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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 JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-015144
GARTNER GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-3099750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 10212 06904-2212
56 Top Gallant Road (Zip Code)
Stamford, CT
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 316-1111
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ].
The number of shares outstanding of the Registrant's capital stock as of
June 30, 1998 was 101,584,309 shares of Common Stock, Class A.
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS Page
Consolidated Balance Sheets at June 30, 1998 and
September 30, 1997 3
Consolidated Statements of Operations for the Three and
Nine Months ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months ended June 30, 1998 and 1997 5
Notes 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 2: CHANGES IN SECURITIES AND USES OF PROCEEDS 13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 13
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
GARTNER GROUP, INC.
Consolidated Balance Sheets
(In thousands, except share data)
June 30, September 30,
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 140,218 $ 142,415
Marketable securities 50,822 28,639
Fees receivable, net 213,722 205,760
Deferred commissions 17,076 23,019
Prepaid expenses and other current assets 34,122 25,775
--------- ---------
Total current assets 455,960 425,608
Long-term marketable securities 59,140 17,691
Property, equipment and leasehold improvements, net 50,548 44,102
Intangible assets, net 151,583 132,195
Other assets 56,111 25,716
--------- ---------
Total assets $ 773,342 $ 645,312
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 86,806 $ 85,411
Commissions payable 9,915 16,979
Accrued bonuses payable 6,450 15,722
Deferred revenues 253,118 254,071
--------- ---------
Total current liabilities 356,289 372,183
--------- ---------
Long-term deferred revenues 2,010 3,259
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock: $.0005 par value 57 54
Additional paid-in capital 257,288 179,017
Cumulative translation adjustment (3,110) (1,098)
Accumulated earnings 173,863 105,138
Treasury stock, at cost (13,055) (13,241)
--------- ---------
Total stockholders' equity 415,043 269,870
--------- ---------
Total liabilities and stockholders' equity $ 773,342 $ 645,312
========= =========
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 For the nine months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Advisory and measurement $121,659 $ 98,480 359,181 $286,618
Learning 5,193 3,993 15,136 13,194
Other, principally consulting and conferences 34,140 23,876 98,907 71,029
-------- -------- -------- --------
Total revenues 160,992 126,349 473,224 370,841
-------- -------- -------- --------
Costs and expenses:
Cost of services and product development 62,861 48,451 181,422 144,256
Selling, general and administrative 55,582 44,491 155,103 123,785
Acquisition-related charge -- -- 6,294 --
Nonrecurring charges -- -- 2,819 --
Depreciation 4,617 3,060 12,821 8,312
Amortization of intangibles 2,470 1,505 7,075 4,507
-------- -------- -------- --------
Total costs and expenses 125,530 97,507 365,534 280,860
-------- -------- -------- --------
Operating income 35,462 28,842 107,690 89,981
Interest income, net 2,200 2,157 6,851 5,227
-------- -------- -------- --------
Income before provision for income taxes 37,662 30,999 114,541 95,208
Provision for income taxes 14,680 12,544 45,816 39,511
-------- -------- -------- --------
Net income $ 22,982 $ 18,455 $ 68,725 $ 55,697
======== ======== ======== ========
Earnings per common share:
Basic $0.23 $0.19 $0.69 $0.59
Diluted $0.22 $0.18 $0.65 $0.55
Weighted average common shares outstanding:
Basic 101,272 95,326 99,755 94,277
Diluted 106,477 102,653 105,675 102,124
See accompanying notes.
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GARTNER GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
For the nine months ended
June 30,
1998 1997
---- ----
Operating activities:
Cash provided by operating activities $ 62,273 $ 62,880
--------- ---------
Investing activities:
Payment for businesses acquired (excluding cash acquired) (23,610) (8,308)
Additions of property, equipment and leasehold improvements, net (17,685) (14,267)
Marketable securities (purchased) sold, net (63,632) 1,937
Investments in unconsolidated subsidiaries (17,024) (8,283)
Loans to officers (2,475) (7,163)
Other investing -- (3)
--------- ---------
Cash used in investing activities (124,426) (36,087)
--------- ---------
Financing activities:
Issuance of common stock 35,379 13,558
Net cash settlement on forward purchase agreement (7,599) --
Sale of treasury stock 186 176
Tax benefits of stock transactions with employees 33,080 26,145
--------- ---------
Cash provided by financing activities 61,046 39,879
--------- ---------
Net (decrease) increase in cash and cash equivalents (1,107) 66,672
Effects of foreign exchange rates on cash and cash equivalents (1,090) (1,657)
Cash and cash equivalents, beginning of period 142,415 96,755
--------- ---------
Cash and cash equivalents, end of period $ 140,218 $ 161,770
========= =========
See accompanying notes.
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GARTNER GROUP, INC.
NOTES 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, 1997. 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 three and nine month
periods ended June 30, 1998 may not be indicative of the results of operations
for the remainder of fiscal 1998.
Note 2 - Acquisitions
In April 1998, the Company acquired all the assets and assumed the liabilities
of AICC Consultores, S.A., and AICC Technology, S.A., ("AICC") for $2.4 million
in cash. AICC provides information technology consulting services and
distributes information technology research products in Argentina and Chile. The
acquisition was accounted for by the purchase method, and the purchase price has
been allocated to the assets acquired and the liabilities assumed, based upon
estimated fair values at the date of acquisition. The excess purchase price over
the fair value of amounts assigned to the net tangible assets acquired was
approximately $1.7 million.
In addition, in May 1998 the Company acquired all the assets and assumed the
liabilities of The Research Board, Inc., for $6.4 million in cash and $5.7
million in Class A Common Stock of the Company. The Research Board compiles and
provides information technology ("IT") research on suppliers and new
technologies, validated management practices and IT best practices to its
membership, which consist principally of senior IT executives. The acquisition
was accounted for by the purchase method, and the purchase price has been
allocated to the assets acquired and the liabilities assumed, based upon
estimated fair values at the date of acquisition. The excess purchase price
over the fair value of amounts assigned to the net tangible assets acquired was
approximately $12.9 million.
Note 3 - Subsequent Event, Agreement to Sell GartnerLearning
On July 27, 1998, the Company announced an agreement to sell GartnerLearning, a
subsidiary of the Company that provides training and services for information
technology professionals, to Harcourt Brace, a publishing and educational
subsidiary of Harcourt General, Inc. Under the terms of the agreement, the
Company will receive an 8 percent equity interest in a newly formed entity plus
other considerations. The newly formed entity will comprise of Harcourt Brace's
NETg unit and GartnerLearning. The transaction is expected to close in the
fourth quarter subject to customary conditions to closing, including certain
regulatory approvals. Management does not expect the transaction to have a
material impact on the Company's financial position.
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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 For the nine months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Advisory and measurement 75.6% 77.9% 75.9% 77.3%
Learning 3.2 3.2 3.2 3.6
Other, principally consulting and conferences 21.2 18.9 20.9 19.1
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Cost of services and product development 39.0 38.4 38.3 38.9
Selling, general and administrative 34.5 35.2 32.8 33.4
Acquisition-related charge -- -- 1.3 --
Nonrecurring charges -- -- 0.6 --
Depreciation 2.9 2.4 2.7 2.2
Amortization of intangibles 1.5 1.2 1.5 1.2
----- ----- ----- -----
Total costs and expenses 77.9 77.2 77.2 75.7
----- ----- ----- -----
Operating income 22.1 22.8 22.8 24.3
Interest income, net 1.4 1.7 1.4 1.4
----- ----- ----- -----
Income before provision for income taxes 23.5 24.5 24.2 25.7
Provision for income taxes 9.1 9.9 9.7 10.7
----- ----- ----- -----
Net income 14.4% 14.6% 14.5% 15.0%
===== ===== ===== =====
TOTAL REVENUES increased 27% to $161.0 million for the third quarter of fiscal
1998 from $126.3 million for the third quarter of fiscal 1997. For the nine
months ended June 30, 1998, total revenues were $473.2 million, up 28% from
$370.8 million for the same period last fiscal year. The Company enters into
annual renewable contracts for advisory (excluding consulting) and measurement
services and learning products ("AML"). Advisory and measurement services
encompass services which, on an ongoing basis, highlight industry developments,
review new products and technologies, provide quantitative market
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research, analyze industry trends within a particular technology or market
sector and provide comparative analysis of the information technology operations
of organizations. Learning represents technology-based training products and
related services. Revenues from advisory and measurement services as well as
learning are recognized as services and products are delivered, and as the
Company's obligation to the client is completed over the contract period.
Revenues from advisory and measurement services for the three months ended June
30, 1998 increased by 24% to $121.7 million from $98.5 million for the same
period in 1997. Revenues from advisory and measurement services increased 25% to
$359.2 million for the nine months ended June 30, 1998, compared to $286.6
million for the same period in the prior fiscal year. The increase in revenues
from advisory and measurement services reflects a combination of increased
penetration of the existing client base, investments in overseas distribution,
global product expansion and incremental revenue from current and prior year
acquisitions. Learning revenues for the third quarter of fiscal 1998 increased
30% to $5.2 million compared to $4.0 million for the third quarter of fiscal
1997. For the nine months ended June 30, 1998, learning revenues were $15.1
million, up 15% from $13.2 million for the same period in 1997.
Contract value increased 31% to $555.5 million at June 30, 1998 versus $423.7
million June 30, 1997. The Company believes that contract value, which is
calculated as the annualized value of all AML contracts in effect at a given
point in time, without regard to the duration of the contracts outstanding at
such time, is a significant measure of the Company's volume of business.
Historically, a substantial portion of client companies have renewed these
services and products for an equal or higher level of total value each year, and
annual revenues from these services in any fiscal year have approximated
contract value at the beginning of the fiscal year. As of June 30, 1998,
approximately 85% of the Company's clients had renewed one or more services in
the last twelve months. However, this renewal rate is not necessarily indicative
of the rate of retention of the Company's revenue base, and contract value at
any time may not be indicative of future AML 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 $255.1 million and $257.3 million at June 30, 1998 and
September 30, 1997, respectively, as presented in the Company's Consolidated
Balance Sheets, represent unamortized revenues from AML services and products
plus unamortized revenues of certain other business products and services not
included in AML services and products. Deferred revenues do not directly
correlate to contract value as of the same date, since contract value represents
an annualized value of all outstanding contracts without regard to the duration
of such contracts, and deferred revenue represents unamortized revenue remaining
on all outstanding contracts including AML and certain other services and
products not included in AML revenue.
Other revenues for the third quarter of fiscal 1998 increased 43% to $34.1
million compared to $23.9 million for the third quarter of fiscal 1997. For the
nine months ended June 30, 1998, other revenues were $98.9 million, up 39% from
$71.0 million for the same period in the prior fiscal year. Other revenues
consist principally of revenues from consulting engagements and conferences. The
increase of $10.2 million for the third quarter of fiscal 1998 over the third
quarter of fiscal 1997 was primarily the result of the introduction of two new
conferences, an increase in related exhibit revenue and the continuing expansion
of consulting services. Year to date, the increase in other revenues over the
prior fiscal year is attributable to increased revenues from the Company's
Symposia conferences and ITxpo exhibition events held annually during the first
quarter of the fiscal year, new events and exhibit revenue as well as increased
consulting revenues.
OPERATING INCOME increased 23% to $35.5 million, or 22% of total revenues, for
the third quarter of fiscal 1998, from $28.8 million, or 23% of total revenues,
for the third quarter of fiscal 1997. Operating income was $107.7 million for
the nine months ended June 30, 1998, an increase of 20% over the $90.0 million
for the same period in fiscal 1997. Operating income increased while investing
in global product and distribution expansion as a result of continuing revenue
growth. Excluding the acquisition-related charge of $6.3 million and the
nonrecurring charges of $2.8 million in the second quarter of fiscal 1998,
operating income for the nine months ended June 30, 1998 increased 30%, over
the same period in the prior fiscal year.
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Costs and expenses increased to $125.5 million in the third quarter of fiscal
1998 from $97.5 million in the third quarter of fiscal 1997. Year to date total
costs and expenses, excluding the acquisition-related charge and nonrecurring
charges, were $356.4 million compared to $280.9 million for the same period last
fiscal year. The increase in costs and expenses over the prior fiscal year for
both the three and nine month period ended June 30, 1998 primarily reflects an
increase in staffing to support the advisory, measurement and consulting
services and incremental costs associated with conferences. Cost of services and
product development expenses were $62.9 million and $48.5 million for the third
quarter of fiscal 1998 and 1997, respectively, and $181.4 million and $144.3
million for the nine months ended June 30, 1998 and 1997, respectively. Costs
related to the delivery of advisory, measurement and learning services are
treated as period costs which are expensed as incurred. Due to management's
ability to control discretionary spending and variable costs linked to financial
performance, costs of services and product development remained relatively
unchanged as a percentage of total revenue for the three months and nine months
ended June 30, 1998 compared to the same periods in the prior fiscal year.
Selling, general and administrative expenses, which were $55.6 million and $44.5
million for the third quarter of fiscal 1998 and 1997, respectively, and $155.1
million and $123.8 million for the nine months ended June 30, 1998 and 1997,
respectively, increased as a result of the Company's continuing expansion of
worldwide distribution channels and additional general and administrative
resources needed to support the growing revenue base. Although the Company has
added general and administrative resources to support the growing revenue base,
it has benefited from economies of scale and leveraging of its general and
administrative staff and facilities. Consequently, selling, general and
administrative expenses have remained relatively flat as a percentage of total
revenues at 35% for the third quarter and 33% for the nine months ended June 30,
1998 and 1997. Additionally, during the second quarter of fiscal 1998, the
Company incurred an acquisition-related charge from a $6.3 million write-off of
purchased in-process research and development costs in connection with the
acquisition of Interpose, Inc. and $2.8 million in nonrecurring charges related
to the Company's relocation of certain accounting and order processing functions
from Stamford, Connecticut to a new financial service center in Ft. Myers,
Florida.
Depreciation expense and amortization expense increased by $1.6 million and $1.0
million, respectively, for the third quarter of fiscal 1998 as compared to the
same period in fiscal 1997 as a result of capital spending required to support
business growth and goodwill associated with recent acquisitions.
INTEREST INCOME, NET was $2.2 million for the third quarter of fiscal 1998 and
the third quarter of fiscal 1997. For the nine months ended June 30, 1998 and
1997, interest income, net was $6.9 million and $5.2 million, respectively. The
increase in interest income for the nine months ended June 30, 1998 is
attributable to an increase in the cash made available from continuing
operations and interest income accumulating on the Company's total cash, cash
equivalents and marketable securities ($250.2 million at June 30, 1998, versus
$192.9 million at June 30, 1997 and $188.7 million at September 30, 1997).
Recent changes in the mix of investable funds to principally tax-free and
tax-advantaged investments, which generally have lower interest rates compared
to taxable investments, have resulted in a minimal increase in reported interest
income for the three months ended June 30, 1998 compared to the same period in
the prior fiscal year.
PROVISION FOR INCOME TAXES increased to $14.7 million compared to $12.5 million
for the third quarter of fiscal 1997. The effective tax rate for the third
quarter and year to date fiscal 1998 was approximately 39% and 40%,
respectively, a decrease from 40% and 41% for the same periods in the prior
fiscal year. The decrease in the effective tax rate is primarily the result of
on-going tax planning initiatives.
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DILUTED EARNINGS PER COMMON SHARE increased 22% to 22 cents per common share for
the third quarter of fiscal 1998, compared to 18 cents per common share for the
third quarter of fiscal 1997. For the nine months ended June 30, 1998 and 1997
diluted earnings per common share were 65 cents per common share and 55 cents
per common share, respectively, an increase of 18%. Excluding the impact of the
acquisition-related charge and nonrecurring charges, diluted earnings per share
were 70 cents per common share for the nine months ended June 30, 1998. Basic
earnings per common share increased 21% to 23 cents per common share for the
third quarter of fiscal 1998 from 19 cents for the third quarter of fiscal 1997.
Basic earnings per common share increased 17% to 69 cents per common share from
59 cents per common share for the nine months ended June 30, 1998 and 1997,
respectively.
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, as it is the quarter in which the largest amount of contact
renewals are due, and the first quarter of the fiscal year typically represents
the slowest growth quarter. 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 AML
contracts are billable upon signing, absent special terms granted on a limited
basis from time to time. All contracts are non-cancelable and non-refundable,
except for government contracts which have a 30-day cancellation clause, but
which have not produced material cancellations to date. The Company's policy is
to record at the time of signing of an AML 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 AML revenues are earned and amortized to income.
Historically, AML revenues have increased significantly in the first quarter of
the ensuing fiscal year over the immediately preceding quarter and other
revenues have increased similarly due to annual conferences and exhibition
events held in the first quarter. Additionally, operating income margin
(operating income as a percentage of total revenues) typically improves in the
first quarter of the fiscal year versus the immediately preceding quarter. The
operating income margin improvement in the first quarter of the fiscal year is
due to the increase in operating income generated on the first quarter Symposia
and ITxpo exhibition events plus an increase in AML revenue upon which the
Company is able to further leverage its selling, general and administrative
expenses.
While operating margin less acquisition-related charge and nonrecurring charges
is favorable versus the prior fiscal year, operating income margin generally is
not as high in the third and fourth quarters of the fiscal year compared to the
first and second quarters. In the current year to date, management's ability to
control costs favorably impacted operating margin. Additionally, the Company
historically does not increase its level of spending until after the first
quarter of the fiscal year, when the rate of growth in revenues and contract
value becomes known. As a result, growth in operating expenses has typically
lagged behind growth in revenues within a given year, and operating income
margin has generally been higher in the earlier quarters of the fiscal year.
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
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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 recently announced an agreement to sell GartnerLearning, a
subsidiary of the Company that provides training and services for information
technology professionals, to Harcourt Brace, a publishing and educational
subsidiary of Harcourt General, Inc. Under the terms of the agreement, Gartner
Group, Inc. will receive an 8 percent equity interest in a newly formed entity
plus other considerations. The newly formed entity will comprise of Harcourt
Brace's NETg unit and GartnerLearning. There can be no assurance that the
Company will be able to disengage from the technology-based training industry
and refocus on core industry products and services without impacting existing
vendor, dealer and client relationships.
The Year 2000 Issue exists as the result of many computer systems and
applications using two digit date fields rather than four to define the
applicable year. As the century change occurs, date-sensitive systems will
recognize the year 2000 as 1900, or not at all. This inability to recognize or
properly treat the Year 2000 may cause systems to process critical financial and
operational information incorrectly. The Company has assessed and continues to
assess the impact of the Year 2000 on its operations. The Company believes,
based upon its internal reviews and other factors, that there will be no
interruption of operations and the future external and internal costs to be
incurred relating to the modification of internal use software for the Year 2000
will not have a material effect on the Company's results of operations or
financial position. Additionally, the Company has implemented a plan to assure
that all computer software products sold by the Company will operate after
December 31, 1999 without any material date-related defects or substantial
changes in functionality. The cost to accomplish this is not expected to be
material.
Liquidity and Capital Resources
The Company's continued focus on revenue and operating margin improvement has
contributed to its ability to continue building cash and utilizing it to make
strategic investments and acquisitions. As of June 30, 1998, total cash and cash
equivalents and marketable securities (including both current and long-term
maturities) increased to $250.2 million from $188.7 million at September 30,
1997. Cash provided by operating activities totaled $62.3 million for the first
nine months of fiscal 1998 (compared to $62.9 million provided for the first
nine months of fiscal 1997) reflecting primarily the impact of increased
revenues and operating margins and related changes in the balance sheet
accounts. Cash used in investing activities was $124.4 million for the first
nine months of fiscal 1998 (compared to $36.1 million of cash used in the first
nine months of fiscal 1997) due primarily to the purchase of marketable
securities of $63.6 million, and acquisition and investments in consolidated and
unconsolidated subsidiaries of $40.6 million. Cash provided by financing
activities totaled $61.0 million for the nine months ended June 30, 1998
(compared to $39.9 million of cash provided for the nine months ended June 30,
1997) and resulted primarily from a net $33.1 million in non-cash tax benefit
received from stock transactions with
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employees and $35.4 million from the issuance of common stock upon the exercise
of employee stock options. The tax benefit of stock transactions with employees
is due to a reduction in the corporate income tax liability based on an imputed
compensation deduction equal to employees' gain upon the exercise of stock
options at an exercise price below fair market. The total gross benefit for the
nine months ended June 30, 1998, was $44.3 million, of which $11.2 million of
the benefit has been recorded as a deferred tax benefit thereby resulting in a
net tax benefit of $33.1 million for the nine months ended June 30, 1998. As
additional stock options have become exercisable each fiscal year under the
Company's stock option plans, both the volume of option exercises and gains on
these exercises have increased, thereby resulting in significant tax benefits
being received in the nine months ended June 30, 1998. The increase in cash
provided by financing activities is offset by the $7.6 million in cash
settlement on a forward purchase agreement. Forward purchase contracts on
Gartner Group, Inc.'s common stock were originally established to facilitate the
acquisition of 1,800,000 shares of common shares necessary to offset a portion
of the shareholder dilution that will be created by the exercise of stock
options reserved for issuance and granted under the Company's 1996 Long Term
Stock Option Plan.
The effect of exchange rates reduced cash and cash equivalents by $1.1 million
through the nine months ended June 30, 1998, and was due to the strengthening of
the U.S. dollar versus certain foreign currencies. The Company has available two
unsecured credit lines, with Chase Manhattan Bank and The Bank of New York for
$25.0 million and $5.0 million, respectively. These lines may be canceled by the
banks at any time without prior notice or penalty. Additionally, the Company
issues letters of credit in the ordinary course of business. The Company had
outstanding letters of credit with Chase Manhattan Bank of approximately $5.4
million and $2.0 million with The Bank of New York at June 30, 1998. 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.
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PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On May 18, 1998, the Company issued 183,841 shares of Class A Common Shares as
partial consideration for the assets of The Research Board, Inc., as more fully
described in Note 2 to the Notes for the Consolidated Financial Statements. The
securities were not registered under the Securities Act of 1933 as amended (the
"Act"), in reliance on the exemption from registration provided by Rule 506
under the Act and Section 4(2) of the Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description of Document
11.1 Computation of Basic and Diluted Earnings per Common Share
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Registrant during the fiscal
quarter ended June 30, 1998.
Items 1, 3, 4 and 5 are not applicable and have been omitted.
13
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Gartner Group, Inc.
-----------------------------------
Date August 14, 1998 /s/ John F. Halligan
---------------- -----------------------------------
John F. Halligan
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
14
1
Exhibit 11.1
Gartner Group, Inc.
Computation of Basic and Diluted Earnings per Common Share
(In thousands, except per share amounts)
For the three months ended, For the nine months ended,
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Net income $ 22,982 $ 18,455 $ 68,725 $ 55,697
======== ======== ======== ========
Denominator
Denominator for basic earnings per share - weighted average
number of common shares outstanding 101,272 95,326 99,755 94,277
Effect of dilutive securities:
Weighted average number of common shares under warrant
outstanding 388 245 368 278
Weighted average number of option shares outstanding 4,817 7,082 5,552 7,569
-------- -------- -------- --------
Dilutive potential common shares 5,205 7,327 5,920 7,847
-------- -------- -------- --------
Denominator for diluted earnings per share - adjusted
weighted average number of common shares outstanding 106,477 102,653 105,675 102,124
======== ======== ======== ========
Basic earnings per common share $ 0.23 $ 0.19 $ 0.69 $ 0.59
======== ======== ======== ========
Diluted earnings per common share $ 0.22 $ 0.18 $ 0.65 $ 0.55
======== ======== ======== ========
15
5
1,000
U.S. DOLLARS
9-MOS
SEP-30-1998
OCT-01-1997
JUN-30-1998
1
140,218
50,822
219,049
5,327
0
455,960
107,136
56,588
773,342
356,289
0
0
0
57
414,986
773,342
473,224
473,224
181,422
181,422
184,112
700
0
114,541
45,816
68,725
0
0
0
68,725
0.69
0.65
