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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 JUNE 30, 2004
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 July 26, 2004 was 105,950,856 shares of Class A Common Stock and 28,118,443
shares of Class B Common Stock.
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at June 30, 2004 and
December 31, 2003 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 29
ITEM 4: CONTROLS AND PROCEDURES 30
PART II OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 31
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 32
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GARTNER, INC.
Condensed Consolidated Balance Sheets
(in thousands)
June 30, December 31,
2004 2003
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 290,997 $ 229,962
Fees receivable, net 214,086 266,122
Deferred commissions 25,720 27,751
Prepaid expenses and other current assets 24,845 25,642
--------- ---------
Total current assets 555,648 549,477
Property, equipment and leasehold improvements, net 61,388 66,541
Goodwill 229,555 230,387
Intangible assets, net 594 985
Other assets 68,052 69,874
--------- ---------
TOTAL ASSETS $ 915,237 $ 917,264
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 144,141 $ 175,609
Deferred revenues 295,109 315,524
--------- ---------
Total current liabilities 439,250 491,133
Other liabilities 50,239 50,385
--------- ---------
TOTAL LIABILITIES 489,489 541,518
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 74 72
Additional paid-in capital 449,070 408,504
Unearned compensation, net (3,471) (1,846)
Accumulated other comprehensive income, net 2,724 1,530
Accumulated earnings 185,428 173,936
Treasury stock, at cost (208,077) (206,450)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 425,748 375,746
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 915,237 $ 917,264
========= =========
See the accompanying notes to the condensed consolidated financial statements.
3
GARTNER, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues:
Research $ 118,966 $ 117,793 $ 241,208 $ 233,517
Consulting 67,609 66,525 132,235 128,304
Events 37,211 25,292 55,382 48,801
Other 4,071 3,708 7,699 6,978
--------- --------- --------- ---------
Total revenues 227,857 213,318 436,524 417,600
Costs and expenses:
Cost of services and product development 114,386 103,440 209,862 205,773
Selling, general and administrative 81,588 80,730 169,222 164,234
Depreciation 6,844 8,964 14,781 18,789
Amortization of intangibles and goodwill
impairments 190 338 1,126 743
Other charges 9,063 -- 19,576 5,426
--------- --------- --------- ---------
Total costs and expenses 212,071 193,472 414,567 394,965
--------- --------- --------- ---------
Operating income 15,786 19,846 21,957 22,635
Income from investments 19 5,491 39 5,522
Interest income (expense), net 370 (5,542) 615 (11,154)
Other (expense) income, net (323) (39) (3,436) 496
--------- --------- --------- ---------
Income before income taxes 15,852 19,756 19,175 17,499
Provision for income taxes 4,824 6,902 7,683 6,157
--------- --------- --------- ---------
Net income $ 11,028 $ 12,854 $ 11,492 $ 11,342
========= ========= ========= =========
Income per common share:
Basic $ 0.08 $ 0.16 $ 0.09 $ 0.14
Diluted $ 0.08 $ 0.13 $ 0.09 $ 0.14
Weighted average shares outstanding:
Basic 132,129 79,234 131,183 79,863
Diluted 135,335 127,959 134,242 128,260
See the accompanying notes to the condensed consolidated financial statements.
4
GARTNER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Six Months Ended
June 30,
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net income $ 11,492 $ 11,342
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, including goodwill impairments 15,907 19,532
Non-cash compensation 1,198 511
Tax benefit associated with employees' exercise of stock options 4,377 -
Deferred taxes 408 68
Gain from investments (39) (5,522)
Accretion of interest and amortization of debt issue costs 602 11,781
Non-cash charges associated with South America closings 2,943 -
Changes in assets and liabilities:
Fees receivable, net 50,141 64,051
Deferred commissions 1,896 3,345
Prepaid expenses and other current assets 523 5,089
Other assets 366 (1,543)
Deferred revenues (17,720) (26,314)
Accounts payable and accrued liabilities (30,787) (4,166)
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 41,307 78,174
--------- ---------
INVESTING ACTIVITIES:
Proceeds from insurance recovery - 5,464
Investments - (1,500)
Additions to property, equipment and leasehold improvements (9,197) (9,765)
--------- ---------
CASH USED IN INVESTING ACTIVITIES (9,197) (5,801)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from stock issued for stock plans 37,852 2,575
Payments for debt issuance costs - (220)
Purchases of treasury stock (6,113) (23,504)
--------- ---------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 31,739 (21,149)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 63,849 51,224
EFFECTS OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (2,814) 5,804
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 229,962 109,657
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 290,997 $ 166,685
========= =========
See the accompanying notes to the condensed consolidated financial statements.
5
GARTNER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of 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 Annual Report on Form 10-K for the year ended December
31, 2003. 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 and six months ended June 30,
2004 may not be indicative of the results of operations for the remainder of
2004. Certain prior year amounts have been reclassified to conform to the
current year presentation.
Note 2 - Comprehensive Income
The components of comprehensive income for the three and six months ended June
30, 2004 and 2003 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
--------- -------- -------- --------
Net income $ 11,028 $ 12,854 $ 11,492 $ 11,342
Other comprehensive (loss) income:
Foreign currency translation adjustments (1,671) 5,756 (1,775) 5,955
Reclassification adjustment of foreign currency
translation adjustments to net income upon closing
of foreign operations - - 2,943 -
Net unrealized (losses) gain on investments, net of tax (2) (11) 26 (7)
--------- -------- -------- --------
Other comprehensive (loss) income (1,673) 5,745 1,194 5,948
--------- -------- -------- --------
Comprehensive income $ 9,355 $ 18,599 $ 12,686 $ 17,290
========= ======== ======== ========
The balance of unrealized holding losses on investments, net of tax, at June 30,
2004 was immaterial. During the six months ended June 30, 2004, we reclassified
$2.9 million of accumulated translation adjustments associated with certain
operations in South America into net income as a result of our closure of
operations. The reclassification adjustment was recorded as a loss within Other
(expense) income, net.
6
Note 3 - Computations of Income per Share of Common Stock
The following table sets forth the reconciliation of the basic and diluted
income per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
NUMERATOR:
Net income used for calculating basic income per share $ 11,028 $ 12,854 $ 11,492 $ 11,342
After-tax interest on convertible long-term debt - 3,323 - 6,567
---------- ---------- ---------- ----------
Income used for calculating diluted income per share $ 11,028 $ 16,177 $ 11,492 $ 17,909
========== ========== ========== ==========
DENOMINATOR:
Weighted average number of common shares used in
the calculation of basic income per share 132,129 79,234 131,183 79,863
Common stock equivalents associated with stock
compensation plans 3,206 413 3,059 440
Weighted average number of shares associated
with convertible long-term debt - 48,312 - 47,957
---------- ---------- ---------- ----------
Shares used in the calculation of diluted income per share 135,335 127,959 134,242 128,260
========== ========== ========== ==========
Basic income per share $ 0.08 $ 0.16 $ 0.09 $ 0.14
========== ========== ========== ==========
Diluted income per share $ 0.08 $ 0.13 $ 0.09 $ 0.14
========== ========== ========== ==========
For the three and six months ended June 30, 2004 and 2003, unvested restricted
stock awards were not included in the computation of diluted income per share
because the effect would have been anti-dilutive. For the three months ended
June 30, 2004 and 2003, options to purchase 11.2 million and 31.9 million
shares, respectively, of Class A Common Stock of the Company were not included
in the computation of diluted income per share because the effect would have
been anti-dilutive. For the six months ended June 30, 2004 and 2003, options to
purchase 11.4 million and 32.2 million shares, respectively, of Class A Common
Stock of the Company were not included in the computation of diluted income per
share because the effect would have been anti-dilutive.
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 loss and loss 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, the
Company's pro forma net income, and pro forma income per share would have been
as follows (in thousands, except per share data):
7
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income as reported $ 11,028 $ 12,854 $ 11,492 $ 11,342
Add: Stock-based compensation expense
included in net income as reported 464 169 779 332
Deduct: Pro forma employee stock-based
compensation cost, net of tax (2,727) (3,603) (5,217) (9,300)
----------- ----------- ----------- -----------
Pro forma income $ 8,765 $ 9,420 $ 7,054 $ 2,374
=========== =========== =========== ===========
Basic income per share:
As reported $ 0.08 $ 0.16 $ 0.09 $ 0.14
Pro forma $ 0.07 $ 0.12 $ 0.05 $ 0.03
Diluted income per share:
As reported $ 0.08 $ 0.13 $ 0.09 $ 0.14
Pro forma $ 0.06 $ 0.10 $ 0.05 $ 0.03
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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
------ ----- ---- ----
Expected dividend yield 0% 0% 0% 0%
Expected stock price volatility 42% 41% 42% 43%
Risk-free interest rate 3.1% 1.7% 3.0% 1.9%
Expected life in years 3.7 3.4 3.7 3.4
The weighted average fair values of our stock options granted during the three
months ended June 30, 2004 and 2003 were $4.35, $2.46. The weighted average fair
values of our stock options granted during the six months ended June 30, 2004
and 2003 were $4.27 and $2.50, respectively.
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
consist 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
JUNE 30, 2004:
Revenues $118,966 $ 67,609 $ 37,211 $ 4,071 $ 227,857
Gross Contribution 73,004 24,835 16,858 3,614 118,311
Corporate and other expenses (102,525)
---------
Operating income $ 15,786
=========
THREE MONTHS ENDED
JUNE 30, 2003:
Revenues $117,793 $ 66,525 $ 25,292 $ 3,708 $ 213,318
Gross Contribution 75,401 22,743 10,532 2,592 111,268
Corporate and other expenses (91,422)
---------
Operating income $ 19,846
=========
SIX MONTHS ENDED
JUNE 30, 2004:
Revenues $241,208 $132,235 $ 55,382 $ 7,699 $ 436,524
Gross Contribution 152,031 50,079 23,965 6,771 232,846
Corporate and other expenses (210,889)
---------
Operating income $ 21,957
=========
SIX MONTHS ENDED
JUNE 30, 2003:
Revenues $233,517 $128,304 $ 48,801 $ 6,978 $ 417,600
Gross Contribution 149,051 43,628 18,932 4,960 216,571
Corporate and other expenses (193,936)
---------
Operating income $ 22,635
=========
9
Note 6 - Goodwill and Intangible Assets
The changes in the carrying amount of goodwill, by reporting segment, for the
six months ended June 30, 2004 are as follows:
Balance Currency Balance
December 31, Translation June 30,
2003 Impairments Adjustments 2004
--------------- --------------- --------------- ---------------
Research $ 128,896 $ - $ (400) $ 128,496
Consulting 68,803 (739) 307 68,371
Events 30,606 - - 30,606
Other 2,082 - - 2,082
--------------- --------------- --------------- ---------------
Total goodwill $ 230,387 $ (739) $ (93) $ 229,555
=============== =============== =============== ===============
During the first quarter of 2004, we recorded a $0.7 million impairment loss for
goodwill recorded for certain operations in South America as a result of our
decision to close those operations.
The following table presents the Company's intangible assets subject to
amortization (in thousands):
June 30, December 31,
2004 2003
-------------- --------------
Non-compete agreements:
Gross cost $ 13,155 $ 13,257
Accumulated amortization (12,808) (12,599)
-------------- --------------
Non-compete agreements, net 347 658
Trademarks and tradenames:
Gross cost 1,808 1,811
Accumulated amortization (1,561) (1,484)
-------------- --------------
Trademarks and tradenames, net 247 327
-------------- --------------
Intangible assets, net $ 594 $ 985
============== ==============
Aggregate amortization expense for the three month period ended June 30, 2004
and 2003 was $0.2 million and $0.3 million, respectively. Aggregate amortization
expense for the six month period ended June 30, 2004 and 2003 was $0.4 million
and $0.7 million, respectively. The estimated future amortization expense of
purchased intangibles is as follows (in thousands):
2004 (remaining six months) $ 294
2005 229
2006 60
2007 10
2008 1
-----
$ 594
=====
10
Note 7 - Other Charges
On April 29, 2004, Michael Fleisher, our Chairman and CEO, announced his
intention to leave Gartner sometime prior to the end of 2004. In conjunction
with his departure, Mr. Fleisher entered into an amendment to his employment
agreement pursuant to which he has agreed that he will continue to serve in the
capacity of Chief Executive Officer for up to six months. In satisfaction of
existing obligations under his original employment agreement and in
consideration of his assistance during this transition period, the Board of
Directors agreed that Mr. Fleisher will receive: (a) payments totaling $4.3
million, which includes his 2003 bonus and compensation in respect of the
transition period; (b) at our cost, group health benefits pursuant to our
standard programs for himself, his spouse and any children for two years or
until he obtains other employment, if that occurs sooner; and (c) reasonable
office support for one year, or until he obtains other employment, if that
occurs sooner. The majority of these costs, excluding compensation during the
transition period, have been recognized during the second quarter of 2004 as an
expense within Other charges.
In addition, in accordance with his previously existing employment agreement
with regards to equity arrangements, Mr. Fleisher will receive (a) acceleration
in full of vesting of all equity arrangements subject to vesting and granted
prior to October 1, 2002; (b) continued vesting until October 29, 2006 of all
outstanding equity awards granted on or after October 1, 2002; and (c) the
ability to exercise all equity arrangements granted after October 1, 2001 until
October 29, 2007 and all equity arrangements granted on or prior to October 1,
2001 until October 29, 2005. The Company recorded a non-cash charge of $0.4
million related to the acceleration of equity arrangements in the second quarter
of 2004.
During the second quarter of 2004, the Company recorded other charges of $9.1
million, which included a majority of the costs noted above, as well as costs
associated with the realignment of the Company's workforce. This workforce
realignment resulted in the termination of an additional 30 employees during the
second quarter of 2004.
During the first quarter of 2004, the Company recorded other charges of $10.5
million, of which $10.4 million was associated with the realignment of our
workforce and $0.1 million was associated with costs to close certain operations
in South America. The workforce realignment portion of the charge is for costs
for employee severance payments and related benefits. This workforce realignment
was a continuation of the action plan initiated during the fourth quarter of
2003 and resulted in the termination of 132 employees during the first quarter
of 2004.
During the first quarter of 2003, the Company recorded other charges of $5.4
million associated with workforce reductions. The charge related to costs
associated with employee termination severance payments and related benefits.
This workforce reduction resulted in the termination of 92 employees during the
three months ended March 31, 2003.
11
The following table summarizes the activity related to the liability for the
restructuring and other severance programs recorded as other charges (in
thousands):
Workforce Excess
Reduction Facilities
Costs Costs Other Total
----------- ----------- ----------- -----------
Accrued Liability at December 31, 2002 11,723 15,936 - 27,659
Charges during six months ended
June 30, 2003 5,426 - - 5,426
Payments (12,627) (3,882) - (16,509)
----------- ----------- ----------- -----------
Accrued Liability at June 30, 2003 4,522 12,054 - 16,576
Charges during remainder of 2003 14,574 9,716 - 24,290
Non-cash charges (123) - - (123)
Payments (6,157) (2,611) - (8,768)
----------- ----------- ----------- -----------
Accrued Liability at December 31, 2003 12,816 19,159 - 31,975
Charges during six months ended
June 30, 2004 19,473 - 103 19,576
Non-cash charges (496) - (66) (562)
Payments (20,840) (2,663) (37) (23,540)
----------- ----------- ----------- -----------
Accrued Liability at June 30, 2004 $ 10,953 $ 16,496 $ - $ 27,449
=========== =========== =========== ===========
The non-cash charges for workforce reductions result from the establishment of a
new measurement date for certain equity compensation arrangements upon the
modification of the terms of the related agreement. The accrued severance of
$11.0 million at June 30, 2004 is expected to be paid by March 31, 2005. We will
fund these costs from existing cash.
Note 8 - Stock Programs
Tender Offer
On June 22, 2004, we initiated a "Dutch Auction Tender Offer" to repurchase
approximately 11.3 million of our Class A Common Stock and approximately 5.5
million shares of our Class B Common Stock, with the price for each Class to be
between $12.50 and $13.50 per share. Additionally, the Company announced that it
would repurchase approximately 9.2 million shares of Class A Common Stock from
Silver Lake Partners at the same price per Class A Share as is paid in the
tender offer. In the event the tender offer is undersubscribed, Silver Lake
Partners will sell additional Class A Shares to the Company up to an aggregate
maximum of 12.0 million shares. Upon the closing of this purchase, which is
scheduled to occur eleven business days following completion of the tender
offer, Silver Lake Partners' percentage of ownership interest in our outstanding
shares will be approximately equal to or below its current level, depending of
the level of stockholder participation in the tender offer.
If we purchase the maximum number of shares of each Class, the total cost will
be between $210 million and $227 million, or between $325 million and $351
million including the repurchase of shares from Silver Lake Partners.
Stock Repurchase Program
On July 17, 2001, the Board of Directors approved the repurchase of up to $75
million of our Common Stock. On July 25, 2002, the Board of Directors increased
the authorized stock repurchase program from the previously approved $75 million
to up to $125 million of our Common Stock. On July 24, 2003, the Board of
Directors authorized an additional increase of $75 million in the stock
repurchase program
12
bringing the total authorization to $200 million. During the six months ended
June 30, 2004, the Company repurchased 413,225 shares of its Class A Common
Stock and 114,600 shares of its Class B Common Stock at an aggregate cost of
$6.1 million under this program. On a cumulative basis at June 30, 2004, the
Company has purchased $133.2 million of our Common Stock under this program. In
conjunction with the tender offer, the Board of Directors terminated this Stock
Repurchase Program during June 2004.
Restricted Stock Award
During the first quarter of 2004, we awarded 175,000 shares of restricted stock
on which the restrictions will lapse after a three-year period in the event that
certain revenue and earnings metrics are achieved. During the second quarter of
2004, we awarded 33,000 shares of restricted stock on which the restrictions
lapse ratably over a three-year period.
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 our
financial position or results of operations when resolved in future periods.
The Company has various agreements in which we may be obligated to indemnify the
other party with respect to certain matters. Generally, these indemnification
provisions are included in contracts arising in the normal course of business.
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 provisions due to the conditional nature of our obligations and
the unique facts of each particular agreement. Historically, payments made by
the Company under these agreements have not been material. As of June 30, 2004,
the Company is not aware of any indemnification agreements that would require
material payments.
Note 10 - Subsequent Event
On July 23, 2004, the Company announced that the Board of Directors named Eugene
Hall as Chief Executive Officer. Mr. Hall will succeed Michael Fleisher, who had
previously announced his intention to depart as Gartner's chairman and chief
executive officer after a transition period. Additionally, James C. Smith, a
current member of the Company's Board of Directors, has been appointed
non-executive Chairman of the Board.
In connection with the Tender Offer discussed in Note 8, we received a $75.0
million bridge loan from JPMorgan Chase Bank on July 30, 2004. We intend to pay
off the bridge loan in full upon the signing of a 225.0 million credit agreement
with a syndicate of lenders. The agreement, expected to be entered into in
August, will provide for a five year $125.0 million term A loan facility and a
five year $100 million revolving credit facility. The facilities will bear
interest equal to LIBOR plus an applicable margin which will vary based on
specified leverage ratios. The term A loan facility will be payable in equal
quarterly installment over a five year period. The credit facilities are subject
to mandatory prepayments from a portion of proceeds from assets sale and
proceeds from certain future debt issuances. The credit agreement includes
customary affirmative, negative and financial covenants primarily based on our
financial results and other measures such as contract value. We believe that our
ability to draw down the full amount available under the facilities will not be
restricted by these covenants on the date we sign them. The facilities also
include commitment fees on the unused portion of the revolving credit facility
not subject to letters of credit.
13
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
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 Annual Report on
Form 10-K for the year ended December 31, 2003. 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.
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 Performance" and elsewhere in this report and in our Annual Report on
Form 10-K for the year ended December 31, 2003. 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.
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.
14
- - 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.
- - 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.
- - 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:
- - GARTNER INTELLIGENCE delivers content and advice to IT professionals,
technology vendors and investors through vehicles such as Research, Events
and SAS.
- - GARTNER EXECUTIVE PROGRAMS offers membership and peer-networking services
for chief information officers (CIOs) and other key executives, through
offerings such as our EXP membership program.
- - GARTNER CONSULTING focuses 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.
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 continue to analyze 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.
BUSINESS SEGMENT 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.
15
Consulting CONSULTING BACKLOG represents future revenue to be
derived from in-process consulting, measurement and
SAS 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 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. Contract value increased
sequentially again in the first quarter of 2004, but decreased slightly during
the second quarter of 2004. However, contract value increased 4% on a
year-over-year comparison. Our research client retention rates maintained the
strong rate of 78% from December 2003 during the second quarter of 2004. We
believe the technology market is showing signs of a recovery, and that the
realignment of our business units discussed previously will help us grow during
this expected recovery.
Our Consulting business ended 2003 with a positive trend, showing two
consecutive quarters of sequential increases in backlog after five consecutive
quarters of sequential decreases. As we noted in our Annual Report on Form 10-K,
we have been exiting certain less profitable consulting practices and
geographies as part of the realignment previously discussed. Due to this plan of
exiting certain practices and geographies, consulting backlog decreased to $92
million at March 31, 2004 from $100 million at December 31, 2003, but backlog
has quickly recovered to $98 million at June 30, 2004 as business has ramped up
in our areas of focus. We also mentioned in our Annual Report on Form 10-K that
we expect this realignment to address our sub-optimal utilization rates and our
lack of scale in some regions. During the second quarter of 2004, our consultant
utilization rates increased to approximately 66% as compared to approximately
55% and 54% during the second and fourth quarter of 2003, respectively.
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. During the
second quarter of 2004, revenues from events that were held in the same quarter
last year increased approximately 31%. Revenues recognized during the first six
months of 2004 were higher than the prior year period despite hosting 12% or
four fewer events than during the first six months of 2003 due to increased
participation.
During the fourth quarter of 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.
We ended the second quarter of 2004 with $426 million of stockholders' equity.
In addition, our cash increased from $230 million at December 31, 2003 to $291
million at June 30, 2004.
During the second quarter of 2004, we initiated another important change to our
capital structure. We
16
commenced a Dutch auction self-tender offer for up to 11,298,630 shares of our
Class A Common Stock and up to 5,505,305 shares of our Class B Common Stock with
the price for each Class to be between $12.50 to $13.50 per share. If we
purchase the maximum number of shares of each Class, the total purchase price
will be between approximately $210 Million and $227 Million. We also entered
into an agreement with Silver Lake Partners, L.P. and certain of its affiliates
("Silver Lake"), which collectively own approximately 44.4% of Gartner's Class A
Common Stock and are affiliated with two members of our Board of Directors, to
purchase from Silver Lake approximately 9.2 million shares of Class A Common
Stock, subject to adjustment if the number of Class A Shares sought in the
tender offer is increased or decreased. Additionally, if the tender offer for
the shares of Class A Common Stock is not fully subscribed, then the number of
shares of Class A Common Stock purchased from Silver Lake will be increased by
that number of Class A Shares equal to the difference between the number of
Class A Shares sought in the tender offer and the actual number of Class A
Shares tendered and accepted for payment in the tender offer (provided that in
no event will more than 12 million Class A Shares be purchased from Silver
Lake). The purchase of shares from Silver Lake will be at the same price per
Class A Share as is paid in the tender offer. Silver Lake has also agreed not to
tender any of its shares in the tender offer. If the maximum number of shares
are purchased as a result of the tender offer and this agreement, the total
purchase price will be between approximately $325 million and $351 million.
We believe that the tender offer is a prudent use of our financial resources
given our business profile and assets, and we believe that investing in our own
shares is an attractive use of capital and an efficient means to provide value
to our stockholders. As of June 30, 2004, we had no debt. In connection with the
tender offer and the Silver Lake agreement, we plan to incur approximately $200
million of non-convertible debt and use up to approximately $150 million of our
cash on hand. We anticipate that we will have adequate cash generating capacity
and no immediate need for the accumulation of cash, and expect that our current
cash balances, anticipated cash flows from operations and borrowing capacity
exceed our capital requirements for normal operations, capital expenditures and
acquisitions and other opportunities for growth that may arise. We believe the
tender offer, if completed, will be accretive to currently projected earnings
per share, although there can be no assurance of this.
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 ("SAB") No. 101, Revenue Recognition in Financial
Statements, and SAB No. 104, Revenue Recognition. 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
17
- - 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 $35.0 million and $38.6 million at June 30, 2004 and
December 31, 2003, respectively. In addition, at June 30, 2004 and December 31,
2003, the Company had not recognized uncollected receivables or deferred
revenues, relating to government contracts that permit termination, of $4.4
million and $6.6 million, respectively.
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. Total trade receivables at June 30, 2004 were $223.1 million, offset by
an allowance for losses of approximately $9.0 million. Total trade receivables
at December 31, 2003 were $275.1 million, offset by an allowance for losses of
approximately $9.0 million.
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 us 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 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:
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, and as additional
information
18
becomes known, we may change our estimates. During the first quarter of 2004, we
recorded an impairment charge of $0.7 million relating to goodwill associated
with certain operations in South America that we decided to close.
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 be charged to income in the period
such determination was made.
CONTINGENCIES AND OTHER LOSS RESERVES AND ACCRUALS - 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. Additionally, we record accruals for estimated discretionary
incentive compensation costs during the year. Amounts accrued at the end of each
reporting period are based on our estimates and may require adjustments as the
ultimate amount paid associated with these incentives are sometimes not known
until after year-end.
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 $10.3 million and $10.9 million at June
30, 2004 and December 31, 2003, respectively.
RESULTS OF OPERATIONS
OVERALL RESULTS
TOTAL REVENUES increased 7% in the second quarter of 2004 to $227.9 million
compared to $213.3 million for the second quarter of 2003 and increased 5% when
comparing the first six months of 2004 to the first six months of 2003. Revenues
for the second quarter of 2004 benefited partially by the timing of events as
several events held in the first quarter of 2003 were held in the second quarter
of 2004, including the attendee portion of our Spring Symposium in North
America, which was completed in the second quarter of 2004. The effects of
foreign currency translation had approximately a 2% positive effect on
19
revenues for the second quarter and a 3% positive effect on revenues on a
year-to-date basis. 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 $10.9 million, or 11%, to
$114.4 million in the second quarter of 2004 from $103.4 million in the second
quarter of 2003 and increased 2% when comparing the first six months of 2004
with the first six months of 2003. Excluding the effects of foreign currency
translation, cost of services and product development would have increased by
approximately 7% during the second quarter and would have decreased 2% during
the first six months of 2004 as compared to the first six months of 2003. The
increase in cost of services and product development on a year-to-date basis
resulted primarily from increased investment in our Research business. The
increase in cost of services and product development during the second quarter
was caused primarily by the timing of events, most significantly the attendee
portion of Spring Symposium which occurred during the second quarter of 2004 as
compared to the first quarter in 2003. Additionally, cost of services and
product development during 2004 benefited by the reversal, $1.7 million during
the second quarter and $3.5 million during the first six months, of prior years'
discretionary incentive compensation programs. As a percentage of sales, cost of
services and product development increased to 50% during the second quarter of
2004 from 48% during the second quarter of 2003 as a result of the shift in our
Events delivery calendar. For the first six months of 2004, cost of services and
product development as a percentage of sales decreased to 48% from 49% in 2003
primarily due to improved Consulting margins in 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $0.9 million, or 1%, to
$81.6 million in the second quarter of 2004 from $80.7 million in the second
quarter of 2003. SG&A increased 3% when comparing the first six months of 2004
to the first six months of 2003. These increases were primarily due to the
effects of foreign currency translation. Excluding the effects of foreign
currency translation, SG&A expenses would have decreased 2% for the second
quarter of 2004 compared to the second quarter of 2003 and would have decreased
1% for the first six months of 2004 compared to the first six months of 2003.
During the second quarter and first six months of 2004, SG&A expenses benefited
by the reversal of $2.6 million and $3.3 million, respectively, of prior year's
discretionary incentive compensation programs. Additionally, the Company reduced
its allowance for doubtful accounts by $1.5 million in the second quarter of
2004 as a result of increased collections and a decline in write-offs.
DEPRECIATION EXPENSE for the second quarter of 2004 decreased 24% to $6.8
million, compared to $9.0 million for the second quarter of 2003 and decreased
21% when comparing the first six months of 2004 to the first six months of 2003.
The decrease was due to a reduction in capital spending during 2002 and 2003
relative to the capital spending in 2000 and 2001.
AMORTIZATION OF INTANGIBLES AND GOODWILL IMPAIRMENTS of $0.2 million for the
second quarter of 2004 decreased from $0.3 million for the second quarter of
2003 due to certain intangible assets having been fully amortized since the
second quarter of 2003. Amortization of intangibles and goodwill impairments
increased during the first six months of 2004 as compared to the same period in
2003 due to the recognition of impairment of goodwill of $0.7 million associated
with certain operations in South America as a result of our decision to close
those operations.
OTHER CHARGES of $9.1 million during the second quarter of 2004 includes
severance costs associated with the departure of our CEO of $3.8 million, as
well as costs associated with the termination of 30 additional employees. The
annualized savings from the termination of these 30 employees would be
approximately $8.3 million. However, the Company plans to reinvest a significant
portion of these savings into improving its products, processes and
infrastructure to help drive future growth. During the first quarter of 2004,
other charges of $10.5 million were primarily associated with a realignment of
our workforce. This workforce realignment was a continuation of the action plan
initiated during the fourth quarter of 2003 and has resulted in the termination
of 132 employees, or approximately 4% of our workforce, bringing the total
terminations to 262 employees associated with the action plan announced in
December 2003. Other charges of $5.4 million during the
20
first quarter of 2003 were for costs for employee severance payments and
benefits associated with workforce reductions. This workforce reduction resulted
in the termination of 92 employees, or approximately 2% of the Company's
workforce at the time.
During the first six months of 2004, we recorded charges of $15.6 million
related to the realignment of our workforce, excluding costs related to the
departure of our Chairman and CEO. The realignment resulted in the termination
of 162 employees during the first six months of 2004. The annualized savings
from the termination of these employees would be approximately $17.5 million.
However, the Company plans to reinvest a significant portion of these savings
into improving its products, processes, and infrastructure to help drive future
growth.
INTEREST INCOME (EXPENSE), NET was income of $0.4 million during the second
quarter of 2004 and $0.6 million during the first six months of 2004 as compared
to expense of $5.5 million and $11.2 million, respectively, in 2003. The
conversion of our outstanding convertible debt to equity during the fourth
quarter of 2003 has substantially eliminated our interest expense.
OTHER (EXPENSE) INCOME, NET for the first six months of 2004 includes the
non-cash write-off of $2.9 million of our accumulated foreign currency
translation adjustments associated with certain of our operations in South
America that we have decided to close. As a result of this decision we were
required to reclassify these currency adjustments that have been accumulated
within equity to earnings, in accordance with Statement of Financial Accounting
Standards No. 52 "Foreign Currency Translation." Other (expense) income, net for
the second quarter of 2004 and the second quarter and first six months of 2003
consists primarily of net foreign currency exchange gains and losses.
PROVISION FOR INCOME TAXES was 30.4% and 34.9% of income before income taxes for
the second quarter of 2004 and 2003, respectively. Provision for income taxes
was 40.1% and 35.2% during the first six months of 2004 and 2003, respectively.
Our projected effective tax rates for full year 2004 is 33%, which is consistent
with 2003. The effective tax rate was lower than the projected effective tax
rate during the second quarter of 2004 due to a higher tax benefit than the
effective tax rate recorded on the severance costs due to the local tax rate
where the costs occurred. The effective tax rate was higher than the projected
effective tax rate during the first six months of 2004 due to certain expenses,
the goodwill impairment and the non-cash write-off of our accumulated foreign
currency translation adjustments associated with certain of our operations in
South America discussed previously, receiving no tax benefit. The effective tax
rate was higher than the projected effective tax rate during 2003 due to the
insurance recovery received during 2003.
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. Gross contribution margin is defined as gross
contribution as a percentage of revenues.
Research
Research revenues increased 1% when comparing the second quarters of 2004 and
2003 and increased 3% when comparing the first six months of 2004 and 2003. The
increases were due primarily to the positive effects of foreign currency
translation.
21
Research gross contribution of $73.0 million for the second quarter of 2004
decreased 3% from $75.4 million for the second quarter of 2003, while gross
contribution margin for the second quarter of 2004 decreased to 61% from 64% in
the prior year period. For the six months ended June 30, 2004, gross
contribution increased to $152 million, or a 63% contribution margin, from
$149.1 million, or a 64% contribution margin. The decrease in gross contribution
margin during 2004 was due primarily to continued investments in our people,
products and processes required to provide future Research growth.
Research contract value increased 4% to $488.7 million at June 30, 2004 from
$468.5 million at June 30, 2003 primarily due to the effects of foreign
currency. Client retention rates increased three percentage points to 78% at
June 30, 2004 from 75% at June 30, 2003, and wallet retention rates increased to
93% during the second quarter of 2004 from 83% during the second quarter of
2003. The stabilization of contract value and the increase in client and wallet
retention rates reflect the beginning stages of what we believe to be an upturn
in demand in the technology market.
Consulting
Consulting revenues increased 2% to $67.6 million for the second quarter of 2004
and increased 3% to $132.2 million for the first six months of 2004 as compared
to the same periods of 2003. Excluding the effects of foreign currency
translation, Consulting revenues would have been relatively consistent in
comparing the second quarter of 2004 with 2003 and would have decreased by
approximately 1% for the six months of 2004. Consulting revenue has remained
relatively stable with the prior year period despite the realignment of our
business to exit certain less profitable consulting practices and geographies,
which has reduced our billable headcount by approximately 17% during the 2004
periods as compared to the 2003 periods.
Consulting gross contribution of $24.8 million for the second quarter of 2004
increased 9.2% from $22.7 million for the second quarter of 2003, and
contribution margin for the second quarter of 2004 increased to 37% from 34% in
the prior year quarter. Gross contribution of $50.1 million for the first six
months of 2004 increased 15% from $43.6 million for the same period of 2003,
with contribution margin for the period increasing to 38% from 34%. The increase
in gross contribution margin was driven by higher consultant utilization rates,
as we realigned our workforce and reduced headcount, and the increasing demand
in focus practice areas.
Consulting backlog, which represents future revenues to be recognized from
in-process consulting, measurement and SAS, increased 7% to $97.7 million at
June 30, 2004, compared to $91.0 million at June 30, 2003. This increase was
primarily due to the increasing demand in focus practice areas.
Events
For the six months ended June 30, 2004, Events revenues increased 13% to $55.4
million compared to $48.8 million for the same period of 2003 despite having 12%
or four fewer events due to increased participation. The average revenue per
event increased during 2004 due to the strong performance of our recurring
events, as well as the addition of new events in 2004 that had higher revenues
than the events that were eliminated. Revenues during the first six months of
2004 benefited from the positive effects of foreign currency translation by
approximately 3%. The comparison of the second quarter of 2004 with the second
quarter of 2003 also benefited from the timing of the attendee portion of Spring
Symposium, which was completed during the second quarter of 2004 as compared to
the first quarter of 2003.
Gross contribution of $24.0 million, or 43% of revenues, for the first six
months of 2004 increased from $18.9 million, or 39% of revenues, for the first
six months of 2003. For the second quarter of 2004, Gross
22
contribution of $16.9 million, or 45% of revenues, increased from $10.5 million,
or 42% of revenues, for the second quarter of 2003. As we manage our Events
portfolio, we have eliminated certain less profitable events during 2004. Also
during 2003, we invested more in marketing and promoting our events to maintain
our attendance levels during a weaker economy, especially in the technology
sector.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $41.3 million for the six months
ended June 30, 2004 compared to $78.2 million for the six months ended June 30,
2003. The net decrease in cash flow from operating activities of $36.9 million
was due primarily to payments of our 2003 bonuses during 2004. No bonuses were
paid during the first half of 2003 as they had previously been paid during the
quarter ended December 31, 2002 but are now being paid during the first half of
the year as a result of our change in fiscal year that became effective January
1, 2003. Additionally, we paid approximately $8.0 million more in severance
during 2004.
Cash used in investing activities increased to $9.2 million during the first six
months of 2004 as compared to $5.8 million during the first six months of 2003.
Capital expenditures in the first six months of both years were relatively
consistent. During the first six months of 2003, we received an insurance
recovery of $5.5 million, and we funded $1.5 million of our capital commitment
to SI II.
Cash provided by financing activities totaled $31.7 million for the six months
ended June 30, 2004, compared to cash used in financing activities of $21.1
million for the six months ended June 30, 2003. We purchased $6.1 million of our
common stock for treasury during the first six months of 2004 as compared to
$23.5 million during the same period in the prior year. In conjunction with the
tender offer, the Board of Directors terminated the stock repurchase program
during June 2004. We received proceeds from stock issued for stock plans of
$37.9 million during the first six months of 2004 as compared to $2.6 million
during the same period in the prior year. This increase is a result of increased
stock option exercises by our employees as increases in our stock price caused a
significantly higher percentage of our vested stock options to be in the money
during the first half of 2004 as compared to 2003.
OBLIGATIONS AND COMMITMENTS
We had a $200.0 million unsecured senior revolving credit facility led by
JPMorgan Chase Bank. At June 30, 2004, there were no amounts outstanding under
the facility. We were subject to certain customary affirmative, negative and
financial covenants under this credit facility, and continued compliance with
these covenants precluded us from borrowing the maximum amount of the credit
facility from time to time. These covenants were primarily based on financial
results and other measures such as contract value. As a result of those
covenants, our borrowing availability at June 30, 2004 was $168.0 million. This
credit facility expired on July 16, 2004.
During the second quarter of 2004, we initiated a Dutch auction self-tender
offer for up to 11,298,630 shares of its Class A Common Stock and up to
5,505,305 shares of its Class B Common Stock with the price for each Class to be
between $12.50 to $13.50 per share. If we purchase the maximum number of shares
of each Class, the total purchase price will be between approximately $210
Million and $227 Million. We also entered into an agreement with Silver Lake,
which collectively own approximately 44.4% of Gartner's Class A Common Stock, to
purchase from Silver Lake approximately 9.2 million shares of Class A Common
Stock, subject to adjustment if the number of Class A Shares sought in the
tender offer is increased or decreased. Additionally, if the tender offer for
the shares of Class A Common Stock is not fully subscribed, then the number of
shares of Class A Common Stock purchased from Silver Lake will be increased by
that number of Class A Shares equal to the difference between the number of
Class A Shares sought in the tender offer and the actual number of Class A
Shares tendered and accepted
23
for payment in the tender offer (provided that in no event will more than 12
million Class A Shares be purchased from Silver Lake). The purchase of shares
from Silver Lake will be at the same price per Class A Share as is paid in the
tender offer. Silver Lake has also agreed not to tender any of its shares in the
tender offer. If the maximum number of shares are purchased as a result of the
tender offer and this agreement, the total purchase price will be between
approximately $325 million and $351 million.
In connection with the tender offer, discussed in Note 8, we received a $75.0
million bridge loan from JPMorgan Chase Bank on July 30, 2004. We intend to pay
off the bridge loan in full upon the signing of a $225.0 million credit
agreement with a syndicate of lenders. The agreement, expected to be entered
into in August, will provide for a five year $125.0 million term A loan facility
and a five year $100 million revolving credit facility. The facilities will bear
interest equal to LIBOR plus an applicable margin which will vary based on
specified leverage ratios. The term A loan facility will be payable in equal
quarterly installments over a five year period. The credit facilities are
subject to mandatory prepayments from a portion of proceeds from assets sale and
proceeds from certain future debt issuances. The credit agreement includes
customary affirmative, negative and financial covenants primarily based on our
financial results and other measures such as contract value. We believe that our
ability to draw down the full amount available under the facilities will not be
restricted by these covenants on the date that we sign them. The facilities also
include commitment fees on the unused portion of the revolving credit facility
not subject to letters of credit.
We believe that the tender offer is a prudent use of our financial resources. As
of June 30, 2004, we have no debt. However, in connection with the tender offer
and the Silver Lake agreement, we plan to incur approximately $200 million of
non-convertible debt under the facilities described above and use up to
approximately $150 million of our cash on hand. We anticipate that we will have
adequate cash generating capacity and no immediate need for the accumulation of
cash, and expect that our current cash balances, anticipated cash flows from
operations and borrowing capacity exceed our capital requirements for normal
operations, capital expenditures and acquisitions and other opportunities for
growth that may arise. 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.
Stock Repurchase Program
On July 17, 2001, the Board of Directors approved the repurchase of up to $75.0
million of our Common Stock. On July 25, 2002, the Board of Directors increased
the authorized stock repurchase program from the previously approved $75 million
to up to $125 million of our common stock. On July 24, 2003, the Company's Board
of Directors authorized an additional increase of $75 million in the stock
repurchase program bringing the total authorization to date to $200 million.
During the six months ended June 30, 2004, we repurchased 413,225 shares of our
Class A Common Stock and 114,600 shares of our Class B Common Stock at an
aggregate cost of $6.1 million under this program. On a cumulative basis at June
30, 2004, we have purchased $133.2 million of our stock under this stock
repurchase program. In conjunction with the tender offer, the Board of Directors
terminated this Stock Repurchase Program during June 2004.
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 fourth quarter, as well as
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
24
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.
Over the past few 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 as economic
conditions continue to 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, 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 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 our 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 their
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.
25
Renewal of Research Business by Existing Clients. Some of our success depends on
renewals of our subscription-based research products and services, which
constituted 55% of our revenues for the first six months of 2004 and 56% for the
six months of 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
Quarterly Report. Additionally, as we implement our strategy to realign our
business to client needs, we may shift the type and pricing of our products
which could impact client renewal rates. While client retention rates were 78%
at June 30, 2004 and 75% at June 30, 2003, 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 financial
condition.
Non-Recurring Consulting Engagements. Consulting segment revenues constituted
30% of our revenues for the first six months of 2004 and 31% for the first six
months of 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 Quarterly Report. Any
material decline in our ability to replace consulting arrangements could have an
adverse impact on our revenues and 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. Additionally, 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. On July 23, 2004, we announced that
the Board of Directors named Eugene Hall as Chief Executive Officer. Mr. Hall
will succeed Michael Fleisher, who had previously announced his intention to
depart as Gartner's chairman and chief executive officer, after a transition
period. Additionally, James C. Smith, a current Board member, has been named
non-executive chairman of the Board of Directors. If we cannot successfully
integrate our Chief Executive Officer into our senior management team, then 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 our 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.
26
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 some
international locations. If any of these arrangements are terminated, we may not
be able to replace the arrangement on beneficial terms or on a timely basis.
Additionally, 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 $75.0 million bridge loan and anticipate borrowing
approximately $200.0 million in order to fund our tender offer. The affirmative,
negative and financial covenants of the bridge loan and the credit facility we
intend to enter into could limit our future financial flexibility. 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.
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
27
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 at a reasonable cost, 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.
Significant Stockholder. Silver Lake Partners, L.P. ("SLP") and its affiliates
own approximately 44.4% of our outstanding Class A Common Stock and
approximately 35% on a combined basis with our outstanding Class B Common Stock
as of June 30, 2004. 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:
- The presence of a classified board of directors;
- 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;
- The ability of the Board of Directors to issue and determine the terms
of preferred stock;
- The existence of a stockholder rights plan;
- Advance notice requirements for inclusion of stockholder proposals at
stockholder meetings; and
- The anti-takeover provisions of Delaware law.
28
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.
29
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As of June 30, 2004, we had limited exposure to market risk for changes in
interest rates since our long-term debt was converted to equity during the
fourth quarter of 2003. Additionally, we had no borrowings under our $200.0
million unsecured senior revolving credit facility that existed at June 30,
2004. Under the revolving credit facility, the interest rate on borrowings was
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. This credit facility expired on July 16, 2004.
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 29%. 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
June 30, 2004, we had investments in equity securities totaling $10.3 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 June 30, 2004, this would result in a
non-cash impairment charge of $10.3 million. Additionally, we have an
outstanding capital commitment to SI II in the amount of $4.0 million.
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, net in the stockholders' equity 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
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
From time to time we enter into foreign currency forward contracts or other
derivative financial instruments to hedge the effects of adverse fluctuations in
foreign currency exchange rates. At June 30, 2004, we had one foreign currency
forward contract outstanding. Foreign currency forward contracts are reflected
at fair value with gains and losses recorded currently in earnings.
30
The following table presents information about our foreign currency forward
contract outstanding as of June 30, 2004, expressed in U.S. dollar equivalents.
Forward
Currency Contract Exchange Unrealized
Purchased Currency Sold Amount Rate Gain Expiration Date
- --------- ------------- -------- -------- ---------- ---------------
Euros U.S. Dollars $4,340 1.2110 $ 8 July 23, 2004
ITEM 4. 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 June 30, 2004, 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 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.
In addition, there have been no significant changes in the Company's internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
31
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(e) Below is a summary of stock repurchases for the quarter ended June 30,
2004. See Note 8 of our Notes to Condensed Consolidated Financial
Statements for information regarding our stock repurchase program.
Class A Common Stock Class B Common Stock Shares Value of Shares
--------------------------- -------------------------- Purchased that may yet
Total Average Total Average Under be Purchased
Shares Price Paid Shares Price Paid Announced Under Plan
Purchased per Share Purchased per Share Plan (in thousands)
--------- ----------- ---------- ---------- ---------- --------------
April 2004 - $ - - $ - -
May 2004 120,300 11.93 56,700 11.95 177,000
June 2004 - - - - -
--------- ----------- ---------- ---------- ---------- --------------
Total quarter 120,300 $ 11.93 56,700 $ 11.95 177,000 $ -
========= =========== ========== ========== ========== ==============
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2004 Annual Meeting of Shareholders of Gartner, Inc. was held on June 30.
A total of 94,648,721 of the Company's Class A shares and 21,797,339 Class B
shares were present or represented by proxy at the meeting. This represented
more than 91.4% and 85.9% of the Company's Class A and Class B shares
outstanding, respectively.
The individual named below was elected to a three-year term as a Class II Common
A Director:
Name Votes Received Votes Withheld
---- -------------- --------------
Maynard G. Webb 92,737,486 1,911,235
The individuals named below were elected to a three-year term as a Class II
Common B Director:
Name Votes Received Votes Withheld
---- -------------- --------------
Anne Suherland Fuch 21,121,842 675,497
Jefrey W. Ubben 21,104,894 692,445
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------------------------
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.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated April 29, 2004 to furnish the
Company's press release issued April 29, 2004, with respect to:
- Financial results for Gartner, Inc. (the "Company") for the quarter
ended March 31, 2004; and
- The announcement that Michael Fleisher, Chairman and CEO, intends to
leave the Company.
Items 1, 3, and 5 of Part II are not applicable and have been omitted.
33
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 August 3, 2004 /s/ Christopher Lafond
----------------------------
Christopher Lafond
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
34