<PAGE> 1
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 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-015144
GARTNER GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-3099750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 10212 06904-2212
56 Top Gallant Road (Zip Code)
Stamford, CT
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 964-0096
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, Class A, $.0005 Par Value Nasdaq
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
None
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, 1996, was
approximately $1.6 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, 1996 was 91,581,031 shares of Common Stock, Class A and 1,600,000
shares of Common Stock, Class B.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for the Annual Meeting of Stockholders of Registrant to be
held on January 23, 1997. Certain information therein is incorporated by
reference into Part III hereof.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Gartner Group, Inc. ("Gartner Group" or the "Company"), founded in 1979, is the
leading independent provider of research and analysis on the computer hardware,
software, communications and related information technology ("IT") industries.
The Company's core business is researching and analyzing significant IT industry
trends and developments, packaging such analysis into annually renewable
subscription-based products and distributing such products through print and
electronic media. The Company's primary clients are business professional users,
purchasers and vendors of IT products and services. With more then 500 sales
professionals in 72 locations, Gartner Group product offerings collectively
provide comprehensive coverage of the IT industry to nearly 7,500 client
organizations.
The Company's business is also comprised of the following entities: Dataquest, a
provider of IT market research and consulting; Real Decisions, a provider of
benchmarking, continuous improvement and best practices services; and Gartner
Group Learning, a developer and publisher of more than 300 software education
training products and services for computer desktop and technical applications
professionals.
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
global leader providing 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 Professional. 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 such as
chief executive, chief financial and chief information officers, purchasing and
data processing managers as well as desktop end-users. 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 400 IT professionals averaging 10 to
15 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 in the following locations:
Stamford, CT; San Jose, CA; Egham, England; Brisbane, Australia; and Tokyo,
Japan and a number of smaller, local research centers throughout the world.
New Product Development and Acquisitions. The Company has introduced 61 new
continuous service products since fiscal 1991 and actively reviews new product
ideas through a multi-functional product strategy committee. Recent investments
and acquisitions include: Productivity Management Group (8/96), a consulting
firm that complements the Company's benchmarking business with project
management; CJ Singer (7/96), a research and consulting firm focused on IT
trends, strategies and solutions in the healthcare industry; Gartner Group
Learning, created from the acquisitions of Relational Courseware (9/96), J3
Learning, Inc. ("J3") (7/96) and Mindware Technologies (7/96), a publisher of
software education and training products for computer desktop and technical
applications professionals; Dataquest, Inc. (12/95), a provider of market
research and forecasting data; and Nomos Ricerca (11/95), an Italian-based
consulting services firm.
Increase Market Penetration. The Company has made substantial investments in the
development of new markets by 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.
Interactive delivery initiatives include the Internet Learning Center,
@vantage(TM) on the World Wide Web, GartnerWeb(TM), Dataquest Interactive, @xpo
and GG IntraWeb.
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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
Continuous Services
The Company's principal products are annually renewable subscription services,
called continuous services, which highlight industry developments, review new
products and technologies and analyze industry trends within a particular
technology or market sector. The Company currently offers over 80 principal
continuous 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 state-of-the-art delivery
mechanisms such as CD-ROM, Lotus Notes(TM), GartnerWeb(TM), and @vantage(TM).
The Company provides a number of other complementary products and services
including:
Consulting Services. Gartner Group consulting services provide customized
project consulting on IT deployment issues. Principal practices of
consulting services include Technical Architecture, Outsourcing Decision
Support, Evolving High Technology Areas, Retainer Consulting Services and
Vendor Consulting.
Events. 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.
Technology-based Training. Gartner Group Learning publishes software
education training products for computer desktop and technical applications
professionals. With more than 300 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.
The Company measures its continuous service business based on contract value.
The Company calculates contract value as the annualized subscription fees under
all continuous service 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 subscriptions for an equal or higher level of total subscription
services each year, and annual continuous services revenues in any fiscal year
have closely correlated to contract value at the beginning of the fiscal year.
As of September 30, 1996, approximately 85 percent of the Company's clients have
renewed one or more subscriptions 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 continuous services revenues or cash flows if the rate of renewal of
continuous services contracts 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 sheet,
represent unamortized revenues from continuous services contracts at the balance
sheet date plus unamortized revenues of certain other products and noncontinuous
services. Therefore, deferred revenues do not directly correlate to contract
value as of the same date because the annualized calculation is made without
regard to the duration of the contracts outstanding at such time, and contract
value is limited to continuous service contracts.
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 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.
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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 continuous service 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
with the acquisition of J3. The success of the Company in the technology-based
training industry will depend on its ability to compete with other
technology-based training vendors and other vendors of IT products and services
including a range of education and training specialists, hardware and system
manufacturers, software vendors, system integrators, dealers, value-added
resellers and network/communications vendors. 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, 1996, the Company employed 2,129 persons. Of the 2,129
employees, 801 are located at the Company's headquarters in Stamford, CT area,
783 are located at other domestic facilities and 545 are located outside of the
United States. None of the Company's employees is 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 229,000 square feet of
leased office space in four 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 37 domestic and 35 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.
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.
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EXECUTIVE OFFICERS
Listed below are the executive officers of the Company as of November 30, 1996:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Manuel A. Fernandez 50 President, Chairman of the Board and
Chief Executive Officer
E. Follett Carter 54 President, Gartner Group Distribution,
Executive Vice President, Sales and Chief
Marketing Officer
John F. Halligan 49 Executive Vice President, Chief Financial
Officer, Treasurer and Corporate Secretary
William T. Clifford 50 President, Gartner Group Research
Executive Vice President, Operations and
Chief Operating Officer
Michael D. Fleisher 31 Executive Vice President and President Gartner
Group Emerging Businesses
</TABLE>
Mr. Fernandez has served as chairman of the board since April 1995, as chief
executive officer since April 1991 and as president and director since January
1991. 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. Carter 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. Prior to joining Gartner
Group, Mr. Carter was manager of systems marketing at Xerox Corporation from
January 1987 to October 1988. 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, and manager
of marketing, sales and service finance operations at GE Appliances from
November 1984 to May 1988. Mr. Halligan holds a bachelor's degree in economics
from Providence College.
Mr. Clifford has been president, Gartner Group research since October 1995,
chief operating officer since April 1995 and executive vice president,
operations since October 1993. 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. Fleisher has been executive vice president and president Gartner Group
emerging businesses since November 1996. From October 1995, he was senior vice
president, emerging businesses; from October 1994 to October 1995, he was vice
president worldwide events; and from April 1993 to October 1995 he was vice
president of business development and focused primarily on the Company's initial
public offering and subsequent acquisitions. Mr. Fleisher's previous business
experience includes working as an associate at Information Partners, a venture
capital firm, from 1990 to 1993 and as a consultant at Bain & Company, a
strategy consulting firm, from 1987 to 1990. Mr. Fleisher holds a bachelor's
degree in economics from Wharton School of Business. Mr. Fleisher was named an
executive officer of the Company in November 1996.
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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,
1996, there were approximately 271 holders of record of the Company's Class A
Common Stock and all of the Company's Class B Common Stock was held by Cognizant
Corporation ("Cognizant"). 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 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.
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
See Exhibit 13.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Change in Accountants
(a) Previous independent accountants
(i) On September 25, 1996, Price Waterhouse LLP resigned as the
independent accountants the Company. Price Waterhouse LLP advised the
Company that it was resigning as the Company's independent accountants
due to a planned business relationship with the Company that may
impair the independence of Price Waterhouse LLP.
(ii) The reports of Price Waterhouse LLP on the financial statements for
the past two fiscal years contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit
scope or accounting principle.
(iv) In connection with its audits for the two most recent fiscal years and
through September 25, 1996, there have been no disagreements with
Price Waterhouse LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
Price Waterhouse LLP would have caused them to make reference thereto
in their report on the financial statements for such years.
(v) During the two most recent fiscal years and through September 25,
1996, there have been no reportable events (as defined in Regulation
S-K Item 304 (a)(1)(v) ).
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(vi) The Company has requested that Price Waterhouse LLP furnish it with a
letter addressed to the SEC stating whether or not it agrees with the
above statements. A copy of such letter, dated October 1, 1996, is
filed as Exhibit 1 to the Current Report on Form 8-K dated October 1,
1996.
(b) New independent accountants
(i) The Company engaged KPMG Peat Marwick LLP as its new independent
accountants as of September 25, 1996. During the two most recent
fiscal years and through September 25, 1996, the Company has not
consulted with KPMG Peat Marwick LLP regarding either (1) the
application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that might
be rendered on the Company's financial statements, and either a
written report was provided to the Company or oral advice was provided
that KPMG Peat Marwick LLP concluded was an important factor
considered by the Company in reaching a decision as to the accounting,
auditing or financial reporting issue; or (2) any matter that was
either the subject of a disagreement, as that term is defined in Item
304 (a)(1)(iv) of Regulation S-K and the related instructions to Item
304 of Regulation S-K, or a reportable event, as that term is defined
in Item 304 (a)(1)(v) of Regulation S-K.
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 23, 1997 and is
incorporated herein by reference. Certain information regarding Executive
Officers of the Registrant is presented after Item 4 in Part I of this 1996
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 13 in the Proxy
Statement for Annual Meeting of Stockholders of Registrant to be held January
23, 1997 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to Executive Compensation is set forth under the caption
"Executive Compensation" on pages 6 through 9 of the Proxy Statement for Annual
Meeting of Stockholders of Registrant to be held January 23, 1997 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 23, 1997 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
23, 1997 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.
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2. Supplemental Schedules
II. Valuation and qualifying accounts (see attached).
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(4) Restated Certificate of Incorporation
3.2(1) Bylaws as amended
4.1(1) Article III of Restated Certificate of Incorporation
(see Exhibit 3.1)
4.2(1) Form of Certificate for Common Stock
10.1(1) Form of Indemnification Agreement
10.2(1) Amended and Restated Registration 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(4) 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
10.6(1)* Long Term Incentive Plan (Tenure Plan), including form
of Employee Stock Purchase Agreement
10.7(2)* 1991 Stock Option Plan, as amended, including form of
Stock Option Agreement
10.8(1)* 1993 Director Stock Option Plan
10.9(1)* Employee Stock Purchase Plan
10.10(3)* 1994 Long Term Stock Option Plan
10.11(4) 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 Fund
10.14(4) Research Sharing Agreement dated May 17, 1995 between
Registrant and SoundView Financial Group
10.15 Commitment Letter dated September 30, 1996 from Chase
Manhattan Bank
11.1 Computation of Net Income per Common Share
13 Management's Discussion and Analysis of Financial
Condition and Results of Operations and Consolidated
Financial Statements and Supplementary Data.
16.1(5) Letter regarding change in certifying accountants
21.1 Subsidiaries of Registrant
23.1 Independent Auditors' Report on Schedule
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
* 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 Registrant's Registration
Statement on Form S-8 as filed on November 3, 1994.
(3) Incorporated by reference from Registrant's Registration
Statement on Form S-8 as filed on May 18, 1995.
(4) Incorporated by reference to the Registrant's Registration
Statement on Form 10-K as filed on December 21, 1995.
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(5) Incorporated by reference to the Current Report on Form 8-K as
filed on October 1, 1996.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated October 1, 1996.
(c) Exhibits
See (a) above.
(d) Financial Statement Schedules
See (a) above.
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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 17th day of December, 1996.
GARTNER GROUP, INC.
By: /s/ MANUEL A. FERNANDEZ
---------------------------------
Manuel A. Fernandez
President, 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
Registration Statement 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, President, Chairman of the December 17, 1996
------------------------ Board and Chief Executive Officer
Manuel A. Fernandez (Principal Executive Officer)
/s/ JOHN F. HALLIGAN Executive Vice President and Chief December 17, 1996
-------------------- Financial Officer (Principal Financial
John F. Halligan and Accounting Officer)
/s/ MAX HOPPER Director December 17, 1996
---------------
Max Hopper
/s/ JOHN P. IMLAY Director December 17, 1996
------------------
John P. Imlay
/s/ STEPHEN G. PAGLIUCA Director December 17, 1996
------------------------
Stephen G. Pagliuca
/s/ DENNIS G. SISCO Director December 17, 1996
--------------------
Dennis G. Sisco
/s/ WILLIAM O. GRABE Director December 17, 1996
---------------------
William O. Grabe
</TABLE>
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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, 1994
Allowance for doubtful accounts and returns
and allowances $2,778 $1,239 $ 162 $ 748 $3,431
====== ====== ====== ====== ======
YEAR ENDED SEPTEMBER 30, 1995
Allowance for doubtful accounts and returns
and allowances $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
====== ====== ====== ====== ======
</TABLE>
(1) Allowances of $121,000, $27,000 and $162,000 assumed upon acquisitions of
entities in fiscal 1996, 1995 and 1994, respectively.
<PAGE> 1
[CHEMICAL CONNECTICUT CORPORATION LETTERHEAD]
T. DAVID SHORT
Senior Vice President
September 30, 1996
Mr. Ronald Carroll
Gartner Group, Inc.
56 Top Gallant Road
P.O. Box 10212
Stamford, CT 06904-2212
Dear Ron:
On behalf of our affiliate, The Chase Manhattan Bank, N.A. ("Chase") I am
pleased to advise you that it is prepared, in its sole discretion, to offer a
line of credit to Gartner Group, Inc. (the "Borrower") up to an amount of
twenty-five million dollars ($25,000,000). The line of credit will be subject
to the terms and conditions stated below:
AMOUNT: Twenty-five million dollars ($25,000,000)
BORROWER: Gartner Group, Inc.
TYPE OF CREDIT: A line of credit repayable on a demand basis.
USE OF PROCEEDS: General working capital.
INTEREST RATE: a) Prime option: Chase prime rate shall be defined as the rate
of interest announced from time to time by Chase as its prime
commercial lending rate.) Interest is to be computed on an
actual/360-day basis and is payable monthly.
b) LIBOR Option: LIBOR + 25bp. Interest shall be determined
for periods of one, two or three months, as selected by the
Borrower, and shall be at an annual rate equal to the London
Interbank Offered Rate ("LIBOR") for corresponding deposits
of U.S. Dollars plus the Applicable Margin. LIBOR will be
determined by Chase at the start of each Interest Period and
will be paid at the end of each Interest Period. Interest is
to be computed on an actual/360-day basis. LIBOR will be
adjusted for Regulation D reserves and capital adequacy and
similar cost requirements.
c) Fixed Option: As available.
REQUEST FOR Any advances made under this line of credit will be on the
ADVANCES: terms and conditions as Chase may require at the time the
Borrower requests an advance and must be evidenced by
documents in form and substance satisfactory to Chase.
Chase reserves the right to request, and the Borrower agrees to provide, such
other information as Chase may determine necessary in order to exercise its
discretion in honoring requests for advances under this line of credit.
<PAGE> 2
Gartner Group, Inc. -2- September 30,1996
This line of credit does not constitute a commitment or in any way obligate
Chase to lend whether or not the Borrower satisfies the conditions in this
letter, and is issued subject to Chase, in its sole discretion, continuing to
be satisfied with the Borrower's financial condition and economic prospect,
prompt advice to Chase of any circumstances which might materially or adversely
affect the Borrower, and the Borrower's maintenance of a satisfactory
relationship with Chase.
This letter is for the Borrower's information only and is not to be shown or
relied upon by third parties. This letter constitutes the entire understanding
between Chase and the Borrower and supersedes all prior discussions. The terms
and conditions set forth in this letter shall survive the execution of the note
evidencing the indebtedness and shall remain in effect so long as this facility
remains in place or any amounts remain outstanding under this line of credit.
Chase will consider requests for advances hereunder until March 30, 1997 unless
this discretionary line of credit is earlier terminated by Chase in its sole
discretion.
Please acknowledge your understanding of the foregoing by signing and returning
the enclosed copy of this letter to the undersigned.
We appreciate the opportunity to be of service to you.
Very truly yours,
By: /s/ T. David Short
- ------------------------------
T. David Short
RECEIPT OF THE FOREGOING LETTER IS HEREBY ACKNOWLEDGED, TOGETHER WITH ASSENT TO
THE TERMS THEREOF:
GARTNER GROUP, INC.
By: signature illegible Dated: 9/30/96
- ----------------------- ------------------------
Its: CFO/EVP
--------------------------
<PAGE> 1
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,
-----------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Primary:
Net income $16,438 $25,161 $24,057
======= ======= =======
Shares:
Weighted average number of common shares outstanding 89,739 87,808 85,260
Weighted average number of warrants outstanding 301 -- --
Weighted average number of option shares outstanding 8,572 6,954 9,748
------- ------- -------
Weighted average number of common shares outstanding as adjusted 98,612 94,762 95,008
======= ======= =======
Net income per common share $ 0.17 $ 0.27 $ 0.25
======= ======= =======
Fully diluted:
Net income $16,438 $25,161 $24,057
======= ======= =======
Shares:
Weighted average number of common shares outstanding 89,739 87,808 85,260
Weighted average number of warrants outstanding 310 -- --
Weighted average number of option shares outstanding 8,805 7,404 9,860
------- ------- -------
Weighted average number of common shares outstanding as adjusted 98,854 95,212 95,120
======= ======= =======
Net income per common share $ 0.17 $ 0.26 $ 0.25
======= ======= =======
</TABLE>
<PAGE> 1
Exhibit 13
Gartner Group, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Continued year-to-year revenue growth highlighted a year of record
achievements in fiscal 1996. The Company posted record revenues for fiscal 1996
of $394.7 million, up 34% from $295.1 million a year ago. This growth consisted
of a 30% increase in revenues from continuous services and a 49% increase in
other revenues, principally from conferences, consulting services and
technology-based training products. Continuous services are annually renewable
subscription services which, on an ongoing basis, highlight industry
developments, review new products and technologies and analyze industry trends
within a particular technology or market sector. Revenues from continuous
services contracts are recognized ratably over the contract period, generally
twelve months.
In fiscal 1996, the Company made two significant acquisitions. The
first was Dataquest, Inc. ("Dataquest"), a wholly-owned subsidiary of the Dun &
Bradstreet Corporation ("D&B"), which was acquired in December 1995 in exchange
for $15.0 million in cash and 3,000,000 shares of Class A Common Stock which had
an approximate fair market value of $60.0 million. In addition, the Company
issued D&B a five year warrant to purchase 600,000 shares of Class A Common
Stock at $16.42 per share. D&B (now Cognizant Corporation pursuant to a spin-off
of D&B as of November 1, 1996) is also the majority shareholder of the Company.
The acquisition was accounted for in a manner similar to a pooling of interests.
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 second such significant
acquisition was J3 Learning, Inc. ("J3") in July 1996 for 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 users.
J3 complements the Company's training business which has been named Gartner
Group Learning. In connection with this acquisition, the Company recorded a
$33.2 million charge in the fourth quarter of fiscal 1996, primarily for
purchased in-process research and development costs.
Contract value increased 29% to approximately $390.0 million at
September 30, 1996 versus the same date last year. The Company believes that
contract value is a significant measure of the Company's volume of business. The
Company calculates contract value as the annualized subscription fees under all
continuous service 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 subscriptions for an equal or higher level of total subscription
payments each year, and annual continuous services revenues in any fiscal year
have closely correlated to contract value at the beginning of the fiscal year.
As of September 30, 1996, approximately 85% of the Company's clients have
renewed one or more subscriptions 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 continuous services revenues or cash flows if the rate of renewal of
continuous services contracts or the timing of new business were to
significantly change during the following twelve months compared to historic
patterns. Deferred revenues of $201.4 million and $164.4 million as of September
30, 1996 and 1995, respectively, as presented in the Company's balance sheets,
represent unamortized revenues from continuous services contracts at the balance
sheet date plus unamortized revenues of certain other products and
non-continuous services. Therefore, deferred revenues do not directly correlate
to contract value as of the same date because the annualized calculation of
contract value is made without regard to the duration of the contracts
outstanding at such time and is limited to continuous service contracts. Backlog
at September 30, 1996 was approximately $50.1 million and represents future
revenues that will be recognized on multi-year and early renewed continuous
service contracts, in-process consulting engagements and technology-based
training products. 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 growth in contract
value at the end of quarters, particularly the fourth quarter of the fiscal
year. Consequently, fees receivable, deferred revenues, deferred commissions and
commissions payable reflect this activity and typically show substantial
increases quarter to quarter, particularly at year end. All contracts are
billable upon signing, absent special terms granted on a limited basis from time
to time. All contracts are non-cancellable and non-refundable, except for
government contracts which have a 30-day cancellation clause, but which have not
produced material cancellations to date. The Company's policy is to record at
the time of signing of a continuous service contract
27
<PAGE> 2
the entire amount of the contract as deferred revenue and fees receivable. The
Company also records the related commission obligation upon the signing of the
contract and amortizes the corresponding deferred commission expense over the
contract period in which the related continuous services revenues are earned and
amortized to income.
Operating income in fiscal 1996 was $49.4 million, net of $34.9 million
in acquisition-related charges. Excluding acquisition-related and non-recurring
charges and credits, operating income would have risen over the past three years
from $29.3 million in fiscal 1994 to $84.3 million in fiscal 1996. Income before
income taxes was $53.1 million for fiscal 1996, up from $46.1 million in the
prior fiscal year ($88.0 and $54.9 million for fiscal 1996 and 1995,
respectively, excluding acquisition-related and non-recurring charges and
credits). Income per share was $0.17 per common share in fiscal 1996 as compared
to last fiscal year's $0.27 per common share ($0.51 and $0.32 per common share
for fiscal 1996 and 1995, respectively, excluding acquisition-related and
non-recurring charges and credits).
The Company's strong cash generation continued in fiscal 1996. The
Company had $129.9 million in cash, cash equivalents and marketable securities
at September 30, 1996, up $34.5 million from $95.4 million at September 30,
1995.
ANALYSIS OF OPERATIONS
The following table sets forth certain results of operations as a percentage of
revenues:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1996 1995 1994
- --------------------------------------------------------------------------------
Percent of revenues:
<S> <C> <C> <C>
Revenues:
Continuous services 78% 80% 79%
Other 22 20 21
- --------------------------------------------------------------------------------
Total revenues 100 100 100
Costs and expenses:
Cost of services and product
development 39 38 38
Selling, general and administrative 37 41 45
Acquisition-related charges 9 -- --
Depreciation 2 2 2
Amortization of intangibles 1 1 2
Non-recurring charges and credits, net -- 3 (7)
- --------------------------------------------------------------------------------
Total costs and expenses 88 85 80
- --------------------------------------------------------------------------------
Operating income 12 15 20
Interest income, net 1 1 0
Preferred Stock Dividends -- -- 0
- --------------------------------------------------------------------------------
Income before minority interest and income taxes 13 16 20
Minority interest -- -- --
- --------------------------------------------------------------------------------
Income before income taxes 13 16 20
Provision for income taxes 9 7 9
- --------------------------------------------------------------------------------
Net income 4% 9% 11%
- --------------------------------------------------------------------------------
</TABLE>
FISCAL YEAR ENDED SEPTEMBER 30, 1996
VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1995
Total revenues increased 34% to $394.7 million in fiscal 1996 as compared to
$295.1 million in fiscal 1995.
Continuous services revenues increased 30% in fiscal 1996 to $306.5
million compared to $235.9 million in fiscal 1995 and comprised approximately
78% of total revenues versus 80% in fiscal 1995. The increase in revenues from
continuous services reflects primarily strong market acceptance of new services
introduced in 1996, volume increases as a result of increased geographic and
client penetration, and a volume pricing strategy that provides more value for
the same dollars each year through the expansion of electronic distribution
within client companies. 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.
The rate of growth in continuous services 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 in fiscal 1996 from $184.6 million in fiscal
1995. Revenues from sales to European clients increased 37% to $98.8 million in
fiscal 1996 from $71.9 million in fiscal 1995, and revenues from sales to Other
International clients increased 10% to $42.4 million in fiscal 1996 from $38.6
million in 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. The Company
intends to continue its expansion of operations outside of the United States and
is considering entering additional international markets.
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.
28
<PAGE> 3
Other revenues, consisting principally of revenues from conferences,
consulting engagements, non-continuous services, technology-based training
products and publications, increased 49% to $88.1 million in fiscal 1996 as
compared to $59.3 million in the prior year. The increase was primarily
attributable to additional conferences held in fiscal 1996 and increased sales
of technology-based training products as a result of the acquisition of J3.
Operating income was $49.4 million in fiscal 1996, compared to $43.7 million in
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
non-recurring charges in fiscal 1995, operating income in fiscal 1996 increased
61% to $84.3 million compared to $52.5 million in fiscal 1995. Excluding the
above mentioned charges, all three geographic areas experienced growth in
operating income in 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, for fiscal 1996 increased to 21% of revenues 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.
The Company's continued focus on margin improvement continues to favorably
impact operating results. 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.
The total dollar amount of costs and expenses excluding
acquisition-related and non-recurring 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
conference contribute a greater portion of the total revenues in fiscal 1996. In
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 in 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 in fiscal 1996 were consistent with the rates earned in fiscal
1995.
Provision for income taxes increased by $15.8 million to $36.7 million
in fiscal 1996, up from $20.9 million in fiscal 1995. The effective rate was 69%
and 46% for fiscal 1996 and 1995, respectively. The 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 8 of the Notes to Consolidated Financial Statements.
FISCAL YEAR ENDED SEPTEMBER 30, 1995
VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1994
Total revenues increased 31% to $295.1 million in fiscal 1995 as compared to
$225.5 million in fiscal 1994.
Continuous services revenues increased 33% in fiscal 1995 to $235.9
million compared to $177.8 million in fiscal 1994 and comprised approximately
80% of total revenues versus 79% in fiscal 1994. Revenue growth resulted
primarily from the following interrelated factors: volume increases as a result
of increased geographic and client penetration, successful product introductions
and a full year of revenue from the acquisition of Real Decisions Corporation
("RDC") in the prior year. Continuous services product prices remained
relatively constant during the period.
Revenues from sales to international clients increased 28% to $110.5
million in fiscal 1995 from $86.5 million in fiscal 1994. The increase reflected
the results of the Company's investment in international markets and increased
market penetration.
Other revenues, consisting principally of revenues from consulting
engagements, conferences, non-continuous services, publications and
technology-based training products, increased 24% to $59.3 million as compared
to $47.7 million in the prior year. The increase was attributable to higher
consulting and conference revenues.
Operating income was unchanged at $43.7 million in fiscal 1995, compared to
$44.0 million in fiscal 1994. However, excluding non-recurring charges and
credits in fiscal 1995 and 1994 of $8.8 million and $(14.6) million,
respectively, operating income increased 79% to $52.5 million in fiscal 1995.
Operating income, as a percentage of total revenues, after excluding
non-recurring charges and credits,
29
<PAGE> 4
increased to 18% of revenues in fiscal 1995 compared to 13% in fiscal 1994. As
revenues grew, the Company was able to take advantage of economies of scale and
leverage its resources, thereby improving margins. Margin improvement measures
implemented by the Company in fiscal 1994 continued to have a favorable impact
in fiscal 1995, including the standardization of research methodology,
electronic distribution, improved productivity of the international sales force
and the further utilization of additional sales channels to reach smaller
organizations.
In fiscal 1995 and 1994, Dataquest recorded non-recurring charges and
credits related to the closing of certain operations, workforce reductions, the
sale of a division and the sale of a building. In fiscal 1995, Dataquest closed
certain operations of its subsidiary in Japan resulting in a $0.6 million
pre-tax charge, and also initiated workforce reduction actions resulting in a
pre-tax charge of $8.2 million primarily relating to severance. In fiscal 1994,
there were three non-recurring events that totaled a pre-tax net credit to
income of $14.6 million, a workforce reduction charge of $0.7 million relating
to severance benefits and a write-down to fair market value of a building
resulting in a $6.2 million provision, and a $21.5 million gain on the sale of
an operating division.
While cost of services and product development as a percentage of
revenues was 38% in both fiscal 1995 and 1994, the total dollar amount of costs
and expenses increased $69.9 million to $251.4 million. The increase was due
principally to the continued expansion of the Company's distribution system and
the need to provide additional support to the growing client base. In fiscal
1995, these factors resulted in a $27.2 million increase in cost of services and
product development and a $18.8 million increase in selling, general and
administrative expenses. Expressed as a percentage of revenues, selling, general
and administrative decreased 4% to 41% in fiscal 1995 as compared to fiscal
1994.
Interest income, net increased to $2.3 million in fiscal 1995 versus $0.2
million for fiscal 1994. This increase in interest income was attributable to an
increase in the Company's average available investable funds and the rates
earned on those funds during fiscal 1995, and the decrease in debt related to
the acquisitions of RDC and New Science Associates ("NSA").
Provision for income taxes increased to $20.9 million in fiscal 1995, up from
$19.9 million in fiscal 1994. The effective rate was 46% and 45% for fiscal 1995
and 1994, respectively. A more detailed analysis of the changes in the provision
for income taxes is provided in Note 8 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 IT products and
services. The Company faces competition from a significant number of independent
providers of similar services as well as the internal marketing and planning
organizations of the Company's clients. The Company also competes indirectly
against other information providers, including electronic and print media
companies and consulting firms. In addition, there are limited barriers to entry
into the Company's market and additional new competitors could readily emerge.
There can be no assurance that the Company will be able to continue to provide
the products and services that meet client needs as the IT market rapidly
evolves, or that the Company can otherwise continue to compete successfully. In
this regard, the Company's ability to compete is largely dependent upon the
quality of its staff of research analysts. Competition for qualified analysts is
intense. There can be no assurance that the Company will be able to hire
additional qualified research analysts as may be required to support the
evolving needs of customers or other growth in the Company's business. Any
failure to maintain a premier staff of research 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 and to other international markets.
The Company is expanding its presence in the technology-based training
industry with the acquisition of J3. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily financed its operations to date through cash
provided by operating activities. The combined historical revenue growth and
operating margin improvements have contributed to positive cash provided by
operating activities in fiscal 1996, 1995 and 1994. In addition, cash flow has
been enhanced by the Company's continuing management of working capital
requirements to support increased sales volumes that have resulted from growth
in the pre-existing businesses and growth due to acquisitions.
30
<PAGE> 5
Cash provided by operating activities during fiscal 1996 was $65.7 million, down
marginally from $67.0 million in the prior fiscal year. Increased cash flow from
income and non-cash charges for depreciation and amortization, and
acquisition-related charges during fiscal 1996, was partially offset by
increased working capital needs to support fiscal 1996 sales growth due to
continuing expansion and development of the Company's distribution system both
domestically and internationally, marketing initiatives, and the addition of
analyst headcount to support expanding client needs and volume.
Cash used for investing activities totaled $66.8 million for the fiscal year
ended September 30, 1996. During fiscal 1996, the Company used $46.2 million in
cash for acquisitions, primarily consisting of $23.0 million used for the
purchase of Dataquest and J3. The Company used $15.6 million for the purchase of
capital assets, mainly related to the expansion of its corporate offices in
Stamford, CT and the net purchase of marketable securities for $4.3 million.
Cash provided by financing activities totaled $31.6 million in fiscal 1996,
versus $8.0 million used during fiscal 1995. The increase in fiscal 1996 is
driven primarily by a $29.4 million credit to additional paid-in capital for tax
benefits received from stock transactions with employees. This benefit is due
to a reduction in the corporate income tax liability based on a tax deduction
equal to the difference between the exercise price and fair market value of the
options exercised by employees of the Company. As the market value of the
Company's stock has increased, both the volume of exercises and gains on those
exercises have increased, thereby resulting in significant tax benefits being
realized in the current fiscal year.
At September 30, 1996, cash, cash equivalents and marketable securities
totaled $129.9 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 cancelled 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 $5.5 million and $2.0
million with The Bank of New York at September 30, 1996. 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.
COMMON STOCK INFORMATION
The Company effected an Initial Public Offering of its Class A Common
Stock on October 4, 1993, at a price to the public of $2.75 per share. The
Company's Class A Common Stock is listed for quotation in the NASDAQ National
Market under the symbol "GART." All of the Company's Class B Common Stock is
held by Cognizant Corporation.
In March 1996, the Company amended its Certificate of Incorporation to
increase the authorized number of shares of common stock of the Company, from a
total of 100,000,000 to 200,000,000 shares of Class A Common Stock and from a
total of 800,000 to 1,600,000 shares of Class B Common Stock. Also in March
1996, the Company effected a two-for-one stock split of the Company's Class A
and Class B Common Stock by means of a stock dividend. The record date was March
16, 1996, and the distribution date was March 29, 1996. The Company also
effected a two-for-one stock split by means of a stock dividend on June 28, 1995
and August 26, 1994. All earnings per share and share data presented herein have
been restated retroactively to reflect such splits. During fiscal 1996, Gartner
Group Class A Common Stock traded within a range of daily closing prices of
$16.25 to $42.50.
<TABLE>
<CAPTION>
Quarterly Common Stock Prices
- -------------------------------------------------------------------------------
Fiscal Year 1996 Fiscal Year 1995
- -------------------------------------------------------------------------------
High Low High Low
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter ended December 31 $23.94 $16.25 $ 9.88 $ 7.00
Second Quarter ended March 31 $33.00 $20.25 $12.07 $ 8.88
Third Quarter ended June 30 $42.50 $30.88 $14.94 $ 9.41
Fourth Quarter ended September 30 $38.63 $27.38 $17.13 $13.13
</TABLE>
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.
31
<PAGE> 6
Gartner Group, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
September 30, 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 96,755 $ 66,581
Marketable securities 30,054 28,833
Fees receivable, net of allowances of $4,460 and $3,690 143,762 112,159
Deferred commissions 17,539 16,493
Prepaid expenses and other current assets 22,040 12,162
- --------------------------------------------------------------------------------------------------------------------
Total current assets 310,150 236,228
Long-term marketable securities 3,047 --
Property and equipment, net 32,818 23,973
Goodwill, net of accumulated amortization of $12,491 and $8,826 93,144 62,871
Other assets 4,949 9,834
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 444,108 $ 332,906
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ -- $ 6,725
Accounts payable and accrued liabilities 60,527 59,198
Commissions payable 15,148 13,008
Accrued bonuses payable 16,781 15,277
Deferred revenues 198,952 161,001
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 291,408 255,209
- --------------------------------------------------------------------------------------------------------------------
Long-term deferred revenues 2,465 3,446
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock:
$.0005 par value, authorized 200,000,000 shares of Class
A Common Stock in 1996 and 1995 and 1,600,000 shares of
Class B Common Stock in 1996 and 1995; issued 102,697,739
shares of Class A Common Stock in 1996 (98,396,398 shares in
1995), and 1,600,000 shares of Class B Common Stock in 1996 and 1995 52 51
Additional paid-in capital 134,711 73,278
Cumulative translation adjustment (2,965) (2,500)
Accumulated earnings 32,008 17,257
Treasury stock, at cost, 11,370,594 and 11,444,594 shares (13,571) (13,835)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 150,235 74,251
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 444,108 $ 332,906
====================================================================================================================
</TABLE>
See notes to consolidated financial statements
32
<PAGE> 7
Gartner Group, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Continuous services $ 306,542 $ 235,867 $ 177,821
Other, principally consulting, training and conferences 88,130 59,279 47,651
- ----------------------------------------------------------------------------------------------------------------
Total revenues 394,672 295,146 225,472
- ----------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of services and product development 152,982 112,675 85,495
Selling, general and administrative 144,473 119,626 100,787
Acquisition-related charges 34,898 -- --
Depreciation 9,064 6,399 6,267
Amortization of intangibles 3,815 3,906 3,584
Non-recurring charges and credits, net -- 8,800 (14,611)
- ----------------------------------------------------------------------------------------------------------------
Total costs and expenses 345,232 251,406 181,522
- ----------------------------------------------------------------------------------------------------------------
Operating income 49,440 43,740 43,950
Interest income, net 3,665 2,271 150
Preferred stock dividends -- -- (152)
- ----------------------------------------------------------------------------------------------------------------
Income before minority interest and provision for income taxes 53,105 46,011 43,948
Minority interest (25) (98) --
- ----------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 53,130 46,109 43,948
Provision for income taxes 36,692 20,948 19,891
- ----------------------------------------------------------------------------------------------------------------
Net income $ 16,438 $ 25,161 $ 24,057
================================================================================================================
Net income per common share:
Primary $ .17 $ .27 $ .25
Fully diluted $ .17 $ .26 $ .25
Weighted average shares outstanding:
Primary 98,612 94,762 95,008
Fully diluted 98,854 95,212 95,120
</TABLE>
See notes to consolidated financial statements
33
<PAGE> 8
Gartner Group, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Cumulative Total
Preferred Common Paid-in Translation Accumulated Treasury Stockholders'
Stock Stock Capital Adjustment Earnings Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1993 $0 $38 $ 38,546 $ 232 $ (235) $(13,830) $ 24,751
Net income -- -- -- -- 24,057 -- 24,057
Net proceeds from issuance of 21,592,000 shares of
Class A Common Stock in initial public offering -- 11 53,938 -- -- -- 53,949
Conversion of 2,700 shares of Series B Preferred Stock
into 1,600,000 shares of Class B Common Stock 0 0 -- -- -- -- 0
Redemption of 34,800 shares of Series A Preferred Stock 0 -- (34,790) -- -- -- (34,790)
Issuance of 1,172,924 of Class A Common Stock upon exercise
of stock options -- 1 385 -- -- -- 386
Purchase of 980 shares of Class A Common Stock -- -- -- -- -- (4) (4)
Issuance from treasury stock of 702,992 shares of Class A
Common Stock -- 0 1,630 -- -- 13 1,643
Net transfers to D&B by Dataquest -- -- -- -- (16,123) -- (16,123)
Cumulative translation adjustment -- -- -- 18 -- -- 18
- ------------------------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements
34
<PAGE> 9
Gartner Group, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION> 1996 1995 1994
Fiscal Year Ended September 30,
<S> <C> <C> <C>
Operating activities: -------- -------- --------
Net income $ 16,438 $ 25,161 $ 24,057
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization of intangibles, deferred financing costs and discount 12,879 9,703 9,193
Acquisition-related charges 34,898 -- --
Provision for doubtful accounts 3,295 1,862 1,239
Deferred revenues 35,800 25,479 31,773
Deferred tax benefit (1,394) (2,690) (4,226)
Pre-acquisition tax benefit applied to reduce goodwill 517 1,257 2,712
Minority interest (25) (98) --
Provision (income) for non-recurring charges and credits, net -- 8,800 (14,611)
Payments for acquisition-related and non-recurring charges and credits, net (7,691) (408) (1,044)
Changes in assets and liabilities, net of effects of acquisitions:
Increase in fees receivable
Increase in deferred commissions (31,779) (10,136) (32,252)
Increase in prepaid expenses and other current assets (1,154) (4,216) (3,283)
Increase (decrease) in other assets (1,995) (1,138) (2,177)
Increase in accounts payable and accrued liabilities 116 (242) (116)
Increase in commissions payable 2,277 10,001 7,994
Increase in accrued bonuses payable 2,160 1,248 4,477
1,347 2,383 3,594
-------- -------- --------
Cash provided by operating activities 65,689 66,966 27,330
Investing activities: -------- -------- --------
Payment for businesses acquired (excluding cash acquired) (46,176) (9,749) (4,886)
Addition of property and equipment (15,614) (18,183) (6,543)
Proceeds from disposal of property and equipment -- 11,826 1,699
Marketable securities purchased, net (4,268) (24,783) (4,050)
Proceeds from sale of division -- -- 21,500
Other investing (750) 521 (216)
-------- -------- --------
Cash (used for) provided by investing activities (66,808) (41,410) 7,504
-------- -------- --------
Financing activities:
Principal payments on long-term debt and capital lease obligations (6,725) (5,825) (2,400)
Net proceeds from initial public offering -- -- 53,946
Redemption of preferred stock -- -- (34,790)
Issuance of common stock and warrants 5,753 1,260 386
Proceeds from Employee Stock Purchase Plan offering 4,547 3,069 1,630
Tax benefits of stock transactions with employees 29,415 9,241 --
Net changes in Dataquest subsidiary balances due to D&B (1,687 (15,731) 13,024)
Sale (purchase) of treasury stock 264 (14) 9
-------- -------- --------
Cash provided by (used for) financing activities 31,567 (8,000) 5,757
-------- -------- --------
Net increase in cash and cash equivalents 30,448 17,556 40,591
Effect of exchange rates on cash and cash equivalents (274) 220 --
Cash and cash equivalents, beginning of fiscal year 66,581 48,805 8,214
-------- -------- --------
Cash and cash equivalents, end of fiscal year $ 96,755 $ 66,581 $ 48,805
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 437 $ 225 $ 156
Income taxes $ 8,463 $ 7,265 $ 12,395
Supplemental schedule of non-cash investing and financing activities:
Payable for acquisitions -- -- $ 9,275
Lease obligation recorded in an exchange transaction for barter credits -- -- $ 1,156
Stock and options issued in connection with J3 acquisition $ 36,719 -- --
</TABLE>
See notes to consolidated financial statements
35
<PAGE> 10
Gartner Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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. Minority interest represents the minority shareholders'
proportionate share of the equity in Relational Courseware, Inc. ("RCI") and
Decision Drivers, Inc. ("DDI"). All significant intercompany transactions and
balances have been eliminated. The results of operations for acquisitions of
companies accounted for using the purchase method have been included in the
Consolidated Statements of Operations beginning on the effective date of
acquisition.
All historical financial information is presented to reflect the
combination of Dataquest, Inc. ("Dataquest") in a manner similar to a pooling of
interests (see Note 3. Acquisitions).
The Company effected a two-for-one split of the Company's Class A and Class
B Common Stock by means of a stock dividend on March 29, 1996. All earnings per
share and share data presented herein have been restated retroactively to
reflect the impact of the common stock split.
Revenue and commission expense recognition. Continuous services revenues are
recognized ratably over the contract period, generally twelve months. The
Company's policy is to record at the time of signing of a continuous service
contract the fees receivable and related deferred revenues for the full amount
of the contract billable on that date. All contracts are non-cancellable and
non-refundable, except for government contracts which have a 30-day cancellation
clause. Such cancellations have not been significant. All contracts are billable
at 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 continuous services revenues are earned
and amortized to income. Other revenues consist principally of revenues
recognized as earned from consulting engagements, conferences, technology-based
training products, publications and other noncontinuous services.
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, in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," as adopted by the
Company in fiscal 1994. It is management's intent to hold all investments to
maturity.
Inventories. Inventories, which primarily consist of finished goods relating to
the Company's training business, 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 $1.3 million and $0.2 million at September 30,
1996 and 1995, respectively.
Property and equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the lesser of the estimated
productive lives of the assets, ranging from three to fifteen years, or the
terms 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.
Non-compete agreement. The non-compete agreement, which became fully amortized
in fiscal 1995, represented consideration paid to the seller of GGI stock in
October 1990 for a covenant not to engage in a business which would compete with
the Company. The aggregate amount of $15.0 million was amortized over the five
year life of the agreement on an accelerated basis of 35% in each of the first
two years, and 10% annually thereafter. Amortization amounted to $1.5 million in
both fiscal 1995 and 1994.
36
<PAGE> 11
Goodwill. Goodwill represents the excess of the purchase price of the Company,
plus subsequent acquisitions, over the fair values of amounts assigned to net
assets acquired and the non-compete agreement. 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 8. Income Taxes).
At the end of each quarter, the Company reviews the recoverability of goodwill
based on estimated undiscounted future cash flows from operating activities
compared with the carrying value of goodwill. Should the aggregate 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
goodwill.
Foreign currency translation. Prior to October 1, 1994, the Company, with the
exception of the international operations of Dataquest, which used the local
currency as the functional currency, used the U.S. dollar as the functional
currency for its international operations. The translation of foreign entities'
monetary assets and liabilities was at year-end exchange rates, and non-monetary
assets and liabilities were translated at historical rates. Income and expense
accounts were translated at average rates in effect during the year, except for
continuous services revenue and depreciation which were translated at historical
rates. The resulting translation adjustments were included in the results of
operations. For the fiscal year ended September 30, 1994, the translation
adjustment and transaction net gains and losses totaled a $0.4 million gain.
Effective October 1, 1994, the Company commenced using the foreign
entities' local currency as the functional currency. This redetermination
reflects the change in financial circumstances of the now substantially
independent foreign operations which have continued to grow, expand and become
more dependent on their local currencies to transact their businesses.
Accordingly, the translation adjustment, including the initial impact of the
change which reduced equity by $1.4 million, is reflected 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 $6.5 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.
In connection with the Dataquest acquisition (see Note 3. Acquisitions),
3,000,000 shares issued to The Dun & Bradstreet Corporation ("D&B") on December
1, 1995 have been included in primary and fully diluted weighted average shares
outstanding as if they had been issued at the beginning of each fiscal year
presented. The warrant for 600,000 shares of Class A Common Stock issued to D&B
in connection with the Dataquest acquisition has been excluded from primary and
fully diluted weighted average shares outstanding for fiscal 1995 and 1994 due
to its anti-dilutive effect.
Recently issued accounting standards. In March 1995, Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," ("FAS 121") was issued. The
statement sets forth guidance as to when to recognize an impairment of
long-lived assets, including goodwill and how to measure such an impairment. The
statement also requires that long-lived assets to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell. The methodology
set forth in FAS 121 is not significantly different from the Company's existing
policies, and, therefore, the adoption of the statement had no impact on the
consolidated financial statements of the Company.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," ("FAS 123") was issued and is
effective for the Company on October 1, 1996. FAS 123 permits, but does not
require, fair value based method of
37
<PAGE> 12
accounting for employee stock option plans which results in compensation expense
being recognized in the results of operations when stock options are granted.
The Company plans to continue to use the current intrinsic value based method of
accounting for such plans where no compensation expense is recognized. However,
as required by FAS 123, the Company will provide pro forma disclosure of net
income and earnings per share in the Notes to Consolidated Financial Statements
as if the fair value based method of accounting had been applied.
Expense allocations. Prior to the Company's acquisition of Dataquest, Dataquest
was a wholly-owned subsidiary of D&B. D&B provides certain services to and
incurs 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, $1.9 and
$1.8 million during the fiscal years 1996, 1995 and 1994, respectively. The
costs of D&B's general corporate overheads were not allocated, as such costs
related to Dataquest were deemed to be immaterial.
Net transfers to D&B by Dataquest. Dataquest transfers to D&B include 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.
Financial instruments. For most instruments, including cash and cash
equivalents, receivables, accounts payable, accruals and short-term debt, the
Company has assumed that the carrying amount approximated fair value as the
majority of these instruments are short-term in nature.
Concentrations of credit risk. Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash 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 date of the
financial statements. Similarly, estimates and assumptions are required for the
reporting of revenues and expenses. Actual results could differ from estimates
that were used.
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 October 4, 1993, the Company effected an Initial Public Offering ("IPO")
of 21,592,000 shares of its Class A Common Stock (including the over-allotment
to the underwriters) at $2.75 per share resulting in net proceeds of $53.9
million. A portion of the proceeds was used to redeem the 34,800 shares of the
Company's Series A Preferred Stock held by D&B in the aggregate amount of $34.8
million, plus accrued dividends of $0.2 million. The Company's Series B
Preferred Stock automatically converted to 1,600,000 shares of Class B Common
Stock as of the effective date of the offering. Immediately after the offering,
D&B owned 40,689,640 shares of Class A Common Stock and all of the Class B
Common Stock (see Note 10. Common Stock).
On November 1, 1996, D&B transferred ownership of its Class A and Class B
Common Stock of the Company to Cognizant Corporation ("Cognizant"). At the date
of transfer, these shares represented 51% of the Company's outstanding common
stock. Cognizant is a spin-off of D&B and is an independent public company.
Cognizant management has stated that it intends to continue its share ownership
and level of management consistent with that of D&B prior to the transfer.
3. ACQUISITIONS
On December 31, 1993, the Company acquired all of the out-standing shares
of Real Decisions Corporation ("RDC"). RDC provides benchmarking services to
information technology components within large corporations to assist the
organizations in analyzing the effectiveness of their use of information
technology systems compared to other organizations. The purchase price for RDC
was $14.3 million, of which $5.0 million was paid at the closing. The balance of
the purchase price was payable pursuant to two promissory notes which accrued
interest at an annual rate of 3.68% and were payable at maturity. The first note
in the amount of $4.8 million was paid December 31, 1994, and the second note in
the amount of $4.5 million was paid December 31, 1995. The purchase price was
paid by the Company out of working capital. The acquisition has been accounted
for by the purchase method, and the purchase
38
<PAGE> 13
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 has been recorded as goodwill in the amount of $14.7 million and is
being amortized over 30 years on the straight-line method.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company as if the acquisition of RDC had occurred
at the beginning of fiscal 1994 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):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1994
- ------------------------------------------------------------------------------
<S> <C>
Total revenues $228,054
Net income $ 24,374
Net income per common share $ 0.26
</TABLE>
On July 18, 1995, the Company acquired a majority interest in RCI for
$7.5 million in cash. RCI develops and markets computer training products
covering major course topics in the areas of application development,
object-oriented programming, front end development tools, operating systems,
networking and groupware. On September 12, 1996, the Company purchased the
remaining share ownership in RCI from minority shareholders. The Company paid
$2.0 million on the acquisition date and agreed to pay additional consideration
on January 2, 2001 based on a percentage of total revenues of the Company's
training business for the four quarters prior to such date. The original
acquisition and the subsequent purchase of the minority interest were 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 of the investment over the fair value of
amounts assigned to the net tangible assets of RCI has been recorded as goodwill
and is being amortized over a period of twelve years on the straight-line
method. The pro forma effect on the Company's results of operations for fiscal
1995 and 1994, had the acquisition occurred at the beginning of each respective
period, is not material.
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 GGI end user focus.
Similar to the Company, Dataquest provides annual subscription services, custom
research and consulting. 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 the Company and Dataquest during the
periods preceding the merger were as follows (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three months ended
December 31, 1995 (Unaudited) GGI Dataquest Combined
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues $76,005 $20,469 $96,474
Net income $10,570 $ 923 $11,493
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended
September 30, 1995 GGI Dataquest Combined
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues $229,152 $65,994 $295,146
Net income (loss) $ 25,539 $ (378) $ 25,161
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended
September 30, 1994 GGI Dataquest Combined
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues $169,002 $56,470 $225,472
Net income $ 14,975 $ 9,082 $ 24,057
</TABLE>
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. Technology-based
training products, available in video and computer-based formats, address
software training needs relating to desktop applications, operating systems,
relational databases, networking technologies and developer languages and tools.
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
39
<PAGE> 14
in the Consolidated Statement of Operations, and the remaining excess purchase
price was allocated as follows (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amortization
Period Amount
- --------------------------------------------------------------------------------
<S> <C> <C>
Existing title library 4 years $ 1,900
Tradename 12 years 4,200
Goodwill 12 years 12,787
-------- --------
$ 18,887
================================================================================
</TABLE>
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):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Total revenue $401,329 $310,150
Net income $ 11,749 $ 16,360
Net income per common share $ 0.12 $ 0.17
</TABLE>
During fiscal 1996 and 1995, the Company completed additional
acquisitions for consideration of $23.2 and $2.2 million in cash, respectively.
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 1995 or 1994, are not material.
4. NON-RECURRING CHARGES AND CREDITS, NET
During fiscal 1995 and 1994, Dataquest recorded non-recurring charges
and credits related to the closing of certain operations, workforce reductions,
the sale of a division and the sale of a building. In fiscal 1994, there were
three non-recurring events that totaled a pre-tax net credit to income of $14.6
million, a $21.5 million gain on the sale of an operating division offset by a
workforce reduction charge of $0.7 million and a write-down to fair market value
of a building resulting in a $6.2 million provision. During fiscal 1995,
Dataquest closed certain operations of its subsidiary in Japan for a $0.6
million pre-tax charge, and also initiated workforce reduction actions resulting
in a pre-tax charge of $8.2 million.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, is carried at cost, less accumulated
depreciation and amortization, and consists of the following (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Furniture and equipment $ 19,801 $ 15,629
Computer equipment 34,843 23,980
Leasehold improvements 14,293 12,528
- --------------------------------------------------------------------------------
68,937 52,137
Less--accumulated depreciation and amortization (36,119) (28,164)
- --------------------------------------------------------------------------------
$ 32,818 $ 23,973
================================================================================
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company leases various facilities, furniture and computer equipment
under lease arrangements expiring between fiscal 1997 and 2010. Included in the
"Property and equipment, net" caption in the accompanying Consolidated Balance
Sheets is leased equipment under capital leases which is being amortized over
the lesser of their related lease terms or the estimated productive lives of the
assets.
Future minimum annual payments under operating lease agreements as of
September 30, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal Year
- --------------------------------------------------------------------------------
<C> <C>
1997 $10,978
1998 9,077
1999 7,507
2000 6,776
2001 6,407
Thereafter 28,097
- --------------------------------------------------------------------------------
Total minimum lease payments $68,842
================================================================================
</TABLE>
Rental expense for operating leases, net of sublease income, was $11.0,
$10.4 and $9.5 million for the fiscal years ended September 30, 1996, 1995 and
1994, 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 $3.3 million for fiscal 1997,
1998 and 1999, $1.2 million for fiscal 2000, and $0.4 million for fiscal 2001.
The Company shares its research with SoundView Financial Group ("SFG"),
a financial services firm, pursuant to a mutual research sharing agreement. The
agreement restricts the Company from marketing research and analysis provided by
SFG to the investor market, defined as persons and firms whose principal use of
the research material is for the purpose of making securities investment
decisions. The agreement may be terminated by either party upon six years'
written notice. Fees earned by the Company for the fiscal years ended September
30, 1996, 1995 and 1994 were approximately $1.7, $1.2 and $1.0 million,
respectively.
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.
40
<PAGE> 15
7. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Payable for purchase of NSA
(net of discount of $114) $ -- $ 2,269
Payable for purchase of RDC -- 4,450
Capital lease obligation -- 6
- -------------------------------------------------------------------------------
-- 6,725
Less--current maturities -- (6,725)
- -------------------------------------------------------------------------------
$ -- $ --
===============================================================================
</TABLE>
Payable for purchase of NSA and RDC. Notes payable are related to the deferred
payment of the purchase price of RDC (see Note 3. Acquisitions) and New Science
Associates ("NSA"). The Company acquired substantially all of the outstanding
shares of common stock of NSA on September 1, 1993 for a purchase price of
approximately $7.2 million, of which $3.2 million was paid at the date of
purchase and $4.0 million was payable over three years ending on the third
anniversary date.
Long-term financing arrangement. The Company entered into a long-term financing
arrangement in fiscal 1994 with the landlord of a leased facility for the
purpose of financing leasehold improvements and other furniture and equipment.
The original amount financed of $1.5 million, which was payable in monthly
installments and bore interest at an annual interest rate of 10.5%, was paid in
full in fiscal 1994.
Mortgage note. On September 1, 1993, concurrent with the acquisition of NSA, the
Company assumed an adjustable rate mortgage note relating to an office building.
The principal amount of $0.9 million was payable in monthly installments through
April 2014. The interest rate, which adjusted annually each April 1 based on an
index specified by the lender, was 9.5% at September 30, 1993. The mortgage note
was paid in full upon sale of the office building in May 1994.
Lines of credit. 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 cancelled by the banks at any time without prior notice or penalty.
No borrowings were outstanding under either line at September 30, 1996 and 1995.
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 $5.5 million and $2.0 million with The Bank of New York at September 30,
1996.
8. INCOME TAXES
Following is a summary of the components of income before minority
interest, income taxes and preferred stock dividends (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $40,625 $38,490 $40,861
Foreign 12,480 7,521 3,239
- --------------------------------------------------------------------------------
Total $53,105 $46,011 $44,100
================================================================================
</TABLE>
The provision (benefit) for income taxes before minority interest,
income taxes and preferred stock dividends on the above income (loss) consists
of the following components (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
U.S. federal $ 1,775 $ 9,282 $ 16,132
State and local 2,178 2,051 4,209
Foreign 3,164 1,807 1,064
- --------------------------------------------------------------------------------
Total current 7,117 13,140 21,405
- --------------------------------------------------------------------------------
Deferred tax expense (benefit):
U.S. federal 58 (1,967) (3,863)
State and local (1,347) (678) (289)
Foreign (105) (45) (74)
- --------------------------------------------------------------------------------
Total deferred (1,394) (2,690) (4,226)
- --------------------------------------------------------------------------------
Total current and deferred 5,723 10,450 17,179
Benefits of stock transactions with
employees credited to additional
paid-in capital 30,452 9,241 --
Benefit of purchased tax benefits
credited to goodwill 517 1,257 2,712
- --------------------------------------------------------------------------------
Total provision for income taxes $ 36,692 $ 20,948 $ 19,891
================================================================================
</TABLE>
41
<PAGE> 16
Current and long-term deferred tax assets and liabilities are comprised
of the following (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Intangible assets $ (1,919) $ --
Other (895) --
- --------------------------------------------------------------------------------
Gross deferred tax liability (2,814) --
- --------------------------------------------------------------------------------
Depreciation 749 850
Expense accruals for book purposes 8,528 7,942
Loss and credit carryforwards 9,698 3,867
Other 1,767 1,304
- --------------------------------------------------------------------------------
Gross deferred tax asset 20,742 13,963
- --------------------------------------------------------------------------------
Valuation allowance (6,580) (4,009)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 11,348 $ 9,954
================================================================================
</TABLE>
Current and long-term deferred tax assets are $8.8 million and $2.5
million for fiscal 1996 and $3.1 million and $6.9 million for fiscal 1995,
respectively.
The valuation allowance relates primarily to domestic and foreign tax
loss carryforwards. The net increase in the valuation allowance of approximately
$2.6 million in the current year results primarily from the acquisition of
domestic loss carryforwards that may expire before the Company can utilize them
and due to limitations under the Internal Revenue Code. Approximately $2.9
million of the valuation allowance would reduce goodwill upon subsequent
recognition of any related tax benefits.
The provision for income taxes before minority interest, income taxes
and preferred stock dividends is greater than the amount of income tax
determined by applying the applicable U.S. federal statutory income tax rate to
pretax income as a result of the following differences:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 5.3 5.4 5.6
Foreign income taxed at a
different rate 2.1 0.2 (0.5)
Non-deductible goodwill and direct
acquisition costs 0.9 2.1 1.6
Non-taxable interest income (1.3) (1.7) --
Recognition of previously
unrecognized deferred tax assets (1.2) (3.6) (6.1)
Portion of previously unrecognized
deferred tax assets credited
to goodwill 0.6 2.7 6.2
Other items 1.6 5.4 3.3
- --------------------------------------------------------------------------------
Effective rate without write-off of
purchased in-process research
and development costs 43.0% 45.5% 45.1%
- --------------------------------------------------------------------------------
Non-deductible write-off of
purchased in-process research
and development costs 26.1 -- --
- --------------------------------------------------------------------------------
Effective tax rate 69.1% 45.5% 45.1%
================================================================================
</TABLE>
As of September 30, 1996, the Company had U.S. federal tax loss
carryforwards of $11.2 million and state and local tax loss carryforwards of
$16.6 million, which will expire in thirteen to fifteen years and five years,
respectively. 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 $8.0 million, of which $1.4 million will
expire next year, $1.0 million will expire within four to five years, and $5.6
million can be carried forward indefinitely.
9. PREFERRED STOCK
In March 1993, the Company amended and restated its certificate of
incorporation to provide for a total of 2,500,000 shares of preferred stock, par
value $0.01, of which 34,800 shares were designated as Series A Preferred Stock,
2,700 shares were designated as Series B Preferred Stock and 2,462,500 shares
were undesignated as to series. In April 1993, the Company issued to D&B 34,800
shares of Series A Preferred Stock and 2,700 shares of Series B Preferred Stock.
The Series A Preferred Stock was redeemed in connection with the Company's IPO
in October 1993. Shares of Series B Preferred Stock automatically converted into
Class B Common Stock upon the IPO (see Note 10. Common Stock).
10. COMMON STOCK
On October 4, 1993, the Company effected an IPO of 21,592,000 shares of
its Class A Common Stock (including the exercise of the underwriters'
over-allotment option) at $2.75 per share resulting in net proceeds of $53.9
million. A portion of the proceeds was used to redeem the 34,800 shares of the
Company's Series A Preferred Stock in the aggregate amount of $34.8 million,
plus accrued dividends of $0.2 million. The remainder of the proceeds was used
for working capital and other general corporate purposes. The Company's Series B
Preferred Stock automatically converted to 1,600,000 shares of Class B Common
Stock as of the effective date of the IPO.
In March 1996, the Company amended its Certificate of Incorporation to
increase the authorized number of shares of Common Stock of the Company, from a
total of 100,000,000 to 200,000,000 shares of Class A Common Stock and from a
total of 800,000 to 1,600,000 shares of Class B Common Stock. Also in March
1996, the Company effected a two-for-one stock split of the Company's Class A
and Class B Common Stock by means of a stock dividend. The record date was March
16, 1996 and the distribution date was
42
<PAGE> 17
March 29, 1996. The Company also effected two-for-one stock splits by means of
stock dividends on June 28, 1995 and August 26, 1994. All earnings per share and
share data presented herein have been restated retroactively to reflect such
splits.
Class A Common Stock and Class B Common Stock are entitled to one vote
per share on all matters to be voted by stockholders, other than the election of
directors, and in the election of directors the holders of Class B Common Stock
are entitled to four votes per share. Shares of Class B Common Stock are
convertible on a share for share basis into shares of Class A Common Stock at
any time at the option of the holder and automatically convert upon the first to
occur of the following: (i) a sale, pledge, assignment or other transfer of such
shares of Class B Common Stock by Cognizant other than a transfer to any parent
or subsidiary of Cognizant or transfer that would not change beneficial
ownership as defined by Section 13(d) of the Securities Exchange Act of 1934, as
amended, or (ii) at any time that the number of shares of voting equity
securities of the Company beneficially owned by Cognizant represents less than
50% of the total number of shares of voting equity securities of the Company
then outstanding for ten consecutive days.
11. EMPLOYEE STOCK PURCHASE PLANS AND AGREEMENTS
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
was implemented with an initial offering period commencing effective with the
IPO and continuing through June 30, 1994, and continuing in six month offering
periods thereafter. 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 1996, 317,118 shares were
issued at an average purchase price of $15.17 per share in conjunction with this
plan. At September 30, 1996, 2,461,712 shares were available for offering under
the plan.
On April 25, 1991, the Company adopted an employee stock purchase plan
which permitted the Company to sell up to 1,950 shares of Redeemable Preferred
Stock at $1,000 per share plus accumulated dividends and 17,600,000 shares of
common stock at $0.0195 per share to employees. The terms of the plan required
that for each share of preferred stock purchased, 9,041.92 shares of common
stock must also be purchased. Employees vested in stock purchased under the
terms of the plan ratably over five years from the effective date of purchase of
October 9, 1990. If an employee who purchased stock under the terms of the plan
ceased to be employed by the Company, the Company at its option could have
elected to repurchase the employee's unvested stock at the original cost paid by
the employee for such stock and vested stock at a price equal to the fair market
value as determined by the Board of Directors on the date of repurchase. In the
event that the Company did not repurchase the shares, the Fund could have
elected to repurchase the shares on the same terms. The shares of preferred
stock issued and outstanding under this plan at September 30, 1992 were redeemed
at liquidation value plus accrued dividends. The Fund's repurchase rights
terminated in April 1993 in connection with certain transactions among the
Company, D&B, and persons and entities associated with the Fund (see Note 2.
Related Parties).
An officer and an executive purchased common and preferred stock in
connection with separate stock purchase agreements during 1991. The officer's
agreement provided for the purchase of 148.148 shares of Redeemable Preferred
Stock and 1,600,000 shares of common stock. The executive's agreement provided
for the purchase of 296.296 shares of redeemable preferred stock and 3,200,000
shares of common stock. These shares were purchased at the same price as shares
purchased under the employee stock purchase plan described above. Both of the
agreements allowed the Company or the Fund, under certain conditions, to
repurchase shares acquired under the terms of the stock purchase agreements or
acquired by exercised stock options, in the event the officer or executive was
no longer employed by the Company. The repurchase price was either the original
purchase cost or the fair market value on the repurchase date, as determined by
the Board of Directors, based upon certain provisions as outlined in the
agreements. The shares of preferred stock issued and outstanding under these
agreements at September 30, 1992 were redeemed at liquidation value plus accrued
dividends. In April 1993, the officer's common shares became fully vested upon
the change in ownership of the Company. The executive sold 2,880,000 shares of
common stock in conjunction with the company's IPO in October 1993 (see Note 10.
Common Stock).
The employees agreed to vote common shares acquired under the stock
purchase plan and stock purchase agreement, respectively, at the direction of
D&B. Under the terms of these agreements, the voting provisions expire on
January 20, 2001 with respect to the officer and ten years from the date of
stock issuance with respect to the employees. In April 1993, the voting
restrictions were released as to all shares vested as of such date upon the
closing of the Company's IPO.
In October 1990, the Company, the Fund, D&B and certain individual
investors entered into a shareholders' agreement that requires the parties,
among other things, to elect or remove (if requested by D&B) at least two
directors designated by D&B, and to elect or remove (if requested by the Fund) a
majority of directors
43
<PAGE> 18
as designated by the Fund. The Company also granted D&B the right, under certain
conditions, to participate in the purchase of additional shares offered for sale
by the Company and the right of first refusal in the event of a proposed sale of
substantially all of the Company's business or assets. Stock registration rights
were granted by the Company, to the Fund, D&B and certain executives and
individuals under the terms of a registration agreement. The agreement granted
certain rights to include shares held by the parties to the agreement as part of
any proposed public registration of the Company's securities and also gave the
parties rights to demand registration of additional shares under certain
conditions which would have been effective after an initial public stock
offering. The shareholders' agreement was terminated in connection with certain
transactions in April 1993 among the Company, D&B and persons and entities
associated with the Fund.
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 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. At September 30, 1996 and
1995, options to purchase 22,800,000 shares of common stock were authorized and
4,152,381 and 6,871,628 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 provides 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, 1996 and 1995, 648,000 and 672,000
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 to senior
personnel long-term equity participation in the Company as an incentive to
promote the long-term success of the Company. Under the terms of the plan, an
aggregate of 6,580,000 options to purchase shares of Class A Common Stock were
granted in October 1994 at an exercise price of $7.1875 per share, the fair
market value of the Company's stock on such date. In October 1995, an additional
280,000 options to purchase shares were granted at exercise prices of $16.625 to
$34.213 per share, the fair market value determined by the Board on 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 timely 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 1995 and 1996 performance,
50% of the first grant will be exercisable on October 1, 1997 and 25% of the
second grant will be exercisable on October 1, 1998. Options for the purchase of
750,000 shares were available for grant at September 30, 1996.
44
<PAGE> 19
A summary of stock option activity under the plans and agreement through
September 30, 1996 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Under
Option Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at September 30, 1993 11,072,560 $ 0.0195 - $ 2.000
Granted 3,630,968 $ 3.960 - $ 5.844
Exercised (1,172,924) $ 0.0195 - $ 1.375
Cancelled (724,532) $ 0.0195 - $ 4.829
- --------------------------------------------------------------------------
Outstanding at September 30, 1994 12,806,072 $ 0.0195 - $ 5.844
Granted 8,707,672 $ 7.188 - $ 13.875
Exercised (1,838,902) $ 0.0195 - $ 5.844
Cancelled (548,688) $ 0.0195 - $ 10.282
- --------------------------------------------------------------------------
Outstanding at September 30, 1995 19,126,154 $ 0.0195 - $ 13.875
Granted 3,665,506 $ 16.625 - $ 34.250
Exercised (3,036,403) $ 0.0195 - $ 17.689
Cancelled (968,660) $ 0.0195 - $ 34.250
- --------------------------------------------------------------------------
Outstanding at September 30, 1996 18,786,597 $ 0.0195 - $ 35.378
==========================================================================
</TABLE>
Options for the purchase of 4,295,277 and 4,105,202 shares were exercisable
at September 30, 1996 and 1995, at prices ranging from $0.0195 to $35.378 per
share.
Shares purchased under the terms of the plans and agreement are subject to
repurchase 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.
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.
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 the 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 $3.2, $2.0 and $1.4 million for the years ended September 30,
1996, 1995 and 1994, respectively.
14. GEOGRAPHIC DATA
The Company's consolidated 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 on the European continent and
"Other International Sales" as revenues attributable to all other areas located
outside of the United States.
European international 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):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Fiscal Year Ended September 30, 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
United States:
Revenues $ 253,451 $ 184,615 $ 139,007
Operating income $ 26,359 $ 33,600 $ 38,033
Identifiable tangible assets $ 282,201 $ 222,262 $ 176,078
Europe:
Revenues $ 98,789 $ 71,946 $ 55,266
Operating income $ 15,968 $ 5,330 $ 714
Identifiable tangible assets $ 50,564 $ 36,474 $ 23,566
Other International:
Revenues $ 42,432 $ 38,585 $ 31,199
Operating income $ 7,113 $ 4,810 $ 5,203
Identifiable tangible assets $ 18,199 $ 8,481 $ 5,571
</TABLE>
Excluding acquisition-related and non-recurring charges and credits, operating
income in the United States was $61.3, $41.8 and $23.4 million for the fiscal
years ended September 30, 1996, 1995 and 1994, respectively.
45
<PAGE> 20
15. SELECTED CONSOLIDATED BALANCE SHEET AND STATEMENTS OF OPERATIONS DATA
A summary of Selected Consolidated Balance Sheet and Statements of Operations
Data is set forth below (in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Balance Sheets Data Statements of Operations Data
- -----------------------------------------------------------------------------------------------------------------
Continuous Total
Gross Fees Deferred Services Other Fiscal Year
Receivable Revenues Revenues Revenues Revenues
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1993 $ 68,477 $ 97,638 -- --
Billings 258,151 178,386 $ 33,655 $ 45,204
Acquisition balances 5,400 7,500 -- --
Cash collections (226,088) -- -- --
Continuous services revenue amortization -- (144,166) 144,166 --
Other service revenue amortization -- (2,447) -- 2,447
- -----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 105,940 136,911 177,821 47,651 $ 225,472
========= ======== =========
Billings 322,169 232,764 36,163 53,512
Acquisition balances 997 243 -- --
Cash collections (313,257) -- -- --
Continuous services revenue amortization -- (199,704) 199,704 --
Other service revenue amortization -- (5,767) -- 5,767
- -----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 115,849 164,447 235,867 59,279 295,146
========= ======== =========
Billings 420,037 329,726 22,071 78,182
Acquisition balances 3,976 1,663 -- --
Cash collections (391,640) -- -- --
Continuous services revenue amortization -- (284,471) 284,471 --
Other service revenue amortization -- (9,948) -- 9,948
- -----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $ 148,222 $ 201,417 $ 306,542 $ 88,130 $ 394,672
=================================================================================================================
</TABLE>
For a description of the Company's revenue recognition policies, see Note 1,
Significant Accounting Policies. Continuous services revenues shown above of
$306.5, $235.9 and $177.8 million for fiscal 1996, 1995 and 1994, respectively,
represent ratable amortization over the contract period, including catch-up
adjustments also shown above for the respective fiscal years of $22.1, $36.2 and
$33.7 million, to account for certain renewals. Catch-up adjustments occur when
there is a lag between the month that a continuous service expires and the month
that it is renewed. The Company continues to provide continuous 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.
46
<PAGE> 21
Gartner Group, Inc.
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 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 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 necessary by them to support their opinion.
Manuel A. Fernandez
Chairman, President and Chief Executive Officer
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 sheet of Gartner Group,
Inc. and its subsidiaries as of September 30, 1996 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year 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 audit. The
consolidated financial statements of Gartner Group, Inc. and its subsidiaries as
of September 30, 1995 and for each of the years in the two-year period 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 audit 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 audit provides 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, 1996 and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Stamford, Connecticut
October 31, 1996
47
<PAGE> 22
Gartner Group, Inc.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except statistical and per share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended September 30, 1996 1995 1994 1993 1992 (1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Continuous services $ 306,542 $ 235,867 $ 177,821 $ 143,591 $ 85,079
OTHER 88,130 59,279 47,651 31,731 15,274
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 394,672 295,146 225,472 175,322 100,353
Total costs and expenses 345,232 251,406 181,522 161,704 98,304
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 49,440 43,740 43,950 13,618 2,049
Interest, net 3,665 2,271 (2) (4,395) (6,503)
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest,
income taxes and extraordinary item 53,105 46,011 43,948 9,223 (4,454)
Minority interest (25) (98) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary item 53,130 46,109 43,948 9,223 (4,454)
Provision for income taxes 36,692 20,948 19,891 5,979 1,075
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 16,438 25,161 24,057 3,244 (5,529)
Extraordinary item--loss from
early extinguishment of long-term debt
(net of tax benefits of $350) -- -- -- (765) --
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 16,438 $ 25,161 $ 24,057 $ 2,479 $ (5,529)
============================================================================================================================
NET INCOME (LOSS) PER COMMON SHARE:
Primary:
Income (loss) before extraordinary item $ .17 $ .27 $ .25 $ .04 $ (.10)
Extraordinary item -- -- -- (.01) --
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .17 $ .27 $ .25 $ .03 (.10)
============================================================================================================================
Fully diluted:
Income (loss) before extraordinary item $ .17 $ .26 $ .25 $ .04 $ (.10)
Extraordinary item -- -- -- (.01) --
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ .17 $ .26 $ .25 $ .03 $ (.10)
============================================================================================================================
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents,
marketable securities $ 126,809 $ 95,414 $ 52,855 $ 8,214 $ 12,277
Fees receivable, net 143,762 112,159 102,509 65,699 35,031
Other current assets 39,579 28,655 22,940 15,224 10,372
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 310,150 236,228 178,304 89,137 57,680
Intangibles and other assets 133,958 96,678 87,619 81,962 51,809
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 444,108 $ 332,906 $ 265,923 $ 171,099 $ 109,489
============================================================================================================================
Current portion of long-term obligations $ -- $ 6,725 $ 5,877 $ 952 $ 6,511
Deferred revenues 198,952 161,001 131,031 94,399 51,550
Other current liabilities 92,456 87,483 62,829 45,735 32,368
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 291,408 255,209 199,737 141,086 90,429
Long-term obligations,
excluding current maturities -- -- 6,419 4,952 32,789
Long-term deferred revenues 2,465 3,446 5,880 3,239 --
Stockholders' equity (deficit) 150,235 74,251 53,887 21,822 (13,729)
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 444,108 $ 332,906 $ 265,923 $ 171,099 $ 109,489
============================================================================================================================
September 30, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
Contract value(2) $389,969 $303,231 $224,390 $172,481 $105,930
Client organizations(3) 7,463 5,500 4,460 3,639 2,778
Client memberships(3)(4) 28,867 19,219 14,779 11,362 9,421
</TABLE>
- ----------------
(1) Does not include the results of Dataquest, Inc. as the Company and
Dataquest, Inc. were not under common control of Dun & Bradstreet, Inc.
(2) Contract value, as measured by the Company, represents the annualized
subscription fees under all continuous service contracts in effect at a
given point in time, without regard to the duration of the contracts
outstanding at such time.
(3) Information provided for fiscal 1992, 1993, 1994 and 1995 does not include
Dataquest, Inc.
(4) Represents the number of units of continuous services sold.
48
<PAGE> 23
Gartner Group, Inc.
QUARTERLY FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Unaudited
- -------------------------------------------------------------------------------------------------------------
Fiscal Year 1996 1st 2nd 3rd 4th(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 96,474 $ 90,834 $ 97,406 $ 109,957
Operating income (loss) $ 19,335 $ 19,722 $ 21,203 $ (10,821)
Net income (loss) $ 11,493 $ 11,712 $ 12,621 $ (19,388)
Primary net income (loss) per common share(3) $ .12 $ .12 $ .13 $ (.19 )
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Fiscal Year 1995 1st 2nd 3rd 4th(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 71,306 $ 65,539 $ 76,409 $ 81,892
Operating income $ 13,306 $ 12,098 $ 12,920 $ 5,416
Net income $ 7,635 $ 7,277 $ 7,474 $ 2,775
Primary net income per common share $ .08 $ .08 $ .08 $ .03
</TABLE>
- -------------------------------
(1) Includes $33.2 million of charges related to the acquisition of J3
Learning, Inc.
(2) Includes $8.8 million of non-recurring charges.
(3) The aggregate of the four quarters' primary net income per common share
does not total the reported full fiscal year amount due to rounding.
49
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT STATE/COUNTRY OF INCORPORATION
Dataquest (Korea), Inc. Delaware
Dataquest Asia Pacific Limited Hong Kong
Dataquest Japan Limited Japan
Dataquest Research (Thailand) Limited Thailand
Dataquest Taiwan Limited Taiwan
Dataquest, Inc. California
Decision Drivers, Inc. Delaware
DQ Research Pte. Ltd. Singapore
G.G. Investment Management, Inc. Delaware
G.G. West Corporation Delaware
Gartner Credit Corporation Delaware
Gartner Enterprises, Ltd. Delaware
Gartner Group Asia, Inc. Delaware
Gartner Group Europe Holdings B.V. The Netherlands
Gartner Group Europe, Inc. Delaware
Gartner Group France S.A.R.L. France
Gartner Group FSC, Inc. Virgin Islands
Gartner Group Italia S.r.P. Italy
Gartner Group Japan KK Japan
Gartner Group Learning, Inc. Minnesota
Gartner Group Nederland B.V. The Netherlands
Gartner Group Norge A/S Norway
Gartner Group Pacific Pty Limited Australia
Gartner Group Sales, Inc. Delaware
Gartner Group Scandinavia A/S Denmark
Gartner Group Sverige AB Sweden
Gartner Group UK Ltd. United Kingdom
Gartner Group, GmbH Germany
Gartner Investment Corporation Delaware
GG Hong Kong, Inc. Delaware
J3 Learning Limited United Kingdom
Mindware Training Technologies, Ltd. Ireland
New Science Associates, Inc. Delaware
New Science Associates, Ltd. United Kingdom
New Science Limited United Kingdom
Nomos Ricerca S.r.P. Italy
Nomos Ricerca Services S.r.P. Italy
Nomos Ricerca Telecomunicazioni S.r.P. Italy
RCI Management Corporation Delaware
Real Decisions Corporation Connecticut
Relational Courseware, L.P. Delaware
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Stockholders
Gartner Group, Inc.:
The audit referred to in our report dated October 31, 1996, included the related
financial statement schedule as of and for the year ended September 30, 1996, as
contained in the annual report on Form 10-K for the year 1996. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
which, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
KPMG Peat Marwick LLP
Stamford, Connecticut
October 31, 1996
<PAGE> 1
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders
Gartner Group, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-85926 and No. 33-92486) on Form S-8 of Gartner Group, Inc. of our report
dated October 31, 1996, relating to the consolidated balance sheet of Gartner
Group, Inc. and its subsidiaries as of September 30, 1996, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for the year then ended, which report appears in the 1996 Annual
Report to Stockholders on Form 10-K of Gartner Group Inc. We also consent to
incorporation by reference of our report on the related financial statement
schedule included elsewhere herein.
KPMG Peat Marwick LLP
Stamford, Connecticut
December 17, 1996
<PAGE> 1
EXHIBIT 23.3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
GARTNER GROUP, INC.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows as of and for each of the two years in the period ended September 30,
1995 present fairly, in all material respects, the financial position, results
of operations and cash flows of Gartner Group, Inc. and its subsidiaries, as of
and for each of the two years in the period 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 audits. We conducted our audits 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 audits provide 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, 1996
and the stock split discussed in
Note 10, which is as of March 29, 1996
<PAGE> 1
EXHIBIT 23.4
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of GARTNER GROUP, INC.
Our audits of the consolidated financial statements referred to in our 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, appearing in this Annual Report on Form 10-K also
included an audit of the Financial Statement Schedule listed in Item 14(a) of
this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Stamford, Connecticut
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
<PAGE> 1
Exhibit 24.1
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 17th day of December, 1996.
GARTNER GROUP, INC.
By: /s/ MANUEL A. FERNANDEZ
---------------------------------
Manuel A. Fernandez
President, 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
Registration Statement 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, President, Chairman of the December 17, 1996
------------------------ Board and Chief Executive Officer
Manuel A. Fernandez (Principal Executive Officer)
/s/ JOHN F. HALLIGAN Executive Vice President and Chief December 17, 1996
-------------------- Financial Officer (Principal Financial
John F. Halligan and Accounting Officer)
/s/ MAX HOPPER Director December 17, 1996
---------------
Max Hopper
/s/ JOHN P. IMLAY Director December 17, 1996
------------------
John P. Imlay
/s/ STEPHEN G. PAGLIUCA Director December 17, 1996
------------------------
Stephen G. Pagliuca
/s/ DENNIS G. SISCO Director December 17, 1996
--------------------
Dennis G. Sisco
/s/ WILLIAM O. GRABE Director December 17, 1996
---------------------
William O. Grabe
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 96,755
<SECURITIES> 30,054
<RECEIVABLES> 148,222
<ALLOWANCES> 4,460
<INVENTORY> 0
<CURRENT-ASSETS> 310,150
<PP&E> 68,937
<DEPRECIATION> 36,119
<TOTAL-ASSETS> 444,108
<CURRENT-LIABILITIES> 291,408
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 150,183
<TOTAL-LIABILITY-AND-EQUITY> 444,108
<SALES> 394,672
<TOTAL-REVENUES> 394,672
<CGS> 152,982
<TOTAL-COSTS> 152,982
<OTHER-EXPENSES> 188,955
<LOSS-PROVISION> 3,295
<INTEREST-EXPENSE> 259
<INCOME-PRETAX> 53,130
<INCOME-TAX> 36,692
<INCOME-CONTINUING> 16,438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,438
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
