================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K
------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14443
GARTNER, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 04-3099750
(State or Other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
P.O. Box 10212
56 Top Gallant Road
Stamford, CT 06902-7747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 316-1111
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Class On Which Registered
-------------- -------------------
Common Stock, Class A, $.0005 Par Value New York Stock Exchange
Common Stock, Class B, $.0005 Par Value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) YES X NO
--- ---
The aggregate market value of the voting stock held by persons other than those
who may be deemed affiliates of the Registrant, as of February 29, 2004, was
approximately $934.7 million. This calculation does not reflect a determination
that persons are affiliates for any other purposes.
The number of shares outstanding of the Registrant's capital stock as of
February 29, 2004 was 102,525,367 shares of Common Stock, Class A and 28,175,143
shares of Common Stock, Class B.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the 2004 Annual Meeting of
Stockholders, or if no such proxy statement is filed by April 30, 2004, an
amendment to this Annual Report on Form 10-K, are incorporated by reference into
Part III of this Report.
================================================================================
10-K.2
GARTNER, INC.
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7
Item 6. Selected Consolidated Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Consolidated Financial Statements and Supplementary Data 27
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 27
Item 9A. Controls and Procedures 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 28
Item 13. Certain Relationships and Related Transactions 28
Item 14. Principal Accountant Fees and Services 28
PART IV
Item 15. Exhibits, Consolidated Financial Statement Schedule and Reports on Form 8-K 29
Report by Management 32
Independent Auditors' Report 33
Consolidated Balance Sheets 34
Consolidated Statements of Operations 35
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 38
Schedule II - Valuation and Qualifying Accounts 57
10-K.3
PART I
ITEM 1. BUSINESS.
GENERAL
Gartner, Inc., founded in 1979, is a leading independent provider of research
and analysis on information technology, computer hardware, software,
communications and related technology industries (the "IT industry"). We provide
comprehensive coverage of the IT industry to approximately 10,000 client
organizations. We serve a global client base consisting primarily of chief
information officers ("CIOs") and other senior IT and business executives in
corporations and government agencies. We also serve technology companies and the
investment community.
The foundation for all Gartner products is our independent research on IT
issues. The findings from this research can be delivered through several
different media, depending on a client's specific business needs, preferences
and objectives:
o Gartner Intelligence - research content and advice for IT professionals,
technology companies and the investment community in the form of reports,
briefings or events.
o Gartner Executive Programs - peer networking services and membership
programs designed specifically for CIOs and other senior executives.
o Gartner Consulting - customized engagements that allow CIOs and other
business executives to apply our knowledge to their specific situation,
with an emphasis on outsourcing and IT management.
MARKET OVERVIEW
In today's dynamic IT marketplace, vendors continually introduce new products
with a wide variety of standards and shorter life cycles. The users of
technology - almost all organizations - must keep abreast of these new
developments, and make major financial commitments to new IT systems and
products. To plan and purchase effectively, these users of technology need
independent, objective, third-party research and consultative services.
We believe that technology accounts for a significant portion of all capital
spending. While the pace of IT investments has slowed over recent years, we
believe there are indications of an upturn in demand in the technology sector.
The intense scrutiny on technology spending ensures that our products and
services remain necessary in the current economy because clients still need
value-added, independent and objective research and analysis of the IT market.
We are a leading provider of independent and objective research and analysis of
the IT industry, and a source of insight about technology acquisition and
deployment. Our global research community provides provocative thought
leadership. We employ more research analysts than any competitor. Our
experienced consultants combine our objective, independent research, with a
practical, sought-after business perspective focused on the IT industry. Our
events are among the world's largest of their kind; gathering highly qualified
audiences of senior business executives, IT professionals, purchasers and
vendors of IT products and services.
PRODUCTS AND SERVICES
Gartner Intelligence
o Research on IT issues on a global scale is the fundamental building block
for all Gartner services. Our research agenda is defined by clients' needs,
focusing on the critical issues, opportunities and challenges they face
every day. Research content, presented in the form of reports, briefings,
updates and related tools, is delivered directly to the client's desktop.
Our research analysts provide in-depth analysis on all aspects of
technology and telecommunications including: hardware, software and
systems, services, IT management, market data and forecasts, and vertical
industry issues.
o Events such as symposia and conferences give clients live access to
insights developed from our research in a concentrated way. In 2003,
Gartner events attracted nearly 28,000 participants. Gartner Symposium,
offered each spring and fall in various international locations, is our
largest and most strategic conference for senior IT
10-K.4
and business professionals. Symposium is combined with ITxpo, an exhibition
where the latest technology products and solutions are demonstrated. We
also offer conferences on specialized topics such as: outsourcing, mobile
wireless, customer relationship management, application integration and
business intelligence in many locations around the world.
Gartner Executive Programs
o Executive Programs (EXP) are exclusive membership programs designed to help
CIOs and other executives become more effective in their enterprises. An
EXP membership leverages the knowledge and expertise of Gartner in ways
that are specific to the CIOs needs, and offers members-only communities
for peer-based collaboration. Members also receive advice and counsel from
a personal relationship manager who understands their goals and can ensure
the most effective level of support from Gartner. At December 31, 2003, EXP
had a membership of more than 2,100 CIOs.
o Best Practices Programs bring together senior business and IT leaders for
exclusive events, multi-client research studies and ad hoc peer exchange
forums. These programs allow clients to learn from the experiences of their
peers and share best practices in order to solve common business problems,
improve corporate performance and drive greater effectiveness. We
facilitate valuable member-to-member relationships based on experience,
issues, location, industry and personal interests.
Gartner Consulting
o Sourcing (Outsourcing, Off-Shoring, BPO). Virtually every major enterprise
today is considering the issue of IT outsourcing, offshore resources and
business process outsourcing. Our consultants provide advice and project
management support across the four stages of the outsourcing or off-shoring
process: strategy, evaluation and selection of partners, contract
development, and relationship management.
o IT Management & Measurement. Successful IT organizations must operate with
maximum effectiveness and efficiency while delivering services that address
the business and process issues of their enterprise. Our consultants
provide advice and support that leverages the intelligence of our research
to address and solve the top issues of the IT organization.
o Federal government. We are highly experienced in developing IT solutions
that meet the unique challenges faced by federal agencies as they attempt
to serve the public's needs. Budgeting, procurement and re-engineering are
just some of the issues our consultants have addressed in the public sector
arena.
o Market & Business Strategies. The intelligence we gather through market
research, client interaction and analysis is unique in the marketplace. Our
consultants leverage this intelligence to assist technology companies in
identifying market demand, improving products and defining the competitive
landscape.
Note 14 to the Consolidated Financial Statements within this Form 10-K includes
financial information about our geographic areas and our three business
segments: research, consulting and events.
o Research products and services highlight industry developments, review new
products and technologies, provide quantitative market research, and
analyze industry trends within a particular technology or market sector.
o Consulting consists primarily of consulting, measurement engagements and
strategic advisory services (paid one-day analyst engagements) ("SAS"),
which provide assessments of cost, performance, efficiency and quality
focused on the IT industry.
o Events consists of various symposia, conferences and exhibitions focused on
the IT industry.
COMPETITION
We believe that the principal competitive factors that differentiate us from
our competitors are:
o The high quality, independence and objectivity of our research and
analysis;
o Our multi-faceted expertise across the IT industry and its technologies,
both legacy and emerging;
10-K.5
o Our position as a research company with broad consulting capabilities;
o Our position as a consulting firm with research analysts;
o The timely delivery of information;
o The ability to offer products that meet changing market needs at
competitive prices; and
o Our superior customer service.
We face competition from a significant number of independent providers of
information products and services. We compete indirectly against consulting
firms and other information providers, including electronic and print media
companies. These indirect competitors could choose to compete directly with us
in the future. Additionally, we face competition from our clients receiving
information from free sources through the Internet. Limited barriers to entry
exist in the markets in which we do business. As a result, new competitors may
emerge and existing competitors may start to provide additional or complementary
services. However, we believe the breadth and depth of our research assets
position us well versus our competition. Increased competition may result in us
losing market share, diminished value in our products and services, reduced
pricing and increased sales and marketing expenditures.
INTELLECTUAL PROPERTY
Our success has resulted in part from proprietary methodologies, software,
reusable knowledge capital and other intellectual property rights. We rely on a
combination of copyright, patent, trademark, trade secret, confidentiality,
non-compete and other contractual provisions to protect our intellectual
property rights. We have policies related to confidentiality and ownership and
to the use and protection of Gartner's intellectual property, and we also enter
into agreements with our employees as appropriate.
We recognize the value of intellectual property in the marketplace and
vigorously identify, create and protect it.
EMPLOYEES
As of December 31, 2003, we had 3,729 employees, of which 730 were located at
our headquarters in Stamford, Connecticut; 1,615 were located at our other
facilities in the United States; and 1,384 were located outside of the United
States. None of our employees are represented by a private non-governmental
collective bargaining arrangement. We have experienced no work stoppages and
consider our relations with employees to be favorable. In December 2003, we
announced that we would be making moderate reductions to our workforce of
approximately 200 employees, or 5%, as we continue to align our business
resources with revenue expectations. A portion of the reductions occurred in the
fourth quarter of Calendar 2003, and the remaining portion is expected to occur
during the first quarter of Calendar 2004.
AVAILABLE INFORMATION
Our Internet address is www.gartner.com and the investor relations section of
our Web site is located at www4.gartner.com/5_about/investor_information/
44a.html. We make available free of charge, on or through the investor relations
section of our Web site, annual reports on Form 10-K, quarterly reports on Form
10-Q, transition report on Form 10-KT, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission.
Also available at http://www4.gartner.com/ir/asset_8465.jsp is information
relating to our corporate governance. This includes (i) CEO & CFO Code of Ethics
which applies to our Chief Executive Officer, Chief Financial Officer,
controller and other financial managers, (ii) Principles of Ethical Conduct
which applies to all employees, (iii) Governance Guidelines, the corporate
governance principles that have been adopted by our Board and (iv) charters for
each of the Board's committees. This information is also available in print to
any shareholder who requests it by writing to Investor Relations, Gartner, Inc.,
56 Top Gallant Road, Stamford, CT 06902.
ITEM 2. PROPERTIES.
Our headquarters is located in approximately 224,000 square feet of leased
office space in four buildings located in Stamford, Connecticut, USA. These
facilities accommodate research and analysis, marketing, sales, client support,
production and corporate administration. The leases on these facilities expire
in 2010. We have a significant presence in the United Kingdom with approximately
72,000 square feet of leased office space in two
10-K.6
buildings located in Egham, UK. We have 34 domestic and 42 international
locations that support our research and analysis, domestic and international
sales efforts and other functions. We believe that our existing facilities and
leases are adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in legal proceedings and litigation arising in the ordinary
course of business. We believe the outcome of all current proceedings, claims
and litigation will not have a material effect on our financial position or
results of operations when resolved in a future period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matter to a vote of our stockholders during the fourth
quarter of the year covered by this Annual Report.
10-K.7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of February 29, 2004, there were approximately 300 holders of record of our
Class A Common Stock and approximately 3,461 holders of record of our Class B
Common Stock. Our Class A and Class B Common Stock trade on the New York Stock
Exchange under the symbols IT and ITB, respectively. The Class B Common Stock is
identical in all respects to the Class A Common Stock, except that the Class B
Common Stock is entitled to elect at least 80% of the members of our Board of
Directors. While subject to periodic review, the current policy of our Board of
Directors is to retain all earnings primarily to provide funds for continued
growth.
The following table sets forth the high and low closing prices for our Class A
Common Stock and Class B Common Stock as reported on the New York Stock Exchange
for the periods indicated.
CLASS A COMMON STOCK
2003 2002 2001
------------------ ------------------- ----------------
High Low High Low High Low
- ----------------------------------------------------------------------------------------------------
Quarter ended March 31 $ 9.68 $ 6.76 $13.48 $11.00 $ 9.16 $6.01
Quarter ended June 30 $ 8.32 $ 6.45 $13.45 $ 9.82 $11.00 $5.80
Quarter ended September 30 $12.60 $ 7.50 $ 9.82 $ 7.75 $11.17 $8.40
Quarter ended December 31 $13.75 $11.12 $10.66 $ 4.90 $11.69 $8.50
CLASS B COMMON STOCK
2003 2002 2001
------------------ ------------------- ----------------
High Low High Low High Low
- ----------------------------------------------------------------------------------------------------
Quarter ended March 31 $ 9.80 $ 6.83 $13.20 $10.86 $ 8.45 $5.81
Quarter ended June 30 $ 8.38 $ 6.85 $13.05 $ 9.00 $ 9.81 $5.50
Quarter ended September 30 $12.30 $ 7.48 $ 9.84 $ 7.67 $10.60 $8.05
Quarter ended December 31 $12.99 $10.70 $10.70 $ 5.20 $11.70 $8.07
The following table provides information regarding our purchases of common stock
for treasury during the fourth quarter of Calendar 2003 under our announced
share repurchase program, which has authorized repurchases of our Class A Common
Stock and Class B Common Stock totaling $200 million. This repurchase program
was originally announced in July 2001 with an authorization to purchase $75
million of our stock. The repurchase program was subsequently amended in July
2002 to increase the authorization to purchase up to $125 million of our stock,
and again in July 2003 to increase the total authorization to purchase up to
$200 million of our stock.
Maximum
Class A Common Stock Class B Common Stock Shares Value of Shares
------------------------- ------------------------- Purchased That May Yet
Average Average Under Be Purchased
Total Shares Price Paid Total Shares Price Paid Announced Under Plan
Purchased per Share Purchased per Share Plan (in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
October 2003 -- $ -- -- $ -- --
November 2003 -- -- 73,700 12.36 73,700
December 2003 416,921 11.95 435,000 11.87 851,921
-------------------------------------------------------------------------------------
Total fourth quarter of Calendar 2003 416,921 $11.95 508,700 $11.94 925,621 $72,868
=====================================================================================
10-K.8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
We changed our fiscal year end from September 30 to December 31, effective
January 1, 2003. We have included Statement of Operations Data for Calendar 2002
for informational purposes. This data was derived from Fiscal 2002 information,
adjusted by information from Transition 2002 and the first quarter of Fiscal
2002. All other information was derived from our audited financial statements
included herein or in submissions of our Form 10-K in prior years.
The selected financial data should be read in conjunction with our consolidated
financial statements and related notes.
Calendar Year Fiscal Year Ended September 30,
------------------------ Transition -------------------------------------------------
(In thousands, except per share data) 2003 2002 2002 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenues:
Research $ 466,907 $ 486,967 $ 120,038 $ 496,403 $ 535,114 $ 509,781 $ 479,045
Consulting 258,628 276,059 58,098 273,692 276,292 216,667 156,444
Events 119,355 109,694 47,169 121,991 132,684 108,589 75,581
Other 13,556 14,873 4,509 15,088 18,794 27,414 29,768
-----------------------------------------------------------------------------------------
Total revenues 858,446 887,593 229,814 907,174 962,884 862,451 740,838
Operating income (loss) 47,461 49,542 (12,886) 96,375 42,514 84,131 133,368
Income (loss) from continuing operations 23,693 15,117 (14,418) 48,578 (220) 53,124 88,271
Loss from discontinued operation -- -- -- -- (65,983) (27,578) -
Net income (loss) $ 23,693 $ 15,117 $ (14,418) $ 48,578 $ (66,203) $ 25,546 $ 88,271
===================================================================================================================================
PER SHARE DATA
Basic income (loss) per share:
from continuing operations $ 0.26 $ 0.18 $ (0.18) $ 0.58 $ (0.00) $ 0.61 $ 0.87
from discontinued operation -- -- -- -- (0.77) (0.31) --
-----------------------------------------------------------------------------------------
$ 0.26 $ 0.18 $ (0.18) $ 0.58 $ (0.77) $ 0.30 $ 0.87
-----------------------------------------------------------------------------------------
Diluted income (loss) per share:
from continuing operations $ 0.26 $ 0.18 $ (0.18) $ 0.47 $ (0.00) $ 0.59 $ 0.84
from discontinued operation -- -- -- -- (0.77) (0.28) (0.31)
-----------------------------------------------------------------------------------------
$ 0.26 $ 0.18 $ (0.18) $ 0.47 $ (0.77) $ 0.31 $ 0.53
-----------------------------------------------------------------------------------------
Weighted average shares outstanding
Basic 91,123 83,329 81,379 83,586 85,862 86,564 101,881
Diluted 92,579 85,040 81,379 130,882 85,862 97,889 104,603
===================================================================================================================================
OTHER DATA
Cash and cash equivalents and
marketable equity securities $ 229,962 $ 109,657 $ 109,657 $ 124,793 $ 40,378 $ 97,102 $ 88,894
Total assets 917,264 810,080 810,080 818,455 839,002 972,361 803,444
Long-term debt -- 351,539 351,539 346,300 326,200 307,254 250,000
Stockholders' equity (deficit) 375,746 (28,701) (28,701) (4,890) (34,518) 74,820 74,486
===================================================================================================================================
The following items impact the comparability of our data from continuing
operations:
o Other charges, which included costs for severance, excess facilities and
impairments of long-lived assets, on a pre-tax basis, of $29.7 million for
Calendar 2003, $49.4 million for Calendar 2002, $32.2 million for
Transition 2002, $17.2 million for Fiscal 2002, $46.6 million for Fiscal
2001, and $23.4 million for Fiscal 1999.
o Pre-tax charges for the impairment of investments of $0.9 million for
Calendar 2003, $4.2 million for Calendar 2002, $1.7 million for Transition
2002, $2.5 million for Fiscal 2002, and $30.4 million for Fiscal 2001.
o Gains (losses) from the sale of investments or assets and associated
insurance claims, on a pre-tax basis, of $5.5 million for Calendar 2003,
$0.5 million for Calendar 2002, $1.3 million for Fiscal 2002, $(0.6)
million for Fiscal 2001, and $29.6 million for Fiscal 2000.
o A tax benefit of $14.5 million during Fiscal 2001 due to the utilization of
foreign tax credits.
o During Calendar 2003, our long-term debt was converted into equity.
10-K.9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements. Forward-looking statements are any statements other
than statements of historical fact, including statements regarding our
expectations, beliefs, hopes, intentions or strategies regarding the future. In
some cases, forward-looking statements can be identified by the use of words
such as "may," "will," "expect," "should," "could," "believe," "plan,"
"anticipate," "estimate," "predict," "potential," "continue," or other words of
similar meaning. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
discussed in, or implied by, the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Factors That May Affect Future Results" below. Readers should not place undue
reliance on these forward-looking statements, which reflect management's opinion
only as of the date on which they were made. Except as required by law, we
disclaim any obligation to review or update these forward-looking statements to
reflect events or circumstances as they occur. Readers should review carefully
any risk factors described in our reports filed with the Securities and Exchange
Commission.
OVERVIEW
With the convergence of IT and business, technology has become increasingly more
important - not just to technology professionals, but also to business
executives. We are an independent and objective research and advisory firm that
helps IT and business executives use technology to build, guide and grow their
enterprises.
We employ a diversified business model that leverages the breadth and depth of
our research intellectual capital while enabling us to maintain and grow our
market-leading position and brand franchise. Our strategy is to align our
resources and our infrastructure to leverage that intellectual capital into
additional revenue streams through effective packaging, campaigning and
cross-selling of our products and services. Our diversified business model
provides multiple entry points and synergies that facilitate increased client
spending on our research, consulting and events. A key strategy is to increase
business volume with our most valuable clients, identifying relationships with
the greatest sales potential and expanding those relationships by offering
strategically relevant research and analysis.
We intend to maintain a balance between (1) pursuing opportunities and applying
resources with a strict focus on growing our businesses and (2) generating
profitability through a streamlined cost structure.
We have been organized into three business segments: research, consulting and
events.
o Research products and services highlight industry developments, review new
products and technologies, provide quantitative market research, and
analyze industry trends within a particular technology or market sector.
o Consulting consists primarily of consulting, measurement engagements and
strategic advisory services (paid one-day analyst engagements) ("SAS"),
which provide assessments of cost, performance, efficiency and quality
focused on the IT industry.
o Events consists of various symposia, conferences and exhibitions focused on
the IT industry.
We have recently begun to undertake a plan to ensure that our business units are
closely aligned with client need and market opportunity. As part of that
process, we have begun to reorganize our business in to three distinct business
units:
o Gartner Intelligence will deliver content and advice to IT professionals,
technology vendors and investors through vehicles such as Research, Events
and SAS.
o Gartner Executive Programs will offer membership and peer-networking
services for chief information officers (CIOs) and other key executives,
through offerings such as the highly successful EXP membership program.
o Gartner Consulting will focus on customized engagements that allow CIOs and
their counterparts to apply Gartner's knowledge to their specific business
situations, with an emphasis on areas such as outsourcing and IT
management.
10-K.10
Organizing our business units around distinct client segments will allow us to
make our existing products more relevant, accelerate the development of new
products that provide solutions for specific client needs, and increase the
Gartner value proposition overall.
As part of implementing this plan, we will be analyzing whether or not it
impacts how we report on our business segments. We will continue to report our
segment information as we have historically until we complete the alignment of
our financial reporting to this new structure and can then analyze what impact,
if any, this alignment will have.
We believe the following business measurements are important performance
indicators for our business segments.
REVENUE CATEGORY BUSINESS MEASUREMENTS
=============================================================================================================================
Research Contract value represents the value attributable to all of our subscription-related research products
that recognize revenue on a ratable basis. Contract value is calculated as the annualized value of all
subscription research contracts in effect at a specific point in time, without regard to the duration of
the contract.
Client retention rate represents a measure of client satisfaction and renewed business relationships
at a specific point in time. Client retention is calculated on a percentage basis by dividing our current
clients who were also clients a year ago, by all clients from a year ago.
Wallet retention rate represents a measure of the amount of contract value we have retained with
clients over a twelve-month period. Wallet retention is calculated on a percentage basis by dividing
the contract value of clients, who were clients one year earlier, by the total contract value from a
year earlier. When wallet retention exceeds client retention, it is an indication of retention of higher-
spending clients.
- ------------------------------------------------------------------------------------------------------------------------------
Consulting Consulting backlog represents future revenue to be derived from in-process consulting,
measurement and strategic advisory services engagements.
Utilization rates represent a measure of productivity of our consultants. Utilization rates are
calculated for billable headcount on a percentage basis by dividing total hours billed by total hours
available to bill.
- ------------------------------------------------------------------------------------------------------------------------------
Events Number of events represents the total number of hosted events completed during the period.
EXECUTIVE SUMMARY OF OPERATIONS AND FINANCIAL POSITION
Technology spending has decreased steadily over the past few years. As a result,
sales of our IT related research have declined as well. During this period, we
have been focused on stabilizing and then growing revenue in our core Research
business. This continued focus began to yield the desired outcome during the
latter half of Calendar 2003. We ended the latter half of 2003 with two
consecutive quarters of sequential increases in contract value after seven
consecutive quarters of sequentially decreasing contract value. Our research
client retention rates steadily increased to 78% at December 31, 2003 from 74%
at December 31, 2002. We believe the technology market is showing signs of a
recovery, and we believe the realignment of our business units discussed
previously will help us grow during this expected recovery.
Our Consulting business also ended the year with a positive trend. We ended
Calendar 2003 with two consecutive quarters of sequential increases in backlog
after five consecutive quarters of sequential decreases. As part of the
realignment previously discussed, we will be exiting certain less profitable
consulting practices and geographies. We expect this realignment to address our
sub-optimal utilization rates and our lack of scale in some regions.
Our Events business continues to deliver strong results, particularly in an
environment where few competitors have survived. Our emphasis on managing the
Events portfolio to retain our long-time successful events and introduce
promising new events has resulted in improved revenue performance. We achieved
these results while hosting fewer events, 57 during Calendar 2003, which was
nine fewer than Calendar 2002.
During the fourth quarter of Calendar 2003, we made an important change to our
capital structure. Our 6% convertible notes were converted into Class A Common
Stock. This eliminated all of our outstanding debt, and the related interest
expense, and we ended the year with $376 million of stockholders' equity. In
addition, our cash increased from $110 million at December 31, 2002 to $230
million at December 31, 2003, while repurchasing $43 million of our common
stock. We have strong financial resources to support additional investments in
growth.
10-K.11
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our quarterly and annual revenue and operating income fluctuate as a result of
many factors, including: the timing of Symposia, our flagship event that
normally occurs during the fourth calendar quarter, and other events; the amount
of new business generated; the mix of domestic and international business;
changes in market demand for our products and services; changes in foreign
currency rates; the timing of the development, introduction and marketing of new
products and services; and competition in the industry. The potential
fluctuations in our operating income could cause period-to-period comparisons of
operating results not to be meaningful and could provide an unreliable
indication of future operating results.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires the application of appropriate
accounting policies. Our significant accounting policies are described in Note 1
in the Notes to Consolidated Financial Statements. Management considers the
policies discussed below to be critical to an understanding of our financial
statements because their application requires complex and subjective judgements
and estimates. Specific risks for these critical accounting policies are
described below.
Revenue recognition - We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). Revenue by significant source is accounted for as follows:
o Research revenues are derived from subscription contracts for research
products. Revenues from research products are deferred and recognized
ratably over the applicable contract term;
o Consulting revenues are based primarily on fixed fees or time and materials
for discrete projects. Revenues for such projects are recognized as work is
delivered and/or services are provided and are evaluated on a contract by
contract basis;
o Events revenues are deferred and recognized upon the completion of the
related symposium, conference or exhibition; and
o Other revenues, principally software licensing fees, are recognized when a
signed non-cancelable software license exists, delivery has occurred,
collection is probable, and the fees are fixed or determinable. Revenue
from software maintenance is deferred and recognized ratably over the term
of the maintenance agreement, which is typically twelve months.
Uncollectible fees receivable - Provisions for bad debts are recognized as
incurred. The measurement of likely and probable losses and the allowance for
uncollectible fees receivable is based on historical loss experience, aging of
outstanding receivables, an assessment of current economic conditions and the
financial health of specific clients. This evaluation is inherently judgmental
and requires material estimates. These valuation reserves are periodically
re-evaluated and adjusted as more information about the ultimate collectibility
of fees receivable becomes available. Circumstances that could cause our
valuation reserves to increase include changes in our clients' liquidity and
credit quality, other factors negatively impacting our clients' ability to pay
their obligations as they come due, and the effectiveness of our collection
efforts. The following tables provides our total fees receivables, along with
the related allowance for losses (in thousands):
December 31,
------------------------ September 30,
2003 2002 2002
- -------------------------------------------------------------------------------
Total fees receivables $275,122 $290,068 $271,843
Allowance for losses (9,000) (7,000) (7,000)
------------------------------------------
Fees receivables, net $266,122 $283,068 $264,843
==========================================
Impairment of goodwill and other intangible assets - The evaluation of goodwill
is performed in accordance with Statement of Financial Accounting Standards No.
142, - "Goodwill and Other Intangible Assets" ("SFAS 142"). Among other
requirements, this standard eliminated goodwill amortization upon adoption and
requires an annual assessment for goodwill impairment. The evaluation of other
intangible assets is performed on a periodic basis.
10-K.12
These assessments require management to estimate the fair values of our
reporting units based on estimates of future business operations and market and
economic conditions in developing long-term forecasts. If we determine that the
fair value of any reporting unit is less than its carrying amount, we must
recognize an impairment charge, for the associated goodwill of that reporting
unit, to earnings in our financial statements. Goodwill is evaluated for
impairment at least annually, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors we consider
important that could trigger a review for impairment include the following:
o Significant under-performance relative to historical or projected future
operating results;
o Significant changes in the manner of our use of acquired assets or the
strategy for our overall business;
o Significant negative industry or economic trends;
o Significant decline in our stock price for a sustained period; and
o Our market capitalization relative to net book value.
Due to the numerous variables associated with our judgments and assumptions
relating to the valuation of the reporting units and the effects of changes in
circumstances affecting these valuations, both the precision and reliability of
the resulting estimates are subject to uncertainty, and as additional
information becomes known, we may change our estimates.
Accounting for income taxes - As we prepare our consolidated financial
statements, we estimate our income taxes in each of the jurisdictions where we
operate. This process involves estimating our current tax exposure together with
assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We record
a valuation allowance to reduce our deferred tax assets when future realization
is in question. We consider future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance. In the event we determine that we would be able to realize our
deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should we determine that we would not be able
to realize all or part of our net deferred tax asset in the future, an
adjustment to the deferred tax asset would decrease income in the period such
determination was made.
Contingencies and other loss reserves and accruals - We establish reserves for
severance costs, contract terminations and asset impairments as a result of
actions we undertake to streamline our organization, reposition certain
businesses and reduce ongoing costs. Estimates of costs to be incurred to
complete these actions, such as future lease payments, sublease income, the fair
value of assets, and severance and related benefits, are based on assumptions at
the time the actions are initiated. To the extent actual costs differ from those
estimates, reserve levels may need to be adjusted. In addition, these actions
may be revised due to changes in business conditions that we did not foresee at
the time such plans were approved. During the fourth quarter of Calendar 2003,
we revised our previous estimates for costs and losses associated with excess
facilities due to declines in market rates for expected sublease income and
revised expected periods of sublease. As a result of these revised estimates, we
recorded a charge of $9.7 million, which was included in Other charges along
with severance costs. Additionally, we record accruals for estimated incentive
compensation costs during the year. The ultimate amount paid associated with
these incentives are sometimes not known until after year-end. During the fourth
quarter of Calendar 2003, we lowered our estimates for incentive compensation
accruals, including bonuses, based on Company performance by approximately $3.2
million as compared to the estimates recorded as of the end of the third quarter
of Calendar 2003.
Impairment of investment securities - A charge to earnings is made when a market
decline below cost is other than temporary. Management regularly reviews each
investment security for impairment based on criteria that include the length of
time and the extent to which market value has been less than cost, the financial
condition and near-term prospects of the issuer, the valuation of comparable
companies and our intent and ability to retain
10-K.13
the investment for a period of time sufficient to allow for any anticipated
recovery in market value. Future adverse changes in market conditions or poor
operating results of underlying investments could result in losses or an
inability to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly requiring
an impairment charge in the future. Total investments in equity securities were
$10.9 million at December 31, 2003, $10.7 million at December 31, 2002, and
$12.7 million at September 30, 2002 (see Note 4 - Investments in the Notes to
the Consolidated Financial Statements).
CHANGE IN FISCAL YEAR
On October 30, 2002, we announced that the Board of Directors approved a change
of our fiscal year-end from September 30 to December 31, effective January 1,
2003. This change resulted in a three-month transitional period ending December
31, 2002. References to Transition 2002, unless otherwise indicated, refer to
the three-month transitional period ended December 31, 2002. References to
Fiscal 2002 and Fiscal 2001, unless otherwise indicated, are to the respective
fiscal year period from October 1 through September 30. References to Calendar
2003 and Calendar 2002, unless otherwise indicated, are to the respective
twelve-month period from January 1 through December 31.
RESULTS OF OPERATIONS
CALENDAR 2003 VERSUS CALENDAR 2002
Total revenues decreased 3% to $858.4 million during Calendar 2003 from $887.6
million during Calendar 2002.
o Research revenues decreased 4% in Calendar 2003 to $466.9 million, compared
to $487.0 million in Calendar 2002, and comprised approximately 54% and 55%
of total revenues in Calendar 2003 and Calendar 2002, respectively.
o Consulting revenues decreased 6% to $258.6 million in Calendar 2003,
compared to $276.1 million in Calendar 2002, and comprised approximately
30% and 31% of total revenues in Calendar 2003 and Calendar 2002,
respectively.
o Events revenues were $119.4 million in Calendar 2003, an increase of 9%
from the $109.7 million in Calendar 2002, and comprised approximately 14%
of total revenues in Calendar 2003 versus 12% in Calendar 2002.
o Other revenues, consisting principally of software licensing and
maintenance fees, decreased 9% to $13.6 million in Calendar 2003 from $14.9
million in Calendar 2002.
While revenues declined in the United States and Canada region, they increased
in our Europe, Middle East and Africa region ("EMEA") and the Other
International region. Revenues from sales to United States and Canadian clients
decreased 7% to $535.7 million in Calendar 2003 from $576.5 million in Calendar
2002. Revenues from sales to clients in the EMEA region increased 5% to $252.3
million in Calendar 2003 from $241.3 million in Calendar 2002. Revenues from
sales to clients in Other International regions increased 1% to $70.5 million in
Calendar 2003 from $69.8 million in Calendar 2002.
The decrease in our total revenues was a result of a decline in demand
throughout the entire technology sector and the overall weakness in the economy,
partially offset by the positive effects of foreign currency exchange rates.
Excluding the effects of foreign currency translation, revenues would have
decreased approximately 8%. See Segment Analysis section below for a further
discussion of segment revenues.
Cost of services and product development increased 4% during Calendar 2003 to
$410.7 million from $396.5 million during Calendar 2002. Excluding the effects
of foreign currency translation, cost of services and product development would
have decreased by 1%. As a percentage of sales, cost of services and product
development increased to 47.8% from 44.7% due primarily to investments in
Gartner EXP, membership programs, product development and costs associated with
customer intelligence, higher conference related expenses and lower utilization
rates for our consulting practice.
10-K.14
Selling, general and administrative expenses decreased 4%, to $333.3 million
during Calendar 2003 from $346.5 million during Calendar 2002. SG&A would have
decreased by approximately 7% had it not been for the negative effect of foreign
currency translation. The decrease in SG&A was primarily the result of lower
sales commissions and our continued focus on streamlining our support
organizations and restructuring efforts.
Depreciation expense for Calendar 2003 decreased 18% to $36.0 million, compared
to $43.7 million for Calendar 2002. The decrease was due to a reduction in
capital spending during Calendar 2002 and Calendar 2003 relative to the capital
spending during Fiscal 2000 and 2001, which led to a decrease in depreciation
expense. In addition, costs capitalized during Fiscal 2000 associated with the
initial launch of the gartner.com Web site in January 2001 have been fully
depreciated as of the beginning of Calendar 2003.
Amortization of intangibles decreased 34% when comparing Calendar 2003 to
Calendar 2002 due to certain intangible assets having been fully amortized over
the past year.
Other charges of $29.7 million during Calendar 2003 were for costs for employee
severance and benefits associated with workforce reductions initiated under two
separate actions, $5.4 million during the first quarter of Calendar 2003 and
$14.6 million during the fourth quarter of Calendar 2003. Additionally, during
the fourth quarter of Calendar 2003, we revised our estimates of previously
recorded costs and losses associated with excess facilities and recorded $9.7
million of additional provisions. The revised estimate was due to a decline in
market lease rates for expected subleases, as well as a reduction in estimated
periods of subleases. The workforce reduction that occurred during the first
quarter of Calendar 2003 was a continuation of the action taken in Transition
2002, which resulted in the termination of 92 employees, or approximately 2% of
our workforce. The purpose of this reduction was to reduce costs in
underperforming segments. The workforce reduction that occurred during the
fourth quarter of Calendar 2003 resulted in the termination of 130 employees, or
approximately 3% of our workforce. The purpose of this workforce reduction was
part of an effort to streamline operations, to strengthen key consulting
practices, and to align our organizational structure to focus on client needs.
We expect the remaining payments associated with the workforce reduction to be
substantially completed by the end of the second quarter of 2004. We are funding
all of these costs out of existing cash. We expect to record additional expenses
for severance during the first quarter of 2004 of approximately $5 million to $8
million associated with the realignment plan initiated during the fourth quarter
of Calendar 2003.
During Calendar 2002, other charges were $49.4 million. These charges were the
result of two actions, one during the first quarter of Calendar 2002 amounting
to $17.2 million, and the other occurring during the fourth quarter of Calendar
2002, or Transition 2002, amounting to $32.2 million. Of the charges occurring
during the first quarter of Calendar 2002, $10.0 million related to costs and
losses associated with the elimination of excess facilities, principally
leasehold improvements and ongoing lease costs and losses associated with
sub-lease arrangements. In addition, approximately $5.8 million of these charges
were associated with our workforce reduction initiated during the first quarter
of Calendar 2002 and were for employee termination severance and benefits. This
workforce reduction resulted in the termination of 92 employees, or
approximately 2% of the Company's workforce at that time. We expect the payments
associated with the workforce reduction to be completed by the end of the first
quarter of 2004. The remaining $1.4 million of expenses recorded as other
charges during the first quarter of Calendar 2002 relates to the impairment of
certain database-related assets. Of the $32.2 million of charges during the
fourth quarter of Calendar 2002, $13.3 million related to costs and losses
associated with our elimination of excess facilities, principally leased
facilities and ongoing lease costs and losses associated with sub-lease
arrangements. The remaining $18.9 million of these charges related to severance
payments and related benefits associated with a workforce reduction, which
included $0.6 million of non-cash compensation. This workforce reduction
resulted in the elimination of approximately 175 positions, or approximately 4%
of our workforce at the time. We are funding all of the remaining costs out of
existing cash.
Interest expense decreased during Calendar 2003 due to the conversion of our
debt to equity in October 2003. The conversion of our debt has eliminated most
of our interest expense since the conversion date.
10-K.15
Gain (loss) on investments, net during Calendar 2003 includes a $5.5 million
insurance recovery received during Calendar 2003 associated with previously
incurred losses arising from the sale of a business. Gain (loss) on investments,
net during Calendar 2003 also includes an impairment loss of $0.9 million
associated with a minority-owned investment not publicly traded. We evaluated
the investment for impairment because of the investee's recapitalization due to
its lack of capital resources to redeem its mandatorily redeemable equity, which
led us to write the investment down to our estimate of fair value. The loss on
investments during Calendar 2002 was caused primarily by the recognition of
impairment losses related to equity securities owned by us through two limited
partnerships, SI Venture Associates ("SI I") and SI Venture Fund II ("SI II").
SI I and SI II are venture capital funds engaged in making investments in early
to mid-stage IT-based or Internet-enabled companies. We own 100% of SI I and 34%
of SI II. See Note 4 - Investments in the Notes to the Consolidated Financial
Statements for a further discussion of the gains and losses on investments. The
impairment factors evaluated by management may change in subsequent periods,
given that the entities underlying these investments operate in a volatile
business environment. In addition, these entities may require additional
financing to meet their cash and operational needs. However, there can be no
assurance that such funds will be available to the extent needed, at terms
acceptable to the entities, if at all. This could result in additional material
non-cash impairment charges in the future.
Other income, net for Calendar 2003 of $0.5 million consists primarily of net
foreign exchange gains. For Calendar 2002, other income, net of $0.1 million
includes a $0.5 million gain from the sale of certain assets during the first
quarter of Calendar 2002, partially offset by net foreign exchange losses.
Provision for income taxes was 33.4% and 37.7% of income before income taxes for
Calendar 2003 and 2002, respectively. Excluding the other charges for workforce
reductions, excess facilities and asset impairments and the gains and losses
from investments, the effective tax rate would have been 33% in Calendar 2003 as
compared to 34% in Calendar 2002. The reduction in the effective tax rate for
Calendar 2003, as compared to that of Calendar 2002, reflects the implementation
of tax planning strategies.
Basic and diluted income per common share was $0.26 for Calendar 2003, compared
to $0.18 for Calendar 2002. For Calendar 2003, basic and diluted EPS were
negatively impacted by our restructuring costs and the impairment of an
investment. Partially offsetting these items was the favorable impact of the
insurance recovery. During Calendar 2002, the restructuring charges and
impairment of investments had an unfavorable impact on basic and diluted EPS.
SEGMENT RESULTS
During Calendar 2003, our business was managed through three reportable
segments: Research, Consulting and Events. As announced in the fourth quarter of
2003, we are moving toward a client focus and realigning our business into three
business units: Gartner Intelligence, Gartner Executive Programs, and Gartner
Consulting. As this realignment is finalized during 2004, we will evaluate the
needs, if any, to realign our segment reporting. Our segment discussion is based
on our historical segments as managed through 2003.
We evaluate reportable segment performance and allocate resources based on gross
contribution margin. Gross contribution is defined as operating income excluding
certain selling, general and administrative expenses, depreciation, amortization
of intangibles and other charges. Gross contribution margin is defined as gross
contribution as a percentage of revenues.
Research
Research revenues decreased 4% when comparing Calendar 2003 and Calendar 2002.
Foreign currency exchange rates favorably impacted research revenues by
approximately 4%. The decrease in research revenues was due to the overall
weakness in the economy and the impact of this weakness on corporate information
technology spending causing lower demand throughout the entire technology
sector.
10-K.16
Research gross contribution of $292.9 million for Calendar 2003 decreased 8%
from $318.7 million for Calendar 2002, while gross contribution margin for
Calendar 2003 decreased to 63% from 65% in the prior year. The decrease in gross
contribution and gross contribution margin is a result of the lower revenues and
costs associated with investments in Gartner EXP, Gartner G2, membership
programs, product development and marketing and costs associated with customer
intelligence.
Research contract value, an indicator of future research revenue, was $482.2
million at December 31, 2003, a decrease of 1% from $489.0 million at December
31, 2002. However, research contract value increased sequentially during both
the third and fourth quarters of Calendar 2003 from $468.5 million at June 30,
2003 and $469.6 million at September 30, 2003. Prior to these sequential
increases during Calendar 2003, contract value had decreased sequentially for
seven consecutive quarters. We believe these sequential increases may be an
indication of an upturn in demand for our products coinciding with potentially
increasing demand in the technology sector. At December 31, 2003, our client
retention rates increased 4 percentage points to 78% as compared to the same
measure at December 31, 2002. Wallet retention increased 8 percentage points
during Calendar 2003 to 89%. The client and wallet retention rates increased
steadily over the four quarters of Calendar 2003. We believe these increases
were a result of implementing a named account sales strategy with our sales
staff and the focusing of their efforts on companies with revenues greater than
$1 billion.
Consulting
Consulting revenues decreased 6% during Calendar 2003 to $258.6 million from
$276.1 million for Calendar 2002. Foreign currency exchange rates had a positive
impact of approximately 5% during Calendar 2003. The decrease in revenues was
caused by lower billable headcount and lower utilization. Workforce reductions
over the past year have resulted in reduced billable headcount in response to
the lower demand in the technology sector. Billable headcount for our Consulting
business as of December 31, 2003 has decreased approximately 11% to 410 at
December 31, 2003 as compared to 459 at December 31, 2002.
Consulting gross contribution of $86.8 million for Calendar 2003 decreased 16%
from $102.8 million for Calendar 2002, and gross contribution margin for
Calendar 2003 decreased to 34% from 37% in the prior year. The decrease in the
gross contribution margin was primarily attributable to lower consultant
utilization rates, which were approximately 53% during Calendar 2003 as compared
to approximately 56% during Calendar 2002.
As part of our realignment that caused workforce reductions during the fourth
quarter of Calendar 2003, we decided to exit certain lines of business and
geographies within our Consulting business in order to focus on areas with
potential for higher growth and profitability. The realignment is expected to
address the sub-optimal utilization rates and our lack of scale in some regions.
In the near term, this decision will affect overall revenue growth for
Consulting as revenues from those areas exited are allowed to wind down, while
new areas of focus are beginning to ramp up.
Consulting backlog decreased 10% to $99.7 million at December 31, 2003, compared
to $111.3 million at December 31, 2002, but increased sequentially during both
the third and fourth quarters of Calendar 2003, when it was $91.0 million at
June 30, 2003 and $92.8 million at September 30, 2003. Consulting backlog
decreased as compared to the prior year due to the decline in demand throughout
the entire technology sector, as technology customers continued to constrain
spending. As noted in the discussion of the Research segment, the sequential
backlog increases in the latter half of Calendar 2003 may be an indication of
increased demand in the technology sector.
Events
Events revenues increased 9% to $119.4 million for Calendar 2003, compared to
$109.7 million for Calendar 2002. Changes in foreign currency exchange rates had
approximately a 5% favorable impact on revenues when comparing Calendar 2003 to
Calendar 2002. Revenues have increased slightly despite having nine fewer events
during Calendar 2003 as compared to Calendar 2002. The average revenue per event
has increased during Calendar 2003 due to the strong performance of our
recurring events, as well as the addition of new events during Calendar 2003
that had higher revenues than the events that were eliminated.
10-K.17
Gross contribution of $56.0 million for Calendar 2003 was relatively consistent
with Calendar 2002. As a percentage of revenues, gross contribution decreased to
47% during Calendar 2003 from 51% during Calendar 2002. The decrease in gross
contribution margin was due primarily to increased personnel expenses and
increased event marketing costs. During 2003, we invested more in marketing and
promoting our events to maintain our attendance levels during a weak economy,
especially in the technology sector.
FISCAL YEAR ENDED SEPTEMBER 30, 2002 VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 2001
Total revenues decreased 6% to $907.2 million in Fiscal 2002 compared to $962.9
million in Fiscal 2001.
o Research revenue decreased 7% in Fiscal 2002 to $496.4 million, compared to
$535.1 million in Fiscal 2001, and comprised approximately 55% and 56% of
total revenues in Fiscal 2002 and 2001, respectively.
o Consulting revenue decreased 1% to $273.7 million in Fiscal 2002, compared
to $276.3 million in Fiscal 2001, and comprised approximately 30% and 29%
of total revenues in Fiscal 2002 and 2001, respectively.
o Events revenue was $122.0 million in Fiscal 2002, a decrease of 8% from the
$132.7 million in Fiscal 2001, and comprised approximately 13% of total
revenues in Fiscal 2002 versus 14% in Fiscal 2001.
o Other revenues, consisting principally of software licensing and
maintenance fees, decreased 20% to $15.1 million in Fiscal 2002 from $18.8
million in Fiscal 2001.
Revenue declined in our three defined geographic market areas: United States and
Canada, EMEA, and Other International. Revenues from sales to United States and
Canadian clients decreased 7% to $595.3 million in Fiscal 2002 from $641.9
million in Fiscal 2001. Revenues from sales to clients in the EMEA region
decreased 3% to $242.1 million in Fiscal 2002 from $250.0 million in Fiscal
2001. Revenues from sales to Other International clients decreased 2% to $69.7
million in Fiscal 2002 from $71.1 million in Fiscal 2001.
Cost of services and product development expenses were $403.7 million and $450.5
million for Fiscal 2002 and Fiscal 2001, respectively. The cost of services and
product development expenses decreased as a percentage of total revenues to 45%
from 47%. The decrease is attributable to reduced personnel costs associated
with headcount reductions, more effective cost management of events and other
cost savings, including reduced travel.
Selling, general and administrative expenses decreased to $345.4 million in
Fiscal 2002 from $370.1 million in Fiscal 2001. The decrease was due to reduced
payroll associated with lower headcount, reduced travel, telephone and other
infrastructure costs across the entire company.
Depreciation expense increased to $42.5 million in Fiscal 2002 from $40.9
million in Fiscal 2001, primarily due to the additional depreciation from
significant capital expenditures made during Fiscal 2001 for internal use
software required to support the business and also due to the amortization of
costs associated with the launch of gartner.com in January 2001.
Amortization of intangibles of $1.9 million in Fiscal 2002 was down from $12.4
million in Fiscal 2001. The primary reason for the decrease was our adoption of
SFAS 142 which eliminated the amortization of goodwill for Fiscal 2002. For
Fiscal 2001, goodwill amortization was $9.5 million and, on an after-tax basis,
was $8.4 million. As a result of adoption, diluted earnings per share for the
year ended September 30, 2002 improved by $0.09.
During Fiscal 2002, we recorded other charges of $17.2 million. Of these
charges, $10.0 million related to costs and losses associated with our
elimination of excess facilities, principally leased facilities and ongoing
lease costs and losses associated with sub-lease arrangements. In addition,
approximately $5.8 million of these charges are associated with a workforce
reduction announced in January 2002 and were for employee termination severance
payments and related benefits. This workforce reduction resulted in the
elimination of approximately 100 positions, or approximately 2% of our workforce
at the time, and the payment of $5.3 million of termination benefits during
Fiscal 2002. The remaining $1.4 million relates to the impairment of certain
database-related assets. Other charges totaled $46.6 million for Fiscal 2001. Of
these charges, $24.8 million was associated with our workforce reduction
10-K.18
announced in April 2001. This workforce reduction resulted in the elimination of
383 positions, or approximately 8% of our workforce at the time, and the payment
of $6.4 million and $18.2 million of termination benefits during Fiscal 2002 and
Fiscal 2001, respectively. The $24.8 million charge was comprised of employee
termination severance payments and related benefits. Approximately $14.3 million
of the other charges were associated with the write-down of goodwill and other
long-lived assets to net realizable value as a result of our decision to
discontinue certain unprofitable products, and $7.5 million of the charge was
associated primarily with the write-off of internally developed systems retired
in connection with the launch of gartner.com. At December 31, 2003, an
insignificant amount of severance costs remain to be paid during 2004. These
costs will be paid from existing cash. The estimated costs associated with the
excess facilities have been reevaluated as part of the charge taken during the
fourth quarter of Calendar 2003 discussed previously.
Operating income increased to $96.4 million in Fiscal 2002 compared to $42.5
million in Fiscal 2001. In Fiscal 2002, our United States and Canadian business
and our European business experienced an increase in operating income of 119%
and 113%, respectively. Our Other International business experienced an
operating loss for the year, which was slightly lower than a year ago. On a
consolidated basis, operating income as a percentage of total revenues was 11%
and 4%, respectively, for Fiscal 2002 and 2001. Operating income was impacted,
in part, by other charges of $17.2 million and $46.6 million in Fiscal 2002 and
2001, respectively, and additional costs associated with the re-architecture of
our Internet capabilities and our research methodology and delivery processes in
Fiscal 2001. Excluding the other charges, operating income for Fiscal 2002 and
2001 was 13% and 9%, respectively, of total revenues. We decreased our staff by
approximately 8% in the second half of Fiscal 2001 and 2% in mid-Fiscal 2002
and, in the fourth quarter of Fiscal 2001, decreased the expense-to-revenue
ratio associated with our cost of services and selling, general and
administrative expenses through various cost-reduction initiatives. The
improvement in operating income was also impacted by lower amortization of
intangibles due to the adoption of SFAS 142. Amortization of goodwill was $9.5
million in Fiscal 2001.
Gain (loss) on investments, net for Fiscal 2002 included the sale of 748,118
shares of CNET for $6.0 million, resulting in a pre-tax gain of $0.8 million. We
acquired this investment as partial consideration for our sale of TechRepublic
to CNET in July 2001. The remaining $2.4 million loss on investments during
Fiscal 2002 was primarily the result of impairment losses related to investments
owned by us through SI I, SI II and other directly owned investments for other
than temporary declines in value. See Note 4 - Investments in the Notes to
Consolidated Financial Statements for a further discussion.
Gain (loss) on investments, net in Fiscal 2001 of $27.5 million included the
sale of shares of an investment, in which we held a minority interest, for net
cash proceeds of $7.5 million and a pre-tax loss of $5.6 million. Fiscal 2001
also included a $5.0 million gain as a result of the sale of shares received
from our venture capital funds, SI I, SI II and other securities for net cash
proceeds of $6.9 million. The remaining loss of $26.9 million during Fiscal 2001
was primarily the result of impairment losses related to investments owned by us
through SI I, SI II and other directly owned investments for other than
temporary declines in value. See Note 4 - Investments in the Notes to
Consolidated Financial Statements for a further discussion.
Interest expense increased to $22.9 million in Fiscal 2002 from $22.4 million in
Fiscal 2001. The increase relates primarily to increased interest expense on the
6% convertible long-term debt compared to Fiscal 2001. Interest income of $1.8
million in Fiscal 2002 was up from $1.6 million in Fiscal 2001 due to a higher
average balance of funds available for investment, offset in part by lower
interest earnings rates. Other expense, net decreased to $0.2 million in Fiscal
2002 from $3.7 million in Fiscal 2001. The decrease related primarily to lower
foreign currency exchange losses of $2.7 and a $0.5 million gain from the sale
of a business in Fiscal 2002.
Provision for income taxes on continuing operations was $25.0 million in Fiscal
2002 compared to a benefit of $9.2 million in Fiscal 2001. The effective tax
rate was 34% for Fiscal 2002. The effective tax rate in Fiscal 2001, less the
impact of a one-time tax benefit of $14.5 million due to the utilization of
foreign tax credits in the second half of Fiscal 2001 and other charges and
losses on investments and related tax impact, was 37%. The reduction in the
effective tax rate in Fiscal 2002 reflects on-going tax planning and the
elimination of non-deductible amortization of goodwill pursuant to the adoption
of SFAS 142. A more detailed analysis of the changes in the provision (benefit)
for income taxes is provided in Note 12-Income Taxes of the Notes to
Consolidated Financial Statements.
10-K.19
Basic income (loss) per common share from continuing operations was $0.58 per
share in Fiscal 2002 compared to $0.00 per share in Fiscal 2001. Diluted income
(loss) per common share from continuing operations was $0.47 per share in Fiscal
2002 compared to $0.00 per share in Fiscal 2001. The elimination of goodwill
amortization in accordance with SFAS 142 improved basic and diluted income per
share from continuing operations by $0.10 and $0.09, respectively, for Fiscal
2002 as compared to Fiscal 2001.
Segment Analysis
Research
Research revenues of $496.4 million in Fiscal 2002 were down 7% from $535.1
million in Fiscal 2001. The decline in revenues was due to lower demand
throughout the entire technology sector and the overall weakness in the general
economy. Research's gross contribution in Fiscal 2002 decreased 7% to $326.3
million from $352.6 million in Fiscal 2001. Research's gross contribution margin
was 66% in Fiscal 2002 and 2001. Although revenues declined, gross contribution
margin remained flat, in part due to reductions in expenses. The decline in
gross contribution was due to lower revenues.
Our research client retention rate was 75% for Fiscal 2002 compared to 74% for
Fiscal 2001. Total research contract value decreased 11% to approximately $496.0
million at September 30, 2002 from $556.0 million at September 30, 2001. The
decrease in contract value reflects a decline in demand throughout the entire
technology sector as well as overall weakness in the general economy.
Consulting
Consulting revenues of $273.7 million in Fiscal 2002 were down 1% from $276.3
million in Fiscal 2001. Revenues for Fiscal 2002 reflect a strategic reduction
in certain client segments and geographies based on market share, competitive
advantage, client size and other factors. The reduction in revenue was partially
offset by increases in average project size and length. Consulting's gross
contribution increased by 13% to $97.9 million in Fiscal 2002 from $86.9 million
in Fiscal 2001. Consulting's gross contribution margin of 36% in Fiscal 2002
increased from 31% in Fiscal 2001 primarily due to reduced expenses, higher
utilization rates and higher billing rates. We reduced headcount and eliminated
expenses in practice areas and markets where we did not have sufficient scale
and volume.
Consulting backlog decreased 10% to approximately $107.6 million at September
30, 2002 from $119.0 million at September 30, 2001. The decrease in backlog
primarily reflects the overall weakness in the general economy.
Events
Events revenues of $122.0 million in Fiscal 2002 were down 8% from $132.7
million in Fiscal 2001. The decline was primarily due to: fewer events due to
the strategic elimination of less profitable and unproven events with the
expectation of obtaining greater attendee and exhibitor participation at
higher-profit events; the overall weakness in the general economy; and lower
travel budgets. Events' gross contribution increased by 3% to $65.4 million in
Fiscal 2002 from $63.6 million in Fiscal 2001 with gross contribution margin of
54% in Fiscal 2002 compared to 48% in Fiscal 2001. The increase in gross
contribution and margin was due to better cost management and the elimination of
less profitable events.
LIQUIDITY AND CAPITAL RESOURCES
Calendar 2003
Cash provided by operating activities during Calendar 2003 was $136.3 million,
compared to $145.8 million during Calendar 2002. The decrease was primarily due
to lower cash-related earnings and a smaller decrease in receivables during
Calendar 2003 compared to Calendar 2002. Cash-related earnings are income from
continuing operations adjusted for the non-cash items included in income, such
as depreciation and amortization, the accretion of interest and amortization of
debt issue costs, along with other non-cash charges. Partially offsetting these
decreases were higher bonus payments during Calendar 2002. Bonus payments were
higher during Calendar 2002 due to our change in fiscal year from September 30
to December 31, effective January 1, 2003. Our Fiscal 2002 bonuses were paid
during Transition 2002, or the fourth quarter of Calendar 2002, whereas,
Calendar 2003 bonuses will be paid during 2004.
10-K.20
Cash used in investing activities was $25.4 million for Calendar 2003, compared
to $26.3 million for Calendar 2002. The decrease was due primarily to the
proceeds received from an insurance recovery of $5.5 million during Calendar
2003 associated with a previously incurred loss on a claim resulting from the
sale of a business in 2000. Additionally, during 2002 we spent $3.9 million to
purchase the remaining 49.9% of People3, Inc. not previously owned by us. During
Calendar 2003 and Calendar 2002, we funded $2.0 million and $1.5 million,
respectively, of our investment commitment to SI II, reducing our remaining
commitment as of December 31, 2003 to $4.0 million. Spending on property and
equipment increased $7.8 million to $28.9 million during Calendar 2003, as
compared to $21.1 million during the same period of 2002.
Cash used in financing activities totaled $3.0 million for Calendar 2003,
compared to $42.2 million for Calendar 2002. We purchased $43.4 million of
common stock for treasury during Calendar 2003, as compared to $59.9 million
during Calendar 2002 (see further discussion below under Stock Repurchases). We
received proceeds of $41.7 million from the exercise of stock options and the
purchase of stock by employees participating in the employee stock purchase plan
during Calendar 2003, as compared to $17.9 million during the Calendar 2002.
At December 31, 2003, cash and cash equivalents totaled $230.0 million. The
effect of exchange rates increased cash and cash equivalents by $12.4 million
during Calendar 2003, and was due to the weakening of the U.S. dollar against
certain foreign currencies.
Fiscal Year 2002
Cash provided by operating activities during Fiscal 2002 was $145.6 million,
compared to $73.5 million during Fiscal 2001. The increase was primarily due to
significantly higher income from continuing operations, lower amounts of
termination payments associated with workforce reductions and working capital
management.
Cash used in investing activities totaled $19.4 million for Fiscal 2002,
compared to $44.6 million used in Fiscal 2001. Cash used in investing activities
during Fiscal 2002 and 2001 included $19.6 million and $57.5 million,
respectively, for additions to property, equipment and leasehold improvements.
These additions in Fiscal 2002 were primarily the result of investments in
infrastructure systems. These cash uses in Fiscal 2002 were partially offset by
proceeds from the sale of marketable securities of $6.0 million. The additions
to property, equipment and leasehold improvements in Fiscal 2001 were primarily
the result of investments in gartner.com and other infrastructure systems. These
cash uses in Fiscal 2001 were partially offset by proceeds from the sale of
marketable securities and discontinued operations of $14.4 million and $10.5
million, respectively. Cash used for business acquisitions was $4.5 million and
$12.0 million for Fiscal 2002 and 2001, respectively.
Cash used in financing activities totaled $40.1 million in Fiscal 2002, compared
to $18.9 million in Fiscal 2001. The cash used in financing activities in Fiscal
2002 resulted primarily from the purchase of $47.0 million of common stock for
treasury (see discussion below under Stock Repurchases) and the repayment of
credit facility loans of $15.0 million. These uses of cash were partially offset
by proceeds of $22.2 million from the exercise of stock options and the employee
stock purchase plan. The cash used in financing activities in Fiscal 2001
resulted primarily from the purchase of common stock for treasury of $37.9
million (see discussion below under Stock Repurchases), offset in part, by
proceeds of $15.0 million from credit facility borrowings and by proceeds of
$9.1 million from the exercise of stock options and the employee stock purchase
plan.
Total cash used by discontinued operations, sold in Fiscal 2001, was $34.2
million in Fiscal 2001.
At September 30, 2002, cash and cash equivalents totaled $124.8 million. The
effect of exchange rates increased cash and cash equivalents by $1.7 million for
the year ended September 30, 2002, and was due to the weakening of the U.S.
dollar against certain foreign currencies. In Fiscal 2001, the negative effect
of exchange rates reduced cash and cash equivalents by $0.4 million.
10-K.21
Obligations and Commitments
We have a $200.0 million unsecured senior revolving credit facility led by
JPMorgan Chase Bank. At December 31, 2003, there were no amounts outstanding
under the facility. We are subject to certain customary affirmative, negative
and financial covenants under this credit facility, and continued compliance
with these covenants preclude us from borrowing the maximum amount of the credit
facility from time to time. These covenants are primarily based on financial
results and other measures such as contract value. As a result of these
covenants, our borrowing availability at December 31, 2003 was $184 million.
This credit facility expires in July 2004. We expect to obtain a revolving
credit facility to replace the current facility upon expiration.
On April 17, 2000, we issued, in a private placement transaction, $300.0 million
of 6% convertible subordinated notes to Silver Lake Partners, L.P. ("SLP") and
other noteholders. Interest accrued semi-annually by a corresponding increase in
the face amount of the convertible notes. These notes were due and payable on
April 17, 2005.
In October 2003, our notes were converted into 49,441,122 shares of Gartner
Class A Common Stock. The shares owned by SLP, as a result of this conversion,
represent approximately 45.9% of our outstanding Class A Common Stock and
approximately 36.1% on a combined basis with our outstanding Class B Common
Stock, based upon shares outstanding as of December 31, 2003. The conversion was
in accordance with the original terms of the notes.
The determination of the number of shares issued upon conversion was based upon
a $7.45 conversion price and a convertible note of $368.3 million, consisting of
the original face amount of $300 million plus accrued interest of $68.3 million.
The unamortized balances of debt issue costs of $2.8 million and debt discount
of $0.3 million as of the conversion date were netted against the outstanding
principal and interest balances, resulting in a $365.2 million increase to
stockholders' equity. Additionally, certain costs directly associated with the
conversion, such as regulatory filings, banking and legal fees totaling $0.6
million were charged to equity.
The following table represents our contractual commitments at December 31, 2003
(in millions):
Less Than 2 - 3 4 - 5 More Than
Total 1 Year Years Years 5 Years
- -------------------------------------------------------------------------------------------------------------
Operating leases $212.8 $29.0 $45.7 $35.6 $102.5
Severance associated with workforce reductions 12.8 12.8 -- -- --
SI II funding commitment 4.0 4.0 -- -- --
Other service agreements 5.7 2.6 2.4 0.7 --
----------------------------------------------------------
Totals $235.3 $48.4 $48.1 $36.3 $102.5
==========================================================
We believe that our current cash balances, together with cash anticipated to be
provided by operating activities and borrowings available under the existing
credit facility, will be sufficient for our expected short-term and foreseeable
long-term cash needs in the ordinary course of business. If we were to require
substantial amounts of additional capital to pursue business opportunities that
may arise involving substantial investments of additional capital, there can be
no assurances that such capital will be available to us or will be available on
commercially reasonable terms.
10-K.22
Stock Repurchases
In July 2001, our Board of Directors approved the repurchase of up to $75
million of Class A and Class B Common Stock. Our Board of Directors has
subsequently increased the authorized stock repurchase program to a total
authorization for repurchase of $200 million. On a cumulative basis at December
31, 2003, we have purchased $127.1 million of our stock under this stock
repurchase program.
Class A Common Stock Class B Common Stock Total
--------------------------- --------------------------- Cost of
Average Average Shares
Total Shares Price Paid Total Shares Price Paid Purchased
Purchased per Share Purchased per Share (in thousands)
- --------------------------------------------------------------------------------------------------
Fiscal 2001 2,318,149 $ 9.79 7,960 $ 9.50 $ 22,773
Fiscal 2002 2,153,400 10.84 2,311,700 10.25 47,047
Transition 2002 963,117 9.79 453,600 9.81 13,880
Calendar 2003 3,435,161 8.47 1,549,485 9.26 43,433
----------------------------------------------------------------------------
Totals 8,869,827 $ 9.53 4,322,745 $ 9.85 $127,132
============================================================================
FACTORS THAT MAY AFFECT FUTURE RESULTS
We operate in a very competitive and rapidly changing environment that involves
numerous risks and uncertainties, some of which are beyond our control. In
addition, we and our clients are affected by the economy. The following section
discusses many, but not all, of these risks and uncertainties.
Economic Conditions. Our revenues and results of operations are influenced by
economic conditions in general and more particularly by business conditions in
the IT industry. A general economic downturn or recession, anywhere in the
world, could negatively affect demand for our products and services and may
substantially reduce existing and potential client information
technology-related budgets. The recent economic downturn in the United States
and globally has led to constrained IT spending, which has impacted our business
and may materially and adversely affect our business, financial condition and
results of operations, including the ability to: maintain client retention,
wallet retention and consulting utilization rates, and achieve contract value
and consulting backlog. To the extent our clients are in the IT industry, the
severe decline in that sector has also had a significant impact on IT spending.
Acts of Terrorism or War. Acts of terrorism, acts of war and other unforeseen
events, may cause damage or disruption to our properties, business, employees,
suppliers, distributors and clients, which could have an adverse effect on our
business, financial condition and operating results. Such events may also result
in an economic slowdown in the United States or elsewhere, which could adversely
affect our business, financial condition and operating results.
Competitive Environment. We face direct competition from a significant number of
independent providers of information products and services, including
information that can be found on the Internet free of charge. We also compete
indirectly against consulting firms and other information providers, including
electronic and print media companies, some of which may have greater financial,
information gathering and marketing resources than we do. These indirect
competitors could choose to compete directly with us in the future. In addition,
limited barriers to entry exist in the markets in which we do business. As a
result, additional new competitors may emerge and existing competitors may start
to provide additional or complementary services. Additionally, technological
advances may provide increased competition from a variety of sources. However,
we believe the breadth and depth of our research assets position us well versus
our competition. Increased competition may result in loss of market share,
diminished value in our products and services, reduced pricing and increased
marketing expenditures. We may not be successful if we cannot compete
effectively on quality of research and analysis, timely delivery of information,
customer service, the ability to offer products to meet changing market needs
for information and analysis, or price.
Renewal of Research Business by Existing Clients. Some of our success depends on
renewals of our subscription-based research products and services, which
constituted 54% of our revenues for Calendar 2003. These research subscription
agreements have terms that generally range from twelve to thirty months. Our
ability to maintain contract renewals is subject to numerous factors, including
those described in this Annual Report. Additionally, as we implement our
strategy to realign our business to client needs, we may shift the type and
10-K.23
pricing of our products which may impact client renewal rates. While client
retention rates were 78% at December 31, 2003 and 74% at December 31, 2002,
there can be no guarantee that we will continue to have this level of client
renewals. Any material decline in renewal rates could have an adverse impact on
our revenues and our financial condition.
Non-Recurring Consulting Engagements. Consulting segment revenues constituted
30% of our revenues for Calendar 2003. These consulting engagements typically
are project-based and non-recurring. Our ability to replace consulting
engagements is subject to numerous factors, including those described in this
Annual Report. Any material decline in our ability to replace consulting
arrangements could have an adverse impact on our revenues and our financial
condition.
Restructuring, Reorganization and Management Team. Our future success depends,
in significant part, upon the continued service and performance of our senior
management and other key personnel. We have recently reorganized our business
around specific client needs. As part of this reorganization, a number of key
management positions have been filled by the promotion of current employees or
the hiring of new employees. As part of this reorganization, we have
restructured our workforce in order to streamline operations and strengthen key
consulting practices. If the reorganization and restructuring of our business do
not lead to the results we expect, our ability to effectively deliver our
products, manage our company and carry out our business plan may be impaired.
Hiring and Retention of Employees. Our success depends heavily upon the quality
of our senior management, research analysts, consultants, sales and other key
personnel. We face competition for the limited pool of these qualified
professionals from, among others, technology companies, market research firms,
consulting firms, financial services companies and electronic and print media
companies, some of which have a greater ability to attract and compensate these
professionals. Some of the personnel that we attempt to hire are subject to
non-compete agreements that could impede our short-term recruitment efforts. Any
failure to retain key personnel or hire and train additional qualified personnel
as required to support the evolving needs of clients or growth in our business,
could adversely affect the quality of our products and services, and therefore,
our future business and operating results.
Maintenance of Existing Products and Services. We operate in a rapidly evolving
market, and our success depends upon our ability to deliver high quality and
timely research and analysis to our clients. Any failure to continue to provide
credible and reliable information that is useful to our clients could have a
material adverse effect on future business and operating results. Further, if
our predictions prove to be wrong or are not substantiated by appropriate
research, our reputation may suffer and demand for our products and services may
decline. In addition, we must continue to improve our methods for delivering our
products and services in a cost-effective manner. Failure to increase and
improve our electronic delivery capabilities could adversely affect our future
business and operating results.
Introduction of New Products and Services. The market for our products and
services is characterized by rapidly changing needs for information and
analysis. To maintain our competitive position, we must continue to enhance and
improve our products and services, develop or acquire new products and services
in a timely manner, and appropriately position and price new products and
services relative to the marketplace and our costs of producing them. Any
failure to achieve successful client acceptance of new products and services
could have a material adverse effect on our business, results of operations or
financial position.
International Operations. A substantial portion of our revenues is derived from
sales outside of North America, 38% for Calendar 2003. As a result, our
operating results are subject to the risks inherent in international business
activities, including general political and economic conditions in each country,
changes in market demand as a result of exchange rate fluctuations and tariffs
and other trade barriers, challenges in staffing and managing foreign
operations, changes in regulatory requirements, compliance with numerous foreign
laws and regulations, different or overlapping tax structures, higher levels of
United States taxation on foreign income, and the difficulty of enforcing client
agreements, collecting accounts receivable and protecting intellectual property
rights in international jurisdictions. We rely on local distributors or sales
agents in some international locations. If any of
10-K.24
these arrangements are terminated by our agent or us, we may not be able to
replace the arrangement on beneficial terms or on a timely basis, or clients of
the local distributor or sales agent may not want to continue to do business
with us or our new agent.
Branding. We believe that our "Gartner" brand is critical to our efforts to
attract and retain clients and that the importance of brand recognition will
increase as competition increases. We may expand our marketing activities to
promote and strengthen the Gartner brand and may need to increase our marketing
budget, hire additional marketing and public relations personnel, expend
additional sums to protect the brand and otherwise increase expenditures to
create and maintain client brand loyalty. If we fail to effectively promote and
maintain the Gartner brand, or incur excessive expenses in doing so, our future
business and operating results could be materially and adversely impacted.
Indebtedness. We have a $200.0 million senior revolving credit facility under
which we can incur significant additional indebtedness, although there were no
amounts outstanding at December 31, 2003. The affirmative, negative and
financial covenants of this debt facility could limit our future financial
flexibility. As a result of these covenants, our borrowing availability at
December 31, 2003 was $184.0 million. The associated debt service costs could
impair future operating results. Any outstanding debt may limit the amount of
cash or additional credit available to us, which could restrain our ability to
expand or enhance products and services, respond to competitive pressures or
pursue future business opportunities requiring substantial investments of
additional capital.
Organizational and Product Integration Related to Acquisitions. We have made and
may continue to make acquisitions of, or significant investments in, businesses
that offer complementary products and services. The risks involved in each
acquisition or investment include the possibility of paying more than the value
we derive from the acquisition, dilution of the interests of our current
stockholders or decreased working capital, increased indebtedness, the
assumption of undisclosed liabilities and unknown and unforeseen risks, the
ability to integrate successfully the operations and personnel of the acquired
business, the ability to retain key personnel of the acquired company, the time
to train the sales force to market and sell the products of the acquired
company, the potential disruption of our ongoing business and the distraction of
management from our business. The realization of any of these risks could
adversely affect our business.
Enforcement of Our Intellectual Property Rights. We rely on a combination of
copyright, patent, trademark, trade secret, confidentiality, non-compete and
other contractual provisions to protect our intellectual property rights.
Despite our efforts to protect our intellectual property rights, unauthorized
third parties may obtain and use technology or other information that we regard
as proprietary. Our intellectual property rights may not survive a legal
challenge to their validity or provide significant protection for us. The laws
of certain countries do not protect our proprietary rights to the same extent as
the laws of the United States. Accordingly, we may not be able to protect our
intellectual property against unauthorized third-party copying or use, which
could adversely affect our competitive position. Our employees are subject to
non-compete agreements. When the non-competition period expires, former
employees may compete against us. If a former employee chooses to compete
against us prior to the expiration of the non-competition period, there is no
assurance that we will be successful in our efforts to enforce the non-compete
provision.
Possibility of Infringement Claims. Third parties may assert infringement claims
against us. Regardless of the merits, responding to any such claim could be time
consuming, result in costly litigation and require us to enter into royalty and
licensing agreements which may not be offered or available on reasonable terms.
If a successful claim is made against us and we fail to develop or license a
substitute technology, our business, results of operations or financial position
could be materially adversely affected.
Potential Fluctuations in Operating Results. Our quarterly and annual operating
income may fluctuate in the future as a result of many factors, including the
timing of the execution of research contracts, which typically occurs in the
fourth calendar quarter, the extent of completion of consulting engagements, the
timing of symposia and other events, which also occur to a greater extent in the
fourth calendar quarter, the amount of new business generated, the mix of
domestic and international business, changes in market demand for our products
and services, the
10-K.25
timing of the development, introduction and marketing of new products and
services, and competition in the industry. An inability to generate sufficient
earnings and cash flow, and achieve our forecasts, may impact our operating and
other activities. The potential fluctuations in our operating income could cause
period-to-period comparisons of operating results not to be meaningful and may
provide an unreliable indication of future operating results.
Significant Stockholder. Silver Lake Partners, L.P. ("SLP") and its affiliates
own approximately 45.9% of our outstanding Class A Common Stock and
approximately 36.1% on a combined basis with our outstanding Class B Common
Stock as of December 31, 2003. Currently, the owners of our Class A Common Stock
are only entitled to vote for two of the ten members of our Board of Directors
and vote together with the holders of the Class B Common Stock as a single class
on all other matters coming before the stockholders. SLP is restricted from
purchasing additional stock without our consent pursuant to the terms of a
Securityholders' Agreement. This Securityholders' Agreement also provides that
we cannot take certain actions, including acquisitions and sales of stock and/or
assets without SLP's consent. While SLP does not hold a majority of our
outstanding shares, it may be able to exercise significant influence over
matters requiring stockholder approval, including the election of directors and
the approval of mergers, consolidations and sales of our assets. SLP's interests
may differ from the interests of other stockholders.
Anti-takeover Protections. Provisions of our certificate of incorporation and
bylaws and Delaware law may make it difficult for any party to acquire control
of us in a transaction not approved by the requisite number of directors. These
provisions include:
o The presence of a classified board of directors;
o The existence of two classes of common stock with our Class B Common Stock
having the ability to elect 80% of our Board of Directors
o The ability of the Board of Directors to issue and determine the terms of
preferred stock;
o Advance notice requirements for inclusion of stockholder proposals at
stockholder meetings; and
o The anti-takeover provisions of Delaware law.
These provisions could delay or prevent a change of control or change in
management that might provide stockholders with a premium to the market price of
their Common Stock.
RECENTLY ISSUED ACCOUNTING STANDARDS
None.
10-K.26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
As of December 31, 2003, we have limited exposure to market risk for changes in
interest rates since our long-term debt was converted to equity during the
fourth quarter of Calendar 2003. Additionally, we have no borrowings under our
$200.0 million unsecured senior revolving credit facility with JPMorgan Chase
Bank. Under the revolving credit facility, the interest rate on borrowings is
LIBOR plus an additional 100 to 200 basis points based on our debt-to-EBITDA
ratio. We believe that an increase or decrease of 10% in the effective interest
rate on available borrowings from our senior revolving credit facility, if fully
utilized, would not have a material effect on our future results of operations.
Each 25 basis point increase or decrease in interest rates would have an
approximate $0.5 million annual effect under the revolving credit facility if
fully utilized.
Investment Risk
We are exposed to market risk as it relates to changes in the market value of
our equity investments. We invest in equity securities of public and private
companies directly and through SI I, a wholly-owned affiliate, and SI II, of
which we own 34%. SI I and SI II are engaged in making venture capital
investments in early to mid-stage IT-based or Internet-enabled companies (see
Note 4 - Investments in the Notes to the Consolidated Financial Statements). As
of December 31, 2003, we had investments in equity securities totaling $10.9
million. Unrealized gains and losses were insignificant. These investments are
inherently risky as the businesses are typically in early development stages and
may never develop. Further, certain of these investments are in publicly traded
companies whose shares are subject to significant market price volatility.
Adverse changes in market conditions and poor operating results of the
underlying investments may result in us incurring additional losses or an
inability to recover the original carrying value of our investments. If there
were a 100% adverse change in the value of our equity portfolio as of December
31, 2003, this would result in a non-cash impairment charge of $10.9 million.
Additionally, we have a commitment to fund an additional $4.0 million of
investments with SI II.
Foreign Currency Exchange Risk
We face two risks related to foreign currency exchange: translation risk and
transaction risk. Amounts invested in our foreign operations are translated into
U.S. dollars at the exchange rates in effect at the balance sheet date. The
resulting translation adjustments are recorded as a component of accumulated
other comprehensive income (loss) in the stockholders' equity (deficit) section
of the Consolidated Balance Sheets. Our foreign subsidiaries generally collect
revenues and pay expenses in currencies other than the United States dollar.
Since the functional currencies of our foreign operations are generally
denominated in the local currency of our subsidiaries, the foreign currency
translation adjustments are reflected as a component of stockholders' equity and
do not impact operating results. Revenues and expenses in foreign currencies
translate into higher or lower revenues and expenses in U.S. dollars as the U.S.
dollar weakens or strengthens against other currencies. Therefore, changes in
exchange rates may negatively affect our consolidated revenues and expenses (as
expressed in U.S. dollars) from foreign operations. Currency transaction gains
or losses arising from transactions in currencies other than the functional
currency are included within Other income (expense), net within the Consolidated
Statements of Operations. Currency transaction gains (losses), net were $0.5
million during Calendar 2003, $(0.4) million during Calendar, 2002, $(0.1)
million during Transition 2002, $(0.8) million during Fiscal 2002, and $(3.5)
million during Fiscal 2001.
From time to time we enter into foreign currency forward exchange contracts or
other derivative financial instruments to hedge the effects of adverse
fluctuations in foreign currency exchange rates. At December 31, 2003, we had
one foreign currency forward contract outstanding. Foreign exchange forward
contracts are reflected at fair value with gains and losses recorded currently
in earnings.
The following table presents information about our foreign currency forward
contract outstanding as of December 31, 2003, expressed in U.S. dollar
equivalents.
Contract Amount Forward Unrealized Loss
Currency Purchased Currency Sold (in thousands) Exchange Rate (in thousands) Expiration Date
- -------------------------------------------------------------------------------------------------------------------
Euros U.S. Dollars $2,000 1.2499 $-- January 26, 2004
10-K.27
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements and schedule supporting such consolidated
financial statements for Calendar 2003, Transition 2002 and for each of the
fiscal years in the two-year period ended September 30, 2002, together with the
reports of KPMG LLP, independent auditors, dated February 5, 2004, are included
in this Annual Report on Form 10-K beginning on Page 31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
We have established disclosure controls and procedures that are designed to
ensure that the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934, as amended (the "Act"), is recorded,
processed, summarized and reported in a timely manner. Specifically, these
controls and procedures ensure that the information is accumulated and
communicated to our executive management team, including our chief executive
officer and our chief financial officer, to allow timely decisions regarding
required disclosure.
Management conducted an evaluation, as of December 31, 2003, of the
effectiveness and design of our disclosure controls and procedures, under the
supervision and with the participation of our chief executive officer and chief
financial officer. Based upon that evaluation, our chief executive officer and
chief financial officer have concluded that our disclosure controls and
procedures are effective in alerting them in a timely manner to material Company
information required to be disclosed by us in reports filed under the Act.
In addition, there have been no significant changes in our internal control over
financial reporting during the quarter ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
10-K.28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be furnished pursuant to this item will be set forth
under the captions "Proposal One: Election of Directors," "Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Definitive
Proxy Statement to be filed no later than April 30, 2004. If the Proxy Statement
is not filed with the Commission by April 30, 2003, such information will be
included in an amendment to this Annual Report filed by April 30, 2004.
ITEM 11. EXECUTIVE COMPENSATION.
The information required to be furnished pursuant to this item is incorporated
by reference from the information set forth under the caption "Executive
Compensation" in the Proxy Statement or if the Proxy Statement is not filed with
the Commission by April 30, 2004, such information will be included in an
amendment to this Annual Report filed by April 30, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required to be furnished pursuant to this item will be set forth
under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement or if the Proxy Statement is not filed with
the Commission by April 30, 2004, such information will be included in an
amendment to this Annual Report filed by April 30, 2004.
The following table provides information as of December 31, 2003 regarding the
number of shares of our Class A Common Stock that may be issued under our equity
compensation plans.
Column C
Number of Securities
Column A Column B Remaining Available
Number of Securities Weighted-Average for Future Issuance
to be Issued Upon Exercise Price of Under Equity
Exercise of Outstanding Compensation Plans
Outstanding Options, Options, Warrants (Excluding Securities
Plan Category Warrants and Rights and Rights in Column A)
- ---------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans Approved by Stockholders
Stock option plans 15,902,853(1) $14.24 7,515,897(2)
2002 Employee Stock Purchase Plan -- N/A 3,177,373
Equity Compensation Plans Not Approved by
Stockholders 15,623,354(3) 10.16 --
-------------------------------------------------------------------
Total 31,526,207 $12.21 10,693,270
===================================================================
(1) Consists of the 1991 Stock Option Plan, the 1993 Directors Stock Option
Plan, the 1994 Long-Term Option Plan, the 1996 Long-Term Option Plan, the
1998 Long Term Stock Option Plan and the 2003 Long Term Incentive Plan.
(2) Consists of the 2003 Long-Term Incentive Plan.
(3) Consists of the 1999 Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required to be furnished pursuant to this item will be set forth
under the caption "Certain Relationships and Transactions" in the Proxy
Statement or if the Proxy Statement is not filed with the Commission by April
30, 2004, such information will be included in an amendment to this Annual
Report filed by April 30, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required to be furnished pursuant to this item will be set forth
under the caption "Principal Accountant Fees and Services" in the Proxy
Statement or if the Proxy Statement is not filed with the Commission by April
30, 2004, such information will be included in an amendment to this Annual
Report filed by April 30, 2004.
10-K.29
PART IV
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM
8-K.
(a) 1. and 2. Consolidated Financial Statements and Schedules
The independent auditors' report, consolidated financial statements and
financial statement schedule listed in the Index to Consolidated Financial
Statements and Schedule on page 31 hereof are filed as part of this report.
All other financial statement schedules not listed in the Index have been
omitted because the information required is not applicable or is shown in the
financial statements or notes thereto.
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------------------------------------------------------------------------------------------------------------------------
3.1a(5) Amended and Restated Certificate of Incorporation-July 16, 1999.
3.1b(6) Certificate of Amendment of the Restated Certificate of Incorporation-February 1, 2001.
3.1c(4) Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and
Series B Junior Participating Preferred Stock of the Company-March 1, 2000.
3.2(5) Amended Bylaws, as amended through April 14, 2000.
4.1(6) Form of Certificate for Common Stock, Class A-as of February 2001.
4.2(6) Form of Certificate for Common Stock, Class B-as of February 2001.
4.3(8) Amended and Restated Rights Agreement, dated as of August 31, 2002, between the Company and Mellon
Investor Services LLC, as Rights Agent, with related Exhibits.
4.4a(6) Amended and Restated Credit Agreement dated July 17, 2000 by and among the Company and certain financial
institutions, including Chase Manhattan Bank in its capacity as a lender and as agent for the lenders.
4.4b(8) Amendment No. 3 to the Amended and Restated Credit Agreement dated as of May 30, 2002.
4.4c(12) Amendment No. 4 to the Amended and Restated Credit Agreement dated as of March 31, 2003.
4.4d(13) Amendment No. 5 to the Amended and Restated Credit Agreement dated as of June 30, 2003.
10.1(1) Form of Indemnification Agreement.
10.2e(8) Amended and Restated Securityholders Agreement dated as of July 12, 2002 among the Company, Silver Lake
Partners, L.P. and other parties thereto.
10.3a(2) Lease dated December 29, 1994 between Soundview Farms and the Company for premises at 56 Top Gallant
Road, 70 Gatehouse Road, and 88 Gatehouse Road, Stamford, Connecticut.
10.3b(3) Lease dated May 16, 1997 between Soundview Farms and the Company for premises at 56 Top Gallant Road,
70 Gatehouse Road, 88 Gatehouse Road and 10 Signal Road, Stamford, Connecticut (amendment to lease dated
December 29, 1994, see exhibit 10.3a).
10.4(5)+ 1993 Director Stock Option Plan as amended and restated on April 14, 2000.
10.5a(13) 2002 Employee Stock Purchase Plan, as Amended and Restated February 5, 2003.
10.6(3)+ 1994 Long Term Stock Option Plan, as amended and restated on October 12, 1999.
10.7(3)+ 1998 Long Term Stock Option Plan, as amended and restated on October 12, 1999.
10.8(3)+ 1996 Long Term Stock Option Plan, as amended and restated on October 12, 1999.
10.9(10)+ 1999 Stock Option Plan
10.10(9)+ 2003 Long-Term Incentive Plan
10.11(8)+ Employment Agreement between Michael D. Fleisher and the Company as of October 1, 2002.
10.12(8)+ Employment Agreement between Maureen O'Connell and the Company dated as of October 15, 2002 and
effective as of September 23, 2002.
10.15(11)+ Employment agreement between Zachary Morowitz and the Company dated as of January 20, 2003.
21.1* Subsidiaries of Registrant.
23.1* Independent Auditors' Consent.
24.1 Power of Attorney (see Signature Page).
31.1* Certification of chief executive officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of chief financial officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32* Certification under Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed with this document.
+ Management compensation plan or arrangement.
- ------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-67576), as amended, effective October 4, 1993.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed on December 21, 1995, SEC File No. 000-15144.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K
filed on December 22, 1999.
(4) Incorporated by reference from the Company's Form 8-K dated March 1, 2000
as filed on March 7, 2000.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed on December 29, 2000.
10-K.30
(6) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed on December 28, 2001.
(7) Incorporated by reference from the Company's Form 10-Q as filed on February
13, 2002.
(8) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed on December 29, 2002.
(9) Incorporated by reference from the Company's Proxy Statement for its annual
meeting dated February 13, 2003.
(10) Incorporated by reference from the Company's Form S-8 as filed on February
16, 2002.
(11) Incorporated by reference from the Company's Transition Report on Form
10-KT as filed on March 31, 2003.
(12) Incorporated by reference from the Company's Form 10-Q as filed on May 15,
2003.
(13) Incorporated by reference from the Company's Form 10-Q as filed on August
14, 2003.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the last quarter of
the year ended December 31, 2003:
1. Report on Form 8-K dated October 1, 2003 regarding the appointments of
Maureen O'Connell as president and chief operating officer and Chris Lafond
as executive vice president and chief financial officer.
2. Report on Form 8-K dated October 9, 2003 regarding the conversion of $300
million of original aggregate principal amount of 6% convertible
subordinated notes into approximately 49.4 million shares of our Class A
Common Stock.
3. Report on Form 8-K dated October 30, 2003 to furnish the Company's press
release issued October 30, 2003, with respect to financial results for
Gartner, Inc. for the quarter ended September 30, 2003.
4. Report on Form 8-K dated December 5, 2003 regarding a staff reduction and
related accounting charge.
10-K.31
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
GARTNER, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Report by Management 32
Independent Auditors' Report 33
Consolidated Balance Sheets as of December 31, 2003 and 2002 and September 30, 2002 34
Consolidated Statements of Operations for the Years Ended December 31, 2003 and 2002 (Unaudited), the 35
Three Month Period Ended December 31, 2002, and the Years Ended September 30, 2002 and 2001
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) for the 36
Year Ended December 31, 2003, the Three Month Period Ended December 31, 2002 and for the Years Ended
September 30, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and 2002 (Unaudited), the 37
Three Month Period Ended December 31, 2002, and the Years Ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements 38
Schedule II - Valuation and Qualifying Accounts for the Year Ended December 31, 2003, the Three Month Period Ended 57
December 31, 2002, and the Years Ended September 30, 2002 and 2001
10-K.32
Report by Management
Management's Responsibility for Financial Reporting
Management has prepared and is responsible for the integrity and objectivity of
the consolidated financial statements and related information included in the
Annual Report. The consolidated financial statements, which include amounts
based on management's best judgments and estimates, were prepared in conformity
with accounting principles generally accepted in the United States of America.
Financial information elsewhere in this Annual Report is consistent with that in
the consolidated financial statements.
The Company maintains a system of internal controls designed to provide
reasonable assurance at reasonable cost that assets are safeguarded and
transactions are properly executed and recorded for the preparation of reliable
financial information. The internal control system is augmented with written
policies and procedures, an organizational structure providing division of
responsibilities, careful selection and training of qualified financial people
and a program of periodic audits performed by both an internal audit department
and independent auditors.
The Audit Committee of the Board of Directors, composed solely of non-employee
directors, meets regularly with management, internal auditors and our
independent accountants to ensure that each is meeting its responsibilities and
to discuss matters concerning internal controls and financial reporting. Both
the independent and internal auditors have unrestricted access to the Audit
Committee.
/s/ Michael D. Fleisher
Michael D. Fleisher
Chairman of the Board and Chief Executive Officer
/s/ Christopher Lafond
Christopher Lafond
Chief Financial Officer
10-K.33
Independent Auditors' Report
The Board of Directors and Stockholders
Gartner, Inc.:
We have audited the consolidated financial statements of Gartner, Inc. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gartner, Inc. and
subsidiaries as of December 31, 2003 and 2002, and September 30, 2002, and the
results of their operations and their cash flows for the year ended December 31,
2003, the three-month period ended December 31, 2002, and each of the years in
the two-year period ended September 30, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note 1, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" in the year ended
September 30, 2002.
/s/ KPMG LLP
New York, New York
February 5, 2004
10-K.34
GARTNER, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
----------------------------- September 30,
2003 2002 2002
----------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 229,962 $ 109,657 $ 124,793
Fees receivable, net of allowances of $9,000, $7,000, and $7,000,
respectively 266,122 283,068 264,843
Deferred commissions 27,751 25,016 26,366
Prepaid expenses and other current assets 25,642 24,201 32,636
----------------------------------------------
Total current assets 549,477 441,942 448,638
Property, equipment and leasehold improvements, net 66,541 71,006 76,161
Goodwill 230,387 223,860 222,427
Intangible assets, net 985 2,254 2,731
Other assets 69,874 71,018 68,498
----------------------------------------------
Total assets $ 917,264 $ 810,080 $ 818,455
==============================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 175,609 $ 134,667 $ 123,969
Deferred revenues 315,524 305,887 306,978
----------------------------------------------
Total current liabilities 491,133 440,554 430,947
Convertible debt -- 351,539 346,300
Other liabilities 50,385 46,688 46,098
----------------------------------------------
Total liabilities 541,518 838,781 823,345
Commitments and contingencies (see note 8)
Stockholders' equity (deficit):
Preferred stock:
$.01 par value, authorized 5,000,000 shares; none issued or outstanding -- -- --
Common stock
$.0005 par value, authorized 166,000,000 shares of Class A Common
Stock and 84,000,000 shares of Class B Common Stock; issued
102,436,100 shares of Class A Common Stock (80,106,020 and
79,986,681 at December 31, 2002 and September 30, 2002) and
40,689,648 shares of Class B Common Stock at December 31, 2003
and 2002 and at September 30, 2002 72 60 60
Additional paid-in capital 408,504 368,090 366,723
Unearned compensation, net (1,846) (3,069) (3,467)
Accumulated other comprehensive income (loss), net 1,530 (11,392) (14,085)
Accumulated earnings 173,936 150,243 164,661
Treasury stock, at cost, 669,837 shares of Class A Common Stock
(29,158,443 and 28,210,725 at December 31, 2002 and September 30,
2002) and 12,456,605 shares of Class B Common Stock (10,907,120
and 10,453,520 at December 31, 2002 and September 30, 2002) (206,450) (532,633) (518,782)
----------------------------------------------
Total stockholders' equity (deficit) 375,746 (28,701) (4,890)
----------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 917,264 $ 810,080 $ 818,455
==============================================
See Notes to Consolidated Financial Statements.
10-K.35
GARTNER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, Fiscal Year September 30,
------------------------- Transition ------------------------
2003 2002 2002 2002 2001
-----------------------------------------------------------------
Revenues: Unaudited
Research $ 466,907 $ 486,967 $ 120,038 $ 496,403 $ 535,114
Consulting 258,628 276,059 58,098 273,692 276,292
Events 119,355 109,694 47,169 121,991 132,684
Other 13,556 14,873 4,509 15,088 18,794
-----------------------------------------------------------------
Total revenues 858,446 887,593 229,814 907,174 962,884
Costs and expenses:
Cost of services and product development 410,666 396,489 108,600 403,718 450,471
Selling, general and administrative 333,283 346,495 90,306 345,382 370,096
Depreciation 36,045 43,726 11,146 42,504 40,873
Amortization of intangibles and goodwill 1,275 1,929 482 1,949 12,367
Other charges 29,716 49,412 32,166 17,246 46,563
-----------------------------------------------------------------
Total costs and expenses 810,985 838,051 242,700 810,799 920,370
-----------------------------------------------------------------
Operating income (loss) 47,461 49,542 (12,886) 96,375 42,514
Gain (loss) on investments, net 4,740 (4,137) (1,688) (1,578) (27,457)
Interest income 2,296 1,968 635 1,845 1,616
Interest expense (19,402) (23,206) (5,942) (22,869) (22,391)
Other income (expense), net 461 117 (141) (170) (3,674)
-----------------------------------------------------------------
Income (loss) before income taxes 35,556 24,284 (20,022) 73,603 (9,392)
Provision (benefit) for income taxes 11,863 9,167 (5,604) 25,025 (9,172)
-----------------------------------------------------------------
Income (loss) from continuing operations 23,693 15,117 (14,418) 48,578 (220)
Discontinued operation, net of taxes:
Loss from discontinued operation -- -- -- -- (26,059)
Loss on disposal of discontinued operation -- -- -- -- (39,924)
-----------------------------------------------------------------
Loss from discontinued operation -- -- -- -- (65,983)
-----------------------------------------------------------------
Net income (loss) $ 23,693 $ 15,117 $ (14,418) $ 48,578 $ (66,203)
=================================================================
Net income (loss) per share:
Basic:
Income (loss) from continuing operations $ 0.26 $ 0.18 $ (0.18) $ 0.58 $ (0.00)
Loss from discontinued operation -- -- -- -- (0.30)
Loss on disposal of discontinued operation -- -- -- -- (0.47)
-----------------------------------------------------------------
Net income (loss) $ 0.26 $ 0.18 $ (0.18) $ 0.58 $ (0.77)
=================================================================
Diluted:
Income (loss) from continuing operations $ 0.26 $ 0.18 $ (0.18) $ 0.47 $ (0.00)
Loss from discontinued operation -- -- -- -- (0.30)
Loss on disposal of discontinued operation -- -- -- -- (0.47)
-----------------------------------------------------------------
Net income (loss) $ 0.26 $ 0.18 $ (0.18) $ 0.47 $ (0.77)
=================================================================
Weighted average shares outstanding:
Basic 91,123 83,329 81,379 83,586 85,862
Diluted 92,579 85,040 81,379 130,882 85,862
See Notes to Consolidated Financial Statements.
10-K.36
GARTNER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated
Other Total
Additional Unearned Comprehensive Stockholders'
Common Paid-In Compensation Income (Loss), Accumulated Treasury Equity
Stock Capital Net Net Earnings Stock (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $ 59 $ 333,828 $ (6,451) $ (1) $ 182,286 $ (434,901) $ 74,820
Comprehensive loss
Net loss -- -- -- -- (66,203) -- (66,203)
Other comprehensive loss
Foreign currency translation adjustments -- -- -- 1,627 -- -- 1,627
Net unrealized loss on investments, net of
tax of $12,811 -- -- -- (16,587) -- -- (16,587)
-------- --------
Other comprehensive loss -- -- -- (14,960) -- -- (14,960)
--------
Comprehensive loss (81,163)
Issuances under stock plans -- 9,024 -- -- -- 15 9,039
Tax benefits of employee stock transactions -- 1,331 -- -- -- -- 1,331
Net settlement on forward purchase
agreement -- (73) -- -- -- 9 (64)
Purchase of shares for treasury stock -- -- -- -- -- (37,893) (37,893)
Elimination of minority interest from sale of
discontinued operation -- (2,056) -- -- -- -- (2,056)
Exercise of options on subsidiary stock -- 56 -- -- -- 56
Stock compensation (net of forfeitures) -- 106 1,306 -- -- -- 1,412
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 59 342,216 (5,145) (14,961) 116,083 (472,770) (34,518)
Comprehensive income
Net income -- -- -- -- 48,578 -- 48,578
Other comprehensive income
Foreign currency translation adjustments -- -- -- (69) -- -- (69)
Net unrealized gain on investments, net of
tax of $630 -- -- -- 945 -- -- 945
-------- --------
Other comprehensive income -- -- -- 876 -- -- 876
--------
Comprehensive income 49,454
Issuances under stock plans 1 21,130 -- -- -- 1,035 22,166
Tax benefits of employee stock transactions -- 2,280 -- -- -- -- 2,280
Purchase of shares for treasury stock -- -- -- -- -- (47,047) (47,047)
Stock compensation (net of forfeitures) -- 1,097 1,678 -- -- -- 2,775
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 60 366,723 (3,467) (14,085) 164,661 (518,782) (4,890)
Comprehensive loss
Net loss -- -- -- -- (14,418) -- (14,418)
Other comprehensive income
Foreign currency translation adjustments -- -- -- 2,668 -- -- 2,668
Net unrealized gain on investments, net of
tax of $17 -- -- -- 25 -- -- 25
-------- --------
Other comprehensive income -- -- -- 2,693 -- -- 2,693
--------
Comprehensive loss (11,725)
Issuances under stock plans -- 1,016 -- -- -- 29 1,045
Tax benefits of employee stock transactions -- (199) -- -- -- -- (199)
Purchase of shares for treasury stock -- -- -- -- -- (13,880) (13,880)
Stock compensation (net of forfeitures) -- 550 398 -- -- -- 948
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 60 368,090 (3,069) (11,392) 150,243 (532,633) (28,701)
Comprehensive income
Net income -- -- -- -- 23,693 -- 23,693
Other comprehensive income
Foreign currency translation adjustments -- -- -- 12,790 -- -- 12,790
Net unrealized gain on investments, net of
tax of $55 -- -- -- 132 -- -- 132
-------- --------
Other comprehensive income -- -- -- 12,922 -- -- 12,922
--------
Comprehensive income 36,615
Issuances under stock plans 3 39,662 -- -- 1,991 41,656
Tax benefits of employee stock transactions 3,930 -- -- -- -- 3,930
Purchase of shares for treasury stock -- -- -- -- -- (43,434) (43,434)
Conversion of debt into shares of Class A
Common Stock 9 (3,027) -- -- -- 367,626 364,608
Stock compensation (net of forfeitures) -- (151) 1,223 -- -- -- 1,072
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 72 $ 408,504 $ (1,846) $ 1,530 $ 173,936 $ (206,450) $ 375,746
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
10-K.37
GARTNER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31, Fiscal Year September 30,
----------------------- Transition -------------------------
2003 2002 2002 2002 2001
------------------------------------------------------------------
Operating activities: Unaudited
Net income (loss) $ 23,693 $ 15,117 $ (14,418) $ 48,578 $(66,203)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss from discontinued operation -- -- -- -- 65,983
Depreciation and amortization of intangibles and
goodwill 37,320 45,655 11,628 44,453 53,240
Non-cash compensation 1,072 3,286 866 2,720 1,151
Tax benefit associated with employee exercise of stock
options 3,930 1,579 (199) 2,280 1,331
Deferred taxes (4,567) (4,139) (7,383) 4,066 (34,973)
(Gain) loss from investments and sales of assets, net (4,740) 3,644 1,688 1,085 27,457
Accretion of interest and amortization of debt issue
costs 18,649 22,430 5,734 22,116 20,802
Non-cash charges associated with impairment of long-
lived assets -- 2,083 659 1,424 18,888
Changes in assets and liabilities, excluding the effects
of acquisitions and discontinued operation:
Fees receivable, net 29,980 42,686 (13,748) 40,299 24,671
Deferred commissions (1,689) 15,602 1,616 9,046 11,902
Prepaid expenses and other current assets 3,829 13,790 1,129 26,069 (26,039)
Other assets (937) 5,858 (673) 1,930 (2,401)
Deferred revenues (4,467) (33,259) (5,683) (50,886) (35,488)
Accounts payable and accrued liabilities 34,264 11,494 19,937 (7,628) 13,147
------------------------------------------------------------------
Cash provided by operating activities 136,337 145,826 1,153 145,552 73,468
------------------------------------------------------------------
Investing activities:
Proceeds from insurance recovery 5,464 -- -- -- --
Purchases of businesses -- (3,858) -- (4,537) (12,011)
Proceeds from sale of investments and assets -- 239 -- 6,264 14,437
Investments (1,960) (1,508) -- (1,508) --
Additions to property, equipment and leasehold
improvements (28,928) (21,124) (5,866) (19,639) (57,546)
Net proceeds from sale of discontinued operation -- -- -- -- 10,501
------------------------------------------------------------------
Cash used in investing activities (25,424) (26,251) (5,866) (19,420) (44,619)
------------------------------------------------------------------
Financing activities:
Proceeds from stock issued for stock plans 41,655 17,925 1,045 22,166 9,095
Proceeds from issuance of debt -- -- -- -- 15,000
Payments on debt -- -- -- (15,000) --
Payments for debt issuance and debt conversion costs (1,182) (238) -- (238) (5,000)
Net cash settlement on forward purchase agreement -- -- -- -- (64)
Purchases of treasury stock (43,434) (59,880) (13,880) (47,047) (37,893)
------------------------------------------------------------------
Cash used in financing activities (2,961) (42,193) (12,835) (40,119) (18,862)
------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 107,952 77,382 (17,548) 86,013 9,987
Cash used by discontinued operation -- -- -- -- (34,203)
Effects of exchange rates on cash and cash equivalents 12,353 4,844 2,412 1,652 (354)
Cash and cash equivalents, beginning of period 109,657 27,431 124,793 37,128 61,698
------------------------------------------------------------------
Cash and cash equivalents, end of period $229,962 $ 109,657 $ 109,657 $ 124,793 $ 37,128
==================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 753 $ 667 $ 159 $ 753 $ 1,589
Income taxes, net of refunds received of $744 during
Calendar 2003, $17,589 during Calendar 2002 and
$26,650 for Fiscal 2002 $ 12,174 $ 2,733 $ 5,105 $ (7,614) $ 14,729
Supplemental schedule of non-cash investing and
financing activities:
Conversion of convertible debt to shares of Class A
Common Stock $364,608 $ -- $ -- $ -- $ --
Accretion of interest and debt discount on convertible
debt $ 16,456 $ 20,401 $ 5,239 $ 20,100 $ 18,946
See Notes to Consolidated Financial Statements.
10-K.38
GARTNER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. On October 30, 2002, we announced that the Board of
Directors approved a change of our fiscal year end from September 30 to December
31, effective January 1, 2003. This change resulted in a three-month
transitional period ending December 31, 2002. References to Transition 2002,
unless otherwise indicated, refer to the three-month transitional period ended
December 31, 2002. References to Fiscal 2002 and Fiscal 2001, unless otherwise
indicated, are to the respective fiscal year period from October 1 through
September 30. References to Calendar 2003 and Calendar 2002, unless otherwise
indicated, are to the respective twelve-month period from January 1 through
December 31. The unaudited financial information for the twelve months ended
December 31, 2002 is presented for comparative purposes. Certain prior year
amounts have been reclassified to conform to the current year presentation. When
used in these notes, the terms "Company," "we," "us," or "our" mean Gartner,
Inc. and its subsidiaries.
Principles of consolidation. The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Investments in
companies in which we own less than 50% but have the ability to exercise
significant influence over operating and financial policies are accounted for
using the equity method. All other investments for which we do not have the
ability to exercise significant influence are accounted for under the cost
method of accounting. The results of operations for acquisitions of companies
accounted for using the purchase method have been included in the Consolidated
Statements of Operations beginning on the closing date of acquisition.
Revenues and commission expense recognition. We typically enter into annually
renewable subscription contracts for research products. Revenues from research
products are deferred and recognized ratably over the applicable contract terms.
The majority of research contracts are billable upon signing, absent special
terms granted on a limited basis from time to time. All research contracts are
non-cancelable and non-refundable, except for government contracts that have a
30-day cancellation clause but have not produced material cancellations to date.
With the exception of certain government contracts which permit termination and
contracts with special billing terms, it is our policy to record the entire
amount of the contract that is billable as a fee receivable at the time the
contract is signed, which represents a legally enforceable claim, and a
corresponding amount as deferred revenue. For those government contracts that
permit termination, we bill the client the full amount billable under the
contract but only record a receivable equal to the earned portion of the
contract. In addition, we only record deferred revenue on these government
contracts when cash is received. Deferred revenue attributable to government
contracts was $38.6 million, $29.3 million, and $28.9 million at December 31,
2003, December 31, 2002, and September 30, 2002, respectively. In addition, at
December 31, 2003, December 31, 2002 and September 30, 2002, we had not
recognized receivables or deferred revenues relating to government contracts
that permit termination of $6.6 million, $4.7 million and $7.7 million,
respectively, which had been billed but not yet collected. We record the
commission obligation related to research contracts upon the signing of the
contract and amortize the corresponding deferred commission expense over the
contract period in which the related revenues are earned.
Consulting revenues, primarily derived from consulting, measurement and
strategic advisory services (paid one-day analyst engagements), are based
primarily on fixed fees or time and materials for discrete projects. Such
revenues are recognized as work is delivered and as services are provided and
are evaluated on a contract by contract basis. Unbilled fees receivables
associated with consulting engagements were $24.3 million at December 31, 2003,
$33.5 million at December 31, 2002, and $32.2 million at September 30, 2002.
Events revenues are deferred and recognized upon the completion of the related
symposium, conference or exhibition. In addition, we defer certain costs
directly related to events and expense these costs in the period during which
the related symposium, conference or exhibition occurs. Our policy is to defer
only those costs, primarily prepaid site and production services costs, which
are incremental and are directly attributable to a specific event. Other costs
of organizing and producing our events, primarily Company personnel and
non-event specific expenses, are expensed in the period incurred. At the end of
each fiscal quarter, we assess on an event-by-event basis whether expected
direct costs of producing a scheduled event will exceed expected revenues. If
such costs are expected to exceed revenues, we record the expected loss in the
period determined.
10-K.39
Other revenues includes software licensing fees which are recognized when a
signed non-cancelable software license exists, delivery has occurred, collection
is probable, and our fees are fixed or determinable. Revenues from software
maintenance is deferred and recognized ratably over the term of each maintenance
agreement, which is typically twelve months.
Cash and cash equivalents. All highly liquid investments with original
maturities of three months or less are classified as cash equivalents. The
carrying value of these investments approximates fair value based upon their
short-term maturity. Investments with maturities of more than three months are
classified as marketable securities.
Investments in equity securities. We account for our investments in publicly
traded equity securities under Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." These investments meet the criteria for classification as available
for sale, given our ability and intent to sell such investments, and are
recorded at fair value and included in Other assets on the Consolidated Balance
Sheets. Unrealized gains and losses on these marketable investments are
recorded, net of tax, as a component of Accumulated other comprehensive income
(loss), net within the Stockholders' equity (deficit) section of the
Consolidated Balance Sheets. Realized gains and losses are recorded in Gain
(loss) on investments, net within the Consolidated Statements of Operations. The
cost of equity securities sold is based on specific identification. We assess
the need to record impairment losses on investments and record such losses when
the impairment of an investment is determined to be other than temporary in
nature. In making this assessment, we consider the significance and duration of
the decline in value and the valuation of comparable companies operating in the
Internet and technology sectors. The impairment factors we evaluate may change
in subsequent periods, since the entities underlying these investments operate
in a volatile business environment. In addition, these entities may require
additional financing to meet their cash and operational needs; however, there
can be no assurance that such funds will be available to the extent needed at
terms acceptable to the entities, if at all. These impairment losses are
reflected in Gain (loss) on investments, net within the Consolidated Statements
of Operations.
We account for investments that we do not have the ability to exercise
significant influence over using the cost method of accounting. Accordingly,
these investments are carried at the lower of cost or net realizable value and
are included in Other assets in the Consolidated Balance Sheets (see Note 4 -
Investments). The equity method is used to account for investments in entities
that are not majority-owned and that we do not control but over which we have
the ability to exercise significant influence.
Property, equipment and leasehold improvements. Property, equipment and
leasehold improvements are stated at cost less accumulated depreciation and
amortization. Property and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized using the straight-line method over the shorter of the estimated
useful lives of the assets or the remaining term of the related leases.
Property, equipment and leasehold improvements, less accumulated depreciation
and amortization consist of the following (in thousands):
December 31,
---------------------------- September 30,
Useful Life (Years) 2003 2002 2002
- ---------------------------------------------------------------------------------------------------------------------------
Computer equipment and software 2 - 3 $ 146,700 $ 132,708 $ 128,795
Furniture and equipment 3 - 8 42,795 39,432 39,381
Leasehold improvements 2 - 15 44,871 37,703 37,510
----------------------------------------------
234,366 209,843 205,686
Less - accumulated depreciation and amortization (167,825) (138,837) (129,525)
----------------------------------------------
$ 66,541 $ 71,006 $ 76,161
==============================================
At December 31, 2003 and 2002, and September 30, 2002, capitalized development
costs for internal use software were $13.1 million, $15.1 million and $15.6
million, respectively, net of accumulated amortization of $32.5 million, $27.9
million and $27.4 million, respectively. Amortization of capitalized internal
software development costs totaled $10.6 million and $15.2 million (unaudited)
during Calendar 2003 and 2002, respectively, $4.4 million during Transition
2002, and $15.7 million and $14.3 million during Fiscal 2002 and 2001,
respectively.
10-K.40
Software development costs. We capitalize certain computer software development
costs and enhancements, for software sold to customers, after the establishment
of technological feasibility, limited to the net realizable value of the
software product, and cease capitalization when the software product is
available for general release to clients. Until these products reach
technological feasibility, all costs related to development efforts are charged
to expense. Once technological feasibility has been determined, additional costs
incurred in development, including coding, testing, and documentation, are
capitalized. Amortization of software development costs is provided on a
product-by-product basis over the estimated economic life of the software,
generally two years, using the straight-line method and is recorded within
Depreciation. Amortization of capitalized computer software development costs
begins when the products are available for general release to customers.
Periodic reviews are performed to ensure that unamortized capitalized software
development costs remain recoverable from future revenue. Capitalized software
costs, net of accumulated amortization, were $1.1 million and $1.7 million at
December 31, 2003 and 2002, respectively and $1.7 million at September 30, 2002.
Amortization expense was $1.6 million and $1.5 million (unaudited) in Calendar
2003 and 2002, respectively, $0.4 million in Transition 2002, and $1.4 million
and $1.0 million in Fiscal 2002 and 2001, respectively.
Intangible assets. Intangible assets are amortized using the straight-line
method over their expected useful lives. Intangible assets subject to
amortization included the following (in thousands):
December 31,
-------------------------- September 30,
Amortization Period (Years) 2003 2002 2002
- ---------------------------------------------------------------------------------------------------------
Non-compete agreements: 2 - 5
Gross cost $ 13,257 $ 12,910 $ 12,829
Accumulated amortization (12,599) (11,157) (10,648)
------------------------------------------
Non-compete agreements, net 658 1,753 2,181
Trademarks and tradenames: 9 - 12
Gross cost 1,811 1,808 1,804
Accumulated amortization (1,484) (1,307) (1,254)
------------------------------------------
Trademarks and tradenames, net 327 501 550
------------------------------------------
Intangible assets, net $ 985 $ 2,254 $ 2,731
==========================================
Aggregate amortization expense related to intangible assets was $1.3 million and
$1.9 million (unaudited) for Calendar 2003 and Calendar 2002, respectively, $0.5
million for Transition 2002, and $1.9 million and $2.8 million for Fiscal 2002
and 2001, respectively. Estimated aggregate amortization expense for each of the
next five Calendar years for intangible assets recorded in the Consolidated
Balance Sheet as of December 31, 2003 is as follows (in thousands):
Year ended December 31,
------------------------------------------------------------------
2004 $710
2005 182
2006 69
2007 24
2008 --
----
Total $985
====
Goodwill. Goodwill represents the excess of the purchase price of acquired
businesses over the estimated fair value of the tangible and identifiable
intangible net assets acquired. Effective October 1, 2001, the Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets." The adoption of SFAS No.
142 eliminated goodwill amortization. Instead, goodwill is tested for impairment
at the reporting unit level, at least annually. A reporting unit can be an
operating segment or a business if discrete financial information is prepared
and reviewed by management. Under the impairment test, if a reporting unit's
carrying amount exceeds its estimated fair value, goodwill impairment is
recognized to the extent that the reporting unit's carrying amount of goodwill
exceeds the implied fair value of the goodwill. The fair value of reporting
units were estimated using discounted cash flows, market multiples, and other
valuation techniques.
10-K.41
The carrying amount of goodwill was allocated to the Company's segments as
follows (in thousands):
December 31,
---------------------- September 30,
2003 2002 2002
- -----------------------------------------------------------------------
Research $128,896 $123,761 $122,567
Consulting 68,803 67,411 67,081
Events 30,606 30,606 30,698
Other 2,082 2,082 2,081
----------------------------------------
Total goodwill $230,387 $223,860 $222,427
========================================
The changes in goodwill in the table above were the result of currency
translation.
The following selected pro forma information for Fiscal 2001 assumes the
provisions of SFAS No. 142 had been applied at the beginning of the fiscal year
(in thousands, except per share):
Income (loss) from continuing operations:
Reported loss from continuing operations $ (220)
Add back: goodwill amortization, net of taxes 8,396
------
Adjusted income from continuing operations $8,176
======
Basic income (loss) per share from continuing operations:
Reported basic loss per share from continuing operations $(0.00)
Effect of goodwill amortization on loss per share 0.10
------
Adjusted basic income per share from continuing operations $ 0.10
======
Diluted income (loss) per share from continuing operations:
Reported diluted loss per share from continuing operations $(0.00)
Effect of goodwill amortization on loss per share 0.09
------
Adjusted diluted income per share from continuing operations $ 0.09
======
Impairment of long-lived assets and intangible assets. We review long-lived
assets and intangible assets other than goodwill for impairment whenever events
or changes in circumstances indicate that the carrying amount of the respective
asset may not be recoverable. Such evaluation may be based on a number of
factors including current and projected operating results and cash flows,
changes in management's strategic direction as well as other economic and market
variables. Our policy regarding long-lived assets and intangible assets other
than goodwill is to evaluate the recoverability of these assets by determining
whether the balance can be recovered through undiscounted future operating cash
flows. Should events or circumstances indicate that the carrying value might not
be recoverable based on undiscounted future operating cash flows, an impairment
loss would be recognized. The amount of impairment, if any, is measured based on
the difference between projected discounted future operating cash flows using a
discount rate reflecting our average cost of funds and the carrying value of the
asset (see Note 5 - Other Charges).
Foreign currency translation. All assets and liabilities of foreign subsidiaries
are translated into U.S. dollars at exchange rates in effect at the balance
sheet date. The resulting translation adjustments are recorded as foreign
currency translation adjustments, a component of Accumulated other comprehensive
income (loss), net within the Stockholders' equity (deficit) section of the
Consolidated Balance Sheets. Income and expense items are translated at average
exchange rates for the year. Currency transaction gains or losses arising from
transactions denominated in currencies other than the functional currency of a
subsidiary are included in results of operations within Other income (expense),
net within the Consolidated Statements of Operations. Currency transaction gains
(losses), net were $0.5 million during Calendar 2003, $(0.4) million (unaudited)
during Calendar, 2002, $(0.1) million during Transition 2002, $(0.8) million
during Fiscal 2002, and $(3.5) million during Fiscal 2001.
Income taxes. Deferred tax assets and liabilities are recognized based on
differences between the book and tax basis of assets and liabilities using
presently enacted tax rates. The provision for income taxes is the sum of the
amount of income tax paid or payable for the year as determined by applying the
provisions of enacted tax laws to taxable income for that year and the net
changes during the year in deferred tax assets and liabilities. Undistributed
earnings of subsidiaries outside of the U.S. amounted to approximately $80
million as of December 31, 2003 and will be indefinitely reinvested.
Accordingly, no material provision has been made for taxes that may be payable
upon remittance of such earnings, nor is it practicable to determine the amount
of any
10-K.42
liability. We credit additional paid-in capital for realized tax benefits
arising from stock transactions with employees. The tax benefit on a
nonqualified stock option is equal to the tax effect of the difference between
the market price of our common stock on the date of exercise and the exercise
price.
Fair value of financial instruments. Our financial instruments include cash and
cash equivalents, fees receivable, accounts payable, and accruals which are
short-term in nature. The carrying amounts of these financial instruments
approximate their fair value. Investments in publicly traded equity securities
are valued based on quoted market prices. Investments in equity securities that
are not publicly traded are valued at the lower of cost or net realizable value,
which approximates fair market value.
Although there were no amounts outstanding at December 31, 2003 under a senior
revolving credit facility, the carrying amount of any such borrowings would
approximate fair value as the rates of interest on the revolving credit facility
approximate current market rates of interest for similar instruments with
comparable maturities.
Concentrations of credit risk. Financial instruments that potentially subject us
to concentrations of credit risk consist primarily of cash and cash equivalents,
marketable equity securities and fees receivable. Concentrations of credit risk
with respect to fees receivable are limited due to the large number of clients
comprising the client base and their dispersion across many different industries
and geographic regions.
Use of estimates. We make estimates and assumptions that affect the reported
amounts of assets, liabilities and disclosures, if any, of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Such estimates are required
by generally accepted accounting principles in the United States of America in
our preparation of the Consolidated Financial Statements. Actual results could
differ from those estimates. Estimates are used when accounting for such items
as allowance for doubtful accounts, investments, depreciation, amortization,
income taxes and certain accrued liabilities.
Accounting for stock-based compensation. We have several stock-based
compensation plans. We apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for our
employee stock options and purchase rights and apply Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Issued to Employees" ("SFAS
123") for disclosure purposes only. Under APB 25, the intrinsic value method is
used to account for stock-based employee compensation plans. The SFAS 123
disclosures include pro forma net income and earnings per share as if the fair
value-based method of accounting had been used. If compensation for employee
options had been determined based on SFAS 123, our pro forma net income, and pro
forma income per share would have been as follows (in thousands, except per
share data):
Fiscal
Calendar Transition ------------------------
2003 2002 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) as reported $ 23,693 $(14,418) $ 48,578 $ (66,203)
Stock-based compensation expense included in net income (loss) 697 563 1,768 748
Pro forma employee stock-based compensation cost, net of tax (16,665) (5,814) (30,116) (40,915)
---------------------------------------------------------
Pro forma income (loss) $ 7,725 $(19,669) $ 20,230 $(106,370)
=========================================================
Basic income (loss) per share:
As reported $ 0.26 $ (0.18) $ 0.58 $ (0.77)
Pro forma $ 0.08 $ (0.24) $ 0.24 $ (1.24)
=========================================================
Diluted income (loss) per share:
As reported $ 0.26 $ (0.18) $ 0.47 $ (0.77)
Pro forma $ 0.08 $ (0.24) $ 0.24 $ (1.24)
=========================================================
The fair value of our stock plans used to compute pro forma net income (loss)
and diluted per share disclosures is the estimated fair value at grant date
using the Black-Scholes option pricing model. The following weighted-average
assumptions were utilized for stock options granted or modified:
Fiscal
Calendar Transition ------------------------
2003 2002 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Expected life (in years) 3.6 3.4 3.5 3.1
Expected volatility 43% 47% 50% 65%
Risk free interest rate 2.0% 2.2% 3.2% 3.2%
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
10-K.43
The weighted average fair values of our stock options granted in Calendar 2003,
Transition 2002 and Fiscal 2002 and 2001 are $3.10, $2.93, $3.67 and $3.77,
respectively.
Recently issued accounting standards. In January 2003, the Financial Accounting
Standards Board ("FASB") issued Financial Interpretation ("FIN") No. 46
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." FIN
No. 46 provides guidance on the identification of entities for which control is
achieved through means other than through voting rights called "variable
interest entities" or "VIEs" and how to determine when and which business
enterprise should consolidate the VIE (the "primary beneficiary"). This new
model for consolidation applies to an entity in which either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entity's activities
without receiving additional subordinated financial support from other parties.
In addition, FIN No. 46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make additional
disclosures. We do not have any interests that would change its current
reporting entity or require additional disclosure outlined in FIN No. 46.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003, for hedging relationships designated after June 30, 2003 and to
certain preexisting contracts. The adoption of SFAS No. 149 had no impact on our
financial position, cash flows or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
SFAS 150 changes the accounting for certain financial instruments that under
previous guidance issuers could account for as equity. It requires that those
instruments be classified as liabilities in balance sheets. The guidance in SFAS
150 is generally effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective on July 1, 2003. The
adoption of SFAS 150 had no impact on our financial position, cash flows or
results of operations.
In December 2003, the Staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition,"
which supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB
104's primary purpose is to rescind the accounting guidance contained in SAB 101
related to multiple-element revenue arrangements that was superseded as a result
of the issuance of Emerging Issues Task Force ("EITF") 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds
the SEC's related "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers" issued with SAB 101 that had been codified in SEC Topic
13, "Revenue Recognition." While the wording of SAB 104 has changed to reflect
the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104, which was effective upon issuance.
The adoption of SAB 104 had no impact on our financial position, cash flows or
results of operations.
2-BUSINESS ACQUISITIONS
Fiscal 2002
On June 10, 2002, we acquired the remaining 49.9% of People3, Inc., an authority
on IT human capital. People3 has been integrated with our consulting segment.
Prior to this acquisition, we owned 50.1% of People3 and consolidated its assets
and liabilities and results of operations. Revenues in Fiscal 2002 were
approximately $6.9 million. The purchase price was $3.9 million, of which $0.2
million was allocated to non-compete agreements, $0.3 million was allocated to
database-related assets and $3.4 million was allocated to goodwill. The
non-compete agreements are being amortized over the life of the agreements,
three-years. The database-related assets are being amortized over their
estimated useful life of five years.
During Fiscal 2002, we completed additional acquisitions for total consideration
of approximately $0.7 million, of which $0.1 million was allocated to tangible
assets, $0.8 million was allocated to goodwill, $0.2 million was allocated to
non-compete agreements and $0.4 million was allocated to liabilities assumed.
The non-compete agreements are being amortized over the five-year term of this
agreement.
10-K.44
Fiscal 2001
On October 2, 2000, we acquired all of the assets and assumed the liabilities of
Solista Global LLC ("Solista") for approximately $9.0 million in cash. Solista
is a provider of strategic consulting services that merge technology and
business expertise to help clients build strategies for the digital world. We
accounted for the acquisition using the purchase method, and we allocated the
purchase price to the assets acquired and the liabilities assumed, based upon
estimated fair values at the date of the acquisition. The excess purchase price
over the fair value of amounts assigned to the net tangible assets acquired was
approximately $6.5 million, of which $6.0 million was allocated to goodwill and
$0.5 million was allocated to non-compete agreements which were amortized over
three years.
During Fiscal 2001, we completed additional acquisitions for consideration of
$3.0 million in cash. The largest of these was the acquisition of an Events
business for approximately $2.6 million.
3-DISCONTINUED OPERATION
On July 2, 2001, we sold our subsidiary, TechRepublic, to CNET for approximately
$23.5 million in cash and common stock of CNET, before reduction for certain
termination benefits of $3.9 million. The gross proceeds were $14.3 million in
cash and 755,058 shares of CNET common stock, which had a fair market value of
$12.21 per share on July 2, 2001. Our Consolidated Financial Statements have
been restated to reflect the disposition of the TechRepublic segment as a
discontinued operation in accordance with APB No. 30. Accordingly, revenues,
costs and expenses, and cash flows of TechRepublic have been excluded from the
respective captions in the Consolidated Statements of Operations and
Consolidated Statements of Cash Flows, and have been reported through the date
of disposition as "Loss from discontinued operation" and "Net cash used by
discontinued operation," for all periods presented.
During Fiscal 2001, we recorded a pre-tax loss of $66.4 million ($39.9 million
after tax) to recognize the loss on the sale. This pre-tax loss includes a
write-down of $42.4 million of assets, primarily goodwill, to net realizable
value, operating losses through the date of sale of $6.5 million, severance and
related benefits of $8.3 million, and other sale-related costs and expenses,
including costs associated with the closure of facilities, of $9.2 million.
Summarized financial information for the discontinued operation for Fiscal 2001
is as follows (in thousands):
Statements of Operations Data
----------------------------------------------------------------
Revenues $ 12,368
========
Loss before income taxes $(32,574)
Benefit for income taxes (6,515)
--------
Loss from discontinued operation, net $(26,059)
========
Loss on disposal before income taxes $(66,436)
Benefit for income taxes (26,512)
--------
Loss on disposal of discontinued operation, net $(39,924)
========
4-INVESTMENTS
At December 31, 2003, our investments in marketable equity securities and other
investments had a cost basis and a fair value of $10.9 million and are included
in Other assets in the Consolidated Balance Sheet. Unrealized gains and losses
at December 31, 2003 were individually insignificant.
During Calendar 2003, we received proceeds of approximately $5.5 million,
recorded as gain on investments, on insurance proceeds received associated with
a negotiated settlement regarding a claim, which occurred in Fiscal 2000,
arising from the sale of GartnerLearning. On September 1, 1998, we sold
GartnerLearning, a division that provided technology based training and services
for IT professionals, to NETg Inc. ("NETg"), a subsidiary of Harcourt, Inc.
(formerly Harcourt Brace & Company), and we recorded a pre-tax loss of
approximately $2.0 million. In addition, we recorded an additional loss, as a
loss on investments, of $6.7 million during Fiscal 2000 in connection with a
negotiated settlement of a claim arising from the sale of GartnerLearning. The
claim asserted that we had breached a contractual commitment under a joint
venture agreement to co-produce a product when GartnerLearning was sold.
10-K.45
During Calendar 2003, we recorded an impairment loss of $0.9 million on a
minority-owned investment that is not publicly traded. We evaluated the
investment for impairment because of the investee's recapitalization due to its
lack of capital resources to redeem its mandatorily redeemable equity. As a
result of this, the holders of the mandatorily redeemable shares have agreed to
a recapitalization of the entity. At December 31, 2003, we wrote our investment
down to our estimate of fair value. The estimate of fair value was based upon a
combination of valuation techniques including a discounted cash flow analysis of
future projections of operating performance, market comparables and other
available information.
During Transition 2002, we recognized impairment losses of $1.7 million
associated with our investment in SI Venture Associates, LLC ("SI I"), and SI
Venture Fund II, LP ("SI II"), collectively "SI investments", described below
under "SI and Other Investments - Related Party".
During Fiscal 2002, we sold 748,118 shares of CNET for $6.0 million resulting in
a pre-tax gain of $0.8 million. Also during Fiscal 2002, we recognized
impairment losses related to our SI investments of $2.5 million.
During Fiscal 2001, we sold shares of an investment in which we held a minority
interest for net cash proceeds of $7.5 million and a pre-tax loss of $5.6
million. In addition, we received additional stock distributions from our
investment in SI Investments. During Fiscal 2001, we sold a portion of the
shares received from SI I and SI II, and other securities, for net cash proceeds
of $6.9 million for a pre-tax gain of $5.0 million. During Fiscal 2001, we
recognized impairment losses of $26.5 million associated with our SI
investments.
SI and Other Investments - Related Party
In addition to equity securities owned directly through SI I, a wholly owned
affiliate, we also own 34% of SI II. Both entities are venture capital funds
engaged in making investments in early to mid-stage IT-based or Internet-enabled
companies. Both entities are managed by SI Services Company, L.L.C., an entity
controlled by our former Chairman of the Board, who continues as an employee and
Chairman Emeritus of the Company, and certain of our former officers and
employees. Management fees incurred for SI Services Company, L.L.C. are
approximately $1.2 million per year. In addition, we provide access to research
and the use of certain office space at no cost to SI Services Company, LLC. We
had a total original investment commitment to SI I and SI II of $10.0 million
and $30.0 million, respectively. The commitment to SI I was fully funded in
prior years. We made contributions to the SI investments of $2.0 million and
$1.5 million during Calendar 2003 and Fiscal 2002, respectively. We made no
contributions during Transition 2002 or Fiscal 2001. Of the $30.0 million
commitment to SI II, $4.0 million remained unfunded at December 31, 2003 and may
be called by SI at any time. The carrying value of our investments held by SI I
and SI II was $1.9 million and $4.8 million, respectively, at December 31, 2003.
Our share of equity gains in SI I and SI II was $0.1 million for Calendar 2003,
$0.01 million for Transition 2002 and $0.2 million for Fiscal 2002. For Fiscal
2001, our share of equity losses in SI I and SI II was $0.3 million. During
Transition 2002, we recognized impairment losses of $1.7 million. These
impairment losses, related to equity securities owned through SI I and SI II for
other than temporary declines in the value of certain investments, are reflected
in Gain (loss) on investments, net in the Consolidated Statements of Operations.
During Fiscal 2002, we recognized impairment losses of $2.5 million, in
connection with our decision to actively pursue the sale of the investments held
in the SI funds. During Fiscal 2001, we made an assessment of the carrying value
of our investments and determined that the carrying value of certain investments
were in excess of their fair value, based on valuations of comparable companies
operating in the Internet and technology sectors. As a result of these
valuations and due to the significance and duration of the decline in value, we
recognized impairment losses of $26.5 million during Fiscal 2001. The impairment
factors we evaluated may change in subsequent periods, since the entities
underlying these investments operate in a volatile business environment. In
addition, these entities may require additional financing to meet their cash and
operational needs; however, there can be no assurance that such funds will be
available to the extent needed at terms acceptable to the entities, if at all.
This could result in additional material non-cash impairment charges in the
future.
10-K.46
5-OTHER CHARGES
During Calendar 2003, we recorded other charges of $29.7 million. Of these
charges, $20.0 million are associated with our workforce reductions; $5.4
million is associated with the workforce reduction announced in February 2003,
and $14.6 million is associated with the workforce reduction announced in
December 2003. These workforce reductions resulted in the termination of 222
employees and the payment of $7.6 million during Calendar 2003. In connection
with the workforce reduction announced in December 2003, we expect to incur
additional severance charges during the first quarter of 2004. In addition,
approximately $9.7 million of these charges relate to additional estimated costs
and losses associated with excess facilities that were previously reserved for
as other charges during Fiscal 2002 and Transition 2002. The increase in the
estimated costs and losses on these facilities was a result of the continued
decline in market rents for the associated facility, as well as changes in
estimates of timing of sublease income.
During Transition 2002, we recorded other charges of $32.2 million. Of these
charges, $13.3 million relates to costs and losses associated with the
elimination and reduction of excess facilities, principally leased facilities
and ongoing lease costs and losses associated with sub-lease arrangements. In
addition, approximately $18.9 million of these charges are associated with our
workforce reduction and are for employee termination severance payments and
related benefits. This workforce reduction resulted in the elimination of 175
positions, or approximately 4% of our workforce at the time, and the payment of
$11.0 million of termination benefits during Calendar 2003.
During Fiscal 2002, we recorded other charges of $17.2 million. Of these
charges, $10.0 million relates to costs and losses associated with the
elimination of excess facilities, principally leased facilities and ongoing
lease costs and losses associated with sub-lease arrangements. In addition,
approximately $5.8 million of these charges are associated with our workforce
reduction announced in January 2002 and are for employee termination severance
payments and related benefits. This workforce reduction resulted in the
elimination of approximately 100 positions, or approximately 2% of our workforce
at the time. The remaining $1.4 million relates to the impairment of certain
database-related assets.
During Fiscal 2001, we recorded other charges of $46.6 million. Of these
charges, $24.8 million are associated with our workforce reduction announced in
April 2001. This workforce reduction resulted in the elimination of 383
positions, or approximately 8% of our workforce at the time. Approximately $14.3
million of the other charges are associated with the write-down of goodwill and
other long-lived assets to net realizable value as a result of our decision to
discontinue certain unprofitable products, and $7.5 million of the charge is
associated primarily with the write-off of internally developed systems in
connection with the launch of gartner.com and seat-based pricing.
At December 31, 2003, $12.8 million of the aggregate termination benefits
relating to the workforce reductions remain to be paid, primarily in the
quarters ended March 31 and June 30, 2004. We will fund these costs from
existing cash.
10-K.47
The following table summarizes the activity related to the liability for the
restructuring programs recorded as other charges (in thousands):
Workforce Excess Asset
Reduction Facilities Impairments
Costs Costs and Other Total
- --------------------------------------------------------------------------------------------------
Accrued liability at September 30, 2000 $ -- $ -- $ -- $ --
Charges during Fiscal 2001 24,780 -- 21,783 46,563
Non-cash charges -- -- (18,888) (18,888)
Payments (18,181) -- (2,895) (21,076)
-------------------------------------------------------
Accrued liability at September 30, 2001 $ 6,599 $ -- $ -- $ 6,599
Charges during Fiscal 2002 5,808 10,014 1,424 17,246
Non-cash charges (120) (2,663) (1,424) (4,207)
Payments (11,629) (3,263) -- (14,892)
-------------------------------------------------------
Accrued liability at September 30, 2002 $ 658 $ 4,088 $ -- $ 4,746
Charges during Transition 2002 18,899 13,267 -- 32,166
Non-cash charges (601) (659) -- (1,260)
Payments (7,233) (760) -- (7,993)
-------------------------------------------------------
Accrued liability at December 31, 2002 $ 11,723 $15,936 $ -- $ 27,659
Charges during Calendar 2003 20,000 9,716 -- 29,716
Non-cash charges (123) -- -- (123)
Payments (18,784) (6,493) -- (25,277)
-------------------------------------------------------
Accrued liability at December 31, 2003 $ 12,816 $19,159 $ -- $ 31,975
=======================================================
6-ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
December 31,
------------------------- September 30,
2003 2002 2002
- ------------------------------------------------------------------------------------------------------------
Taxes payable $ 16,957 $ 14,612 $ 22,955
Payroll and related benefits payable 54,220 37,829 43,114
Commissions payable 19,350 15,919 14,504
Accounts payable 8,714 7,576 12,829
Severance associated with other charges (Note 5) 12,816 11,723 658
Excess facilities costs associated with other charges (Note 5) 19,159 15,936 4,088
Other accrued liabilities 44,393 31,072 25,821
------------------------------------------
Total accounts payable and accrued liabilities $175,609 $134,667 $123,969
==========================================
7-DEBT
We maintain an unsecured Credit Agreement with JPMorgan Chase Bank, as
administrative agent for the participating financial institutions thereunder,
providing for a maximum of $200 million of borrowings under a senior revolving
credit facility. The revolving credit facility expires on July 16, 2004, with
any borrowings under such facility maturing on that date, subject to certain
customary conditions on the date of any such loan. We had no amounts outstanding
at December 31, 2003 and 2002, and September 30, 2002. We pay a commitment fee
of 0.30% to 0.50% on the unused revolving credit amount. Pursuant to certain
financial covenants of the revolving credit facility, we had $184 million of
available borrowings at December 31, 2003. These covenants are primarily based
on financial results and other measures such as contract value. During Fiscal
2002, the weighted average interest rate on borrowings, which were only
outstanding during October and November of 2001, was 3.6%.
On April 17, 2000, we issued, in a private placement transaction, $300.0 million
of 6% convertible subordinated notes (the "convertible notes") to Silver Lake
Partners, L.P. ("Silver Lake") and other noteholders. The convertible notes were
scheduled to mature in April 2005 and had been accruing interest at 6% per
annum. Interest had accrued semi-annually by a corresponding increase in the
face amount of the convertible notes commencing September 15, 2000.
In October 2003, the notes were converted into 49,441,122 shares of Gartner
Class A Common Stock in accordance with the original terms of the notes. The
determination of the number of shares issued upon conversion was based upon a
$7.45 conversion price and a convertible note of $368.3 million, consisting of
the original face amount of $300 million plus accrued interest of $68.3 million.
The unamortized balances of debt issue costs of $2.8 million and debt discount
of $0.3 million as of the conversion date were netted against the outstanding
principal and interest balances, resulting in a $365.2 million increase to
stockholders' equity. Additionally, certain costs directly associated with the
conversion, such as regulatory filing, banking and legal fees, totaling $0.6
million, were charged to equity.
10-K.48
As part of the original private placement transaction, two Silver Lake
representatives were elected to our ten-member Board of Directors. We also
granted to Silver Lake the right to acquire 5% of any Company subsidiary that is
spun off or spun out at 80% of the initial public offering price.
We issue letters of credit in the ordinary course of business. At December 31,
2003, we had outstanding letters of credit with JPMorgan Chase Bank for $3.4
million, The Bank of New York for $2.0 million and with others for $0.9 million.
8-COMMITMENTS AND CONTINGENCIES
We lease various facilities, furniture and computer equipment under operating
lease arrangements expiring between 2004 and 2025. Future minimum annual
payments under non-cancelable operating lease agreements at December 31, 2003
are as follows (in thousands):
Year ended December 31,
-----------------------------------------------------------------
2004 $ 29,026
2005 25,513
2006 20,234
2007 18,655
2008 16,862
Thereafter 102,515
--------
Total minimum lease payments $212,805
========
Rental expense for operating leases was $25.5 million for Calendar 2003, $7.0
million for Transition 2002, and $27.6 million and $26.9 million for the Fiscal
2002 and 2001, respectively. We also have commitments for office services, such
as printing, copying, shipping and mail services, which expire at various dates
in 2005 and 2006. The minimum obligation under these agreements is approximately
$5.7 million in the aggregate.
We are involved in legal proceedings and litigation arising in the ordinary
course of business. We believe the outcome of all current proceedings, claims
and litigation will not have a material effect on our financial position or
results of operations when resolved in a future period.
We have various agreements that may obligate us to indemnify the other party
with respect to certain matters. Generally, these indemnification clauses are
included in contracts arising in the normal course of business under which we
customarily agree to hold the other party harmless against losses arising from a
breach of representations related to such matters as title to assets sold and
licensed or certain intellectual property rights. It is not possible to predict
the maximum potential amount of future payments under these indemnification
agreements due to the conditional nature of our obligations and the unique facts
of each particular agreement. Historically, payments made by us under these
agreements have not been material. As of December 31, 2003, we were not aware of
any indemnification agreements that would require material payments.
9-STOCKHOLDERS' EQUITY (DEFICIT)
Capital stock. Holders of Class A Common Stock and Class B Common Stock are
entitled to one vote per share on all matters to be voted by stockholders and
vote together as a single class, other than with respect to the election of
directors. Class A Common Stock stockholders are entitled to one vote per share
on the election of Class A directors, which constitute no more than 20% of the
directors, and Class B Common Stock stockholders are entitled to one vote per
share on the election of Class B directors, which constitute at least 80% of the
directors. In addition, any Class B Common Stock holder who owns more than 15%
of the outstanding Class B Common Stock, will not be able to vote all of his or
her Class B Common Stock in the election of directors unless such holder owns an
equivalent percentage of Class A Common Stock.
10-K.49
The following table provides transactions relating to our common stocks:
Class A Common Stock Class B Common Stock
----------------------------- -------------------------
Treasury Treasury
Issued Stock Issued Stock
Shares Shares Shares Shares
- -------------------------------------------------------------------------------------------------------------
Balance at September 31, 2000 77,484,237 23,740,562 40,689,648 8,129,732
Issuances under stock plans 589,632 (772,285) -- --
Purchases for treasury -- 2,980,512 -- 12,088
Settlement of forward purchase agreement -- 672,365 -- --
Forfeitures of restricted stock (64,592) -- -- --
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 78,009,277 26,621,154 40,689,648 8,141,820
Issuances under stock plans 1,989,240 (563,829) -- --
Purchases for treasury -- 2,153,400 -- 2,311,700
Forfeitures of restricted stock (11,836) -- -- --
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 79,986,681 28,210,725 40,689,648 10,453,520
Issuances under stock plans 124,847 (15,399) -- --
Purchases for treasury -- 963,117 -- 453,600
Forfeitures of restricted stock (5,508) -- -- --
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 80,106,020 29,158,443 40,689,648 10,907,120
Issuances under stock plans 4,037,656 (784,916) -- --
Purchases for treasury -- 3,435,161 -- 1,549,485
Issuance of shares upon conversion of debt 18,302,271 (31,138,851) -- --
Forfeitures of restricted stock (9,847) -- -- --
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 102,436,100 669,837 40,689,648 12,456,605
=============================================================================================================
Stock repurchase program. In July 2001, our Board of Directors approved the
repurchase of up to $75 million of Class A and Class B Common Stock. Our Board
of Directors has subsequently increased the authorized stock repurchase program
to a total authorization for repurchase of $200 million. On a cumulative basis
at December 31, 2003, we have purchased $127.1 million of our stock under this
stock repurchase program.
Forward purchase agreements. Beginning in 1997, the Company entered into a
series of forward purchase agreements to effect the repurchase of 1,800,000 of
its Class A Common Stock. These agreements were settled quarterly at the
Company's option on a net basis in either shares of its own Class A Common Stock
or cash. To the extent that the market price of the Company's Class A Common
Stock on a settlement date is higher (lower) than the forward purchase price,
the net differential is received (paid) by the Company. During Fiscal 2001, two
settlements resulted in the Company delivering 491,789 shares of Class A Common
Stock and paying approximately $64,000 in cash. During June 2001, the Company
terminated the forward purchase agreement by reacquiring 1,164,154 shares of
Class A Common Stock for approximately $9.7 million. There were no forward
purchase agreements outstanding at December 31, 2003.
10-STOCK PLANS
Stock option plans. Under our stock option plans, we grant stock options to
employees that allow them to purchase shares of our Class A Common Stock. We
grant these options as an incentive for employees to contribute to our long-term
success. We also grant options to members of our Board of Directors and certain
consultants. Generally, we issue stock options at their fair market value at the
date of grant. Most options vest either a) annually over a three-year service
period, or b) over a four-year vesting period, with 25% vesting at the end of
the first year and the remaining 75% vesting monthly over the next three years.
Our options generally expire ten years from the grant date. At December 31,
2003, 7.5 million shares of Class A Common Stock were authorized for grants of
options.
In February 2003, our stockholders approved the 2003 Long-Term Incentive Plan
("2003 Plan") which replaced our 1993 Director Stock Option Plan, 1994 Long Term
Option Plan, 1996 Long Term Stock Option Plan, 1998 Long Term Stock Option Plan
and 1999 Stock Option Plan (collectively the "Previous Plans"). Under the 2003
Plan, 9,928,000 shares of Class A Common Stock were initially available for
grant. Upon approval of the 2003 Plan, no further grants or awards were
allowable under the Previous Plans. However, any outstanding options or awards
under the Previous Plans remain outstanding until the earlier of their exercise,
forfeiture, or expiry date.
10-K.50
A summary of stock option activity under the plans and agreement through
December 31, 2003 follows:
Class A Common Stock
------------------------------
Weighted
Under Average
Option Exercise Price
- -----------------------------------------------------------------------
Outstanding at September 30, 2000 30,566,726 $14.67
Granted 10,339,620 $ 8.21
Exercised (592,832) $ 6.16
Canceled (5,330,390) $13.86
------------------------------
Outstanding at September 30, 2001 34,983,124 $13.03
Granted 5,629,441 $ 9.42
Exercised (1,989,049) $ 8.92
Canceled (4,617,199) $14.12
------------------------------
Outstanding at September 30, 2002 34,006,317 $12.52
Granted 3,601,127 $ 8.13
Exercised (131,343) $ 7.91
Canceled (1,012,162) $12.86
------------------------------
Outstanding at December 31, 2002 36,463,939 $12.10
Granted 2,598,070 $ 9.03
Exercised (4,278,704) $ 8.82
Canceled (3,257,098) $12.82
------------------------------
Outstanding at December 31, 2003 31,526,207 $12.21
==============================
Options for the purchase of 23.1 million, 21.9 million, and 17.6 million shares
of Class A Common Stock were exercisable at December 31, 2003 and 2002, and
September 30, 2002, respectively.
The following table summarizes information about stock options outstanding at
December 31, 2003:
Outstanding Exercisable
----------------------------- -----------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------------------------
$ 1.00 - $ 7.95 6,698,168 7.09 $ 7.38 4,486,697 $ 7.50
$ 7.96 - $ 9.10 6,209,139 8.10 $ 8.88 3,102,138 $ 8.91
$ 9.23 - $10.31 6,330,934 6.19 $10.17 5,853,378 $10.23
$10.48 - $16.96 5,752,689 6.72 $13.96 4,582,581 $14.46
$17.44 - $22.71 6,131,617 4.52 $20.23 4,698,617 $19.94
$23.90 - $34.06 403,660 3.27 $29.01 403,660 $29.01
--------------------------------------------------------------------------
31,526,207 6.49 $12.21 23,127,071 $12.66
==========================================================================
Employee stock purchase plans. In January 1993, the Company adopted an employee
stock purchase plan, and reserved an aggregate of 4,000,000 shares of Class A
Common Stock for issuance under this plan. The 1993 plan expired during 2003. In
March 2002, shareholders approved the 2002 Employee Stock Purchase Plan with
substantially identical terms. Eligible employees are permitted to purchase
Class A Common Stock through payroll deductions, which may not exceed 10% of an
employee's compensation (or $21,250 in any calendar year), at a price equal to
85% of the Class A Common Stock price as reported by the NYSE at the beginning
or end of each offering period, whichever is lower. No shares were issued during
Transition 2002. During Calendar 2003 and Fiscal 2002, 551,388 and 560,861
shares were issued from treasury stock at an average purchase price of $7.25 and
$7.90 per share, respectively, from these plans. At December 31, 2002 and
September 30, 2002, 3.7 million shares were available for purchase under the
2002 plan. At December 31, 2003, we had 3.2 million shares available for
purchase under this plan.
Restricted stock awards. Beginning in 1998, we granted restricted stock awards
under the 1991 Stock Option Plan and the 1998 Long Term Stock Option Plan. The
restricted stock awards vest in six equal installments with the first
installment vesting two years after the grant and then annually thereafter for
five years. Recipients are not required to provide consideration to the Company
other than rendering service and have the right to vote the shares and to
receive dividends. The restricted stock may not be sold by the employee during
the vesting period. In 1999, we also awarded 40,500 stock options with an
exercise price of $1.00 per share that vest on the same basis as the restricted
stock awards to certain international employees. Such stock options had a
weighted
10-K.51
average fair market value of $22.81 per stock option on the date of grant. We
had a total of 99,024 restricted shares of Class A Common Stock outstanding at
December 31, 2003. There were 155,993 and 178,167 restricted shares of Class A
Common Stock outstanding at December 31, 2002 and September 30, 2002,
respectively. There were no awards of restricted stock during Calendar 2003,
Transition 2002, or Fiscal 2002 or 2001. At December 31, 2003, the aggregate
unamortized compensation expense for restricted stock awards and the $1 stock
option grants was $1.8 million and is included as Unearned compensation, net in
the Consolidated Balance Sheets. Total compensation expense recognized for the
restricted stock awards and the stock options granted with an exercise price of
$1.00 per share was $0.9 million, $0.3 million, $1.3 million, and $1.1 million
for Calendar 2003, Transition 2002, and for Fiscal 2002 and 2001, respectively.
11-COMPUTATION OF EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS
Basic earnings per share ("EPS") is computed by dividing income (loss) from
continuing operations by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in earnings. When the exercise of stock options or
conversion of convertible debt is antidilutive they are excluded from the
calculation.
The following table sets forth the reconciliation of the basic and diluted
earnings per share computations (in thousands, except per share).
Calendar Fiscal
----------------------- Transition --------------------
2003 2002 2002 2002 2001
-------------------------------------------------------------
Unaudited
Numerator:
Income (loss) from continuing operations $23,693 $15,117 $(14,418) $ 48,578 $ (220)
After-tax interest on convertible long-term debt -- -- -- 12,380 --
-------------------------------------------------------------
Income (loss) used for calculating diluted EPS $23,693 $15,117 $(14,418) $ 60,958 $ (220)
=============================================================
Denominator:
Weighted average number of common shares used in the
calculation of basic income per share 91,123 83,329 81,379 83,586 85,862
Common stock equivalents associated with stock
compensation plans 1,456 1,711 -- 1,976 --
Weighted average shares associated with convertible debt -- -- -- 45,320 --
-------------------------------------------------------------
Shares used in the calculation of diluted income per share 92,579 85,040 81,379 130,882 85,862
=============================================================
Income (loss) per share from continuing operations:
Basic $ 0.26 $ 0.18 $ (0.18) $ 0.58 $ (0.00)
=============================================================
Diluted $ 0.26 $ 0.18 $ (0.18) $ 0.47 $ (0.00)
=============================================================
The following table presents the number of options to purchase shares (in
millions) of Class A Common Stock that were not included in the computation of
diluted EPS because the effect would have been antidilutive. During periods with
reported income, these options were antidilutive because their exercise prices
were greater than the average market value of a share of Class A Common Stock
during the period. During periods with reported loss, all options outstanding
had an antidilutive effect.
Calendar Fiscal
----------------------- Transition --------------------
2003 2002 2002 2002 2001
-------------------------------------------------------------
Unaudited
Antidilutive options (in millions) 19.9 21.4 36.5 14.5 35.0
Average market price per share of Class A Common Stock
during periods with reported income $9.49 $10.25 -- $10.57 --
For all periods shown, unvested restricted stock awards were not included in the
computation of diluted income (loss) per share because the effect would have
been antidilutive. Additionally, convertible notes, for the periods outstanding,
during Calendar 2003 and 2002, Transition 2002 and Fiscal 2001 were not included
in the EPS calculation using the "as if converted" method because the effect
would have been antidilutive.
10-K.52
The following table provides information on the after-tax interest expense that
was not added back to the numerator of the EPS calculation and the weighted
average number of shares associated with the convertible debt that was not
included in the denominator of the EPS calculation because the effect would have
been antidilutive (in thousands):
Calendar Transition Fiscal Fiscal
2003 2002 2002 2002 2001
---------- --------------- ------------ -------- ----------
(Unaudited)
After-tax interest on convertible long-term debt $10,147 $12,566 $ 3,227 N/A $11,667
Weighted average shares associated with convertible debt 37,035 45,995 47,021 N/A 30,534
12-INCOME TAXES
Following is a summary of the components of income (loss) before provision
(benefit) for income taxes, loss from discontinued operation (in thousands):
Fiscal
Calendar Transition -------------------------
2003 2002 2002 2001
----------------------------------------------------------
U.S. $(2,972) $(18,357) $35,330 $(132,522)
Non-U.S. 38,528 (1,665) 38,273 24,120
----------------------------------------------------------
Total 35,556 (20,022) 73,603 (108,402)
Loss from discontinued operation -- -- -- 99,010
----------------------------------------------------------
Income (loss) from continuing operations before income taxes $35,556 $(20,022) $73,603 $ (9,392)
==========================================================
The provision (benefit) for income taxes on the above income consists of the
following components (in thousands):
Fiscal
Calendar Transition -------------------------
2003 2002 2002 2001
----------------------------------------------------------
Current tax expense from operations:
U.S. federal $ (576) $ 276 $ 5,591 $ 9,192
State and local 1,623 507 1,361 4,862
Foreign 11,453 1,194 11,649 10,258
----------------------------------------------------------
Total current 12,500 1,977 18,601 24,312
Deferred tax (benefit) expense:
U.S. federal (942) (5,774) 3,330 (29,355)
State and local (788) (956) 911 (4,782)
Foreign (2,837) (653) (175) (836)
----------------------------------------------------------
Total deferred (4,567) (7,383) 4,066 (34,973)
----------------------------------------------------------
Total current and deferred 7,933 (5,406) 22,667 (10,661)
Benefit from stock transactions with employees 3,930 (198) 2,280 1,331
Benefit from acquired tax benefits applied to reduce goodwill -- -- 78 158
----------------------------------------------------------
Income tax expense (benefit) on continuing operations 11,863 (5,604) 25,025 (9,172)
Current taxes from loss on discontinued operation:
U.S. federal -- -- -- (33,522)
State and local -- -- -- (1,585)
Deferred tax expense from loss on discontinued operation:
U.S. federal -- -- -- 137
State and local -- -- -- 178
Benefit from acquired tax benefits applied to reduce goodwill -- -- -- 1,765
----------------------------------------------------------
Provision (benefit) for income taxes $11,863 $(5,604) $25,025 $(42,199)
==========================================================
Current and long-term deferred tax assets and liabilities are comprised of the
following (in thousands):
December 31,
------------------------- September 30,
2003 2002 2002
-----------------------------------------
Depreciation and amortization $ 7,002 $ 6,800 $ 6,988
Expense accruals for book purposes 31,231 25,259 21,717
Loss and credit carryforwards 41,821 37,923 32,947
Intangible assets 376 1,835 -
Equity interest -- -- 98
Other 2,037 2,047 3,183
-----------------------------------------
Gross deferred tax asset 82,467 73,864 64,933
Intangible assets -- -- (1,000)
-----------------------------------------
Gross deferred tax liability -- -- (1,000)
Valuation allowance (35,863) (32,250) (29,156)
-----------------------------------------
Net deferred tax asset $ 46,604 $ 41,614 $ 34,777
=========================================
10-K.53
Current and long-term net deferred tax assets were $8.9 million and $37.7
million as of December 31, 2003, $6.0 million and $35.6 million as of December
31, 2002, and $3.7 million and $31.1 million as of September 30, 2002,
respectively, and are included in Prepaid expenses and other current assets and
Other assets in the Consolidated Balance Sheets.
The valuation allowance relates to domestic state and local and foreign tax net
operating loss and capital loss carryforwards that more likely than not will
expire unutilized. The net increase in the valuation allowance of approximately
$3.6 million in Calendar 2003 was primarily due to increases in state and local
net operating losses. Approximately $1.9 million of the valuation allowance will
reduce additional paid-in-capital upon subsequent recognition of any related tax
benefits related to stock options.
The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate on income (loss) from continuing operations are:
Fiscal
Calendar Transition ------------------------
2003 2002 2002 2001
--------------------------------------------------
Statutory tax rate 35.0% (35.0%) 35.0% (35.0%)
State income taxes, net of federal benefit 2.6 (2.9) 2.4 3.6
Foreign income taxed at a different rate (11.4) 5.6 (1.8) 13.2
Non-deductible goodwill -- -- -- 18.1
Non-taxable income (0.8) (0.3) (0.2) (0.3)
Exempt foreign trading gross receipts -- -- (0.4) (13.5)
Non-deductible meals and entertainment 1.7 0.6 0.6 5.6
Officers' life insurance 0.1 0.5 0.5 12.7
Valuation allowance on losses from minority-owned investments 0.9 3.0 0.5 88.5
Valuation allowance on (utilization of) foreign tax credits 2.5 -- (1.5) (185.1)
Other items 2.8 0.5 (1.1) (5.5)
-------------------------------------------------
Effective tax rate 33.4% (28.0%) 34.0% (97.7%)
=================================================
As of December 31, 2003, we had U.S. federal capital loss carryforwards of $24.3
million, of which $19.2 million will expire in three years, $3.6 million will
expire within four years, and the remaining $1.5 million will expire in five to
six years, foreign tax credit carryforwards of $8.8 million which will expire in
three to four years and other federal tax credit carryforwards of $1.8 million
which can be carried forward indefinitely. We had a federal net operating loss
carryforward of $6.7 million, the majority of which will expire in 19 years,
state and local tax net operating loss carryforwards of $172.5 million, of which
$43.5 million will expire within one to five years, $28.2 million will expire
within six to fifteen years, and $100.8 million will expire within sixteen to
twenty years. We also had $73.8 million in state and local capital loss
carryforwards, of which $69.6 million will expire in three years, $3.6 million
will expire in four years and the remaining $0.6 million will expire in five to
six years. Lastly, we had foreign tax loss carryforwards of $14.2 million of
which $4.2 million will expire in one to ten years and $10.0 million that can be
carried forward indefinitely.
13-EMPLOYEE BENEFITS
We have a savings and investment plan covering substantially all domestic
employees. We contribute amounts to this plan based upon the level of the
employee contributions. In addition, we also contribute fixed and discretionary
profit sharing contributions set by the Board of Directors. Amounts expensed in
connection with the plan totaled $9.3 million, $1.9 million, $9.5 million, and
$10.5 million for Calendar 2003, Transition 2002, and for Fiscal 2002 and 2001,
respectively.
Deferred compensation employee stock trust. We have supplemental deferred
compensation arrangements for the benefit of certain officers, managers and
other key employees. These arrangements are partially funded by life insurance
contracts, which have been purchased by us. The plan permits the participants to
diversify their investments. The value of the assets held, managed and invested,
pursuant to the agreement was $11.6 million, $9.3 million and $8.1 million at
December 31, 2003, December 31, 2002 and September 30, 2002, respectively, and
are included in Other assets. The corresponding deferred compensation liability
of $13.4 million, $10.8 million and $9.6 million at December 31, 2003, December
31, 2002 and September 30, 2002, respectively, is recorded at the fair market
value of the assets held in a rabbi trust and adjusted, with a corresponding
charge or credit to compensation cost, to reflect the fair value of the amount
owed to the employee and is included in Other liabilities. Total compensation
expense recognized for the plan was $0.3 million, $0.1 million, $0.6 million,
for Calendar 2003, Transition 2002 and Fiscal 2002, respectively, as compared to
$0.1 million of income for Fiscal 2001.
10-K.54
14-SEGMENT INFORMATION
We manage our business in three reportable segments: research, consulting and
events. Research consists primarily of subscription-based research products.
Consulting consists primarily of consulting, measurement engagements and
strategic advisory services. Events consists of various symposia, conferences
and exhibitions.
We evaluate reportable segment performance and allocate resources based on gross
contribution margin. Gross contribution, as presented below, is defined as
operating income excluding certain selling, general and administrative expenses,
depreciation, amortization of intangibles and other charges. The accounting
policies used by the reportable segments are the same as those used by the
Company.
We earn revenue from clients in many countries. Other than the United States,
there is no individual country in which revenues from external clients represent
10% or more of our consolidated revenues. Additionally, no single client
accounted for 10% or more of total revenue and the loss of a single client, in
management's opinion, would not have a material adverse effect on revenues.
We do not identify or allocate assets, including capital expenditures, by
operating segment. Accordingly, assets are not being reported by segment because
the information is not available by segment and is not reviewed in the
evaluation of performance or making decisions in the allocation of resources.
The following tables present information about reportable segments (in
thousands). The "Other" column includes certain revenues and corporate and other
expenses (primarily selling, general and administrative) unallocated to
reportable segments, expenses allocated to operations that do not meet the
segment reporting quantitative threshold, and other charges. There are no
intersegment revenues:
Research Consulting Events Other Consolidated
-------------------------------------------------------------------
Calendar 2003
Revenues $466,907 $258,628 $119,355 $13,556 $ 858,446
Gross Contribution 292,874 86,778 56,004 10,081 445,737
Corporate and other expenses (398,276)
---------
Operating income $ 47,461
=========
Calendar 2002 (unaudited)
Revenues $486,967 $276,059 $109,694 $14,873 $ 887,593
Gross Contribution 318,709 102,780 56,101 10,184 487,774
Corporate and other expenses (438,232)
---------
Operating income $ 49,542
=========
Transition 2002
Revenues $120,038 $ 58,098 $ 47,169 $ 4,509 $ 229,814
Gross Contribution $ 76,932 $ 18,883 $ 27,622 $ 3,640 127,077
Corporate and other expenses (139,963)
---------
Operating income $ (12,886)
=========
Fiscal 2002
Revenues $496,403 $273,692 $121,991 $15,088 $ 907,174
Gross Contribution 326,345 97,924 65,405 9,316 498,990
Corporate and other expenses (402,615)
---------
Operating income $ 96,375
=========
Fiscal 2001
Revenues $535,114 $276,292 $132,684 $18,794 $ 962,884
Gross Contribution 352,574 86,949 63,625 4,227 507,375
Corporate and other expenses (464,861)
---------
Operating income $ 42,514
=========
Our consolidated revenues are generated primarily through direct sales to
clients by domestic and international sales forces and a network of independent
international sales agents. We define "Other International Revenues" as revenues
attributable to all areas located outside of the United States, Canada and
Europe. Most of our products and services are provided on an integrated
worldwide basis. Because of the integration of products and services delivery,
it is not practical to separate precisely our revenues by geographic location.
Long-lived assets exclude goodwill and other intangible assets. Accordingly, the
separation set forth in the table below is based upon internal allocations,
which involve certain management estimates and judgments.
10-K.55
Summarized information by geographic location is as follows (in thousands):
Calendar Fiscal
----------------------------- Transition ------------------------
2003 2002 2002 2002 2001
-----------------------------------------------------------------------
Revenues: (Unaudited)
United States and Canada $535,694 $576,491 $148,585 $595,331 $641,877
Europe, Middle East and Africa 252,264 241,322 62,412 242,099 249,953
Other International 70,488 69,780 18,817 69,744 71,054
-----------------------------------------------------------------------
Total revenues $858,446 $887,593 $229,814 $907,174 $962,884
=======================================================================
Long-lived assets:
United States and Canada $ 67,081 $ 74,298 $ 74,298 $ 78,920 $ 98,931
Europe, Middle East and Africa 16,400 17,496 17,496 17,808 21,732
Other International 3,793 3,925 3,925 4,113 5,096
-----------------------------------------------------------------------
Total long-lived assets $ 87,274 $ 95,719 $ 95,719 $100,841 $125,759
=======================================================================
15-QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share data)
Calendar 2003 First Second Third Fourth(5)
- ----------------------------------------------------------------------------------------------------
Revenues $204,282 $213,318 $196,904 $243,942
Operating income (loss) (1) 2,789 19,846 13,991 10,835
Net (loss) income (2) (1,512) 12,854 5,474 6,877
Net (loss) income per share:
Basic $ (0.02) $ 0.16 $ 0.07 $ 0.05
Diluted (4) (0.02) 0.13 0.07 0.05
Fiscal 2002 First Second Third Fourth
- ----------------------------------------------------------------------------------------------------
Revenues $249,395 $201,095 $236,157 $220,527
Operating income (loss) (1) 33,947 (1,371) 34,678 29,121
Net income (loss) (2) 19,043 (4,316) 18,255 15,596
Net income (loss) per share:
Basic (3) $ 0.23 $ (0.05) $ 0.22 $ 0.19
Diluted (4) 0.17 (0.05) 0.16 0.15
(1) Includes other charges of $5.4 million in the first quarter of Calendar
2003, $24.3 million in the fourth quarter of Calendar 2003, and $17.2
million in the second quarter of Fiscal 2002.
(2) Includes gains (losses) on investments of $0.0 million, $5.5 million, $0.1
million, and $(0.9) million for each of the first, second, third and fourth
quarters of Calendar 2003, respectively, and $0.9 million, $0.1 million,
$(2.5) million, and $0.0 million for the first, second, third and fourth
quarters of Fiscal 2002, respectively.
(3) The aggregate of the four quarters' basic earnings per common share does
not total the reported full fiscal year amount due to the effect of
rounding.
(4) The aggregate of the four quarters' diluted earnings per common share does
not total the reported full calendar and fiscal year amounts due to the
effect of dilutive securities and rounding.
(5) During the fourth quarter of Calendar 2003, we recorded adjustments for
certain incentive compensation accruals, including bonuses, that provided a
benefit to operating income during the quarter of approximately $3.2
million, in the aggregate.
10-K.56
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this Report on Form 10-K to be signed on its behalf by the
undersigned, duly authorized, in Stamford, Connecticut, on March 12, 2004.
Gartner, Inc.
/s/ Michael D. Fleisher
Date: March 12, 2004 By: _____________________________
Michael D. Fleisher
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below appoints Michael D. Fleisher and
Christopher Lafond and each of them, acting individually, as his or her
attorney-in-fact, each with full power of substitution, for him or her in all
capacities, to sign all amendments to this Report on Form 10-K, and to file the
same, with appropriate exhibits and other related documents, with the
Securities and Exchange Commission. Each of the undersigned, ratifies and
confirms his or her signatures as they may be signed by his or her
attorney-in-fact to any amendments to this Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Name Title Date
/s/ MICHAEL D. FLEISHER Director and Chairman of the Board March 12, 2004
- --------------------------- and Chief Executive Officer
Michael D. Fleisher (Principal Executive Officer)
/s/ CHRISTOPHER LAFOND Executive Vice President and March 12, 2004
- --------------------------- Chief Financial Officer
Christopher Lafond (Principal Financial and Accounting Officer)
/s/ ANNE SUTHERLAND FUCHS Director March 12, 2004
- ---------------------------
Anne Sutherland Fuchs
/s/ WILLIAM O. GRABE Director March 12, 2004
- ---------------------------
William O. Grabe
/s/ MAX D. HOPPER Director March 12, 2004
- ---------------------------
Max D. Hopper
/s/ GLENN HUTCHINS Director March 12, 2004
- ---------------------------
Glenn Hutchins
/s/ STEPHEN G. PAGLIUCA Director March 12, 2004
- ---------------------------
Stephen G. Pagliuca
/s/ JAMES C. SMITH Director March 12, 2004
- ---------------------------
James C. Smith
/s/ DAVID J. ROUX Director March 12, 2004
- ---------------------------
David J. Roux
/s/ DENNIS G. SISCO Director March 12, 2004
- ---------------------------
Dennis G. Sisco
/s/ MAYNARD G. WEBB, JR. Director March 12, 2004
- ---------------------------
Maynard G. Webb, Jr.
10-K.57
GARTNER, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions As a Additions As a
Balance at Charged to % of Charged Deductions % of Balance
Beginning Costs and Year-End to Other from Year-End at End
of Year Expenses Amount Accounts (1) Reserve Amount of Year
- --------------------------------------------------------------------------------------------------------------------------
Fiscal 2001:
Allowance for doubtful accounts $5,003 $5,037 90% $ -- $4,440 79% $5,600
and returns and allowances
Fiscal 2002:
Allowance for doubtful accounts $5,600 $9,119 130% $ -- $7,719 110% $7,000
and returns and allowances
Transition 2002:
Allowance for doubtful accounts $7,000 $2,329 33% $ -- $2,329 33% $7,000
and returns and allowances
Calendar 2003:
Allowance for doubtful accounts $7,000 $8,276 92% $2,000 $8,276 92% $9,000
and returns and allowances
(1) Amounts charged to revenues.
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
State/Country of
Subsidiary Incorporation
- -------------------------------------------------------------------------------------- -----------------
Computer & Communications Information Group, Inc. (dba Datapro Information Services) New Jersey
Computer Consultancy Group, Limited United Kingdom
Computer Consultancy Group (Management) Limited United Kingdom
Computer Financial Consultants, Inc. Delaware
Computer Financial Consultants, Limited United Kingdom
Computer Financial Consultants (Management) Limited United Kingdom
Dataquest Australia Pty. Ltd. Australia
Dataquest, Inc. California
Decision Drivers, Inc. Delaware
G.G. Canada, Inc. Delaware
G.G. Credit, Inc. Delaware
G.G. Global Holdings, Inc. Delaware
G.G. Properties, Ltd. Bermuda
G.G. Scandinavia, A.S. Denmark
G.G. West Corporation Delaware
Gartner Advisory (Singapore) PTE LTD. Singapore
Gartner Australasia Pty Limited Australia
Gartner Austria GmbH Austria
Gartner Belgium BVBA Belgium
Gartner (Cambridge) Holdings, Inc. Delaware
Gartner Canada Co. Nova Scotia
Gartner Chile, S.A. Chile
Gartner Credit Corp. Delaware
Gartner Danmark ApS Denmark
Gartner Deutschland, GmbH Germany
Gartner do Brasil Ltda. Brazil
Gartner Enterprises, Ltd. Delaware
Gartner Europe Holdings, B.V. The Netherlands
Gartner Financial Services Company Ireland
Gartner France S.A.R.L. France
Gartner FSC, Inc. Barbados
Gartner Fund I, Inc. Delaware
Gartner Fund II, Inc. Delaware
Gartner Group Argentina, S.A. Argentina
Gartner Group Research (Thailand) Ltd. Thailand
Gartner Group Taiwan Ltd. Taiwan
Gartner Group (Thailand) Ltd. Thailand
Gartner Holdings Ireland Ltd. Ireland
Gartner Hong Kong, Limited Hong Kong
Gartner India Research & Advisory Services Private Limited India
Gartner Investments I, LLC Delaware
Gartner Investments II, LLC Delaware
Gartner Ireland Limited Ireland
Gartner Italia, S.r.l. Italy
Gartner Japan Ltd. Japan
Gartner (Korea), Inc. Delaware
Gartner Mexico S. D. der .L. de C.V. Mexico
Gartner Nederland B.V. The Netherlands
Gartner Norge A.S. Norway
Gartner Sverige AB Sweden
Gartner Switzerland GmbH Switzerland
Gartner UK Limited United Kingdom
Griggs-Anderson, Inc. Delaware
National Institute for Management Technology Ireland
People3, Inc. Delaware
The IT Management Programme Limited United Kingdom
The Research Board, Inc. Delaware
The Warner Group California
Vision Events International, Inc. Delaware
Wentworth Research Limited United Kingdom
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Gartner, Inc.:
We consent to the incorporation by reference in the registration statement (No.
333-76711) on Form S-3 and the registration statements (No. 033-85926, No.
033-92486, No. 333-35169, No. 333-42587, No. 333-77015, No. 333-77013, No.
333-30546, No. 333-97557, No. 333-91256 and No. 333-104753) on Form S-8 of
Gartner, Inc. of our report dated February 5, 2004, with respect to the
consolidated balance sheets of Gartner, Inc. and subsidiaries as of December 31,
2003 and 2002 and September 30, 2002, and the related consolidated statements of
operations, stockholders' equity (deficit) and comprehensive income (loss) and
cash flows for the year ended December 31, 2003, the three month period ended
December 31, 2002, and each of the years in the two-year period ended September
30, 2002, and the related consolidated financial statement schedule, which
report appears in the December 31, 2003 Annual Report on Form 10-K of Gartner,
Inc.
Our report contains an explanatory paragraph indicating that the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" in the year ended September 30, 2002.
/s/ KPMG LLP
New York, New York
March 12, 2004
Exhibit 31.1
CERTIFICATION
I, Michael D. Fleisher, certify that:
(1) I have reviewed this Annual Report on Form 10-K of Gartner, Inc.;
(2) Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based
on my most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's Board of Directors:
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Michael D. Fleisher
Michael D. Fleisher
Chief Executive Officer
March 12, 2004
Exhibit 31.2
CERTIFICATION
I, Christopher Lafond, certify that:
(1) I have reviewed this Annual Report on Form 10-K of Gartner, Inc.;
(2) Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based
on my most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's Board of Directors:
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Christopher Lafond
Christopher Lafond
Chief Financial Officer
March 12, 2004
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Gartner, Inc. (the "Company") on Form
10-K for the twelve month period ended December 31, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), as Chief
Executive Officer of the Company and Chief Financial Officer of the Company,
each hereby certifies, pursuant to 18 U.S.C. [sec] 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Michael D. Fleisher
Name: Michael D. Fleisher
Title: Chief Executive Officer
Date: March 12, 2004
/s/ Christopher Lafond
Name: Christopher Lafond
Title: Chief Financial Officer
Date: March 12, 2004
A signed original of this written statement required by Section 906 has
been provided to Gartner, Inc. and will be retained by Gartner, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.