1 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-015144 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 June 30, 1997 was 95,721,586 shares of Common Stock, Class A. 1
2 TABLE OF CONTENTS PART I FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS Page Consolidated Balance Sheets at June 30, 1997 and September 30, 1996 3 Consolidated Statements of Operations for the Three and Nine Months ended June 30, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows for the Nine Months ended June 30, 1997 and 1996 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 6: EXHIBITS AND REPORTS ON FORM 8-K 12 2
3 PART I FINANCIAL INFORMATION Item 1 Financial Statements GARTNER GROUP, INC. Consolidated Balance Sheets (In thousands, except share data) <TABLE> <CAPTION> June 30, September 30, 1997 1996 --------- --------- ASSETS Current assets: <S> <C> <C> Cash and cash equivalents $ 161,770 $ 96,755 Marketable securities 20,520 30,054 Fees receivable, net 162,635 143,762 Deferred commissions 13,989 17,539 Prepaid expenses and other current assets 24,250 22,040 --------- --------- Total current assets 383,164 310,150 Long-term marketable securities 10,644 3,047 Property and equipment, net 38,964 32,818 Goodwill, net 97,125 93,144 Other assets 20,478 4,949 --------- --------- Total assets $ 550,375 $ 444,108 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 66,787 $ 60,527 Commissions payable 8,443 15,148 Accrued bonuses payable 13,211 16,781 Deferred revenues 209,831 198,952 --------- --------- Total current liabilities 298,272 291,408 --------- --------- Deferred revenues 6,115 2,465 Commitments and contingencies Stockholders' equity: Preferred stock -- -- Common stock: $.0005 par value 53 52 Additional paid-in capital 174,415 134,711 Cumulative translation adjustment (2,790) (2,965) Accumulated earnings 87,705 32,008 --------- --------- 259,383 163,806 Less: Treasury stock, at cost (13,395) (13,571) --------- --------- Total stockholders' equity 245,988 150,235 --------- --------- Total liabilities and stockholders' equity $ 550,375 $ 444,108 ========= ========= </TABLE> See accompanying notes. 3
4 GARTNER GROUP, INC. Consolidated Statements of Operations (In thousands, except per share data) <TABLE> <CAPTION> For the three months ended For the nine months ended June 30, June 30, --------- --------- --------- --------- 1997 1996 1997 1996 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenues: Research, advisory and benchmarking services $ 98,480 $ 77,458 $ 286,618 $ 224,471 Other, principally conferences, consulting and training 27,869 19,948 84,223 60,244 --------- --------- --------- --------- Total revenues 126,349 97,406 370,841 284,715 --------- --------- --------- --------- Costs and expenses: Cost of services and product development 48,451 38,967 144,256 110,192 Selling, general and administrative 44,491 34,124 123,785 103,581 Acquisition-related charges -- -- -- 1,665 Depreciation 3,060 2,202 8,312 6,451 Amortization of intangibles 1,505 910 4,507 2,565 --------- --------- --------- --------- Total costs and expenses 97,507 76,203 280,860 224,454 --------- --------- --------- --------- Operating income 28,842 21,203 89,981 60,261 Interest income, net 2,157 939 5,227 2,567 --------- --------- --------- --------- Income before minority interest and income taxes 30,999 22,142 95,208 62,828 Minority interest -- -- -- (25) --------- --------- --------- --------- Income before income taxes 30,999 22,142 95,208 62,853 Provision for income taxes 12,544 9,521 39,511 27,027 --------- --------- --------- --------- Net income $ 18,455 $ 12,621 $ 55,697 $ 35,826 ========= ========= ========= ========= Net income per common share $ 0.18 $ 0.13 $ 0.55 $ 0.36 ========= ========= ========= ========= Weighted average shares outstanding 102,653 100,094 102,124 98,896 ========= ========= ========= ========= </TABLE> See accompanying notes. 4
5 GARTNER GROUP, INC. Condensed Consolidated Statements of Cash Flows (In thousands) <TABLE> <CAPTION> For the nine months ended June 30, --------- --------- 1997 1996 --------- --------- <S> <C> <C> Operating activities: Cash provided by operating activities $ 62,880 $ 40,317 --------- --------- Investing activities: Payment for businesses acquired (excluding cash acquired) (8,308) (18,292) Additions of property and equipment, net (14,267) (12,246) Marketable securities sold, net 1,937 7,243 Investments in unconsolidated businesses (8,283) -- Loans to officers (7,163) -- Other investing (3) (25) --------- --------- Cash used for investing activities (36,087) (23,320) --------- --------- Financing activities: Principal payments on long-term debt -- (4,450) Issuance of common stock and warrants 13,558 7,487 Issuance of treasury stock 176 -- Distributions of capital between Dataquest and its former parent -- (1,687) Tax benefits of stock transactions with employees 26,145 23,223 --------- --------- Cash provided by financing activities 39,879 24,573 --------- --------- Net increase in cash and cash equivalents 66,672 41,570 Effects of foreign exchange rates on cash and cash equivalents (1,657) (276) Cash and cash equivalents, beginning of period 96,755 66,581 --------- --------- Cash and cash equivalents, end of period $ 161,770 $ 107,875 ========= ========= </TABLE> See accompanying notes. 5
6 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 three and nine month periods ended June 30, 1997 may not be indicative of the results of operations for the remainder of fiscal 1997. Note 2 - Loans to Officers On June 4, 1997, with the Board of Directors approval, the Company provided loans totaling $7.2 million to certain officers to facilitate the purchase of common stock arising out of the exercise of stock options. The loan proceeds were not used to fund the option exercise price of the common stock acquired. The loans are full recourse obligations to the officers and are also secured by shares of the Company's stock. The loans bear interest at an annual rate of 6.14% and mature on June 3, 1999. The loans are included in Other Assets on the June 30, 1997 Balance Sheet. Note 3 - Class B Common Stock Conversion As of June 30, 1997, the Company recorded the conversion of all Class B Common Stock into Class A Common Stock on a one for one basis, pursuant to a provision of the Articles of Incorporation which requires conversion when the Class B Common Stockholder's voting equity falls below a certain ownership percentage after considering all exercisable options and warrants outstanding. Note 4 - Subsequent Event, Acquisition of Datapro Information Services On August 1, 1997, the Company acquired Datapro Information Services ("Datapro"), a unit of McGraw-Hill Companies for consideration of approximately $25 million in cash. Datapro is a provider of information on product specifications and pricing, product comparisons, technology reports, market overviews, case studies and user ratings surveys. Datapro's subscription based products provide feature and side-by-side comparisons of computer hardware, software and communications products. The acquisition will be accounted for by the purchase method. 6
7 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: <TABLE> <CAPTION> For the three months ended For the nine months ended June 30, June 30, ------------------------ ------------------------ 1997 1996 1997 1996 ------ ------ ------ ------ <S> <C> <C> <C> <C> Revenues: Research, advisory and benchmarking services 77.9% 79.5% 77.3% 78.8% Other, principally conferences, consulting and training 22.1 20.5 22.7 21.2 ------ ------ ------ ------ Total revenues 100.0 100.0 100.0 100.0 ------ ------ ------ ------ Costs and expenses: Cost of services and product development 38.4 40.0 38.9 38.7 Selling, general and administrative 35.2 35.0 33.4 36.4 Acquisition-related charges -- -- -- 0.6 Depreciation 2.4 2.3 2.2 2.3 Amortization of intangibles 1.2 0.9 1.2 0.9 ------ ------ ------ ------ Total costs and expenses 77.2 78.2 75.7 78.8 ------ ------ ------ ------ Operating income 22.8 21.8 24.3 21.2 Interest income, net 1.7 1.0 1.4 0.9 ------ ------ ------ ------ Income before minority interest and income taxes 24.5 22.8 25.7 22.1 Minority interest -- -- -- -- ------ ------ ------ ------ Income before income taxes 24.5 22.8 25.7 22.1 Provision for income taxes 9.9 9.8 10.7 9.5 ------ ------ ------ ------ Net income 14.6% 13.0% 15.0% 12.6% ====== ====== ====== ====== </TABLE> TOTAL REVENUES increased 30% to $126.3 million for the third quarter of fiscal 1997 from $97.4 million for the third quarter of fiscal 1996. For the nine months ended June 30, 1997, total revenues were $370.8 million, up 30% from $284.7 million for the same period last fiscal year. Revenues from research, advisory and benchmarking services ("RABS") increased by 27% to $98.5 million from $77.5 million for the third quarter of fiscal 1996. RABS revenues increased 28% to $286.6 million for the nine months ended June 30, 1997, compared with $224.5 million for the same period last fiscal year. RABS encompass products which, on an ongoing basis, highlight industry developments, review new products and technologies, provide quantitative market research, analyze industry trends within a particular 7
8 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 and the first half of fiscal 1997, volume increases as a result of increased geographic and client penetration, and expansion of electronic distribution within client companies, all of which were offset partially by a volume pricing strategy that provides more value for the same dollars each year. Contract value increased 27% to $423.7 million at June 30, 1997 versus $334.5 million at June 30, 1996. 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 renew 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 June 30, 1997, 84% 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 $215.9 million and $201.4 million at June 30, 1997 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 third quarter of fiscal 1997 increased 40% to $27.9 million compared to $19.9 million for the third quarter of fiscal 1996. For the nine months ended June 30, 1997, other revenues were $84.2 million, up 40% from $60.2 million for the same period last fiscal year. Other revenues consist principally of revenues from conferences, consulting engagements and technology-based training products and publications. The increase of $8.0 million in the third quarter of fiscal 1997 over the third quarter of fiscal 1996 was primarily due to increased revenues from the Company's consulting and technology-based training businesses. Year to date, the increase in other revenues over the prior fiscal year is primarily attributable to increased revenues from the Company's Symposia conferences and ITxpo exhibition events held annually during the first quarter of the fiscal year, and to increased revenues in the consulting and technology-based training businesses. OPERATING INCOME rose 36% to $28.8 million, or 23% of total revenues, for the third quarter of fiscal 1997, from $21.2 million or 22% of total revenues in the third quarter of fiscal 1996. Operating income was $90.0 million for the nine months ended June 30, 1997, an increase of 49% over the $60.3 million for the same period in fiscal 1996. Excluding acquisition-related charges of $1.7 million in the first quarter of fiscal 1996, operating income for the nine months ended June 30, 1997 increased 45%. Operating income has increased as a result of solid revenue growth coupled with controlled spending that has allowed the Company to gain economies of scale through the leveraging of its resources (additional revenues have been generated using essentially the same resources). The Company's continued focus on margin improvement has favorably impacted operating results. While costs and expenses increased to $97.5 million in the third quarter of fiscal 1997 from $76.2 million in the third quarter of fiscal 1996, such costs decreased to 77% of total revenues from 78% in the third quarter of fiscal 1996. Year to date total costs and expenses were $280.9 million, or 76% of total revenues, compared to $224.5 million or 79% of total revenues for the same period last fiscal year. Cost of services and product development expenses were $48.5 million and $39.0 million for the third quarter of fiscal 1997 and 1996, respectively, and $144.3 million and $110.2 million for the nine months ended June 30, 1997 and 1996, respectively. This increase in expenses over the prior fiscal year reflects the need to provide additional support to the growing client base, including investment in strategic areas such as 8
9 electronic and Internet distribution, costs associated with the implementation of the Company's new client inquiry process (QuickPath) and product development costs (particularly for technology-based training products). Cost of services and product development expenses, as a percentage of total revenues, decreased slightly from 40% for the third quarter of fiscal 1996 to 38% for the third quarter of fiscal 1997. The decrease was primarily attributable to improved gross margins on conferences as compared to the comprable quarter of the prior year and lower delivery cost per dollar of revenue generated due to increased electronic delivery of products. Selling, general and administrative expenses, which were $44.5 million and $34.1 million for the third quarter of fiscal 1997 and 1996, respectively, and $123.8 million and $103.6 million for the nine months ended June 30, 1997 and 1996, respectively, increased as a result of the Company's continuing expansion of worldwide distribution channels and resulting commissions earned on the revenue generated. The increase in commission expense was offset partially by the elimination and/or reduction of redundant general and administrative expenses, including personnel reductions and facility rationalization relating to the acquisition of Dataquest in December 1995, which had a favorable impact on general and administrative expenses. Although the Company has added general and administrative resources to support the growing revenue base, it has benefited from economies of scale and leveraging of its general and administrative staff and facilities. Consequently, selling, general and administrative expenses were 35% of total revenues for the third quarter of fiscal 1997 and 1996. For the nine months ended June 30, 1997, selling, general and administrative expenses were 33% of total revenues as compared to 36% of total revenues for the comprable period in the prior year. Acquisition-related charges of $1.7 million in the first quarter of fiscal 1996 for the acquisition of Dataquest were not recurring in fiscal 1997. Additionally, amortization of intangibles increased by $0.6 million in the third quarter and $1.9 million year to date in fiscal 1997 as compared to the same periods in fiscal 1996, reflecting primarily goodwill associated with fiscal 1996 and 1997 acquisitions. INTEREST INCOME, NET was $2.2 million for the third quarter of fiscal 1997, up from $0.9 million from the third quarter of fiscal 1996. For the nine months ended June 30, 1997 and 1996, interest income, net was $5.2 million and $2.6 million, respectively. These net increases resulted from interest income accumulating on the Company's cash, cash equivalents and marketable securities ($192.9 million at June 30, 1997, versus $118.7 million at June 30, 1996 and $129.9 million at September 30, 1996) and from reduced interest expense after remaining 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 third quarter or first nine months of fiscal 1997 versus the same periods of fiscal 1996. PROVISION FOR INCOME TAXES increased to $12.5 million in the third quarter of fiscal 1997, compared to $9.5 million for the third quarter fiscal 1996. The effective tax rate for the third quarter and year to date fiscal 1997 was 40.5% and 41.5%, respectively, a decrease from 43% for the same periods last fiscal year. The decrease in the effective tax rate is due to on-going tax planning initiatives. NET INCOME PER COMMON SHARE increased 38% to 18 cents per common share for the third quarter of fiscal 1997, compared to 13 cents for the third quarter of fiscal 1996. For the nine months ended June 30, 1997 and 1996, net income per common share was 55 cents and 36 cents, respectively, a 53% increase year over year. 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. 9
10 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 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 RABS revenue upon which the Company is able to further leverage its selling, general and administrative expenses, plus operating income generated on the first quarter Symposia and ITxpo exhibition events. While favorable versus the prior fiscal year, operating income margin generally is not as high in the second, third and fourth quarters of the fiscal year compared to the first quarter of the fiscal year as the operating income margins on the ITxpo conferences in the first fiscal quarter are higher than on conferences held later in the fiscal year. Additionally, the Company historically does not increase its level of spending until after the first quarter of the fiscal year, when the rate of growth in contract value becomes known. As a result, growth in operating expenses has typically lagged behind growth in revenues within a given year, and operating 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 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 nine months ended June 30, 1997. 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. 10
11 The Company's cash and cash equivalents balance at June 30, 1997 and September 30, 1996 was $161.8 million and $96.8 million, respectively, while the marketable securities balance (including both current and long-term maturities) decreased to $31.2 million at June 30, 1997 from $33.1 million at September 30, 1996. Cash provided by operating activities totaled $62.9 million for the first nine months of fiscal 1997 (compared to $40.3 million for the first nine months of fiscal 1996) reflecting primarily the impact of increased revenues and operating margins which are related to quarterly operating trends in the balance sheet accounts, particularly fees receivable, deferred revenues, deferred commissions, commissions payable and bonuses payable. Cash used for investing activities was $36.1 million for the first nine months of fiscal 1997 (compared to $23.3 million of cash used for the first nine months of fiscal 1996) and consisted primarily of the addition of property and equipment for $14.3 million, acquisition of businesses of $8.3 million, investments in unconsolidated companies of approximately $8.3 million, and loans to officers of $7.2 million offset partially by cash provided by net proceeds on the sale of marketable securities of $1.9 million. Cash provided by financing activities totaled $39.9 million for the nine months ended June 30, 1997 (compared to $24.6 million of cash provided for the nine months ended June 30, 1996) and resulted primarily from $26.1 million in tax benefits from stock transactions with employees and $13.6 million from the issuance of common stock upon the exercise of employee stock options. The tax benefit of stock transactions with employees is due to a reduction in the corporate income tax liability based on an imputed compensation deduction equal to employees' gain upon the exercise of stock options at an exercise price below fair market value. The effect of exchange rates reduced cash and cash equivalents by $1.7 million through the nine months ended June 30, 1997, and was due to the strengthening of the U.S. dollar versus certain foreign currencies. Through June 30, 1996, the foreign denominated cash balances were significantly less and the exchange rate fluctuations were not as significant as in the current fiscal year, thereby resulting in a reduction of $0.3 million in cash. The Company has available two unsecured credit lines, with The Bank of New York and Chase Manhattan Bank for $5.0 million and $25.0 million, respectively. These lines may be canceled by the banks at any time without prior notice or penalty. Additionally, the Company issues letters of credit in the ordinary course of business. The Company had outstanding letters of credit with Chase Manhattan Bank of $5.5 million and $2.0 million with The Bank of New York at June 30, 1997. The Company currently has no material capital commitments. The Company believes that its current cash balances and marketable securities, together with cash anticipated to be provided by operating activities and borrowings available under the existing lines of credit, will be sufficient for the expected short-term and foreseeable long-term cash needs of the Company, including possible acquisitions. As of June 30, 1997, the Company recorded the conversion of all Class B Common Stock into Class A Common Stock on a one for one basis, pursuant to a provision of the Articles of Incorporation which requires conversion when the Class B Common Stockholder's voting equity falls below a certain ownership percentage after considering all exercisable options and warrants outstanding. RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, Statement of Financial Accounting Standard No. 128, "Earnings per Share" was issued. The statement sets forth guidance on the presentation of earnings per share and requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if all common stock equivalents were exercised (similar to fully diluted earnings per share under APB Opinion No. 15). If the new standard was in effect during fiscal 1997, basic net income per share for the three months and nine months ended June 30, 1997 would have been $0.19 and $0.59 per share, respectively. Diluted income per share would have been $0.18 and $0.54 per share for the three months and nine months ended June 30, 1997, respectively. The Company is required to adopt the new standard in the first quarter of fiscal 1998. In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures about Segments of an Enterprise and Related Information" were issued. SFAS No. 130 establishes standards for reporting and disclosure of 11
12 comprehensive income and its components in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders which is currently not required. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company is required to adopt both new standards in the first quarter of 1999. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Number Description of Document 10.7 Gartner Group, Inc. 1991 Stock Option Plan as amended and restated on February 24, 1997 10.10 Gartner Group, Inc. 1994 Long Term Stock Option Plan as amended and restated on February 24, 1997 10.16 Gartner Group, Inc. 1996 Long Term Stock Option Plan as amended and restated on February 24, 1997 11.1 Computation of Net Income 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, 1997. Items 1, 2, 3, 4 and 5 are not applicable and have been omitted. 12
13 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, 1997 /s/ John F. Halligan --------------- ------------------------------ John F. Halligan Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 13
14 EXHIBIT INDEX ------------- Exhibit Number Description of Document -------------- ----------------------- 10.7(a) Amendment effective February 24, 1997 to the 1991 Stock Option Plan 10.10(a) Amendment effective February 24, 1997 to the 1994 Long Term Stock Option Plan 10.16(a) Amendment effective February 24, 1997 to the 1996 Long Term Stock Option Plan 11.1 Computation of Net Income per Common Share 27.1 Financial Data Schedule