, investments in
overseas distribution and incremental revenue from current and prior year
acquisitions.
Contract value increased 35% to approximately $526 million at September
30, 1997 versus the same date last year. The Company believes that contract
value, which is calculated as the annualized value of all advisory, measurement
and learning ("AML") contracts in effect at a given point in time, without
regard to the duration of the contracts outstanding at such time, is a
significant measure of the Company's volume of business. Historically, a
substantial portion of client companies have renewed these services for an equal
or higher level of total value each year, and annual revenues from these
services in any fiscal year have approximated contract value at the beginning
of the fiscal year. Had contract value from the learning business been included
in contract value at September 30, 1996, the increase in fiscal 1997 contract
value would have been 33%. As of September 30, 1997, approximately 85% of the
Company's clients have renewed one or more services in the last twelve months.
However, this renewal rate is not necessarily indicative of the rate of
retention of the Company's revenue base, and contract value at any time may not
be indicative of future AML revenues or cash flows if the rate of renewal of AML
services and products or the timing of new business were to significantly change
during the following twelve months compared to historic patterns. Total
deferred revenues of $257.3 million and $201.4 million as of September 30, 1997
and 1996, respectively, as presented in the Company's Consolidated Balance
Sheets, represent unamortized revenues from AML services and products plus
unamortized revenues of certain other products and services not included in AML
services and products. Deferred revenues do not directly correlate to contract
value as of the same date since contract value represents an annualized value of
all outstanding contracts without regard to the duration of such contracts, and
deferred revenue represents unamortized revenue remaining on all outstanding
contracts including AML and certain other services and products not included in
AML revenue. Backlog at September 30, 1997 was approximately $95.1 million and
represents future revenues that will be recognized on multi-year and early
renewed AML contracts, plus in-process consulting engagements. Such revenues
will be recognized when services and products are delivered. Backlog is not
included in deferred revenues or contract value.
Historically, the Company has realized significant renewals and growth in
contract value at the end of quarters. The fourth quarter of the fiscal year
typically is the fastest growth quarter for contract value and the first quarter
of the fiscal year typically represents the slowest growth quarter as it is the
quarter in which the largest amount of 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 an AML
contract the fees receivable and related deferred revenues for the full amount
of the contract billable on that date. 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.
13
<PAGE>
Historically, AML revenues have increased significantly in the first
quarter of the ensuing fiscal year over the immediately preceding quarter and
other revenues have increased similarly due to annual conferences and exhibition
events held in the first quarter. Additionally, operating margin (operating
income as a percentage of total revenues) typically improves in the first
quarter of the fiscal year versus the immediately preceding quarter. The
operating margin improvement in the first quarter of the fiscal year is due to
the increase in revenue upon which the Company is able to further leverage its
selling, general and administrative expenses, plus operating income generated
from the first quarter Symposium and ITxpo exhibition events. Operating margin
generally is not as high in the second, third and fourth quarters of the fiscal
year compared to the first quarter of the fiscal year as the operating margins
on the ITxpo event in the first fiscal quarter are higher than on
conferences/events held later in the fiscal year. Additionally, the Company
historically does not increase its level of spending until after the first
quarter of the fiscal year, when the rate of growth in contract value becomes
known. As a result, growth in operating expenses has typically lagged behind
growth in revenues within a given year, and operating margin has generally been
higher in the earlier quarters of the fiscal year.
Operating income rose 136% to $116.6 million for fiscal 1997, or 23% of
total revenues, from $49.4 million, or 13% of total revenues for fiscal 1996.
Excluding acquisition-related charges of $34.9 million (consisting primarily of
a $32.2 million write-off of purchased, in-process research and development
costs in connection with the acquisition of J3 Learning, Inc. ("J3") in fiscal
1996), operating income for fiscal 1997 increased 38%. Operating income has
increased as a result of solid revenue growth coupled with controlled spending
that has 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 has
impacted favorably operating results. Net income per common share was $0.71 for
fiscal 1997 as compared to last fiscal year's $0.17 per common share ($0.51 per
common share for fiscal 1996 when excluding acquisition-related charges). The
Company's strong cash generation also continued in fiscal 1997. The Company had
$188.7 million in total cash, cash equivalents and marketable securities at
September 30, 1997, up $58.8 million from $129.9 million at September 30, 1996.
ANALYSIS OF OPERATIONS
The following table sets forth certain results of operations as a percentage of
revenues:
Fiscal Year Ended September 30, 1997 1996 1995
- - --------------------------------------------------------------------------------
Percent of revenues:
Revenues:
Advisory and measurement 78% 78% 80%
Learning 4 3 --
Other 18 19 20
- - --------------------------------------------------------------------------------
Total revenues 100 100 100
- - --------------------------------------------------------------------------------
Costs and expenses:
Cost of services and
product development 40 39 38
Selling, general and
administrative 34 37 41
Acquisition-related charges -- 9 --
Depreciation 2 2 2
Amortization of intangibles 1 1 1
Nonrecurring charges -- -- 3
- - --------------------------------------------------------------------------------
Total costs and expenses 77 88 85
- - --------------------------------------------------------------------------------
Operating income 23 12 15
Minority interest -- -- --
Interest income, net 1 1 1
- - --------------------------------------------------------------------------------
Income before income taxes 24 13 16
Provision for income taxes 10 9 7
- - --------------------------------------------------------------------------------
Net income 14% 4% 9%
================================================================================
FISCAL YEAR ENDED SEPTEMBER 30, 1997 VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1996
Total revenues increased 30% to $511.2 million for fiscal 1997 as compared to
$394.7 million for fiscal 1996. Revenues from advisory (excluding consulting)
and measurement services increased 29% for fiscal 1997 to $396.2 million
compared to $306.5 million for fiscal 1996 and comprised approximately 78% of
total revenues in both fiscal 1997 and fiscal 1996. Revenue from learning
increased 74% for fiscal 1997 to $21.3 compared to $12.2 for fiscal 1996 and
comprised approximately 4% of revenues in fiscal 1997 versus 3% in fiscal 1996.
The increase in AML revenues reflects primarily strong market acceptance of new
services introduced in 1996 and the first half of 1997, volume increases as a
result of increased geographic and client penetration, continuation of a volume
pricing strategy that provides more value for the same dollars each year through
the expansion of electronic distribution within client companies and incremental
revenues from acquisitions completed in fiscal 1997 and fiscal 1996 (primarily
Datapro Information Services, Inc. ("Datapro") and J3).
14
<PAGE>
Other revenues, consisting principally of revenues from consulting and
conferences, increased 23% to $93.7 million for fiscal 1997 as compared to $75.9
million for the prior year. The increase is primarily attributable to additional
conferences held in fiscal 1997, increased revenue versus fiscal 1996 for
certain conferences and expansion of consulting services to new geographic
regions.
The rate of growth in total revenues has continued to be strong in the
three defined geographic market areas of the Company: the United States, Europe
and Other International. Total revenues from sales to United States clients
increased 31% to $333.0 million for fiscal 1997 from $253.5 million for fiscal
1996. Total revenues from sales to European clients increased 24% to $122.0
million for fiscal 1997 from $98.8 million for fiscal 1996, and total revenues
from sales to Other International clients increased 33% to $56.2 million for
fiscal 1997 from $42.4 million for fiscal 1996. These increases reflect
primarily the continued results of the Company's sales strategy to extend the
Company's sales channels to clients with revenues ranging from $100 million to
$2 billion (versus $500 million to $2 billion for fiscal 1996), in addition to
the Company's historic focus on larger customers. In Europe and Other
International markets, additional investment in direct sales personnel and
distributor relationships has also contributed to revenue growth. The Company
intends to continue its expansion of operations outside of the United States in
fiscal 1998.
Operating income was $116.6 million for fiscal 1997 compared to $49.4
million for fiscal 1996. Excluding acquisition-related charges of $34.9 mil-lion
for fiscal 1996, operating income for fiscal 1997 increased 38%. All three
defined geographic areas experienced growth in operating income in fiscal 1997,
with a 139%, 130% and 138% increase in the United States, Europe and Other
International geographic areas, respectively. Operating income, as a percentage
of total revenues, increased to 23% for fiscal 1997 versus 21% for fiscal 1996,
after excluding the above mentioned acquisition-related charges. Operating
income has increased as a result of solid revenue growth coupled with controlled
spending that has 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 has favorably impacted operating results.
While costs and expenses, excluding acquisition-related charges, increased
to $394.6 million for fiscal 1997 from $310.3 million for fiscal 1996, such
costs decreased to 77% of total revenues for fiscal 1997, down from 79% for
fiscal 1996. Cost of services and product development expenses were $202.8
million and $153.0 million for fiscal 1997 and 1996, respectively. This increase
in expenses over the prior fiscal year reflects the need to provide additional
support to the growing client base, including investment in strategic areas such
as electronic and Internet distribution, costs associated with the
implementation of the Company's new client inquiry process (QuickPath) and
product development costs (particularly for technology-based training products).
The decrease in cost of services and product development expenses, as a
percentage of total revenues, is attributable primarily to improved gross
margins on conferences as compared to the prior fiscal year and lower delivery
cost per dollar of revenue generated due to increased electronic delivery of AML
services and products. Selling, general and administrative expenses, which were
$173.6 million and $144.5 million for fiscal 1997 and 1996, respectively,
increased primarily as a result of the Company's continued expansion of
worldwide distribution channels and resulting commissions earned on the revenue
generated. The increase in commission expense was offset partially by the
elimination and/or reduction of redundant general and administrative expenses,
including personnel reductions and facility rationalization relating to
acquisitions. Although the Company has added general and administrative
resources to support the growing revenue base, it has benefited from economies
of scale and leveraging of its general and administrative staff and facilities.
Consequently, selling, general and administrative expenses were 34% of total
revenues for fiscal 1997 as compared to 37% for fiscal 1996.
Acquisition-related charges of $34.9 million for fiscal 1996 for the
acquisitions of Dataquest, Inc. and J3 were not recurring for fiscal 1997.
Depreciation expense increased to $11.8 million for fiscal 1997 from $9.1
million for fiscal 1996, due primarily to capital spending required to support
business growth. Additionally, amortization of intangibles increased by $2.6
million for fiscal 1997 as compared to fiscal 1996, reflecting primarily
goodwill associated with fiscal 1996 and 1997 acquisitions.
15
<PAGE>
Interest income, net, increased to $7.3 million for fiscal 1997, versus
$3.7 million for fiscal 1996. This improvement resulted from interest income
accumulating on the Company's total cash, cash equivalents and marketable
securities ($188.7 million at September 30, 1997 versus $129.9 million at
September 30, 1996), changes in the mix to higher yielding investments and from
reduced interest expense after remaining debt related to fiscal 1993 and 1994
acquisitions was paid during fiscal 1996.
Provision for income taxes increased by $14.1 million to $50.7 million for
fiscal 1997, up from $36.7 million for fiscal 1996. The effective tax rate was
41% and 69% for fiscal 1997 and 1996, respectively. Absent the non-deductible
write-off for purchased in-process research and development costs, the effective
tax rate for fiscal 1996 was 43%. The decrease in the effective tax rate from
fiscal 1996, excluding the above mentioned non-deductible write-off, is due to
on-going tax planning initiatives. A more detailed analysis of the changes in
the provision for income taxes is provided in Note 9 of the Notes to
Consolidated Financial Statements.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1995
Total revenues increased 34% to $394.7 million for fiscal 1996 as compared to
$295.1 million for fiscal 1995. Revenues from advisory (excluding consulting)
and measurement services increased 30% for fiscal 1996 to $306.5 million
compared to $235.9 million for fiscal 1995 and comprised approximately 78% of
total revenues for fiscal 1996 versus 80% for fiscal 1995. Revenue from learning
increased 839% for fiscal 1996 to $12.2 million compared to $1.3 million for
fiscal 1995. The increase in AML revenues reflects primarily strong market
acceptance of new services introduced in fiscal 1996, volume increases as a
result of increased geographic and client penetration, a volume pricing strategy
that provides more value for the same dollars each year through the expansion of
electronic distribution within client companies and incremental revenues from
the acquisition of J3 in July 1996. In addition, the Company launched a number
of Internet-based products during fiscal 1996 that are designed to expand the
distribution channels for the Company's products in future fiscal years.
Other revenues, consisting principally of revenues from consulting and
conferences, increased 31% to $75.9 million for fiscal 1996 as compared to $58.0
million for the prior year. This increase was attributable primarily to
additional conferences held in fiscal 1996.
The rate of growth in total revenues has continued strong in the three
defined geographic market areas of the Company: the United States, Europe and
Other International. Revenues from sales to United States clients increased 37%
to $253.5 million for fiscal 1996 from $184.6 million for fiscal 1995. Revenues
from sales to European clients increased 37% to $98.8 million for fiscal 1996
from $71.9 million for fiscal 1995, and revenues from sales to Other
International clients increased 10% to $42.4 million for fiscal 1996 from $38.6
million for fiscal 1995. These increases reflect primarily the continued results
of the Company's sales strategy to extend the Company's sales channels to
clients with revenues ranging from $500 million to $2 billion, in addition to
the Company's historic focus on larger customers. In Europe and Other
International markets, additional investment in direct sales personnel and
distributor relationships has also contributed to revenue growth.
Operating income was $49.4 million for fiscal 1996, compared to $43.7
million for fiscal 1995. Excluding $34.9 million in acquisition-related charges
(consisting primarily of a $32.2 million write-off of purchased in-process
research and development costs in connection with the acquisition of J3) and
$8.8 million of nonrecurring charges in fiscal 1995, operating income for fiscal
1996 increased 61% to $84.3 million compared to $52.5 million for fiscal 1995.
Excluding the above mentioned charges, all three geographic areas experienced
growth in operating income for fiscal 1996, with a 47%, 200% and 31% increase in
the United States, Europe and Other International geographic areas,
respectively. Operating income, as a percentage of total revenues, after
excluding the above mentioned charges, increased to 21% of revenues for fiscal
1996 versus 18% for fiscal 1995. As revenues have grown, the Company has been
able to take advantage of economies of scale and has leveraged its resources
(additional revenues have been generated using essentially the same resources),
thereby improving margins. These measures include electronic distribution,
improved productivity of the sales force resulting from a significant investment
in new technologies, and the utilization of new sales channels to reach more
organizations. These measures have had a greater incremental impact on Europe's
operating income relative to the other geographic areas mainly due to the prior
year distribution improvements being in place for all of fiscal 1996, combined
with significant revenue growth.
16
<PAGE>
The total dollar amount of costs and expenses, excluding
acquisition-related and nonrecurring charges, increased $67.7 million to $310.3
million. The dollar increase in cost growth reflected primarily the need to
provide additional support to the growing client base, including investment in
strategic areas such as electronic and Internet distribution and information
systems infrastructure. Additionally, cost of services and product development,
as a percentage of total revenues increased, reflecting a shift in the Company's
total revenues as higher direct cost businesses such as consulting and
conferences contributed to a greater portion of the total revenues for fiscal
1996. For fiscal 1996, these factors resulted in a $40.3 million increase in
cost of services and product development and a $24.8 million increase in
selling, general and administrative expenses compared to the prior fiscal year.
However, expressed as a percentage of revenues, costs of services and product
development increased only 1% from 38% to 39% and selling, general and
administrative decreased from 41% to 37% of total revenues in comparing fiscal
1996 to fiscal 1995.
Interest income, net, increased to $3.7 million for fiscal 1996, versus
$2.3 million for fiscal 1995. This increase in interest income is attributable
to an increase in the Company's average available investable funds and the
decrease in debt related to prior years' acquisitions. Rates earned on the
average available investable funds for fiscal 1996 were consistent with the
rates earned for fiscal 1995.
Provision for income taxes increased by $15.8 million to $36.7 million for
fiscal 1996, up from $20.9 million for fiscal 1995. The effective rate was 69%
and 46% for fiscal 1996 and 1995, respectively. This increase reflects the
non-deductible write-off for purchased in-process research and development costs
in fiscal 1996. Absent this charge, the effective tax rate for fiscal 1996 was
43%. A more detailed analysis of the changes in the provision for income taxes
is provided in Note 9 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. Competition for
qualified analysts is intense. There can be no assurance that the Company will
be able to hire additional qualified IT analysts as may be required to support
the evolving needs of customers or any growth in the Company's business. Any
failure to maintain a premier staff of IT analysts could adversely affect the
quality of the Company's products and services, and therefore its future
business and operating results. Additionally, there may be increased business
risk as the Company expands product and service offerings to smaller domestic
companies.
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.
The Company has expanded its presence in the technology-based training
industry. The success of the Company in the technology-based training industry
will depend on its ability to compete with vendors of these products and
services which include a range of education and training specialists, hardware
and system manufacturers, software vendors, system integrators, dealers,
value-added resellers and network/ communications vendors, certain of whom have
significantly greater product breadth and market presence in the
technology-based training sector. There can be no assurance that the Company
will be able to provide products that compare favorably with new competitive
17
<PAGE>
products or that competitive pressures will not require the Company to reduce
prices. Future success will also depend on the Company's ability to develop new
training products that are released timely with the introductions of the
underlying software products.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through cash provided
by operating activities. The combination of revenue growth and operating margin
improvements have contributed to positive cash provided by operating activities
for fiscal 1997, 1996 and 1995. In addition, cash flow has been enhanced by the
Company's continuing management of working capital requirements to support
increased sales volumes from growth in the pre-existing businesses and growth
due to acquisitions.
Cash provided by operating activities for fiscal 1997 was $87.2 million
compared to $65.7 million for the prior fiscal year. This increase reflected
primarily the impact of increased revenues and operating margins and related
changes in the balance sheet accounts, particularly fees receivable, deferred
revenues, deferred commissions, commissions payable and bonuses payable.
Cash used for investing activities totaled $84.3 million for the fiscal
year ended September 30, 1997. During fiscal 1997, the Company used $33.3
million in cash for acquisitions, primarily for the purchase of Datapro for $25
million, and $9.0 million for investments in unconsolidated businesses. The
Company also used $21.5 million for the purchase of capital assets, loaned
officers $7.2 million 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) and had net purchases of
marketable securities for $13.2 million.
Cash provided by financing activities totaled $44.6 million for fiscal
1997, versus $31.6 million for fiscal 1996. The increase for fiscal 1997 was
driven primarily by a $36.8 million credit to additional paid-in capital for tax
benefits received from stock transactions with employees and $13.6 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. As additional stock options have become exercisable each fiscal
year under the Company's stock option plans, both the volumes of option
exercises and gains on those exercises have increased, thereby resulting in
significant tax benefits being realized in both fiscal 1997 and 1996. These
increases were partially offset by a net cash settlement of $12.0 million on a
forward purchase agreement on the Company's common stock.
The effect of exchange rates reduced cash and cash equivalents by $1.8
million for the year ended September 30, 1997, and was due to the strengthening
of the U.S. dollar versus certain foreign currencies. In fiscal 1996, the
foreign denominated cash balances were significantly less and the exchange rate
fluctuations were not as significant as in the current fiscal year, thereby
resulting in a reduction of $0.3 million in cash. At September 30, 1997, cash,
cash equivalents and marketable securities totaled $188.7 million. In addition,
the Company has available two unsecured credit lines with The Bank of New York
and Chase Manhattan Bank for $5.0 million and $25.0 million, respectively. These
lines may be canceled by the banks at any time without prior notice or penalty.
Additionally, the Company issues letters of credit in the ordinary course of
business. The Company had outstanding letters of credit with Chase Manhattan
Bank of $4.0 million and $2.0 million with The Bank of New York at September 30,
1997. The Company currently has no material capital commitments.
The Company believes that its current cash balances and marketable
securities, together with cash anticipated to be provided by operating
activities and borrowings available under the existing lines of credit, will be
sufficient for the expected short-term and foreseeable long-term cash needs of
the Company, including possible acquisitions.
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: competition, rapidly changing technology, regulatory
requirements and uncertainties of international trade.
18
<PAGE>
COMMON STOCK INFORMATION
The Company's Class A Common Stock is listed for quotation in the Nasdaq
National Market under the symbol "GART." The Company effected two-for-one stock
splits by means of stock dividends in March 1996, June 1995 and August 1994. All
earnings per share and share data presented herein have been restated
retroactively to reflect such splits. As of September 30, 1997, the Company
recorded the conversion of all Class B Common Stock into Class A Common Stock on
a one for one basis, pursuant to a provision of the Articles of Incorporation
which requires conversion when the Class B Common Stockholder's voting equity
falls below a certain ownership percentage after considering all exercisable
options and warrants outstanding. During fiscal 1997, the Company's Class A
Common Stock traded within a range of daily closing prices of $20.38 to $42.06
per share.
- - --------------------------------------------------------------------------------
QUARTERLY COMMON STOCK PRICES
- - --------------------------------------------------------------------------------
Fiscal Year 1997 Fiscal Year 1996
----------------- -----------------
High Low High Low
- - --------------------------------------------------------------------------------
First Quarter ended
December 31 $38.88 $29.75 $23.94 $16.25
Second Quarter ended
March 31 $42.06 $20.38 $33.00 $20.25
Third Quarter ended
June 30 $35.94 $20.63 $42.50 $30.88
Fourth Quarter ended
September 30 $36.63 $25.50 $38.63 $27.38
- - --------------------------------------------------------------------------------
The Company has not paid any cash dividends on its common stock and
currently intends to retain any future earnings for use in its business.
Accordingly, the Company does not anticipate that any cash dividends will be
declared or paid on the common stock in the foreseeable future.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standard No. 128, "Earnings
per Share" was issued. This statement sets forth guidance on the presentation of
earnings per share and requires dual presentation of basic and diluted earnings
per share on the face of the income statement. Basic earnings per share is
computed by dividing net income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if all common stock
equivalents were exercised (similar to fully diluted earnings per share under
Accounting Principles Board Opinion No. 15). If the new standard was in effect
during fiscal 1997, basic net income per common share for the fiscal year ended
September 30, 1997 would have been $0.77 and diluted income per common share
would have been $0.71. The Company is required to adopt the new standard in the
first quarter of fiscal 1998.
In June 1997, Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income ("FAS 130") and "Disclosures about Segments of
an Enterprise and Related Information" ("FAS 131") were issued. FAS 130
establishes standards for reporting and disclosure of comprehensive income and
its components in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders, which is currently not required. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company is required to adopt both new standards in the first
quarter of fiscal 1999.
19
<PAGE>
GARTNER GROUP CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share data)
September 30, 1997 1996
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 142,415 $ 96,755
Marketable securities 28,639 30,054
Fees receivable, net of allowances of $5,340 and $4,460 205,760 143,762
Deferred commissions 23,019 17,539
Prepaid expenses and other current assets 25,775 22,040
- - -------------------------------------------------------------------------------------------------------
Total current assets 425,608 310,150
Long-term marketable securities 17,691 3,047
Property, equipment and leasehold improvements, net 44,102 32,818
Intangible assets, net 132,195 93,144
Other assets 25,716 4,949
- - -------------------------------------------------------------------------------------------------------
Total assets $ 645,312 $ 444,108
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 85,411 $ 60,527
Commissions payable 16,979 15,148
Accrued bonuses payable 15,722 16,781
Deferred revenues 254,071 198,952
- - -------------------------------------------------------------------------------------------------------
Total current liabilities 372,183 291,408
- - -------------------------------------------------------------------------------------------------------
Long-term deferred revenues 3,259 2,465
Commitments and contingencies
Stockholders' equity:
Preferred stock:
$.01 par value, authorized 2,500,000 shares; none issued or outstanding -- --
Common stock:
$.0005 par value, authorized 200,000,000 shares of Class A Common
Stock and 1,600,000 shares of Class B Common Stock; issued
108,334,601 shares of Class A Common (102,697,739 in 1996) and 0
shares of Class B Common Stock
(1,600,000 in 1996) 54 52
Additional paid-in capital 179,017 134,711
Cumulative translation adjustment (1,098) (2,965)
Accumulated earnings 105,138 32,008
Treasury stock, at cost, 11,624,805 and 11,370,594 shares (13,241) (13,571)
- - -------------------------------------------------------------------------------------------------------
Total stockholders' equity 269,870 150,235
- - -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 645,312 $ 444,108
=======================================================================================================
</TABLE>
See notes to consolidated financial statements
20
<PAGE>
GARTNER GROUP CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Year Ended September 30, 1997 1996 1995
- - --------------------------------------------------------------------------------
REVENUES:
Advisory and measurement $396,219 $306,542 $235,867
Learning 21,314 12,219 1,301
Other, principally consulting and conferences 93,706 75,911 57,978
- - --------------------------------------------------------------------------------
Total revenues 511,239 394,672 295,146
- - --------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of services and product development 202,815 152,982 112,675
Selling, general and administrative 173,610 144,473 119,626
Acquisition-related charges -- 34,898 --
Depreciation 11,758 9,064 6,399
Amortization of intangibles 6,443 3,815 3,906
Nonrecurring charges -- -- 8,800
- - --------------------------------------------------------------------------------
Total costs and expenses 394,626 345,232 251,406
- - --------------------------------------------------------------------------------
Operating income 116,613 49,440 43,740
Minority interest -- 25 98
Interest income, net 7,260 3,665 2,271
- - --------------------------------------------------------------------------------
Income before provision for income taxes 123,873 53,130 46,109
Provision for income taxes 50,743 36,692 20,948
- - --------------------------------------------------------------------------------
Net income $ 73,130 $ 16,438 $ 25,161
================================================================================
NET INCOME PER COMMON SHARE:
Primary $ .71 $ .17 $ .27
================================================================================
Fully diluted $ .71 $ .17 $ .26
================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary 102,459 98,612 94,762
================================================================================
Fully diluted 102,751 98,854 95,212
================================================================================
See notes to consolidated financial statements
21
<PAGE>
GARTNER GROUP CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Cumulative Total
Preferred Common Paid-in Translation Accumulated Treasury Stockholders'
(In thousands, except share data) Stock Stock Capital Adjustment Earnings Stock Equity
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 $0 $50 $ 59,709 $ 250 $ 7,699 $(13,821) $ 53,887
Net income - -- -- -- 25,161 -- 25,161
Issuance of 1,838,902 shares of Class A
Common Stock upon exercise of stock options - 1 1,259 -- -- -- 1,260
Issuance of 345,644 shares of Class A
Common Stock from purchases by employees - 0 1,659 -- -- -- 1,659
Issuance from treasury stock of 172,594 shares of
Class A Common Stock - -- 1,410 -- -- 3 1,413
Purchase of 152,624 of Class A Common Stock - -- -- -- -- (17) (17)
Tax benefits of stock transactions with employees - -- 9,241 -- -- -- 9,241
Net transfers to D&B by Dataquest - -- -- -- (15,603) -- (15,603)
Cumulative translation adjustment - -- -- (2,750) -- -- (2,750)
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 0 51 73,278 (2,500) 17,257 (13,835) 74,251
Net income - -- -- -- 16,438 -- 16,438
Issuance of 3,036,403 shares of Class A
Common Stock upon exercise of stock options - 1 5,752 -- -- -- 5,753
Issuance of 199,648 shares of Class A Common
Stock from purchases by employees - 0 2,407 -- -- -- 2,407
Issuance from treasury stock of 117,470 shares of
Class A Common Stock from purchases
by employees - -- 2,140 -- -- 264 2,404
Tax benefits of stock transactions with employees - -- 29,415 -- -- -- 29,415
Net transfers to D&B by Dataquest - -- -- -- (1,687) -- (1,687)
Cumulative translation adjustment - -- -- (465) -- -- (465)
Acquisition of Dataquest, Inc. - -- (15,000) -- -- -- (15,000)
Acquisition of J3 Learning, Inc. - 0 36,719 -- -- -- 36,719
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 0 52 134,711 (2,965) 32,008 (13,571) 150,235
Net income - -- -- -- 73,130 -- 73,130
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 from purchases
by employees - -- 5,883 -- -- 330 6,213
Conversion of 1,600,000 shares of Class B
Common Stock into Class A Common Stock - 0 -- -- -- -- 0
Tax benefits of stock transactions with employees - -- 36,833 -- -- -- 36,833
Net share settlement of 449,932 shares of
Class A Common Stock received on forward
purchase agreement - -- -- -- -- 0 0
Net cash settlement paid on forward
purchase agreement - -- (12,004) -- -- -- (12,004)
Cumulative translation adjustment - -- -- 1,867 -- -- 1,867
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $0 $54 $ 179,017 $(1,098) $ 105,138 $(13,241) $ 269,870
=================================================================================================================================
</TABLE>
See notes to consolidated financial statements
22
<PAGE>
GARTNER GROUP CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
Fiscal Year Ended September 30, 1997 1996 1995
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 73,130 $ 16,438 $ 25,161
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization of intangibles 18,201 12,879 9,703
Acquisition-related charges -- 34,898 --
Provision for doubtful accounts 3,421 3,295 1,862
Equity in losses of minority owned company 202 -- --
Deferred revenues 41,750 35,800 25,479
Deferred tax expense (benefit) 1,554 (1,394) (2,690)
Pre-acquisition tax benefit applied to reduce goodwill 275 517 1,257
Minority interest -- (25) (98)
Provision for nonrecurring charges -- -- 8,800
Payments for nonrecurring charges (724) (7,691) (408)
Changes in assets and liabilities, net of effects of acquisitions:
Increase in fees receivable (60,378) (31,779) (10,136)
Increase in deferred commissions (4,262) (1,154) (4,216)
Increase in prepaid expenses and other current assets (7,915) (1,995) (1,138)
(Increase) decrease in other assets (2,707) 116 (242)
Increase in accounts payable and accrued liabilities 23,782 2,277 10,001
Increase in commissions payable 1,785 2,160 1,248
(Decrease) increase in accrued bonuses payable (957) 1,347 2,383
- - ---------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 87,157 65,689 66,966
- - ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Payment for businesses acquired (excluding cash acquired) (33,306) (46,176) (9,749)
Investments in unconsolidated subsidiaries (9,089) (750) (180)
Addition of property, equipment and leasehold improvements (21,513) (15,614) (18,183)
Proceeds from disposal of property, equipment and leasehold improvements -- -- 11,826
Marketable securities purchased, net (13,229) (4,268) (24,783)
Loans to Officers (7,163) -- --
Other investing -- -- (341)
- - ---------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (84,300) (66,808) (41,410)
- - ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations -- (6,725) (5,825)
Issuance of common stock and warrants 13,596 5,753 1,260
Proceeds from Employee Stock Purchase Plan offering 5,883 4,547 3,069
Tax benefits of stock transactions with employees 36,833 29,415 9,241
Distributions of capital between Dataquest and its former parent -- (1,687) (15,731)
Net cash settlement on forward purchase agreement (12,004) -- --
Sale (purchase) of treasury stock 330 264 (14)
- - ---------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities 44,638 31,567 (8,000)
- - ---------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 47,495 30,448 17,556
Effect of exchange rates on cash and cash equivalents (1,835) (274) 220
Cash and cash equivalents, beginning of period 96,755 66,581 48,805
- - ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 142,415 $ 96,755 $ 66,581
- - ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest -- $ 437 $ 225
Income taxes $ 6,597 $ 8,463 $ 7,265
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock and options issued in connection with J3 acquisition -- $ 36,719 --
</TABLE>
See notes to consolidated financial statements
23
<PAGE>
GARTNER GROUP 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. ("GGI" or the "Company") and its majority-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated. Minority interest represents the minority shareholder's
proportionate share of the equity in businesses owned less than 100%. 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 effective 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. Revenues from advisory, measurement
and learning ("AML") contracts are recognized as services and products are
delivered, and as the Company's obligation to the client is completed over the
contract period, generally twelve months. The Company's policy is to record at
the time of signing of an AML contract the fees receivable and related deferred
revenues, for the full amount of the contract billable on that date. All such
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. All contracts are billable upon signing, absent special
terms granted on a limited basis from time to time. 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. Other revenues consist
principally of revenues recognized as earned from consulting services and
conferences.
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. Marketable securities are considered "held-to-maturity" and valued
at amortized cost, which approximates market. It is management's intent to hold
all investments to maturity.
Inventories. Inventories, which consist primarily of finished goods relating to
the Company's learning business (technology-based training products), are stated
at the lower of cost or market. Cost is determined on a first-in, first-out
basis. Inventories consist primarily of material costs, and are included in the
balance sheet caption "Prepaid and other current assets." Inventories were $2.1
million and $1.3 million at September 30, 1997 and 1996, respectively.
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 asset or the remaining term of the related leases.
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 cease 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. Software development costs, subsequent to technological feasibility
and prior to general release, were not material and have been expensed.
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 estimated 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 the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109") (see Note 9. Income Taxes).
Non-compete agreements are being amortized on a straight-line basis over the
period of the agreement ranging from three to five years. Tradenames and other
intangibles are amortized using the straight-line method over their estimated
useful lives ranging from four to thirty years. At the
24
<PAGE>
end of each quarter, the Company reviews the recoverability of all intangibles
based on estimated undiscounted future cash flows from operating activities
compared with the carrying value of the intangible asset. Should the aggregate
of such future cash flows be less than the carrying value, a writedown would be
required, measured by the difference between the discounted future cash flows
(or another acceptable method for determining fair value) and the carrying value
of the intangible.
Foreign currency translation. All assets and liabilities of foreign subsidiaries
are translated into U.S. dollars at fiscal year-end exchange rates. Income and
expense items are translated at average exchange rates prevailing during the
fiscal year. The resulting translation adjustments are recorded as a component
of stockholders' equity.
Income taxes. Income taxes are provided using the asset and liability method in
accordance with FAS 109. Deferred tax assets and liabilities are recognized
based on differences between the book and tax bases 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 $4.2 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. To the extent the
Company incurs employment taxes as a direct result of the exercise of such stock
options, this cost is charged to Additional paid-in capital.
Computations of net income per share of common stock. Primary and fully diluted
net income per share of common stock is computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. The computation includes the weighted average
number of shares issued in connection with the Dataquest, Inc. ("Dataquest")
acquisition (see Note 3. Acquisitions), on December 1, 1995, as if they had been
issued at the beginning of fiscal 1996 and fiscal 1995. The warrant issued in
connection with the Dataquest acquisition has been excluded from primary and
fully diluted weighted average shares outstanding for fiscal 1995 due to its
anti-dilutive effect.
Stock based compensation. In October 1995, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") was
issued. This statement defines a fair value based method of accounting for an
employee stock option. Companies may, however, elect to adopt this new
accounting rule through a pro forma disclosure option, while continuing to use
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." As permitted by FAS 123, the Company has adopted the disclosure
provisions and continues accounting for its employee stock compensation plans
under APB 25 (see Note 12 for the fair value disclosures required under FAS
123).
Recently issued accounting standards. In February 1997, Statement of Financial
Accounting Standard No. 128, "Earnings per Share", was issued. The statement
sets forth guidance on the presentation of earnings per share and requires dual
presentation of basic and diluted earnings per share on the face of the income
statement. Basic earnings per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if all common stock equivalents were exercised
(similar to fully diluted earnings per share under APB Opinion No. 15). If the
new standard was in effect during fiscal 1997, basic net income per common share
for the fiscal year ended September 30, 1997 would have been $0.77 and diluted
net income per common share would have been $0.71. The Company is required to
adopt the new standard in the first quarter of fiscal 1998.
25
<PAGE>
In June 1997, Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income"("FAS 130") and "Disclosures about Segments of
an Enterprise and Related Information" ("FAS 131"), were issued. FAS 130
establishes standards for reporting and disclosure of comprehensive income and
its components in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. FAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders which is currently not required. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company is required to adopt both new standards in the first
quarter of fiscal 1999.
Expense Allocations. Prior to the Company's acquisition of Dataquest, Dataquest
was a wholly-owned subsidiary of The Dun and Bradstreet Corporation ("D&B"). D&B
provided certain services to and incurred certain costs on behalf of its
wholly-owned subsidiaries and divisions. These costs, which included employee
benefit and executive compensation programs, payroll processing and
administration, general treasury services and various business insurance
coverages, were allocated on a pro rata basis to Dataquest when it was a
wholly-owned subsidiary of D&B and were $0.3 and $1.9 million during the fiscal
years 1996 and 1995, respectively. The costs of D&B's general corporate
overheads were not allocated, as such costs related to Dataquest were deemed to
be immaterial.
Distributions of capital between Dataquest and its former parent. Dataquest
transfers to D&B included historical investments and advances from D&B, as well
as current period income or losses, net transfers to/from D&B, and current
income taxes payable or receivable.
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
amount of the Company's financial instruments approximates its fair value.
Concentrations of Credit Risk. Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash,
marketable securities and fees receivable. The Company invests its cash
primarily in a diversified portfolio of highly-rated municipal and government
bonds. Concentrations of credit risk with respect to fees receivables are
limited due to the large number of customers comprising the Company's customer
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.
Reclassifications. Certain reclassifications have been made in the prior years
financial statements to conform with the fiscal 1997 presentation.
2. RELATED PARTIES
D&B, an investor in Information Partners Capital Fund, L.P. ("the 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 Class A and Class B Common Stock of the Company to
Cognizant Corporation ("Cognizant"), a spin-off of D&B and an independent public
company. At the date of transfer, these shares represented approximately 51% of
the Company's outstanding common stock. During fiscal 1997, Cognizant's
ownership of the Company's outstanding common stock fell below 50%.
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 are full recourse obligations to the Officers and are also
secured by shares of the Company's common stock held by the Officers. The loans
bear interest at an annual rate of 6.14% and mature on June 3, 1999. The
principal amount of
26
<PAGE>
the loans totaling $7.2 million are included in Other assets on the September
30, 1997 Consolidated Balance Sheet.
3. ACQUISITIONS
On December 1, 1995, the Company acquired all the outstanding shares of
Dataquest, a wholly-owned subsidiary of D&B, for consideration of $15.0 million
in cash, 3,000,000 shares of Class A Common Stock with an approximate fair
market value of $60.0 million, and a five year warrant to purchase 600,000
shares of Class A Common Stock at $16.42 per share. Dataquest is a provider of
information technology ("IT") market research and consulting for the IT vendor
manufacturer and financial communities which complements the Company's end user
focus. The Company has accounted for the acquisition as a transfer and exchange
between companies under common control and the 3,000,000 shares have been
assumed to be outstanding for all periods presented. Accordingly, the accounts
of Dataquest have been combined with the Company's at historical cost in a
manner similar to a pooling of interests. Transaction costs of $1.7 million
relating to the acquisition have been included in acquisition-related charges in
the Consolidated Statement of Operations for fiscal 1996.
Combined and separate results of GGI and Dataquest during the periods
preceding the merger were as follows (in thousands):
Three months ended
December 31, 1995 (Unaudited) GGI Dataquest Combined
- - --------------------------------------------------------------------------------
Total revenues $76,005 $20,469 $96,474
Net income $10,570 $923 $11,493
- - --------------------------------------------------------------------------------
Fiscal year ended
September 30, 1995 GGI Dataquest Combined
- - --------------------------------------------------------------------------------
Total revenues $229,152 $65,994 $295,146
Net income (loss) $25,539 $ (378) $25,161
- - --------------------------------------------------------------------------------
There were no intercompany transactions between the two companies for the
periods presented.
On July 31, 1996, the Company acquired all of the outstanding shares of J3
Learning Corporation ("J3") for consideration of approximately $8.0 million in
cash, 1,065,290 shares of Class A Common Stock which had an approximate fair
market value of $35.4 million and options to purchase Class A Common Stock which
had a value of $1.3 million. J3 publishes, markets and distributes software
educational materials for corporate and individual 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 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 $51.1 million. Of
such amount, $32.2 million was expensed at acquisition as purchased in-process
research and development costs and is included in acquisition-related charges in
the Consolidated Statement of Operations for fiscal 1996, and the remaining
excess purchase price was allocated as follows (in thousands):
Amortization
Period (years) Amount
- - --------------------------------------------------------------------------------
Existing title library 4 $ 1,900
Tradename 12 4,200
Goodwill 12 12,787
- - --------------------------------------------------------------------------------
$18,887
================================================================================
The following unaudited pro forma summary presents the consolidated
results of operations of the Company as if the acquisition of J3 had occurred at
the beginning of fiscal 1995 and does not purport to be indicative of what would
have occurred had the acquisition been made as of that date or of results which
may occur in the future (in thousands, except per share data):
Fiscal Year Ended September 30, 1996 1995
- - --------------------------------------------------------------------------------
Total revenues $401,329 $310,150
Net income $ 11,749 $ 16,360
Net income per common share $ 0.12 $ 0.17
- - --------------------------------------------------------------------------------
On August 1, 1997, the Company acquired all of the outstanding shares of
Datapro Information Services, Inc. ("Datapro"), a unit of the McGraw-Hill
Companies for consideration of approximately $25 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
27
<PAGE>
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 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 fiscal 1996, consolidated total
revenues would have been $536.6 million and $431.4 for fiscal 1997 and 1996,
respectively. 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 fiscal 1997
and 1996 net income and net income per common share is not material.
During fiscal 1997 and 1996, the Company completed additional acquisitions
for consideration of $8.1 and $23.2 million in cash, respectively. These
acquisitions have been accounted for under the purchase method and substantially
all of the purchase price has been assigned to goodwill. The results of these
acquired operations individually and collectively, had they occurred at the
beginning of fiscal 1997, 1996 or 1995 are not material.
During fiscal 1997 and 1996 the Company made several investments totaling
$7.1 million and $0.9 million, respectively, that are accounted for on the cost
method. The Company also made an investment totaling $1.9 million in 1997 that
is accounted for on the equity method. These investments totaled $9.4 million
and $0.9 million and are included in Other assets on the Consolidated Balance
Sheets as of September 30, 1997 and 1996, respectively.
In October 1997, the Company acquired a 32% membership interest in Jupiter
Communications, LLC ("Jupiter") for $8.0 million in cash. Jupiter is a provider
of analyst-based research and strategic planning services to the consumer
Internet and interactive industry.
4. NONRECURRING CHARGES
During fiscal 1995, Dataquest closed certain operations of its subsidiary in
Japan for a $0.6 million pre-tax charge, and initiated workforce reduction
actions resulting in a pre-tax charge of $8.2 million. These charges were
recorded as a nonrecurring charge in the Consolidated Statement of Operations.
5. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, are carried at cost less
accumulated depreciation and amortization, and consist of the following (in
thousands):
Useful September 30,
-------------------
Life (years) 1997 1996
- - --------------------------------------------------------------------------------
Furniture and equipment 3-8 $ 25,568 $ 19,801
Computer equipment 2-3 56,979 34,843
Leasehold improvements 2-15 19,257 14,293
- - --------------------------------------------------------------------------------
101,804 68,937
Less - accumulated depreciation
and amortization (57,702) (36,119)
- - --------------------------------------------------------------------------------
$ 44,102 $ 32,818
================================================================================
6. INTANGIBLE ASSETS
Intangible assets, net, are carried at cost less accumulated amortization, and
consist of the following (in thousands):
Amortization September 30,
-------------------
Period (years) 1997 1996
- - --------------------------------------------------------------------------------
Goodwill 7-30 $138,537 $ 97,535
Non-compete agreements 3-5 3,462 --
Tradenames 12 6,978 6,200
Title library 4 1,900 1,900
- - --------------------------------------------------------------------------------
150,877 105,635
Less - accumulated amortization (18,682) (12,491)
- - --------------------------------------------------------------------------------
$132,195 $ 93,144
================================================================================
7. COMMITMENTS
The Company leases various facilities, furniture and computer equipment under
lease arrangements expiring between fiscal 1998 and 2010.
Future minimum annual payments under operating lease agreements as of
September 30, 1997 are as follows (in thousands):
Fiscal Year Ending September 30,
- - --------------------------------------------------------------------------------
1998 $12,346
1999 10,326
2000 9,312
2001 7,743
2002 6,220
Thereafter 52,350
- - --------------------------------------------------------------------------------
Total minimum lease payments $98,297
================================================================================
28
<PAGE>
Rental expense for operating leases, net of sublease income, was $16.8,
$11.0 and $10.4 million for the fiscal years ended September 30, 1997, 1996 and
1995, respectively. The Company has commitments with two facilities management
companies for printing, copying, mail room and other related services. The
minimum annual obligations under these service agreements are $3.8 million for
fiscal 1998 and 1999, $1.3 million for fiscal 2000, and $0.4 million for fiscal
2001.
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.
8. LONG-TERM OBLIGATIONS
The Company has available two unsecured credit lines with The Bank of New York
and Chase Manhattan Bank for $5.0 million and $25.0 million, respectively.
Borrowings under The Bank of New York line accrue interest charges at LIBOR plus
2%. Alternatively, the rate shall be the higher of the prime commercial lending
rate of the bank or the Federal Funds Rate plus 1/2 of 1% in the event LIBOR is
unavailable. The Chase Manhattan Bank line carries an interest rate equal to
either the prime rate of Chase Manhattan Bank, LIBOR plus 2.5% for periods of
30, 60 or 90 days as the Company may choose, or a "fixed option" rate. There are
no commitment fees associated with these lines. These lines may be canceled by
the banks at any time without prior notice or penalty. No borrowings were
outstanding under either line at September 30, 1997 and 1996.
Letters of credit are issued by the Company in the ordinary course of
business. The Company had outstanding letters of credit with Chase Manhattan
Bank of $4.0 million and $2.0 million with The Bank of New York at September 30,
1997.
9. INCOME TAXES
Following is a summary of the components of income before provision for income
taxes (in thousands):
Fiscal Year Ended September 30, 1997 1996 1995
- - --------------------------------------------------------------------------------
U.S. $ 93,758 $40,650 $38,588
Non-U.S. 30,115 12,480 7,521
- - --------------------------------------------------------------------------------
Consolidated $123,873 $53,130 $46,109
================================================================================
The provision for income taxes on the above income consists of the
following components (in thousands):
Fiscal Year Ended September 30, 1997 1996 1995
- - --------------------------------------------------------------------------------
Current tax expense:
U.S. federal $ 797 $ 1,775 $ 9,282
State and local 1,872 2,178 2,051
Foreign 8,208 3,164 1,807
- - --------------------------------------------------------------------------------
Total current 10,877 7,117 13,140
- - --------------------------------------------------------------------------------
Deferred tax expense (benefit):
U.S. federal 434 58 (1,967)
State and local 912 (1,347) (678)
Foreign 208 (105) (45)
- - --------------------------------------------------------------------------------
Total deferred 1,554 (1,394) (2,690)
- - --------------------------------------------------------------------------------
Total current and deferred 12,431 5,723 10,450
- - --------------------------------------------------------------------------------
Benefit of stock transactions
with employees credited
to additional paid-in capital 38,037 30,452 9,241
Benefit of purchased tax benefits
credited to goodwill 275 517 1,257
- - --------------------------------------------------------------------------------
Total provision for
income taxes $50,743 $ 36,692 $ 20,948
================================================================================
Current and long-term deferred tax assets and liabilities are comprised of
the following (in thousands):
September 30,
--------------------------
1997 1996
- - --------------------------------------------------------------------------------
Depreciation $ 895 $ 749
Expense accruals for book purposes 6,992 8,528
Loss and credit carryforwards 9,380 9,698
Other 1,706 1,767
- - --------------------------------------------------------------------------------
Gross deferred tax asset 18,973 20,742
- - --------------------------------------------------------------------------------
Intangible assets (3,383) (1,919)
Other (858) (895)
- - --------------------------------------------------------------------------------
Gross deferred tax liability (4,241) (2,814)
- - --------------------------------------------------------------------------------
Valuation allowance (4,962) (6,580)
- - --------------------------------------------------------------------------------
Net deferred tax asset $ 9,770 $ 11,348
================================================================================
29
<PAGE>
Current and long-term net deferred tax assets are $5.1 million and $4.7
million as of September 30, 1997 and $8.8 million and $2.5 million as of
September 30, 1996, respectively, and are included in Prepaid and other current
assets and Other assets, respectively, in the Consolidated Balance Sheets.
The valuation allowance relates to domestic and foreign tax loss
carryforwards. The net decrease in the valuation allowance of approximately $1.6
million in the current year results primarily from the utilization of foreign
tax loss carryforwards. The tax benefit from such tax loss carryforwards was
$1.7, $1.0 and $1.7 million for fiscal years 1997, 1996 and 1995, respectively.
Approximately $1.8 million and $1.4 million of the valuation allowance would
reduce goodwill and additional paid-in capital, respectively, upon subsequent
recognition of any related tax benefits.
The differences between the U.S. federal statutory income tax rate and the
Company's effective rate are:
Fiscal Year Ended September 30, 1997 1996 1995
- - --------------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 4.5 5.3 5.4
Foreign income taxed at a
different rate 0.6 1.5 (0.7)
Non-deductible goodwill and
direct acquisition costs 0.9 0.9 2.1
Non-taxable interest income (0.9) (1.3) (1.7)
Exempt foreign trading gross
receipts (1.0) -- --
Other items 1.9 1.6 5.4
- - --------------------------------------------------------------------------------
Effective rate without write-off
of purchased in-process research
and development costs 41.0 43.0 45.5
Non-deductible write-off of
purchased in-process research
and development costs -- 26.1 --
- - --------------------------------------------------------------------------------
Effective tax rate 41.0% 69.1% 45.5%
================================================================================
As of September 30, 1997, the Company had U.S. federal tax loss
carryforwards of $10.0 million which will expire in eleven to fifteen years and
state and local tax loss carryforwards of $35.4 million the majority of which
will expire in four to five years. The U.S. federal tax loss carryforwards are
subject to limitations on their use under the Internal Revenue Code. In
addition, the Company has foreign tax loss carryforwards of $6.6 million, of
which $1.1 million will expire within three to four years, and $5.5 million can
be carried forward indefinitely.
10. CAPITAL STOCK AND STOCK REPURCHASE PROGRAM
The Company effected two-for-one stock splits of its Class A and Class B Common
Stock by means of stock dividends in March 1996, June 1995 and August 1994. All
earnings per share and share data presented herein have been restated
retroactively to reflect such splits. As of September 30, 1997, the Company has
recorded the conversion of all Class B Common Stock into Class A Common Stock on
a one for one basis, pursuant to a provision of the Articles of Incorporation
which requires conversion when the Class B Common Stockholder's voting equity
falls below a certain ownership percentage after considering all exercisable
options and warrants outstanding. Class A Common Stock stockholders are entitled
to one vote per share on all matters to be voted by stockholders, other than the
election of directors. Prior to the conversion of the Class B Common Stock,
Class B Common stockholders had certain preferential voting rights with respect
to the election of members of the Board of Directors.
During fiscal 1997, the Company entered into a series of forward purchase
agreements on its common stock. These agreements are settled at the Company's
option on a net basis in either shares of its own common stock or in cash. To
the extent that the market price of the Company's common stock on a settlement
date is higher (lower) than the forward purchase price, the net differential is
received (paid) by the Company. As of September 30, 1997, an agreement in place
cover approximately $36.9 million or 1,350,068 shares of the Company's stock
having forward purchase prices established at $27.31 per share. If the market
priced portion of this agreement was settled based on the September 30, 1997
market price of the Company's common stock ($30.00 per share), the Company would
be entitled to receive approximately 100,081 shares. During fiscal 1997, two
settlements resulted in the Company receiving 449,932 shares of 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).
30
<PAGE>
11. EMPLOYEE STOCK PURCHASE PLANS
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 Class A Common Stock price as reported by NASDAQ at
the beginning or end of each offering period, whichever is lower. During fiscal
1997, 195,721 shares were issued from treasury stock at an average purchase
price of $31.76 per share in connection with this plan. At September 30, 1997,
2,272,316 shares were avail-able for offering under the plan.
12. STOCK OPTIONS AND WARRANTS
Under the terms of the 1991 Stock Option Plan, (the "Option Plan"), the Board of
Directors may grant non-qualified and incentive stock options, entitling
employees to purchase shares of the Company's common stock at the fair market
value determined by the Board on the date of grant. The Board can determine the
date on which options vest and become exercisable. A total of 22,800,000 shares
of Class A Common Stock were reserved for issuance under the plan. At September
30, 1997 and 1996 2,955,416 and 4,152,381 options were available for grant,
respectively.
In January 1993, the Company adopted a stock option plan for directors
(the "1993 Director Option Plan") and reserved an aggregate of 1,200,000 shares
of Class A Common Stock for issuance under this plan. The plan provided for the
automatic grant of 120,000 options to purchase shares of Class A Common Stock to
each non-employee director upon first becoming a director on or after February
1, 1993, and the automatic grant of an option to purchase an additional 24,000
options to purchase shares of Class A Common Stock annually based on continuous
service as a director. In January 1996, the plan was amended to provide for the
automatic grant of 15,000 options to purchase shares of Class A Common Stock to
each non-employee director upon first becoming a director and the automatic
grant of an option to purchase an additional 3,000 options to purchase shares of
Class A Common Stock annually based on continuous service as a director. 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. Options granted are subject to
cumulative yearly vesting over a three year period after the date of grant and
the number of shares to be granted under the amended terms will not be adjusted
for any future stock splits. At September 30, 1997 and 1996, 621,000 and 648,000
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 ("the 1994 Long-Term
Plan") and the reservation of an aggregate of 7,200,000 shares of Class A Common
Stock for issuance thereunder. The purpose of the plan is to provide 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
all financial performance targets are met 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
subsequent financial performance targets are met for both the first and second
fiscal years following the date of grant, a second 25% become exercisable three
years following the date of grant. If financial performance targets are met
consecutively for all three fiscal 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. Failure to achieve the specified target or targets for any
one fiscal year or consecutive fiscal years can be remedied by achievement of
the cumulative target in a succeeding fiscal year or years. Based on fiscal year
1995, 1996 and 1997 performance, 1,597,500 options were exercisable on September
30, 1997. An additional 1,543,750 options became exercisable on October 10,
1997. At September 30, 1997 and 1996, 810,000 and 750,000 shares were available
for grant, respectively.
31
<PAGE>
In October 1996, the Company adopted the 1996 Long-Term Stock Option Plan
("the 1996 Long-Term 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. An aggregate of 1,800,000 shares of Class A Common Stock were
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 all financial performance targets are met 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
and, if subsequent financial performance targets are met for both the first and
second years following the date of grant, a second 25% become exercisable four
years following the date of grant. If financial performance targets are met
consecutively for all three years following the date of grant, a third 25%
become exercisable on the fifth anniversary date following the date of grant and
the final 25% become exercisable on the sixth anniversary following the date of
grant. Based on fiscal year 1997 performance, 451,250 options will be
exercisable on February 24, 2000. At September 30, 1997, 25,000 options to
purchase common stock were available for grant.
On April 4, 1997, the Company repriced certain stock options granted from
October 1995 through January 1997 under the 1991 Option Plan and the 1994
Long-Term Plan. In total, options to purchase 1,647,000 shares of common stock
were repriced at an exercise price of $23.875 per share. The original vesting
schedules and expiration dates associated with these stock options were also
amended to coincide with the stock option repricing date. These amounts have
been included as granted and canceled options during fiscal 1997 in the summary
activity table shown below.
A summary of stock option activity under the plans and agreement through
September 30, 1997 follows:
Weighted
Shares under Average
Option Price
- - --------------------------------------------------------------------------------
Outstanding at September 30, 1994 12,806,072 $ 1.540
Granted 8,707,672 $ 7.860
Exercised (1,838,902) $ 0.811
Canceled (548,688) $ 3.653
- - --------------------------------------------------------------------------------
Outstanding at September 30, 1995 19,126,154 $ 4.439
Granted 3,665,506 $21.943
Exercised (3,036,403) $ 1.994
Canceled (968,660) $ 9.809
- - --------------------------------------------------------------------------------
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
================================================================================
Options for the purchase of 3,492,390 and 4,295,277 shares were
exercisable at September 30, 1997 and 1996, respectively.
Shares purchased under the terms of the plans are subject to repurchase by
the Company at the fair market value of the shares as determined by the Board of
Directors at the repurchase date based on the circumstances as outlined in the
option agreements.
The following table summarizes information about stock options outstanding
at September 30, 1997:
Weighted
average
Weighted remaining
Range of Number Number average contractual
exercise prices outstanding exercisable exercise price life (years)
- - --------------------------------------------------------------------------------
$ 0.02 - .94 1,299,751 965,191 $ 0.57 1.9
$ 1.13 - 4.83 2,495,746 1,066,786 $ 2.87 3.3
$ 5.03 - 9.50 7,130,592 522,312 $ 7.25 6.9
$10.28 - 13.88 564,268 342,650 $12.27 7.7
$16.63 - 21.09 5,059,046 545,796 $19.93 9.0
$25.15 - 35.38 1,271,947 49,655 $28.91 9.5
- - --------------------------------------------------------------------------------
A warrant expiring December 1, 2000 to purchase 600,000 shares of Class A
Common Stock at $16.42 per share is held by Cognizant. The warrant was issued in
connection with the acquisition of Dataquest.
The Company has chosen to continue applying APB No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized for the fixed stock option plans. Had
compensation cost for the
32
<PAGE>
Company's stock-based compensation plans been determined based on the fair value
at the grant dates under those plans, consistent with the method prescribed
under FAS 123, the Company's net income and net income per common share would
have been reduced to the pro forma amounts indicated below:
Fiscal Year Ended September 30, 1997 1996
- - --------------------------------------------------------------------------------
Net income As reported $73,130 $16,438
Pro forma $62,497 $10,616
Net income per
common share As reported $0.71 $0.17
Pro forma $0.61 $0.11
- - --------------------------------------------------------------------------------
The pro forma disclosures shown above reflect options granted after fiscal
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 options used to compute pro forma
net income and 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 used for stock options granted or modified:
Fiscal Year Ended September 30, 1997 1996
- - --------------------------------------------------------------------------------
Expected life (in years) 2.4 - 6.4 2.4 - 6.4
Expected volatility .40 .38
Risk free interest rate 6.00% - 6.09% 6.00%
Expected dividend yield 0.00% 0.00%
- - --------------------------------------------------------------------------------
The weighted average fair values of the Company's stock options granted in
1997 and 1996 are $12.32 and $5.56, respectively.
13. EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS
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 employee contributions.
In addition, the Company also contributes fixed and discretionary amounts
based on employee participation and attainment of operating margins specified by
the Board. Amounts expensed in connection with the plan totaled $4.6, $3.2, and
$2.0 million for the years ended September 30, 1997, 1996 and 1995,
respectively.
14. GEOGRAPHIC DATA
The Company's consolidated total revenues are generated primarily through direct
sales to clients by domestic and international sales forces, a network of
independent international distributors, and to a lesser extent by international
joint venture partners. 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 other areas located
outside of the United States.
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 customer receivables are maintained by and therefore are included as
identifiable assets of the U.S. operations.
Summarized information by geographic location is as follows (in
thousands):
Fiscal Year Ended September 30, 1997 1996 1995
- - --------------------------------------------------------------------------------
United States:
Revenues $333,038 $253,451 $184,615
Operating income $ 62,884 $ 26,359 $ 33,600
Identifiable tangible assets $407,262 $282,201 $222,262
Europe:
Revenues $121,971 $ 98,789 $ 71,946
Operating income $ 36,800 $ 15,968 $ 5,330
Identifiable tangible assets $ 73,974 $ 50,564 $ 36,474
Other International:
Revenues $ 56,230 $ 42,432 $ 38,585
Operating income $ 16,929 $ 7,113 $ 4,810
Identifiable tangible assets $ 27,654 $ 18,199 $ 8,481
- - --------------------------------------------------------------------------------
Excluding acquisition-related and nonrecurring charges, operating income
in the United States was $61.3, and $41.8 million for the fiscal years ended
September 30, 1996 and 1995, respectively.
33
<PAGE>
15. SELECTED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS DATA
A summary of Selected Consolidated Balance Sheets and Statements of Operations
data is set forth below (in thousands):
<TABLE>
<CAPTION>
Balance Sheets Data Statements of Operations Data
------------------------ --------------------------------
Total
Gross Fees Deferred AML Other Fiscal Year
Receivable Revenues Revenue Revenues Revenues
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 $ 105,940 $ 136,911
Billings 322,169 234,065 $ 36,163 $52,211
Acquisition balances 997 243 --
Cash collections (313,257) -- -- --
AML revenue amortization -- (201,005) 201,005 --
Other service revenue amortization -- (5,767) -- 5,767
- - --------------------------------------------------------------------------------------------------
Balance at September 30, 1995 115,849 164,447 $237,168 $57,978 $295,146
================================
Billings 420,037 340,476 $ 22,071 $67,432
Acquisition balances 3,976 1,663 -- --
Cash collections (391,640) -- -- --
AML revenue amortization -- (296,690) 296,690 --
Other service revenue amortization -- (8,479) -- 8,479
- - --------------------------------------------------------------------------------------------------
Balance at September 30, 1996 148,222 201,417 $318,761 $75,911 $394,672
================================
Billings 574,588 452,271 $ 18,160 $80,723
Acquisition balances 4,297 15,998 -- --
Cash collections (516,007) -- -- --
AML revenue amortization -- (399,373) 399,373 --
Other service revenue amortization -- (12,983) -- 12,983
- - --------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $ 211,100 $ 257,330 $417,533 $93,706 $511,239
==================================================================================================
</TABLE>
For a description of the Company's revenue recognition policies, see Note
1 - Significant Accounting Policies. AML revenues shown above of $417.5, $318.8,
and $237.2 million for fiscal years 1997, 1996 and 1995, respectively, are
recognized as services and products are delivered, and as the Company's
obligation to the client is completed over the contract period. Included in AML
revenues are catch-up adjustments also shown above for the fiscal years 1997,
1996 and 1995 of $18.2, $22.1, and $36.2 million, respectively, to account for
certain renewals. Catch-up adjustments occur when there is a lag between the
month that a contract expires and the month that it is renewed. The Company
continues to provide services for a certain period of time after expiration,
based on the Company's historical experience that most clients who do not renew
prior to expiration do so on a retroactive basis. The Company recognizes no
revenues, however, during this period. When a client renews the service on a
retroactive basis, the Company records the previously unrecognized revenue as a
catch-up adjustment.
34
<PAGE>
GARTNER GROUP REPORTS BY MANAGEMENT AND INDEPENDENT AUDITORS
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 designed 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 1997 and 1996, KPMG Peat Marwick LLP,
and the independent accountants for fiscal years prior to 1996, Price Waterhouse
LLP, audit and render an opinion on the financial statements in accordance with
general accepted auditing standards. These standards include an assessment of
the systems of internal controls and tests of transactions to the extent
necessary by them to support their opinion.
/s/ Manuel A. Fernandez
MANUEL A. FERNANDEZ
Chairman and Chief Executive Officer
/s/ John F. Halligan
JOHN F. HALLIGAN
Executive Vice President, Chief Financial Officer,
Treasurer and Corporate Secretary
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 its subsidiaries as of September 30, 1997 and 1996 and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years then ended. 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. The
consolidated financial statements of Gartner Group, Inc. and its subsidiaries
for the year ended September 30, 1995 were audited by other auditors whose
report, dated November 1, 1995, except as to the Dataquest acquisition discussed
in Note 3, which is as of January 25, 1996 and the stock split discussed in Note
10, which is as of March 29, 1996, expressed an unqualified opinion on those
statements.
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 consolidated financial position of
Gartner Group, Inc. and its subsidiaries as of September 30, 1997 and 1996 and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Stamford, Connecticut
October 31, 1997
35
<PAGE>
GARTNER GROUP SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data)
Fiscal Year Ended September 30, 1997 1996 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Advisory and measurement $396,219 $306,542 $235,867 $ 177,821 $ 143,591
Learning 21,314 12,219 1,301 -- --
Other, principally consulting and conferences 93,706 75,911 57,978 47,651 31,731
- - -----------------------------------------------------------------------------------------------------------
Total revenues 511,239 394,672 295,146 225,472 175,322
Total costs and expenses 394,626 345,232 251,406 181,522 161,704
- - -----------------------------------------------------------------------------------------------------------
Operating income 116,613 49,440 43,740 43,950 13,618
Minority interest 0 25 98 0 0
Interest income, net 7,260 3,665 2,271 (2) (4,395)
- - -----------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 123,873 53,130 46,109 43,948 9,223
Provision for income taxes 50,743 36,692 20,948 19,891 5,979
- - -----------------------------------------------------------------------------------------------------------
Income before extraordinary item 73,130 16,438 25,161 24,057 3,244
Extraordinary item - loss from early extinguishment of
long-term debt (net of tax benefits of $350) -- -- -- -- (765)
- - -----------------------------------------------------------------------------------------------------------
Net income $ 73,130 $ 16,438 $ 25,161 $ 24,057 $ 2,479
===========================================================================================================
NET INCOME (LOSS) PER COMMON SHARE:
Primary:
Income before extraordinary item $ .71 $ .17 $ .27 $ .25 $ .04
Extraordinary item -- -- -- -- (.01)
- - -----------------------------------------------------------------------------------------------------------
Net income $ .71 $ .17 $ .27 $ .25 $ .03
===========================================================================================================
Fully diluted:
Income before extraordinary item $ .71 $ .17 $ .26 $ .25 $ .04
Extraordinary item -- -- -- -- (01)
- - -----------------------------------------------------------------------------------------------------------
Net income $ .71 $ .17 $ .26 $ .25 $ .03
===========================================================================================================
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents, marketable securities $171,054 $126,809 $ 95,414 $ 52,855 $ 8,214
Fees receivable, net 205,760 143,762 112,159 102,509 65,699
Other current assets 48,794 39,579 28,655 22,940 15,224
- - -----------------------------------------------------------------------------------------------------------
Total current assets 425,608 310,150 236,228 178,304 89,137
Intangibles and other assets 219,704 133,958 96,678 87,619 81,962
- - -----------------------------------------------------------------------------------------------------------
Total assets $645,312 $444,108 $332,906 $ 265,923 $ 171,099
===========================================================================================================
Current portion of long-term obligations -- -- $ 6,725 $ 5,877 $ 952
Deferred revenues $254,071 $198,952 161,001 131,031 94,399
Other current liabilities 118,112 92,456 87,483 62,829 45,735
- - -----------------------------------------------------------------------------------------------------------
Total current liabilities 372,183 291,408 255,209 199,737 141,086
Long-term obligations, excluding current maturities -- -- -- 6,419 4,952
Long-term deferred revenues 3,259 2,465 3,446 5,880 3,239
Stockholders' equity 269,870 150,235 74,251 53,887 21,822
- - -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $645,312 $444,108 $332,906 $ 265,923 $ 171,099
===========================================================================================================
September 30, 1997 1996 1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------
Contract value (1) $525,901 $389,969 $303,231 $ 224,390 $ 172,481
Client organizations (2) 9,084 7,463 5,500 4,460 3,639
</TABLE>
(1) Contract value, as measured by the Company, represents the annualized
value of all advisory, measurement and learning contracts in effect at a
given point in time, without regard to the duration of the contracts
outstanding at such time.
(2) Information provided for fiscal 1993, 1994, and 1995 does not include
Dataquest, Inc.
36
<PAGE>
GARTNER GROUP QUARTERLY FINANCIAL DATA
(In thousands, except per share data)
Unaudited
Fiscal Year 1997 1st 2nd 3rd 4th
- - -------------------------------------------------------------------------------
Revenues $125,367 $119,125 $126,349 $ 140,398
Operating income $ 31,519 $ 29,620 $ 28,842 $ 26,632
Net income $ 19,042 $ 18,200 $ 18,455 $ 17,433
Primary net income per common share (1) $ .19 $ .18 $ .18 $ .17
Fiscal Year 1996 1st 2nd 3rd 4th (2)
- - -------------------------------------------------------------------------------
Revenues $ 96,474 $ 90,834 $ 97,406 $ 109,957
Operating income $ 19,335 $ 19,722 $ 21,203 ($ 10,821)
Net income $ 11,493 $ 11,712 $ 12,621 ($ 19,388)
Primary net income per common share (1) $ .12 $ .12 $ .13 $ (0.19)
- - -------------------------------------------------------------------------------
(1) The aggregate of the four quarters' primary net income per common share
does not total the reported full fiscal year amount due to rounding.
(2) Includes $33.2 million of charges related to the acquisition of J3
Learning, Inc.
37
<PAGE>
GARTNER GROUP CORPORATE DIRECTORY
BOARD OF DIRECTORS
Manuel A. Fernandez
Chairman and Chief Executive Officer
Gartner Group, Inc.
William O. Grabe (2)(3)
General Partner
General Atlantic Partners
Max D. Hopper (1)(3)
Principal
Max D. Hopper
Associates, Inc.
Retired Chairman
SABRE Technology Group
John P. Imlay, Jr. (1)
Chairman
Imlay Investments, Inc.
Stephen G. Pagliuca (2)(3)
Managing Director
Information Partners
Capital Fund
Dennis G. Sisco (2)
President
Storm Ridge Capital
Robert E. Weissman (1)
Chairman and Chief Executive Officer
Cognizant Corporation
(1) Audit committee
(2) Compensation committee
(3) Corporate Governance
committee
EXECUTIVE OFFICERS
E. Follett Carter
Executive Vice President
and President,
Gartner Distribution
William T. Clifford
President and Chief Operating Officer
Manuel A. Fernandez
Chairman and Chief Executive Officer
Michael D. Fleisher
Executive Vice President
and President,
Emerging Businesses
John F. Halligan
Executive Vice President,
Chief Financial Officer,
Treasurer and Corporate
Secretary
CORPORATE HEADQUARTERS
56 Top Gallant Road
Stamford, CT 06904
U.S.A.
Phone (203) 316-1111
EUROPE
Tamesis, The Glanty
Egham, Surrey
TW20 9AW
United Kingdom
Phone (44) 1784-431611
JAPAN
Aobadai Hills, 4F
7-7, Aobadai, 4-chome
Meguro-ku, Tokyo 153
Japan
Phone (81) 3-3481-3670
ASIA
Suite 5904-7
Central Plaza
18 Harbour Road
Wanchai
Hong Kong
Phone (852) 2824-6168
PACIFIC
424 Upper Roma Street
Third Floor
Brisbane, QLD 4006
Australia
Phone (61) 7-3405-2525
ANNUAL MEETING
Gartner Group's annual
meeting for shareholders
will be held at 4:00 p.m.
(EST) on January 20, 1998
at the the company's
headquarters in Stamford, CT.
INVESTOR RELATIONS
Requests for financial
information should
be sent to:
Gartner Group Inc.
Investor Relations Dept.
56 Top Gallant Road
Stamford, CT 06904
Phone (203) 316-6537
Fax (203) 316-6878
INTERNET
Additional corporate
information is available on
the World Wide Web:
http://www.gartner.com
STOCK LISTING AND
TRADING SYMBOL
The company's common
stock is listed on the
NASDAQ National Market
System. The trading symbol
is GART.
LEGAL COUNSEL
Wilson, Sonsini,
Goodrich & Rosati
Palo Alto, CA
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Stamford, CT
TRANSFER AGENT
BankBoston, N.A.
Boston, MA
Phone (617) 575-3120
Entire contents (C) by 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: Meyer Design Associates, Inc. Wilton, CT
38
<PAGE>
be smart
www.gartner.com
[LOGO]GartnerGroup
56 Top Gallant Road
P.O. Box 10212
Stamford, CT 06904-2212
1232-AR-97
EXHIBIT 99.4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
GARTNER GROUP, INC.
In our opinion, the consolidated statements of operations, of changes in
stockholders' equity and of cash flows for the year ended September 30, 1995
present fairly, in all material respects, the results of operations and cash
flows of Gartner Group, Inc. and its subsidiaries, for the year ended September
30, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Gartner
Group, Inc. for any period subsequent to September 30, 1995.
PRICE WATERHOUSE LLP
Stamford, Connecticut
November 1, 1995, except as to the
Dataquest acquisition discussed in
Note 3, which is as of January 25, l996
and the stock split discussed in
Note 10, which is as of March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 318,435
<SECURITIES> 0
<RECEIVABLES> 303,609
<ALLOWANCES> 7,199
<INVENTORY> 26,463
<CURRENT-ASSETS> 694,412
<PP&E> 508,078
<DEPRECIATION> 274,495
<TOTAL-ASSETS> 1,579,520
<CURRENT-LIABILITIES> 441,210
<BONDS> 0
0
0
<COMMON> 1,711
<OTHER-SE> 799,859
<TOTAL-LIABILITY-AND-EQUITY> 1,579,520
<SALES> 0
<TOTAL-REVENUES> 1,418,153
<CGS> 0
<TOTAL-COSTS> 1,082,811
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,293
<INCOME-PRETAX> 430,235
<INCOME-TAX> 117,885
<INCOME-CONTINUING> 312,350
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 312,350
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.86
</TABLE>
