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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
[X] THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED DECEMBER 31, 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
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
--- ---
The number of shares outstanding of the Registrant's capital stock as of
December 31, 1996 was 92,158,884 shares of Common Stock, Class A and 1,600,000
shares of Common Stock, Class B.
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS Page
Consolidated Balance Sheets at December 31, 1996 and
September 30, 1996 3
Consolidated Statements of Operations for the Three
Months ended December 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for
the Three Months ended December 31, 1996 and 1995 5
Note to Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
PART II OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 12
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
GARTNER GROUP, INC.
Consolidated Balance Sheets
(In thousands, except share data)
December 31, September 30,
1996 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 123,697 $ 96,755
Marketable securities 22,276 30,054
Fees receivable, net 141,708 143,762
Deferred commissions 15,237 17,539
Prepaid expenses and other current assets 22,986 22,040
--------- ---------
Total current assets 325,904 310,150
Long-term marketable securities 1,041 3,047
Property and equipment, net 33,684 32,818
Goodwill, net 91,771 93,144
Other assets 6,535 4,949
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Total assets $ 458,935 $ 444,108
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 75,395 $ 60,527
Commissions payable 7,240 15,148
Accrued bonuses payable 7,080 16,781
Deferred revenues 183,901 198,952
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Total current liabilities 273,616 291,408
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Deferred revenues 2,871 2,465
Commitments
Stockholders' equity:
Preferred stock -- --
Common stock: $.0005 par value 52 52
Additional paid-in capital 147,524 134,711
Cumulative translation adjustment (2,607) (2,965)
Accumulated earnings 51,050 32,008
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196,019 163,806
Less: Treasury stock, at cost (13,571) (13,571)
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Total stockholders' equity 182,448 150,235
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Total liabilities and stockholders' equity $ 458,935 $ 444,108
========= =========
See accompanying notes.
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GARTNER GROUP, INC.
Consolidated Statements of Operations
(In thousands, except per share data)
For the three months ended
December 31,
--------------------------
1996 1995
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Revenues:
Research, advisory and benchmarking services $ 92,090 $ 72,006
Other, principally conferences, consulting and training 33,277 24,468
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Total revenues 125,367 96,474
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Costs and expenses:
Cost of services and product development 50,523 37,078
Selling, general and administrative 39,234 35,387
Acquisition-related charges -- 1,665
Depreciation 2,595 2,237
Amortization of intangibles 1,496 772
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Total costs and expenses 93,848 77,139
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Operating income 31,519 19,335
Interest income, net 1,316 802
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Income before minority interest and income taxes 32,835 20,137
Minority interest -- (25)
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Income before income taxes 32,835 20,162
Provision for income taxes 13,793 8,669
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Net income $ 19,042 $ 11,493
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Net income per common share $ 0.19 $ 0.12
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Weighted average shares outstanding 101,951 97,492
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See accompanying notes.
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GARTNER GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
For the three months ended
December 31,
----------------------
1996 1995
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Operating activities:
Cash provided by operating activities $ 9,161 $ 3,805
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Investing activities:
Payment for net assets of subsidiaries acquired (excluding cash) -- (18,303)
Additions of property and equipment, net (2,921) (2,617)
Net proceeds from sale of marketable securities 9,784 1,202
Other investing (1,704) --
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Cash provided by (used for) investing activities 5,159 (19,718)
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Financing activities:
Principal payments on long-term debt and capital lease obligations -- (4,450)
Issuance of common stock and warrants 5,174 1,097
Net changes in Dataquest subsidiary balances due to D&B -- (1,687)
Tax benefits of stock transactions with employees 7,639 3,400
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Cash provided by (used for) financing activities 12,813 (1,640)
========= ========
Net increase (decrease) in cash and cash equivalents 27,133 (17,553)
Effects of foreign exchange rates on cash and cash equivalents (191) (40)
Cash and cash equivalents, beginning of period 96,755 66,581
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Cash and cash equivalents, end of period $ 123,697 $ 48,988
========= ========
See accompanying notes.
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GARTNER GROUP, INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Consolidated Financial Statements
These interim consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and should be read in conjunction with
the consolidated financial statements and related notes of Gartner Group, Inc.
(the "Company") on Form 10-K for the fiscal year ended September 30, 1996. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of financial position,
results of operations and cash flows at the dates and for the periods presented
have been included. The results of operations for the first quarter ended
December 31, 1996 may not be indicative of the results of operations for the
remaining quarters in fiscal 1997.
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ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below under
"Quarterly Operating Income Trends," "Other Factors that may Affect Future
Performance" and elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth certain results of operations as a percentage of
total revenues:
For the three months ended
December 31,
-----------------
1996 1995
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Revenues:
Research, advisory and benchmarking services 73.5% 74.6%
Other 26.5 25.4
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Total revenues 100.0 100.0
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Costs and expenses:
Cost of services and product development 40.3 38.4
Selling, general and administrative 31.3 36.7
Acquisition-related charges -- 1.8
Depreciation 2.1 2.3
Amortization of intangibles 1.2 0.8
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Total costs and expenses 74.9 80.0
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Operating income 25.1 20.0
Interest income, net 1.1 0.9
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Income before minority interest and income taxes 26.2 20.9
Minority interest -- --
------ ------
Income before income taxes 26.2 20.9
Provision for income taxes 11.0 9.0
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Net income 15.2% 11.9%
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TOTAL REVENUES increased 30% to $125.4 million for the first quarter of fiscal
1997 from $96.5 million for the first quarter of fiscal 1996. Revenues from
research, advisory and benchmarking services ("RABS") increased by 28% to $92.1
million from $72.0 million for the first quarter of fiscal 1996. RABS revenues
comprised approximately 73.5% and 74.6% of total revenues for the first quarter
of fiscal 1997 and 1996, respectively. RABS encompass products which, on an
ongoing basis, highlight industry developments, review new products and
technologies, provide quantitative market research, analyze
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industry trends within a particular technology or market sector and provide
comparative analysis of the information technology operations of organizations.
The Company enters into annually renewable contracts for RABS. Revenues from
RABS are recognized as products and services are delivered, and as the Company's
obligation to the client is completed over the contract period. The increase in
revenues from RABS reflects primarily strong market acceptance of new services
introduced in fiscal 1996, volume increases as a result of increased geographic
and client penetration, offset partially by a volume pricing strategy that
provides more value for the same dollars each year and through the expansion of
electronic distribution within client companies.
Contract value increased 25% to $380.0 million at December 31, 1996 versus
$305.0 million at December 31, 1995. The Company believes that contract value,
which is calculated as the annualized value of all RABS contracts in effect at a
given point in time, without regard to the duration of the RABS contracts
outstanding at such time, is a significant measure of the Company's volume of
RABS business. Historically, the Company has experienced that a substantial
portion of client companies have renewed contracts for an equal or higher level
of total payments each year, and annual RABS revenues in any fiscal year have
approximated contract value at the beginning of the fiscal year. As of December
31, 1996, 83% of the Company's clients had renewed one or more RABS services in
the last twelve months. However, this renewal rate is not necessarily indicative
of the rate of retention of the Company's RABS revenue base, and contract value
at any time may not be indicative of future RABS revenues or cash flows if the
rate of renewal of contracts, or the timing of new business were to
significantly change during the following twelve months compared to historic
patterns. Total deferred revenues of $186.8 million and $201.4 million at
December 31, 1996 and September 30, 1996, respectively, as presented in the
Company's consolidated balance sheets, represent unamortized revenues from RABS
contracts plus unamortized revenues of certain other products and services not
included in RABS. Deferred revenues do not directly correlate to contract value
as of the same date, since contract value represents an annualized value of all
outstanding RABS contracts without regard to the duration of such contracts, and
deferred revenue represents unamortized revenue remaining on all outstanding
contracts including RABS and certain other products and services not included in
RABS.
Other revenues for the first quarter of fiscal 1997 increased 36% compared to
the first quarter of fiscal 1996, to $33.3 million from $24.5 million. Other
revenues consist principally of revenues recognized as earned from conferences,
consulting engagements and sale of technology-based training products and
publications. The increase of $8.8 million in the first quarter of fiscal 1997
over the first quarter of fiscal 1996 was primarily due to increased revenues
from the Company's Symposia conferences and ITxpo exhibition events held
annually during the first quarter of the fiscal year. Technology-based training
products also contributed to the revenue growth in the first quarter of fiscal
1997 compared to first quarter of fiscal 1996 as a result of the acquisition of
J3 Learning in July 1996.
OPERATING INCOME rose 63% to $31.5 million, or 25.1% of total revenues, for the
first quarter of fiscal 1997, from $19.3 million or 20.0% of total revenues in
the first quarter of fiscal 1996. Excluding acquisition-related charges of $1.7
million in the first fiscal quarter of 1996, operating income would have
increased 50% from $21.0 million. Operating income has increased as revenues
continue to grow due to the benefit the Company has gained from economies of
scale and the leveraging of its resources (additional revenues have been
generated using essentially the same resources). The Company's continued focus
on margin improvement has favorably impacted operating results.
While costs and expenses increased to $93.9 million in the first quarter of
fiscal 1997 from $77.1 million in the first quarter of fiscal 1996, such costs
decreased to 74.9% of total revenues from 80.0% (78.2% excluding
acquisition-related costs) in the first quarter of fiscal 1996. The increase in
cost of services and product development expenses ($50.5 million and $37.1
million for the first quarter of fiscal
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1997 and 1996, respectively) reflected primarily the need to provide additional
support to the growing client base, including investment in strategic areas
such as electronic and Internet distribution, costs associated with
conferences, costs resulting from the Company's new client inquiry process
(Quick Path) and product development costs (particularly for technology-based
training products). As a result, cost of services and product development
expenses, as a percentage of total revenues has increased approximately 2% from
38.4% for the first quarter of fiscal 1996 to 40.3% for the first quarter of
fiscal 1997. The increase in selling, general and administrative expenses
($39.2 million and $35.4 million for the first quarter of fiscal 1997 and 1996,
respectively) is due to the Company's continuing expansion of worldwide
distribution channels and resulting commissions earned on the revenue
generated. This is partially offset by elimination and/or reduction of
redundant general and administrative expenses, including personnel reductions
and facility rationalization relating to the acquisition of Dataquest, which
had a favorable impact on general and administrative costs in the first quarter
of fiscal 1997 compared to the first quarter of fiscal 1996. Consequently,
selling, general and administrative expenses have decreased to 31.3% of total
revenues for the first quarter of fiscal 1997, versus 36.7% of total revenues
for the first quarter of fiscal 1996.
Acquisition-related charges of $1.7 million in the first quarter of fiscal 1996
for the acquisition of Dataquest were not recurring in the first quarter of
fiscal 1997. Additionally, amortization of intangibles increased by $0.7 million
in the first quarter of fiscal 1997 as compared to the first quarter of fiscal
1996, reflecting goodwill associated with fiscal 1996 acquisitions.
INTEREST INCOME, NET was $1.3 million for the first quarter of fiscal 1997, up
from $0.8 million for the first quarter of fiscal 1996. This net increase
resulted from interest income accumulating on the Company's cash, cash
equivalents and marketable securities ($147.0 million at December 31, 1996,
versus $76.6 million at December 31, 1995) and from reduced interest expense
after debt related to fiscal 1993 and 1994 acquisitions was paid during fiscal
1996. Interest rates were not a significant factor in the increase in interest
income earned in the first quarter of fiscal 1997 versus the first quarter of
fiscal 1996.
PROVISION FOR INCOME TAXES increased by $5.1 million to $13.8 million in the
first fiscal quarter of 1997, compared to the first quarter fiscal 1996. The
effective tax rate for the first quarter of fiscal 1997 was 42%, a decrease from
43% in the first quarter of fiscal 1996. The decrease in the effective tax rate
is due to the realization of certain tax-loss carryforwards on the increasingly
profitable international operations plus on-going tax planning initiatives.
NET INCOME PER COMMON SHARE increased 58% to 19 cents per common share for the
first quarter of fiscal 1997, as compared to 12 cents for the first quarter of
fiscal 1996.
QUARTERLY OPERATING INCOME TRENDS. Historically, the Company has realized
significant renewals and growth in contract value at the end of quarters. The
fourth quarter of the fiscal year typically is the fastest growth quarter for
contract value and the first quarter of the fiscal year typically represents the
slowest growth quarter as it is the quarter in which the largest amount of
contact renewals are due. As a result of the quarterly trends in contract value
and overall business volume, fees receivable, deferred revenues, deferred
commissions and commissions payable reflect this activity and typically show
substantial increases at quarter end, particularly at fiscal year end. All
contracts are billable upon signing, absent special terms granted on a limited
basis from time to time. All contracts are non-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 RABS contract the entire amount of the
contract billable as deferred revenue and fees receivable. The Company also
records the related commission obligation upon the signing of the contract and
amortizes the corresponding deferred commission expense over the contract period
in which the related RABS revenues are earned and amortized to income.
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Historically, RABS revenues have increased significantly in the first quarter of
the ensuing fiscal year over the immediately preceding quarter and other
revenues have increased similarly due to the annual conference and exhibition
events held in the first quarter. Additionally, operating income margin
typically improves in the first quarter of the fiscal year versus the
immediately preceding quarter. The reasons for the improvement in operating
income margin for the first quarter of fiscal 1997 is discussed under the
caption Operating Income. The Company does not expect the operating income
improvement realized in the first quarter of fiscal 1997 to be as significant in
the next three quarters of this fiscal year. Therefore, the operating income for
the first quarter of fiscal 1997 may not be indicative of the quarterly
operating income results for the remainder of fiscal 1997.
OTHER FACTORS THAT MAY AFFECT FUTURE PERFORMANCE. The Company's future operating
results will depend upon the Company's ability to continue to compete
successfully in the market for information products and services. The Company
faces competition from a significant number of independent providers of similar
services, as well as the internal marketing and planning organizations of the
Company's clients. The Company also competes indirectly against other
information providers, including electronic and print media companies and
consulting firms. In addition, there are limited barriers to entry into the
Company's market and additional new competitors could readily emerge. There can
be no assurance that the Company will be able to continue to provide the
products and services that meet client needs as the Information Technology
("IT") market rapidly evolves, or that the Company can otherwise continue to
compete successfully. In this regard, the Company's ability to compete is
largely dependent upon the quality of its staff of IT analysts. Competition for
qualified analysts is intense. There can be no assurance that the Company will
be able to hire additional qualified IT analysts as may be required to support
the evolving needs of customers or any growth in the Company's business. Any
failure to maintain a premier staff of IT analysts could adversely affect the
quality of the Company's products and services, and therefore its future
business and operating results. Additionally, there may be increased business
risk as the Company expands product and service offerings to smaller domestic
companies. The Company's operating results are also subject to risks inherent in
international sales, including changes in market demand as a result of exchange
rate fluctuations, tariffs and other barriers, challenges in staffing and
managing foreign sales operations, and higher levels of taxation on foreign
income than domestic income. Further expansion would require additional
management attention and financial resources.
The Company has expanded its presence in the technology-based training industry
with the acquisition of J3 Learning Corporation in July 1996. 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 combination of revenue growth and operating income
margin improvements have contributed to positive cash provided by operating
activities for the three months ended December 31, 1996. In addition, cash flow
has been enhanced by the Company's continuing management of working capital
requirements to support increased sales volumes from growth in the pre-existing
businesses and growth due to acquisitions.
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The Company's cash and cash equivalents balance at December 31, 1996 and
September 30, 1996 was $123.7 million and $96.8 million, respectively, while
the marketable securities balance (including both current and long-term
maturities) decreased to $23.3 million at December 31, 1996 from $33.1 million
at September 30, 1996. Cash provided by operating activities totaled $9.2
million for the first quarter of fiscal 1997 (compared with $3.8 million for
the first quarter of fiscal 1996) reflecting primarily the impact of quarterly
operating trends on the balance sheet accounts, particularly fees receivable,
deferred revenues, deferred commissions, commissions payable and bonuses
payable. Cash provided by investing activities was $5.2 million for the first
quarter of fiscal 1997 (compared to $19.7 million use of cash for investing
activities for the first quarter of fiscal 1996), and consisted primarily of
cash provided by the net proceeds on the sale of marketable securities of $9.8
million, partially offset by cash used for the addition of property and
equipment of $2.9 million and equity investments in companies of $1.7 million.
Cash provided by financing activities totaled $12.8 million in the first
quarter of fiscal 1997 (compared to a $1.6 million use of cash for financing
activities for the first quarter of fiscal 1996), and resulted from $7.6
million in tax benefits of stock transactions with employees and $5.2 million
from the issuance of common stock. The tax benefit of stock transactions with
employees is due to a reduction in the corporate income tax liability based on
an imputed compensation deduction equal to employees' gain upon the exercise of
stock options at an exercise price below fair market value. As the market value
of the Company's stock has increased, both the volume of exercises and gains on
those exercises has increased, thereby resulting in significant tax benefits
being realized in the current fiscal year.
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 December 31,
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.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on January 23, 1997. Holders of an
aggregate of 92,018,087 shares of Class A Common Stock and 1,600,000 shares of
Class B Common Stock at the close of business on December 13, 1996, were
entitled to vote at the meeting. At such meeting, the stockholders elected the
following persons to the Board of Directors by the following votes:
Total Vote
Total Vote for Withheld from
Each Director Each Director
Manuel A. Fernandez 83,852,442 57,239
William O. Grabe 83,867,813 41,868
John P. Imlay 83,867,980 41,701
Max D. Hopper 83,867,563 42,118
Stephen G. Pagliuca 83,852,591 57,090
Dennis G. Sisco 83,678,374 231,307
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The stockholders approved the Company's 1996 Long Term Stock Option Plan by a
vote of 70,564,381 for, 12,615,629 against, and 60,759 shares abstaining. The
stockholders also ratified the appointment of KPMG Peat Marwick, LLP as
independent auditors for the Company for the 1997 fiscal year. The vote was
83,659,501 for, 229,518 against and 20,662 shares abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description of Document
11.1 Computation of Net Income per Common Share
10.16 1996 Long Term Stock Option Plan
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Registrant during the three
months ended December 31, 1996.
Items 2, 3, and 5 are not applicable and have been omitted.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Gartner Group, Inc.
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Date February 13, 1997 /s/ John F. Halligan
------------------ ------------------------------
John F. Halligan
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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