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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ______ TO _______
COMMISSION FILE NUMBER 1-14443
GARTNER, INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-3099750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
56 Top Gallant Road 06904-2212
P.O. Box 10212 (Zip Code)
Stamford, CT
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 316-1111
Indicate by check mark whether the Registrant (1) has filed all reports
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) YES [X] NO [ ].
The number of shares outstanding of the Registrant's capital stock as of
April 30, 2003 was 50,124,605 shares of Class A Common Stock and 29,638,528
shares of Class B Common Stock.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS Page
Condensed Consolidated Balance Sheets at March 31, 2003 and
December 31, 2002 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 25
ITEM 4: CONTROLS AND PROCEDURES 26
PART II OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 27
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GARTNER, INC.
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2003 2002
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 135,431 $ 109,657
Fees receivable, net 257,930 283,068
Deferred commissions 23,319 25,016
Prepaid expenses and other current assets 33,994 41,524
--------- ---------
Total current assets 450,674 459,265
Property, equipment and leasehold improvements, net 64,821 71,006
Goodwill and other intangibles, net 225,513 226,114
Other assets 69,898 71,018
--------- ---------
TOTAL ASSETS $ 810,906 $ 827,403
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 140,811 $ 151,990
Deferred revenues 301,361 305,887
--------- ---------
Total current liabilities 442,172 457,877
Long-term convertible debt 356,805 351,539
Other liabilities 46,474 46,688
--------- ---------
TOTAL LIABILITIES 845,451 856,104
STOCKHOLDERS' DEFICIT
Preferred stock -- --
Common stock 60 60
Additional paid-in capital 369,623 368,090
Unearned compensation, net (2,818) (3,069)
Accumulated other comprehensive loss, net (11,188) (11,392)
Accumulated earnings 148,731 150,243
Treasury stock, at cost (538,953) (532,633)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (34,545) (28,701)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 810,906 $ 827,403
========= =========
See the accompanying notes to the condensed consolidated financial statements.
3
GARTNER, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)
Three Months Ended
March 31,
2003 2002
--------- ---------
Revenues:
Research $ 115,724 $ 122,735
Consulting 61,779 65,893
Events 23,509 9,100
Other 3,270 3,367
--------- ---------
Total revenues 204,282 201,095
Costs and expenses:
Cost of services and product development 102,333 88,341
Selling, general and administrative 83,504 86,032
Depreciation 9,825 10,344
Amortization of intangibles 405 503
Other charges 5,426 17,246
--------- ---------
Total costs and expenses 201,493 202,466
--------- ---------
Operating income (loss) 2,789 (1,371)
Income from minority-owned investments 31 78
Interest income 435 300
Interest expense (6,047) (5,631)
Other income (expense), net 535 (16)
--------- ---------
Loss before income taxes (2,257) (6,640)
Benefit for income taxes (745) (2,324)
--------- ---------
Net loss $ (1,512) $ (4,316)
========= =========
Basic loss per common share $ (0.02) $ (0.05)
Diluted loss per common share $ (0.02) $ (0.05)
Weighted average shares outstanding:
Basic 80,492 84,613
Diluted 80,492 84,613
See the accompanying notes to the condensed consolidated financial statements.
4
GARTNER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Three Months Ended
March 31,
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net loss $ (1,512) $ (4,316)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization of intangibles 10,230 10,847
Non-cash compensation 251 298
Tax benefit associated with employee exercise of stock options -- 1,189
Deferred taxes 5 (145)
Income from minority-owned investments (31) (78)
Accretion of interest and amortization of debt issue costs 5,822 5,454
Gain from sale of business -- (493)
Non-cash charges associated with impairment of long-lived assets -- 1,424
Changes in assets and liabilities:
Fees receivable 25,934 22,467
Deferred commissions 1,728 4,210
Prepaid expenses and other current assets 7,691 17,177
Other assets 72 5,670
Deferred revenues (5,257) 8,551
Accounts payable and accrued liabilities (11,207) (17,727)
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 33,726 54,528
--------- ---------
INVESTING ACTIVITIES:
Purchases of businesses -- (99)
Proceeds from sale of business -- 239
Additions to property, equipment and leasehold improvements (3,357) (4,532)
--------- ---------
CASH USED IN INVESTING ACTIVITIES (3,357) (4,392)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from stock issued for stock plans 2,021 13,462
Purchase of treasury stock (6,808) (12,153)
--------- ---------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (4,787) 1,309
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 25,582 51,445
EFFECTS OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 192 (96)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 109,657 27,431
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 135,431 $ 78,780
========= =========
See the accompanying notes to the condensed consolidated financial statements.
5
GARTNER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
On October 30, 2002, Gartner, Inc. (the "Company") announced that the Board of
Directors approved a change of the Company's 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 quarterly periods of 2002, unless otherwise
indicated, are to the calendar quarters of 2002. Certain prior year amounts have
been reclassified to conform to the current year presentation.
These interim condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and should be read
in conjunction with the consolidated financial statements and related notes of
the Company filed in our Transition Report on Form 10-KT for the transition
period from October 1, 2002 to December 31, 2002. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
operating revenues and expenses. These estimates are based on management's
knowledge and judgments. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation of financial position, results of operations and cash flows at the
dates and for the periods presented have been included. The results of
operations for the three months ended March 31, 2003 may not be indicative of
the results of operations for the remainder of fiscal 2003.
Note 2 - Comprehensive Loss
The components of comprehensive loss for the three months ended March 31, 2003
and 2002 are as follows (in thousands):
Three Months Ended
March 31,
2003 2002
------- -------
Net loss $(1,512) $(4,316)
Other comprehensive income (loss):
Foreign currency translation adjustments 199 (1,799)
Net unrealized gains (losses) on investments, net of tax 5 (319)
------- -------
Other comprehensive income (loss) 204 (2,118)
------- -------
Comprehensive loss $(1,308) $(6,434)
======= =======
The balance of unrealized holding losses, net of tax, at March 31, 2003 was $0.1
million.
6
Note 3 - Computations of Loss per Share of Common Stock
The following table sets forth the reconciliation of the basic and diluted loss
per share (in thousands, except per share data):
Three Months Ended
March 31,
2003 2002
-------- --------
Numerator:
Net loss used for calculating basic loss per share $ (1,512) $ (4,316)
After-tax interest on convertible long-term debt -- --
-------- --------
Loss used for calculating diluted loss per share $ (1,512) $ (4,316)
======== ========
Denominator:
Weighted average number of common shares used in the calculation of
basic loss per share 80,492 84,613
Common stock equivalents associated with stock compensation plans -- --
Weighted average number of shares associated with convertible
long-term debt -- --
-------- --------
Shares used in the calculation of diluted loss per share 80,492 84,613
======== ========
Basic and diluted loss per share $ (0.02) $ (0.05)
======== ========
For the three months ended March 31, 2003 and 2002, unvested restricted stock
awards were not included in the computation of diluted loss per share because
the effect would have been anti-dilutive. For the three months ended March 31,
2003 and 2002, options to purchase 36.5 million and 35.3 million shares,
respectively, of Class A Common Stock of the Company were not included in the
computation of diluted loss per share because the effect would have been
anti-dilutive. The calculation above does not add back the after-tax interest on
convertible debt to Net loss in the numerator and does not add the weighted
average number of shares associated with the convertible debt to the denominator
because the effect would have been anti-dilutive for both periods presented. Had
the effect of conversion of the debt been dilutive on an "if converted" method
for the three months ended March 31, 2003, $3.1 million of after-tax interest
would have been added to the numerator and 47.6 million shares would have been
added to the denominator of the above calculation. Had the effect of conversion
of the debt been dilutive on an "if converted" method for the three months ended
March 31, 2002, $3.1 million of after-tax interest would have been added to the
numerator and 45.0 million shares would have been added to the denominator of
the above calculation.
Note 4 - Accounting for Stock-Based Compensation
The Company has several stock-based compensation plans. The Company applies APB
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its employee stock options and purchase rights and applies
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.
7
If compensation for employee options had been determined based on SFAS 123, the
Company's pro forma net loss, and pro forma loss per share would have been as
follows (in thousands, except per share data):
Three Months Ended
March 31,
2003 2002
-------- --------
Net loss as reported $ (1,512) $ (4,316)
Add: Stock-based compensation expense already included in
net loss as reported 163 266
Deduct: Pro forma employee compensation cost related to stock options,
restricted stock and share purchase plan, net of tax (5,697) (7,713)
-------- --------
Pro forma net loss $ (7,046) $(11,763)
======== ========
Basic and diluted loss per share:
As reported $ (0.02) $ (0.05)
Pro forma $ (0.09) $ (0.14)
The fair value of the Company's stock plans was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Three Months Ended
March 31,
2003 2002
-------- --------
Expected Dividend yield 0% 0%
Expected stock price volatility 45% 50%
Risk-free interest rate 2.0% 3.2%
Expected life in years 3.4 3.5
Note 5 - Segment Information
The Company manages its business in three reportable segments organized on the
basis of differences in its products and services: Research, Consulting, and
Events. Research consists primarily of subscription-based research products.
Consulting consists primarily of consulting and measurement engagements. Events
consists of various symposia, expositions and conferences.
The Company evaluates reportable segment performance and allocates resources
based on gross contribution margin. Gross contribution, as presented below, is
the profit or loss from operations before interest income and expense, certain
selling, general and administrative costs, amortization, income taxes, other
expenses, and foreign exchange gains and losses. The accounting policies used by
the reportable segments are the same as those used by the Company.
The Company does not identify or allocate assets, including capital
expenditures, by operating segment. Accordingly, assets are not reported by
segment because the information is not available and is not reviewed in the
evaluation of segment performance.
8
The following tables present information about reportable segments (in
thousands). The "Other" column consists primarily of software sales and certain
other revenues and related expenses that do not meet the segment reporting
quantitative thresholds. There are no inter-segment revenues.
Research Consulting Events Other Consolidated
-------- ---------- -------- ------- ------------
THREE MONTHS ENDED
MARCH 31, 2003:
Revenues $115,724 $ 61,779 $ 23,509 $ 3,270 $ 204,282
Gross Contribution 73,650 20,885 8,400 2,368 105,303
Corporate and other expenses (102,514)
---------
Operating income $ 2,789
=========
THREE MONTHS ENDED
MARCH 31, 2002:
Revenues $122,735 $ 65,893 $ 9,100 $ 3,367 $ 201,095
Gross Contribution 82,984 22,533 4,225 1,530 111,272
Corporate and other expenses (112,643)
---------
Operating loss $ (1,371)
=========
Note 6 - Intangible Assets
The following table presents the Company's intangible assets subject to
amortization (in thousands):
March 31, 2003 December 31, 2002
---------------------------- ----------------------------
Accumulated Accumulated
Gross Amortization Gross Amortization
-------- ------------ -------- ------------
Non-compete agreements $ 12,904 $ (11,514) $ 12,910 $ (11,157)
Trademarks & tradenames 1,808 (1,351) 1,808 (1,307)
-------- --------- -------- ---------
Total $ 14,712 $ (12,865) $ 14,718 $ (12,464)
======== ========= ======== =========
Aggregate amortization expense for the three months period ended March 31, 2003
and 2002 was $405 thousand and $502 thousand, respectively. The estimated future
amortization expense of purchased intangibles is as follows (in thousands):
2003 (remaining nine months) $ 872
2004 722
2005 237
2006 14
2007 2
-------
$ 1,847
=======
9
Note 7 - Other Charges
During the three months ended March 31, 2003, the Company recorded other charges
of $5.4 million associated with workforce reductions. The charge is for costs
for employee termination severance payments and related benefits. This workforce
reduction has resulted in the termination of 92 employees and the payment of
$1.2 million during the three months ended March 31, 2003.
Other charges recorded in prior periods included:
- - During the three month transition period ended December 31, 2002, the
Company 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
the Company's workforce reduction and are for employee termination
severance payments and related benefits. This workforce reduction resulted
in the elimination of 175 positions and the payment of $5.7 million of
termination benefits during the three months ended March 31, 2003.
- - During the three months ended March 31, 2002, the Company 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 the Company's workforce
reduction and are for related employee termination severance payments and
related benefits. This workforce reduction resulted in the elimination of
approximately 100 positions. The remaining $1.4 million relates to the
impairment of certain database-related assets.
- - During Fiscal 2001, the Company recorded other charges of $46.6 million.
Of these charges, $24.8 million are associated with the Company's
workforce reduction announced in April 2001. This workforce reduction
resulted in the elimination of 383 positions, and the payment of $0.1
million of termination severance payments and related benefits during the
three months ended March 31, 2003. 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 the Company's
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.
10
The following table summarizes the activity related to the liability for the
restructuring programs recorded as other charges (in thousands):
Workforce Excess
Reduction Facilities Asset
Costs Costs Impairments Total
--------- ---------- ----------- --------
Accrued Liability at December 31, 2001 $ 2,889 $ -- $ -- $ 2,889
Charges during three months ended
March 31, 2002 5,808 10,014 1,424 17,246
Non-cash charges (120) (2,663) (1,424) (4,207)
Payments (4,905) (1,417) -- (6,322)
-------- -------- -------- --------
Accrued Liability at March 31, 2002 3,672 5,934 -- 9,606
Payments during remainder of fiscal 2002 (3,014) (1,846) -- (4,860)
-------- -------- -------- --------
Accrued Liability at September 30, 2002 658 4,088 -- 4,746
Charges during three month transition
period ended December 31, 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 three months ended
March 31, 2003 5,426 -- -- 5,426
Payments (7,044) (1,767) -- (8,811)
-------- -------- -------- --------
Accrued Liability at March 31, 2003 $ 10,105 $ 14,169 $ -- $ 24,274
======== ======== ======== ========
The non-cash charges for workforce reductions result from the establishment of a
new measurement date for certain stock options upon the modification of the
exercise term.
Note 8 - Stock Repurchase Program
On July 19, 2001, the Company's Board of Directors approved the repurchase of up
to $75.0 million of Class A and Class B Common Stock. On July 25, 2002, the
Company's Board of Directors increased the authorized stock repurchase program
from the previously approved $75 million to up to $125 million of its Class A
and Class B Common Stock. During the three months ended March 31, 2003, the
Company repurchased 841,600 shares of its Class A Common Stock and 69,900 shares
of its Class B Common Stock at an aggregate cost of $6.8 million under this
program. On a cumulative basis at March 31, 2003, the Company has purchased
$90.5 million of the Company's stock.
Note 9 - Contingencies
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. The Company believes the outcome of all current
proceedings, claims and litigation will not have a material effect on the
Company's financial position or results of operations when resolved in a future
period.
The Company has various agreements in which it may be obligated 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 the Company customarily agrees to hold the other party harmless against
losses arising from a breach of representations related to such matters as title
to assets sold and
11
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 the Company's obligations and the
unique facts of each particular agreement. Historically, payments made by the
Company under these agreements have not been material. As of March 31, 2003,
management was not aware of any indemnification agreements that would require
material payments.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of the following Management's Discussion and Analysis (MD&A) is to
help facilitate the understanding of significant factors influencing the first
quarter operating results, financial condition and cash flows of Gartner, Inc.
Additionally, the MD&A also conveys our expectations of the potential impact of
known trends, events or uncertainties that may impact future results. You should
read this discussion in conjunction with our condensed consolidated financial
statements and related notes included in this report and in our Transition
Report on Form 10-KT for the three month transition period ended December 31,
2002. Historical results and percentage relationships are not necessarily
indicative of operating results for future periods.
References to "the Company," "we," "our," and "us" are to Gartner, Inc. and its
subsidiaries.
On October 30, 2002, the Company announced that the Board of Directors approved
a change of the Company's 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 the quarters of 2002 are to the calendar quarters of 2002.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. 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," "expects," "should," "believes," "plans," "anticipates," "estimates,"
"predicts," "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," "Euro Conversion," and elsewhere in this report and in our
Transition Report on Form 10-KT for the three month transition period ended
December 31, 2002. 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 also should review carefully any
risk factors described in other reports filed by us with the Securities and
Exchange Commission.
BUSINESS MEASURES
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.
13
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.
--------------------------------------------------------------------
Consulting CONSULTING BACKLOG represents future
revenue to be derived from in-process
consulting, measurement and strategic
advisory services engagements.
--------------------------------------------------------------------
Events DEFERRED EVENTS REVENUE represents
billings and relates directly to our
future symposia, conferences and
exhibitions. Events revenues are
deferred and recognized upon the
completion of the related symposium,
conference or exhibition.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires the application of appropriate
accounting policies. The policies discussed below are considered by management
to be critical to an understanding of Gartner's financial statements because
their application requires the most significant management judgments. 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:
- - Research revenues are derived from subscription contracts for research
products. Revenues from research products are deferred and recognized
ratably over the applicable contract term;
- - 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;
- - Events revenues are deferred and recognized upon the completion of the
related symposium, conference or exhibition; and
- - 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.
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. 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 with a
corresponding amount as deferred revenue, since the contract represents a
legally enforceable claim. For those government contracts that permit
termination, the Company bills the client the full amount billable under the
contract but only records a receivable equal to the earned portion of the
contract. In addition, the Company only records deferred revenue on these
government contracts when cash is received. Deferred revenues attributable to
government contracts were $28.4 million and $29.3 million at March 31, 2003 and
December 31, 2002, respectively. In addition, at March 31, 2003 and December 31,
2002, the Company had not recognized uncollected receivables or deferred
revenues, relating to government contracts that permit termination, of $5.5
million and $4.7 million, respectively.
14
UNCOLLECTIBLE ACCOUNTS RECEIVABLE - Provisions for bad debts are recognized as
incurred. The measurement of likely and probable losses and the allowance for
uncollectible accounts 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 accounts 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 quality of our collection efforts.
Total trade receivables at March 31, 2003 were $264.9 million, against which an
allowance for losses of approximately $7.0 million was provided. Total trade
receivables at December 31, 2002 were $290.1 million, against which an allowance
for losses of approximately $7.0 million was provided.
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 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 $10.4 million and $10.7 million at March
31, 2003 and December 31, 2002, respectively.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS - The evaluation of goodwill
is performed in accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets." Among other requirements, this standard eliminated goodwill
amortization upon adoption and required an initial assessment for goodwill
impairment within six months of adoption and at least annually thereafter. The
evaluation of other intangible assets is performed on a periodic basis. These
assessments require management to estimate the fair value of our reporting units
based on estimates of future business operations and market and economic
conditions in developing long-term forecasts. If we determine the fair values
are less than the carrying amount of goodwill recorded on our Consolidated
Balance Sheets, we must recognize an impairment in our financial statements. The
carrying amount of goodwill at March 31, 2003 was $223.7 million. 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 in determining whether an impairment may exist include:
significant under-performance relative to historical or projected future
operating results, significant changes in the manner of our use of acquired
assets or the strategy for our overall business, and significant negative
industry or economic trends.
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. 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
15
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 be charged to income in
the period such determination was made.
CONTINGENCIES AND OTHER LOSS RESERVES - We establish reserves for severance
costs, lease costs associated with excess facilities, 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.
RESULTS OF OPERATIONS
OVERALL RESULTS
TOTAL REVENUES increased 2% in the first quarter of 2003 to $204.3 million
compared to $201.1 million for the first quarter of 2002. The increase in total
revenues resulted from the timing of Spring Symposium, which was held in the
first quarter of 2003 as compared to the second calendar quarter of 2002. The
increase caused by the timing of Spring Symposium was partially offset by the
decline in demand throughout the entire technology sector and the overall
weakness in the general economy. Please refer to the section of this MD&A
entitled "Segment Results" for a further discussion of revenues by segment.
COST OF SERVICES AND PRODUCT DEVELOPMENT increased $14.0 million, or 16%, to
$102.3 million in the first quarter of 2003 from $88.3 million in the first
quarter of 2002. The increase in cost of services and product development
resulted primarily from higher conference expenses and related travel expenses
due to the timing of Spring Symposium.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $2.5 million, or 3%, to
$83.5 million in the first quarter of 2003 from $86.0 million in the first
quarter of 2002. The decrease was primarily the result of lower commission
expenses. Our sales year, the period in which sales personnel's achievement
against quota is measured, traditionally consisted of the twelve months ending
in September each year. In 2001, due to factors including the business impacts
of the events of September 11, 2001, we extended our sales year an additional
quarter through December 31, 2001. This additional quarter increased the earned
commissions that were deferred and subsequently expensed over the term of the
related sales agreements, resulting in higher commission expense in 2002.
DEPRECIATION EXPENSE for the first quarter of 2003 decreased 5% to $9.8 million,
compared to $10.3 million for the first quarter 2002. The decrease was due to a
reduction in capital spending over the past 18 months, which has led to a
decrease in depreciation expense.
AMORTIZATION OF INTANGIBLES of $0.4 million for the first quarter of 2003
decreased from $0.5 million for the same period in 2002 due to certain
intangible assets having been fully amortized since the first quarter of 2002.
16
OTHER CHARGES of $5.4 million during the first quarter of 2003 were for costs
for employee termination severance and benefits associated with workforce
reductions. This workforce reduction has resulted in the elimination of 92
positions, or approximately 2% of the Company's workforce, and the payment of
$1.2 million of termination benefits during the quarter ended March 31, 2003, in
addition to payments of $5.7 million related to workforce reductions initiated
during the three month transitional period ended December 31, 2002. During the
three months ended March 31, 2002, Other charges were $17.2 million. Of these
charges, $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 the Company's
workforce reduction and were for employee termination severance and benefits.
This workforce reduction resulted in the elimination of approximately 100
positions, or approximately 2% of the Company's workforce, and the payment of
$2.6 million of termination benefits during the quarter ended March 31, 2002.
The remaining $1.4 million relates to the impairment of certain database-related
assets. The Company is funding all of these costs out of operating cash flows.
INTEREST EXPENSE increased to $6.0 million in the first quarter of 2003 from
$5.6 million in the first quarter of 2002 due to the compounding of interest on
our long-term convertible debt.
OTHER INCOME (EXPENSE), NET for the first quarter of 2003 consists primarily of
net foreign currency exchange gains. This compares with net foreign currency
exchange losses of $0.5 million and a $0.5 million gain from the sale of a
business during the first quarter of 2002.
BENEFIT FOR INCOME TAXES was a benefit of $.7 million in the first quarter of
2003, compared to a benefit of $2.3 million in the same quarter of 2002. The
effective tax rate was 33% for the first quarter of 2003 and 35% for the first
quarter of 2002. The reduction in the effective tax rate for the 2003 year, as
compared to the 2002 year, reflects the implementation of tax planning
strategies.
NET LOSS AND BASIC AND DILUTED LOSS PER COMMON SHARE was a loss of $0.02 for the
first quarter of 2003, compared to a loss of $0.05 for the first quarter of
2002. The restructuring recorded as Other charges impacted diluted loss per
common share by $0.05 and $0.13 unfavorably during the first quarters of 2003
and 2002, respectively.
SEGMENT RESULTS
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.
Research
Research revenues decreased 6% to $115.7 million for the first quarter of 2003,
compared to $122.7 million for the for the first quarter of 2002. The decrease
was due to lower demand throughout the entire technology sector and to the
overall weakness in the general economy. Research gross contribution of $73.7
million for the first quarter of 2003 decreased 11% from $83.0 million for the
first quarter of 2002. Gross contribution margin for the quarter ended March 31,
2003 decreased to 64% from 68% in the prior year period. The decrease in gross
contribution and gross contribution margin is a result of the costs associated
with investments in Gartner EXP, Gartner G2, membership programs, product
development and marketing and database management. Research contract value,
which consists of the annualized value of all subscription-based research
products with ratable revenue recognition, was $474.4 million at March 31, 2003,
a decrease of 7% from $511.2 million at March 31, 2002. The decrease in contract
value reflects
17
a decline in demand throughout the entire technology and finance industries as
our large clients in these industries continue to rationalize their spending.
Consulting
Consulting revenues decreased 6% to $61.8 million for the first quarter of 2003
compared to $65.9 million for the first quarter of 2002. The decrease in
revenues was caused by lower billable headcount and lower fees from Speaker
Advisory Services (SAS). SAS fees decreased due to the timing of the Spring
Symposium that occurred in the first quarter of 2003 as compared to the second
quarter during 2002. Analysts' attendance at the Spring Symposium in the first
quarter of 2003 resulted in decreased billable time for SAS engagements.
Consulting gross contribution of $20.9 million for the first quarter of 2003
decreased 7% from $22.5 million for the first quarter of 2002. Gross
contribution margin for the first quarter of 2003 remained consistent with the
prior year quarter at 34%. We continue to focus on larger engagements and on a
limited set of practices and markets in which we can achieve significant
penetration. Consulting backlog, which represents future revenues to be
recognized from in-process consulting, measurement and strategic advisory
services engagements decreased 23% to $98.3 million at March 31, 2003, compared
to $127.5 million at March 31, 2002. Consulting backlog decreased primarily due
to the deferral of decisions regarding future consulting projects by government
sector clients as a result of the war in Iraq.
Events
Events revenues increased 158% to $23.5 million for the first quarter of 2003,
compared to $9.1 million for the first quarter of 2002. The increase was
primarily due to the timing of Spring Symposium and certain Vision events, which
were held in the first quarter of 2003 as compared to the second quarter of
2002. The increase in revenues due to the timing of events was approximately
$13.5 million. Gross contribution of $8.4 million for the first quarter of 2003
increased from $4.2 million for the first quarter of 2002. Gross contribution
margin for the first quarter of 2003 of 36% decreased from 46% for the first
quarter of 2002. The decrease in gross contribution margin was due primarily to
a decrease in attendees and exhibitors at the events caused by the overall
decrease in spending in the technology industry. Deferred revenue for events
decreased 33% to $36.6 million at March 31, 2003 as compared to $54.3 million at
March 31, 2002 primarily due to the timing of the Spring Symposium and Vision
events, as revenue was recognized on these events in the first quarter of 2003,
as well as due to changes in billing terms.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $33.7 million for the three months
ended March 31, 2003 compared to $54.5 million for the three months ended March
31, 2002. The net decrease in cash flow from operating activities of $20.8
million was due primarily to receipt of tax refunds of $17.5 million during the
first quarter of 2002 for capital loss and foreign tax credit carrybacks. In
addition, we incurred $2.5 million of higher payments relating to our
restructuring programs during the first quarter of 2003 as compared to the first
quarter of 2002.
Cash used in investing activities was $3.4 million for the three months ended
March 31, 2003, compared to $4.4 million for the three months ended March 31,
2002. The decrease was due primarily to lower amounts spent on capital
expenditures during first quarter of 2003.
Cash used in financing activities totaled $4.8 million for the three months
ended March 31, 2003, compared to cash provided by financing activities of $1.3
million for the three months ended March 31,
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2002. We purchased $6.8 million of common stock for treasury during the first
quarter of 2003 as compared to $12.2 million during the same period in the prior
year. We received proceeds from stock issued for stock plans of $2.0 million
during the first quarter of 2003 as compared to $13.5 million during the same
period in the prior year.
OBLIGATIONS AND COMMITMENTS
We have a $200.0 million unsecured senior revolving credit facility led by
JPMorgan Chase Bank. At March 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 March 31, 2003 was $51.4 million.
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. and certain
of Silver Lake's affiliates ("SLP"). Interest accrues semi-annually by a
corresponding increase in the face amount of the convertible notes. Accordingly,
$57.3 million has been added to the face amount of the convertible notes'
balance outstanding at March 31, 2003, resulting in a balance outstanding of
$357.3 million on that date, before reducing this balance for unamortized debt
discount of $0.5 million. These notes are due and payable on April 17, 2005.
On or after April 17, 2003, subject to satisfaction of certain customary
conditions, we may redeem all of the convertible notes for cash provided that:
(1) the average closing price of our Class A Common Stock for the twenty
consecutive trading days immediately preceding the date the redemption
notice is given equals or exceeds $11.175 (150% of the adjusted conversion
price of $7.45 per share); and
(2) the closing price of our Class A Common Stock on the trading day
immediately preceding the date the redemption notice is given also equals
or exceeds $11.175.
The redemption price is the face amount of the notes plus all accrued interest.
If we initiate the redemption, SLP has the option of receiving payment in cash,
Class A Common Stock (at a conversion price of $7.45 per share), or a
combination of cash and stock. We are under no obligation to initiate any such
redemption.
Commencing on April 18, 2003, SLP may convert all or a portion of the notes to
Class A Common Stock. If SLP initiates the conversion, we have the option of
redeeming all the notes for cash at a price based on the number of shares into
which the notes would be converted (at a conversion price of $7.45 per share)
and the market price on the date the notice of conversion is given. If we were
to redeem all of the notes for cash in response to SLP's election to convert the
notes to Class A Common Stock, we would incur a significant earnings charge at
the time of the redemption equal to the difference between the market value of
our Class A Common Stock at the time of redemption at the conversion price of
$7.45 per share and the carrying value of the notes. Had the notes been
convertible at March 31, 2003, the notes would have been convertible into 48.0
million shares with a total market value of $332.9 million, using our March 31,
2003 Class A Common Stock market price of $6.95 per share. On the maturity date,
April 17, 2005, we must satisfy any remaining notes for cash equal to the face
amount of the notes plus accrued interest; if none of the notes have been
redeemed or converted on that date, such amount will be $403.2 million.
19
We also issue letters of credit in the ordinary course of business. As of March
31, 2003, we had letters of credit outstanding with JPMorgan Chase Bank for $1.1
million, The Bank of New York for $2.0 million, and others for $0.8 million.
We lease various facilities, furniture and computer equipment under operating
lease arrangements expiring between 2003 and 2025. Future commitments under
non-cancellable operating lease agreements are $24 million for April 1, 2003
through December 31, 2003, and are $23.5 million, $20.5 million, $17.4 million
and $16.8 million for 2004, 2005, 2006 and 2007, respectively.
At March 31, 2003, we had involuntary employee termination severance and benefit
obligations remaining relative to our workforce reduction programs of $10.1
million, which we anticipate paying primarily over the remainder of 2003. The
obligations remaining at March 31, 2003 relative to the costs of facility
reductions, principally lease payments, were $14.2 million. Payments relating to
facility reductions will be made over the remaining lease terms with the
majority occurring over the next several years.
The Company has a 34% interest in SI II, a venture capital fund engaged in
making investments in early to mid-stage IT-based or Internet-enabled companies.
We had a total remaining investment commitment to SI II of $5.9 million at March
31, 2003. We have funded $1.5 million of this commitment since March 31, 2003,
and we expect to fund the remainder of this investment commitment during 2003.
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, or for the
possible redemption of the convertible notes, there can be no assurances that
such capital will be available to us or will be available on commercially
reasonable terms.
Stock Repurchase Program
On July 19, 2001, our Board of Directors approved the repurchase of up to $75.0
million of Class A and Class B Common Stock. On July 25, 2002, our Board of
Directors increased the authorized stock repurchase program from the previously
approved $75 million to up to $125 million of its Class A and Class B Common
Stock. During the three months ended March 31, 2003, we repurchased 841,600
shares of our Class A Common Stock and 69,900 shares of our Class B Common Stock
at an aggregate cost of $6.8 million under this program. On a cumulative basis
at March 31, 2003, the Company has purchased $90.5 million of its stock. We
expect to make repurchases from time to time over the next two years through
open market purchases, block trades or otherwise. Repurchases are subject to the
availability of the stock, prevailing market conditions, the trading price of
the stock, and our financial performance. Repurchases will be funded from cash
flow from operations and possible borrowings under our existing credit facility.
BUSINESS AND TRENDS
Our quarterly and annual revenue and operating income fluctuate as a result of
many factors, including the timing of the execution of research contracts, the
extent of completion of consulting engagements, the timing of Symposia and other
events, all of which occur to a greater extent in the quarter ended December 31,
the amount of new business generated, the mix of domestic and international
business, changes in market demand for our products and services, the timing of
the development, introduction and marketing of new products and services, and
competition in the industry. The potential fluctuations in our operating
20
income could cause period-to-period comparisons of operating results not to be
meaningful and could provide an unreliable indication of future operating
results. As previously discussed, our consulting backlog has experienced a
decline. The largest factor causing this decline was decreases in committed
spending from government clients. While we expect to recover some of the
deferred spending commitments from federal government clients, recovering
spending commitments from state and local governments may be difficult for the
remainder of 2003.
Over the past couple of years we have seen a decrease in overall technology
spending due to the economic environment. In response to the decrease in
technology spending we have attempted to constrain spending and have implemented
cost reduction programs to reduce workforce and facilities costs. The timing of
the cost reductions does not necessarily coincide with the timing of decreases
in revenues, but is anticipated to provide future benefit in the form of lower
expenses. While we have reduced certain costs, we also plan to maintain a level
of spending sufficient for us to be in a strong position to grow if and when
economic conditions improve.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE.
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, our clients and we 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 effect demand for our products and services and may
substantially reduce existing and potential client information
technology-related budgets. The current 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 continued customer
renewals and achieve contract value, backlog and deferred events revenue. 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. 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. Although our market share has been increasing, 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.
21
Renewal of Research Business by Existing Clients. Some of our success depends on
renewals of our subscription-based research products and services, which
constituted 57% of total revenues for the first quarter of 2003 and 61% for the
first quarter of 2002. 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
Quarterly Report. Client retention rates were 74% for both the first quarters of
2003 and 2002. Any material decline in retention rates or the amount of spending
by clients could have an adverse impact on our revenues and our financial
condition.
Non-Recurring Consulting Engagements. Consulting segment revenues constituted
30% and 33% of total revenues for the first quarter of 2003 and 2002,
respectively. Such 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 Quarterly Report. Any
material decline in our ability to replace consulting arrangements could have an
adverse impact on our revenues and our financial condition.
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. 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
22
some international locations. If any of 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.
Investment Activities. We maintain investments in equity securities in private
and publicly traded companies through direct ownership and through wholly and
partially owned venture capital funds. The companies we invest in are primarily
early to mid-stage IT-based and Internet-enabled businesses. There are numerous
risks related to such investments, due to their nature and the volatile public
markets, including significant delay or failure of anticipated returns. 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.
Indebtedness. We have incurred significant indebtedness through our 6%
convertible notes, of which $357.3 million was outstanding at March 31, 2003,
before reducing this balance for unamortized debt discount of $0.5 million.
Additionally, we have a $200.0 million senior revolving credit facility under
which we can incur significant additional indebtedness. The affirmative,
negative and financial covenants of these debt facilities could limit our future
financial flexibility. As a result of these covenants, our borrowing
availability at March 31, 2003 was $51.4 million. The associated debt service
costs could impair future operating results. Our 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. On the maturity date of the 6% convertible
notes, April 17, 2005, we must satisfy any remaining notes for cash equal to the
face amount of the notes plus accrued interest; if none of the notes have been
redeemed or converted by that date, such amount will be $403.2 million. The
payment of this amount could materially adversely impact our future business and
operating results.
Convertible Notes. Commencing on April 18, 2003, the holders of our 6%
convertible notes (of which $357.3 million was outstanding at March 31, 2003)
may elect to convert all or a portion of the notes to shares of our Class A
Common Stock. If all or a substantial portion of the notes are converted, the
note holders will own a substantial number of shares of our Class A Common
Stock. Had the notes been convertible at March 31, 2003, the notes would have
been convertible into 48.0 million shares of our Class A Common Stock, which
would constitute 37% of our combined Class A and Class B Common Stock
outstanding on that date. This is based upon the conversion price of $7.45 per
share. If the holders elect to convert the notes, we may redeem them. See
"Obligations and Commitments" and "Indebtedness" above. If we do not redeem the
notes and all or a substantial portion of the notes are converted, the holder of
the notes (SLP) will become our largest shareholder (based upon our shareholder
base as of March 31, 2003). This, in turn, may (1) give SLP the ability to
exercise significant control over the Company; (2) create significant dilution
for other shareholders; and (3) cause volatility in our stock price. If we want
to redeem the convertible notes in response to the note holders' election to
convert, or on our own under certain circumstances, there can be no assurance
that we will be able to obtain sufficient capital on a commercially reasonable
basis, or at all, in order to fund a redemption. Even if we could obtain
sufficient
23
capital to fund a redemption, it could materially adversely impact our future
business and operating results.
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 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.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As of March 31, 2003, we have exposure to market risk for changes in interest
rates primarily from borrowings under long-term debt which consists of a $200.0
million unsecured senior revolving credit facility with JPMorgan Chase Bank and
$356.8 million of 6% convertible subordinated notes. At March 31, 2003, there
were no amounts outstanding under the revolving credit facility and our
borrowing availability was $51.4 million. 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. If markets were to decline, we could
be required to accrue interest on the 6% convertible debt that would exceed
those based on current market rates. Each 25 basis point decrease in interest
would have an associated annual opportunity cost of approximately $0.9 million
based on the March 31, 2003 balance. 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. As of
March 31, 2003, we had investments in equity securities totaling $10.4 million.
Unrealized gains and losses net of deferred taxes are recorded as a separate
component of accumulated other comprehensive (loss) income in the stockholders'
(deficit) equity section of the Consolidated Balance Sheets. 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 March 31,
2003, this would result in a non-cash impairment charge of $10.4 million. We are
continuing efforts to sell all of our investments owned through SI I and 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 currency 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 in results of operations.
25
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 March 31, 2003, we had four
foreign currency forward contracts 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
contracts outstanding as of March 31, 2003, expressed in U.S. dollar
equivalents.
FORWARD
CURRENCY CURRENCY CONTRACT EXCHANGE UNREALIZED GAIN (LOSS)
PURCHASED SOLD AMOUNT RATE AT MARCH 31, 2003 EXPIRATION DATE
--------- -------- ------ -------- ---------------------- ---------------
Great Britain Pound U.S. Dollars $6.3 million 0.6387 $8.3 thousand April 23, 2003
Sterling
Swiss Francs U.S. Dollars $3.5 million 1.3862 $(8.7) thousand April 23, 2003
Norwegian Krona U.S. Dollars $1.2 million 7.4405 $1.9 thousand April 23, 2003
Euros U.S. Dollars $1.1 million 1.0639 $(2.4) thousand April 23, 2003
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure 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.
Within 90 days prior to the filing of our Quarterly Report on Form 10-Q for the
three month period ended March 31, 2003, the Company conducted an evaluation,
under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, of the effectiveness
and design of our disclosure controls and procedures. Based upon that
evaluation, our chief executive officer and chief financial officer have
concluded that the Company's 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.
(b) Changes in Internal Controls.
Subsequent to the date of the evaluation, there have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls and procedures, nor were any corrective actions
required with regard to significant deficiencies and material weaknesses.
26
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 13, 2003, the Company held its 2003 Annual Meeting of Stockholders.
At the meeting, the Company's Class B stockholders were asked to vote upon the
re-election of three Class B directors. Additionally, the Company's Class A and
Class B stockholders were asked to approve the 2003 Long-Term Incentive Plan.
With respect to the re-election of directors, not less than 23,592,225 Class B
shares were voted in favor of re-election, and not more than 2,937,710 Class B
shares were withheld with respect to any nominee.
With respect to the approval of the 2003 Long-Term Incentive Plan, 33,598,220,
or 53.7%, of the combined Class A and Class B shares were voted for approval,
26,962,956, or 43.1%, of the combined Class A and Class B shares were voted
against approval, and 2,059,242, or 3.2%, of the combined Class A and Class B
shares abstained. In connection with this proposal, there were 8,981,146 broker
non-votes of Class A shares, and 2,344,602 broker non-votes of Class B shares.
Accordingly, the Plan was approved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------------------- -------------------------------------------------------
4.4c Amendment No. 4 to the Amended and Restated Credit
Agreement dated as of March 31, 2003.
99.1 (1) Certification of Chief Executive Officer under Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 (1) Certification of Chief Financial Officer under Section
906 of the Sarbanes-Oxley Act of 2002.
(1) This document is being furnished in accordance with SEC
Release Nos. 33-8212 and 34-47551.
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the fiscal
quarter ended March 31, 2003.
Items 1, 2, 3, and 5 are not applicable and have been omitted.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Gartner, Inc.
Date May 14, 2003 /s/ Maureen E. O'Connell
------------------------------
Maureen E. O'Connell
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
CERTIFICATION PURSUANT TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(1) I have reviewed this Quarterly Report on Form 10-Q (the "10-Q") of
Gartner, Inc.;
(2) Based on my knowledge, this 10-Q 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 10-Q;
(3) Based on my knowledge, the financial statements, and other financial
information included in this 10-Q, 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 10-Q;
(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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 10-Q is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this 10-Q (the "Evaluation Date"); and
c) presented in this 10-Q our conclusions about the effectiveness
of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on my most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this 10-Q whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Michael D. Fleisher
- -------------------------------
Michael D. Fleisher
Chief Executive Officer
May 14, 2003
CERTIFICATION PURSUANT TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(1) I have reviewed this Quarterly Report on Form 10-Q (the "10-Q") of
Gartner, Inc.;
(2) Based on my knowledge, this 10-Q 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 10-Q;
(3) Based on my knowledge, the financial statements, and other financial
information included in this 10-Q, 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 10-Q;
(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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 10-KT is being prepared;
b) evaluated the effectiveness of the registrant disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this 10-Q (the "Evaluation Date"); and
c) presented in this 10-Q our conclusions about the effectiveness
of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certified officer and I have disclosed, based
on my most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors;
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
10-Q whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Maureen E. O'Connell
- ---------------------------------
Maureen E. O'Connell
Chief Financial Officer
May 14, 2003
30