Back to GetFilings.com
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 SEPTEMBER 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
October 31, 2004 was 88,171,795 shares of Class A Common Stock and 22,613,138
shares of Class B Common Stock.
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at September 30,
2004 and December 31, 2003 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 16
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 31
ITEM 4: CONTROLS AND PROCEDURES 32
PART II OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS 33
ITEM 6: EXHIBITS 33
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GARTNER, INC.
Condensed Consolidated Balance Sheets
(in thousands)
September 30, December 31,
2004 2003
------------ -----------
(audited)
ASSETS
Current assets:
Cash and cash equivalents $ 156,641 $ 229,962
Fees receivable, net 215,587 266,122
Deferred commissions 26,967 27,751
Prepaid expenses and other current assets 31,700 25,642
--------- ---------
Total current assets 430,895 549,477
Property, equipment and leasehold improvements, net 64,911 66,541
Goodwill 229,555 230,387
Intangible assets, net 328 985
Other assets 68,601 69,874
--------- ---------
TOTAL ASSETS $ 794,290 $ 917,264
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 140,553 $ 175,609
Deferred revenues 299,929 315,524
Current portion of long term debt 40,000 -
--------- ---------
Total current liabilities 480,482 491,133
Other liabilities 50,461 50,385
Long term debt 160,000 -
--------- ---------
TOTAL LIABILITIES 690,943 541,518
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 75 72
Additional paid-in capital 467,025 408,504
Unearned compensation, net (1,559) (1,846)
Accumulated other comprehensive income, net 3,584 1,530
Accumulated earnings 185,588 173,936
Treasury stock, at cost (551,366) (206,450)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 103,347 375,746
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 794,290 $ 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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Research $ 119,004 $ 115,830 $ 360,212 $ 349,347
Consulting 60,073 62,998 192,308 191,302
Events 18,675 15,904 74,057 64,705
Other 4,136 2,172 11,835 9,150
--------- ---------- --------- ---------
Total revenues 201,888 196,904 638,412 614,504
Costs and expenses:
Cost of services and product development 100,196 94,378 310,058 300,151
Selling, general and administrative 85,090 79,169 254,312 243,403
Depreciation 6,589 9,046 21,370 27,835
Amortization of intangibles and goodwill
impairments 203 320 1,329 1,063
Other charges 4,333 - 23,909 5,426
--------- ---------- --------- ---------
Total costs and expenses 196,411 182,913 610,978 577,878
--------- ---------- --------- ---------
Operating income 5,477 13,991 27,434 36,626
(Loss) gain from investments, net (2,184) 102 (2,145) 5,624
Interest (expense) income, net (602) (5,774) 13 (16,928)
Other (expense) income, net (189) (148) (3,625) 348
--------- ---------- --------- ---------
Income before income taxes 2,502 8,171 21,677 25,670
Provision for income taxes 2,342 2,697 10,025 8,854
--------- ---------- --------- ---------
Net income $ 160 $ 5,474 $ 11,652 $ 16,816
========= ========== ========= =========
Income per common share:
Basic $ 0.00 $ 0.07 $ 0.09 $ 0.21
Diluted $ 0.00 $ 0.07 $ 0.09 $ 0.21
Weighted average shares outstanding:
Basic 121,767 78,026 128,044 79,251
Diluted 124,318 128,934 130,923 128,363
See the accompanying notes to the condensed consolidated financial statements.
4
GARTNER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Nine Months Ended
September 30,
2004 2003
---- ----
OPERATING ACTIVITIES:
Net income $ 11,652 $ 16,816
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, including goodwill impairments 22,699 28,898
Non-cash compensation 1,273 758
Tax benefit associated with employees' exercise of stock options 8,262 1,423
Deferred taxes 409 88
Loss (gain) from investments, net 2,145 (5,624)
Accretion of interest and amortization of debt issue costs 744 17,909
Non-cash charges associated with South America closings 2,943 -
Changes in assets and liabilities:
Fees receivable, net 49,352 68,646
Deferred commissions 698 2,249
Prepaid expenses and other current assets (6,215) 1,300
Other assets (1,320) (2,014)
Deferred revenues (14,107) (11,964)
Accounts payable and accrued liabilities (32,261) (2,557)
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 46,274 15,928
--------- ---------
INVESTING ACTIVITIES:
Proceeds from insurance recovery - 5,464
Investments - (1,507)
Additions to property, equipment and leasehold improvements (19,036) (16,401)
--------- ---------
CASH USED IN INVESTING ACTIVITIES (19,036) (12,444)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from stock issued for stock plans 56,472 20,956
Proceeds from issuance of debt 200,000 -
Payments for debt issuance costs (2,821) (570)
Purchases of stock via tender offer, net of costs (346,148) -
Purchases of treasury stock (6,114) (32,380)
--------- ---------
CASH USED IN FINANCING ACTIVITIES (98,611) (11,994)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (71,373) 91,490
EFFECTS OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (1,948) 5,790
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 229,962 109,657
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 156,641 $ 206,937
========= =========
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 nine months ended
September 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 nine months ended
September 30, 2004 and 2003 are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------- ------- -------- --------
Net income $ 160 $ 5,474 $ 11,652 $ 16,816
Other comprehensive income (loss):
Foreign currency translation adjustments 858 (259) (916) 5,696
Reclassification adjustment of foreign currency
translation adjustments to net income upon closing
of foreign operations - - 2,943 -
Net unrealized gains on investments, net of tax 3 8 28 1
------- ------- -------- --------
Other comprehensive income (loss) 861 (251) 2,055 5,697
------- ------- -------- --------
Comprehensive income $ 1,021 $ 5,223 $ 13,707 $ 22,513
======= ======= ======== ========
The balance of unrealized holding losses on investments, net of tax, at
September 30, 2004 was immaterial. During the nine months ended September 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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------- -------- -------- --------
NUMERATOR:
Net income used for calculating basic income per share $ 160 $ 5,474 $ 11,652 $ 16,816
After-tax interest on convertible long-term debt - 3,341 - 9,908
-------- -------- -------- --------
Income used for calculating diluted income per share $ 160 $ 8,815 $ 11,652 $ 26,724
======== ======== ======== ========
DENOMINATOR:
Weighted average number of common shares used in
the calculation of basic income per share 121,767 78,026 128,044 79,251
Common stock equivalents associated with stock
Compensation plans 2,551 1,878 2,879 797
Weighted average number of shares associated
with convertible long-term debt - 49,030 - 48,315
-------- -------- -------- --------
Shares used in the calculation of diluted income per share 124,318 128,934 130,923 128,363
======== ======== ======== ========
Basic income per share $ 0.00 $ 0.07 $ 0.09 $ 0.21
======== ======== ======== ========
Diluted income per share $ 0.00 $ 0.07 $ 0.09 $ 0.21
======== ======== ======== ========
For the three and nine months ended September 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 September 30, 2004 and 2003, options to purchase 13.0 million and 19.0
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 nine months ended September 30, 2004 and 2003,
options to purchase 11.9 million and 26.7 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) income and (loss)
income 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 (loss) income, and pro forma (loss) income per share
would have been as follows (in thousands, except per share data):
7
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
--------- --------- ---------- ----------
Net income as reported $ 160 $ 5,474 $ 11,652 $ 16,816
Add: Stock-based compensation expense
included in net income, net of tax 48 161 827 493
Deduct: Pro forma employee stock-based
compensation cost, net of tax (3,809) (4,314) (9,596) (13,614)
--------- --------- ---------- ----------
Pro forma net (loss) income $ (3,601) $ 1,321 $ 2,883 $ 3,695
========= ========= ========== ==========
Basic income (loss) per share:
As reported $ 0.00 $ 0.07 $ 0.09 $ 0.21
Pro forma $ (0.03) $ 0.02 $ 0.02 $ 0.05
Diluted income (loss) per share:
As reported $ 0.00 $ 0.07 $ 0.09 $ 0.21
Pro forma $ (0.03) $ 0.02 $ 0.02 $ 0.05
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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------- -------- -------- --------
Expected dividend yield 0% 0% 0% 0%
Expected stock price volatility 34% 43% 40% 43%
Risk-free interest rate 3.3% 2.2% 3.0% 1.9%
Expected life in years 4.0 4.0 3.8 3.4
The weighted average fair values of our stock options granted during the three
months ended September 30, 2004 and 2003, were $3.88 and $3.48, respectively.
The weighted average fair values of our stock options granted during the nine
months ended September 30, 2004 and 2003, were $4.20 and 2.59, 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.
8
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.
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
SEPTEMBER 30, 2004:
Revenues $ 119,004 $ 60,073 $ 18,675 $ 4,136 $ 201,888
Gross Contribution 72,050 20,738 6,571 3,753 103,112
Corporate and other expenses (97,635)
----------
Operating income $ 5,477
==========
THREE MONTHS ENDED
SEPTEMBER 30, 2003:
Revenues $ 115,830 $ 62,998 $ 15,904 $ 2,172 $ 196,904
Gross Contribution 73,330 21,680 5,163 1,375 101,548
Corporate and other expenses (87,557)
----------
Operating income $ 13,991
==========
NINE MONTHS ENDED
SEPTEMBER 30, 2004:
Revenues $ 360,212 $ 192,308 $ 74,057 $ 11,835 $ 638,412
Gross Contribution 224,082 70,816 30,537 10,523 335,985
Corporate and other expenses (308,551)
----------
Operating income $ 27,434
==========
NINE MONTHS ENDED
SEPTEMBER 30, 2003:
Revenues $ 349,347 $ 191,302 $ 64,705 $ 9,150 $ 614,504
Gross Contribution 222,381 65,308 24,095 6,335 318,119
Corporate and other expenses (281,493)
----------
Operating income $ 36,626
==========
9
Note 6 - Goodwill and Intangible Assets
The changes in the carrying amount of goodwill, by reporting segment, for the
nine months ended September 30, 2004 are as follows (in thousands):
Balance Currency Balance
December 31, Translation September 30,
2003 Impairments Adjustments 2004
------------ ------------ ------------ ------------
Research $ 128,896 $ - $ (260) $ 128,636
Consulting 68,803 (739) 105 68,169
Events 30,606 - - 30,606
Other 2,082 - - 2,082
------------ ------------ ------------ ------------
Total goodwill $ 230,387 $ (739) $ (155) $ 229,493
============ ============ ============ ============
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):
September 30, December 31,
2004 2003
------------ ------------
Non-compete agreements:
Gross cost $ 13,156 $ 13,257
Accumulated amortization (12,979) (12,599)
------------ ------------
Non-compete agreements, net 177 658
Trademarks and tradenames:
Gross cost 1,807 1,811
Accumulated amortization (1,594) (1,484)
------------ ------------
Trademarks and tradenames, net 213 327
------------ ------------
Intangible assets, net $ 390 $ 985
============ ============
Aggregate amortization expense for the three month period ended September 30,
2004 and 2003 was $0.2 million and $0.3 million, respectively. Aggregate
amortization expense for the nine month period ended September 30, 2004 and 2003
was $0.6 million and $1.1 million, respectively. The estimated future
amortization expense of purchased intangibles is as follows (in thousands):
2004 (remaining three months) $ 128
2005 199
2006 53
2007 9
2008 1
-------
$ 390
=======
10
Note 7 - Other Charges
On September 28, 2004, the Company announced that CEO, Eugene Hall, would assume
direct responsibility for the business operations. As a result of this change,
Maureen O'Connell, President and Chief Operating Officer, decided to leave the
Company as of October 21, 2004. Further, the position of President and Chief
Operating Officer has been eliminated. In connection with her departure, Ms.
O'Connell entered into a separation agreement on September 27, 2004. Pursuant to
the terms of the agreement, Ms. O'Connell received: (a) a single lump sum
severance payment equal to $3.2 million; (b) at our cost, group health benefits
pursuant to our standard programs for herself, her spouse and any children for
two years or until she obtains other employment, if that occurs sooner; and (c)
reasonable office support for one year, or until she obtains other employment,
if that occurs sooner. These costs have been recognized during the third quarter
of 2004 as an expense within Other charges.
In addition, in accordance with her previously existing employment agreement
with regards to equity arrangements, Ms. O'Connell received: (a) continued
vesting until October 21, 2006 of all outstanding stock options; and (b) the
ability to exercise all outstanding equity arrangements until October 21, 2007.
On April 29, 2004, Michael Fleisher, our then Chairman and CEO, announced his
intention to leave Gartner sometime prior to the end of 2004. In connection with
his departure, Mr. Fleisher entered into an amendment to his employment
agreement pursuant to which he agreed to 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 would 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 received (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 third quarter of 2004, the Company recorded other charges of $4.3
million, which included $3.1 million of costs related to Ms. O'Connell's
separation, as well as $0.5 million costs associated with the elimination of one
additional position. The charge also includes $0.8 million related to Mr.
Fleisher's employment agreement amendment.
During the second quarter of 2004, the Company recorded other charges of $9.1
million, which included $3.8 million of costs related to Mr. Fleisher's
departure, as well as $5.3 million of 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
11
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.
12
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 Nine months ended
September 30, 2003 5,426 - - 5,426
Payments (15,038) (5,158) - (20,196)
---------- ---------- ---------- ----------
Accrued Liability at September 30, 2003 2,111 10,778 - 12,889
Charges during remainder of 2003 14,574 9,716 - 24,290
Non-cash charges (123) - - (123)
Payments (3,746) (1,335) - (5,081)
---------- ---------- ---------- ----------
Accrued Liability at December 31, 2003 12,816 19,159 - 31,975
Charges during nine months ended
September 30, 2004 23,806 - 103 23,909
Non-cash charges (496) - (66) (562)
Payments (25,804) (3,922) (37) (29,763)
---------- ---------- ---------- ----------
Accrued Liability at September 30, 2004 $ 10,322 $ 15,237 $ - $ 25,559
========== ========== ========== ==========
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
$10.3 million at September 30, 2004 is expected to be paid by March 31, 2005. We
will fund these costs from existing cash.
Note 8 - Investments
During the quarter ending September 30, 2004, the Company recorded a non-cash
charge of $2.2 million. This charge is related to the transfer of the Company's
investment in TruSecure to SI II, as well as a decrease in the Company's
ownership percentage in SI II of seven basis points. As a result of this
transfer and the decrease in ownership, the Company has been relieved of all
future capital calls, which totaled $4 million. For the nine month period ended
September 30, 2003, the Company recorded insurance proceeds of approximately
$5.5 million related to a claim associated with a settlement arising from the
sale of GartnerLearning.
Total investments in equity securities were $7.8 million and $10.9 million at
September 30, 2004 and December 31, 2003, respectively.
Note 9 - Stock Programs
Tender Offer
On August 10, 2004, the Company announced the final results of its "Dutch
Auction Tender Offer". The Company repurchased 11.3 million shares of its Class
A Common Stock and 5.5 million shares of its Class B Common Stock at a purchase
price of $13.30 and $12.50 per share, respectively. Additionally, the Company
repurchased 9.2 million Class A shares from Silver Lake Partners and certain of
its affiliates ("Silver Lake") at a purchase price of $13.30 per share. The
total cost of the tender was $346.1 million including transaction costs of $3.8
million.
13
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 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
at $11.15 per share on which restrictions will lapse over 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 at $11.96
per share, on which the restrictions lapse ratably over a three-year period.
During the third quarter of 2004, we awarded 33,000 shares of restricted stock
at $12.78 per share on which the restrictions lapse ratably over a three-year
period. Additionally, due to an employee termination in the forth quarter of
2004, the 175,000 shares of restricted stock issued in the first quarter will be
forfeited.
Note 10 - 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 September 30,
2004, the Company is not aware of any indemnification agreements that would
require material payments.
Note 11 - Income Taxes
The Company's provision for income taxes was 93.6% and 33.0% of income before
income taxes for the third quarter of 2004 and 2003, respectively. The provision
for income taxes was 46.3% and 34.5% during the first nine months of 2004 and
2003, respectively. The effective tax rate increased during the third quarter of
2004 as compared to the third quarter of 2003 due to limitations on certain
deductions included in the other charges and the loss on investments. The
effective tax rate increased during the first nine months of 2004 as compared to
the first nine months of 2003 due to other charges, the goodwill impairment and
the non-cash write-off of our accumulated foreign currency translation
adjustments associated with the closing of certain operations in South America
for which there is no tax benefit.
Note 12 - Debt
The Company assumed debt during the third quarter of 2004. The Company's credit
agreement provides for a $200.0 million term A loan facility and a five year
$100 million revolving credit facility. The
14
facilities bear interest equal to LIBOR plus an applicable margin which varies
based on specified leverage ratios. At September 30, 2004, the current interest
rate was 3.08%. The term A loan facility is payable in equal quarterly
installments over a five year period ending August 12, 2009. 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 the Company's financial results and other measures such as
contract value. The facilities also include commitment fees on the unused
portion of the revolving credit facility not subject to letters of credit. At
September 30, 2004, there was $200 million outstanding on the term loan facility
and $3.5 million of letters of credit outstanding under the revolving credit
facility. As a result of these letters of credit, the Company's borrowing
availability at September 30, 2004 was $96.5 million. Note 13 - Subsequent Event
On October 27, 2004, the Company announced it is contemplating a charge in the
fourth quarter of 2004 related to closing certain facilities, restructuring
within its international operations and non-cash charges related to the
restructuring of certain internal systems. The Company will provide additional
guidance when a final decision is made.
On October 15, 2004, the Company announced it entered into an employment
agreement with Mr. Eugene A. Hall. Mr. Hall officially joined the Company as
Chief Executive Officer on August 4, 2004, succeeding Michael Fleisher who had
previously announced his intention to depart as Gartner's chairman and chief
executive officer. Additionally, the Company announced that Mr. Hall received an
inducement grant of 500,000 shares of restricted stock for which the market
value on the date of grant was $12.05 per share. The shares are in addition to
non-qualified options to purchase 800,000 shares of Gartner's Class A Common
Stock granted in the third quarter of 2004 at a price of $12.11 per share. As
long as Mr. Hall remains an employee, the restriction on the 500,000 shares of
restricted stock will lapse upon the earlier of (a) Gartner's 60 day average
stock price meeting certain targets, or (b) a change in control of Gartner. The
price targets are $20 for the first 300,000 shares, $25 for the next 100,000
shares and $30 for the remaining 100,000 shares. If Gartner's 60 day average
stock price exceeds the stipulated per share target during the 60 day
measurement period, the Company will be required to record a non-cash
compensation charge equal to Gartner's 60 day average stock price times the
number of shares associated with the applicable target. For example, if the
Company's average 60 days stock price is $22 per share, the first lapse shall
result in the Company recording a $6.6 million non-cash compensation charge
(300,000 shares at $22/share).
15
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.
16
- - 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 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.
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 is beginning to show improvement after several years of
steady decline. As a result, sales of our IT related research are improving as
well. During the last several years, 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,
decreased slightly during the second quarter and increased sequentially again in
the third quarter of 2004. Additionally, contract value increased 4% on a
year-over-year comparison primarily due to the effects of foreign currency. Our
research client retention rates maintained the strong rate of 78% from
17
December 2003 through the third quarter of 2004.
Our Consulting business ended 2003 with a positive trend, showing two
consecutive quarters of sequential increases in backlog after two 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 $103 million at September 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 2004, our average consultant
utilization rates increased to approximately 62% as compared to approximately
56% during the same nine month period in 2003.
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
third quarter of 2004, revenues from events that were held in the same quarter
last year increased approximately 25% due to increased attendance. Revenues
recognized during the first nine months of 2004 were 14% higher than the prior
year period despite hosting 6% or three fewer events than during the first nine
months of 2003 due to increased participation and the strong performance of our
recurring events.
During the fourth quarter of 2003, our 6% convertible notes were converted into
Class A Common Stock. This transaction eliminated all our outstanding debt and
related interest expense as of December 31, 2003.
On August 10, 2004, the Company announced the final results of its Dutch auction
tender offer. The Company repurchased 11.3 million shares of its Class A Common
Stock and 5.5 million shares of its Class B Common Stock at a purchase price of
$13.30 and $12.50 per share, respectively. Additionally, the Company repurchased
9.2 million Class A shares from Silver Lake Partners, L.P. and certain of its
affiliates ("Silver Lake"), which collectively owned approximately 44.4% of
Gartner's Class A Common Stock and are affiliated with two members of our Board
of Directors, at a purchase price of $13.30 per share. The total cost of the
tender was $346.1 million including transaction costs of $3.8 million.
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;
18
- - Events revenues are deferred and recognized upon the completion of the
related symposium, conference or exhibition; and
- - Other revenues, principally software licensing fees, are recognized when a
signed non-cancelable software license exists, delivery has occurred,
collection is probable, and the fees are fixed or determinable. Revenue
from software maintenance is deferred and recognized ratably over the term
of the maintenance agreement, which is typically twelve months.
The majority of research contracts are billable upon signing, absent special
terms granted on a limited basis from time to time. All research contracts are
non-cancelable and non-refundable, except for government contracts that have a
30-day cancellation clause, but have not produced material cancellations to
date. It is our policy to record the entire amount of the contract that is
billable as a fee receivable at the time the contract is signed with a
corresponding amount as deferred revenue, since the contract represents a
legally enforceable claim. For those government contracts that permit
termination, the Company bills the client the full amount billable under the
contract but only records a receivable equal to the earned portion of the
contract. In addition, the Company only records deferred revenue on these
government contracts when cash is received. Deferred revenues attributable to
government contracts were $36.0 million and $38.6 million at September 30, 2004
and December 31, 2003, respectively. In addition, at September 30, 2004 and
December 31, 2003, the Company had not recognized uncollected receivables or
deferred revenues, relating to government contracts that permit termination, of
$6.5 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 September 30, 2004 were $224.6 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
19
precision and reliability of the resulting estimates are subject to uncertainty,
and as additional information 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.
During the quarter ending September 30, 2004, the Company recorded a non-cash
charge of $2.2 million. This charge is related to the transfer of our investment
in TruSecure to SI II, as well as a decrease in our ownership percentage in SI
II of seven basis points. As a result of this transfer and the decrease in
ownership, the Company has been relieved of all future capital calls, which
totaled $4 million. For the nine month period ended September 30, 2003, the
Company recorded insurance proceeds of approximately $5.5 million related to a
claim associated with a settlement arising from the sale of GartnerLearning.
Total investments in equity securities were $7.8 million and $10.9 million at
September 30, 2004 and December 31, 2003, respectively.
20
RESULTS OF OPERATIONS
OVERALL RESULTS
TOTAL REVENUES increased 3% in the third quarter of 2004 to $201.9 million
compared to $196.9 million for the third quarter of 2003 and increased 4% when
comparing the first nine months of 2004 to the first nine months of 2003. The
effects of foreign currency translation had approximately a 3% positive effect
on revenues for the third 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 $5.8 million, or 6%, to
$100.2 million in the third quarter of 2004 from $94.4 million in the third
quarter of 2003 and increased 3% when comparing the first nine months of 2004
with the first nine months of 2003. Excluding the effects of foreign currency
translation, cost of services and product development would have increased by
approximately 3% during the third quarter and would have decreased 1% during the
first nine months of 2004 as compared to the first nine months of 2003. The
increase in cost of services on a quarter to date basis resulted primarily from
increased investment in our Research business. The increase in cost of services
and product development on a year-to-date basis is primarily related to foreign
currency. Cost of services and product development during 2004 benefited by the
reversal of $3.5 million of prior years' discretionary incentive compensation
programs. As a percentage of sales, cost of services and product development
increased to 50% during the third quarter of 2004 from 49% during the third
quarter of 2003. For the first nine months of 2004, cost of services and product
development as a percentage of sales remained flat at 49% as compared to the
first nine months of 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $5.9 million, or 7%, to
$85.1 million in the third quarter of 2004 from $79.2 million in the third
quarter of 2003. SG&A increased 4% when comparing the first nine months of 2004
to the first nine 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 increased 4% for the third
quarter of 2004 compared to the third quarter of 2003 and would have increased
1% for the first nine months of 2004 compared to the first nine months of 2003.
SG&A expenses during 2004 benefited by the reversal of $3.3 million of prior
years' discretionary incentive compensation programs. Additionally, the Company
reduced its allowance for doubtful accounts by $1.5 million in 2004 as a result
of increased collections and a decline in write-offs.
DEPRECIATION EXPENSE for the third quarter of 2004 decreased 27% to $6.6
million, compared to $9.0 million for the third quarter of 2003 and decreased
23% when comparing the first nine months of 2004 to the first nine 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
third quarter of 2004 decreased from $0.3 million for the third quarter of 2003
due to certain intangible assets having been fully amortized since the third
quarter of 2003. Amortization of intangibles and goodwill impairments increased
during the first nine 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 $4.3 million during the third quarter of 2004 primarily
includes severance costs associated with the departure of our President and COO
and our CEO of $3.1 million and $0.8 million, respectively. Other charges of
$9.1 million during the second quarter of 2004 includes $3.8 million of
21
severance costs associated with the departure of our CEO, as well as $5.3
million of costs associated with the termination of 30 additional employees.
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 previously announced in December 2003. Other charges of $5.4 million
during the 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 nine months of 2004, we recorded charges of $16.1 million
related to the realignment of our workforce, excluding costs of $7.8 million
related to the departure of our President and COO and our Chairman and CEO. The
realignment resulted in the termination of 163 employees during the first nine
months of 2004. The annualized savings from the termination of these employees
should be approximately $17.8 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.
(LOSS) GAIN ON INVESTMENTS, NET was a loss of $2.2 million for the quarter
ending September 30, 2004. This loss is related to the transfer of our
investment in TruSecure to SI II, as well as a decrease in our ownership
percentage in SI II of seven basis points. As a result of this transfer and the
decrease in ownership, the Company has been relieved of all future capital
calls, which totaled $4 million. For the nine month period ended September 30,
2003, the Company recorded insurance proceeds of approximately $5.5 million
related to a claim associated with a settlement arising from the sale of
GartnerLearning.
INTEREST INCOME (EXPENSE), NET was expense of $0.6 million during the third
quarter of 2004 and income of $0.01 million during the first nine months of 2004
as compared to expense of $5.8 million and $17.0 million, respectively, in 2003.
The conversion of our outstanding convertible debt to equity during the fourth
quarter of 2003 has decreased our interest expense. However, due to the new
credit agreement signed in the third quarter of 2004, interest expense will
increase in the future.
OTHER (EXPENSE) INCOME, NET for the first nine 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 third quarter of 2004 and the third quarter and first nine months of 2003
consists primarily of net foreign currency exchange gains and losses.
PROVISION FOR INCOME TAXES was 93.6% and 33.0% of income before income taxes for
the third quarter of 2004 and 2003, respectively. Provision for income taxes was
46.3% and 34.5% during the first nine months of 2004 and 2003, respectively. Our
projected effective tax rate for full year 2004 is 33.0%, exclusive of the
charge noted below, which is consistent with 2003. The effective tax rate was
higher than the projected effective tax rate during the third quarter of 2004
due to limitations on certain deductions included in the other charges and the
loss on investments. The effective tax rate was higher than the projected
effective tax rate during the first nine months of 2004 due to other charges,
the goodwill impairment and the non-cash write-off of our accumulated foreign
currency translation adjustments associated with the closing of certain
operations in South America for which there is no tax benefit. The effective tax
rate for the nine months ended September 30, 2003 was higher than the projected
effective tax rate for the nine months ended September 30, 2003 due to the
insurance recovery received during 2003.
22
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 3% when comparing the third quarters of 2004 and
2003 and increased 3% when comparing the first nine months of 2004 and 2003. The
increases were due primarily to the positive effects of foreign currency
translation.
Research gross contribution of $72.1 million for the third quarter of 2004
decreased 2% from $73.3 million for the third quarter of 2003, while gross
contribution margin for the third quarter of 2004 decreased to 61% from 63% in
the prior year period. For the nine months ended September 30, 2004, gross
contribution increased to $224.1 million, or a 62% contribution margin, from
$222.4 million, or a 64% contribution margin. The decrease in gross contribution
margin during 2004 was due primarily to increased revenues from our executive
programs, which are lower in margin than subscription services as well as
continued investments in our people, products and processes required to provide
future Research growth.
Research contract value increased 4% to $489.2 million at September 30, 2004
from $469.6 million at September 30, 2003 primarily due to the effects of
foreign currency. Client retention rates increased two percentage points to 78%
at September 30, 2004 from 76% at September 30, 2003, and wallet retention rates
increased to 93% during the third quarter of 2004 from 85% during the third
quarter of 2003.
Consulting
Consulting revenues decreased 5% to $60.1 million for the third quarter of 2004
and increased 1% to $192.3 million for the first nine months of 2004 as compared
to the same periods in 2003. Excluding the effects of foreign currency
translation, Consulting revenues would have decreased 8% for the third quarter
of 2004 as compared to the third quarter of 2003 and would have decreased by
approximately 4% for the nine months of 2004. Consulting revenue has decreased
as compared to the prior year period as a result of our planned realignment of
our business to exit certain less profitable consulting practices and
geographies, which has reduced our billable headcount by approximately 12%
during the 2004 periods as compared to the 2003 periods.
Consulting gross contribution of $20.7 million for the third quarter of 2004
decreased 4% from $21.7 million for the third quarter of 2003, and contribution
margin for the third quarter of 2004 increased to 35% from 34% in the prior year
quarter. Gross contribution of $70.8 million for the first nine months of 2004
increased 8% from $65.3 million for the same period of 2003, with contribution
margin for the period increasing to 37% 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 11% to $103.4 million at
September 30, 2004, compared to $92.8
23
million at September 30, 2003. This increase was primarily due to the increasing
demand in focus practice areas.
Events
Events revenue increased 17% to $18.7 million for the third quarter of 2004 as
compared to $15.9 million for the third quarter of 2003. For the nine months
ended September 30, 2004, Events revenues increased 14% to $74.1 million
compared to $64.7 million for the same period of 2003. The average revenue per
event increased during 2004 due to the strong performance of our recurring
events. Revenues during the third quarter of 2004 benefited from the positive
effect of foreign currency by approximately 2%. Revenues during the first nine
months of 2004 benefited from the positive effects of foreign currency
translation by approximately 3% as compared to the first nine months of 2003.
Gross contribution of $30.5 million, or 41% of revenues, for the first nine
months of 2004 increased from $24.1 million, or 37% of revenues, for the first
nine months of 2003. For the third quarter of 2004, gross contribution of $6.6
million, or 35% of revenues, increased from $5.2 million, or 32% of revenues,
for the third 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 $46.3 million for the nine months
ended September 30, 2004 compared to $115.9 million for the nine months ended
September 30, 2003. The net decrease in cash flow from operating activities of
$69.7 million was due primarily to payments of our 2003 bonuses during 2004. No
bonuses were paid during the first nine months 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. Further, the Company paid a portion of its
2004 bonuses in the third quarter of 2004 in accordance with the current year
corporate bonus plan. Additionally, we paid approximately $10.1 million more, or
$30.3 million in severance during 2004 than in 2003. The net decrease in cash
flow from operating activities was also due to the decrease in the change in
fees receivables, net of approximately $19.3 million due to accelerated
collections during the nine month period ended September 30, 2003 as compared to
the nine months ended September 30, 2004.
Cash used in investing activities increased to $19 million during the first nine
months of 2004 as compared to $12.4 million during the first nine months of
2003. Capital expenditures in the first nine months of 2004 are approximately
16% higher than the same period in 2003. During the first nine 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 used by financing activities totaled $98.6 million for the nine months
ended September 30, 2004, compared to $12.0 million for the nine months ended
September 30, 2003. We purchased $352.3 million of our common stock for treasury
during the first nine months of 2004 as compared to $32.4 million during the
same period in the prior year, of which $346.1 million represents the tender
inclusive of related costs. We received proceeds from stock issued for stock
plans of $56.5 million during the first nine months of 2004 as compared to $21.0
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 nine months of 2004 as compared to 2003.
Additionally, proceeds from the issuance of debt, net of debt issuance costs
during the nine months ended September 30, 2004 was $197.2 million.
24
OBLIGATIONS AND COMMITMENTS
Our credit agreement provides for a $200.0 million term A loan facility and a
five year $100 million revolving credit facility. The facilities bear interest
equal to LIBOR plus an applicable margin which varies based on specified
leverage ratios. At September 30, 2004, the current interest rate was 3.08%. The
term A loan facility is payable in equal quarterly installments over a five year
period ending August 12, 2009. The facility interest payments are payable upon
the LIBOR borrowing maturity dates. 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. The facilities also include
commitment fees on the unused portion of the revolving credit facility not
subject to letters of credit. At September 30, 2004, there was $200 million
outstanding on the term loan facility and $3.5 million of letters of credit
outstanding under the revolving credit facility. As a result of these letters of
credit, our borrowing availability at September 30, 2004 was $96.5 million. The
Company is contemplating taking a charge in the fourth quarter of 2004. To the
extent that this charge negatively impacts certain financial covenants, our
future borrowing ability under the revolving credit facility may be
significantly reduced.
On August 10, 2004, the Company announced the final results of its Dutch auction
tender offer. The Company repurchased 11.3 million shares of its Class A Common
Stock and 5.5 million shares of its Class B Common Stock at a purchase price of
$13.30 and $12.50 per share, respectively. Additionally, the Company repurchased
9.2 million Class A shares from Silver Lake Partners, L.P. and certain of its
affiliates ("Silver Lake"), which collectively owned approximately 44.4% of
Gartner's Class A Common Stock and are affiliated with two members of our Board
of Directors, at a purchase price of $13.30 per share. The total cost of the
tender was $346.1 million including transaction costs of $3.8 million.
We believe that the tender offer was 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. 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.
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 nine months ended September 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
September 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.
25
Non-Cash Compensation Charges in Future Periods.
On October 15, 2004, we announced that Mr. Hall received an inducement grant of
500,000 shares of restricted stock for which the market value on the date of
grant was $12.05 per share. As long as Mr. Hall remains an employee, the
restriction on the 500,000 shares of restricted stock will lapse upon the
earlier of (a) our 60 day average stock price meeting certain targets, or (b)
change in control. The price targets are $20 for the first 300,000 shares, $25
for the next 100,000 shares and $30 for the remaining 100,000 shares. If our 60
day average stock price exceeds the stipulated per share target during the 60
day measurement period, we will be required to record a non-cash compensation
charge equal to our 60 day average stock price times the number of shares
associated with the applicable target. For example, if our average 60 days stock
price is $22 per share, the first lapse shall result in us recording a $6.6
million non-cash compensation charge (300,000 shares at $22/share).
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 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
26
an adverse effect on our business, financial condition and operating results.
Such events may also result in an economic slowdown in the United States or
elsewhere, which could adversely affect our business, financial condition and
operating results.
Competitive Environment. We face direct competition from a significant number of
independent providers of information products and services, including
information that can be found on the Internet free of charge. We also compete
indirectly against consulting firms and other information providers, including
electronic and print media companies, some of which may have greater financial,
information gathering and marketing resources than we do. These indirect
competitors could choose to compete directly with us in the future. In addition,
limited barriers to entry exist in the markets in which we do business. As a
result, additional new competitors may emerge and existing competitors may start
to provide additional or complementary services. Additionally, technological
advances may provide increased competition from a variety of sources. However,
we believe the breadth and depth of our research assets position us well versus
our competition. Increased competition may result in loss of market share,
diminished value in our products and services, reduced pricing and increased
marketing expenditures. We may not be successful if we cannot compete
effectively on quality of research and analysis, timely delivery of information,
customer service, the ability to offer products to meet changing market needs
for information and analysis, or price.
Renewal of Research Business by Existing Clients. Some of our success depends on
renewals of our subscription-based research products and services, which
constituted 56% of our revenues for the first nine months of 2004 and 57% for
the nine 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 September 30, 2004 and 76% at September 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 nine months of 2004 and 31% for the first nine
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 A. Hall as Chief Executive Officer. Mr. Hall
succeeded Michael Fleisher, who had previously announced his intention to depart
as Gartner's chairman and chief executive officer. Additionally, James C. Smith,
a current Board member, has been named non-executive chairman of the Board of
Directors. Further, on September 28, 2004, we announced that the position of
President and Chief Operating Officer, previously held by Maureen O'Connell, was
eliminated and that Mr. Hall would assume direct
27
responsibility for business operations. 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.
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.
28
Indebtedness. We have a $200 million term loan and a $100 million revolving
loan. The affirmative, negative and financial covenants of the loans 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
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.
29
Significant Stockholder. Silver Lake Partners, L.P. ("SLP") and its affiliates
own approximately 42.8% of our outstanding Class A Common Stock and
approximately 34.0% on a combined basis with our outstanding Class B Common
Stock as of October 31, 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;
- - Advance notice requirements for inclusion of stockholder proposals at
stockholder meetings; and
- - The anti-takeover provisions of Delaware law.
These provisions could delay or prevent a change of control or change in
management that might provide stockholders with a premium to the market price of
their Common Stock.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As of September 30, 2004, we have limited exposure to market risk for changes in
interest rates. We have $200 million outstanding on our term loan facility.
Additionally, we had no borrowings under our $100 million revolving credit
facility that existed at September 30, 2004. Under the credit facilities, the
interest rate on borrowings varies. We believe that an increase or decrease of
10% in the effective interest rate on our term loan and our 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 $0.7 million annual effect under the credit facility if
fully utilized.
Investment Risk
We are exposed to market risk as it relates to changes in the market value of
our equity investments. We invest in equity securities of public and private
companies directly and through SI I, a wholly owned affiliate, and SI II, of
which we owned 29% as of September 30, 2004. In connection with the $2.2 million
loss on investments recognized in the third quarter of 2004, our ownership
dropped to 21.27% in the fourth quarter of 2004 and we eliminated all
outstanding capital commitments to SI II. 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 September 30, 2004, we had investments in equity securities
totaling $7.8 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 September 30, 2004, this would result in a non-cash impairment
charge of $7.8 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 September 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.
31
The following table presents information about our foreign currency forward
contract outstanding as of September 30, 2004, expressed in (thousands) U.S.
dollar equivalents.
Forward
Currency Contract Exchange Unrealized
Purchased Currency Sold Amount Rate Gain Expiration Date
- ------------ ----------------- -------- -------- ---------- ----------------
Euros Hong Kong Dollars $ 903 9.548 $ 2 October 25, 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 September 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 or submitted
under the Act.
In addition, there have been no significant changes in the Company's internal
control over financial reporting during the quarter ended September 30, 2004
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
32
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Below is a summary of stock repurchases for the quarter ended September
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 Shares
------------------------- ------------------------ Purchased To be
Total Average Total Average Under Purchased
Shares Price Paid Shares Price Paid Announced Under
Purchased per Share Purchased per Share Plan Plan
---------- ------------ --------- ------------ ---------- ---------
July 2004 20,567,957 $ 13.30 5,505,305 $ 12.50 26,073,262 -
August 2004 - - - - - -
September 2004 - - - - - -
---------- ------------ --------- ------------ ---------- ---------
Total quarter 20,567,957 $ 13.30 5,505,305 $ 12.50 26,073,262 -
========== ============ ========= ============ ========== =========
ITEM 6. EXHIBITS
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- --------------------------------------------------------------------
4.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended September 30, 2000 as filed on December 29,
2000).
4.2 Certificate of Amendment of the Restated Certificate of Incorporation
(incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended September 30, 2001 as filed on December 28,
2001).
4.3 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock and Series B Junior Participating
Preferred Stock of the Registrant (incorporated by reference from the
Registrant's Form 8-K dated March 1, 2000 as filed on March 7, 2000).
4.4 Amended Bylaws of the Registrant as amended through April 14, 2000
(incorporated by reference from the Registrant's Annual Report on
Form 10-K for the year ended September 30, 2000 as filed on December
29, 2000).
4.5 Form of Certificate for Class A Common Stock, Class A (incorporated by
reference from the Registrant's Annual Report on Form 10-K for the
year ended September 30, 2001 as filed on December 28, 2001).
4.6 Amended and Restated Rights Agreement, dated as of August 31, 2002
(incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended September 30, 2002 as filed on December 27,
2002).
4.7 Amendment No. 1 to the Amended and Restated Rights Agreement, dated as
of June 30, 2003 (incorporated by reference from the Registrant's
Amendment No. 2 to Form 8-A as filed on June 30, 2003).
33
10.1 Credit Agreement, dated as of August 12, 2004, among Gartner, Inc.,
the several lenders from time to time parties hereto, Fleet National
Bank, N.A., Citizens Bank of Massachusetts, Comercia Bank and HSBC
Bank USE, N.A., as Co-Syndication Agents, LaSalle Bank National
Association, as Agent, and JPMorgan Chase Bank, as Administrative
Agent.
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.
Items 1, 3, 4 and 5 of Part II are not applicable and have been omitted.
34
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 November 8, 2004 /s/ Christopher Lafond
----------------------------
Christopher Lafond
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
35
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ----------------------------------------------------------------------
4.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended September 30, 2000 as filed on December 29,
2000).
4.2 Certificate of Amendment of the Restated Certificate of Incorporation
(incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended September 30, 2001 as filed on December 28,
2001).
4.3 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock and Series B Junior Participating
Preferred Stock of the Registrant (incorporated by reference from the
Registrant's Form 8-K dated March 1, 2000 as filed on March 7, 2000).
4.4 Amended Bylaws of the Registrant as amended through April 14, 2000
(incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended September 30, 2000 as filed on December 29,
2000).
4.5 Form of Certificate for Class A Common Stock, Class A (incorporated by
reference from the Registrant's Annual Report on Form 10-K for the
year ended September 30, 2001 as filed on December 28, 2001).
4.6 Amended and Restated Rights Agreement, dated as of August 31, 2002
(incorporated by reference from the Registrant's Annual Report on Form
10-K for the year ended September 30, 2002 as filed on December 27,
2002).
4.7 Amendment No. 1 to the Amended and Restated Rights Agreement, dated as
of June 30, 2003 (incorporated by reference from the Registrant's
Amendment No. 2 to Form 8-A as filed on June 30, 2003).
10.1 Credit Agreement, dated as of August 12, 2004, among Gartner, Inc.,
the several lenders from time to time parties hereto, Fleet National
Bank, N.A., Citizens Bank of Massachusetts, Comercia Bank and HSBC
Bank USE, N.A., as Co-Syndication Agents, LaSalle Bank National
Association, as Agent, and JPMorgan Chase Bank, as Administrative
Agent.
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.
36