UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBERFor the fiscal year ended December 31, 2004
2005
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| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period fromtoCOMMISSION FILE NUMBER
Commission file number: 1-14443 GARTNER, INC.
(Exact name of Registrantregistrant as specified in its charter)
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Delaware
| | 04-3099750 |
(State or other jurisdiction of
incorporation or organization) | | 04-3099750
(I.R.S. Employer
Identification Number)No.) |
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P.O. Box 10212
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56 Top Gallant Road
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Stamford, CT
CT. | | 06902-7700 |
| (Address of principal executive offices) | | 06902-7747
(Zip Code) |
(203) 316-1111(Registrant’s telephone number, including area
code: (203) 316-1111code)
Securities Registered Pursuantregistered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of Each Exchange |
Title of Class | | On Which Registeredeach exchange on which registered |
Common Stock, Class A, $.0005 Par Value | | New York Stock Exchange |
Common Stock, Class B, $.0005 Par Valuepar value per share | | New York Stock Exchange |
Securities
Registered Pursuantregistered pursuant to Section 12(g) of the Act:
None.None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No þ
Indicate by check mark whether the Registrantregistrant (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 Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
Registrant’sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
oþIndicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” (as defined in Rule 12b-2 of the Exchange ActAct). (Check one):
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| Large accelerated filer o | | Accelerated filer þ | | Non-accelerated filer o | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2)12b-2 of the Exchange Act). Yes
þo No
oþThe
As of June 30, 2005, the aggregate market value of the
votingregistrant’s common stock held by
persons other than those who may be deemed affiliatesnon-affiliates of the
Registrant,registrant was $610,769,942 based on the closing sale price as
of June 30, 2004, was approximately $745.8 million. This calculation does not reflect a determination that persons are affiliates for any other purposes.Thereported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the Registrant’s capitalissuer’s classes of common stock, as of February 28, 2005 was 89,502,496 shares of Common Stock, Class A and 22,612,954 shares of Common Stock, Class B.the latest practicable date.
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| Class | | Outstanding at February 28, 2006 |
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| Common Stock, $0.0005 par value per share | | 114,376,119 shares |
DOCUMENTS INCORPORATED BY REFERENCE
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| Document | | Parts Into Which Incorporated |
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| Proxy Statement for the Annual Meeting of Stockholders to be held May 30, 2006 (Proxy Statement) | | Part III |
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| . | | |
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GARTNER, INC.
20042005 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS23
PART I
Gartner, Inc., founded in 1979, is a leading independent provider of research and analysis on information technology, computer hardware, software, communications and related technology industries (the “IT industry”). We provide comprehensive coverage of the IT industry to approximately 10,000 client organizations. We serve a global client base consisting primarily of chief information officers (“CIOs”) and other senior IT and business executives in corporations and government agencies. We also serve technology companies and the investment community.
Unless otherwise indicated or unless the context requires otherwise, all references in this Form 10-K to “Gartner,” “Company,” “we,” “us,” “our” or similar terms mean Gartner, Inc. and its subsidiaries on a consolidated basis.
The foundation for all Gartner products is our independent research on IT issues. The findings from this research can be delivered through several different media, depending on a client’s specific business needs, preferences and objectives:
| • | | Research–— provides research content and advice for IT professionals, technology companies and the investment community in the form of reports and briefings, as well as peer networking services and membership programs designed specifically for CIOs and other senior executives. |
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| • | | 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. |
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| • | | Events–— consists of various symposia, conferences and exhibitions focused on the IT industry. |
In today’s dynamic IT marketplace,
vendorstechnology providers continually introduce new products with a wide variety of standards and shorter life cycles. The users of technology
–— almost all organizations
–— must keep abreast of these new developments, and make major financial commitments to new IT systems and products. To plan and purchase effectively, these users of technology need independent, objective, third-party research and consultative services. We believe that technology accounts for a significant portion of all capital spending. The intense scrutiny on technology spending ensures that our products and services remain necessary in the current economy because clients
still need value-added, independent and objective research and analysis of the IT market.
We are a leading provider of independent and objective research and analysis of the IT industry, and a source of insight about technology acquisition and deployment. Our global research community provides provocative thought leadership. We employ more research analysts than any competitor. Our experienced consultants combine our objective, independent research, with a practical, sought-after business perspective focused on the IT industry. Our events are among the world’s largest of their kind; gathering highly qualified audiences of senior business executives, IT professionals, purchasers and vendors of IT products and services.
Our principal products and services are Research, Consulting, and Events:
§ | RESEARCH.Research on IT issues on a global scale is the fundamental building block for all Gartner services. Our research agenda is defined by clients’ needs, focusing on the critical issues, opportunities and challenges they face every day. Research content, presented in the form of reports, briefings, updates and related tools, is delivered directly to the client’s desktop. Our research analysts provide in-depth analysis on all aspects of technology and telecommunications including: hardware, software and systems, services, IT management, market data and forecasts, and vertical industry issues. |
RESEARCH.Research on IT issues on a global scale is the fundamental building block for all Gartner services. Our research agenda is defined by clients’ needs, focusing on the critical issues, opportunities and challenges they face every day. Research content, presented in the form of reports, briefings, updates and related tools, is delivered directly to the client’s desktop via our website. Our research analysts provide in-depth analysis on all aspects of technology and telecommunications including: hardware, software and systems, services, IT management, market data and forecasts, and vertical industry issues.
Executive Programs (EXP)(EP) are exclusive membership programs designed to help CIOs and other executives become more effective in their enterprises. An EXPEP membership leverages the knowledge and expertise of Gartner in ways that are specific to the CIOs needs, and offers members-only communities for peer-based collaboration. Members also receive advice and counsel from a personal relationship manager who understands their goals and can ensure the most effective level of support from Gartner. Our Best Practices Programsprograms bring together senior business and IT leaders for exclusive events, multi-client research studies and ad hoc peer exchange forums. These programs allow clients to learn from the experiences of their peers and share best practices in order to solve common business problems, improve corporate performance and drive greater effectiveness. At December 31, 2004,2005, our various Executive Programs had a membership of approximately 2,7003,500 CIOs and other senior IT leaders.
CONSULTING.Our consulting staff provides customized project consulting on the delivery, deployment, and management of high-tech products and services in four focus areas: IT Management and Measurement, Sourcing, Federal Government, and Market and Business Strategies:
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§ | CONSULTING.Our consulting staff provides customized project consulting on the delivery, deployment, and management of high-tech products and services in four focus areas: IT Management and Measurement, Sourcing, Federal Government, and Market and Business Strategies: |
| | IT Management and Measurement. Successful IT organizations must operate with maximum effectiveness and efficiency while |
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| delivering services that address the business and process issues of their enterprise. Our consultants provide advice and support that leverages the intelligence of our research to address and solve the top issues of the IT organization. |
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| | Sourcing. Virtually every major enterprise today is considering the issue of IT outsourcing, offshore resources and business process outsourcing. Our consultants provide advice and project management support across the four stages of the sourcing process: strategy, evaluation and selection of partners, contract development, and relationship management. |
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| | | Federal Government. We are highly experienced in developing IT solutions that meet the unique challenges faced by federal agencies as they attempt to serve the public’s needs. Budgeting, procurement and re-engineering are just some of the issues our consultants have addressed in the public sector arena. |
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| | | Market and Business Strategies. The intelligence we gather through market research, client interaction and analysis is unique in the marketplace. Our consultants leverage this intelligence to assist technology companies in identifying market demand, improving products and defining the competitive landscape. |
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| • | | EVENTS.Symposia and conferences give clients live access to insights developed from our research in a concentrated way. In 2004,2005, Gartner events attracted nearly 31,00036,000 participants. Gartner Symposium, offered each spring and fall in various international locations, is a large, strategic conference for senior IT and business professionals. Symposium is combined with ITxpo, an exhibition where the latest technology products and solutions are demonstrated. We also offer conferences on specialized topics such as: outsourcing, mobile wireless, customer relationship management, and application integration and business intelligence in many locations around the world. |
Note
15 –13 — Segment Information to the Consolidated Financial Statements within this Form 10-K includes financial information about our geographic areas and our three business segments:
research, consultingResearch, Consulting and
events.Events.
We believe that the principal competitive factors that differentiate us from our competitors are:
| • | | The high quality, independence and objectivity of our research and analysis; |
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| • | | Our multi-faceted expertise across the IT industry and its technologies, both legacy and emerging; |
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| • | | Our position as a research company with broad consulting capabilities; |
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| • | | Our position as a consulting firm with research analysts; |
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| • | | The timely delivery of information; |
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| • | | The ability to offer products that meet changing market needs at competitive prices; and |
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| • | | Our superior customer service. |
We face competition from a significant number of independent providers of information products and services. We compete indirectly against consulting firms and other information providers, including electronic and print media companies. These indirect competitors could choose to compete directly with us in the future. Additionally, we face competition from our clients receiving information from free sources through the Internet. Limited barriers to entry exist in the markets in which we do business. As a result, new competitors may emerge and existing competitors may start to provide additional or complementary services. However, we believe the breadth and depth of our research assets position us well versus our competition. Increased competition may result in us losing market share, diminished value in our products and services, reduced pricing, and increased sales and marketing expenditures.
Our success has resulted in part from proprietary methodologies, software, reusable knowledge capital and other intellectual property rights. We rely on a combination of copyright, patent, trademark, trade secret, confidentiality, non-compete and other contractual provisions to protect our intellectual property rights. We have policies related to confidentiality and ownership and to the use and protection of Gartner’s intellectual property, and we also enter into agreements with our employees as appropriate.
We recognize the value of our intellectual property in the marketplace and vigorously identify, create and protect it.
5
EMPLOYEES
EMPLOYEES
As of December 31,
2004,2005, we had
3,6253,622 employees, of which
661approximately 276 were related to our acquisition of META Group, Inc. (“META”) on April 1, 2005. Of the 3,622 employees at year-end 2005, 633 were located at our headquarters in Stamford, Connecticut;
1,6491,541 were located at our other facilities in the United States; and
1,3151,448 were located outside of the United States. Our employees may be subject to
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collective bargaining agreements at a company or industry level in those countries where this is part of the local labor law or practice. We have experienced no work stoppages and consider our relations with our employees to be favorable. In December 2004, we announced a restructuring plan that included a severance charge of $5.9 million as part of a workforce reduction as we continue to align our business resources with revenue expectations. Pursuant to that plan, during the fourth quarter of Calendar 2004, we reduced our workforce by 40 employees, or approximately 1% of our total workforce as of December 31, 2004. We expect additional reductions to occur during the first quarter of Calendar 2005, which will result in an additional severance charge estimated at between $5.0 to $6.0 million.
Our Internet address is
www.gartner.com and the investor relations section of our Web site is located at
www.gartner.com/investors. investor.gartner.com. We make available free of charge, on or through the investor relations section of our Web site, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Also available atwww.gartner.com/investors investor.gartner.com is information relating to our corporate governance. This includes (i) CEO & CFO Code of Ethics which applies to our Chief Executive Officer, Chief Financial Officer, controller and other financial managers, (ii) Principles of Ethical Conduct which applies to all employees, (iii) Governance Guidelines, the corporate governance principles that have been adopted by our Board and (iv) charters for each of the Board’s committees. This information is also available in print to any shareholder who requests it by writing to Investor Relations, Gartner, Inc., 56 Top Gallant Road, Stamford, CT 06902.
ITEM 1A. RISK FACTORS
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.
Our Operating Results Could be Negatively Impacted if the IT Industry Experiences an Economic Down Cycle. 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. Such a downturn could materially and adversely affect our business, financial condition and results of operations, including the ability to: maintain client retention, wallet retention and consulting utilization rates, and achieve contract value and consulting backlog.
We Have Grown, and May Continue to Grow, Through Acquisitions and Strategic Investments, Which Could Involve Substantial Risks. We have made and may continue to make acquisitions of, or significant investments in, businesses that offer complementary products and services, including our acquisition of META that we completed on April 1, 2005. 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 retain key personnel of the acquired company, the time to train the sales force to market and sell the products of the acquired business, 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.
We Face Significant Competition and Our Failure to Compete Successfully Could Materially Adversely Affect Our Results of Operations and Financial Condition. 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 also 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. There can be no assurance that we will be able to successfully compete against current and future competitors and our failure to do so could result in loss of market share, diminished value in our products and services, reduced pricing and increased marketing expenditures. Furthermore, we may not be successful if we cannot compete effectively on quality of research and analysis, timely delivery of information, customer service, and the ability to offer products to meet changing market needs for information and analysis, or price.
We Depend on Renewals of Subscription Base Services and Our Failure to Renew at Historical Rates Could Lead to a Decrease in Our Revenues.Some of our success depends on renewals of our subscription-based research products and services, which constituted 53% and 54% of our revenues for Calendar 2005 and Calendar 2004, respectively. 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 the following:
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| • | | delivering high-quality and timely analysis and advice to our clients; |
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| • | | understanding and anticipating market trends and the changing needs of our clients; and |
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| • | | delivering products and services of the quality and timeliness necessary to withstand competition. |
Additionally, as we implement our strategy to realign our business to client needs, we may shift the type and pricing of our products which may impact client renewal rates. While research client retention rates were 81% and 80% at December 31, 2005 and 2004, respectively, there can be no guarantee that we will continue to maintain this rate of client renewals. Any material decline in renewal rates could have an adverse impact on our revenues and our financial condition.
We Depend on Non-Recurring Consulting Engagements and Our Failure to Secure New Engagements Could Lead to a Decrease in Our Revenues.Consulting segment revenues constituted 30% of our revenues for Calendar 2005 and 29% for Calendar 2004. These consulting engagements typically are project-based and non-recurring. Our ability to replace consulting engagements is subject to numerous factors, including the following:
| • | | delivering consistent, high-quality consulting services to our clients; |
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| • | | tailoring our consulting services to the changing needs of our clients; and |
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| • | | our ability to match the skills and competencies of our consulting staff to the skills required for the fulfillment of existing or potential consulting engagements. |
Any material decline in our ability to replace consulting arrangements could have an adverse impact on our revenues and our financial condition.
We May Not be Able to Attract and Retain Qualified Personnel Which Could Jeopardize the Quality of Our Products and ServicesOur success depends heavily upon the quality of our senior management, research analysts, consultants, sales and other key personnel. We face competition for the limited pool of these qualified professionals from, among others, technology companies, market research firms, consulting firms, financial services companies and electronic and print media companies, some of which have a greater ability to attract and compensate these professionals. Some of the personnel that we attempt to hire are subject to non-compete agreements that could impede our short-term recruitment efforts. Any failure to retain key personnel or hire and train additional qualified personnel as required to support the evolving needs of clients or growth in our business, could adversely affect the quality of our products and services, and our future business and operating results.
We May Not be Able to Maintain Our 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.
We May Not be Able to Introduce the New Products and Services that We Need to Remain Competitive. 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.
Our International Operations Expose Us to a Variety of Risks Which Could Negatively Impact Our Future Revenue and Growth. Approximately 38% of our revenues for Calendar 2005 were 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 foreign currency exchange rates, changes in market demand as a result of 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. Furthermore, we rely on local distributors or sales agents in some international locations. If any of these arrangements are terminated by our agent or us, we may not be able to replace the arrangement on beneficial terms or on a timely basis, or clients of the local distributor or sales agent may not want to continue to do business with us or our new agent.
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We May Not be Able to Maintain the Equity in Our Brand Name. We believe that our “Gartner” brand, including our independence, 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.
The Costs of Servicing Our Outstanding Debt Obligations Could Impair Our Future Operating Results. We have a $200.0 million term loan as well as a $125.0 million revolving credit facility. The affirmative, negative and financial covenants of the credit facility could limit our future financial flexibility. The associated debt service costs of these facilities could impair our future operating results. The 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.
If We Are Unable to Enforce and Protect Our Intellectual Property Rights Our Competitive Position May be Harmed. 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.
We May be Subject to Infringement Claims. Third parties may assert infringement claims against us. Regardless of the merits, responding to any such claim could be time consuming, result in costly litigation and require us to enter into royalty and licensing agreements which may not be offered or available on reasonable terms. If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations or financial position could be materially adversely affected.
Our Operating Results May Fluctuate From Period to Period and May Not Meet the Expectations of Securities Analysts or Investors, Which May Cause the Price of Our Common Stock to Decline.Our quarterly and annual operating results 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 results could cause period-to-period comparisons of operating results not to be meaningful and may provide an unreliable indication of future operating results. Furthermore, our operating results may not meet the expectations of securities analysts or investors in the future. If this occurs, the price of our stock would likely decline.
Interests of Certain of Our Significant Stockholders May Conflict With Yours. Silver Lake Partners, L.P. (“SLP”) and its affiliates own approximately 33.0% of our common stock as of February 28, 2006. 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. Additionally, ValueAct Partners and its affiliates own approximately 16.3% of our common stock as of February 28, 2006. While neither SLP nor ValueAct holds a majority of our outstanding shares, they may be able, either individually or together, 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. Their interests may differ from the interests of other stockholders.
Our Anti-takeover Protections May Discourage or Prevent a Change of Control, Even if a Change in Control Would be Beneficial to Our Stockholders. 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 our Board of Directors. These provisions include:
| • | | The ability of our Board of Directors to issue and determine the terms of preferred stock; |
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| • | | Advance notice requirements for inclusion of stockholder proposals at stockholder meetings; |
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| • | | A preferred shares rights agreement; and |
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| • | | The anti-takeover provisions of Delaware law. |
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These provisions could discourage 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no material unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Securities Act of 1934.
Our corporate headquarters is located in approximately 213,000 square feet of leased office space in three buildings located in Stamford, Connecticut, USA. These facilities accommodate research and analysis, marketing, sales, client support, production, and corporate administration. The leases on these facilities expire in 2010.2010; however, the leases do contain renewal options. We have a significant presence in the United Kingdom with approximately 72,000 square feet of leased office space in two buildings located in Egham, UK, for which the leases expire in 2020 and 2025, respectively. We have an additional 3625 domestic and 50 international locations that support our research and analysis, domestic and international sales efforts, and other functions.functions, which includes certain META locations that we have decided to continue to lease. As part of our continuing effort to adjust our office space as needs change, during 2005 we announced plans to reducereduced our office space in San Jose, California by consolidating employees from two buildings into one building in the secondand continued to close or third quarter of Calendar 2005, whichreduce office space where appropriate. We continue to constantly assess our space needs as our business changes, but we estimate will result in a charge from $6.0 to $7.0 million. We believe that our existing facilities are adequate for our current needs and that additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS. The Internal Revenue Service (“IRS”) has completed the field work portion of an audit of our federal income tax returns for tax years ended September 30, 1999, through 2002. In October 2005, we received an Examination Report indicating proposed changes that primarily relate to the valuation of intangible assets licensed to a foreign subsidiary and the calculation of payments under a cost sharing arrangement between Gartner Inc. and one of its foreign subsidiaries. Gartner disagrees with the proposed adjustments relating to valuation and the cost sharing arrangement and intends to vigorously dispute this matter through applicable IRS and judicial procedures, as appropriate. However, if the IRS were to ultimately prevail on the issues, it could result in additional taxable income for the years under examination of approximately $130.7 million and an additional federal cash tax liability of approximately $41.0 million. The Company recorded a provision in prior periods based on our estimate of the amount for which the claim will be settled, and no additional amount was booked in the current period. Although the final resolution of the proposed adjustments is uncertain, we believe the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, cash flows, or results of operations. The IRS has commenced an examination of tax years 2003 and 2004. There have been no significant developments to date.
On December 23, 2003, Gartner was sued in an action entitledExpert Choice, Inc. v. Gartner, Inc., Docket No. 3:03cv02234, United States District Court for the District of Connecticut. The plaintiff, Expert Choice, Inc., seeks unspecified amount of damages for claims relating to royalties for the development, licensing, marketing, sale and distribution of certain computer software and methodologies. The case is currently in the discovery phase. Subsequently, in January 2004, an arbitration demand was filed against Decision Drivers, Inc., one of our subsidiaries, and against Gartner, Inc., by Expert Choice. The arbitration demand described the claim as being in excess of $10.0 million, but did not provide further detail. On February 22, 2006, we were informed of an offer from Expert Choice’s counsel to settle the matter for $35.0 million. We immediately rejected Expert Choice’s settlement offer since we believe we have meritorious defenses against the claims and we intend to continue to vigorously defend the case.
In addition to the matters discussed above, we are involved in legal proceedings and litigation arising in the ordinary course of business. We believe that the outcomepotential liability, if any, in excess of amounts already accrued from all current proceedings, claims and litigation will not have a material effect on our financial position or results of operations when resolved in a future period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. We did not submit any matter to a vote of our stockholders during the fourth quarter of the year covered by this Annual Report.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESPURCHASE OF EQUITY SECURITIES. In the third quarter of Calendar 2005 we eliminated our dual class capital structure by combining each share of our outstanding Class A Common Stock and Class B Common Stock into a single class of common stock. As of February 28,
2005,2006, there were approximately
2003,065 holders of record of our
Class A Common Stock and approximately 3,029 holders of record of our Class B Common Stock. Our Class A and Class B Common Stock tradecommon stock which trades on the New York Stock Exchange under the
symbols IT and ITB, respectively. The Class B Common Stock is identical in all respects to the Class A Common Stock, except that the Class B Common Stock is entitled to elect at least 80% of the members of our Board of Directors.In February 2005, we announced that the Board of Directors approved the combination of our Class A and Class B Common Stock. The combination is subject to stockholder approval at our annual meeting to take place in the late spring or early summer of 2005.
symbol IT.
The following table sets forth the high and low closing prices for our
Class A Common Stock and Class B Common Stockcommon stock as reported on the New York Stock Exchange for the periods
indicated.CLASS A COMMON STOCKindicated:
| | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | | | | | | | | | | | | | | | |
| | | High | | Low | | High | | Low | | | 2005 | | 2004 |
| | | | | High | | Low | | High | | Low |
| Quarter ended March 31 | | $ | 11.85 | | $ | 11.00 | | $ | 9.68 | | $ | 6.76 | | | $ | 12.68 | | $ | 9.05 | | $ | 11.85 | | $ | 11.00 | |
| Quarter ended June 30 | | $ | 13.38 | | $ | 11.70 | | $ | 8.32 | | $ | 6.45 | | | $ | 11.29 | | $ | 8.06 | | $ | 13.38 | | $ | 11.70 | |
| Quarter ended September 30 | | $ | 13.17 | | $ | 11.25 | | $ | 12.60 | | $ | 7.50 | | | $ | 11.83 | | $ | 10.11 | | $ | 13.17 | | $ | 11.25 | |
| Quarter ended December 31 | | $ | 12.85 | | $ | 11.43 | | $ | 13.75 | | $ | 11.12 | | | $ | 14.16 | | $ | 11.02 | | $ | 12.85 | | $ | 11.43 | |
CLASS B COMMON STOCK
| | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | High | | | Low | | | High | | | Low | |
| | | |
| Quarter ended March 31 | | $ | 11.61 | | | $ | 10.80 | | | $ | 9.80 | | | $ | 6.83 | |
| Quarter ended June 30 | | $ | 12.97 | | | $ | 11.52 | | | $ | 8.38 | | | $ | 6.85 | |
| Quarter ended September 30 | | $ | 12.92 | | | $ | 11.17 | | | $ | 12.30 | | | $ | 7.48 | |
| Quarter ended December 31 | | $ | 12.49 | | | $ | 11.33 | | | $ | 12.99 | | | $ | 10.70 | |
We did not purchase shares of our common stock for treasury during the fourth quarter of Calendar 2004. However, see “Executive Summary of Operations and Financial Position” in Item 7 for a discussion of shares repurchased during the first three-quarters of Calendar 2004.
The equity compensation plan information set forth in Part III, Item 12 of this Form 10-K is hereby incorporated by reference into this Part II, Item 5.
DIVIDEND POLICY
We currently do not pay cash dividends on our Class A or Class B Common Stock.common stock. While subject to periodic review, the current policy of our Board of Directors is to retain all earnings primarily to provide funds for continued growth. Our Amended and Restated Credit Agreement, dated August 12, 2004,as of June 29, 2005, contains a negative covenant, which may limit our ability to pay dividends. In addition, our Amended and Restated Security Holders Agreement with Silver Lake Partners, L.P. requires us to obtain Silver Lake’s consent prior to declaring or paying dividends.
The equity compensation plan information set forth in Part III, Item 12 of this Form 10-K is hereby incorporated by reference into this Part II, Item 5.
SHARE REPURCHASES
In the fourth quarter of Calendar 2005 our Board of Directors authorized a $100.0 million common share repurchase program. The following table provides detail related to repurchases of our common stock for treasury in the fourth quarter of 2005 under this program:
| | | | | | | | | | | | | |
| | | | | | | | | | | Maximum |
| | | Common Stock | | Value of Shares |
| | | | | | | Average | | That May Yet |
| | | Total Shares | | Price Paid | | Be Purchased |
| | | Purchased | | per Share | | (in thousands) |
| | | |
| October 2005 | | | — | | | | — | | | | — | |
| November 2005 | | | 419,600 | | | $ | 13.12 | | | | — | |
| December 2005 | | | 418,200 | | | | 13.34 | | | | — | |
| | | |
| Total fourth quarter of Calendar 2005 | | | 837,800 | | | $ | 13.23 | | | $ | 88,915 | |
| | | |
In the third quarter of Calendar 2005 we completed a cash buy back of 6.4 million of vested and outstanding stock options held by our employees and incurred a charge of approximately $6.0 million.
610
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA We changed our fiscal year-end from September 30 to December 31, effective January 1, 2003. References to Transition 2002, unless otherwise indicated, refer to the three-month transitional period ended December 31, 2002. References to Fiscal 2002, and Fiscal 2001, unless otherwise indicated, are to the respective fiscal year period from October 1 through September 30. References to Calendar 2005, Calendar 2004, Calendar 2003, and Calendar 2002, unless otherwise indicated, are to the respective twelve-month period from January 1 through December 31. We have included unaudited Statement of Operations Data for Calendar 2002 for informational purposes. This data was derived from Fiscal 2002 information, adjusted by information from Transition 2002 and the first quarter of Fiscal 2002. All of the information was derived from our audited financial statements included herein or in submissions of our Form 10-K in prior years. The selected financial data should be read in conjunction with our consolidated financial statements and related notes.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Year |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ended |
| | | Calendar Year | | Transition | | Fiscal Year Ended September 30, | | | Calendar Year | | Transition | | September 30, |
| (In thousands, except per share data) | | 2004 | | 2003 | | 2002 | | 2002 | | 2002 | | 2001 | | 2000 | | | 2005 | | 2004 | | 2003 | | 2002 | | 2002 | | 2002 |
| | STATEMENT OF OPERATIONS DATA | | |
| Revenues: | | |
| Research | | $ | 480,486 | | $ | 466,907 | | $ | 486,967 | | $ | 120,038 | | $ | 496,403 | | $ | 535,114 | | $ | 509,781 | | | $ | 523,033 | | $ | 480,486 | | $ | 466,907 | | $ | 486,967 | | $ | 120,038 | | $ | 496,403 | |
| Consulting | | 259,419 | | 258,628 | | 276,059 | | 58,098 | | 273,692 | | 276,292 | | 216,667 | | | 301,074 | | 259,419 | | 258,628 | | 276,059 | | 58,098 | | 273,692 | |
| Events | | 138,393 | | 119,355 | | 109,694 | | 47,169 | | 121,991 | | 132,684 | | 108,589 | | | 151,339 | | 138,393 | | 119,355 | | 109,694 | | 47,169 | | 121,991 | |
| Other | | 15,523 | | 13,556 | | 14,873 | | 4,509 | | 15,088 | | 18,794 | | 27,414 | | | 13,558 | | 15,523 | | 13,556 | | 14,873 | | 4,509 | | 15,088 | |
| | | | | |
| Total revenues | | 893,821 | | 858,446 | | 887,593 | | 229,814 | | 907,174 | | 962,884 | | 862,451 | | | 989,004 | | 893,821 | | 858,446 | | 887,593 | | 229,814 | | 907,174 | |
| Operating income (loss) | | 42,659 | | 47,333 | | 49,541 | | | (12,886 | ) | | 96,183 | | 42,043 | | 84,131 | | | 25,280 | | 42,659 | | 47,333 | | 49,541 | | | (12,886 | ) | | 96,183 | |
| Income (loss) from continuing operations | | 16,889 | | 23,589 | | 15,118 | | | (14,418 | ) | | 48,423 | | | (691 | ) | | 53,124 | | |
| Loss from discontinued operation | | — | | — | | — | | — | | — | | | (65,983 | ) | | | (27,578 | ) | |
| Net income (loss) | | $ | 16,889 | | $ | 23,589 | | $ | 15,118 | | $ | (14,418 | ) | | $ | 48,423 | | $ | (66,674 | ) | | $ | 25,546 | | |
| (Loss) income from continuing operations | | | | (2,437 | ) | | 16,889 | | 23,589 | | 15,118 | | | (14,418 | ) | | 48,423 | |
| Net (loss) income | | | $ | (2,437 | ) | | $ | 16,889 | | $ | 23,589 | | $ | 15,118 | | $ | (14,418 | ) | | $ | 48,423 | |
| | PER SHARE DATA | | |
| Basic income (loss) per share: | | |
| from continuing operations | | $ | 0.14 | | $ | 0.26 | | $ | 0.18 | | $ | (0.18 | ) | | $ | 0.58 | | $ | (0.01 | ) | | $ | 0.61 | | |
| from discontinued operation | | — | | — | | — | | — | | — | | | (0.77 | ) | | | (0.31 | ) | |
| | | |
| | | | |
| Basic (loss) income per share: | | | $ | (0.02 | ) | | $ | 0.14 | | $ | 0.26 | | $ | 0.18 | | $ | (0.18 | ) | | $ | 0.58 | |
| | | | | |
| | | $ | 0.14 | | $ | 0.26 | | $ | 0.18 | | $ | (0.18 | ) | | $ | 0.58 | | $ | (0.78 | ) | | $ | 0.30 | | |
| | | | | |
| Diluted income (loss) per share: | | |
| from continuing operations | | $ | 0.13 | | $ | 0.25 | | $ | 0.18 | | $ | (0.18 | ) | | $ | 0.46 | | $ | (0.01 | ) | | $ | 0.59 | | |
| from discontinued operation | | — | | — | | — | | — | | — | | | (0.77 | ) | | | (0.28 | ) | |
| Diluted (loss) income per share: | | | $ | (0.02 | ) | | $ | 0.13 | | $ | 0.25 | | $ | 0.18 | | $ | (0.18 | ) | | $ | 0.46 | |
| | | | | |
| | | $ | 0.13 | | $ | 0.25 | | $ | 0.18 | | $ | (0.18 | ) | | $ | 0.46 | | $ | (0.78 | ) | | $ | 0.31 | | |
| | | | |
| Weighted average shares outstanding | | |
| Basic | | 123,603 | | 91,123 | | 83,329 | | 81,379 | | 83,586 | | 85,862 | | 86,564 | | |
| Weighted average shares outstanding Basic | | | 112,253 | | 123,603 | | 91,123 | | 83,329 | | 81,379 | | 83,586 | |
| Diluted | | 126,326 | | 92,579 | | 85,040 | | 81,379 | | 130,882 | | 85,862 | | 97,889 | | | 112,253 | | 126,326 | | 92,579 | | 85,040 | | 81,379 | | 130,882 | |
| | OTHER DATA | | |
| Cash, cash equivalents and marketable equity securities | | $ | 160,126 | | $ | 229,962 | | $ | 109,657 | | $ | 109,657 | | $ | 124,793 | | $ | 40,378 | | $ | 97,102 | | | $ | 70,282 | | $ | 160,126 | | $ | 229,962 | | $ | 109,657 | | $ | 109,657 | | $ | 124,793 | |
| Total assets | | 861,194 | | 918,732 | | 808,909 | | 808,909 | | 814,003 | | 835,148 | | 972,361 | | | 1,026,617 | | 861,194 | | 918,732 | | 808,909 | | 808,909 | | 814,003 | |
| Long-term debt | | 150,000 | | — | | 351,539 | | 351,539 | | 346,300 | | 326,200 | | 307,254 | | | 180,000 | | 150,000 | | — | | 351,539 | | 351,539 | | 346,300 | |
| Stockholders’ equity (deficit) | | 130,048 | | 374,790 | | | (29,408 | ) | | | (29,408 | ) | | | (5,596 | ) | | | (34,998 | ) | | 74,820 | | | 146,588 | | 130,048 | | 374,790 | | | (29,408 | ) | | | (29,408 | ) | | | (5,596 | ) |
|
The following items impact the comparability of our data from continuing operations:
| • | | On April 1, 2005, we acquired META for approximately $168.3 million in cash, excluding transaction costs. The results of META are included in our consolidated results beginning on that date. To fund the purchase of META, we borrowed $67.0 million under our revolving credit facility. |
|
| • | | During Calendar 2005 we recorded $15.0 million in pre-tax charges related to the third quarterintegration of META. |
|
| • | | During Calendar 2005 we repurchased approximately 0.8 million of our common shares. |
|
| • | | In Calendar 2004 we completed a tender offer in which we repurchased approximately 11.316.8 million shares of our Class A common stock and 5.5 million shares of our Class B common stock.shares. Additionally, we also repurchased approximately 9.2 million Class Aof our common shares from Silver Lake Partners and certain of its affiliates. We borrowed $200.0 million in connection with these purchases. |
|
| • | | During Calendar 2003, our long-term debt was converted into equity. |
|
| • | | Other charges, which included costs for severance, excess facilities, impairment of long-lived assets and exit from certain non-core product lines, on a pre-tax basis, of $29.2 million in Calendar 2005, $35.8 million for Calendar 2004, $29.7 million for Calendar 2003, $49.4 million for Calendar 2002, $32.2 million for Transition 2002, and $17.2 million for Fiscal 2002, $46.6 million for Fiscal 2001, and $0 for Fiscal 2000.2002. |
|
| • | | Pre-tax charges for the impairment of investments of $5.3 million in 2005, $3.0 million for Calendar 2004, $0.9 million for Calendar 2003, $4.2 million for Calendar 2002, $1.7 million for Transition 2002, and $2.5 million for Fiscal 2002, $30.4 million for Fiscal 2001, and $0 for Fiscal 2000.2002. |
11
| • | | Pre-tax goodwill impairment charges of $2.7 million forin Calendar 2004. In the same year, $3.1 million of foreign currency charges related to the closing of certain operations in South America. |
|
| • | | Gains (losses) on investments or assets and associated insurance claims, on a pre-tax basis, of $(0.5) million in Calendar 2005, $5.5 million for Calendar 2003, $0.5 |
7
| million for Calendar 2002, and $1.3 million for Fiscal 2002, $(0.6) million for Fiscal 2001, and $29.6 million for Fiscal 2000.2002. |
• | A tax benefit of $14.5 million for Fiscal 2001 due to the utilization of foreign tax credits. |
• | Calendar 2003, Fiscal 2002, and Fiscal 2001 have been adjusted to reflect the impact of $0.1 million, $0.1 million, and $0.5 million, respectively, of additional pension expense, net. The effect of the adjustments on each of the aforementioned previously reported annual financial statements was not material. See Note 3 – Correction of SFAS 87 Accounting Treatment in the Notes to the Consolidated Financial Statements for additional information. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENTS In addition to historical information, this Annual Report contains forward-looking statements. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “expect,” “should,” “could,” “believe,” ‘plan,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” or other words of similar meaning. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed
in “Factors That May Affect Future Results” below.under Part 1, Item 1A, Risk Factors. Readers should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur. Readers should review carefully any risk factors described in our reports filed with the Securities and Exchange Commission.
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 three core businesses and (2) generating profitability through a streamlined cost structure.
We have three business segments:
research, consultingResearch, Consulting and
events.Events.
| • | | Researchprovides research content and advice for IT professionals, technology companies and the investment community in the form of reports and briefings, as well as peer networking services and membership programs designed specifically for CIOs and other senior executives. |
|
| • | | Consultingconsists 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. |
|
| • | | Eventsconsists 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 SegmentBUSINESS SEGMENT | | BUSINESS MEASUREMENTS |
| |
| Research | | Contract valuerepresents 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 raterepresents 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. |
8
| | | |
Business Segment | | BUSINESS MEASUREMENTS |
| | Wallet retention raterepresents 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 |
12
| | |
| BUSINESS SEGMENT | | BUSINESS MEASUREMENTS |
|
| | 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, or increased spending by retained clients, or both. |
| | |
| | Number of executive program membersrepresents the number of paid participants in executive programs. |
| | | |
| |
| Consulting | | Consulting backlogrepresents future revenue to be derived from in-process consulting, measurement and strategic advisory services engagements. |
| | |
| | Utilization ratesrepresent 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. |
| | |
| | Billing Raterepresents earned billable revenue divided by total billable hours. |
| | |
| | Average annualized revenue per billable headcountrepresents a measure of the revenue generating ability of an average billable consultant and is calculated periodically by multiplying the average billing rate per hour times the average utilization percentage times the billable hours available for one year. |
| | | |
| |
| Events | | Number of eventsrepresents the total number of hosted events completed during the period. |
| | |
| | Number of attendeesrepresents the total number of people who attended events during the period.attend events. |
ANNOUNCED ACQUISITION
EXECUTIVE SUMMARY OF META GROUP, INC.On December 27, 2004,OPERATIONS AND FINANCIAL POSITION
During Calendar 2005, we announced an agreement to acquireacquired META Group, Inc. (“META”) in an all-cash transaction for $10.00 per share, or approximately $162$168.3 million, excluding transaction costs.costs of $8.1 million. META iswas a publicly owned, premier information technology and research firm that was based in Stamford, Connecticut with about 715 employees. In 2004, META generated $141.5 million in revenue from 52 worldwide locations and had $90.8 million of assets at December 31, 2004. The results of operations of META trades onare included in our consolidated financial results beginning April 1, 2005, the NASDAQ National Market underdate of the symbol “METG.” The Boardsacquisition. As of Directors of both companies have approved the transaction, and on JanuaryDecember 31, 2005 we announced that notice hadhave fully and successfully integrated META into our operations.
We initiated and completed several actions during Calendar 2005 to enhance shareholder value. We simplified our capital structure by eliminating our dual class stock, and since July 7th our common stock has been receivedtrading under one ticker symbol—IT. We believe this change increased the trading liquidity of our common stock for our shareholders. In September we completed a buy back of certain vested and outstanding stock options for cash, which resulted in the tender and cancellation of approximately 6.4 million options. We undertook the buy back to reduce the option overhang resulting from the Federal Trade Commissionhigh number of early terminationoptions outstanding. In October our Board of Directors authorized a $100.0 million common share repurchase program, and we repurchased approximately 838,000 of our common shares by the end of the waiting period underyear.
We enhanced our liquidity and financial flexibility during Calendar 2005 by amending our Credit Agreement. In addition to increasing our available credit and securing a more favorable amortization schedule, we also obtained more favorable covenant terms. We also reduced our exposure to rising interest rates on the
Hart-Scott-Rodino Antitrust Improvements Act. META filed its definitive proxy statement with the SEC on February 17, 2005 and is scheduled to hold a special meeting of stockholders to approve the transaction on March 23, 2005. Closingterm portion of the
transaction,loan facility by entering into an interest rate swap agreement in the fourth quarter of Calendar 2005, which
effectively converted the base floating rate on the base term loan to a fixed rate. We ended Calendar 2005 with $70.3 million in cash, which we believe is
subjectsufficient to
customary closing conditions, including approval by META’s stockholders, is expected to be effective April 1, 2005.EXECUTIVE SUMMARY OF OPERATIONS AND FINANCIAL POSITION
During Calendar 2004,meet our current needs, and our stockholders’ equity at December 31, 2005 was $146.6 million.
We believe that we have
continuedstabilized our core Research business and will continue to focus on
stabilizinggrowing its revenues. Research revenue was up 9% over the prior year, to $523.0 million; revenue was up about 3% excluding the impact of META and
then growing revenue in our core Research business. This continued focus began to yield the
desired outcome during the latter halfeffect of
Calendar 2003. We ended the latter half of Calendar 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 Calendar 2004, decreased slightly during the second quarter of Calendar 2004, and increased sequentially again in both the third and fourth quarters of Calendar 2004.foreign currency. At December 31,
2004,2005, contract value was
$509.2$592.6 million, up
6%16%, or $83.4 million, from
the $482.2$509.2 million at December 31,
2003, with roughly half of the increase due to the effects of foreign currency. The $509.2 million contract value2004. This represents our highest contract value since
September 30, 2000 and our second highest level ever. In addition, the
first quarter of Calendar 2002.growth in contract value shows increases across all regions as well as across the entire product portfolio. Our Research client retention rate at December 31,
20042005 increased to
80%81% from
78%80% at the prior year-end, while wallet retention
increasedwas down to
95%93% from
89%95% over the same period.
Consulting revenue for Calendar
20042005 was
flat when compared to Calendar 2003, despiteup 16% over the
impact of the realignment in which we reduced headcount when we exited certain practicesprior year (revenue was up 11% excluding META and
geographies. Excluding the effects of foreign currency
exchange rates, revenues would have decreased approximately 4% in Calendar 2004 compared to Calendar 2003. Our Consulting businessimpact), and we ended Calendar
2004 with the continuation of the positive trend that began in Calendar 2003, when we ended that year with two consecutive quarters of sequential increases in backlog after five consecutive quarters of sequential decreases. Due to the realignment, consulting backlog decreased to $91.7 million at March 31, 2004, but quickly increased to $97.7 million at June 30, 2004 and $103.4 million at September 30, 2004, as business ramped up in our areas of focus. We ended the year2005 with a backlog of
$111.8$119.9 million, a
$12.1 million7% increase
overfrom December 31,
2003. The realignment has also had a positive impact on sub-optimal utilization rates and our lack of scale in some regions.2004. During Calendar
2004,2005, our average consultant utilization
rates increased to approximately 63% asrate was 62%, compared to
54%63% in the prior year, while billable headcount
declinedincreased to
493525 at December 31,
2004,2005, compared to
526475 at December 31,
2003.2004. Our average annualized revenue per billable headcount was above $375,000.
Our Events business continues to deliver strong results.consistent and profitable growth. Our emphasis on managing the Events portfolio to retain our long-time successful events and introduce promising new events has resulted in substantially improved overallcontinued positive revenue performance, with Calendar 20042005 revenue up 16% over the prior year, as well as same event revenue, up 19%9% over the prior year. We achieved these results whileSame event revenue also increased, up 5% over the number of events declined, with 56 held during Calendar 2004 as comparedprior year. Contributing to 57 held in Calendar 2003.the increased
913
During Calendar 2004, we repurchased
revenue was a
significantsubstantial increase in the number of
shares of our Class A and Class B Common Stock. During the first half ofevents, with 70 held during Calendar
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 our Stock Repurchase Program. During the third quarter of 2004, we completed a “Dutch Auction Tender Offer” in which we repurchased 11,339,019 shares of our Class A Common Stock and 5,505,489 shares of our Class B Common Stock at a purchase price of $13.30 and $12.50 per share, respectively. Additionally, we also repurchased 9,228,938 shares of our Class A Common Stock from Silver Lake Partners and certain of its affiliates (“Silver Lake”) at a purchase price of $13.30 per share. The total cost of these purchases was $346.2 million, including transaction costs of $3.8 million. In conjunction with the tender offer, our Board of Directors terminated the Stock Repurchase Program in June 2004.In connection with the tender offer, in the third quarter of Calendar 2004, we borrowed $200.0 million under a five-year term loan facility, of which $10.0 million was repaid in the fourth quarter of Calendar 2004. We also obtained a $100.0 million, five-year revolving credit facility, of which $59.2 million was available at December 31, 2004. Subsequent to December 31, 2004, we entered into an amendment to our Credit Agreement covenant requirements which resulted in additional borrowing capacity under the revolving credit facility. As a result, the amended borrowing availability under the revolving credit facility would have been $96.5 million at December 31, 2004.
At December 31, 2004, we had a cash balance of $160.1 million2005 as compared to $230.0 million at December 31, 2003. In order to fund the purchase of META, we anticipate that we will use a combination of cash and our amended five-year revolving credit facility. In connection with funding the META transaction, the Company anticipates repatriating $52.0 million56 held in cash earnings from its non-US subsidiaries in early 2005.
In February 2005, our Board of Directors approved the elimination of our classified Board structure. Additionally, as previously announced, the Board of Directors has approved the combination of our Class A and Class B Common Stock. Both of these items are subject to stockholder approval at our annual meeting of stockholders to take place in the late spring or early summer of 2005.
During the fourth quarter of Calendar 2003, we made a significant change to our capital structure. Our 6% convertible notes were converted into Class A Common Stock. This eliminated all of our outstanding debt at that time and the related interest expense.
2004.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS Our quarterly and annual revenue, operating income, and cash flow fluctuate as a result of many factors, including: the timing of Symposia, our flagship event that normally occurs during the fourth calendar quarter, and other events; the amount of new business generated; the mix of domestic and international business; changes in market demand for our products and services; changes in foreign currency rates; the timing of the development, introduction and marketing of new products and services; and competition in the industry. The potential fluctuations in our operating income could cause period-to-period comparisons of operating results not to be meaningful and could provide an unreliable indication of future operating results.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements requires the application of appropriate accounting policies. Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements. Management considers the policies discussed below to be critical to an understanding of our financial statements because their application requires complex and subjective judgments and estimates. Specific risks for these critical accounting policies are described below.
Revenue recognition–— We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (“SAB 101”), and
SABSEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”). 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 primarilygenerated from fixed fee and time and material engagements. Revenue from fixed fee contracts is recognized on fixed fees ora percentage of completion basis. Revenues from time and materials for discrete projects. Revenues for such projects areengagements is recognized as work is delivered and/or services are provided and are evaluated on a contract by contract basis;provided; |
| |
| • | • | Events revenues are deferred and recognized upon the completion of the related symposium, conference or exhibition; and |
| |
| • | • | Other revenues principallyconsists primarily of fees from research reprints and software licensing. Reprint fees are recognized when the reprint is shipped. Fees from software licensing fees, areis 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 deferreddeterminable; and recognized ratably over the term of the maintenance agreement, which is typically twelve months. |
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| • | • | 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, we bill the client the full amount billable under the contract but only record a receivable equal to the earned portion of the contract. In addition, we only record deferred revenue on these government contracts when cash is received. Deferred revenues attributable to government contracts were $40.9$41.7 million and $38.6$40.9 million at December 31, 20042005 and December 31, 2003,2004, respectively. In addition, at December 31, 20042005 and December 31, 2003,2004, we had not recognized uncollected receivables or deferred revenues, relating to government contracts that permit termination, of $4.2$7.1 million and $6.6$4.2 million, respectively. |
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The preliminary purchase price allocation of the META acquisition includes an estimate of the fair value of the cost to fulfill the deferred revenue obligation assumed from META. The estimated fair value of the deferred revenue obligation was determined by estimating the costs to provide the services plus a normal profit margin, and did not include any costs associated with selling efforts. As a result, in allocating the purchase price we recorded adjustments to reduce the carrying value of META’s March 31, 2005 deferred revenue by approximately $12.6 million. Consequently, revenues related to META contracts existing at the date of acquisition in the amount of approximately $9.0 million that would have been recorded by META had it remained an independent entity were not recognized in Calendar 2005, and the remaining $3.6 million will impact Calendar 2006. As former META customers renew their contracts, we will recognize the full value of revenue from those new contracts over the respective contract periods.
Uncollectible fees receivable–— The allowance for losses is composed of a bad debt and a sales and allowance reserve. Provisions for bad debts are recognized as incurred.charged against earnings. The measurement of likely and probable losses and the allowance for uncollectible fees receivable is based on historical loss experience, aging of outstanding receivables, an assessment of current economic conditions and the financial health of specific clients. This evaluation is inherently judgmental and requires material estimates. These valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectibility of fees receivable becomes available. Circumstances that could cause our valuation reserves to increase include changes in our clients’ liquidity and credit quality, other factors negatively impacting our clients’ ability to pay their obligations as they come due, and the effectiveness of our collection efforts. The following table provides our total fees receivable, along with the related allowance for losses (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | December 31, | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | | | | |
| Total fees receivable | | $ | 266,139 | | $ | 275,122 | | | $ | 321,095 | | $ | 266,139 | |
| Allowance for losses | | | (8,450 | ) | | | (9,000 | ) | | | (7,900 | ) | | | (8,450 | ) | |
| | | | | |
| Fees receivable, net | | $ | 257,689 | | $ | 266,122 | | | $ | 313,195 | | $ | 257,689 | |
| | | | | |
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Impairment of goodwill and other intangible assets–— The evaluation of goodwill is performed in accordance with Statement of Financial Accounting Standards No. 142,
-— “Goodwill and Other Intangible Assets”
(”(“SFAS 142”). Among other requirements, this standard eliminated goodwill amortization upon adoption and requires ongoing annual assessments of goodwill impairment. The evaluation of other intangible assets is performed on a periodic basis. These assessments require management to estimate the fair values of our reporting units based on estimates of future business operations and market and economic conditions in developing long-term forecasts. If we determine that the fair value of any reporting unit is less than its carrying amount, we must recognize an impairment charge, for the associated goodwill of that reporting unit, to earnings in our financial statements. Goodwill is evaluated for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger a review for impairment include the following:
| | • | | 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; |
| |
| | • | | Significant negative industry or economic trends; |
| |
| | • | | Significant decline in our stock price for a sustained period; and |
| |
| | • | | Our market capitalization relative to net book value. |
Due to the numerous variables associated with our judgments and assumptions relating to the valuation of the reporting units and the effects of changes in circumstances affecting these valuations, both the precision and reliability of the resulting estimates are subject to uncertainty, and as additional information becomes known, we may change our estimates. During
Calendar 2004, we recorded an impairment charge of $0.7 million in the first quarter relating to goodwill associated with certain operations in South America that were closed, and in the fourth quarter we recorded a goodwill impairment charge of $2.0 million related to the exit from certain non-core product lines.
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 expense 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 sheets. We record a valuation allowance to reduce our deferred tax assets when future realization is in question. We consider the availability of loss carryforwards, existing deferred tax liabilities, 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 against income in the period such determination was made.
We operate in numerous foreign taxing jurisdictions and our level of operations or profitability in each jurisdiction could have an impact upon the amount of income taxes that we provide in any given year. In addition, our tax filings for various tax years are subject to audit by the tax authorities in jurisdictions where we conduct business. These audits may result in assessments of additional taxes. We have provided for the amounts we believe will ultimately result from these audits. However, resolution of these matters involves uncertainties and there are no assurances that the ultimate resolution will not exceed the amounts provided.
In October 2005 we received an IRS Examination Report showing proposed changes that primarily relate to the valuation of intangible assets licensed to a foreign subsidiary and the calculation of payments under a cost sharing arrangement. See Item 3. Legal Proceedings for additional information.
Contingencies and other loss reserves and accruals–— We record accruals 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. During
the fourth quarter of Calendar
2004,2005 we revised our previous
estimatesestimate for costs and losses associated with excess facilities
due to declines in market rates for expected sublease income and
revised expected periods of sublease. As a result of these revised estimates, we recorded a charge
for excess facilities of
$2.3approximately $8.2 million,
which wasprimarily due to a reduction of office space in San Jose, California, where we consolidated employees from two buildings into one. The charge is included in Other charges along with severance,
the option buyback, impairment, and other costs. Additionally, we record accruals for estimated incentive compensation costs during each year. Amounts accrued at the end of each reporting period are based on our estimates and may require adjustment as the ultimate amount paid for these incentives are sometimes not known until after year end.
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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. We own equity securities through two limited partnerships, SI Venture Associates (“SI I”) and SI Venture Fund II (“SI II”), which are venture capital funds engaged in making investments in early to mid-stage IT-based or Internet-enabled companies. At December 31, 2004, we owned 100% of SI I and 22% of SI II. In the fourth quarter of Calendar 2004, we made the decision to liquidate SI I and to sell our interest in SI II. In addition, in the fourth quarter of Calendar 2004, we recorded a charge of $1.5 million related to the liquidation of SI I, which included $0.8 million for the write-down of the investment and $0.7 million in related shutdown charges. No charges were recorded on SI II in the fourth quarter of Calendar 2004 related to the planned sale since the carrying value of the investment approximates its net realizable value. In the third quarter of Calendar 2004, we recorded a non-cash charge of $2.2 million 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 hundred basis points. As a result of this transfer and the decrease in ownership, we were relieved of all future capital calls, which had totaled $4.0 million.
Total investments in equity securities were $7.0 million at December 31, 2004 and $10.9 million at December 31, 2003 (see Note 5 – Investments in the Notes to the Consolidated Financial Statements).
CHANGE IN FISCAL YEAR
On October 30, 2002, we announced that our Board of Directors had approved a change of our fiscal year-end from September 30 to December 31, effective January 1, 2003. This change resulted in a three-month transitional period ending December 31, 2002. References to Transition 2002, unless otherwise indicated, refer to the three-month transitional period ended December 31, 2002. References to Fiscal 2002 and Fiscal 2001, unless otherwise indicated, are to the respective fiscal year period from October 1 through September 30. References to Calendar 2006, Calendar 2005, Calendar 2004, Calendar 2003, and Calendar 2002, unless otherwise indicated, are to the
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respective twelve-month period from January 1 through December 31.
RESULTS OF OPERATIONS
CALENDAR 2005 VERSUS CALENDAR 2004
Total revenues increased 11%, or $95.2 million, to $989.0 million during Calendar 2005 from $893.8 million during Calendar 2004.
| • | | Researchrevenues increased 9% in Calendar 2005 to $523.0 million, compared to $480.5 million in Calendar 2004, and comprised approximately 53% and 54% of total revenues in Calendar 2005 and Calendar 2004, respectively. |
|
| • | | Consultingrevenues in Calendar 2005 of $301.1 million were up 16% compared to the $259.4 in Calendar 2004, and comprised approximately 30% and 29% of total revenues in Calendar 2005 and Calendar 2004, respectively. |
|
| • | | Eventsrevenues were $151.3 million in Calendar 2005, an increase of 9% from the $138.4 million in Calendar 2004, and comprised approximately 15% of total revenues in both periods. |
|
| • | | Otherrevenues, consisting principally of reprint and software licensing fees, decreased 13% to $13.6 million in Calendar 2005 from $15.5 million in Calendar 2004. |
The effects of foreign currency translation had approximately a $1.1 million negative effect on total revenues for Calendar 2005 compared to Calendar 2004, while the META purchase added approximately $50.0 million of revenue. Excluding the effects of foreign currency translation and the META acquisition, revenues would have increased approximately 5% year-over-year. See the Segment Results section below for a further discussion of segment revenues.
Revenues increased in all regions. Revenues from sales to United States and Canadian clients increased 9% to $611.0 million in Calendar 2005 from $559.4 million in Calendar 2004. Revenues from sales to clients in Europe, the Middle East and Africa (“EMEA”) increased 13% to $296.8 million in Calendar 2005 from $263.0 million in Calendar 2004. Revenues from sales to clients in other international regions increased 14% to $81.2 million in Calendar 2005 from $71.4 million in Calendar 2004.
Cost of services and product development increased $52.1 million, or 12%, to $486.6 million in Calendar 2005 from $434.5 million in Calendar 2004, with foreign currency translation having a negligible impact. The increase in cost of services and product development on a year-to-date basis resulted primarily from an increase in salary and benefits expense of approximately $33.5 million, primarily driven by the addition of 140 people related to the META purchase, and higher bonus expense and sales commissions of $14.2 million and $5.0 million, respectively. The increase in bonus expense reflects the Company’s decision to restore bonus payouts to a competitive level. In addition, we had $5.3 million of higher conference expenses related to an increase in the number of events and attendees.
Cost of services and product development in Calendar 2005 benefited by the reversal of $2.1 million of prior years’ incentive compensation program accruals. Additionally, cost of services and product development during Calendar 2004 benefited by the reversal of $3.5 million of prior years’ incentive compensation program accruals. For Calendar 2005 and 2004, cost of services and product development as a percentage of sales was 49% for both periods.
Selling, general and administrative expenses increased $47.4 million, or 14%, to $397.3 million in Calendar 2005 from $349.8 million in Calendar 2004, with foreign currency translation having a negligible impact. The increase in SG&A expenses on a year-to-date basis was primarily driven by our continued investment in our sales organization, in which we now have over 700 sales associates, a 17% increase over Calendar 2004, reflecting the addition of 110 sales associates in 2005. We added 111 people related to the META purchase, including 80 sales associates, accounting for approximately $10.7 million of the increase. In addition to the $10.7 million increase attributable to META, other salary and benefit increases totaled $12.1 million, while bonus expense and sales commissions increased by $6.9 million and $7.0 million, respectively. Also, we had approximately $16.4 million of additional external consulting, facilities, outsourcing, and other charges. These charges were offset by the favorable impact of approximately $4.4 million of lower costs, primarily marketing, and production. SG&A expenses in Calendar 2005 benefited by the reversal of $0.9 million of prior years’ incentive compensation program accruals. During Calendar 2004, SG&A expenses benefited by the reversal of $3.3 million of prior year’s incentive compensation program accruals. During Calendar 2004 the Company reduced its allowance for doubtful accounts by $3.7 million as a result of increased collections and a decline in write-offs.
Depreciation expense for Calendar 2005 decreased 8% to $25.5 million, compared to $27.6 million for Calendar 2004. The reduction is due to a decline in capital spending, reflecting our disciplined capital spending on projects that support our strategic initiatives.
Amortization of intangibles increased to $10.2 million in Calendar 2005 from $0.7 million in the prior year due to the amortization of the $25.6 million of intangibles asset acquired in the META acquisition. The majority of the intangibles related to the META acquisition will be fully amortized by the end of Calendar 2006.
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Goodwill impairments were $2.7 million in Calendar 2004, reflecting the write-off of goodwill related to the closing of certain operations in Latin America and other non-core product lines.
Other charges during Calendar 2005 were $29.2 million, which includes $10.7 million related to workforce reductions, $6.0 million for an option buyback, $8.2 million related to a reduction in office space, and $4.3 million of other charges. The Company severed a total of 150 employees in Calendar 2005 and estimates the annualized savings from the termination of these employees to be approximately $15.2 million. The Company plans to reinvest a significant portion of these savings into improving its products, processes, and infrastructure to help drive future growth.
During the fourth quarter of Calendar 2005, the Company recorded other charges of $1.5 million for costs associated with employee termination severance payments and related benefits for 27 employees. In addition, during the fourth quarter of Calendar 2005 the Company reversed approximately $0.7 million of previously accrued severance benefits because the amounts actually paid were less than estimated. During the third quarter of Calendar 2005, the Company recorded other charges of $6.0 million related to its completion of a one time offer to buy back certain vested and outstanding stock options for cash (See Note 8 — Equity and Stock Programs in the Notes to the Consolidated Financial Statements for additional information). During the second quarter of Calendar 2005, the Company recorded other charges of $8.2 million. Included in the second quarter charge was $8.2 million of costs primarily related to the reduction of office space in San Jose, California, by consolidating employees from two buildings into one. The Company also recorded a charge of $0.6 million associated with certain stock combination expenses, which was offset by a reversal of approximately $0.9 million of accrued severance and other charges that the Company determined would not be paid. During the first quarter of Calendar 2005, the Company recorded other charges of $14.3 million. Included in the charge was $10.6 million for costs associated with employee termination severance payments and related benefits. The workforce reduction was a continuation of the plan announced in the fourth quarter of Calendar 2004 which resulted in the termination of 123 employees during the three months ended March 31, 2005. In addition, during the first quarter of Calendar 2005 the Company also recorded other charges of approximately $3.7 million, primarily related to a restructuring of the Company’s international operations.
Other charges during Calendar 2004 were $35.8 million. Included in this amount was $29.7 million related to severance and benefits for 203 employees, including costs of $7.7 million related to the departure of our President and COO and our Chairman and CEO. Of the 203 employees, 132 were severed as part of the action plan announced in the fourth quarter of Calendar 2003. During Calendar 2004 the Company also revised its estimate of previously recorded costs and losses associated with excess facilities and recorded $2.3 million of additional provisions. The revised estimate was due to a decline in market lease rates for expected subleases, as well as a reduction in estimated periods of subleases. The Company also recorded charges in Calendar 2004 of $1.9 million related to the restructuring of certain internal systems, and $1.8 million for charges related to the exit from certain international and other non-core operations.
(Loss) gain on investments, net for Calendar 2005 includes non-cash charges of $5.1 million and $0.2 million during the first and second quarters, respectively, primarily related to writedowns of its investment in SI Venture Fund II, L.P. (“SI II”) which the Company had decided to sell in the fourth quarter of Calendar 2004. The Company recorded the writedown in the first quarter of Calendar 2005 to reduce the investment to its estimated net realizable value after receiving preliminary indications of interest to acquire the investment for less than its recorded value. The Company took the additional writedown in the second quarter of Calendar 2005 based on a preliminary sale agreement for which the proceeds were less than the recorded value. On August 2, Calendar 2005, the Company sold its investment in SI II for approximately $1.3 million, with no resulting gain or loss recorded on the sale since the investment was already at net realizable value. During the fourth quarter of Calendar 2005, the Company sold an investment in common stock it had acquired in the META acquisition for $0.7 million, and recorded a loss of $0.5 million, which is recorded in (Loss) gain from investments, net in the Consolidated Statements of Operations.
(Loss) gain on investments, net for Calendar 2004 was a loss of $3.0 million. In the fourth quarter of Calendar 2004, the Company made the decision to liquidate its equity investments in SI Venture Associates, L.L.C. (“SI I”) and to sell the Company’s interest in SI II. SI I and SI II were venture capital funds engaged in making investments in early to mid-stage IT-based or Internet-enabled companies, of which the Company owned 100% of SI I and 22% of SI II at December 31, 2004. In the fourth quarter of Calendar 2004, the Company recorded a charge of $1.5 million related to the liquidation of SI I, to include $0.8 million for the writedown of the investment and $0.7 million in related shutdown charges. No charges were recorded on SI II in the fourth quarter of Calendar 2004 related to the planned sale since management believed that the carrying value of the investment approximated its net realizable value. In the third quarter of Calendar 2004, the Company recorded a non-cash charge of $2.2 million related to the transfer of an investment to SI II, as well as a decrease in the Company’s ownership percentage in SI II of seven hundred basis points. The carrying value of the Company’s investments held by SI I and SI II were zero and $6.7 million, respectively, at December 31, 2004.
Other (expense), net for Calendar 2005 of $2.9 million consists primarily of net foreign currency exchange gains and losses. Other (expense), net of $3.9 million in Calendar 2004 includes the non-cash write-off of $3.1 million of accumulated foreign currency translation adjustments associated with certain of our operations in South America that we have closed. 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.”
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Provision for income taxes was 144.8% and 51.0% of income before income taxes for Calendar 2005 and 2004, respectively. The increase in the effective tax rate for Calendar 2005, as compared to that of Calendar 2004, is principally due to the fact that the Company generated less income in low tax jurisdictions as compared to the prior year and recorded valuation allowances against capital losses and foreign tax credit carryforwards. The impact of these items is offset, in part, by benefits taken to reduce the overall tax expense on repatriated earnings as well as reductions for interest costs related to tax contingencies. The impact of the various positive and negative adjustments is amplified by lower pretax book income in 2005 as compared to 2004.
In Calendar 2004, we took a $5.0 million tax charge in anticipation of repatriating approximately $52.0 million in earnings from our non-US subsidiaries in Calendar 2005. The repatriation was expected to qualify for a one-time reduced tax rate pursuant to the American Jobs Creation Act. (AJCA). The charge was partially offset by a benefit of $2.5 million to release valuation allowance on foreign tax credits that were expected to be utilized before they expired.
In March 2005, we repatriated approximately $52.0 million in cash from our non-US subsidiaries. Also in 2005, we took into account technical corrections issued by the Treasury Department related to repatriating earnings under the AJCA. As a result of favorable provisions in the technical corrections, we realized a tax benefit of $3.6 million in 2005 that reduced the cumulative charge on the repatriated earnings to $1.4 million. In addition, as a consequence of the application of the technical corrections, we re-evaluated our ability to use foreign tax credits in the future and took a charge of $2.5 million to re-establish valuation allowance for foreign tax credits that will more likely than not expire unused.
Excluding the effect of certain one-time charges, the provision for income taxes for calendar years ended 2005 and 2004 would have been 36.6% and 36.0% respectively. In 2005, the most significant of these one-time charges included expenses related to the acquisition and integration of META, various capital losses and impairments, charges associated with the buy-back of under water stock options, and severance and facilities reduction charges. In 2004, the most significant of these one-time charges included nondeductible goodwill impairment, the write-off of accumulated foreign currency translation adjustments associated with certain South American operations, various capital losses and impairments, and severance and facilities reduction charges.
2005 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, goodwill impairments, income taxes, META integration charges, and other charges. Gross contribution margin is defined as gross contribution as a percentage of revenues.
Research
Research revenues increased 9%, or $42.5 million, when comparing Calendar 2005 and Calendar 2004, with META contributing approximately $29.0 million, and growth in our Executive Programs accounting for the majority of the rest of the increase. The impact of foreign currency was immaterial. Excluding the impact of META and foreign currency, revenue was up 3%.
Research gross contribution of $310.0 million for Calendar 2005 increased from the $292.7 million for Calendar 2004, while the gross contribution margin for Calendar 2005 decreased to 59% from 61% in the prior year. The decrease in the gross contribution margin in Calendar 2005 was primarily due to increased revenues from our Executive Programs, which have lower margins than our core subscription products, an increase in compensation costs, mostly due to headcount related to the META acquisition, and the impact of converting META contract value to Gartner contract value. We have now transacted on approximately 95% of the META contract value.
Research contract value, an indicator of future research revenue, was $592.6 million at December 31, 2005, an increase of 16%, or $83.4 million, from $509.2 million at December 31, 2004. Approximately half of the increase in contract value is attributable to the META acquisition. Excluding the impact of foreign currency, contract value increased by approximately 13%. The research contract value of $592.6 million at December 31, 2005 represents our highest reported contract value since September 30, 2000.
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At December 31, 2005, our research client retention rate increased 1 percentage point to 81% from 80% at December 31, 2004, while our wallet retention rate was 93% compared to 95% at December 31, 2004. Our Executive Program membership was 3,522 at December 31, 2005, up 18% from 2,975 at December 31, 2004, which is attributed to new business growth in North America and EMEA, as well as improved renewal rates and clients obtained as a result of the META acquisition. Our Executive Program membership remains the largest in our industry and has almost doubled in the last three years.
Consulting
Consulting revenues of $301.1 million for Calendar 2005 were up 16%, or $41.7 million, when compared to the $259.4 million in Calendar 2004, with META contributing approximately $18.0 million of the revenue growth. The revenue increase reflects strong organic growth in our core consulting services as well as in the performance-fee portion of our consulting business. The increase in the performance-fee business for Calendar 2005 includes revenues that the Company did not expect to close until the first quarter of 2006, and as a result our margin for that quarter will be impacted. The growth in our core consulting services reflects our continuing execution of our strategy of focusing on fewer accounts, attracting larger deals through integrated solutions, and enhancing engagement profitability through improved resource management. Revenue in Calendar 2005 increased despite our exit from certain less profitable consulting practices and geographies in Calendar 2004. The effect of foreign currency exchange rates reduced revenues by approximately 1%. Excluding the impact of META and foreign currency, revenue was up 11%.
Consulting gross contribution of $125.7 million for Calendar 2005 increased significantly from the prior year, up 36% from the $92.7 million for Calendar 2004, primarily due to higher profitability per engagement, as well as the impact of the timing of performance-fees discussed above. Gross contribution margin for Calendar 2005 increased to 42% from 36% in the prior year. Consulting utilization rates were 62% during Calendar 2005 as compared to 63% during Calendar 2004, while our billable rate was over $350 per hour in Calendar 2005, compared to a $318 per hour billable rate in Calendar 2004. Our billable headcount increased to 525 at December 31, 2005 as compared to 475 at December 31, 2004, an 11% increase, primarily related to consultants from the META acquisition. Our average annualized revenue per billable headcount was approximately $390,000 in Calendar 2005 compared to $342,000 in Calendar 2004.
Consulting backlog, which represents future revenues to be recognized from in-process consulting, measurement and SAS, increased 7%, or $8.1 million, to $119.9 million at December 31, 2005, compared to $111.8 million at December 31, 2004.
Events.Events revenues increased 9%, or $12.9 million, to $151.3 million for Calendar 2005, compared to $138.4 million for Calendar 2004, with approximately $2.4 million of the increase related to META. Changes in foreign currency exchange rates had a negligible effect on revenues when comparing Calendar 2005 to Calendar 2004. Excluding META and foreign currency, revenue was up 8%. The revenue increase was primarily due to an increase in the number of events, to 70 for Calendar 2005 compared to 56 in the prior year period, as we added 15 new events in new topic areas and geographies. Revenue increased to a lesser extent due to continued performance from our recurring events, for which revenue was up about 5% year over year. The number of attendees at our Events increased by about 14% in Calendar 2005 compared to Calendar 2004, rising to 35,502 from 31,223, respectively.
Gross contribution of $76.1 million for Calendar 2005 was 9.6% higher than the $69.5 million recorded in Calendar 2004. As a percentage of revenues, gross contribution was 50% during Calendar 2005 and Calendar 2004. Since new events typically run at lower margins in their first year of existence, the 15 new events we launched in Calendar 2005 had slightly lower margins than existing events. However, in addition to launching these new events, we continued to rationalize our existing portfolio by exiting from events that no longer met our profit targets. As a result of this active portfolio management, we were able to deliver a flat contribution margin year-over-year.
CALENDAR 2004 VERSUS CALENDAR 2003
Total revenues increased 4% to $893.8 million during Calendar 2004 from $858.4 million during Calendar 2003.
• | Researchrevenues increased 3% in Calendar 2004 to $480.5 million, compared to $466.9 million in Calendar 2003, and comprised approximately 54% of total revenues in both Calendar 2004 and Calendar 2003. |
• | Consultingrevenues in Calendar 2004 of $259.4 were up slightly compared to the $258.6 in Calendar 2003, and comprised approximately 29% and 30% of total revenues in Calendar 2004 and Calendar 2003, respectively. |
• | Eventsrevenues were $138.4 million in Calendar 2004, an increase of 16% from the $119.4 million in Calendar 2003, and comprised approximately 15% of total revenues in Calendar 2004 versus 14% in Calendar 2003. |
• | Otherrevenues, consisting principally of software licensing and maintenance fees, increased 15% to $15.5 million in Calendar 2004 from $13.6 million in Calendar 2003. |
Researchrevenues increased 3% in Calendar 2004 to $480.5 million, compared to $466.9 million in Calendar 2003, and comprised approximately 54% of total revenues in both Calendar 2004 and Calendar 2003.
Consultingrevenues in Calendar 2004 of $259.4 were up slightly compared to the $258.6 in Calendar 2003, and comprised approximately 29% and 30% of total revenues in Calendar 2004 and Calendar 2003, respectively.
Eventsrevenues were $138.4 million in Calendar 2004, an increase of 16% from the $119.4 million in Calendar 2003, and comprised approximately 15% of total revenues in Calendar 2004 versus 14% in Calendar 2003.
Otherrevenues, consisting principally of reprint and software licensing fees, increased 15% to $15.5 million in Calendar 2004 from $13.6 million in Calendar 2003.
The effects of foreign currency translation had approximately a 3% positive effect on total revenues for Calendar 2004 compared to Calendar 2003. Excluding the positive effects of foreign currency translation, revenues would have increased approximately 1%. year-
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over-year. See the Segment Results section below for a further discussion of segment revenues.
Revenues increased in all
regions.regions year-over-year. Revenues from sales to United States and Canadian clients increased 4% to $559.4 million in Calendar 2004 from $535.7 million in Calendar 2003. Revenues from sales to clients in Europe, the Middle East and Africa (“EMEA”) increased 4% to $263.0 million in Calendar 2004 from $252.3 million in Calendar 2003. Revenues from sales to clients in other international regions increased 1% to $71.4 million in Calendar 2004 from $70.5 million in Calendar 2003.
Cost of services and product development increased 6% during Calendar 2004 to $434.5 million from $410.7 million during Calendar 2003. Excluding the effects of foreign currency translation, cost of services and product development would have increased by 2%, primarily due to increased investment in our core Research business. Growth in our Executive Programs and Events businesses also contributed to higher costs in Calendar 2004. As a percentage of sales, cost of services and product development increased to 48.6% from 47.8% in the prior year period. Cost of services and product development in Calendar 2004 benefited from the reversal of $3.5 million of prior years’ incentive compensation.
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Selling, general and administrative expenses increased 5%, to $349.8 million during Calendar 2004 from $333.4 million during Calendar 2003. SG&A would have increased by approximately 2% excluding the negative effects of foreign currency translation. As a percentage of sales, SG&A expense increased slightly in Calendar 2004, to 39.1% of sales from 38.8% in Calendar 2003. SG&A expenses benefited during Calendar 2004 from the reversal of $3.3 million of prior years’ incentive compensation, as well as a reduction in the allowance for doubtful accounts of $3.7 million due to increased collections and a decline in bad debt write-offs as a percentage of sales.
Depreciation expense for Calendar 2004 decreased 23% to $27.7 million, compared to $36.0 million for Calendar 2003. The decrease was due to a reduction in capital spending during Calendar 2004, Calendar 2003 and Calendar 2002 relative to the capital spending during Fiscal 2001 and 2000, which led to a decrease in depreciation expense.
Amortization of intangibles decreased 46% when comparing Calendar 2004 to Calendar 2003 due to certain intangible assets having been fully amortized since the third quarter of Calendar 2003.
Goodwill impairments were $2.7 million in Calendar 2004 compared to $0 in Calendar 2003, reflecting the write-off of goodwill related to the closing of certain operations in Latin America and other non-core product lines.
Other charges during the fourth quarter of Calendar 2004 were $11.9 million, of which $5.9 million was for severance and benefits related to a workforce reduction of 40 employees.
We expect additional workforce reductions to occur during the first quarter of Calendar 2005 which will result in an additional severance and benefits charge estimated at between $5.0 million and $6.0 million. Other charges of $4.3 million during the third quarter of Calendar 2004 primarily included severance costs associated with the departure of our President and our former CEO of $3.1 million and $0.8 million, respectively. Other charges of $9.1 million during the second quarter of Calendar 2004 included $3.8 million of severance costs associated with the departure of our former CEO, as well as $5.3 million of costs associated with the termination of 30 employees. During the first quarter of Calendar 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 Calendar 2003 and resulted in the termination of 132 employees, or approximately 4% of our workforce, bringing the total terminations associated with the action plan to 262 employees.
We expect payments associated with the workforce reduction to be substantially completed by the end of the second quarter of Calendar 2005. We are funding these costs out of existing cash.For all of Calendar 2004, we recorded total charges of $29.7 million related to the realignment of our workforce, including costs of $7.7 million related to the departure of our President and our former CEO. The realignment resulted in the termination of 203 employees for the full year. The annualized savings from the termination of these employees would be approximately $23.3 million. However, we plan to reinvest a significant portion of these savings into improving our products, processes,
infrastructure, and
infrastructure to
helpfund increases in sales capacity to drive future growth.
Additionally, during the fourth quarter of Calendar 2004, we revised our estimates of previously recorded costs and losses associated with excess facilities and recorded $2.3 million of additional provisions. The revised estimate was due to a decline in market lease rates for expected subleases, as well as a reduction in estimated periods of subleases. We also recorded a charge of $1.9 million in the fourth quarter of Calendar 2004 related to the abandonment of certain internal systems, and $1.8 million for charges related to the exit from certain international and other non-core operations.
As part of our continuing effort to adjust our office space as needs change, we have announced plans to reduce our office space in San Jose, California by consolidating employees from two buildings into one building in the second or third quarter of Calendar 2005, which we estimate will result in a charge ranging from $6.0 to $7.0 million.In the first quarter of Calendar 2005, we plan to restructure certain international operations, which we estimate will result in a charge ranging from $4.0 million to $5.0 million.
Other charges of $29.7 million during Calendar 2003 were for costs for employee severance and benefits associated with workforce reductions initiated under two separate actions, $5.4 million during the first quarter of Calendar 2003 and $14.6 million during the fourth quarter of Calendar 2003. Additionally, during the fourth quarter of Calendar 2003, we revised our estimates of previously recorded costs and losses associated with excess facilities and recorded $9.7 million of additional provisions. The revised estimate was due to a decline in market lease rates for expected subleases, as well as a reduction in estimated periods of subleases. The workforce reduction that occurred during the first quarter of Calendar 2003 was a continuation of the action taken in Transition 2002, which resulted in the termination of 92 employees, or approximately 2% of our workforce. The purpose of this reduction was to reduce costs in underperforming segments. The workforce reduction that occurred during the fourth quarter of Calendar 2003 resulted in the termination of 130 employees, or approximately 3% of our workforce. The purpose of this workforce reduction was part of an effort to streamline operations, strengthen key consulting practices, and align our organizational structure to focus on client needs. These remaining payments
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Gain (loss)
associated with the workforce reduction were completed in the second quarter of Calendar 2004 and were funded out of existing cash.
(Loss) gain on investments, net during Calendar 2004 was a loss of $3.0 million. In the fourth quarter of Calendar 2004, we recorded a charge of $0.8 million related to the liquidation of SI I. In addition, we recorded an additional charge of $0.7 million in related liquidation costs, which is recorded in Other charges. In the third quarter of Calendar 2004, we recorded a charge of $2.2 million for the transfer of our investment in TruSecure to SI II, as well as a decrease in our ownership percentage in SI II of seven hundred basis points. As a result of this transfer and the decrease in ownership, we were relieved of all future capital calls, which had totaled $4.0 million. See Note
5 –3 — Investments in the Notes to the Consolidated Financial Statements for additional information.
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Gain (loss)(Loss) gain on investments, net of $4.7 million during Calendar 2003 includeswas a gain of $4.7 which included a $5.5 million insurance recovery received during Calendar 2003 associated with previously incurred losses arising from the sale of a business. Gain (loss) on investments, net during Calendar 2003 also includesAlso included was an impairment loss of $0.9 million associated with a minority-owned investment not publicly traded. We evaluated the investment for impairment because of the investee’s recapitalization due to its lack of capital resources to redeem its mandatorily redeemable equity, which led us to write the investment down to our estimate of fair value.
The conversion of our outstanding convertible debt to equity during the fourth quarter of
Calendar 2003 decreased our interest expense. However, due to the new credit agreement signed in the third quarter of
Calendar 2004, interest expense will increase in the future.
Other (expense), net for Calendar 2004 of $3.9 million includes the non-cash write-off of $3.1 million of accumulated foreign currency translation adjustments associated with certain of our operations in South America that we have closed. 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 income, net for Calendar 2003 of $0.5 million consists primarily of net foreign exchange gains.
Provision for income taxes was 51.0% and 33.4% of income before income taxes for Calendar 2004 and 2003, respectively. The increase in the effective tax rate for Calendar 2004, as compared to that of Calendar 2003, reflects the impact of a charge for planned repatriation of foreign earnings in Calendar 2005 at a one-time favorable tax rate pursuant to the Jobs Creation Act of 2004. It also reflects
Excluding the
impacteffect of certain
non-deductible book charges for workforce reductions, excess facilities, asset impairments, and losses on capital investments. These additional charges are partially offset by the release of valuation allowance on foreign tax credits. Excluding these otherone-time charges, the
effective tax rateprovision for income taxes for calendar years ended 2004 and 2003 would have been
32.7% in36.0% and 33.0% respectively. In Calendar 2004,
as compared to 33% inthe most significant of these one-time charges included nondeductible goodwill impairment, the write-off of accumulated foreign currency translation adjustments associated with certain South American operations, various capital losses and impairments, and severance and facilities reduction charges. In Calendar
2003.2003, the most significant of these one-time charges included various capital losses and impairments, and severance and facilities reduction charges.
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, goodwill impairments, and other charges. Gross contribution margin is defined as gross contribution as a percentage of revenues.
Research
Research revenues increased 3% when comparing Calendar 2004 and Calendar 2003, but excluding the favorable effects of foreign currency exchange rates, revenue was flat.
Research gross contribution of $292.7 million for Calendar 2004 decreased slightly from the $292.9 million for Calendar 2003, while gross contribution margin for Calendar 2004 decreased to 61% from 63% in the prior year. The decrease in the gross contribution margin in Calendar 2004 was primarily due to increased revenues from our executive programs, which have lower margins than our core subscription products, as well as continued investment in our people, products, and processes required to provide Research growth.
Research contract value, an indicator of future research revenue, was $509.2 million at December 31, 2004, an increase of 6% from $482.2 million at December 31, 2003, with roughly half of the increase due to the effects of foreign currency. The research contract value of $509.2 million at December 31, 2004
representsrepresented our highest reported contract value since the first quarter of Calendar 2002. During this period, we
have been focused on stabilizing and then growing revenue in our core Research business. This continued focus began to yield the desired outcome during the latter half of Calendar 2003. We ended the latter half of 2003 with two consecutive quarters of sequential increases in contract value after seven consecutive quarters of sequentially decreasing contract value. Contract value increased sequentially again in the first quarter of Calendar 2004, decreased slightly during the second quarter of Calendar 2004, and increased sequentially again in both the third and fourth quarters of Calendar 2004.
At December 31, 2004, our client retention rates increased 2 percentage points to 80% as compared to the same measure at December 31, 2003. Wallet retention increased 6 percentage points during Calendar 2004 to 95%. While wallet retention rates held steady or climbed
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over the four quarters of Calendar 2004, client retention dipped slightly in the first quarter and then climbed for the remainder of the year.
Our Executive Program membership was 2,708 at December 31, 2004, up 16% from 2,332 at December 31, 2003, which is attributed to new business growth in North America and EMEA, as well as improved renewal rates.
Consulting
Consulting revenues of $259.4 for Calendar 2004 were up slightly when compared to the $258.6 million in Calendar 2003. Excluding the effects of foreign currency exchange rates, revenues would have decreased approximately 4% in Calendar 2004 compared to Calendar 2003. Adjusted for currency effects, Consulting revenue decreased compared to the prior year as a result of our realignment of our business to exit certain less profitable consulting practices and geographies.
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Consulting gross contribution of $92.7 million for Calendar 2004 increased 7% from the $86.8 million for Calendar 2003, while gross contribution margin for Calendar 2004 increased to 36% from 34% in the prior year. The increase in the gross contribution margin was primarily attributable to higher consultant utilization rates, which were approximately 63% during Calendar 2004 as compared to approximately 54% during Calendar 2003, as the effects of the realignment were realized, and the reduction in our billable headcount to 493475 at December 31, 2004 as compared to 526 at December 31, 2003, a 6%10% decrease. Our billable rate was $327.00 per hour in Calendar 2004, a 7% increase from the $306.00 rate in Calendar 2003, which is due to more efficient use of staff globally and a higher billable rate in EMEA due to the effects of foreign exchange.
Consulting backlog increased 12% to $111.8 million at December 31, 2004, compared to $99.7 million at December 31, 2003. Our Consulting business ended Calendar 2004 with the continuation of the positive trend that began in Calendar 2003, when we ended that year with two consecutive quarters of sequential increases in backlog after five consecutive quarters of sequential decreases. Due to the realignment in which we exited certain practices and geographies, consulting backlog decreased to $91.7 million at March 31, 2004, but increased to $97.7 million at June 30, 2004 and $103.4 million at September 30, 2004, as business ramped up in our areas of focus.
Events
Events revenues increased 16% to $138.4 million for Calendar 2004, compared to $119.4 million for Calendar 2003. Changes in foreign currency exchange rates had approximately a 2% favorable impact on revenues when comparing Calendar 2004 to Calendar 2003. Revenues have increased despite having one less event during Calendar 2004 as compared to Calendar 2003, with 56 and 57 events, respectively. Revenue for Calendar 2004 increased due to higher attendance and higher average exhibitor revenue, resulting in higher average revenue per event in our recurring events. Attendance at Events increased to 30,99931,223 in Calendar 2004 from 27,547 in Calendar 2003, a 12.5%13% increase, which is attributed to the popularity of the topics offerred.
offered.
Gross contribution of $69.5 million for Calendar 2004 was 24% higher than the $56.0 million recorded in Calendar 2003. As a percentage of revenues, gross contribution increased to 50% during Calendar 2004 from 47% during Calendar 2003. The increase in gross contribution margin was due to the mix of events as well as lower personnel and marketing costs. Also, during
Calendar 2003, we invested more in marketing and promoting our events to maintain our attendance levels during a weak economy, especially in the technology sector.
CALENDAR 2003 VERSUS CALENDAR 2002
Total revenues decreased 3%
LIQUIDITY AND CAPITAL RESOURCES
Calendar 2005
Cash provided by operating activities totaled $27.1 million for Calendar 2005, compared to $858.4$48.2 million for the prior year, a $21.1 million decline. The net decrease in cash flow from operating activities was due primarily to the payment of $35.0 million of META integration payments, higher employee salary costs, primarily related to higher headcount due to the acquisition of META, and to a lesser extent, a shift in the mix of our products in the Research segment from higher margin core research to lower margin Executive Programs. Offsetting these decreases was a $12.0 million reduction in bonus payments and a decline of approximately $10.0 million in severance and related payments.
Cash used in investing activities increased to $181.0 million during Calendar
2003 from $887.62005 as compared to $29.0 million
during Calendar 2002.• | Researchrevenues decreased 4% in Calendar 2003 to $466.9 million, compared to $487.0 million in Calendar 2002, and comprised approximately 54% and 55% of total revenues in Calendar 2003 and Calendar 2002, respectively. |
• | Consultingrevenues decreased 6% to $258.6 million in Calendar 2003, compared to $276.1 million in Calendar 2002, and comprised approximately 30% and 31% of total revenues in Calendar 2003 and Calendar 2002, respectively. |
• | Eventsrevenues were $119.4 million in Calendar 2003, an increase of 9% from the $109.7 million in Calendar 2002, and comprised approximately 14% of total revenues in Calendar 2003 versus 12% in Calendar 2002. |
• | Otherrevenues, consisting principally of software licensing and maintenance fees, decreased 9% to $13.6 million in Calendar 2003 from $14.9 million in Calendar 2002. |
While revenues declined in the United States and Canada region, they increasedprior year, primarily due to the acquisition of META, which was completed on April 1, 2005. The Company’s net cash investment in our EMEA andMETA was approximately $176.4 million of cash paid, including transaction costs, less the Other International regions. Revenues$15.1 million acquired from sales to United States and Canadian clients decreased 7% to $535.7 million in Calendar 2003 from $576.5 million in Calendar 2002. Revenues from sales to clients inMETA. Offsetting the EMEA region increased 5% to $252.3 million in Calendar 2003 from $241.3 million in Calendar 2002. Revenues from sales to clients in Other International regions increased 1% to $70.5 million in Calendar 2003 from $69.8 million in Calendar 2002.
The decrease in our total revenuescash paid for META was a result of a decline in demand throughoutcapital expenditures, which decreased $2.7 million for Calendar 2005 as compared to Calendar 2004, and $2.1 million in cash received from the entire technology sectorsale of the Company’s investment in SI II and the overall weakness in the economy, partially offsetother investments.
Cash provided by financing activities totaled $70.0 million for Calendar 2005, compared to $97.2 million of cash used for Calendar 2004. The increase was primarily driven by the positive effectsborrowing of foreign currency exchange rates. Excludingadditional debt in Calendar 2005 and cash used in Calendar 2004 for stock repurchases.
We had an additional $56.7 million of debt at December 31, 2005 compared to the
effectsprior year end. During Calendar 2005 we borrowed $327.0 million and we repaid $271.3 million. We borrowed $250.0 million on June 29, 2005 related to the refinancing of
foreign currency translation, revenues would have decreased approximately 8%. See Segment Analysis section below for a further discussion of segment revenues.Cost of services and product development increased 4% during Calendar 2003 to $410.7 million from $396.5 million during Calendar 2002. Excluding the effects of foreign currency translation, cost of services and product development would have decreased by 1%. As a percentage of sales, cost of services and product development increased to 47.8% from 44.7% due primarily to investments in Gartner EXP, membership programs, product development and costs associated with customer intelligence, higher conference related expenses and lower utilization rates for our consulting practice.
debt by Selling, general and administrative expenses decreased 4%, to $333.4 million during Calendar 2003 from $346.5 million during Calendar 2002. SG&A would have decreased by approximately 7% had it not been for the negative effect of foreign currency translation. The
1522
decrease
entering into an Amended and Restated Credit Agreement (as discussed in
SG&A was primarily the result of lower sales commissions and our continued focus on streamlining our support organizations and restructuring efforts.Depreciation expense for Calendar 2003 decreased 18% to $36.0 million, compared to $43.7 million for Calendar 2002. The decrease was due to a reduction in capital spending during Calendar 2002 and Calendar 2003 relative to the capital spending during Fiscal 2000 and 2001, which led to a decrease in depreciation expense. In addition, costs capitalized during Fiscal 2000 associated with the initial launch of the gartner.com Web site in January 2001 have been fully depreciated as of the beginning of Calendar 2003.
Amortization of intangibles decreased 34% when comparing Calendar 2003 to Calendar 2002 due to certain intangible assets having been fully amortized over the past year.
Other charges of $29.7 million during Calendar 2003 were for costs for employee severance and benefits associated with workforce reductions initiated under two separate actions, $5.4 million during the first quarter of Calendar 2003 and $14.6 million during the fourth quarter of Calendar 2003. Additionally, during the fourth quarter of Calendar 2003, we revised our estimates of previously recorded costs and losses associated with excess facilities and recorded $9.7 million of additional provisions. The revised estimate was due to a decline in market lease rates for expected subleases, as well as a reduction in estimated periods of subleases. The workforce reduction that occurred during the first quarter of Calendar 2003 was a continuation of the action taken in Transition 2002, which resulted in the termination of 92 employees, or approximately 2% of our workforce. The purpose of this reduction was to reduce costs in underperforming segments. The workforce reduction that occurred during the fourth quarter of Calendar 2003 resulted in the termination of 130 employees, or approximately 3% of our workforce. The purpose of this workforce reduction was part of an effort to streamline operations, to strengthen key consulting practices, and to align our organizational structure to focus on client needs.
During Calendar 2002, other charges were $49.4 million. These charges were the result of two actions, one during the first quarter of Calendar 2002 amounting to $17.2 million, and the other occurring during the fourth quarter of Calendar 2002, or Transition 2002, amounting to $32.2 million. Of the charges occurring during the first quarter of Calendar 2002, $10.0 million related to costs and losses associated with the elimination of excess facilities, principally leasehold improvements and ongoing lease costs and losses associated with sub-lease arrangements. In addition, approximately $5.8 million of these charges were associated with our workforce reduction initiated during the first quarter of Calendar 2002 and were for employee termination severance and benefits. This workforce reduction resulted in the termination of 92 employees, or approximately 2% of our workforce at that time. We expect the payments associated with the workforce reduction to be completed by the end of the first quarter of 2004. The remaining $1.4 million of expenses recorded as other charges during the first quarter of Calendar 2002 relates to the impairment of certain database-related assets. Of the $32.2 million of charges during the fourth quarter of Calendar 2002, $13.3 million related to costs and losses associated with our elimination of excess facilities, principally leased facilities and ongoing lease costs and losses associated with sub-lease arrangements. The remaining $18.9 million of these charges related to severance payments and related benefits associated with a workforce reduction, which included $0.6 million of non-cash compensation. This workforce reduction resulted in the elimination of approximately 175 positions, or approximately 4% of our workforce at the time.
Gain (loss) on investments, net during Calendar 2003 includes a $5.5 million insurance recovery received during Calendar 2003 associated with previously incurred losses arising from the sale of a business. Gain (loss) on investments, net during Calendar 2003 also includes an impairment loss of $0.9 million associated with a minority-owned investment not publicly traded. We evaluated the investment for impairment because of the investee’s recapitalization due to its lack of capital resources to redeem its mandatorily redeemable equity, which led us to write the investment down to our estimate of fair value. The loss on investments during Calendar 2002 was caused primarily by the recognition of impairment losses related to equity securities owned by us through two limited partnerships, SI Venture Associates (“SI I”) and SI Venture Fund II (“SI II”). SI I and SI II are venture capital funds engaged in making investments in early to mid-stage IT-based or Internet-enabled companies. At December 31, 2002 we owned 100% of SI I and 34% of SI II. See Note 5 – Investments6 — Debt in the Notes to the Consolidated Financial Statements for a further discussion ofStatements), $67.0 million in April under the gains and losses on investments.
Interest expense decreased during Calendar 2003 duerevolver related to the conversion of our debtMETA acquisition, and $10.0 million under the revolver which was used to equity in October 2003. The conversion of our debt has eliminated most of our interest expense sincemake the conversion date.
Other income, net for Calendar 2003 of $0.5 million consists primarily of net foreign exchange gains. For Calendar 2002, other income, net of $0.1 million includes a $0.5 million gain from the sale of certain assets during the firstsecond quarter of Calendar 2002, partially offset by net foreign exchange losses.
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Provision2005 quarterly payment on the term loan. Of the $271.3 million repaid during Calendar 2005, we paid $247.0 million on June 29, 2005 related to the refinancing, we made $23.4 million in quarterly debt payments, and we paid $0.9 million for income taxes was 33.4% and 37.7%a note payable we acquired in the META acquisition. We also paid $1.1 million in debt issue costs during the second quarter of income before income taxesCalendar 2005 related to the refinancing of our debt.
We received proceeds from stock issued for
stock plans of $31.0 million during Calendar
2003 and 2002, respectively. Excluding the other charges for workforce reductions, excess facilities and asset impairments and the gains and losses from investments, the effective tax rate would have been 33% in Calendar 20032005 as compared to
34% in Calendar 2002. The reduction$67.9 million in the
effective tax rate for Calendar 2003,prior year as a result of our higher stock price during 2004 as compared to
that2005, which resulted in more stock option exercises by employees in 2004. The Company used $6.0 million of
Calendar 2002, reflects the implementation of tax planning strategies.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 administrativecash, including expenses, depreciation, amortization of intangibles, goodwill impairments, and other charges. Gross contribution margin is defined as gross contribution as a percentage of revenues.
Research
Research revenues decreased 4% when comparing Calendar 2003 and Calendar 2002. Foreign currency exchange rates favorably impacted research revenues by approximately 4%. The decreaseto buy back employee stock options in research revenues was due to the overall weakness in the economy and the impact of this weakness on corporate information technology spending causing lower demand throughout the entire technology sector.
Research gross contribution of $292.9 million for Calendar 2003 decreased 8% from $318.7 million for Calendar 2002, while gross contribution margin for Calendar 2003 decreased to 63% from 65% in the prior year. The decrease in gross contribution and gross contribution margin is a result of the lower revenues and costs associated with investments in Gartner EXP, Gartner G2, membership programs, product development and marketing and costs associated with customer intelligence.
Research contract value, an indicator of future research revenue, was $482.2 million at December 31, 2003, a decrease of 1% from $489.0 million at December 31, 2002. However, research contract value increased sequentially during both the third and fourth quarters of Calendar 2003 from $468.52005. In the fourth quarter of Calendar 2005 we used $9.6 million at June 30, 2003of cash to repurchase our stock, while in 2004 we used $346.1 million of cash for a stock tender offer and $469.6$6.1 million at September 30, 2003. Prior to these sequential increases during Calendar 2003, contract value had decreased sequentiallyof cash for five consecutive quarters. treasury stock purchases.
At December 31,
2003, our client retention2005, cash and cash equivalents totaled $70.2 million. The effect of exchange rates
increased 4 percentage points to 78% as compared to the same measure at December 31, 2002. Wallet retention increased 8 percentage pointsdecreased cash and cash equivalents by $6.0 million during Calendar
2003 to 89%. The client2005, and
wallet retention rates increased steadily over the four quarters of Calendar 2003.Consulting
Consulting revenues decreased 6% during Calendar 2003 to $258.6 million from $276.1 million for Calendar 2002. Foreign currency exchange rates had a positive impact of approximately 5% during Calendar 2003. The decrease in revenues was caused by lower utilization. Billable headcount for our Consulting business as of December 31, 2003 increased to 526 at December 31, 2003 as compared to 459 at December 31, 2002.
Consulting gross contribution of $86.8 million for Calendar 2003 decreased 16% from $102.8 million for Calendar 2002, and gross contribution margin for Calendar 2003 decreased to 34% from 37% in the prior year. The decrease in the gross contribution margin was primarily attributable to lower consultant utilization rates, which were approximately 53% during Calendar 2003 as compared to approximately 56% during Calendar 2002.
Consulting backlog decreased 10% to $99.7 million at December 31, 2003, compared to $111.3 million at December 31, 2002, but increased sequentially during both the third and fourth quarters of Calendar 2003, when it was $91.0 million at June 30, 2003 and $92.8 million at September 30, 2003. Consulting backlog decreased as compared to the prior year due to the decline in demand throughoutstrengthening of the entire technology sector, as technology customers continued to constrain spending.
Events
Events revenues increased 9% to $119.4 million for Calendar 2003, compared to $109.7 million for Calendar 2002. Changes inU.S. dollar against certain foreign currency exchange rates had approximately a 5% favorable impact on revenues when comparing Calendar 2003 to Calendar 2002. Revenues have increased slightly despite having nine fewer events during Calendar 2003 as compared to Calendar 2002. The average revenue per event increased during Calendar 2003 due tocurrencies, primarily the strong performance of our recurring events, as well as the addition of new events during Calendar 2003 that had higher revenues than the events that were eliminated.
Gross contribution of $56.0 million for Calendar 2003 was relatively consistent with Calendar 2002. As a percentage of revenues, gross
17
contribution decreased to 47% during Calendar 2003 from 51% during Calendar 2002. The decrease in gross contribution margin was due primarily to increased personnel expensesEuro and increased event marketing costs. During 2003, we invested more in marketing and promoting our events to maintain our attendance levels during a weak economy, especially in the technology sector.
LIQUIDITY AND CAPITAL RESOURCES
Sterling.
Calendar 2004
Cash provided by operating activities during Calendar 2004 totaled $48.3 million compared to $136.3 million in Calendar 2003. The net decrease in cash flow from operating activities of $88.0 million was due to several factors. We paid $27.0 million in bonuses during 2004 compared to zero in Calendar 2003. No bonuses were paid during Calendar 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. As a result, the 2003 bonuses were paid in Calendar 2004. Further, we paid a portion of our 2004 bonuses in the third quarter of Calendar 2004 in accordance with the current year corporate bonus plan. Additionally, cash from operating activities declined because we paid approximately $14.0 million more in severance during Calendar 2004 than in Calendar 2003. The net decrease in cash flow from operating activities was also due to the accelerated collection of receivables in Calendar 2003 which improved operating cash flow in that year by approximately $26.0 million, which was not repeated in Calendar 2004. Lastly, approximately $15.0 million of certain accrued liabilities booked in the fourth quarter of Calendar 2003 were paid in the first quarter of Calendar 2004.
Cash used in investing activities increased to $29.0 million during Calendar 2004 as compared to $25.4 million for Calendar 2003. The increase was primarily due to $3.9 million we prepaid related to the acquisition of META. Capital expenditures in Calendar 2004 of $25.1 million were 15% lower than the $28.9 million in Calendar 2003. During Calendar 2003, we received an insurance recovery of $5.5 million, and we funded $2.0 million of our capital commitment to SI II.
Cash used by financing activities totaled $97.3 million for Calendar 2004, compared to $3.0 million used in Calendar 2003. We purchased $352.3 million of our common stock for treasury during Calendar 2004, of which $346.2 million represents the tender offer and Silver Lake repurchases, inclusive of related costs, as compared to $43.4 million during the prior year. We received proceeds from stock issued for stock plans of $67.8 million during Calendar 2004, as compared to $41.7 million during the prior year. This increase is a result of higher stock option exercises by our employees as increases in our stock price caused a significantly larger percentage of our vested stock options to be in the money during Calendar 2004 as compared to Calendar 2003. We borrowed $200 million related to the tender in the third quarter of Calendar 2004, receiving proceeds, net of debt issuance costs, of $197.2 million. We repaid
$10$10.0 million of this debt in the fourth quarter of Calendar 2004.
At December 31, 2004, cash and cash equivalents totaled $160.1 million. The effect of exchange rates increased cash and cash equivalents by $8.1 million during Calendar 2004, and was due to the weakening of the U.S. dollar against certain foreign currencies, primarily the Euro and Sterling.
Calendar 2003
Cash provided by operating activities during Calendar 2003 was $136.3
Obligations and Commitments
The Company has a $325.0 million,
compared to $145.8 million during Calendar 2002. The decrease was primarily due to lower cash-related earnings and a smaller decrease in receivables during Calendar 2003 compared to Calendar 2002. Cash-related earnings are income from continuing operations adjusted for the non-cash items included in income, such as depreciation and amortization, the accretion of interest and amortization of debt issue costs, along with other non-cash charges. Partially offsetting these decreases were higher bonus payments during Calendar 2002. Bonus payments were higher during Calendar 2002 due to our change in fiscal year from September 30 to December 31, effective January 1, 2003. Our Fiscal 2002 bonuses were paid during Transition 2002, or the fourth quarter of Calendar 2002, whereas, Calendar 2003 bonuses were paid during 2004.Cash used in investing activities was $25.4 million for Calendar 2003, compared to $26.3 million for Calendar 2002. The decrease was due primarily to the proceeds received from an insurance recovery of $5.5 million during Calendar 2003 associatedunsecured five-year Credit Agreement with a previously incurred loss on a claim resulting from the salebank group led by JPMorgan Chase Bank consisting of a business in 2000. Additionally, during 2002 we spent $3.9 million to purchase the remaining 49.9% of People3, Inc. not previously owned by us. During Calendar 2003 and Calendar 2002, we funded $2.0 million and $1.5 million, respectively, of our investment commitment to SI II, reducing our remaining commitment as of December 31, 2003 to $4.0 million. Spending on property and equipment increased $7.8 million to $28.9 million during Calendar 2003, as compared to $21.1 million during the same period of 2002.
Cash used in financing activities totaled $3.0 million for Calendar 2003, compared to $42.2 million for Calendar 2002. We purchased $43.4 million of common stock for treasury during Calendar 2003, as compared to $59.9 million during Calendar 2002 (see further discussion that follows under Stock Repurchases). We received proceeds of $41.7 million from the exercise of stock options and the purchase of stock by employees participating in the employee stock purchase plan during Calendar 2003, as compared to $17.9 million during the Calendar 2002.
At December 31, 2003, cash and cash equivalents totaled $230.0 million. The effect of exchange rates increased cash and cash equivalents
18
by $12.4 million during Calendar 2003, and was due to the weakening of the U.S. dollar against certain foreign currencies.
Obligations and Commitments
We have a Credit Agreement that provides for a $200.0 million term A loan facility and a five-year, $100$125.0 million revolving credit facility. During the third quarterThe revolving credit facility may be increased up to $175.0 million. As of 2004, we borrowed $200 million under the term A loan facility, receiving net proceeds after debt issuance costs of $197.2 million. In accordance with the requirements of the term A loan facility, we made a loan payment of $10.0 million in the fourth quarter of Calendar 2004. At December 31, 2004,2005, there was $190$196.7 million outstanding on the term loan facility and $3.5$50.0 million of letters of credit outstanding underon the revolving credit facility. Based on specified covenant requirements, our borrowing availability atAs of December 31, 2004 under2005, the revolving credit facility was $59.2 million. Subsequent to December 31, 2004, we entered into an amendment of the Credit Agreement covenant requirements that resulted in additionalCompany had approximately $45.6 million borrowing capacity under the revolving credit facility. As a result,
The term loan will be repaid in 19 quarterly installments, with the amended borrowing availability under thefinal payment due on June 29, 2010. The revolving credit facility would have been $96.5may be used for loans, and up to $15.0 million may be used for letters of credit. The revolving loans may be borrowed, repaid and reborrowed until June 29, 2010, at which time all amounts borrowed must be repaid. The loans bear interest, at the Company’s option, at a rate equal to the greatest of the Administrative Agent’s prime rate, the Administrative Agent’s rate for three-month certificates of deposit (adjusted for statutory reserves) and the average rate on overnight federal funds plus1/2 of 1% plus a spread equal to between 0.00% and 0.75%
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depending on the Company’s leverage ratio as of the fiscal quarter most recently ended, or at the Eurodollar rate (adjusted for statutory reserves) plus a spread equal to between 1.00% and 1.75%, depending on the Company’s leverage ratio as of the fiscal quarter most recently ended.
The Credit Agreement contains certain restrictive loan covenants, including, among others, financial covenants requiring a maximum leverage ratio, a minimum fixed charge coverage ratio, and a minimum annualized contract value ratio and covenants limiting Gartner’s ability to incur indebtedness, grant liens, make acquisitions, be acquired, dispose of assets, pay dividends, repurchase stock, make capital expenditures and make investments. Gartner’s obligations under the credit facility are guaranteed by Gartner’s U.S. subsidiaries. It also contains events of default that include, among others, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of covenants, cross defaults to certain other indebtedness, bankruptcy and insolvency events, material judgments, and events constituting a change of control. The occurrence of an event of default will increase the applicable rate of interest by 2.0% and could result in the acceleration of Gartner’s obligations under the Credit Agreement and an obligation of any or all of the guarantors to pay the full amount of Gartner’s obligations under the Credit Agreement.
In December 2005 the Company entered into an interest rate swap agreement to hedge the base interest rate risk on the term loan. The effect of the swap is to convert the floating base rate on the term loan to a fixed rate. Under the swap terms, the Company will pay a 4.885% fixed rate and in return will receive a three-month LIBOR rate. The three-month LIBOR rate received on the swap will match the base rate paid on the term loan since both use three-month LIBOR. The swap had an initial notional value of $200.0 million which will decline as payments are made on the term loan so that the amount outstanding under the term loan and the notional amount of the swap will always be equal. The swap had a notional amount of $196.7 million at December 31,
2004.The facilities bear interest equal to LIBOR plus an applicable margin2005, which varies based on specified leverage ratios. At December 31, 2004,was the current interest rate was 3.59%. Thesame as the outstanding amount of the term A loan facility is payable in equal quarterly installments overloan.
In October 2005, the Company’s Board of Directors authorized a
five-year period ending August 12, 2009. The credit facilities$100.0 million common share repurchase program. Repurchases under the program will be made from time-to-time through open market purchases and/or block trades. Repurchases are subject to
mandatory prepayments from a portionthe availability of
proceeds from asset salesour common stock, prevailing market conditions, the trading price of the Company’s common stock, 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.performance. The
facilities also include commitment fees on the unused portion of the revolving credit facility not subject to letters of credit.On April 17, 2000, we issued, in a private placement transaction, $300.0 million of our unsecured 6% convertible subordinated notes due April 17, 2005 to Silver Lake and other noteholders. Interest accrued semi-annually by a corresponding increase in the face amount of the convertible notes. In October 2003, the notes were converted into 49,441,122 shares of Gartner Class A Common Stock. The conversion was in accordance with the original terms of the notes.
The determination of the number of shares issued upon conversion was based upon a $7.45 conversion price and a convertible note of $368.3 million, consisting of the original face amount of $300 million plus accrued interest of $68.3 million. The unamortized balances of debt issue costs of $2.8 million and debt discount of $0.3 million as of the conversion date were netted against the outstanding principal and interest balances, resulting in a $365.2 million increase to stockholders’ equity. Additionally, certain costs directly associated with the conversion, such as regulatory filings, banking and legal fees totaling $0.6 million were charged to equity.
The following table represents our contractual commitments at December 31, 2004 (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Less Than | | | 1 - 3 | | | 4 - 5 | | | More Than | |
| | | Total | | | 1 Year | | | Years | | | Years | | | 5 Years | |
| |
| Operating leases | | $ | 206.9 | | | $ | 29.9 | | | $ | 44.0 | | | $ | 37.1 | | | $ | 95.9 | |
| Senior credit facility | | | 190.0 | | | | 40.0 | | | | 80.0 | | | | 70.0 | | | | — | |
| Severance associated with workforce reductions | | | 9.3 | | | | 8.3 | | | | 1.0 | | | | — | | | | — | |
| Miscellaneous service agreements | | | 1.8 | | | | 1.8 | | | | — | | | | — | | | | — | |
| META acquisition obligation | | | 1.7 | | | | 1.7 | | | | — | | | | — | | | | — | |
| | | |
| Totals | | $ | 409.7 | | | $ | 81.7 | | | $ | 125.0 | | | $ | 107.1 | | | $ | 95.9 | |
| | | |
On December 27, 2004, we announced that we would acquire META in an all-cash transaction for $10.00 per share, or approximately $162.0 million, excluding transaction costs. While subject to regulatory and stockholder approvals, we expect the transaction to be effective April 1, 2005. The $1.7 million of META acquisition obligation in the table above relates to additional nonrefundable acquisition expenses that we are obligated to pay. In orderCompany intends to fund the repurchases from cash flow from operations but may also borrow under the Company’s existing Credit Agreement. During the fourth quarter of Calendar 2005, the Company repurchased 837,800 shares of its common stock under this program for a total purchase price of META, we anticipate that we will use a combination$11.1 million, of cash and our amended five-year revolving credit facility. In connection with funding the META transaction, we anticipate repatriating $52.0which $1.5 million in cash earnings from our non-US subsidiarieswas paid in early 2005.
January 2006 when the related share repurchase transactions settled.
We believe that our existing cash balances, together with cash from our operating activities and the additional borrowing capacity under our amended five-year revolving credit facility, will be sufficient for our expected short-term and foreseeable long-term needs. We are currently evaluating
The following table represents our contractual cash commitments at December 31, 2005 (in millions), including contractual commitments related to the option of establishing long-term debt as a permanent part ofMETA acquisition. The table excludes interest payments under our capital structure. However, there can be no assurances that such capital will be available to us or will be available on commercially reasonable terms.credit facility:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Less Than | | | 1 - 3 | | | 4 - 5 | | | More Than | |
| | | Total | | | 1 Year | | | Years | | | Years | | | 5 Years | |
| Operating leases (1) | | $ | 204.9 | | | $ | 32.7 | | | $ | 54.3 | | | $ | 41.2 | | | $ | 76.7 | |
| Borrowings (2) | | | 246.7 | | | | 61.7 | | | | 70.0 | | | | 115.0 | | | | — | |
| Severance associated with workforce reductions (1) | | | 4.0 | | | | 3.7 | | | | .3 | | | | — | | | | — | |
| Contract terminations and other (1) | | | 1.7 | | | | 1.1 | | | | .6 | | | | — | | | | — | |
| Deferred compensation arrangement (3) | | | 16.6 | | | | 2.3 | | | | 2.9 | | | | 2.3 | | | | 9.1 | |
| Common stock repurchase program (4) | | | 1.5 | | | | 1.5 | | | | — | | | | — | | | | — | |
| Miscellaneous service agreements | | | 0.3 | | | | 0.3 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Totals | | $ | 475.7 | | | $ | 103.3 | | | $ | 128.1 | | | $ | 158.5 | | | $ | 85.8 | |
| | | | | | | | | | | | | | | | |
| | |
| (1) | | Includes liabilities related to META recorded under EITF 95-3 (see Note 2 — Acquisition of META in the Notes to the Consolidated Financial Statements). |
|
| (2) | | The $61.7 million due in less than one year includes $50.0 million drawn on our revolving credit facility. Although the terms of the Credit Agreement do not require payment until 2010, it is currently our intent to repay this amount within one year. |
|
| (3) | | Represents a liability under the Company’s supplemental deferred compensation arrangement (see Note 12 — Employee Benefits in the Notes to the Consolidated Financial Statements). Amounts payable to active employees whose termination date is unknown have been included in the more than 5 years category since the Company cannot estimate when the amounts will be paid. |
|
| (4) | | Represents $1.5 million paid in early January 2006 when the related share repurchase transactions settled. |
Tender Offer
On August 10, 2004, we announced the final results of our Dutch auction tender offer. We repurchased approximately 11.3 million shares of our Class A Common Stock and 5.5 million shares of our Class B Common Stock at a purchase price of $13.30 and $12.50 per share, respectively.
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Additionally, we repurchased 9.2 million Class A shares from Silver Lake and certain of its affiliates, which collectively owned approximately 44.4% of our 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 purchases was $346.2 million, including transaction costs of $3.8 million.
Stock Repurchases
In July 2001, our Board of Directors approved the repurchase of up to $75.0 million of Class A and Class B Common Stock. The Board of Directors subsequently increased the authorized stock repurchase program to a total authorization for repurchase of $200.0 million. On a cumulative basis at December 31, 2004, we have purchased $133.2 million of our stock under this stock repurchase program. In connection with the tender offer, the Board of Directors terminated the stock repurchase program in June 2004. The following table provides information related to our cumulative repurchases under this program:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Total | |
| | | Class A Common Stock | | | Class B Common Stock | | | Cost of | |
| | | | | | | Average | | | | | | | Average | | | Shares | |
| | | Total Shares | | | Price Paid | | | Total Shares | | | Price Paid | | | Purchased | |
| | | Purchased | | | per Share | | | Purchased | | | per Share | | | (in thousands) | |
| | | |
| Fiscal 2001 | | | 2,318,149 | | | $ | 9.79 | | | | 7,960 | | | $ | 9.50 | | | $ | 22,773 | |
| Fiscal 2002 | | | 2,153,400 | | | | 10.84 | | | | 2,311,700 | | | | 10.25 | | | | 47,047 | |
| Transition 2002 | | | 963,117 | | | | 9.79 | | | | 453,600 | | | | 9.81 | | | | 13,880 | |
| Calendar 2003 | | | 3,435,161 | | | | 8.47 | | | | 1,549,485 | | | | 9.26 | | | | 43,433 | |
| Calendar 2004 | | | 413,225 | | | | 11.59 | | | | 114,600 | | | | 11.55 | | | | 6,112 | |
| | | |
| Totals | | | 9,283,052 | | | $ | 9.62 | | | | 4,437,345 | | | $ | 9.89 | | | $ | 133,245 | |
| | | |
Off-Balance Sheet Arrangements
Through December 31, 2004, we have not entered into any off balance sheet arrangements or transactions with unconsolidated entities or other persons.
QUARTERLY FINANCIAL DATA
| | | | | | | | | | | | | | | | | |
| (in thousands, except per share data) | | | | | | | | | | |
| Calendar 2004 | | First (4) | | | Second (4) | | | Third | | | Fourth | |
| |
| Revenues | | $ | 208,667 | | | $ | 227,857 | | | $ | 201,888 | | | $ | 255,409 | |
| Operating income (1) | | | 6,171 | | | | 15,786 | | | | 5,477 | | | | 15,225 | |
| Net income (2) | | | 464 | | | | 11,028 | | | | 160 | | | | 5,237 | |
| Net income per share: | | | | | | | | | | | | | | | | |
| Basic (3) | | $ | 0.00 | | | $ | 0.08 | | | $ | 0.00 | | | $ | 0.05 | |
| Diluted | | | 0.00 | | | | 0.08 | | | | 0.00 | | | | 0.05 | |
| | | | | | | | | | | | | | | | | |
| Calendar 2003 | | First | | | Second | | | Third | | | Fourth (4) | |
| |
| Revenues | | $ | 204,282 | | | $ | 213,318 | | | $ | 196,904 | | | $ | 243,942 | |
| Operating income (1) | | | 2,789 | | | | 19,846 | | | | 13,991 | | | | 10,707 | |
| Net (loss) income (2) | | | (1,512 | ) | | | 12,854 | | | | 5,474 | | | | 6,773 | |
| Net (loss) income per share: | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.02 | ) | | $ | 0.16 | | | $ | 0.07 | | | $ | 0.05 | |
| Diluted (3) | | | (0.02 | ) | | | 0.13 | | | | 0.07 | | | | 0.05 | |
| | | | | | | | | | | | | | | | | |
| Calendar 2005 | | First (4) | | | Second | | | Third | | | Fourth | |
| Revenues | | $ | 199,824 | | | $ | 274,569 | | | $ | 225,311 | | | $ | 289,300 | |
| Operating (loss) income (1) | | | (10,786 | ) | | | 5,138 | | | | 1,186 | | | | 29,742 | |
| Net (loss) income (2) | | | (14,707 | ) | | | (819 | ) | | | (1,721 | ) | | | 14,810 | |
| Net (loss) income per share (3): | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.13 | ) | | $ | (0.01 | ) | | $ | (0.02 | ) | | $ | 0.13 | |
| Diluted | | | (0.13 | ) | | | (0.01 | ) | | | (0.02 | ) | | | 0.13 | |
| | | | | | | | | | | | | | | | | |
| (in thousands, except per share data) | | | | | | | | | | | | | | | | |
| Calendar 2004 | | First (4) | | Second (4) | | Third | | Fourth |
| | | | | | | | | | | | | |
| Revenues | | $ | 208,667 | | | $ | 227,857 | | | $ | 201,888 | | | $ | 255,409 | |
| Operating income (1) | | | 6,171 | | | | 15,786 | | | | 5,477 | | | | 15,225 | |
| Net income (2) | | | 464 | | | | 11,028 | | | | 160 | | | | 5,237 | |
| Net income per share (3): | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.00 | | | $ | 0.08 | | | $ | 0.00 | | | $ | 0.05 | |
| Diluted | | | 0.00 | | | | 0.08 | | | | 0.00 | | | | 0.05 | |
| (1) | | Calendar 2005 includes Other charges of $14.3 million in the first quarter, $8.2 million in the second quarter, $6.0 million in the third quarter, and $0.7 million in the fourth quarter. Calendar 2004 includes Other charges of $10.5 million in the first quarter, $9.1 million in the second quarter, $4.3 million in the third quarter, and $11.9 million in the fourth quarter. |
| (2) | | Calendar 20032005 includes Other chargeslosses on investments of $5.4$5.1 million, $0.2 million, and $0.5 million in the first, quartersecond and $24.3 million in the fourth quarter. |
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(2) | | Includes gains (losses)quarters, respectively. Calendar 2004 includes losses on investments of $(2.2)$2.2 million and $(0.8)$0.8 million in the third and fourth quarters, of Calendar 2004, respectively, and $5.5 million, $0.1 million, and $(0.9) million for the second, third and fourth quarters of Calendar 2003, respectively. Calendar 2004 also includes $2.9 million and $0.2 million of accumulated foreign currency translation charges in the first and fourth quarters, respectively, and $0.7 million and $2.0 million of goodwill impairment in the first and fourth quarters, respectively. |
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| (3) | | The aggregate of the four quarters’ basic and diluted earnings per common share doesmay not equal the reported full calendar amounts due to the effects of dilutive securities and rounding. |
|
| (4) | | During the first quarter of Calendar 2005, and the first and second quarters of Calendar 2004, and the fourth quarter of Calendar 2003, we recorded adjustments for certain prior year incentive compensation accruals, including bonuses, thatwhich provided a benefit to operating income of approximately $2.8$2.9 million, $4.0$2.5 million and $3.2$4.3 million, respectively. |
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FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
We operate in a very competitiveRECENTLY ISSUED ACCOUNTING STANDARDS
In June 2005 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and
rapidly changing environmentError Corrections” (“SFAS No. 154”), which will require entities 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 further 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 if it were to continue could materially and adversely affect our business, financial condition and results of operations, including the ability to: maintain client retention, wallet retention and consulting utilization rates, and achieve contract value and consulting backlog. To the extent our clients are in the IT industry, the severe decline in that sector has also had a significant impact on their spending.
Organizational and Product Integration Related to Acquisitions. We have made and may continue tovoluntarily make acquisitions of, or significant investments in, businesses that offer complementary products and services, including our pending acquisition of META. 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.
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 does 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 our Chief Executive Officer. Mr. Hall succeeded Michael Fleisher, who had previously announced his intention to depart as our 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 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.
Acts of Terrorism or War.Acts of terrorism, acts of war and other unforeseen events, may cause damage or disruption to our properties, business, employees, suppliers, distributors and clients, which could have an adverse effect on our business, financial condition and operating results. Such events may also result in an economic slowdown in the United States or elsewhere, which could adversely affect our business, financial condition and operating results.
Competitive Environment. We face direct competition from a significant number of independent providers of information products and services, including information that can be found on the Internet free of charge. We also compete indirectly against consulting firms and other information providers, including electronic and print media companies, some of which may have greater financial, information gathering and marketing resources than we do. These indirect competitors could choose to compete directly with us in the future. In addition, limited barriers to entry exist in the markets in which we do business. As a result, additional new competitors may emerge and existing competitors may start to provide additional or complementary services. Additionally, technological advances may provide increased competition from a variety of sources. Increased competition may result in loss of market share, diminished value in our products and services, reduced pricing and increased marketing expenditures. We may not be successful if we cannot compete effectively on quality of research and analysis, timely delivery of information, customer service, the ability to offer products to meet changing market needs for information and analysis, or price.
Renewal of Research Business by Existing Clients.Some of our success depends on renewals of our subscription-based research products and services, which constituted 54% of our revenues for Calendar 2004 and Calendar 2003. These research subscription agreements have terms that generally range from twelve to thirty months. Our ability to maintain contract renewals is subject to numerous factors, including those described in this Annual Report. Additionally, as we implement our strategy to realign our business to client needs, we may shift the type and pricing of our products which may impact client renewal rates. While client retention rates were 80% at December 31, 2004 and 78% at December 31, 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 our financial condition.
Non-Recurring Consulting Engagements.Consulting segment revenues constituted 29% of our revenues for Calendar 2004 and 30% of our revenues for Calendar 2003. These consulting engagements typically are project-based and non-recurring. Our ability to replace
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consulting engagements is subject to numerous factors, including those described in this Annual Report. Any material decline in our ability to replace consulting arrangements could have an adverse impact on our revenues and our financial condition.
Hiring and Retention of Employees. Our success depends heavily upon the quality of our senior management, research analysts, consultants, sales and other key personnel. We face competition for the limited pool of these qualified professionals from, among others, technology companies, market research firms, consulting firms, financial services companies and electronic and print media companies, some of which have a greater ability to attract and compensate these professionals. Some of the personnel that we attempt to hire are subject to non-compete agreements that could impede our short-term recruitment efforts. Any failure to retain key personnel or hire and train additional qualified personnel as required to support the evolving needs of clients or growth in our business, could adversely affect the quality of our products and services, and therefore, our future business and operating results.
Maintenance of Existing Products and Services. We operate in a rapidly evolving market, and our success depends upon our ability to deliver high quality and timely research and analysis to our clients. Any failure to continue to provide credible and reliable information that is useful to our clients could have a material adverse effect on future business and operating results. Further, if our predictions prove to be wrong or are not substantiated by appropriate research, our reputation may suffer and demand for our products and services may decline. In addition, we must continue to improve our methods for delivering our products and services in a cost-effective manner. Failure to increase and improve our electronic delivery capabilities could adversely affect our future business and operating results.
Introduction of New Products and Services. The market for our products and services is characterized by rapidly changing needs for information and analysis. To maintain our competitive position, we must continue to enhance and improve our products and services, develop or acquire new products and services in a timely manner, and appropriately position and price new products and services relative to the marketplace and our costs of producing them. Any failure to achieve successful client acceptance of new products and services could have a material adverse effect on our business, results of operations or financial position.
International Operations. A substantial portion of our revenues is derived from sales outside of North America, 37% for Calendar 2004. 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 by our agent or us, we may not be able to replace the arrangement on beneficial terms or on a timely basis. Additionally, clients of the local distributor or sales agent may not want to continue to do business with us or our new agent.
Branding. We believe that our “Gartner” brand is critical to our efforts to attract and retain clients and that the importance of brand recognition will increase as competition increases. We may expand our marketing activities to promote and strengthen the Gartner brand and may need to increase our marketing budget, hire additional marketing and public relations personnel, expend additional sums to protect the brand and otherwise increase expenditures to create and maintain client brand loyalty. If we fail to effectively promote and maintain the Gartner brand, or incur excessive expenses in doing so, our future business and operating results could be materially and adversely impacted.
Indebtedness. We have a $200.0 million senior revolving credit facility as well as a $100 million revolving credit facility. The affirmative, negative and financial covenants of the credit facility could limit our future financial flexibility. As a result of these covenants, our borrowing availability at December 31, 2004 was $59.2 million, and would have been $96.5 million based on an amendment to the Credit Agreement. The associated debt service costs of these facilities could impair our future operating results. The 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.
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
22
not be offered or available on reasonable terms. If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations or financial position could be materially adversely affected.
Potential Fluctuations in Operating Results. Our quarterly and annual operating income may fluctuate in the future as a result of many factors, including the timing of the execution of research contracts, which typically occurs in the fourth calendar quarter, the extent of completion of consulting engagements, the timing of symposia and other events, which also occur to a greater extent in the fourth calendar quarter, the amount of new business generated, the mix of domestic and international business, changes in market demand for our products and services, the timing of the development, introduction and marketing of new products and services, and competition in the industry. An inability to generate sufficient earnings and cash flow, and achieve our forecasts, may impact our operating and other activities. The potential fluctuations in our operating income could cause period-to-period comparisons of operating results not to be meaningful and may provide an unreliable indication of future operating results.
Significant Stockholders. Silver Lake and its affiliates own approximately 42.2% of our Class A Common Stock and approximately 33.7% of our total common stock on a combined basis as of February 28, 2005. 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. Silver Lake 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 Silver Lake’s consent. Additionally, ValueAct Partners and its affiliates own approximately 13.0% of our Class A Common Stock, 22.7% of our Class B Common Stock and 14.9% of our total common stock on a combined basis as of February 28, 2005. While neither Silver Lake nor ValueAct holds a majority of our outstanding shares, they may be able, either individually or together, 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. Their 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 our Board 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 our Board of Directors to issue and determine the terms of preferred stock; |
• | Advance notice requirements for inclusion of stockholder proposals at stockholder meetings; |
• | A preferred shares rights agreement; 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. We have announced that we intend to eliminate our classified board structure and combine our two classes of common stock, subject to the approval of our stockholders, at our next annual meeting of stockholders to be held in the late spring or early summer of 2005. These actions could serve to make it easier for a change of control to occur.
Non-Cash Compensation Charges in Future Periods.On October 15, 2004, we announced that Eugene A. Hall received an inducement grant of 500,000 shares of restricted stock with a market value on the date of grant of $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) a change in control. The price targets are $20 foraccounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes Accounting Principles Board Opinion No. 20, “Accounting Changes,” which previously required that most voluntary changes in accounting principle be recognized by including in the first 300,000 shares, $25 forcurrent period’s net income 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 equalcumulative effect of changing to the closing pricenew accounting principle. SFAS No. 154 also makes a distinction between “retrospective application” of our stock on the date the target is met times the number of shares associated with the applicable target. For example, if our average 60 days stock price is $22 per sharean accounting principle and the stock closes at $22.50 per share,“restatement” of financial statements to reflect the first lapse shall resultcorrection of an error. The statement is effective for accounting changes and error corrections made in us recording a $6.75 million non-cash compensation charge (300,000 shares at $22.50/share).
RECENTLY ISSUED ACCOUNTING STANDARDS
fiscal years beginning after December 15, 2005.
In December 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 123R, Share-Based Payments (“SFAS 123R”)“Share-Based Payment” (SFAS No. 123R). The ruleThis statement replaces SFAS No. 123 and APB 25 and will require the recognition of expense for share-based payments, to include the value of stock options and other equity awards granted to employees. The revised rule isstatement was originally effective for periods beginning after June 15, 2005, butwith early adoption permitted. On April 21, 2005 the SEC issued a standard that amends the date of compliance with SFAS No. 123R (“the SEC amendment”). Under the SEC amendment, SFAS No. 123R must be adopted beginning with the first interim or annual reporting period of the registrant’s first fiscal year beginning on or after June 15, 2005. Gartner adopted SFAS No. 123R on January 1, 2006, under the modified prospective method of adoption.
Projecting the amount of future stock compensation expense is
permitted. We planinherently difficult as it is dependent on the type and amount of future awards granted, and the volatility and price of our common stock on the date of grant. The Company is currently reviewing its stock compensation strategy and anticipates that it will make changes to
adopt the
new ruletypes of equity awards that it will grant in the future. Based on
July 1, 2005. We are currently assessingour current estimates, we project that the
impact the revised ruleadoption of SFAS 123R will result in $12.0 million to $14.0 million of pre-tax expense in Calendar 2006, which will have
a materially negative impact on our
financial position, cash flows, and results of operations, but we believe it may have a material effect on our results of operations.2325
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As of December 31,
2004,2005, we have exposure to
market risk for changes in interest rates since we had
$190.0$246.7 million
drawnoutstanding on our unsecured
senior revolving credit
facilityagreement with JPMorgan Chase
Bank.Bank, with $196.7 million outstanding on the term loan and $50.0 million outstanding on the revolver. Under the
revolving credit
facility,agreement, the interest rate on
our borrowings is LIBOR plus an additional 100 to 150 basis points based on our debt-to-EBITDA ratio.
However,During the fourth quarter of Calendar 2005 we
believe thatentered into an
increase or decrease of 10% ininterest rate swap contract which effectively converts the
effectivefloating base interest rate on
available borrowings from our senior revolving credit facility would not havethe term loan to a
material effectfixed rate. Accordingly, the base interest rate risk on
our future results of operations. Eachthe term loan has been eliminated, but we are still exposed to interest rate risk on the revolver. However, a 25 basis point increase or decrease in interest rates would
only have an approximate
$0.5$0.3 million
pre-tax annual effect under the
revolving credit facilityrevolver when fully utilized.
Investment Risk
We are exposed to market risk as it relates to changes in the market value of our equity investments. We investAs of December 31, 2005, we had investments in equity securities of public and private companies directly and through SI II, of which we own 22% at December 31, 2004. SI II is engaged in making venture capital investments in early to mid-stage IT-based or Internet-enabled companiestotaling $0.3 million (see Note 5 –3 — Investments in the Notes to the Consolidated Financial Statements). As of December 31, 2004, we had investments in equity securities totaling $7.0 million. These investments are inherently risky as the businesses are typically in early development stages and may never develop. Further, certain of these investments are in publicly traded companies whose shares are subject to significant market price volatility. Adverse changes in market conditions and poor operating results of the underlying investments may result in us incurring additional losses or an inability to recover the original carrying value of our investments. If there were a 100% adverse change in the value of our equity portfolio as of December 31, 2004,2005, this would result in a non-cash impairment charge of $7.0approximately $0.3 million. We had no additional commitments to fund SI II as of December 31, 2004.
Foreign Currency Exchange Risk
We face two risks related to foreign currency exchange: translation risk and transaction risk. Amounts invested in our foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in the stockholders’ equity section of the Consolidated Balance Sheets. Our foreign subsidiaries generally collect revenues and pay expenses in currencies other than the United States dollar. Since the functional currencies of our foreign operations are generally denominated in the local currency of our subsidiaries, the foreign currency translation adjustments are reflected as a component of stockholders’ equity and do not impact operating results. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. dollars as the U.S. dollar weakens or strengthens against other currencies. Therefore, changes in exchange rates may negatively affect our consolidated revenues and expenses (as expressed in U.S. dollars) from foreign operations. Currency transaction gains or losses arising from transactions in currencies other than the functional currency are included within Other income (expense), net within the Consolidated Statements of Operations. Currency transaction gains (losses), net were $(2.8) million, $(3.1) million, during Calendar 2004,and $0.5 million during Calendar2005, 2004 and 2003, $(0.4) million during Calendar 2002, $(0.1) million during Transition 2002, and $(0.8) million during Fiscal 2002.
respectively.
From time to time we enter into foreign currency forward exchange contracts or other derivative financial instruments to hedgeoffset the effects of adverse fluctuations in foreign currency exchange rates. Foreign exchange forward contracts are reflected at fair value with unrealized and realized gains and losses recorded in earnings. At December 31, 2004, we had noThe following table presents information about our foreign currency forward contracts or other derivative financial instruments outstanding.outstanding as of December 31, 2005, expressed in U.S. dollar equivalents:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Forward | | | | | | | |
| Currency | | | | | | Contract | | | Exchange | | | Unrealized | | | Expiration | |
| Purchased | | Currency Sold | | | Amount | | | Rate | | | Gain (Loss) | | | Date | |
| YEN | | EUR | | | 3,595,000 | | | | .0072 | | | | (14,000 | ) | | January 24, 2006 |
| EUR | | SGD | | | 612,000 | | | | 1.9631 | | | | 4,000 | | | January 24, 2006 |
| AUD | | EUR | | | 3,340,000 | | | | .6212 | | | | (20,000 | ) | | January 24, 2006 |
| EUR | | SEK | | | 1,119,000 | | | | 9.3849 | | | | 4,000 | | | January 24, 2006 |
| DKK | | EUR | | | 2,189,000 | | | | .1340 | | | | (1,000 | ) | | January 24, 2006 |
| CHF | | EUR | | | 4,447,000 | | | | .6439 | | | | (11,000 | ) | | January 24, 2006 |
| GBP | | EUR | | | 3,101,000 | | | | 1.4560 | | | | (3,000 | ) | | January 24, 2006 |
| EUR | | USD | | | 2,582,000 | | | | 1.1803 | | | | 16,000 | | | January 24, 2006 |
| USD | | EUR | | | 17,815,000 | | | | .8398 | | | | 46,000 | | | January 26, 2006 |
| USD | | AUD | | | 3,448,000 | | | | 1.3762 | | | | (33,000 | ) | | January 26, 2006 |
| USD | | EUR | | | 10,570,000 | | | | .8386 | | | | 42,000 | | | January 26, 2006 |
| | | | | | | | | | | | | | | | |
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Our consolidated financial statements for Calendar2005, 2004, Calendarand 2003, Transition 2002 and for the Fiscal year ended September 30, 2002, together with the reports of KPMG LLP, independent registered public accounting firm, dated March 16, 2005,10, 2006, are included in this Annual Report on Form 10-K beginning on Page 40.32.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
None.
2426
ITEM 9A. CONTROLS AND PROCEDURES Management conducted an evaluation, as of December 31,
2004,2005, of the effectiveness of the design and operation of our disclosure controls and procedures, (as such term is defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) under the supervision and with the participation of our chief executive officer and chief financial officer. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective in alerting them in a timely manner to material Company information required to be disclosed by us in reports filed or submitted under the Act.
Management’s Annual Report on Internal Control Over Financial Reporting Gartner management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Gartner’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of December 31,
2004.2005. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment was reviewed with the Audit Committee of the Board of Directors.
Based on its assessment of internal
controlscontrol over financial reporting, management has concluded that, as of December 31,
2004,2005, Gartner’s internal control over financial reporting was
effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.effective.
Gartner’s independent registered public accountants KPMG LLP, have issued an
attestattestation report on management’s assessment of Gartner’s internal control of financial reporting. This report appears on page
42.34.
Changes in Internal Control Over Financial ReportingDuring our most recent fiscal quarter, except as set forth below, there has not occurred any change
There were no changes in our internal
controlcontrols over financial reporting
(as such term is defined in Rules 13a- 15(f) and 15d- 15(f) underduring the
Exchange Act)quarter ended December 31, 2005 that
hashave materially affected, or
isare reasonably likely to materially affect our internal
controlcontrols over financial reporting.
We have dedicated significant resources, including management time and effort, in connection with our compliance with Section 404. As part of our compliance effort, during the fourth quarter of 2004, we made certain improvements to our internal controls, including adding additional controls, such as management-level approvals, implementation of accounting and reporting disclosure checklists, as well as more comprehensive documentation of key control activities in the financial reporting process.
ITEM 9B. OTHER INFORMATION Not applicable.
2527
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The
following table sets forth certain information
regarding our directors and executive officers as of March 16, 2005. | | | | | | |
Name | | Age | | Position |
Eugene A. Hall (4) | | | 48 | | | Chief Executive Officer and Director |
| | | | | | |
Alister Christopher | | | 44 | | | Senior Vice President, Worldwide Events |
| | | | | | |
Scott Fertig | | | 46 | | | Senior Vice President & Chief Information Officer |
| | | | | | |
Robin B. Kranich | | | 34 | | | Senior Vice President, Research Operations and Business Development |
| | | | | | |
Christopher Lafond | | | 39 | | | Executive Vice President and Chief Financial Officer |
| | | | | | |
Michael McCarty | | | 56 | | | Senior Vice President, Global Sales |
| | | | | | |
Robert C. Patton | | | 44 | | | President, Gartner Consulting |
| | | | | | |
Lewis G. Schwartz | | | 54 | | | Senior Vice President, General Counsel &
Corporate Secretary |
| | | | | | |
Peter Sondergaard | | | 41 | | | Senior Vice President, Research Content |
| | | | | | |
Clive Taylor | | | 50 | | | Senior Vice President, International Operations |
| | | | | | |
Joseph T. Waters | | | 46 | | | Senior Vice President, Executive Programs |
| | | | | | |
Michael J. Bingle (2)(5) | | | 32 | | | Director |
| | | | | | |
Anne Sutherland Fuchs (3)(6) | | | 57 | | | Director |
| | | | | | |
William O. Grabe (3)(4) | | | 66 | | | Director |
| | | | | | |
Max D. Hopper (1)(4) | | | 70 | | | Director |
| | | | | | |
Glenn H. Hutchins (3)(5) | | | 49 | | | Director |
| | | | | | |
Stephen G. Pagliuca (1)(5) | | | 50 | | | Director |
| | | | | | |
James C. Smith (1)(4) | | | 64 | | | Chairman of the Board |
| | | | | | |
Jeffrey W. Ubben (2)(6) | | | 43 | | | Director |
| | | | | | |
Maynard G. Webb, Jr. (2)(6) | | | 49 | | | Director |
(1) | | Member of our Audit Committee |
|
(2) | | Member of our Compensation Committee |
|
(3) | | Member of our Corporate Governance Committee |
|
(4) | | Director whose term expires at our 2005 Annual Meeting |
|
(5) | | Director whose term expires at our 2006 Annual Meeting |
|
(6) | | Director whose term expires at our 2007 Annual Meeting |
Eugene A. Hallhas been our Chief Executive Officer and a director since August 2004. Priorrequired to joining us, Mr. Hall was a senior executive at Automatic Data Processing, serving most recently as President, Employers Services Major Accounts Division, a $2 billion human resources and payroll services business with 8,000 associates. Prior to joining ADP in 1998, Mr. Hall spent 16 years at McKinsey & Company, rising to the level of Director (senior partner). Mr. Hall holds a B.S. in Mechanical Engineering from the Massachusetts Institute of Technology (M.I.T.) and received an M.B.A. degree from Harvard Business School.
Alister Christopherhas been our Senior Vice President, Worldwide Events since June 2003. During his 12 years at Gartner, Mr. Christopher has served in a variety of roles, including Sales Executive, Director, Sales Operations in EMEA, VP of EMEA Inside Sales, GVP, North American Inside Sales and GVP EMEA Sales. Prior to joining us in August 1996, Mr. Christopher spent 10 years in the IT industry, with, among others, ICL Corporation. Mr. Christopher studied Business Management at Swansea College, United Kingdom.
26
Scott Fertighas been our Chief Information Officer since August 2002 and is responsible for all internal and client-facing IT applications worldwide. Prior to joining Gartner, Mr. Fertig was a principal at Narrowcast Partners, a strategic business and IT consultancy serving media companies. Prior to joining Narrowcast Partners in July 2001, Mr. Fertig served as Chief Information Officer and Chief Technology Officer of TechRepublic. From April 2000 to August 2000, he consulted for a number of companies, including Gartner. From December 1996 to April 2000, Mr. Fertig founded and served as CEO of Mirror World Technologies, a knowledge management software company. Prior to that, Mr. Fertig headed up server and internet development for Software AG’s Business Intelligence division. Mr. Fertig has a B.A. degree from Hampshire College, and a Master of Science and Master of Philosophy in Computer Science from Yale University.
Robin Kranichhas been our Senior Vice President Research Operations and Business Development since November 2004. During her more than 10 years at Gartner, Ms. Kranich has held various roles, including Senior Vice President and General Manager of Gartner EXP, Vice President and Chief of Staff to Gartner’s president and various sales and sales management roles. Prior to joining us in September 1994, Ms. Kranich was part of the Technology Advancement Group at Marriott International. Ms. Kranich holds a degree in business administration from American University in Washington, D.C.
Christopher Lafondhas been our Executive Vice President, Chief Financial Officer since October 2003. From January 2002 to October 2003, Mr. Lafond served as Chief Financial Officer for North America and Latin America. From July 2000 to December 2001, Mr. Lafond was Group Vice President and North American Controller. Mr. Lafond joined us in March 1995 and has held several finance positions, including Director of Finance, Vice President of Finance and Assistant Controller. Prior to joining us, Mr. Lafond was Senior Financial Planner at International Business Machines Corporation and an Analyst in fixed-income asset management at J.P. Morgan Investment Management. Mr. Lafond holds a bachelor’s degree from the University of Connecticut and a master’s degree from the Columbia University Graduate School of Business.
Mike McCartyhas been our Senior Vice President of Global Sales since April 2004. Prior to joining us, Mr. McCarty spent 13 years with IBM in a variety of sales and sales management positions. He was also the Executive Vice President of Sales and Customer Service for HBO & Company (now part of McKesson Information Solutions) and Liebert Corporation. He served as president and CEO for Carecentric Solutions, Multum Information Services and Just Medicine, Inc. Mr. McCarty holds a Bachelor of Science degree and an M.B.A degree in Finance from Bowling Green State University.
Bob Pattonhas been our President, Gartner Consulting since April 2004. Prior to joining us, Mr. Patton worked for 13 years at Cap Gemini Ernst & Young in numerous senior management roles, most recently as CEO, Government Solutions. Previously, he was managing director CGE&Y Americas sector. Mr. Patton holds a B.B.A. in Accounting with honors from the University of Georgia and is a Certified Public Accountant. He is also a graduate of the executive leadership program at the J.L. Kellogg School of Management at Northwestern University.
Lew Schwartzhas been our Senior Vice President, General Counsel and Corporate Secretary since January 2001. Prior to joining Gartner, Mr. Schwartz was a partner with the law firm of Shipman & Goodwin LLP, serving on the firm’s management committee. Before joining Shipman & Goodwin, Mr. Schwartz was a partner with Schatz & Schatz, Ribicoff & Kotkin, an associate in New York City at Skadden, Arps, Slate, Meagher & Flom, and an assistant district attorney in New York County (Manhattan). Mr. Schwartz holds a B.A. degree from Yale University and a J.D. degree from the Cornell Law School.
Peter Sondergaardhas been our Senior Vice President, Research Content since August 2004. During his 16 years at Gartner, Mr. Sondergaard has held various roles, including Head of Research for the Technology & Services Sector, Hardware & Systems Sector Vice President and General Manager for Gartner Research EMEA. Mr. Sondergaard started at Gartner as a program director for Gartner’s personal computing research area, specializing in the overall desktop computing issues of European users. Prior to joining Gartner in November, 1998, Mr. Sondergaard was research director at International Data Corporation in Europe. Mr. Sondergaard holds a Master’s degree in economics from the University of Copenhagen.
Clive Taylorhas been our Senior Vice President, International Operations since February 2004. Mr. Taylor joined Gartner in January 1995 as Senior Vice President of our Measurement business. Prior to joining Gartner, Mr. Taylor spent 16 years in packaged software design and business consulting at a senior level with companies in Europe and the United States, including Nynex and Fujitsu. Mr. Taylor holds a bachelor of science honors degree in production engineering from the University of Aston in Birmingham, England.
Terry Watershas run our worldwide Executive Programs business as Senior Vice President, Executive Programs since January 2005. Prior to rejoining Gartner in August 2002, Mr. Waters was the chief operating officer for ScreamingMedia, an Internet content syndication solutions provider based in New York City. From 1985 to 1999, Mr. Waters spent 14 years with Gartner in a variety of senior sales, marketing and product leadership roles, including head of Eastern Region sales for North America and head of worldwide marketing. Mr. Waters started his career with Xerox Corporation, where he spent four years in sales and product-marketing support. Mr. Waters holds a bachelor’s degree in history from the College of the Holy Cross.
27
Michael J. Binglehas been a director since October 2004. Mr. Bingle is a managing director of Silver Lake Partners, a private equity firm. He joined Silver Lake Partners in January 2000. From 1996 to 2000, Mr. Bingle was a principal with Apollo Management, L.P., a private investment partnership. From 1994 to 1996, Mr. Bingle was an investment banker at Goldman, Sachs & Co., an investment banking firm. Mr. Bingle holds a B.S.E. in Biomedical Engineering from Duke University. Mr. Bingle was nominated to the Boardbe furnished pursuant to an agreement with Silver Lake Partners. See Certain Relationships and Related Transactions.
Anne Sutherland Fuchshas been a director since July 1999. On January 1, 2003, Ms. Fuchs became a consultant to private equity firms. Prior to this Ms. Fuchs was employed by LVMH Moët Hennessy Louis Vuitton, a global luxury products conglomerate, where she served as Executive Vice President of LVMH from March to December 2002 and as the global chief executive at Phillips de Pury & Luxembourg, LVMH’s auction house subsidiary, from July 2001 to February 2002. From 1994 to 2001, Ms. Fuchs worked for Hearst Magazines, where she was most recently the Senior Vice President and Group Publishing Director. Prior to joining Hearst, Ms. Fuchs held executive and publisher positions with a number of companies. Ms. Fuchs is Chair of the Commission on Women’s Issues for New York City. Ms. Fuchs holds a bachelor’s degree from New York University and two honorary doctorate degrees.
William O. Grabehas been a director since April 1993. Mr. Grabe is a Managing Member of General Atlantic Partners, LLC, a private equity firm, where he has worked since April 1992. Prior to his affiliation with General Atlantic, Mr. Grabe retired from IBM Corporation as an IBM Vice President and Corporate Officer. Mr. Grabe is a director of AI Metrix, Inc., Bottomline Technologies, Compuware Corporation, Digital China Holdings Limited, LHS Telekom GMBH & Co. KG, Lifecare, Inc. and Patni Computer Systems Ltd.. Mr. Grabe is a trustee of the Cancer Research Institute and Outward Bound USA. Mr. Grabe is on the Board of Visitors of the UCLA Graduate School of Business. Mr. Grabe holds a bachelor’s degree from New York University and an M.B.A. degree from the University of California at Los Angeles.
Max D. Hopperhas been a director since January 1994. In 1995, he founded Max D. Hopper Associates, Inc., a consulting firm specializing in creating benefits from the strategic use of advanced information systems. He is the retired chairman of the SABRE Technology Group and served as Senior Vice President for American Airlines, both units of AMR Corporation. Mr. Hopper is a director of Perficient, Inc. and United Stationers, Inc. Mr. Hopper holds a bachelor’s degree from the University of Houston.
Glenn H. Hutchinshas been a director since April 2000. Mr. Hutchins is a managing director of Silver Lake Partners, a private equity firm he co-founded in January 1999. From 1994 to 1999, Mr. Hutchins was a Senior Managing Director of The Blackstone Group, where he focused on private equity investing. Mr. Hutchins is a director of Ameritrade Holding Corp. and Seagate Technology. Mr. Hutchins holds an A.B. degree from Harvard College, an M.B.A. degree from Harvard Business School and a J.D. degree from Harvard Law School. Mr. Hutchins was nominated to the Board pursuant to an agreement with Silver Lake Partners. See Certain Relationships and Related Transactions.
Stephen G. Pagliucahas been a director since July 1990. Mr. Pagliuca is a founding partner of Information Partners Capital Fund, L.P., a venture capital fund, and has served as its Managing Partner since 1989. He is also a Managing Director of Bain Capital, Inc., an investment firm with which Information Partners is associated. Prior to 1989, Mr. Pagliuca was a partner at Bain & Company, where he managed client relationships in the information services, software, credit services and health care industries. Mr. Pagliuca is a director of Ameritrade Holding Corp. and Instinet Group Incorporated. Mr. Pagliuca, a certified public accountant, holds a bachelor’s degree from Duke University and an M.B.A. degree from Harvard Business School.
James C. Smithhas been a director since October 2002. Until its sale in 2004, Mr. Smith was Chairman of the Board of First Health Group Corp., a national health benefits company. Prior to that, Mr. Smith was the Chief Executive Officer of First Health from January 1984 through January 2002 and President of First Health from January 1984 to January 2001. Mr. Smith is a Director of Reliant Pharmaceuticals and an Advisory Director to CIC Partners, a private equity investment group. Mr. Smith holds a bachelor’s degree from Northeastern University.
Jeffrey W. Ubbenhas been a director since June 2004. Mr. Ubben is a co-founder and Managing Partner of ValueAct Capital, an investment partnership. From 1995 to 2000, Mr. Ubben was a Managing Partner of Blum Capital. Prior to that, he was a portfolio manager for Fidelity Investments from 1987 to 1995. Mr. Ubben is a director of Martha Stewart Living Omnimedia, Inc., Per-Se Technologies, Inc. and Mentor Corporation. Mr. Ubben holds a bachelor’s degree from Duke University and an M.B.A. degree from the J. L. Kellogg Graduate School of Management at Northwestern University.
Maynard G. Webb, Jr.has been a director since October 2001. Since June 2002, Mr. Webb has been chief operating officer of eBay, Inc., an online marketplace. Prior to that he was president of eBay Technologies, a division of eBay, Inc. from August 1999 through June 2002. From July 1998 to August 1999, Mr. Webb was Senior Vice President and Chief Information Officer at Gateway, Inc. From February 1995 to July 1998, Mr. Webb was Vice President and Chief Information Officer at Bay Networks, Inc. Mr. Webb holds a bachelor’s degree from Florida Atlantic University.
28
Audit Committee and Audit Committee Financial Expert
Our Audit Committee currently consists of Messrs. Hopper, Pagliuca and Smith. Our Board has determined that Mr. Pagliuca qualifies as an Audit Committee Financial Expert as defined by the rules of the Securities and Exchange Commission.
Code of Ethics
We have adopted a Code of Conduct, a Code of Ethics and a CEO and CFO Code of Ethics, each of which is available atwww.gartner.com/investor.
Board Independence
Our Board Governance Guidelines are available at www.gartner.com/investor. Under these guidelines, the Governance Committee and the full Board annually assess the independence of the non-management directors of the Board by reviewing the financial and other relationships between the directors and us. This review is designed to determine whether these directors are independent, as defineditem will be set forth under the standardscaptions “Proposal One: Election of the New York Stock Exchange. The Governance CommitteeDirectors,” “Executive Officers” and the Board have determined that all of our non-management directors are independent under those standards. We have adopted a written committee charter for each of our Audit Committee, Compensation Committee, and Governance Nominating Committee. Each of these documents is available on our website at www.gartner.com/investor.
Stockholders and other interested parties may communicate with any of our directors, including our non-management directors, by writing to them c/o Corporate Secretary, Gartner, Inc., 56 Top Gallant Road, P.O. 10212, Stamford, CT 06904.
NYSE Annual CEO Certification
In June 2004, we filed our Annual CEO Certification with the New York Stock Exchange as required by Section 303A.12 of the New York Stock Exchange Listed Company Manual.
Section“Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) ofCompliance” in the Securities Exchange Act of 1934Proxy Statement to be filed no later than April 30, 2006. If the Proxy Statement is not filed with the Commission by April 30, 2006, such information will be included in an amendment to this Annual Report filed by April 30, 2006.
NYSE Certification
The NYSE requires
ourthat the chief executive officers
directors and persons who beneficially own more than 10% of
either classits listed companies certify annually to the NYSE that they are not aware of
our Common Stockviolations by their companies of NYSE corporate governance listing standards. The Company submitted a non-qualified certification by its Chief Executive Officer to
file reports of ownership and changes of ownershipthe NYSE last year in accordance with the
SEC and to furnish us with copies of the reports they file. Based solely on our review of the reports received by us, or written representations from certain reporting persons, we believe that all reports were timely filed, (a) except for one late Form 4 filed jointly by ValueAct Capital and its affiliates and Jeffrey Ubben on July 6, 2004 to show purchases of our Class A Common Stock made between December 31, 2004 and May 12, 2004; and (b) the grant of an option to Lew Schwartz made on December 13, 2002 which was not reported on a timely-filed Form 4, but was subsequently reported on a Form 5 filed on February 11, 2005, and one late Form 4 filed by Mr. Schwartz on May 14, 2004 to show a sale of stock made by him on May 11, 2004; and (c) an amended Form 3 was filed by Peter Sondergaard on November 15, 2004 to add certain holdings that were omitted from his original Form 3 filed on November 10, 2004.29
NYSE’s rules.
ITEM 11. EXECUTIVE COMPENSATION.SUMMARY COMPENSATION TABLE
The
following table provides information
about compensation paid by us to (i) those individuals serving as our Chief Executive Officer during 2004, (ii) the other four most highly compensated executive officers who served as executive officers as of December 31, 2004, and (iii) two additional individuals who would have been among our four most highly compensated Executive Officers had they continued to serve as executive officers on December 31, 2004 (collectively, the “Named Executive Officers”).| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Long-Term | | | | |
| | | | | | | | | | | | | | | Long-Term | | | Compensation | | | | |
| | | | | | | | | | | | | | | Compensation | | | Awards | | | | |
| | | | | | | Annual | | | Awards | | | Securities | | | | |
| | | | | | | Compensation(1) | | | Restricted Stock | | | Underlying | | | All Other | |
| Name and Principal Position | | Year | | | Salary ($) | | | Bonus ($)(2) | | | Award ($)(3) | | | Options(#) | | | Compensation($)(4) | |
Eugene A. Hall(5) | | | 2004 | | | $ | 263,749 | | | $ | 270,833 | | | $ | 6,025,000 | | | | 800,000 | | | $ | 28,766 | |
| Chief Executive Officer | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Michael D. Fleisher(6) | | | 2004 | | | $ | 442,000 | | | | — | | | | — | | | | — | | | $ | 3,542,835 | |
| Chief Executive Officer | | | 2003 | | | | 650,000 | | | | 442,000 | | | | — | | | | 250,000 | | | | 16,544 | |
| | | | 2002 | | | | 500,000 | | | | 450,000 | | | | — | | | | 250,000 | | | | 16,451 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Allister Chrisopher(7) | | | 2004 | | | $ | 342,850 | | | $ | 170,844 | | | | — | | | | 12,000 | | | $ | 34,388 | |
Senior Vice President,
Worldwide Events | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Michael McCarty(8) | | | 2004 | | | $ | 235,208 | | | $ | 196,706 | | | | — | | | | 125,000 | | | $ | 33,020 | |
Senior Vice President,
Global Sales | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Robert C. Patton(9) | | | 2004 | | | $ | 337,500 | | | $ | 785,000 | | | $ | 394,680 | | | | 210,000 | | | $ | 12,790 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Long-Term | | | | |
| | | | | | | | | | | | | | | Long-Term | | | Compensation | | | | |
| | | | | | | | | | | | | | | Compensation | | | Awards | | | | |
| | | | | | | Annual | | | Awards | | | Securities | | | | |
| | | | | | | Compensation(1) | | | Restricted Stock | | | Underlying | | | All Other | |
| Name and Principal Position | | Year | | | Salary ($) | | | Bonus ($)(2) | | | Award ($)(3) | | | Options(#) | | | Compensation($)(4) | |
| President, Gartner Consulting | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Clive Taylor(10) | | | 2004 | | | $ | 340,040 | | | $ | 105,572 | | | | — | | | | — | | | $ | 40,622 | |
Senior Vice President,
International Operations | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Maureen O’Connell(11) | | | 2004 | | | $ | 464,054 | | | $ | 575,000 | | | | — | | | | 55,000 | | | $ | 3,194,805 | |
| President and | | | 2003 | | | | 518,740 | | | | 416,000 | | | | — | | | | 250,000 | | | | 12,758 | |
| Chief Operating Officer | | | 2002 | | | | 136,538 | | | | 400,000 | | | | — | | | | 650,000 | | | | 1,550 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Willard Pardue, Jr.(12)
President, Gartner Intelligence | | | 2004 | | | $ | 379,166 | | | $ | 264,654 | | | $ | 1,951,250 | | | | 660,000 | | | $ | 1,625,450 | |
(1) | | The amounts shown exclude certain perquisites and other personal benefits, such as car allowances. These amounts, in the aggregate, did not equal or exceed the lesser of $50,000 or 10 percent of the total annual salary and bonus for each executive officer. |
|
(2) | | The amounts shown include bonuses earned in the year noted although such amounts are payable in the subsequent year. The amounts shown exclude bonuses paid in the year noted but earned in prior years. |
|
(3) | | The following restricted stock grants were made to Named Executive Officers during 2004: (i) Mr. Hall – 500,000 shares, the terms under which the restrictions on these shares lapse are described in the description of Mr. Hall’s employment agreement below. The market value of these shares at December 31, 2004 was $6,225,000; (ii) Mr. Patton – 33,000 shares. The market value of these shares at December 31, 2004 was $411,180; and (iii) Mr. Pardue – 175,000 shares. Mr. Pardue forfeited his entire restricted stock reward upon his resignation in October, 2004. |
30
(4) | | For 2004, the amounts shown represents: (i) premiums paid for life insurance: Mr. Hall - $11,850; Mr. Fleisher - $4,370; Mr. McCarty - $7,170; Mr. Patton – $2,090; Ms. O’Connell - $1,760; Mr. Pardue - $4,830; (ii) premiums paid for long term disability insurance: Mr. Fleisher - - $3,654; Mr. Patton – $4,421; Ms. O’Connell - $4,288; Mr. Pardue - $1,621; (iii) matching and profit sharing contributions under our defined benefit plans: Mr. McCarty - $7,250; Mr. Patton – $6,279; Mr. Christopher - $34,338; Mr. Taylor - $40,622; Ms. O’Connell - $5,200; Mr. Pardue - $5,200; (iv) relocation expenses: Mr. Hall - $16,916; Mr. McCarty - $18,600; Mr. Pardue - $69,570; (v) severance payments: Mr. Fleisher - $3,534,811; Ms. O’Connell - $3,173,557; Mr. Pardue - $1,544,229; and (vi) legal fees: Ms. O’Connell – $10,000. |
|
(5) | | Mr. Hall was elected Chief Executive Officer in August 2004. |
|
(6) | | Mr. Fleisher resigned as Chief Executive Officer in August 2004. Mr. Fleisher’s last day of employment was October 30, 2004. |
|
(7) | | The position of Senior Vice President, Worldwide Events was elevated to the executive officer level in November 2004. Mr. Christopher’s bonus includes a $15,365 retention bonus. |
|
(8) | | Represents compensation received from April 2004, the start date of Mr. McCarty’s employment. Mr. McCarty’s bonus includes a $40,625 sign on bonus and a $81,250 retention bonus. |
|
(9) | | Represents compensation received from April 2004, the start date of Mr. Patton’s employment. Mr. Patton’s bonus includes a $200,000 sign on bonus and a $225,000 retention bonus. |
|
(10) | | Mr. Taylor was appointed Senior Vice President, International Operations in February 2004. |
|
(11) | | Ms. O’Connell resigned as of October 21, 2004. Ms. O’Connell’s bonus consisted of a $575,000 retention bonus. |
|
(12) | | Represents compensation received from January 2004, the start date of Mr. Pardue’s employment. Mr. Pardue resigned as of November 5, 2004. Mr. Pardue’s bonus includes a $14,654 sign on bonus and a $250,000 retention bonus. |
OPTIONS GRANTED IN 2004 TO THE NAMED EXECUTIVE OFFICERS
The following table provides information regarding stock options to purchase our Class A Common Stock granted to the Named Executive Officers during 2004:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Individual Grant(1) | | | | | | | Potential Realizable | |
| | | Number of | | | % of Total Options | | | | | | | | | | Value at Assumed Annual | |
| | | Securities | | | Granted to | | Exercise | | | | | | | Stock Price Rates of | |
| | | Underlying | | | Employees | | Price | | | Expiration | | | Appreciation for Option Term(2) | |
| Name | | Options | | | in Fiscal Year | | Per Share | | | Date | | | 5% | | | 10% | |
| Eugene A. Hall | | | 800,000 | | | | 15.68 | % | | $ | 12.11 | | | | 8/16/14 | | | $ | 6,092,731 | | | $ | 15,440,177 | |
| Alister Christopher | | | 12,000 | | | | 0.24 | | | | 12.45 | | | | 6/1/14 | | | | 93,957 | | | | 238,105 | |
| Michael McCarty | | | 75,000 | | | | 1.47 | | | | 11.96 | | | | 5/17/14 | | | | 564,118 | | | | 1,429,587 | |
| | | | 50,000 | | | | 0.98 | | | | 12.49 | | | | 6/07/04 | | | | 392,745 | | | | 995,292 | |
| Robert C. Patton | | | 150,000 | | | | 2.94 | | | | 11.96 | | | | 5/17/14 | | | | 1,128,237 | | | | 2,859,174 | |
| | | | 60,000 | | | | 1.18 | | | | 12.49 | | | | 6/07/04 | | | | 471,294 | | | | 1,194,351 | |
| Maureen O’Connell | | | 55,000 | | | | 1.08 | | | | 12.49 | | | | 6/07/14 | | | | 432,019 | | | | 1,094,821 | |
| Willard Pardue, Jr. | | | 600,000 | | | | 11.76 | | | | 11.15 | | | | 2/04/14 | | | | 4,207,305 | | | | 10,662,137 | |
| | | | 60,000 | | | | 1.18 | | | | 12.49 | | | | 6/07/04 | | | | 471,294 | | | | 1,194,351 | |
(1) | | These options were granted under our 2003 Long Term Incentive Plan and are subject to its terms. These options vest in equal annual installments on the anniversary of the date of grant. Mr. Hall’s option vests over a four-year period, and all of the other options vest over a three-year period. |
|
(2) | | Shown are the hypothetical gains or option spreads that would exist for the respective options. These gains are based on assumed rates of annual compounded stock price appreciation on our Class A Common Stock of 5% and 10% from the date the option was granted over the option term of ten years. The 5% and 10% assumed rates of appreciation are mandated by SEC rules and do not represent our projection of future increases in the price of our Class A Common Stock. |
OPTIONS EXERCISED IN 2004 BY THE NAMED EXECUTIVE OFFICERS AND 2004 YEAR-END OPTION VALUES
The following table provides information regarding options exercised by each Named Executive Officer during fiscal 2004, the number of unexercised options at fiscal year-end and the value of unexercised “in-the-money” options at fiscal year-end:
31
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of | | | | | | | Number of Securities | | | Value of Unexercised | |
| | | Shares | | | | | | | Underlying Unexercised | | | In-the-Money Options | |
| | | Acquired | | | Value | | | Options at Year-End | | | at Year-End(1) | |
| Name | | on Exercise | | | Realized | | | Exercisable | | | Unexercisable | | | Exercisable | | | Unexercisable | |
| Eugene A. Hall | | | — | | | | — | | | | — | | | | 800,000 | | | $ | — | | | $ | 280,000 | |
| Michael D. Fleisher | | | 1,165,417 | | | $ | 3,456,648 | | | | 412,417 | | | | 229,166 | | | | 64,894 | | | | 768,851 | |
| Alister Christopher | | | — | | | | — | | | | 97,662 | | | | 31,665 | | | | 219,926 | | | | 73,223 | |
| Michael McCarty | | | — | | | | — | | | | — | | | | 125,000 | | | | — | | | | 37,500 | |
| Robert C. Patton | | | — | | | | — | | | | — | | | | 210,000 | | | | — | | | | 75,000 | |
| Clive Taylor | | | — | | | | — | | | | 136,435 | | | | 7,665 | | | | 351,163 | | | | 15,170 | |
| Maureen O’Connell | | | 352,084 | | | | 1,703,977 | | | | 72,917 | | | | 449,166 | | | | 0 | | | | 1,733,871 | |
| Willard Pardue, Jr. | | | — | | | | — | | | | 140,000 | | | | — | | | | 157,200 | | | | — | |
(1) | | The values for “in-the-money” options represent the difference between the exercise price of the options and the closing price of our Class A Common Stock on December 31, 2004, which was $12.46 per share. |
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee currently consists of Messrs. Bingle, Smith and Webb. No member of our Compensation Committee is a current or former officer or employee of Gartner or any of our subsidiaries. None of our executive officers has served on the board of directors or on the compensation committee of any other entity that had an executive officer serving on our Board or our Compensation Committee.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Mr. Hall.Mr. Hall entered into an Employment Agreement effective August 4, 2004 (the “Hall Agreement”). Under the agreement, Mr. Hall serves as our Chief Executive Officer through July 31, 2007, and thereafter for subsequent one-year periods unless either party provides ninety days written notice not to renew. During the term of the agreement, we agree to include Mr. Hall on our slate of nomineesrequired to be electedfurnished pursuant to our Board.
Mr. Hall’s initial base salarythis item is $650,000, subject to annual adjustmentsincorporated by our Board or Compensation Committee. Mr. Hall’s annual target bonus is equal to 100% of his base salary and is based onreference from the achievement of specified company and individual objectives. Mr. Hall’s bonus may be higher or lower thaninformation set forth under the target bonus amount based on over- or under- achievement of the objectives, but in no event shall the bonus exceed 200% of his base salary. Mr. Hall’s bonus for the first twelve months of his employment is guaranteed at 100% of his target bonus. Additionally, we agreed to provide Mr. Hall with an automobile and a driver during his employment term.
Pursuant to the agreement, Mr. Hall received a grant on August 16, 2004 of options to purchase 800,000 of our Class A Common Stock at a price of $12.11 per share. These stock options vest in four equal annual installments on the anniversary of the date of grant. Mr. Hall also received a grant of 500,000 shares of restricted stock. The restrictions on these shares will lapse upon the earlier of (a) our 60-day average stock price meeting certain targets, or (b) a 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.
Mr. Hall’s employment is at will and may be terminated by him or us upon sixty days’ notice. If we terminate Mr. Hall’s employment involuntarily without Business Reasons (as definedcaption “Executive Compensation” in the agreement) or a Constructive Termination (as defined in the agreement) occurs,Proxy Statement or if we dothe Proxy Statement is not renewfiled with the agreement upon its expiration and Mr. Hall terminates his employment within ninety days following the expiration of the agreement, Mr. HallCommission by April 30, 2006, such information will be entitledincluded in an amendment to receive: (a) his base salary for twenty-four months, payable in accordance with our regular payroll schedule; (b) 200% of his target bonus for the year in which the termination occurs, and any earned but unpaid bonus from the prior year; (c) continued vesting for twenty-four months other than any award that vests pursuant to performance-based criteria.
If a Change in Control (as defined in the agreement) occurs, Mr. Hall will be entitled to receive: (a) three times his base salary then in effect; (b) three times his minimum target bonus for the fiscal year in which the Change in Control occurs (plus any unpaid bonus from the prior fiscal year); (c) acceleration in full of his option grant and the lapsing of all restrictions on his restricted stock grant; (d) at our cost, group health benefits pursuant to our standard programs for himself, his spouse and any children for three years after the Change in Control; and (e) any Gross-Up Payments (as defined in the agreement) for Mr. Hall’s excise tax liabilities.
Alister Christopher.Mr. Christopher entered into a service agreement on August 18, 2003 with our UK subsidiary, Gartner Group UK Limited. Under the agreement, Mr. Christopher serves as our Senior Vice President, Worldwide Events until the earlier of his 60th birthday or the date that the agreement is terminatedthis Annual Report filed by either party, provided, however, that Gartner must give Mr. Christopher 12 months notice, or pay him out in lieu of notice.
32
April 30, 2006.
Mr. Chrisopher’s base salary is £180,000 per annum and his discretionary bonus is £85,000, subject to Gartner meeting its performance targets and his meeting his defined personal objectives. We agreed to contribute an amount equal to 6% of Mr. Christopher’s base salary to our UK defined contribution pension scheme. This amount increases to 8% after two years of service. Additionally, we agreed to provide Mr. Christopher with either a car with a lease value of £850 per month , or a car allowance of £1,000 per month.
Clive Taylor.Mr. Taylor entered into a service agreement on December 21, 2004 with our UK subsidiary, Gartner Group UK Limited. Under the agreement, Mr. Taylor serves as our Senior Vice President, International Operations until the earlier of his 60th birthday or the date that the agreement is terminated by either party, provided, however, that Gartner must give Mr. Taylor 12 months notice, or pay him out in lieu of notice.
Mr. Taylor’s base salary is £188,000 per annum and his discretionary bonus is £94,000 subject to Gartner meeting its performance targets and his meeting his defined personal objectives. We agreed to contribute an amount equal to 6% of Mr. Taylor’s base salary to our UK defined contribution pension scheme. The amount rises to 8% after two years of service. Additionally, we agreed to provide Mr. Taylor with a car or car allowance.
Executive Officers.Other than Messrs. Christopher, Sondergaard and Taylor, who are employed by our UK subsidiary, and our CEO, we do not have long-term employment agreements with any of our executive officers. Each of our executive officers is covered by Gartner’s Executive Benefits Program which provides that upon either a change of control, involuntary termination without business reason, or a constructive termination, each of our executive officers will be entitled to receive: (a) one times base salary then in effect; (b) acceleration in full of vesting of all outstanding stock options that would have vested within twelve months of the termination date; and (c) at our cost, group health benefits pursuant to our standard programs for the executive, the executive’s spouse and any children for one year after the termination date. Additionally, the program provides for additional life and long term disability insurance, as well as a $5,000 financial planning allowance and an annual physical examination.
COMPENSATION OF DIRECTORS
Directors who are also employees, and directors who we appoint at the request of another entity because of the relationship between that entity and us, receive no fees for their services as directors. All other directors receive the following compensation for their services:
| | |
Annual Fee: | | $50,000 per director and an additional $60,000 for our non-executive Chairman, payable in four equal quarterly installments, on the first day of each quarter. Up to 50% of the fee may be paid in cash and the balance is paid in our Class A Common Stock equivalents. All payments in stock equivalents are credited to an account based on the fair market value of the stock on the last day of the preceding quarter. Payment of the stock equivalents, which may be in cash or shares of Class A Common Stock, is deferred until the director ceases to be a director. |
| | |
Annual Committee
Chair Retainer: | | $5,000 for the chair of each of our Compensation and Governance Committees. $10,000 for the chair of our Audit Committee. Amounts are payable in the same manner as the Annual Fee. |
| | |
Attendance Fee for
Board Meetings: | | None; however, we do reimburse directors for their expenses to attend meetings. |
| | |
Committee Member
Retainer: | | $5,000 for each of our Compensation and Governance Committee members. $10,000 for each Audit Committee member. Committee chairs receive both a committee chair and a committee member retainer. |
| | |
Initial Option Grant: | | 15,000 shares of our Class A Common Stock upon becoming a director. |
| | |
Annual Option Grant: | | 7,000 shares of our Class A Common Stock on March 1 of each year if the director has served for at least six months. |
| | |
Option Vesting and Term: | | Option grants vest in 3 equal installments on the first three anniversaries of grant and remain exercisable until 10 years from the date of grant (5 years for those issued prior to the adoption of our 2003 Long-Term Incentive Plan). If the director ceases to be a director, the option expires in 90 days, unless the director is permanently disabled or dies while serving as a director, in which cases the option may be exercised for 6 months or one year, respectively, but in no event beyond its regular term. |
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.Based on our review
The information required to be furnished pursuant to this item will be set forth under the caption “Security Ownership of information on fileCertain Beneficial Owners and Management” in the Proxy Statement or if the Proxy Statement is not filed with the Securities and Exchange Commission and our stock records, the following table provides certainby April 30, 2006, such information about beneficial ownership of our Class A and Class B Common Stock as of February 28, 2005 by: (i) each person (or group of affiliated persons) which is knownwill be included in an amendment to this Annual Report filed by us to own beneficially more than five percent of our Class A or Class B Common Stock, (ii) each of our directors, (iii) each Named Executive Officer, and (iv) all directors and current executive officers as a group. Unless otherwise indicated, the address for those listed below is c/o Gartner, Inc., 56 Top Gallant Road, Stamford, CT 06904. Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.April 30, 2006.
| | | | | | | | | | | | | | | | | |
| Number of | | Percent of | | | Number of | | | Percent of | | | | |
| Name of Beneficial Owner | | Class A Shares | | | Class A | | | Class B Shares | | | Class B | |
Michael J. Bingle(1) | | | 37,740,128 | | | | 42.17 | % | | | — | | | | — | |
Anne Sutherland Fuchs(2) | | | 33,001 | | | | * | | | | — | | | | — | |
William O. Grabe(2) | | | 102,001 | | | | * | | | | — | | | | — | |
Max D. Hopper(2) | | | 49,001 | | | | * | | | | — | | | | — | |
Glenn H. Hutchins(3) | | | 37,740,128 | | | | 42.17 | % | | | — | | | | — | |
Stephen G. Pagliuca(4) | | | 67,001 | | | | * | | | | — | | | | — | |
James C. Smith(5) | | | 112,334 | | | | * | | | | — | | | | — | |
Maynard G. Webb, Jr.(6) | | | 42,001 | | | | * | | | | — | | | | — | |
Jeffrey W. Ubben(7) | | | 11,592,000 | | | | 12.95 | % | | | 5,122,546 | | | | 22.65 | % |
Eugene A. Hall(8) | | | 500,000 | | | | * | | | | — | | | | — | |
Christopher Alister(9) | | | 102,828 | | | | * | | | | — | | | | — | |
| Michael McCarty | | | 0 | | | | * | | | | — | | | | — | |
Robert C. Patton(10) | | | 33,000 | | | | * | | | | — | | | | — | |
Clive Taylor(11) | | | 140,601 | | | | * | | | | — | | | | — | |
All current directors, director nominees and current executive officers as a group (20 persons)(12) | | | 51,089,575 | | | | 56.49 | % | | | 5,126,635 | | | | 22.65 | % |
Wellington Management Company, LLP. (13) | | | 6,646,660 | | | | 7.43 | % | | | — | | | | — | |
| 75 State Street, Boston, MA 02109 | | | | | | | | | | | | | | | | |
Entities Affiliated with Silver Lake Partners, L.P. (14) | | | 37,740,128 | | | | 42.17 | % | | | — | | | | — | |
| 2725 Sand Hill Road, Suite 150, Menlo Park, CA 94025 | | | | | | | | | | | | | | | | |
VA Partners, L.L.C. (15) | | | 11,592,000 | | | | 12.95 | % | | | 5,122,546 | | | | 22.65 | % |
| One Maritime Plaza, Suite 1400, San Francisco, CA 94111 | | | | | | | | | | | | | | | | |
* Less than 1%
(1) | | Silver Lake Partners, L.P., Silver Lake Investors, L.P. and Silver Lake Technology Investors, L.L.C. own 37,740,128 shares of Class A Common Stock. Silver Lake Technology Associates, L.L.C. is the General Partner of each of Silver Lake Partners, L.P. and Silver Lake Investors, L.P. Silver Lake Technology Management, L.L.C. is the manager of Silver Lake Technology Investors, L.L.C. Mr. Bingle is a Managing Director of each of Silver Lake Technology Associates, L.L.C. and of Silver Lake Technology Management, L.L.C. As such, Mr. Bingle could be deemed to have shared voting or dispositive power over these shares. Mr. Bingle, however, disclaims beneficial ownership in these shares, except to the extent of his pecuniary interest therein. |
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(2) | | Includes 28,001 shares of Class A Common Stock issuable upon the exercise of stock options that are exercisable within 60 days of February 28, 2005. |
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(3) | | Silver Lake Partners, L.P., Silver Lake Investors, L.P. and Silver Lake Technology Investors, L.L.C. own 37,740,128 shares of Class A Common Stock. Silver Lake Technology Associates, L.L.C. is the General Partner of each of Silver Lake Partners, L.P. and Silver Lake Investors, L.P. Silver Lake Technology Management, L.L.C. is the manager of Silver Lake Technology Investors, L.L.C. Mr. Hutchins is a Managing Member of each of Silver Lake Technology Associates, L.L.C. and of Silver Lake Technology Management, L.L.C. As such, Mr. Hutchins could be deemed to have shared voting or dispositive power over these shares. Mr. Hutchins, however, disclaims beneficial ownership in these shares, except to the extent of his pecuniary interest therein. |
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(4) | | Includes 28,001 shares of Class A Common Stock issuable upon the exercise of stock options that are exercisable within 60 days of February 28, 2005, and includes 10,000 shares of Class A Common Stock that are owned by Mr. Pagliuca indirectly. |
|
(5) | | Includes 12,334 shares of Class A Common Stock issuable upon the exercise of stock options that are exercisable within 60 days of February 28, 2005. |
|
(6) | | Includes 22,001 shares of Class A Common Stock issuable upon the exercise of stock options that are exercisable within 60 days of February 28, 2005. |
|
(7) | | ValueAct Capital Master Fund, L.P. and ValueAct Capital Partners Co-Investment, L.P. own 11,592,000 shares of our Class A Common Stock and 5,122,546 shares of our Class B Common Stock. VA Partners, L.L.C. is the General Partner of each of these entities. Mr. Ubben is a Managing Member of VA Partners, L.L.C. As such, Mr. Ubben could be deemed to have shared voting or dispositive power over these shares. Mr. Ubben, however, disclaims beneficial ownership in these shares, except to the extent of his pecuniary interest therein. |
|
(8) | | Includes 500,000 shares of restricted stock. |
|
(9) | | Includes 102,828 shares of Class A Common Stock issuable upon the exercise of stock options that are exercisable within 60 days of February 28, 2005. |
|
(10) | | Includes 33,000 shares of restricted stock. |
|
(11) | | Includes 134,001 shares of Class A Common Stock issuable upon the exercise of stock options that are exercisable within 60 days of February 28, 2005. |
|
(12) | | Includes 940,042 shares of Class A Common Stock issuable upon the exercise of stock options that are exercisable within 60 days of February 28, 2005 and 533,084 shares of restricted stock. |
|
(13) | | The shares shown as beneficially owned by Wellington Management Company, LLP were reported in its Schedule 13G filed with the SEC on February 14, 2005. |
|
(14) | | Represents shares owned by a group of investment funds affiliated with Silver Lake Partners, L.P., the General Partner of which is Silver Lake Technology Associates, including (i) 34,755,105 shares owned by Silver Lake Partners, L.P.; (ii) 998,701 shares owned by Silver Lake Investors, L.P.; and (iii) 1,986,322 shares owned by Silver Lake Technology Investors, L.L.C. |
|
(15) | | Represents shares owned by a group of investments whose General Partner is VA Partners, L.L.C., including: (i) 8,549,089 shares of Class A Common Stock and 5,083,973 shares of Class B Common Stock owned by ValueAct Capital Master Fund, L.P.; and (ii) 120,511 shares of Class A Common Stock and 38,573 shares of Class B Common Stock owned by ValueAct Capital Partners Co-Investors, L.P. |
35
The following table provides information as of December 31, 20042005, regarding the number of shares of our Class A Common Stockcommon stock that may be issued under our equity compensation plans.plans:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Column C | | | Column C | |
| | | Number of Securities | | | Number of Securities | |
| | | Column A | | Column B | | Remaining Available | | | Column A | | Column B | | Remaining Available | |
| | | Number of Securities | | Weighted-Average | | for Future Issuance | | | Number of Securities | | Weighted-Average | | for Future Issuance | |
| | | to be Issued Upon | | Exercise Price of | | Under Equity | | | to be Issued Upon | | Exercise Price of | | Under Equity | |
| | | Exercise of | | Outstanding | | Compensation Plans | | | Exercise of | | Outstanding | | Compensation Plans | |
| | | Outstanding Options, | | Options, Warrants | | (Excluding Securities | | | Outstanding Options, | | Options, Warrants | | (Excluding Securities | |
| Plan Category | | Warrants and Rights | | and Rights | | in Column A) | | | Warrants and Rights | | and Rights | | in Column A) | |
| | | |
| Equity Compensation Plans Approved by Stockholders | | | | |
| Equity Compensation Plans Approved by Stockholders: | | |
| Stock option plans | | | 14,469,349 | (1) | | $ | 14.81 | | | 3,436,249 | (2) | | | 11,024,178 | (1) | | $ | 11.54 | | | 10,929,767 | (2) |
| 2002 Employee Stock Purchase Plan | | — | | N/A | | 2,733,414 | | | — | | — | | 2,193,331 | |
| Equity Compensation Plans Not Approved by Stockholders | | | 10,670,284 | (3) | | 10.36 | | — | | |
| Equity Compensation Plans Not Approved by | | |
| Stockholders | | | | 6,589,413 | (3) | | 9.58 | | — | |
| | | | | | | | | | |
| Total | | 25,139,633 | | $ | 12.92 | | 6,169,663 | | | 17,613,591 | | $ | 10.81 | | 13,123,098 | |
| | | | | | | | | | |
| | |
| (1) | | Consists of the 1991 Stock Option Plan, the 1993 Directors Stock Option Plan, the 1994 Long-Term Option Plan, the 1996 Long-Term Option Plan, the 1998 Long Term Stock Option Plan and the 2003 Long Term Incentive Plan. |
| |
| (2) | | Consists of the 2003 Long-Term Incentive Plan.
|
| |
| (3) | | Consists of the 1999 Stock Option Plan. In November 1999, we adopted the 1999 Stock Option Plan. Under the terms of the plan, our Board of Directors could grant non-qualified and incentive stock options and other awards to eligible employees and consultants. Gartner’s directors and most highly compensated executive officers were not eligible for awards under the plan. Substantially all of the options currently granted under the plan vest and become fully exercisable each year for three years in equal installments following the date of grant, based on continued employment, and have a term of ten years from the date of grant assuming continued employment. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.RELATIONSHIP WITH SILVER LAKE PARTNERS, L.P.
On April 17, 2000, we issued
The information required to be furnished pursuant to this item will be set forth under the caption “Certain Relationships and
sold an aggregate of $300 million principal amount of our unsecured 6% Convertible Junior Subordinated Promissory Notes due April 17, 2005 to Silver Lake Partners, L.P. (“Silver Lake”) and certain of Silver Lake’s affiliates and to Integral Capital Partners IV, L.P. and one of its affiliates. In October 2003, these notes were converted into 49,441,122 shares of our Class A Common Stock. The determination ofTransactions” in the
number of shares issued uponProxy Statement or if the
conversion was based upon a $7.45 conversion price and a convertible note of $368.3 million, consisting of the original face amount of $300 million plus accrued interest of $68.3 million. In connectionProxy Statement is not filed with the
issuance of the notes, we agreed, among other things, that Silver Lake would recommend two nominees for director and we would include two Silver Lake nominees on our slate of nomineesCommission by April 30, 2006, such information will be included in an amendment to
be elected to our Board. This obligation exists while Silver Lake owns Class A Common Stock representing at least 20 percent of the amount of Class A Common Stock into which the notes were converted.Silver Lake purchased $112,200 in research and consulting services from us during 2004 and has contracted to purchase subscription research services from us in 2005 in the amount of $113,700.
RELATIONSHIPS WITH OTHER THIRD PARTIES
Several of our other directors are employedthis Annual Report filed by companies that purchase our research and consulting services in the ordinary course of their business. The following table shows the amount of research and consulting services purchased by each company during 2004 and the amount for which each company has signed commitments to date for 2005:
| | | | | | | | | | | | | |
| |
| | Name of Company | | | 2004 | | | | 2005 | | |
| | Bain Capital, Inc. | | | $ | 107,635 | | | | $ | 91,550 | | |
| | Behrman Capital | | | $ | 5,860 | | | | $ | 0 | | |
| | Ebay, Inc. | | | $ | 164,000 | | | | $ | 37,250 | | |
| | General Atlantic Partners, L.P. | | | $ | 407,500 | | | | $ | 205,000 | | |
| | Value Act Capital | | | $ | 113,265 | | | | $ | 16,734 | | |
| |
3628
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.KPMG LLP has audited our financial statements since September 1996. During 2004, KPMG performed recurring audit services, including the examination of our annual financial statements, limited reviews of quarterly financial
The information
and certain statutory audits. KPMG also performed services for us in other business areas. The following table sets forth the fees billed for these professional services during 2004 and 2003.| | | | | | | | | | | | | |
| |
| | | | | 2004 | | | | 2003 | | |
| | Audit Fees (1): | | | $ | 1,823,584 | | | | $ | 806,145 | | |
| | Audit-Related Fees (2): | | | | 45,045 | | | | | 48,000 | | |
| | Tax Fees (3): | | | | 700,044 | | | | | 533,828 | | |
| | All Other Fees: | | | | — | | | | | — | | |
| | Total: | | | $ | 2,568,673 | | | | $ | 1,387,973 | | |
| |
(1) Audit fees consisted of audit work performed on consolidated financial statements, as well as work normally performed by the independent auditors in connection with statutory and regulatory filings.
(2) Audit-related fees consisted primarily of audits of our employee benefit plan, as well as an audit of a foreign subsidiary not required by statute or regulation.
(3) Tax fees are fees associated with tax compliance in foreign locations, tax advice, and tax planning.
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically reportbe furnished pursuant to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. All of the services relating to the feesitem will be set forth onunder the above table were pre-approvedcaption “Principal Accountant Fees and Services” in the Proxy Statement or if the Proxy Statement is not filed with the Commission by the Audit Committee.
April 30, 2006, such information will be included in an amendment to this Annual Report filed by April 30, 2006. 3729
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) 1. and 2. Consolidated Financial Statements and Schedules
The reports of our independent registered public accounting firm and consolidated financial statements listed in the Index to Consolidated Financial Statements on page
3932 hereof are filed as part of this report.
All financial statement schedules not listed in the Index have been omitted because the information required is not applicable or is shown in the consolidated financial statements or notes thereto.
3. Exhibits
| | | |
| EXHIBIT | | |
| NUMBER | | DESCRIPTION OF DOCUMENT |
|
2.1(16)3.1a(1) | | Agreement and Plan of Merger, dated as of December 26, 2004, by and among the Company, Green Falcon, Inc. and META Group, Inc. |
|
3.1a(5) | | Amended and Restated Certificate of Incorporation-July 16, 1999.Incorporation of the Company. |
| | |
3.1b(6) | | Certificate of Amendment of the Restated Certificate of Incorporation-February 1, 2001. |
| | |
3.1c(4)3.1c(2) | | Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and Series B Junior Participating Preferred Stock of the Company-MarchCompany, dated as of March 1, 2000. |
| | |
3.2(5)3.2(3) | | Amended Bylaws, as amended through February 3, 2004.2, 2006. |
| | |
4.1(6)4.1(1) | | Form of Certificate for Common Stock Class A-asas of February 2001.June 2 2005. |
| | |
4.2(6) | | Form of Certificate for Common Stock, Class B-as of February 2001. |
| | |
4.3(8)4.2(4) | | Amended and Restated Rights Agreement, dated as of August 31, 2002, between the Company and Mellon Investor Services LLC (as successor Rights Agent of Fleet National Bank). |
| | |
4.4(12)4.3(5) | | Amendment No. 1 to the Amended and Restated Rights Agreement, dated as of August 31, 2002, by and between Gartner, Inc.the Company and Mellon Investor Services LLC (as successor Rights Agent of Fleet National Bank), dated June 30, 2003, by and between Gartner, Inc.the Company and Mellon Investor Services LLC. |
| 4.4 (1) | | |
4.5 (14) | | Amended and Restated Credit Agreement, dated as of June 29, 2005, to the Credit Agreement, dated as of August 12, 2004, among the Company, the several lenders from time to time parties, thereto, 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, N.A. as Administrative Agentadministrative agent. (the “Credit Agreement”) |
| | |
4.6(17)4.5(16) | | First Amendment to the Amended and Restated Credit Agreement, dated as of March 3,June 29, 2005, to the Credit Agreement.Agreement, dated as of August 12, 2004, among the Company, the several lenders from time to time who are parties, and JPMorgan Chase Bank, N.A. as administrative agent. |
| | |
10.1(1)10.1(6) | | Form of Indemnification Agreement. |
|
10.2(8)10.2(4) | | Amended and Restated Securityholders Agreement dated as of July 12, 2002 among the Company, Silver Lake Partners, L.P. and other parties thereto. |
| | |
10.3(2)10.3(7) | | Lease dated December 29, 1994 between Soundview Farms and the Company for premises at 56 Top Gallant Road, 70 Gatehouse Road, and 88 Gatehouse Road, Stamford, Connecticut. |
| | |
10.4(3)10.4(8) | | Lease dated May 16, 1997 between Soundview Farms and the Company for premises at 56 Top Gallant Road, 70 Gatehouse Road, 88 Gatehouse Road and 10 Signal Road, Stamford, Connecticut (amendment to lease dated December 29, 1994, see exhibit 10.3a). |
| | |
10.5(2)+10.5(7)ª | | 1991 Stock Option Plan as amended and restated on October 19, 1999. |
| | |
10.6(5)10.6(9)ª
| | 1993 Director Stock Option Plan as amended and restated on April 14, 2000. |
| | |
10.7(13)10.7(10)ª
| | 2002 Employee Stock Purchase Plan, as Amended and Restated February 5, 2003. |
| | Effective June 1, 2005. |
10.8(3)10.8(1)ª
| | 1994 Long Term Stock Option Plan, as amended and restated on October 12, 1999. |
| | |
10.9(3)10.9(1)ª
| | 1998 Long Term Stock Option Plan, as amended and restated on October 12, 1999. |
| | |
10.10(3)10.10(1)ª
| | 1996 Long Term Stock Option Plan, as amended and restated on October 12, 1999. |
| | |
|
38
| | |
10.11(10)10.11(11)ª
| | 1999 Stock Option Plan. |
| | Plan |
10.12(9)10.12(1)ª
| | 2003 Long-Term Incentive Plan. |
| | Plan |
10.13 (15)(12)ª | | Employment Agreement between Eugene A. Hall and the Company dated as of October 15, 2004. |
| | 2004 |
10.14(15)10.14(13)ª
| | Restricted Stock Agreement by and between Eugene A. Hall and the Company dated as of October 15, 2004. |
| | November 9, 2005. |
10.15*10.15(14)ª
| | Employment Agreement between Gartner Group UK Limited and Alister Christopher dated September 23, 2003.Company Deferred Compensation Plan, Effective January 1, 2005. |
| 10.16(15) | | |
10.16*ª
| | Employment Agreement between Gartner Group UK Limited and Clive Taylor dated December 21, 2004. |
| | Company Executive Benefits Program. |
| 21.1* | | Subsidiaries of Registrant. |
| | |
| 23.1* | | Consent of Independent Registered Public Accounting Firm |
| | |
| 24.1 | | Power of Attorney (see Signature Page). |
| | |
| 31.1* | | Certification of chief executive officer under Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 31.2* | | Certification of chief financial officer under Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32* | | Certification under Section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed with this document.
ª Management compensation plan or arrangement.
| | |
| (1) | | Incorporated by reference from the Company’s Registration Statement on Form S-1 (File No. 33-67576), as amended, effective October 4, 1993. |
|
(2) | | Incorporated by reference from the Company’s AnnualCurrent Report on Form 10-K8-K dated June 29, 2005 as filed on December 21, 1995, SEC File No. 000-15144.July 6, 2005. |
30
|
(3) | | Incorporated by reference from the Company’s Annual Report on Form 10-K filed on December 22, 1999. |
|
(4)(2) | | Incorporated by reference from the Company’s Current Report on Form 8-K dated March 1, 2000 as filed on March 7, 2000. |
| |
| (3) | | Incorporated by reference from the Company’s Current Report on Form 8-K dated February 2, 2006 as filed on February 7, 2006. |
|
| (4) | | Incorporated by reference from the Company’s Annual Report on Form 10-K as filed on December 29, 2002. |
|
| (5) | | Incorporated by reference from the Company’s Amendment Number 2 to Form 8-A as filed on June 30, 2003. |
|
| (6) | | Incorporated by reference from the Company’s Registration Statement on Form S-1 (File No. 33-67576), as amended, effective October 4, 1993. |
|
| (7) | | Incorporated by reference from the Company’s Annual Report on Form 10-K as filed on December 21, 1995 |
|
| (8) | | Incorporated by reference from the Company’s Annual Report on Form 10-K filed on December 22, 1999. |
|
| (9) | | Incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed on May 4, 2004. |
| |
(6) | | Incorporated by reference from the Company’s Annual Report on Form 10-K as filed on December 28, 2001. |
|
(7)(10) | | Incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed on February 13, 2002.May 10, 2005. |
| |
(8) | | Incorporated by reference from the Company’s Annual Report on Form 10-K as filed on December 29, 2002. |
|
(9) | | Incorporated by reference from the Company’s Definitive Proxy Statement for its annual meeting dated February 13, 2003. |
|
(10)(11) | | Incorporated by reference from the Company’s Form S-8 as filed on February 16, 2002. |
|
(11) | | Incorporated by reference from the Company’s Transition Report on Form 10-KT as filed on March 31, 2003.
|
| |
| (12) | | Incorporated by reference from the Company’s Amendment Number 2. To Form 8-A as filed on June 30, 2003. |
|
(13) | | Incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed on August 14, 2003. |
|
(14) | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q as filed on November 8, 2004. |
|
(15) | | Incorporated by reference to from the Company Current Report on Form 8-K dated October 15, 2004. |
| |
| (13) | | Incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed on November 9, 2005. |
|
| (14) | | Incorporated by reference from the Company’s Current Report on Form 8-K dated December 21, 2005 as filed on December 28, 2005. |
|
| (15) | | Incorporated by reference from the Company’s Current Report on Form 8-K dated August 25, 2005 as filed on August 26, 2005. |
|
| (16) | | Incorporated by reference from the Company’s Current Report on Form 8-K dated February 10, 2006 as filed on December 28, 2004. |
|
(17) | | Incorporated by reference from the Company Current Report on Form 8-K filed on March 7, 2005.February 16, 2006. |
31
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS GARTNER, INC.
CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| | | 4133 | |
| | | | |
| Report of Independent Registered Public Accounting Firm | | | 4234 | |
| | | | |
Consolidated Balance Sheets as of December 31, 2004,2005 and 20032004 | | | 4335 | |
| | | | |
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004, 2003 and 2002 (Unaudited), the Three Month Period Ended December 31, 2002, and the Year Ended September 30, 20022003 | | | 4436 | |
| | | | |
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss) for the Years Ended December 31, 2005, 2004, and 2003 the Three Month Period Ended December 31, 2002, and the Year Ended September 30, 2002 | | | 4537 | |
| | | | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004, 2003 and 2002 (Unaudited), the Three Month Period Ended December 31, 2002, and the Year Ended September 30, 20022003 | | | 4638 | |
| | | | |
| Notes to Consolidated Financial Statements | | | 4739 | |
All financial statement schedules have been omitted because the information required is not applicable or is shown in the consolidated financial statements or notes thereto.
4032
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Gartner, Inc.:
We have audited the accompanying consolidated balance sheets of Gartner, Inc. and subsidiaries as of December 31,
20042005 and
2003,2004, and the related consolidated statements of operations, stockholders’ equity
(deficit) and comprehensive income (loss), and cash flows for each of the years in the
two-yearthree-year period ended December 31,
2004, the three-month period ended December 31, 2002, and the year ended September 30, 2002.2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gartner, Inc. and subsidiaries as of December 31,
20042005 and
2003,2004, and the results of their operations and their cash flows for each of the years in the
two-yearthree-year period ended December 31,
2004, the three-month period ended December 31, 2002, and the year ended September 30, 2002,2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Gartner, Inc.’s internal control over financial reporting as of December 31,
2004,2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March
16, 200510, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
New York, New York
March 16, 200510, 2006
4133
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Gartner, Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting under Item 9A, that Gartner, Inc. (the “Company”) maintained effective internal control over financial reporting as of December 31,
2004,2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
��provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Gartner, Inc. maintained effective internal control over financial reporting as of December 31,
2004,2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Gartner, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31,
2004,2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Gartner, Inc. and subsidiaries as of December 31,
20042005 and
2003,2004, and the related consolidated statements of operations, stockholders’ equity
(deficit) and comprehensive income (loss), and cash flows for each of the years in the
two-yearthree-year period ended December 31,
2004, the three-month period ended December 31, 2002, and the year ended September 30, 2002,2005, and our report dated March
16, 200510, 2006 expressed an unqualified opinion on those consolidated financial statements.
New York, New York
March 16, 200510, 2006
4234
GARTNER, INC.
GARTNER, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | | | | |
| ASSETS | | |
| Current assets: | | |
| Cash and cash equivalents | | $ | 160,126 | | $ | 229,962 | | | $ | 70,282 | | $ | 160,126 | |
| Fees receivable, net of allowances of $8,450, and $9,000, respectively | | 257,689 | | 266,122 | | |
| Fees receivable, net of allowances of $7,900, and $8,450, respectively | | | 313,195 | | 257,689 | |
| Deferred commissions | | 32,978 | | 27,751 | | | 42,804 | | 32,978 | |
| Prepaid expenses and other current assets | | 37,052 | | 30,465 | | | 35,838 | | 37,052 | |
| | | | | |
| Total current assets | | 487,845 | | 554,300 | | | 462,119 | | 487,845 | |
| Property, equipment and leasehold improvements, net | | 63,495 | | 66,541 | | | 61,770 | | 63,495 | |
| Goodwill | | 231,759 | | 230,387 | | | 404,034 | | 231,759 | |
| Intangible assets, net | | 138 | | 985 | | | 15,793 | | 138 | |
| Other assets | | 77,957 | | 66,519 | | | 82,901 | | 77,957 | |
| | | | | |
| Total assets | | $ | 861,194 | | $ | 918,732 | | | $ | 1,026,617 | | $ | 861,194 | |
| | | | | |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| Current liabilities: | | |
| Accounts payable and accrued liabilities | | $ | 181,502 | | $ | 180,432 | | | $ | 243,036 | | $ | 181,502 | |
| Deferred revenues | | 307,696 | | 315,524 | | | 333,065 | | 307,696 | |
| Current portion of long-term debt | | 40,000 | | — | | | 66,667 | | 40,000 | |
| | | | | |
| Total current liabilities | | 529,198 | | 495,956 | | | 642,768 | | 529,198 | |
| Long-term debt | | 150,000 | | — | | | 180,000 | | 150,000 | |
| Other liabilities | | 51,948 | | 47,986 | | | 57,261 | | 51,948 | |
| | | | | |
| Total liabilities | | 731,146 | | 543,942 | | | 880,029 | | 731,146 | |
| | | |
| Commitments and contingencies (see note 9) | | |
| Commitments and contingencies (see note 7) | | |
| Stockholders’ equity: | | |
| Preferred stock: | | |
| $.01 par value, authorized 5,000,000 shares; none issued or outstanding | | — | | — | | | — | | — | |
| Common stock | | |
| $.0005 par value, authorized 166,000,000 shares of Class A Common Stock and 84,000,000 shares of Class B Common Stock; issued 110,130,444 and 102,436,100 shares, respectively, of Class A Common Stock and 40,689,648 shares of Class B Common Stock for both periods | | 75 | | 72 | | |
| Common stock: | | |
| $.0005 par value, authorized 250,000,000 shares for both periods; 153,549,434 shares and 150,820,092 shares issued, respectively | | | 77 | | 75 | |
| Additional paid-in capital | | 485,713 | | 408,504 | | | 511,062 | | 485,713 | |
| Unearned compensation, net | | | (7,553 | ) | | | (1,846 | ) | | | (6,652 | ) | | | (7,553 | ) |
| Accumulated other comprehensive income (loss), net | | 12,722 | | 1,310 | | |
| Accumulated other comprehensive income, net | | | 6,320 | | 12,722 | |
| Accumulated earnings | | 190,089 | | 173,200 | | | 187,652 | | 190,089 | |
| Treasury stock, at cost, 20,977,585 and 669,837 shares, respectively, of Class A Common Stock and 18,076,694 and 12,456,605 shares, respectively, of Class B Common Stock | | | (550,998 | ) | | | (206,450 | ) | |
| Treasury stock, at cost, 39,214,747 and 39,054,279 common shares, respectively, | | | | (551,871 | ) | | | (550,998 | ) |
| | | | | |
| Total stockholders’ equity | | 130,048 | | 374,790 | | | 146,588 | | 130,048 | |
| | | | | |
| Total liabilities and stockholders’ equity | | $ | 861,194 | | $ | 918,732 | | | $ | 1,026,617 | | $ | 861,194 | |
| | | | | |
See Notes to Consolidated Financial Statements.
4335
GARTNER, INC.
GARTNER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
| | | | | | | | | | | | | | | | | | | | |
| | | | | Fiscal Year | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Transition | | September 30, | | | Year Ended December 31, |
| | | 2004 | | 2003 | | 2002 | | 2002 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | | Unaudited | | | |
| Revenues: | | |
| Research | | $ | 480,486 | | $ | 466,907 | | $ | 486,967 | | $ | 120,038 | | $ | 496,403 | | | $ | 523,033 | | $ | 480,486 | | $ | 466,907 | |
| Consulting | | 259,419 | | 258,628 | | 276,059 | | 58,098 | | 273,692 | | | 301,074 | | 259,419 | | 258,628 | |
| Events | | 138,393 | | 119,355 | | 109,694 | | 47,169 | | 121,991 | | | 151,339 | | 138,393 | | 119,355 | |
| Other | | 15,523 | | 13,556 | | 14,873 | | 4,509 | | 15,088 | | | 13,558 | | 15,523 | | 13,556 | |
| | | | | |
| Total revenues | | 893,821 | | 858,446 | | 887,593 | | 229,814 | | 907,174 | | | 989,004 | | 893,821 | | 858,446 | |
| Costs and expenses: | | |
| Cost of services and product development | | 434,499 | | 410,666 | | 396,489 | | 108,600 | | 403,718 | | | 486,611 | | 434,499 | | 410,666 | |
| Selling, general and administrative | | 349,834 | | 333,411 | | 346,496 | | 90,306 | | 345,574 | | | 397,252 | | 349,834 | | 333,411 | |
| Depreciation | | 27,650 | | 36,045 | | 43,726 | | 11,146 | | 42,504 | | | 25,502 | | 27,650 | | 36,045 | |
| Amortization of intangibles | | 687 | | 1,275 | | 1,929 | | 482 | | 1,949 | | | 10,226 | | 687 | | 1,275 | |
| Goodwill impairments | | 2,711 | | — | | — | | — | | — | | | — | | 2,711 | | — | |
| META integration charges | | | 14,956 | | — | | — | |
| Other charges | | 35,781 | | 29,716 | | 49,412 | | 32,166 | | 17,246 | | | 29,177 | | 35,781 | | 29,716 | |
| | | | | |
| Total costs and expenses | | 851,162 | | 811,113 | | 838,052 | | 242,700 | | 810,991 | | | 963,724 | | 851,162 | | 811,113 | |
| | | | | |
| Operating income (loss) | | 42,659 | | 47,333 | | 49,541 | | | (12,886 | ) | | 96,183 | | |
| Operating income | | | 25,280 | | 42,659 | | 47,333 | |
| (Loss) gain on investments, net | | | (2,958 | ) | | 4,740 | | | (4,137 | ) | | | (1,688 | ) | | | (1,578 | ) | | | (5,841 | ) | | | (2,958 | ) | | 4,740 | |
| Interest income | | 3,063 | | 2,296 | | 1,968 | | 635 | | 1,845 | | | 2,142 | | 3,063 | | 2,296 | |
| Interest expense | | | (4,380 | ) | | | (19,402 | ) | | | (23,206 | ) | | | (5,942 | ) | | | (22,869 | ) | | | (13,214 | ) | | | (4,380 | ) | | | (19,402 | ) |
| Other (expense) income, net | | | (3,922 | ) | | 461 | | 119 | | | (141 | ) | | | (170 | ) | | | (2,929 | ) | | | (3,922 | ) | | 461 | |
| | | | | |
| Income (loss) before income taxes | | 34,462 | | 35,428 | | 24,285 | | | (20,022 | ) | | 73,411 | | |
| Provision (benefit) for income taxes | | 17,573 | | 11,839 | | 9,167 | | | (5,604 | ) | | 24,988 | | |
| Income before income taxes | | | 5,438 | | 34,462 | | 35,428 | |
| Provision for income taxes | | | 7,875 | | 17,573 | | 11,839 | |
| | | | | |
| Net income (loss) | | $ | 16,889 | | $ | 23,589 | | $ | 15,118 | | $ | (14,418 | ) | | $ | 48,423 | | |
| Net (loss) income | | | $ | (2,437 | ) | | $ | 16,889 | | $ | 23,589 | |
| | | | | |
| | | |
| Net income (loss) per share: | | |
| Net (loss) income per share: | | |
| Basic: | | $ | 0.14 | | $ | 0.26 | | $ | 0.18 | | $ | (0.18 | ) | | $ | 0.58 | | | $ | (0.02 | ) | | $ | 0.14 | | $ | 0.26 | |
| Diluted | | $ | 0.13 | | $ | 0.25 | | $ | 0.18 | | $ | (0.18 | ) | | $ | 0.46 | | | $ | (0.02 | ) | | $ | 0.13 | | $ | 0.25 | |
| | | |
| Weighted average shares outstanding: | | |
| Basic | | 123,603 | | 91,123 | | 83,329 | | 81,379 | | 83,586 | | | 112,253 | | 123,603 | | 91,123 | |
| Diluted | | 126,326 | | 92,579 | | 85,040 | | 81,379 | | 130,882 | | | 112,253 | | 126,326 | | 92,579 | |
See Notes to Consolidated Financial Statements.
4436
GARTNER, INC.
GARTNER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE DATA)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Accumulated | | | | | Accumulated | | |
| | | Other | | | | | Other | | |
| | | Additional | | Unearned | | Comprehensive | | Total | | | Additional | | Unearned | | Comprehensive | | Total | |
| | | Common | | Paid-In | | Compensation, | | Income (Loss), | | Accumulated | | Treasury | | Stockholders' | | | Common | | Paid-In | | Compensation, | | Income (Loss), | | Accumulated | | Treasury | | Stockholders’ | |
| | | Stock | | Capital | | Net | | Net | | Earnings | | Stock | | Equity (Deficit) | | | Stock | | Capital | | Net | | Net | | Earnings | | Stock | | Equity | |
| | Balance at September 30, 2001 | | $ | 59 | | $ | 342,216 | | $ | (5,145 | ) | | $ | (14,964 | ) | | $ | 115,606 | | $ | (472,770 | ) | | $ | (34,998 | ) | |
| Comprehensive income | | |
| Net income | | — | | — | | — | | — | | 48,423 | | — | | 48,423 | | |
| Other comprehensive income | | |
| Foreign currency translation adjustments | | — | | — | | — | | | (140 | ) | | — | | — | | | (140 | ) | |
| Net unrealized gain on investments, net of tax of $630 | | — | | — | | — | | 945 | | — | | — | | 945 | | |
| | | | | | | |
| Other comprehensive income | | — | | — | | — | | 805 | | — | | — | | 805 | | |
| | | | | |
| Comprehensive income | | 49,228 | | |
| Issuances under stock plans | | 1 | | 21,130 | | — | | — | | ��� | | 1,035 | | 22,166 | | |
| Tax benefits of employee stock transactions | | — | | 2,280 | | — | | — | | — | | — | | 2,280 | | |
| Purchase of shares for treasury stock | | — | | — | | — | | — | | — | | | (47,047 | ) | | | (47,047 | ) | |
| Stock compensation (net of forfeitures) | | — | | 1,097 | | 1,678 | | — | | — | | — | | 2,775 | | |
| | |
| Balance at September 30, 2002 | | 60 | | 366,723 | | | (3,467 | ) | | | (14,159 | ) | | 164,029 | | | (518,782 | ) | | | (5,596 | ) | |
| Comprehensive loss | | |
| Net loss | | — | | — | | — | | — | | | (14,418 | ) | | — | | | (14,418 | ) | |
| Other comprehensive income | | |
| Foreign currency translation adjustments | | — | | — | | — | | 2,667 | | — | | — | | 2,667 | | |
| Net unrealized gain on investments, net of tax of $17 | | — | | — | | — | | 25 | | — | | — | | 25 | | |
| | | | | | | |
| Other comprehensive income | | — | | — | | — | | 2,692 | | — | | — | | 2,692 | | |
| | | | | |
| Comprehensive loss | | | (11,726 | ) | |
| Issuances under stock plans | | — | | 1,016 | | — | | — | | — | | 29 | | 1,045 | | |
| Tax benefits of employee stock transactions | | — | | | (199 | ) | | — | | — | | — | | — | | | (199 | ) | |
| Purchase of shares for treasury stock | | — | | — | | — | | — | | — | | | (13,880 | ) | | | (13,880 | ) | |
| Stock compensation (net of forfeitures) | | — | | 550 | | 398 | | — | | — | | — | | 948 | | |
| | |
| Balance at December 31, 2002 | | 60 | | 368,090 | | | (3,069 | ) | | | (11,467 | ) | | 149,611 | | | (532,633 | ) | | | (29,408 | ) | | $ | 60 | | $ | 368.090 | | $ | (3.069 | ) | | $ | (11.467 | ) | | $ | 149.611 | | $ | (532.633 | ) | | $ | (29.408 | ) |
| Comprehensive income | | |
| Net income | | — | | — | | — | | — | | 23,589 | | — | | 23,589 | | | — | | — | | — | | — | | 23,589 | | — | | 23,589 | |
| Other comprehensive income | | |
| Other comprehensive income: | | |
| Foreign currency translation adjustments | | — | | — | | — | | 12,645 | | — | | — | | 12,645 | | | — | | — | | — | | 12,645 | | — | | — | | 12,645 | |
| Net unrealized gain on investments, net of tax of $55 | | — | | — | | — | | 132 | | — | | — | | 132 | | | — | | — | | — | | 132 | | — | | — | | 132 | |
| | | | | | | | | | | |
| Other comprehensive income | | — | | — | | — | | 12,777 | | — | | — | | 12,777 | | | — | | — | | — | | 12,777 | | — | | — | | 12,777 | |
| | | | | | | |
| Comprehensive income | | 36,366 | | | 36,366 | |
| Issuances under stock plans | | 3 | | 39,662 | | — | | — | | — | | 1,990 | | 41,655 | | | 3 | | 39,662 | | — | | — | | — | | 1,990 | | 41,655 | |
| Tax benefits of employee stock transactions | | — | | 3,930 | | — | | — | | — | | — | | 3,930 | | | — | | 3,930 | | — | | — | | — | | — | | 3,930 | |
| Purchase of shares for treasury stock | | — | | — | | — | | — | | — | | | (43,434 | ) | | | (43,434 | ) | | — | | — | | — | | — | | — | | | (43,434 | ) | | | (43,434 | ) |
| Conversion of debt into shares of Class A | | |
| Common Stock | | 9 | | | (3,027 | ) | | — | | — | | — | | 367,627 | | 364,609 | | |
| Conversion of debt into shares of Class A Common Stock | | | 9 | | | (3,027 | ) | | — | | — | | — | | 367,627 | | 364,609 | |
| Stock compensation (net of forfeitures) | | — | | | (151 | ) | | 1,223 | | — | | — | | — | | 1,072 | | | — | | | (151 | ) | | 1,223 | | — | | — | | — | | 1,072 | |
| | Balance at December 31, 2003 | | 72 | | 408,504 | | (1,846 | ) | | 1,310 | | 173,200 | | (206,450 | ) | | 374,790 | | | $ | 72 | | $ | 408,504 | | $ | (1,846 | ) | | $ | 1,310 | | $ | 173,200 | | $ | (206,450 | ) | | $ | 374,790 | |
| | Comprehensive income | | |
| Net income | | — | | — | | — | | — | | 16,889 | | — | | 16,889 | | | — | | — | | — | | — | | 16,889 | | — | | 16,889 | |
| Other comprehensive income | | |
| Other comprehensive income: | | |
| Foreign currency translation adjustments | | — | | — | | — | | 11,284 | | — | | — | | 11,284 | | | — | | — | | — | | 11,284 | | — | | — | | 11,284 | |
| Net unrealized gain on investments, net of tax of $0 | | — | | — | | — | | 128 | | — | | — | | 128 | | | — | | — | | — | | 128 | | — | | — | | 128 | |
| | | | | | | | | | | |
| Other comprehensive income | | — | | — | | — | | 11,412 | | — | | — | | 11,412 | | | — | | — | | — | | 11,412 | | — | | — | | 11,412 | |
| | | | | | | |
| Comprehensive income | | 28,301 | | | 28,301 | |
| | | | | | | |
| Issuances under stock plans | | 3 | | 60,199 | | — | | — | | — | | 7,714 | | 67,916 | | | 3 | | 60,199 | | — | | — | | — | | 7,714 | | 67,916 | |
| Tax benefits of employee stock transactions | | — | | 10,004 | | — | | — | | — | | — | | 10,004 | | | — | | 10,004 | | — | | — | | — | | — | | 10,004 | |
| Purchase of shares for treasury stock | | — | | — | | — | | — | | — | | | (352,262 | ) | | | (352,262 | ) | | — | | — | | — | | — | | — | | | (352,262 | ) | | | (352,262 | ) |
| Common Stock | | — | | — | | — | | — | | — | | | — | | — | | — | | — | | — | |
| Stock compensation (net of forfeitures) | | — | | 7,006 | | | (5,707 | ) | | — | | — | | — | | 1,299 | | | — | | 7,006 | | | (5,707 | ) | | — | | — | | — | | 1,299 | |
| | Balance at December 31, 2004 | | $ | 75 | | $ | 485,713 | | $ | (7,553 | ) | | $ | 12,722 | | $ | 190,089 | | $ | (550,998 | ) | | $ | 130,048 | | | $ | 75 | | $ | 485,713 | | $ | (7,553 | ) | | $ | 12,722 | | $ | 190,089 | | $ | (550,998 | ) | | $ | 130,048 | |
| | Comprehensive income | | |
| Net loss | | | — | | — | | — | | — | | | (2,437 | ) | | — | | | (2,437 | ) |
| Other comprehensive (loss): | | |
| Foreign currency translation adjustments | | | — | | — | | — | | | (5,970 | ) | | — | | — | | | (5,970 | ) |
| Unrealized loss on investment and swap, net of tax of $(225) | | | — | | — | | — | | | (432 | ) | | — | | — | | | (432 | ) |
| | | | | | | |
| Other comprehensive (loss) | | | — | | — | | — | | | (6,402 | ) | | — | | — | | | (6,402 | ) |
| | | | | | | |
| Comprehensive (loss) | | | | (8,839 | ) |
| | | | | |
| Issuances under stock plans | | | 2 | | 20,748 | | — | | — | | — | | 10,210 | | 30,960 | |
| Tax benefits of employee stock transactions | | | — | | 4,472 | | — | | — | | — | | — | | 4,472 | |
| Purchase of shares for treasury stock | | | — | | — | | — | | — | | — | | | (11,083 | ) | | | (11,083 | ) |
| Common Stock | | | — | | — | | — | | — | | — | |
| Stock compensation (net of forfeitures) | | | — | | 129 | | 901 | | — | | — | | — | | 1,030 | |
| | | |
| Balance at December 31, 2005 | | | $ | 77 | | $ | 511,062 | | $ | (6,652 | ) | | $ | 6,320 | | $ | 187,652 | | $ | (551,871 | ) | | $ | 146,588 | |
| | | |
See Notes to Consolidated Financial Statements.
4537
GARTNER, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
| | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Transition | | September 30, | | | Year Ended December 31, |
| | | 2004 | | 2003 | | 2002 | | 2002 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | | Unaudited | | | |
| Operating activities: | | |
| Net income (loss) | | $ | 16,889 | | $ | 23,589 | | $ | 15,118 | | $ | (14,418 | ) | | $ | 48,423 | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| Net (loss) income | | | $ | (2,437 | ) | | $ | 16,889 | | $ | 23,589 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | |
| Depreciation and amortization of intangibles | | 28,337 | | 37,320 | | 45,655 | | 11,628 | | 44,453 | | | 35,728 | | 28,337 | | 37,320 | |
| Non-cash compensation | | 1,299 | | 1,072 | | 3,286 | | 945 | | 2,775 | | | 1,030 | | 1,299 | | 1,072 | |
| Tax benefit associated with employee exercise of stock options | | 10,004 | | 3,930 | | 1,579 | | | (199 | ) | | 2,280 | | | 4,472 | | 10,004 | | 3,930 | |
| Deferred taxes | | | (8,613 | ) | | | (4,567 | ) | | | (4,139 | ) | | | (7,383 | ) | | 4,066 | | | | (5,644 | ) | | | (8,613 | ) | | | (4,567 | ) |
| Loss (gain) from investments and sales of assets, net | | 2,958 | | | (4,740 | ) | | 3,644 | | 1,688 | | 1,085 | | | 5,841 | | 2,958 | | | (4,740 | ) |
| Accretion of interest and amortization of debt issue costs | | 954 | | 18,649 | | 22,430 | | 5,734 | | 22,116 | | | 1,424 | | 954 | | 18,649 | |
| Charge for stock option buy back | | | 5,980 | | — | | — | |
| Goodwill impairments | | 2,711 | | — | | — | | — | | — | | | — | | 2,711 | | — | |
| Non-cash charges associated with impairment of long-lived assets | | 5,157 | | — | | 2,083 | | 659 | | 1,424 | | | — | | 5,157 | | — | |
| Changes in assets and liabilities: | | |
| Fees receivable, net | | 13,711 | | 29,980 | | 42,686 | | | (13,748 | ) | | 40,299 | | | | (35,746 | ) | | 13,711 | | 29,980 | |
| Deferred commissions | | | (5,197 | ) | | | (1,689 | ) | | 15,602 | | 1,616 | | 9,046 | | | | (9,850 | ) | | | (5,197 | ) | | | (1,689 | ) |
| Prepaid expenses and other current assets | | | (788 | ) | | 2,578 | | 10,218 | | | (2,443 | ) | | 25,088 | | | | (2,436 | ) | | | (788 | ) | | 2,578 | |
| Other assets | | | (5,850 | ) | | 452 | | 7,388 | | | (481 | ) | | 9,415 | | | 113 | | | (5,850 | ) | | 452 | |
| Deferred revenues | | | (14,764 | ) | | | (4,467 | ) | | | (33,259 | ) | | | (5,683 | ) | | | (50,886 | ) | | 3,899 | | | (14,764 | ) | | | (4,467 | ) |
| Accounts payable and accrued liabilities | | 1,393 | | 34,230 | | 13,535 | | 23,238 | | | (14,032 | ) | | 24,748 | | 1,393 | | 34,230 | |
| | | | | |
| Cash provided by operating activities | | 48,201 | | 136,337 | | 145,826 | | 1,153 | | 145,552 | | | 27,122 | | 48,201 | | 136,337 | |
| | | | | |
| | |
| Investing activities: | | |
| Proceeds from insurance recovery | | — | | 5,464 | | — | | — | | — | | | — | | — | | 5,464 | |
| Purchases of businesses | | — | | — | | | (3,858 | ) | | — | | | (4,537 | ) | |
| Proceeds from sale of investments and assets | | — | | — | | 239 | | — | | 6,264 | | |
| Proceeds from sale of investments | | | 2,059 | | — | | — | |
| Investments | | — | | | (1,960 | ) | | | (1,508 | ) | | — | | | (1,508 | ) | | — | | — | | | (1,960 | ) |
| Prepaid acquisition costs for Meta | | | (3,870 | ) | | — | | — | | — | | — | | |
| Acquisition of META (net of cash acquired) | | | | (161,323 | ) | | — | | — | |
| Prepaid acquisition costs for META | | | — | | | (3,870 | ) | | — | |
| Additions to property, equipment and leasehold improvements | | | (25,104 | ) | | | (28,928 | ) | | | (21,124 | ) | | | (5,866 | ) | | | (19,639 | ) | | | (22,356 | ) | | | (25,104 | ) | | | (28,928 | ) |
| Other investing activities, net | | | 640 | | — | | — | |
| | | | | |
| Cash used in investing activities | | | (28,974 | ) | | | (25,424 | ) | | | (26,251 | ) | | | (5,866 | ) | | | (19,420 | ) | | | (180,980 | ) | | | (28,974 | ) | | | (25,424 | ) |
| | | | | |
| | |
| Financing activities: | | |
| Proceeds from stock issued for stock plans | | 67,916 | | 41,655 | | 17,925 | | 1,045 | | 22,166 | | | 30,960 | | 67,916 | | 41,655 | |
| Proceeds from issuance of debt | | 200,000 | | — | | — | | — | | — | | |
| Proceeds from debt issuance | | | 327,000 | | 200,000 | | — | |
| Payments for debt issuance and debt conversion costs | | | | (1,082 | ) | | | (2,823 | ) | | | (1,182 | ) |
| Payments on debt | | | (10,000 | ) | | — | | — | | — | | | (15,000 | ) | | | (271,291 | ) | | | (10,000 | ) | | — | |
| Payments for debt issuance and debt conversion costs | | | (2,823 | ) | | | (1,182 | ) | | | (238 | ) | | — | | | (238 | ) | |
| Purchases of stock via tender offer, including costs | | | (346,150 | ) | | — | | — | | — | | — | | | — | | | (346,150 | ) | | — | |
| Purchases of treasury stock | | | (6,112 | ) | | | (43,434 | ) | | | (59,880 | ) | | | (13,880 | ) | | | (47,047 | ) | | | (9,585 | ) | | | (6,112 | ) | | | (43,434 | ) |
| Purchases of options via stock option buy back, including costs | | | | (5,980 | ) | | — | | — | |
| | | | | |
| Cash used in financing activities | | | (97,169 | ) | | | (2,961 | ) | | | (42,193 | ) | | | (12,835 | ) | | | (40,119 | ) | |
| Cash provided (used) in financing activities | | | 70,022 | | | (97,169 | ) | | | (2,961 | ) |
| | | | | |
| Net (decrease) increase in cash and cash equivalents | | | (77,942 | ) | | 107,952 | | 77,382 | | | (17,548 | ) | | 86,013 | | | | (83,836 | ) | | | (77,942 | ) | | 107,952 | |
| Effects of exchange rates on cash and cash equivalents | | 8,106 | | 12,353 | | 4,844 | | 2,412 | | 1,652 | | | | (6,008 | ) | | 8,106 | | 12,353 | |
| Cash and cash equivalents, beginning of period | | 229,962 | | 109,657 | | 27,431 | | 124,793 | | 37,128 | | | 160,126 | | 229,962 | | 109,657 | |
| | | | | |
| Cash and cash equivalents, end of period | | $ | 160,126 | | $ | 229,962 | | $ | 109,657 | | $ | 109,657 | | $ | 124,793 | | | $ | 70,282 | | $ | 160,126 | | $ | 229,962 | |
| | | | | |
| | | |
| Supplemental disclosures of cash flow information: | | |
| Cash paid during the period for: | | |
| Interest | | $ | 2,591 | | $ | 753 | | $ | 667 | | $ | 159 | | $ | 753 | | | $ | 12,333 | | $ | 2,591 | | $ | 753 | |
| Income taxes, net of refunds received of $1,342, $744, and $17,589 in Calendar 2004, 2003, and 2002, respectively, and $26,650 for Fiscal 2002 | | $ | 12,474 | | $ | 12,174 | | $ | 2,733 | | $ | 5,105 | | $ | (7,614 | ) | |
| Income taxes, net of refunds received | | | $ | 12,033 | | $ | 12,474 | | $ | 12,174 | |
| Supplemental schedule of non-cash investing and financing activities: | | |
| Transfer of investment to SI II | | $ | (2,186 | ) | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | (2,186 | ) | | $ | — | |
| Conversion of convertible debt to shares of Class A Common Stock | | $ | — | | $ | 364,609 | | $ | — | | $ | — | | $ | — | | |
| Conversion of convertible debt to shares of common stock | | | $ | — | | $ | — | | $ | 364,609 | |
| Accretion of interest and debt discount on convertible debt | | $ | — | | $ | 16,456 | | $ | 20,401 | | $ | 5,239 | | $ | 20,100 | | | $ | — | | $ | — | | $ | 16,456 | |
See Notes to Consolidated Financial Statements.
4638
GARTNER, INC.
GARTNER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation.
On October 30, 2002, the Company announced that the Board of Directors approved a change in the Company’sThe fiscal year
end from September 30 to December 31, effective January 1, 2003. This change resulted in a three-month transitional period ending December 31, 2002. References to Transition 2002, unless otherwise indicated, refer toof Gartner, Inc. (the “Company”) represents the
three-month transitional period ended December 31, 2002. References to Fiscal 2002 and Fiscal 2001, unless otherwise indicated, are to the respective fiscal year period from October 1 through September 30. References to Calendar 2004, Calendar 2003 and Calendar 2002, unless otherwise indicated, are to the respective twelve-month period from January 1 through December 31.
The unaudited financial information for the twelve months ended December 31, 2002 is presented for comparative purposes. Certain prior year amounts have been reclassified to conform to the current year presentation. When used in these notes, the terms “Company,” “we,” “us,” or “our” mean Gartner, Inc. and its subsidiaries.
During 2005, the Company combined its Class A and Class B common stock into a single class of common stock. Accordingly, certain share amounts disclosed herein have been restated to reflect the stock combination.
Principles of consolidation. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Investments in companies in which the Company owns less than 50% but have the ability to exercise significant influence over operating and financial policies are accounted for using the equity method. All other investments for which the Company does not have the ability to exercise significant influence are accounted for under the cost method of accounting. The results of operations for acquisitions of companies accounted for using the purchase method have been included in the Consolidated Statements of Operations beginning on the closing date of acquisition.
Certain amounts in the prior year presentations have been reclassified to conform to the current year presentation. Revenues and commission expense recognition. The Company typically enters into annually renewable subscription contracts for research products. Revenues from research products are deferred and recognized ratably over the applicable contract terms. The majority of research contracts are billable upon signing, absent special terms granted on a limited basis from time to time. All research contracts are non-cancelable and non-refundable, except for government contracts that have a 30-day cancellation clause but have not produced material cancellations to date. With the exception of certain government contracts which permit termination and contracts with special billing terms, it is Company policy to record the entire amount of the contract that is billable as a fee receivable at the time the contract is signed, which represents a legally enforceable claim, and a corresponding amount as deferred revenue. For those government contracts that permit termination, 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 revenue attributable to government contracts was
$40.9$41.7 million and
$38.6$40.9 million at December 31,
20042005 and
2003,2004, respectively. In addition, at December 31,
20042005 and
2003,2004, the Company had not recognized receivables or deferred revenues relating to government contracts that permit termination of
$4.2$7.1 million and
$6.6$4.2 million, respectively, which had been billed but not yet collected. The Company records the commission obligation related to research contracts upon the signing of the contract and amortizes the corresponding deferred commission expense over the contract period in which the related revenues are earned.
Consulting revenues, primarily derived from consulting, measurement and strategic advisory services (paid one-day analyst engagements), are
based primarilygenerated from fixed fee and time and material engagements. Revenue from fixed fee contracts is recognized on
fixed fees ora percentage of completion basis. Revenues from time and materials
for discrete projects. Such revenues areengagements is recognized as work is delivered
and asand/or services are
provided and are evaluated on a contract by contract basis.provided. Unbilled fees receivables associated with consulting engagements were
$31.9 million at December 31, 2005 and $27.9 million at December 31,
2004 and $24.3 million at December 31, 2003.2004.
Events revenues are deferred and recognized upon the completion of the related symposium, conference or exhibition. In addition, the Company defers certain costs directly related to events and expenses these costs in the period during which the related symposium, conference or exhibition occurs. The Company policy is to defer only those costs, primarily prepaid site and production services costs, which are incremental and are directly attributable to a specific event. Other costs of organizing and producing
Companyour events, primarily
Company personnel and non-event specific expenses, are expensed in the period incurred. At the end of each fiscal quarter, the Company assesses on an event-by-event basis whether expected direct costs of producing a scheduled event will exceed expected revenues. If such costs are expected to exceed revenues, the Company records the expected loss in the period determined.
Other revenues includes
reprint and software licensing fees
which areand other miscellaneous revenues. Revenue from reprints is recognized when the reprint has been shipped. Software licensing revenue is recognized when a signed non-cancelable software license exists, delivery has occurred, collection is probable, and
theour fees are fixed or determinable.
Revenues from software maintenance is deferred and recognized ratably over the term of each maintenance agreement, which is typically twelve months.Cash and cash equivalents. All highly liquid investments with original maturities of three months or less are classified as cash equivalents. The carrying value of these investments approximates fair value based upon their short-term maturity. Investments with maturities of more than three months are classified as marketable securities.
47
Investments in equity securities. The Company accounts for its investments in publicly traded equity securities under Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These investments meet the criteria for classification as available for sale, given the Company’s ability and intent to sell such investments, and are recorded at fair value and included in Other assets on the Consolidated Balance Sheets. Unrealized gains and losses on these
39
marketable investments are recorded, net of tax, as a component of Accumulated other comprehensive income (loss) within the Stockholders’ equity section of the Consolidated Balance Sheets. Realized gains and losses are recorded in
Gain (loss)(Loss) gain on investments, net within the Consolidated Statements of Operations. The cost of equity securities sold is based on specific identification. The Company assesses the need to record impairment losses on investments and records such losses when the impairment of an investment is determined to be other than temporary in nature. In making this assessment,
the Company considerswe consider the significance and duration of the decline in value and the valuation of comparable companies operating in the Internet and technology sectors. The impairment factors
the Company evaluateswe evaluate may change in subsequent periods, since the entities underlying these investments operate in a volatile business environment. In addition, these entities may require additional financing to meet their cash and operational needs; however, there can be no assurance that such funds will be available to the extent needed at terms acceptable to the entities, if at all. These impairment losses are reflected in Gain (loss) on investments, net within the Consolidated Statements of Operations.
The Company accounts for investments that
it doeswe do not have the ability to exercise significant influence over using the cost method of accounting. Accordingly, these investments are carried at the lower of cost or net realizable value and are included in Other assets in the Consolidated Balance Sheets (see Note
5 -3 — Investments). The equity method is used to account for investments in entities that are not majority-owned and that the Company does not control but over which
it haswe have the ability to exercise significant influence.
Property, equipment and leasehold improvements. Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining term of the related leases. Property, equipment and leasehold improvements, less accumulated depreciation and amortization consist of the following (in thousands):
| | | | | | | | | | | | | |
| | | | | | | December 31, | |
| | | Useful Life (Years) | | | 2004 | | | 2003 | |
| | | |
| Computer equipment and software | | | 2 - 3 | | | $ | 153,489 | | | $ | 146,700 | |
| Furniture and equipment | | | 3 - 8 | | | | 43,261 | | | | 42,795 | |
| Leasehold improvements | | | 2 - 15 | | | 46,096 | | | | 44,871 | |
| ` | | | | | | |
| | | | | | | | 242,846 | | | | 234,366 | |
| Less – accumulated depreciation and amortization | | | | | | | (179,351 | ) | | | (167,825 | ) |
| ` | | | | | | |
| | | | | | | $ | 63,495 | | | $ | 66,541 | |
| ` | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | December 31, | |
| | | Useful Life (Years) | | | 2005 | | | 2004 | |
| Computer equipment and software | | | 2 - 3 | | | $ | 138,121 | | | $ | 153,489 | |
| Furniture and equipment | | | 3 - 8 | | | | 39,892 | | | | 43,261 | |
| Leasehold improvements | | | 2 - 15 | | | | 46,123 | | | | 46,096 | |
| | | | | | | | | | | |
| | | | | | | | 224,136 | | | | 242,846 | |
| Less — accumulated depreciation and amortization | | | | | | | (162,366 | ) | | | (179,351 | ) |
| | | | | | | | | | | |
| | | | | | | $ | 61,770 | | | $ | 63,495 | |
| | | | | | | | | | |
At December 31,
20042005 and
2003,2004, capitalized development costs for internal use software were
$13.4$13.2 million and
$13.1$13.4 million, respectively, net of accumulated amortization of
$17.4$14.0 million and
$32.5$17.4 million, respectively. Amortization of capitalized internal software development costs totaled
$6.7 million, $7.7 million,
and $10.6 million
during 2005, 2004, and
$15.22003, respectively, which is included in Depreciation in the Consolidated Statements of Operations. Depreciation expense was $24.9 million,
(unaudited) during Calendar$26.6 million, and $34.4 million in 2005, 2004,
and 2003,
and 2002, respectively, $4.4 million during Transition 2002, and $15.7 million during Fiscal 2002.respectively.
Software development costs. The Company capitalizes certain computer software development costs and enhancements, for software sold to customers, after the establishment of technological feasibility, limited to the net realizable value of the software product, and ceaseceases capitalization when the software product is available for general release to clients. Until these products reach technological feasibility, all costs related to development efforts are charged to expense. Once technological feasibility has been determined, additional costs incurred in development, including coding, testing, and documentation, are capitalized. Amortization of software development costs is provided on a product-by-product basis over the estimated economic life of the software, generally two years, using the straight-line method and is recorded within Depreciation. Amortization of capitalized computer software development costs begins when the products are available for general release to customers. Periodic reviews are performed to ensure that unamortized capitalized software development costs remain recoverable from future revenue. Capitalized software costs, net of accumulated amortization, were $0.3$0.1 million and $1.1$0.3 million at December 31, 2005 and 2004, respectively. Amortization expense was $0.6 million, $0.9 million, and $1.6 million in 2005, 2004, and 2003, respectively. Amortization expense was $0.9 million, $1.6 million and $1.5 million (unaudited) in Calendar 2004, 2003, and 2002, respectively, $0.4 million in Transition 2002, and $1.4 million in Fiscal 2002.In December 2005 the Company decided to discontinue the sale of internally created software to customers, the effects of which were immaterial.
4840
Intangible assets. Intangible assets are amortized using the straight-line method over their expected useful lives. Intellectual property and databases are amortized over 18 months, while customer relationships are amortized over five years. Noncompete agreements are amortized over two to five years while trademarks are amortized over nine to twelve years. The acquisition of META resulted in the recording of $25.6 million of intangibles assets, which was composed of $14.4 million of intellectual property, $7.7 million of customer relationships, and $3.5 million of customer relationships.
Intangible assets subject to amortization includedinclude the following (in thousands):
| | | | | | | | | | | | | |
| | | | | | | December 31, | |
| | | Amortization Period (Years) | | | 2004 | | | 2003 | |
| | | |
| Non-compete agreements: | | | 2 - 5 | | | | | | | | | |
| Gross cost | | | | | | $ | 628 | | | $ | 13,257 | |
| Accumulated amortization | | | | | | | (548 | ) | | | (12,599 | ) |
| ` | | | | | | |
| Non-compete agreements, net | | | | | | | 80 | | | | 658 | |
| Trademarks and tradenames: | | | 9 - 12 | | | | | | | | | |
| Gross cost | | | | | | | 202 | | | | 1,811 | |
| Accumulated amortization | | | | | | | (144 | ) | | | (1,484 | ) |
| ` | | | | | | |
| Trademarks and tradenames, net | | | | | | | 58 | | | | 327 | |
| ` | | | | | | |
| Intangible assets, net | | | | | | $ | 138 | | | $ | 985 | |
| ` | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2005 | | Intellectual | | | Customer | | | Databases | | | Other | | | Total | |
| | | Property | | | Relationships | | | | | | | | | | |
| Gross cost | | $ | 14,317 | | | $ | 7,700 | | | $ | 3,479 | | | $ | 1,293 | | | $ | 26,789 | |
| Accumulated amortization | | | (7,158 | ) | | | (1,155 | ) | | | (1,739 | ) | | | (944 | ) | | | (10,996 | ) |
| | | | | | | | | | | | | | | | |
| Net | | $ | 7,159 | | | $ | 6,545 | | | $ | 1,740 | | | $ | 349 | | | $ | 15,793 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2004 | | Intellectual | | | Customer | | | Databases | | | Other | | | Total | |
| | | Property | | | Relationships | | | | | | | | | | |
| Gross cost | | $ | — | | | $ | — | | | $ | — | | | $ | 1,555 | | | $ | 1,555 | |
| Accumulated amortization | | | — | | | | — | | | | — | | | | (1,417 | ) | | | (1,417 | ) |
| | | | | | | | | | | | | | | | |
| Net | | $ | — | | | $ | — | | | $ | — | | | $ | 138 | | | $ | 138 | |
| | | | | | | | | | | | | | | | |
The Other category includes noncompete agreements and trademarks. Aggregate amortization expense related to intangibleintangibles assets was $10.2 million, $0.7 million, and $1.3 million for 2005, 2004, and $1.9 million (unaudited) for Calendar 2004, 2003, and 2002, respectively, $0.5 million for Transition 2002, and $1.9 million for Fiscal 2002. Estimated aggregaterespectively.
The estimated future amortization expense for each of the next five Calendar years for intangible assets recorded in the Consolidated Balance Sheet as of December 31, 2004by year from purchased intangibles is as follows (in thousands):
| | | | | |
| Year ended December 31, | | | | |
| |
| 2005 | | $ | 98 | |
| 2006 | | | 37 | |
| 2007 | | | 3 | |
| | | | |
| Total | | $ | 138 | |
| | | | |
| | | | | |
| 2006 | | $ | 10,573 | |
| 2007 | | | 1,580 | |
| 2008 | | | 1,580 | |
| 2009 | | | 1,580 | |
| 2010 | | | 480 | |
| | | | |
| | | $ | 15,793 | |
| | | | |
Goodwill. Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the tangible and identifiable intangible net assets acquired.
Effective October 1, 2001, the Company adoptedUnder SFAS No. 142, “Goodwill and Other Intangible
Assets.Assets,”
The adoption of SFAS No. 142 eliminated goodwill
amortization. Instead, goodwillis not amortized but is tested for impairment, at
least annually, at the reporting unit
level, at least annually.level. A reporting unit can be an operating segment or a business if discrete financial information is prepared and reviewed by management. Under the impairment test, if a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the extent that the reporting unit’s carrying amount of goodwill exceeds the implied fair value of the goodwill. The fair value of reporting units were estimated using discounted cash flows, market multiples, and other valuation techniques.
The acquisition of META resulted in the recording of $181.2 million of goodwill (see Note 2 — Acquisition of META). The carrying amount of goodwill was allocated to the Company’s segments as follows (in thousands):follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | Balance | | Goodwill | | Currency | | Balance | |
| | | 2004 | | 2003 | | | December 31, | | From META | | Translation | | December 31, | |
| | | | | 2004 | | Acquisition | | Adjustments | | 2005 | |
| Research | | $ | 131,921 | | $ | 128,896 | | | $ | 131,921 | | $ | 154,593 | | $ | (7,014 | ) | | $ | 279,500 | |
| Consulting | | 67,150 | | 68,803 | | | 67,150 | | 20,770 | | | (1,834 | ) | | 86,086 | |
| Events | | 30,606 | | 30,606 | | | 30,606 | | 5,872 | | | (112 | ) | | 36,366 | |
| Other | | 2,082 | | 2,082 | | | 2,082 | | — | | — | | 2,082 | |
| | | | | | | | | | | | |
| Total goodwill | | $ | 231,759 | | $ | 230,387 | | | $ | 231,759 | | $ | 181,235 | | $ | (8,960 | ) | | $ | 404,034 | |
| | | | | | | | | | | | |
During Calendar
In 2004, the Company recorded goodwill impairment charges of $2.7 million in the Consulting segment related to certain operations in
41
South America that were closed and for the exit from other non-core operations.
The remaining changes in goodwill in the table above were the result of currency translation.49
Impairment of long-lived assets and intangible assets. The Company reviews long-lived assets and intangible assets other than goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of the respective asset may not be recoverable. Such evaluation may be based on a number of factors including current and projected operating results and cash flows, changes in management’s strategic direction as well as other economic and market variables. The Company’s policy regarding long-lived assets and intangible assets other than goodwill is to evaluate the recoverability of these assets by determining whether the balance can be recovered through undiscounted future operating cash flows. Should events or circumstances indicate that the carrying value might not be recoverable based on undiscounted future operating cash flows, an impairment loss would be recognized. The amount of impairment, if any, is measured based on the difference between projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds and the carrying value of the asset (see Note 64 — Other Charges).
Foreign currency translation. All assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as foreign currency translation adjustments, a component of Accumulated other comprehensive income (loss), net within the Stockholders’ equity section of the Consolidated Balance Sheets. Income and expense items are translated at average exchange rates for the year. Currency transaction gains or losses arising from transactions denominated in currencies other than the functional currency of a subsidiary are included in results of operations within Other income (expense), net within the Consolidated Statements of Operations. Currency transaction gains (losses), net were
$(2.8) million during 2005, $(3.9) million during
Calendar 2004,
and $0.5 million during
Calendar 2003, $(0.4) million (unaudited) during Calendar, 2002, $(0.1) million during Transition 2002, and $(0.8) million during Fiscal 2002.2003. The $(3.9)
million currency transaction loss in
Calendar 2004
includesincluded a foreign currency charge of $(3.1) million related to the closing of certain operations in South America.
From time to time we enter into foreign currency forward exchange contracts or other derivative financial instruments to offset the effects of adverse fluctuations in foreign currency exchange rates. These contracts have a short maturity and are reflected at fair value with unrealized and realized gains and losses recorded in Other income (expense). During 2005, the net gain (loss) from these contracts was immaterial. At December 31, 2005, the Company had eleven foreign currency forward contracts outstanding with a total notional amount of approximately $53.0 million. All of these contracts expired in January 2006.
Income taxes. Deferred tax assets and liabilities are recognized based on differences between the book and tax basis of assets and liabilities using presently enacted tax rates. The provision for income taxes is the sum of the amount of income tax paid or payable for the year as determined by applying the provisions of enacted tax laws to taxable income for that year and the net changes during the year in deferred tax assets and liabilities. The Company creditsWe credit additional paid-in capital for realized tax benefits arising from stock transactions with employees. The tax benefit on a nonqualified stock option is equal to the tax effect of the difference between the market price of the Company’s common stock on the date of exercise and the exercise price.
Undistributed earnings of subsidiaries outside of the U.S. amounted to approximately
$83.0$30.0 million as of December 31,
2004,2005. These earnings have been and will continue to be permanently reinvested. Accordingly, no provision for
which no deferredU.S. federal and state income taxes
hadhas been
previously recorded in accordance with Accounting Principles Board Opinion No. 23, “Accounting for Income Taxes - Special Areas” (“APB 23”).provided thereon. The Company
anticipates repatriatingdid repatriate approximately $52.0 million of
this amountforeign earnings in
early 2005. Pursuant2005 in order to
take advantage of the beneficial provisions of the American Jobs Creation Act of 2004
(AJCA). Pursuant to the AJCA, a
deferred tax charge of $5.0 million was included in tax expense for
2004. This2004 and a tax benefit of $3.6 million was included in tax expense for 2005. The net charge
of $1.4 million is the Company’s best
current estimate of the tax cost related to the dividend repatriation.
Such estimate may be revised as a result of additional guidance or clarifying language that may be issued by Congress and/or the Department of the Treasury, or any changes in the Company’s factual assumptions that may occur.Fair value of financial instruments. The Company’s financial instruments include cash and cash equivalents, fees receivable, accounts payable, and accruals which are short-term in nature. The carrying amounts of these financial instruments approximate their fair value. Investments in publicly traded equity securities are valued based on quoted market prices. Investments in equity securities that are not publicly traded are valued at the lower of cost or net realizable value, which approximates fair market value.
At December 31,
2004,2005, the Company had
$190.0$246.7 million
outstanding under its senior revolving credit facility.of borrowings outstanding. The carrying amount of these borrowings approximates fair value as the rate of interest on the
revolving credit facilityterm loan and revolver approximates current market rates of interest for similar instruments with comparable maturities.
In December 2005 the Company entered into an interest rate swap agreement to hedge its exposure to the floating base interest rate on the term loan (see Note 6 — Debt). The interest rate swap had a negative fair value of approximately $0.7 million at December 31, 2005.
Concentrations of credit risk.Financial instruments that potentially subject
the Companyus to concentrations of credit risk consist primarily of cash and cash equivalents, marketable equity securities and fees receivable. Concentrations of credit risk with respect to fees receivable are limited due to the large number of clients comprising the client base and their dispersion across many different industries and geographic regions.
Use of estimates. The Company makes estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures, if any, of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates are required by generally accepted accounting principles in the United States of America in the Company’s preparation of its Consolidated Financial Statements. Actual results could differ from those estimates. Estimates are used
42
when accounting for such items as allowance for doubtful accounts, investments, depreciation, amortization, income taxes and certain accrued liabilities.
Accounting for stock-based compensation. The Company has several stock-based compensation plans. The Company applies
APBAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) in accounting for our employee stock options and purchase rights and apply Statement of Financial Accounting Standards No. 123 “Accounting for Stock Issued to Employees” (“SFAS
No. 123”) for disclosure purposes only. Under APB 25, the intrinsic value method is used to account for stock-based employee compensation plans. The SFAS
No. 123 disclosures include pro forma net income and earnings per share as if the fair value-based method of accounting had been used. If compensation for employee
stock compensationoptions had been determined based on SFAS
No. 123,
the Company’sour pro forma net
(loss) income, and pro forma
(loss) income per share would have been as follows (in thousands, except per share data):
50
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| Net (loss) income as reported | | $ | (2,437 | ) | | $ | 16,889 | | | $ | 23,589 | |
| Stock-based compensation expense included in net (loss) income, net of tax | | | 679 | | | | 930 | | | | 697 | |
| Pro forma employee stock-based compensation cost, net of tax | | | (39,517 | ) | | | (12,570 | ) | | | (16,665 | ) |
| | | | | | | | | | |
| Pro forma (loss) income | | $ | (41,275 | ) | | $ | 5,249 | | | $ | 7,621 | |
| | | | | | | | | | |
| Basic (loss) income per share: | | | | | | | | | | | | |
| As reported | | $ | (0.02 | ) | | $ | 0.14 | | | $ | 0.26 | |
| Pro forma | | $ | (0.37 | ) | | $ | 0.04 | | | $ | 0.08 | |
| | | | | | | | | | |
| Diluted (loss) income per share: | | | | | | | | | | | | |
| As reported | | $ | (0.02 | ) | | $ | 0.13 | | | $ | 0.25 | |
| Pro forma | | $ | (0.37 | ) | | $ | 0.04 | | | $ | 0.08 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | Calendar | | | Calendar | | | Transition | | | Fiscal | |
| | | 2004 | | | 2003 | | | 2002 | | | 2002 | |
| | | |
| Net income (loss) as reported | | $ | 16,889 | | | $ | 23,589 | | | $ | (14,418 | ) | | $ | 48,423 | |
| Stock-based compensation expense included in net income | | | | | | | | | | | | | | | | |
| (loss), net of tax | | | 930 | | | | 697 | | | | 563 | | | | 1,768 | |
| Pro forma employee stock-based compensation cost, net of tax | | | (12,570 | ) | | | (16,665 | ) | | | (5,814 | ) | | | (30,116 | ) |
| | | |
| Pro forma income (loss) | | $ | 5,249 | | | $ | 7,621 | | | $ | (19,669 | ) | | $ | 20,075 | |
| | | |
| | | | | | | | | | | | | | | | | |
| Basic income (loss) per share: | | | | | | | | | | | | | | | | |
| As reported | | $ | 0.14 | | | $ | 0.26 | | | $ | (0.18 | ) | | $ | 0.58 | |
| Pro forma | | $ | 0.04 | | | $ | 0.08 | | | $ | (0.24 | ) | | $ | 0.24 | |
| | | |
| | | | | | | | | | | | | | | | | |
| Diluted income (loss) per share: | | | | | | | | | | | | | | | | |
| As reported | | $ | 0.13 | | | $ | 0.25 | | | $ | (0.18 | ) | | $ | 0.46 | |
| Pro forma | | $ | 0.04 | | | $ | 0.08 | | | $ | (0.24 | ) | | $ | 0.24 | |
| | | |
The fair value of the Company’s stock plans used to compute pro forma net (loss) income (loss) and diluted (loss) income per share disclosures is the estimated fair value at grant date using the Black-Scholes option pricing model. The following weighted-average assumptions were utilized for stock options granted or modified:
| | | | | | | | | | | | | | | | | | |
| | | Calendar | | Calendar | | Transition | | Fiscal | | |
| | | 2004 | | 2003 | | 2002 | | 2002 | | | | | | | |
| | | | | 2005 | | 2004 | | 2003 |
| Expected life (in years) | | 3.8 | | 3.6 | | 3.4 | | 3.5 | | | 3.1 | | 3.8 | | 3.6 |
| Expected volatility | | | 40 | % | | | 43 | % | | | 47 | % | | | 50 | % | | 31% | | 40% | | 43% |
| Risk free interest rate | | | 3.0 | % | | | 2.0 | % | | | 2.2 | % | | | 3.2 | % | | 3.7% | | 3.0% | | 2.0% |
| Expected dividend yield | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | 0.0% | | 0.0% | | 0.0% |
The weighted average fair values of the Company’s stock options granted in
Calendar2005, 2004,
Calendarand 2003
Transition 2002were $2.73, $4.20, and
Fiscal 2002 are $4.20, $3.10,
$2.93, and $3.67, respectively.
Recently issued accounting standards.
On June 1, 2005 the Financial Accounting Standards Board issued SFAS No. 154,Accounting Changes and Error Corrections(“SFAS No. 154”), which will require entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless such application would be impracticable. SFAS No. 154 supersedes Accounting Principles Board Opinion No. 20,Accounting Changes(“APB 20”), which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. Another significant change in practice under SFAS No. 154 will be that if an entity changes its
43
method of depreciation, amortization, or depletion for long-lived, nonfinancial assets, the change must be accounted for as a change in accounting estimate. Under APB 20, such a change would have been reported as a change in accounting principle. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005.
In December 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 123R,
Share-Based Payments (“SFAS 123R”)“Share-Based Payment” (SFAS No. 123R).
The ruleThis statement replaces SFAS
No. 123 and APB 25 and will require the recognition of expense for share-based payments, to include the value of stock options
and other equity awards granted to employees. The revised
rule isstatement was originally effective for periods beginning after June 15, 2005,
butwith early adoption
is permitted.
The Company plans to adoptOn April 21, 2005 the
new rule on July 1, 2005. The Company is currently assessingSEC issued a standard that amends the
impact the revised rule will have on its financial position, cash flows, and resultsdate of
operations, and believe it may have a material effect on the Company’s results of operations.In December 2003, the FASB issuedcompliance with SFAS No. 132 (Revised), “Employer’s Disclosures about Pensions and Other Postretirement Benefits”123R (“SFAS 132R”the SEC amendment”). Under the SEC amendment, SFAS 132R requires additional disclosures relating to assets, obligations, cash flows and net periodic pension cost.No. 123R must be adopted beginning with the first interim or annual reporting period of the registrant’s first fiscal year beginning on or after June 15, 2005. Gartner adopted SFAS 132R is effective for fiscal years ending after December 31, 2003. The Company’s required SFAS 132R disclosure is included in Note 14 – Employee Benefits.
No. 123R on January 1, 2006, under the prospective method of adoption.
2—ANNOUNCED ACQUISITION OF META On December 27, 2004,April 1, 2005, the Company andcompleted the acquisition of META announced an agreement under which the Company will acquire META in an all-cash transaction for $10.00 per share, ora purchase price of approximately $162.0$168.3 million, excluding transaction costs.costs of approximately $8.1 million. Pursuant to the Agreement and Plan of Merger, each share of META is a publicly owned, premiercommon stock outstanding at the effective time of the merger was converted into the right to receive $10.00 in cash. The Company funded the purchase of META with $67.0 million borrowed under its revolving credit facility and existing cash.
META was an information technology and research firm basedfirm. The acquisition is intended to accelerate revenue growth in Stamford, ConnecticutGartner’s core research business by increasing sales coverage through the addition of sales people from META with 715 employees. In 2004,knowledge of the marketplace and existing client relationships, increasing the Company’s presence in targeted international markets and providing greater coverage in several key industries. The acquisition is also intended to achieve cost synergies in general and administrative expenses.
The acquisition was accounted for as a purchase business combination. The consolidated financial statements include the results of META generated $141.5 million in revenue from 52 worldwide locations and had $90.8 million of assets at December 31, 2004. META trades on the NASDAQ National Market under the symbol “METG.” The Boards of Directors of both firms have approved the agreement, and on January 31, 2004, the Company announced that notice had been received from the Federal Trade Commissiondate of early terminationacquisition. The purchase price was allocated to the net assets and liabilities acquired based on their estimated fair values as of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act concerning its planned acquisition of META. META filed its definitive proxy statement with the SECdate, based on February 17, 2005 and is scheduled to hold a special meeting of stockholders to approve the transaction on March 23, 2005. Closingthird party valuation. Any excess of the transaction, which is subjectpurchase price over the estimated fair value of the net assets acquired, including identifiable intangible assets, was allocated to customary closing conditions, including approval by META’s stockholders, is expectedgoodwill. A final determination of the purchase price allocation will be made within one year of the acquisition date.
The following table represents the preliminary allocation of the purchase price to be effective April 1, 2005. See Note 9 – Commitmentsassets acquired and Contingencies for additional information.liabilities assumed (dollars in thousands):
| | | | | |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 15,144 | |
| Fees receivable, net | | | 31,506 | |
| Prepaid expenses and other current assets | | | 867 | |
| | | | |
| Total current assets | | | 47,517 | |
| Property, equipment, and leasehold improvements, net | | | 1,353 | |
| Goodwill | | | 181,235 | |
| Intangible assets: | | | | |
| Content | | | 14,400 | |
| Customer relationships | | | 7,700 | |
| Databases | | | 3,500 | |
| | | | |
| Total intangible assets | | | 25,600 | |
| Other assets | | | 10,199 | |
| | | | |
| Total assets | | $ | 265,904 | |
| | | | |
| | | | | |
| Liabilities | | | | |
| Current liabilities: | | | | |
| Accounts payable and accrued liabilities | | $ | 52,227 | |
| Deferred revenues | | | 36,162 | |
| Notes payable | | | 958 | |
| | | | |
5144
| | | | | |
| Total current liabilities | | | 89,347 | |
| Other liabilities | | | 134 | |
| | | | |
| Total liabilities | | $ | 89,481 | |
| | | | |
At December 31, 2005, $154.6 million, $20.7 million, and $5.9 million of goodwill were recorded in the Research, Consulting, and Events segments, respectively, as a result of the META acquisition. Of the total $181.2 million recorded in goodwill related to META at December 31, 2005, none is expected to be deductible for income tax purposes. During the fourth quarter of 2005, the Company reduced recorded goodwill from the META acquisition by $4.0 million, to $181.2 million from $185.2 million at September 30, 2005. The reduction was due to the recording of a reduction of $3.1 million in accrued facility and other liabilities and a reduction in deferred revenues of $0.9 million. At December 31, 2005, the Company believes that it may still record changes to the purchase price allocation related to deferred revenues and the recording of liabilities related to META integration activities under Emerging Issues Task Force Issue 95-3 (see the table below).
Intangible assets recorded on the META acquisition are being amortized on a straight-line basis over their estimated remaining lives. Customer relationships are amortized over five years. Content represents research that is part of the intellectual property of META and is amortized over 18 months. META databases are used to generate consulting services to specific customers and are amortized over 18 months.
The preliminary purchase price allocation includes an estimate of the fair value of the cost to fulfill the deferred revenue obligation assumed from META. The estimated fair value of the deferred revenue obligation was determined by estimating the costs to provide the services plus a normal profit margin, and did not include any costs associated with selling efforts. As a result, in allocating the purchase price, the Company has recorded adjustments to reduce the carrying value of META’s March 31, 2005 deferred revenue balance by approximately $12.6 million.
In connection with the META acquisition, the Company commenced integration activities that resulted in the recording of liabilities in purchase accounting under Emerging Issues Task Force Issue 95-3, “Recognition of Liabilities in Connection with a Purchase Combination” (“EITF 95-3”), for involuntary terminations and lease and contract terminations. The liability for involuntary termination benefits covers 276 employees and through December 31, 2005, almost all of these employees have been terminated. The Company expects to pay the remaining balance for severance and benefits by March 31, 2006. The majority of the remaining liabilities for contract terminations and exit costs should be paid by June 30, 2006, while the lease liabilities will be paid over their respective contract periods through 2012.
The following table summarizes the initial obligations recorded and activity through December 31, 2005 (dollars in thousands) under EITF 95-3:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Opening Balance | | | | | | | | | | | | | | | Currency | | | | |
| | | April 1, | | | Additional | | | | | | | | | | | Translation | | | Balance | |
| | | 2005 | | | Accruals (1) | | | Adjustments (2) | | | Payments | | | Adjustments | | | December 31, 2005 | |
| Lease terminations | | $ | 15,383 | | | $ | — | | | $ | (2,290 | ) | | $ | (4,302 | ) | | $ | (255 | ) | | $ | 8,536 | |
| Severance and benefits | | | 11,251 | | | | 740 | | | | (690 | ) | | | (10,411 | ) | | | (499 | ) | | | 391 | |
| Contract terminations | | | 3,008 | | | | 1,358 | | | | (1,016 | ) | | | (3,237 | ) | | | — | | | | 113 | |
| Costs to exit activities | | | 1,415 | | | | — | | | | (133 | ) | | | (835 | ) | | | (26 | ) | | | 421 | |
| Tax contingencies | | | — | | | | 569 | | | | — | | | | — | | | | — | | | | 569 | |
| | | | | | | | | | | | | | | | | | | |
| | | $ | 31,057 | | | $ | 2,667 | | | $ | (4,129 | ) | | $ | (18,785 | ) | | $ | (780 | ) | | $ | 10,030 | |
| | | | | | | | | | | | | | | | | | | |
(1) During 2005, the Company recorded $2.6 million of additional accruals related to META obligations under EITF 95-3. The effect of these additional accruals is to increase the amount of recorded goodwill from the META acquisition.
In the fourth quarter of 2005, the Company booked an additional accrual against goodwill of approximately $0.1 million related to the identification of an additional tax contingency. During the third quarter of 2005, the Company recorded an additional accrual against goodwill of approximately $0.4 million related to a contract settlement of a META equipment lease obligation. During the second quarter of 2005, the Company recorded accruals of approximately $2.1 million against goodwill for additional severance, the termination of two META contracts, and for various tax contingencies. The Company recorded $0.7 million of severance related to the identification of additional benefits that will be paid to severed META employees. In addition, the Company recorded a $0.4 million accrual related to the termination of a META sales agent relationship, and a $0.5 million accrual was for the termination of an existing agreement with a former
3—CORRECTION OF SFAS 87 ACCOUNTING TREATMENT45
Prior
META employee. Under an existing agreement with META, the former employee was entitled to Calendarannual payments for the years 2004 through 2008, which included a percentage of certain META consulting revenues. In the second quarter of 2005, Gartner negotiated the termination of this agreement, effective as of April 1, 2005, by agreeing to engage the former employee on an independent contractor basis through December 31, 2008 and by buying out his right to receive a percentage of revenues for a lump-sum payment. The tax contingencies accrual of approximately $0.5 million reflected the Company’s best estimate at that time of taxes due on various META obligations.
(2) During 2005, the Company recorded various adjustments to the estimated META liabilities booked as of April 1, 2005 that reduced the obligation by $4.1 million. These adjustments were recorded as more information became available regarding the obligations, permitting the Company to make a better estimate of the amount of their ultimate settlement, or the obligations were actually settled in cash for amounts that were different than estimated at the time of the acquisition. The adjustment of these liabilities resulted in a reduction to the goodwill recorded on the META acquisition.
Among these adjustments was a fourth quarter 2005 adjustment to reduce accrued lease terminations by $2.3 million due to higher rental revenue related to faster subleasing of the leases than originally projected. In addition, the Company reduced accrued severance by approximately $0.5 million based on revised estimates on the amount that would be paid, and reversed a $0.1 million contract termination accrual after determining that the Company did not
applyhave any liability. During the
requirementssecond quarter of
SFAS 87 – “Employers’ Accounting for Pensions” (SFAS 87)2005 an adjustment was recorded to
reverse a
defined-benefit pension plan in one of its international locations. The plan is statutory in nature and covers approximately 85 individuals. The Company has determined that approximately $0.7 million
accrual for the termination of
pension expense, net of tax, for this plan should have been recorded over the period 1994 through Calendar 2003 in accordance with the requirements of SFAS 87. Although the impact of this additional expense is immaterial,a sales agent relationship that the Company
has restated its financial statementsbelieved would be settled for
Calendar 2003 and Fiscal 2002 to record the pension expense as a
correction of an error in prior periods. The effect of these adjustments on previously reported operating results and earnings per share is summarized below. The impact of the adjustments reduced total assets by $3.2 million and total liabilities by $2.4 million at December 31, 2003. The impact of the adjustments prior to Fiscal 2002 reduced retained earnings by approximately $0.5 million. There was no effect on the previously reported liquidity or net operating cash flows for either Calendar 2003 or Fiscal 2002. In Calendar 2004, the Company is recording pension expense in accordance with SFAS 87.lesser amount.
The following table sets forthsummarizes the impactunaudited pro forma financial information for the acquisition and the related financing as if the acquisition of META had been consummated on January 1, 2005 and 2004 under the restatement on prior periods (inpurchase method of accounting (dollars in thousands, except per share data)amounts):
| | | | | | | | | | | | | | | | | |
| | | Calendar 2003 | | | Fiscal 2002 | |
| | | As Reported | | | Restated | | | As Reported | | | Restated | |
| Operating income | | $ | 47,461 | | | $ | 47,333 | | | $ | 96,375 | | | $ | 96,183 | |
| | | | | | | |
| Net income | | $ | 23,693 | | | $ | 23,589 | | | $ | 48,578 | | | $ | 48,423 | |
| | | | | | | |
| Basic income per share | | $ | 0.26 | | | $ | 0.26 | | | $ | 0.58 | | | $ | 0.58 | |
| | | | | | | |
| Diluted income per share | | $ | 0.26 | | | $ | 0.25 | | | $ | 0.47 | | | $ | 0.46 | |
| | | | | | | |
| | | | | | | | | |
| | | Twelve Months Ended | |
| | | December 31, | |
| | | 2005 | | | 2004 | |
| Revenues | | $ | 1,022.2 | | | $ | 1,035.0 | |
| Net (loss) income | | | (6.3 | ) | | | 3.8 | |
| (Loss) income per common share: | | | | | | | | |
| Basic | | $ | (0.06 | ) | | $ | 0.03 | |
| Diluted | | $ | (0.06 | ) | | $ | 0.03 | |
The effectunaudited pro forma combined financial information does not necessarily represent what would have occurred if the acquisition had taken place on the dates presented and is not representative of the restatementCompany’s future consolidated results. The future combined Company results will not reflect the historical combined Company results of both entities. Future research revenues are expected to be lower on a combined Company basis as a result of expected customer overlap, and future consulting revenues are expected to be lower on a combined Company basis as a result of exiting certain practices. In addition, the Company’s previously reported annualfuture general and administrative expenses are expected to be lower on a combined company basis as a result of the expected cost synergies. The net financial impact of these matters has not been reflected in the pro forma information. Achievement of any of the expected cost savings and synergies is subject to risks and uncertainties and no assurance can be given that such cost savings or synergies will be achieved.
The pro forma information does not include all liabilities that may result from the operation of META’s business in conjunction with that of Gartner’s following the acquisition and all adjustments in respect of possible settlements of outstanding liabilities (other than those already included in the historical financial statements
wasof either company), as these are not
material.4—BUSINESS ACQUISITIONS
Fiscal 2002
On June 10, 2002,presently estimable. Therefore, the actual amounts ultimately recorded may differ materially from the information presented in the accompanying pro forma information.
The Company
recognizes revenue associated with the fulfillment of the acquired
the remaining 49.9% of People3, Inc., an authority on IT human capital. People3 has been integratedMETA contracts, consistent with the Company’s
consulting segment. Prior to this acquisition,standard revenue recognition methodology, ratably over the
Company owned 50.1%contract term, which is typically twelve months, or upon the completion of
People3 and consolidated its assets and liabilities and resultsthe related event. All direct costs associated with the fulfillment of
operations. Revenues in Fiscal 2002 were approximately $6.9 million. The purchase price was $3.9 million, of which $0.2 million was allocated to non-compete agreements, $0.3 million was allocated to database-related assets and $3.4 million was allocated to goodwill. The non-compete agreementsthe acquired META contracts are being
amortizedexpensed over the
lifeperiod in which the related revenues are recognized. The pro forma information reflects the Company’s current estimate of the
agreements, three-years. The database-related assets are being amortized over their estimated useful life of five years. In December 2004,costs required to fulfill the
Company decideddeferred obligation related to
shutdown the
operations of this non-core product line, the effects of which were immaterial.During Fiscal 2002, the Company completed additional acquisitions for total consideration of approximately $0.7 million, of which $0.1 million was allocated to tangible assets, $0.8 million was allocated to goodwill, $0.2 million was allocated to non-compete agreements and $0.4 million was allocated to liabilities assumed. The non-compete agreements are being amortized over the five-year term of this agreement.
5—acquired META contracts.
At December 31, 2004,2005, the Company’s investments in marketable equity securities and other investments had a cost basis and a fair value of $7.0$0.3 million and arewhich is included in OtherPrepaid expenses and other current assets in the Consolidated Balance Sheet. At December 31, 2004,2005, the Company had an unrealized gain of approximately $0.1 million related to these investments.this investment. Investments in equity securities were $7.0 million at December 31, 2004, which is included in Other assets.
46
During 2005, the Company recorded non-cash charges of $5.1 million and $0.2 million during the first and second quarters, respectively, primarily related to writedowns of its investment in SI II, which the Company had decided to sell in the fourth quarter of 2004. The Company ownsrecorded the writedown in the first quarter of 2005 to reduce the investment to its estimated net realizable value after receiving preliminary indications of interest to acquire the investment for less than its recorded value. The Company took the additional writedown in the second quarter of 2005 based on a preliminary sale agreement for which the proceeds were less than the recorded value. The impairment losses are recorded in (Loss) gain from investments, net in the Consolidated Statements of Operations. On August 2, 2005, the Company sold its investment in SI II for approximately $1.3 million, with no resulting gain or loss recorded on the sale since the investment was already at net realizable value. During the fourth quarter of 2005, the Company sold an investment in common stock it had acquired in the META acquisition for $0.7 million, and recorded a loss of $0.5 million, which is recorded in (Loss) gain from investments, net in the Consolidated Statements of Operations.
In the fourth quarter of 2004, the Company made the decision to liquidate its equity
securities through two limited partnerships,investments in SI Venture Associates (“SI I”) and
to sell the Company’s interest in SII. SI
Venture FundI and SI II
(“SI II”), which arewere venture capital funds engaged in making investments in early to mid-stage IT-based or Internet-enabled companies, of which the Company
ownsowned 100% of SI I and 22% of SI II at December 31, 2004. In the fourth quarter of
Calendar 2004, the Company made the decision to liquidate SI I and to sell the Company’s interest in SI 11. In addition, in the fourth quarter of Calendar 2004, the Company recorded a charge of $1.5 million related to the liquidation of SI I, to include $0.8 million for the writedown of the investment and $0.7 million in related shutdown charges. No charges were recorded on SI II in the fourth quarter of
Calendar 2004 related to the planned sale since
management believed that the carrying value of the investment
approximatesapproximated its net realizable value. In the third quarter of
Calendar 2004, the Company recorded a non-cash charge of $2.2 million related to the transfer of
itsan investment
in TruSecure to SI II, as well as a decrease in
itsthe Company’s ownership percentage in SI II of seven hundred basis points.
As a result of this transfer and the decrease in ownership, the Company was relieved of all future capital calls, which totaled $4 million.52
Impairment losses on these investments are reflected in Gain (loss) on investments, net in the Consolidated Statements of Operations. The carrying value of the Company’s investments held by SI I and SI II waswere zero and $6.7 million, respectively, at December 31, 2004. The investment in SI II iswas not presented separately on the balance sheet as a held for sale asset as the amount iswas not material.
At December 31, 2003, the Company’s investments in marketable equity securities and other investments had a cost basis and a fair value of $10.9 million. Unrealized gains and losses at December 31, 2003 were individually insignificant.
During
Calendar 2003, the Company received proceeds of approximately $5.5 million, recorded as
a gain on investments, on insurance proceeds received associated with a negotiated settlement
regarding a claim, which occurred in Fiscal 2000, arising from the sale of GartnerLearning. On September 1, 1998, the Company sold GartnerLearning, a division that provided technology based training and services for IT professionals, to NETg Inc. (“NETg”), a subsidiary of Harcourt, Inc. (formerly Harcourt Brace & Company), and the Company recorded a pre-tax loss of approximately $2.0 million. In addition, the Company recorded an additional loss, as a loss on investments, of $6.7 million during Fiscal 2000 in connection with a negotiated settlement of a claim arising from the sale of
GartnerLearning.During CalendarGartnerLearning in 1998. Also during 2003, the Company recorded an impairment loss of $0.9 million on a minority-owned investment that iswas not publicly traded. The Company evaluated the investment for impairment because of the investee’s recapitalization due to its lack of capital resources to redeem its mandatorily redeemable equity. As a result of this, the holders of the mandatorily redeemable shares have agreed to a recapitalization of the entity. At December 31, 2003, the Company wrote the investment down to estimated of fair value. The estimate of fair value was based upon a combination of valuation techniques including a discounted cash flow analysis of future projections of operating performance, market comparables and other available information.
4—OTHER CHARGES
During
Transition 2002, the Company recognized impairment losses of $1.7 million associated with the Company’s investment in SI I and SI II. During Fiscal 2002, the Company sold 748,118 shares of CNET for $6.0 million resulting in a pre-tax gain of $0.8 million, and recognized impairment losses related to its SI investments of $2.5 million.The Company’s share of equity gains in SI I and SI II was $0.1 million for both Calendar 2004 and 2003, $0.01 million for Transition 2002, and $0.2 million for Fiscal 2002.
SI and Other Investments – Related Party
The Company owns 100% of SI I and 22% of SI II at December 31, 2004. Both entities are managed by SI Services Company, L.L.C., an entity controlled by a former CEO and Chairman of the Board, who continues to be paid pursuant to the terms of his employment agreement with the Company, and certain of the Company’s former officers and employees. Management fees incurred for SI Services Company, L.L.C. are approximately $1.2 million per year. In addition, the Company provides access to research and the use of certain office space at no cost to SI Services Company, LLC. The Company had a total original investment commitment to SI I and SI II of $10.0 million and $30.0 million, respectively. The commitment to SI I was fully funded in prior years. The Company made contributions to the SI investments of $2.0 million and $1.5 million during Calendar 2003 and Fiscal 2002, respectively. No contributions were made during Transition 2002. Of the $30.0 million commitment to SI II, $4.0 million remained unfunded at December 31, 2003. In the third quarter of Calendar 2004,2005, the Company recorded a non-cash chargeOther charges of $2.2$29.2 million, which included $10.7 million related to the transferworkforce reductions, $6.0 million for an option buyback, $8.2 million primarily due to a reduction in office space, and approximately $4.3 million of its investment in TruSecure to SI II, as well as a decrease in ownership percentage in SI II of seven hundred basis points. As a result of this transfer and the decrease in ownership, the Company was relieved of all future capital calls for SI II.
6—OTHER CHARGES
other charges.
During the fourth quarter of Calendar2005, the Company recorded other charges of $1.5 million for costs associated with employee termination severance payments and related benefits for 27 employees. In addition, during the fourth quarter of 2005 the Company reversed approximately $0.7 million of previously accrued severance benefits because the amounts paid were less than accrued. During the third quarter of 2005, the Company recorded other charges of $6.0 million related to its completion of a one time offer to buy back certain vested and outstanding stock options for cash (See Note 8 — Equity and Stock Programs). During the second quarter of 2005, the Company recorded other charges of $8.2 million. Included in the second quarter charge was $8.2 million of costs primarily related to the reduction of office space in San Jose, California, by consolidating employees from two buildings into one. The Company also recorded a charge of $0.6 million associated with certain stock combination expenses, which was offset by a reversal of $0.9 million of accrued severance and other charges that the company determined would not be paid. During the first quarter of 2005, the Company recorded other charges of $14.3 million. Included in the charge was $10.6 million for costs associated with employee termination severance payments and related benefits. The workforce reduction was a continuation of the plan announced in the fourth quarter of 2004 which resulted in the termination of 123 employees during the three months ended March 31, 2005. In addition, during the first quarter of 2005 the Company also recorded other charges of approximately $3.7 million, primarily related to a restructuring of the Company’s international operations.
During 2004, the Company recorded Other charges of
$11.9 million, of which $5.9 million$35.8 million. Included in this amount was
for severance and benefits related to an announced workforce reduction. The Company severed 40 employees and expects additional workforce reductions to occur during the first quarter of Calendar 2005 as part of this effort. Other charges of $4.3 million during the third quarter of Calendar 2004 primarily included severance costs associated with the departure of the Company’s President and COO and former Chairman and CEO of $3.1 million and $0.8 million, respectively. Other charges of $9.1 million during the second quarter of Calendar 2004 included $3.8 million of severance costs associated with the departure of the Company’s former Chairman and CEO, as well as $5.3 million of costs associated with the termination of 30 additional employees. During the first quarter of Calendar 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 Calendar 2003 and has resulted in the termination of 132 employees, or approximately 4% of the Company’s workforce, bringing the total terminations to 262 employees associated with the action plan previously announced in December 2003.For all of Calendar 2004, the Company recorded total charges of $29.7 million related to the realignment of the Company’s workforce,severance and benefits for 203 employees, including costs of $7.7 million related to the departure of the Company’sour President and COO and our former Chairman and CEO. This realignment resulted inOf the termination of 203 employees, for132 were severed as part of the full year. The annualized savings from the termination of these employees should be
53
approximately $23.3 million. However, the Company plans to reinvest a significant portion of these savings into improving its products, processes, and infrastructure to help drive future growth.
Additionally, duringaction plan announced in the fourth quarter of Calendar2003. During 2004 the Company also revised its estimatesestimate of previously recorded costs and losses associated with excess facilities and recorded $2.3 million of additional provisions. The revised estimate was due to a decline in market lease rates for expected subleases, as well as a reduction in estimated periods of subleases. The Company also recorded a chargecharges in 2004 of $1.9 million in the fourth quarter of Calendar 2004 related to the restructuring of certain internal systems, and $1.8 million for charges related to the exit from certain international and other non-core operations.
During Calendar
In 2003, the Company recorded Other charges of $29.7 million. Of these charges, $20.0 million arewas associated with the Company’s workforce reductions; $5.4 million is associated with the workforce reduction announced in February 2003, and $14.6 million is associated with the workforce reduction announced in December 2003. These workforce reductions resulted in the termination oftotaling 222 employees and the payment of $7.6 million during Calendar 2003.people. In addition, approximatelythe Company recorded $9.7 million of these charges relate tofor additional estimated costs and losses associated with excess facilities that were previously reserved for as other charges during Fiscal 2002 and Transition 2002. The increase in the estimated costs and losses on these facilities was a result of the continued decline in market rents for the associated facility, as well as changes in estimates of timing of sublease income.facilities.
47
During Transition 2002, the Company recorded other charges of $32.2 million. Of these charges, $13.3 million relates to costs and losses associated with the elimination and reduction of excess facilities, principally leased facilities and ongoing lease costs and losses associated with sub-lease arrangements. In addition, approximately $18.9 million of these charges are associated with the Company’s workforce reduction and are for employee termination severance payments and related benefits. This workforce reduction resulted in the elimination of 175 positions, or approximately 4% of the Company’s workforce at the time, and the payment of $11.0 million of termination benefits during Calendar 2003.
During Fiscal 2002, the Company recorded other charges of $17.2 million. Of these charges, $10.0 million relates to costs and losses associated with the elimination of excess facilities, principally leased facilities and ongoing lease costs and losses associated with sub-lease arrangements. In addition, approximately $5.8 million of these charges are associated with the Company’s workforce reduction announced in January 2002 and are for employee termination severance payments and related benefits. This workforce reduction resulted in the elimination of approximately 100 positions, or approximately 2% of the Company’s workforce at the time.
At December 31, 2004, $9.3 million of the aggregate termination benefits relating to the workforce reductions remain to be paid, primarily in the quarters ended March 31 and June 30, 2005. In addition, costs for excess facilities will be paid until Calendar 2011, while the asset impairments and other will be paid out during the first and second quarters of Calendar 2005. The Company will fund these costs from existing cash.
The following table summarizes the activity related to the liability for the restructuring programs recorded as other charges (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Workforce | | Excess | | Asset | | | | | Workforce | | Excess | | Asset | | | |
| | | Reduction | | Facilities | | Impairments | | | | | Reduction | | Facilities | | Impairments | | | |
| | | Costs | | Costs | | and Other | | Total | | | Costs | | Costs | | and Other | | Total | |
| | | | |
| Accrued liability at September 30, 2001 | | $ | 6,599 | | $ | — | | $ | — | | $ | 6,599 | | |
| Charges during Fiscal 2002 | | 5,808 | | 10,014 | | 1,424 | | 17,246 | | |
| Non-cash charges | | | (120 | ) | | | (2,663 | ) | | | (1,424 | ) | | | (4,207 | ) | |
| Payments | | | (11,629 | ) | | | (3,263 | ) | | — | | | (14,892 | ) | |
| | | | |
| Accrued liability at September 30, 2002 | | $ | 658 | | $ | 4,088 | | $ | — | | $ | 4,746 | | |
| Charges during Transition 2002 | | 18,899 | | 13,267 | | — | | 32,166 | | |
| Non-cash charges | | | (601 | ) | | | (659 | ) | | — | | | (1,260 | ) | |
| Payments | | | (7,233 | ) | | | (760 | ) | | — | | | (7,993 | ) | |
| | | | |
| Accrued liability at December 31, 2002 | | $ | 11,723 | | $ | 15,936 | | $ | — | | $ | 27,659 | | | $ | 11,723 | | $ | 15,936 | | $ | — | | $ | 27,659 | |
| Charges during Calendar 2003 | | 20,000 | | 9,716 | | — | | 29,716 | | |
| Charges during 2003 | | | 20,000 | | 9,716 | | — | | 29,716 | |
| Non-cash charges | | | (123 | ) | | — | | — | | | (123 | ) | | | (123 | ) | | — | | — | | | (123 | ) |
| Payments | | | (18,784 | ) | | | (6,493 | ) | | — | | | (25,277 | ) | | | (18,784 | ) | | | (6,493 | ) | | — | | | (25,277 | ) |
| | | | | | | | | | | | |
| Accrued liability at December 31, 2003 | | $ | 12,816 | | $ | 19,159 | | $ | — | | $ | 31,975 | | | $ | 12,816 | | $ | 19,159 | | $ | — | | $ | 31,975 | |
| Charges during Calendar 2004 | | 29,707 | | 2,263 | | 5,784 | | 37,754 | | |
| Charges during 2004 | | | 29,707 | | 2,263 | | 3,811 | | 35,781 | |
| Non-cash charges | | | (496 | ) | | — | | | (4,251 | ) | | | (4,747 | ) | | | (496 | ) | | — | | | (2,278 | ) | | | (2,774 | ) |
| Payments | | | (32,759 | ) | | | (4,247 | ) | | | (35 | ) | | | (37,041 | ) | | | (32,759 | ) | | | (4,247 | ) | | | (35 | ) | | | (37,041 | ) |
| | | | | | | | | | | | |
| Accrued liability at December 31, 2004 | | $ | 9,268 | | $ | 17,175 | | $ | 1,498 | | $ | 27,941 | | | $ | 9,268 | | $ | 17,175 | | $ | 1,498 | | $ | 27,941 | |
| Charges during 2005 | | | 10,702 | | 8,270 | | 10,205 | | 29,177 | |
| Currency translation and reclassifications | | | | (432 | ) | | | (583 | ) | | | (1,032 | ) | | | (2,047 | ) |
| Payments | | | | (15,947 | ) | | | (4,267 | ) | | | (10,084 | ) | | | (30,298 | ) |
| | | | | | | | | | | | |
| Accrued liability at December 31, 2005 | | | $ | 3,591 | | $ | 20,595 | | $ | 587 | | $ | 24,773 | |
| | | | | | | | | | | |
54
The excess facilities liability as of December 31, 2005 of $20.6 million in the table above does not include approximately $3.7 million of accrued excess facilities liability as of December 31, 2005 related to interest accreted on the lease liabilities. The interest accreted is charged to interest expense in the Consolidated Statements of Operations. Of the $20.6 million of excess facilities liability at December 31, 2005, approximately $14.6 million is classified in Other liabilities on the Consolidated Balance Sheets.
7—The Company expects about $2.7 million of the $3.6 million of workforce reduction costs to be paid by June 30, 2006, while the majority of the rest will be paid by year-end 2006. The $0.6 million of asset impairments and other should be paid by June 30, 2006. The Company intends to fund these payments from existing cash. Costs for excess facilities will be paid as the leases expire, through 2011.
5—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES AND OTHER ASSETS Accounts payable and accrued liabilities consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | | | |
| Taxes payable | | $ | 20,337 | | $ | 16,957 | | |
| Accrued taxes and taxes payable | | | $ | 46,206 | | $ | 20,337 | |
| Accrued bonus | | | 43,313 | | 18,707 | |
| Payroll and related benefits payable | | 58,433 | | 54,220 | | | 51,191 | | 39,726 | |
| Commissions payable | | 23,337 | | 19,350 | | | 32,540 | | 23,337 | |
| Accounts payable | | 12,706 | | 8,714 | | | 12,071 | | 12,706 | |
| Severance associated with other charges (Note 6) | | 9,268 | | 12,816 | | |
| Excess facilities costs associated with other charges (Note 6) | | 17,175 | | 19,159 | | |
| Severance associated with other charges | | | 3,591 | | 9,268 | |
| Excess facilities costs associated with other charges | | | 5,958 | | 17,175 | |
| EITF 95-3 obligations related to META acquisition | | | 5,983 | | — | |
| Other accrued liabilities | | 40,246 | | 49,216 | | | 42,183 | | 40,246 | |
| | | | | | | | |
| Total accounts payable and accrued liabilities | | $ | 181,502 | | $ | 180,432 | | | $ | 243,036 | | $ | 181,502 | |
| | | | | | | | |
Other assets consist of the following (in thousands):
| | | | | | | | | | |
| | | December 31, | | | | | | | | | |
| | | 2004 | | 2003 | | | December 31, | |
| | | | | 2005 | | 2004 | |
| Security deposits | | $ | 1,488 | | $ | 1,333 | | | $ | 1,862 | | $ | 1,488 | |
| Investment in unconsolidated subsidiaries | | 7,002 | | 10,864 | | | — | | 7,002 | |
| Non-current deferred tax assets | | 43,055 | | 38,431 | | | 56,627 | | 43,055 | |
| Benefit plan related assets | | 17,373 | | 14,098 | | | 18,774 | | 17,373 | |
| Prepaid acquisition costs for META | | 6,039 | | | — | | |
| Debt issuance costs | | 2,468 | | | 602 | | |
| Other long-term assets | | 532 | | 1,191 | | |
| | | | |
| Total other assets | | $ | 77,957 | | $ | 66,519 | | |
| | | | |
48
8—DEBT
| | | | | | | | | |
| | | December 31, | |
| | | 2005 | | | 2004 | |
| Prepaid acquisition costs for META | | | — | | | | 6,039 | |
| Debt acquisition costs | | | 2,917 | | | | 2,468 | |
| Other long-term assets | | | 2,721 | | | | 532 | |
| | | | | | | |
| Total other assets | | $ | 82,901 | | | $ | 77,957 | |
| | | | | | | |
6—DEBT
The Company
hasentered into an
unsecuredAmended and Restated Credit Agreement
(the “Credit Agreement”) on June 29, 2005 that provides for a $325.0 million, unsecured five-year facility with
a bank group led by JPMorgan Chase Bank,
N.A. as administrative agent,
for the participating financial institutions thereunder, providing forconsisting of a
maximum of $200.0 million
of borrowings under a senior term
A facility,loan and a
five year, $100.0$125.0 million revolving credit facility.
During the third quarterThe revolving credit facility may be increased up to $175.0 million. As of
2004, the Company borrowed $200 million under the term A loan facility, receiving net proceeds after debt issuance costs of $197.2 million. In accordance with the requirements of the term A loan facility, the Company made a loan payment of $10.0 million in the fourth quarter of Calendar 2004. At December 31,
2004,2005, there was
$190.0$196.7 million outstanding on the term loan
facility and
$3.5$50.0 million
of letters of credit outstanding
underon the revolving credit facility.
The facilities bear interest equalCredit Agreement requires the term loan to LIBOR plus an applicable margin that varies based on specified leverage ratios. At December 31, 2004, the current interest rate was 3.59%. The term A loan facility is payablebe repaid in equal19 quarterly installments, over a five year period ending August 12, 2009.with the final payment due on June 29, 2010. The credit facilities are subject to mandatory prepayments from a portion of proceeds from asset sales 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. As a result of these covenants, our borrowing availability at December 31, 2004 was $59.2 million. The facilities also include commitment fees on the unused portion of the revolving credit facility not subjectmay be used for loans, and up to $15.0 million may be used for letters of credit. The revolving loans may be borrowed, repaid and reborrowed until June 29, 2010, at which time all amounts borrowed must be repaid. The loans bear interest, at the Company’s option, among several alternatives, and the Company paidhas elected to use LIBOR plus a commitment feemargin; the margin consists of 0.30% to 0.50%a spread between 1.00% and 1.50%, depending on the unused revolvingCompany’s leverage ratio as of the fiscal quarter most recently ended. The Company has elected to use a three-month LIBOR rate for the term loan and a one-month LIBOR rate for the revolver.
The Credit Agreement contains certain restrictive loan covenants, including, among others, financial covenants requiring a maximum leverage ratio, a minimum fixed charge coverage ratio, and a minimum annualized contract value ratio and covenants limiting Gartner’s ability to incur indebtedness, grant liens, make acquisitions, be acquired, dispose of assets, pay dividends, repurchase stock, make capital expenditures and make investments. Gartner’s obligations under the credit
amount. During Calendar 2004,facility are guaranteed by Gartner’s U.S. subsidiaries. It also contains events of default that include, among others, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of covenants, cross defaults to certain other indebtedness, bankruptcy and insolvency events, material judgments, and events constituting a change of control. The occurrence of an event of default will increase the
weighted-averageapplicable rate of interest
rate onby 2.0% and could result in the
borrowings, which were only outstanding duringacceleration of Gartner’s obligations under the
thirdCredit Agreement and
fourth quarter, was 3.28%.Subsequentan obligation of any or all of the guarantors to December 31, 2004,pay the full amount of Gartner’s obligations under the Credit Agreement.
On February 10, 2006, the Company entered into an amendment to the Credit Agreement. The amendment modified the definition of consolidated fixed charges to allow Gartner to exclude up to $30.0 million spent on share repurchases during the fourth quarter of 2005 and full year 2006. The amendment also increased the letter of credit facility to $15.0 million and now provides for letters of credit denominated in foreign currencies.
In December 2005 the Company repaid $3.3 million of the term loan in accordance with the Credit Agreement covenant requirements, which resulted in additionalterms. As of December 31, 2005, the Company had approximately $45.6 million borrowing capacity under the revolving credit facility. As of December 31, 2005, the interest rates on the term loan and revolver were 6.03% and 5.89%, respectively, which consist of a result,three-month LIBOR base rate and one-month LIBOR base rate, respectively, plus a margin of 1.50% on each.
In December 2005 the amended borrowing availabilityCompany entered into an interest rate swap agreement to hedge the base interest rate risk on the term loan. The effect of the swap is to convert the floating base rate on the term loan to a fixed rate. Under the swap terms, the Company will pay a 4.885% fixed rate and in return will receive a three-month LIBOR rate. The three-month LIBOR rate received on the swap will match the base rate paid on the term loan since both use three-month LIBOR. The swap had an initial notional value of $200.0 million which will decline as payments are made on the term loan so that the amount outstanding under the revolving credit facility would have been $96.5term loan and the notional amount of the swap will always be equal. The swap had a notional amount of $196.7 million at December 31, 2004.2005, which was the same as the outstanding amount of the term loan.
The Company accounts for the swap as a cash flow hedge in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). SFAS No. 133 requires all derivatives, whether designated as hedges or not, to be recorded on the balance sheet at fair value. Since the swap qualifies as a cash flow hedge under SFAS No. 133, changes in the fair value of the swap will be recorded in other comprehensive income as long as the swap continues to effectively hedge the base interest rate risk on the term loan. Any ineffective portion of changes in the fair value of the hedge will be recorded in earnings. At December 31, 2005, there was no ineffective portion of the hedge as defined under SFAS No. 133. The interest rate swap had a negative fair value of $0.7 million at December 31, 2005, which is recorded in other comprehensive income.
The Company issues letters of credit in the ordinary course of business. At December 31, 2005, the Company had outstanding letters of credit of $4.9 million.
49
7—COMMITMENTS AND CONTINGENCIES
The Company leases various facilities, furniture and computer equipment under operating lease arrangements expiring between 2006 and 2025. Future minimum annual payments under non-cancelable operating lease agreements at December 31, 2005 are as follows (in thousands):
| | | | | |
| Year ended December 31, | | | | |
| |
| 2006 | | $ | 32,749 | |
| 2007 | | | 30,163 | |
| 2008 | | | 24,156 | |
| 2009 | | | 21,761 | |
| 2010 | | | 19,448 | |
| Thereafter | | | 76,669 | |
| | | | |
| Total minimum lease payments | | $ | 204,946 | |
| | | | |
Rental expense for operating leases was $25.0 million in 2005, $25.2 million in 2004, and $25.5 million for 2003. The Company also has commitments for office services, such as printing, copying, shipping and mail services, which expire in 2006. The minimum obligation under these agreements is approximately $0.3 million in the aggregate.
The Internal Revenue Service (“IRS”) has completed the field work portion of an audit of the Company’s federal income tax returns for tax years ended September 30, 1999, through 2002. In October 2005, the Company received an Examination Report indicating proposed changes that primarily relate to the valuation of intangible assets licensed to a foreign subsidiary and the calculation of payments under a cost sharing arrangement between Gartner Inc. and one of its foreign subsidiaries. Gartner disagrees with the proposed adjustments relating to valuation and the cost sharing arrangement and intends to vigorously dispute this matter through applicable IRS and judicial procedures, as appropriate. However, if the IRS were to ultimately prevail on the issues, it could result in additional taxable income for the years under examination of approximately $130.7 million and an additional federal cash tax liability of approximately $41.0 million. The Company recorded a provision in prior periods based on its estimate of the amount for which the claim will be settled, and no additional amount was booked in the current period. Although the final resolution of the proposed adjustments is uncertain, the Company believes the ultimate disposition of this matter will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations. The IRS has commenced an examination of tax years 2003 and 2004. There have been no significant developments to date.
On December 23, 2003, Gartner was sued in an action entitledExpert Choice, Inc. v. Gartner, Inc., Docket No. 3:03cv02234, United States District Court for the District of Connecticut. The plaintiff, Expert Choice, Inc., seeks unspecified amount of damages for claims relating to royalties for the development, licensing, marketing, sale and distribution of certain computer software and methodologies. The case is currently in the discovery phase. Subsequently, in January 2004, an arbitration demand was filed against Decision Drivers, Inc., one of the Company’s subsidiaries, and against Gartner, Inc., by Expert Choice. The arbitration demand described the claim as being in excess of $10.0 million, but did not provide further detail. On February 22, 2006, the Company was informed of an offer from Expert Choice’s counsel to settle the matter for $35.0 million. The Company immediately rejected Expert Choice’s settlement offer since the Company believes that is has meritorious defenses against the claims and the Company intends to continue to vigorously defend the case.
In addition to the matters discussed above, we are involved in legal proceedings and litigation arising in the ordinary course of business. We believe that the potential liability, if any, in excess of amounts already accrued from all proceedings, claims and litigation will not have a material effect on our financial position or results of operations when resolved in a future period.
The Company has various agreements that may obligate us to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which we customarily agree to hold the other party harmless against losses arising from a breach of representations related to such matters as title to assets sold and licensed or certain intellectual property rights. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of the Company’s obligations and the unique facts of each particular agreement. Historically, payments made by us under these agreements have not been material. As of December 31, 2005, we did not have any indemnification agreements that would require material payments.
8—EQUITY AND STOCK PROGRAMS
Capital stock. Holders of common stock are entitled to one vote per share on all matters to be voted by stockholders. At the Company’s Annual Meeting on June 29, 2005, the Company’s stockholders approved the combination of the Company’s Class A Common Stock and Class B Common Stock into a single class of common stock and the elimination of the classification of the Company’s Board of Directors. Each share of outstanding Class A Common Stock and Class B Common Stock was reclassified into a share of a single class of common stock. Accordingly, certain share amounts disclosed herein have been restated to reflect the stock combination. The combination had no impact on the total issued and outstanding shares of common stock and did not increase the total number of authorized shares of
50
common stock. A Restated Certificate of Incorporation was filed with the Delaware Secretary of State on July 6, 2005 to effectuate these changes. The new common stock retains the Class A Common Stock’s ticker symbol on the New York Stock Exchange (IT) and the Class B Common Stock was delisted from the New York Stock Exchange after the effective date.
The Company does not currently pay cash dividends on its common stock. While subject to periodic review, the current policy of the Board of Directors is to retain all earnings primarily to provide funds for continued growth. Our Amended and Restated Credit Agreement, dated as of June 29, 2005, contains a negative covenant, which may limit our ability to pay dividends. In addition, our Amended and Restated Security Holders Agreement with Silver Lake Partners, L.P. requires us to obtain Silver Lake’s consent prior to declaring or paying dividends.
The following table provides transactions relating to the Company’s common stock:
| | | | | | | | | |
| | | | | | | Treasury | |
| | | Issued | | | Stock | |
| | | Shares | | | Shares | |
| |
| Balance at December 31, 2002 | | | 120,795,668 | | | | 40,065,563 | |
| Issuances under stock plans | | | 4,037,656 | | | | (784,916 | ) |
| Issuance of shares upon conversion of debt | | | 18,302,271 | | | | (31,138,851 | ) |
| Purchases for treasury | | | — | | | | 4,984,646 | |
| Forfeitures of restricted stock | | | (9,847 | ) | | | — | |
| |
| Balance at December 31, 2003 | | | 143,125,748 | | | | 13,126,442 | |
| Issuances under stock plans | | | 7,871,016 | | | | (690,382 | ) |
| Purchases for treasury | | | — | | | | 26,618,219 | |
| Forfeitures of restricted stock | | | (176,672 | ) | | | — | |
| |
| Balance at December 31, 2004 | | | 150,820,092 | | | | 39,054,279 | |
| Issuances under stock plans | | | 3,252,677 | | | | (689,845 | ) |
| Purchases for treasury | | | — | | | | 850,313 | |
| Forfeitures/cancellations of restricted stock | | | (523,335 | ) | | | — | |
| |
| Balance at December 31, 2005 | | | 153,549,434 | | | | 39,214,747 | |
| |
$100 million share repurchase program.In October 2005, the Company’s Board of Directors authorized a $100.0 million common share repurchase program. Repurchases under the program will be made from time-to-time through open market purchases and/or block trades. The Company intends to fund the repurchases from cash flow from operations but may also borrow under the Company’s existing credit facility. Repurchases are subject to the availability of our common stock, prevailing market conditions, the trading price of the Company’s common stock, and our financial performance. During the fourth quarter of 2005, the Company repurchased 837,800 shares of its common stock under this program for a total purchase price of $11.1 million, of which $9.6 million was paid in December 2005 and $1.5 million was paid in early January 2006 when the related share purchase transactions settled.
Stock option buy back.During the third quarter of 2005, the Company completed its one-time offer to buy back certain vested and outstanding stock options for cash, which resulted in the tender and cancellation of 6,383,445 options. In conjunction with the buyback, the Company recorded a charge of approximately $6.0 million, including transaction and related costs. The charge is recorded in Other charges, net in the Consolidated Statements of Operations.
Under the offer, option holders were given the opportunity to elect to tender their eligible options in exchange for a cash payment equal to the value of the outstanding options, as calculated based on the Black-Scholes valuation model. The offer was made to all current and certain former employees, except current executive officers and directors, who held options to purchase our common stock with a strike price greater than $12.94. The accounting for the buyback is governed by APB 25. Under APB 25, the cash consideration paid for redeemed stock options is treated as compensation expense, which is a charge to earnings. In addition to the expense, APB 25 also requires that those outstanding options which the Company offered to redeem and which were not tendered are subject to variable accounting treatment from the day of the offer onward, requiring the Company to take a potential charge each quarter to the extent the in-the-money value of those options increased as measured on the last day of the quarter. The Company recorded immaterial charges in the third and fourth quarters of 2005 related to the revaluation of these options. Variable accounting treatment triggered by the option buy back ceased on January 1, 2006, the date the Company adopted SFAS No. 123R.
Long term incentive plan.At the Company’s Annual Meeting on June 29, 2005, the Company’s stockholders approved certain amendments to Gartner’s 2003 Long Term Incentive Plan (“the Plan”), including an 11 million share increase in the number of shares available under the Plan, the addition of restricted stock units as an award available for grant under the Plan, and the extension of the term of the Plan until April 19, 2015, unless sooner terminated by the Company’s Board of Directors.
51
Tender Offer.In the third quarter of 2004 the Company completed a Dutch auction tender offer under which it repurchased 16.8 million common shares. Additionally, the Company repurchased 9.2 million common shares from Silver Lake Partners, L.P. and certain of its affiliates (“Silver Lake”). The total cost of the tender was $346.2 million including transaction costs of $3.8 million.
Terminated $200.0 million share repurchase program.In July 2001, the Company’s Board of Directors approved the repurchase of up to $75.0 million of common stock. The Board of Directors subsequently increased the authorized stock repurchase program to a total authorization for repurchase of $200.0 million. During 2004, the Company repurchased 527,825 shares for a total cost of approximately $6.1 million. On a cumulative basis, the Company repurchased 13,720,397 shares of common stock for a total cost of $133.2 million under this program. In connection with the 2004 tender offer, the Board of Directors terminated the stock repurchase program in June 2004.
Conversion of convertible notes.On April 17, 2000, the Company issued, in a private placement transaction, $300.0 million of 6% convertible subordinated notes (the “convertible notes”) to Silver Lake Partners, L.P. (“Silver Lake”) and other noteholders. The convertible notes were scheduled to mature in April 2005 and had been accruing interest at 6% per annum. Interest had accrued semi-annually by a corresponding increase in the face amount of the convertible notes commencing September 15, 2000.
In October 2003, the convertible notes were converted into 49,441,122 shares of Gartner
Class A Common Stockcommon stock in accordance with the original terms of the notes. The determination of the number of shares issued upon conversion was based upon a $7.45 conversion price and a convertible note of $368.3 million, consisting of the original face amount of $300 million plus accrued interest of $68.3 million. The unamortized balances of debt issue costs of $2.8 million and debt discount of $0.3 million as of the conversion date were netted
55
against the outstanding principal and interest balances, resulting in a $365.2 million increase to stockholders’ equity. Additionally, certain costs directly associated with the conversion, such as regulatory filing, banking and legal fees, totaling $0.6 million, were charged to equity.
As part of the original private placement transaction, two Silver Lake representatives were elected to our ten-member Board of Directors. The Company also granted to Silver Lake the right to acquire 5% of any Company subsidiary that is spun off or spun out at 80% of the initial public offering price.
The Company issues letters of credit in the ordinary course of business. At December 31, 2004, the Company had outstanding letters of credit with JPMorgan Chase Bank for $3.5 million.
9—COMMITMENTS AND CONTINGENCIESOn December 27, 2004, the Company announced that it would acquire META in an all-cash transaction valued at $10.00 per share, or approximately $162.0 million, excluding transaction costs. While subject to regulatory and shareholder approvals, the Company believes the transaction will close in the second quarter of Calendar 2005. In order to fund the purchase of META, the Company anticipates that it will use a combination of cash and the Company’s amended five-year revolving credit facility. In connection with funding the META transaction, the Company anticipates repatriating $52.0 million in cash earnings from its non-US subsidiaries in early 2005. At December 31, 2004, the Company had a $1.7 million nonrefundable obligation related to the META acquisition.
The Company leases various facilities, furniture and computer equipment under operating lease arrangements expiring between 2005 and 2025. Future minimum annual payments under non-cancelable operating lease agreements at December 31, 2004 are as follows (in thousands):OPTION PLANS
| | | | | |
| Year ended December 31, | | | | |
| |
| 2005 | | $ | 29,899 | |
| 2006 | | | 23,311 | |
| 2007 | | | 20,701 | |
| 2008 | | | 18,879 | |
| 2009 | | | 18,217 | |
| Thereafter | | | 95,929 | |
| | | | |
| Total minimum lease payments | | $ | 206,936 | |
| | | | |
Rental expense for operating leases was $25.2 million for Calendar 2004, $25.5 million for Calendar 2003, $7.0 million for Transition 2002, and $27.6 million for Fiscal 2002. The Company also has commitments for office services, such as printing, copying, shipping and mail services, which expire at various dates in 2005. The minimum obligation under these agreements is approximately $1.8 million in the aggregate.
The Company is involved in legal proceedings and litigation arising in the ordinary course of business. The Company believes the outcome of all current proceedings, claims and litigation will not have a material effect on the Company’s financial position or results of operations when resolved in a future period.
The Company has various agreements that may obligate it to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which it customarily agrees to hold the other party harmless against losses arising from a breach of representations related to such matters as title to assets sold and licensed or certain intellectual property rights. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of the Company’s obligations and the unique facts of each particular agreement. Historically, payments made by the Company under these agreements have not been material. As of December 31, 2004, the Company was not aware of any indemnification agreements that would require material payments.
10—STOCKHOLDERS’ EQUITY
Capital stock. Holders of Class A Common Stock and Class B Common Stock are entitled to one vote per share on all matters to be voted by stockholders and vote together as a single class, other than with respect to the election of directors. Class A Common Stock stockholders are entitled to one vote per share on the election of Class A directors, which constitute no more than 20% of the directors, and Class B Common Stock stockholders are entitled to one vote per share on the election of Class B directors, which constitute at least 80% of the directors. In addition, any Class B Common Stock holder who owns more than 15% of the outstanding Class B Common Stock, will not be able to vote all of his or her Class B Common Stock in the election of directors unless such holder owns an equivalent
56
percentage of Class A Common Stock.
In February 2005, the Company announced that its Board of Directors approved the elimination of its classified Board structure and approved the combination of the Company’s Class A and Class B common shares. Both of these items are subject to stockholder approval at the Company’s annual meeting to take place in the late spring or early summer of 2005.
The Company does not currently pay cash dividends on its Class A or Class B common stock. While subject to periodic review, the current policy of the Board of Directors is to retain all earnings primarily to provide funds for continued growth. The Credit Agreement, dated August 12, 2004, contains a negative covenant which may limit the Company’s ability to pay dividends. In addition, the Amended and Restated Security Holders Agreement with Silver Lake Partners, L.P. requires the Company to obtain Silver Lake’s consent prior to declaring or paying dividends.
The following table provides transactions relating to the Company’s common stocks:
| | | | | | | | | | | | | | | | | |
| | | Class A Common Stock | | | Class B Common Stock | |
| | | | | | | Treasury | | | | | | | Treasury | |
| | | Issued | | | Stock | | | Issued | | | Stock | |
| | | Shares | | | Shares | | | Shares | | | Shares | |
| Balance at September 30, 2001 | | | 78,009,277 | | | | 26,621,154 | | | | 40,689,648 | | | | 8,141,820 | |
| Issuances under stock plans | | | 1,989,240 | | | | (563,829 | ) | | | — | | | | — | |
| Purchases for treasury | | | — | | | | 2,153,400 | | | | — | | | | 2,311,700 | |
| Forfeitures of restricted stock | | | (11,836 | ) | | | — | | | | — | | | | — | |
| |
| Balance at September 30, 2002 | | | 79,986,681 | | | | 28,210,725 | | | | 40,689,648 | | | | 10,453,520 | |
| Issuances under stock plans | | | 124,847 | | | | (15,399 | ) | | | — | | | | — | |
| Purchases for treasury | | | — | | | | 963,117 | | | | — | | | | 453,600 | |
| Forfeitures of restricted stock | | | (5,508 | ) | | | — | | | | — | | | | — | |
| |
| Balance at December 31, 2002 | | | 80,106,020 | | | | 29,158,443 | | | | 40,689,648 | | | | 10,907,120 | |
| |
| Issuances under stock plans | | | 4,037,656 | | | | (784,916 | ) | | | — | | | | — | |
| Purchases for treasury | | | — | | | | 3,435,161 | | | | — | | | | 1,549,485 | |
| Issuance of shares upon conversion of debt | | | 18,302,271 | | | | (31,138,851 | ) | | | — | | | | — | |
| Forfeitures of restricted stock | | | (9,847 | ) | | | — | | | | — | | | | — | |
| |
| Balance at December 31, 2003 | | | 102,436,100 | | | | 669,837 | | | | 40,689,648 | | | | 12,456,605 | |
| Issuances under stock plans | | | 7,871,016 | | | | (690,382 | ) | | | — | | | | — | |
| Purchases for treasury | | | — | | | | 20,998,130 | | | | — | | | | 5,620,089 | |
| Forfeitures of restricted stock | | | (176,672 | ) | | | — | | | | — | | | | — | |
| |
| Balance at December 31, 2004 | | | 110,130,444 | | | | 20,977,585 | | | | 40,689,648 | | | | 18,076,694 | |
| |
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, L.P. and certain of its affiliates (“Silver Lake”) at a purchase price of $13.30 per share. The total cost of the purchases was $346.2 million including transaction costs of $3.8 million.
Stock repurchase program. In July 2001, the Company’s Board of Directors approved the repurchase of up to $75 million of Class A and Class B Common Stock. The Board of Directors subsequently increased the authorized stock repurchase program to a total authorization for repurchase of $200 million. On a cumulative basis at December 31, 2004, the Company has purchased $133.2 million of our stock under this stock repurchase program. In connection with the tender offer, the Board of Directors terminated the stock repurchase program in June 2004.
The following table provides information related to our cumulative repurchases under this program:
57
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Total | |
| | | Class A Common Stock | | | Class B Common Stock | | | Cost of | |
| | | | | | | Average | | | | | | | Average | | | Shares | |
| | | Total Shares | | | Price Paid | | | Total Shares | | | Price Paid | | | Purchased | |
| | | Purchased | | | per Share | | | Purchased | | | per Share | | | (in thousands) | |
| Fiscal 2001 | | | 2,318,149 | | | $ | 9.79 | | | | 7,960 | | | $ | 9.50 | | | $ | 22,773 | |
| Fiscal 2002 | | | 2,153,400 | | | | 10.84 | | | | 2,311,700 | | | | 10.25 | | | | 47,047 | |
| Transition 2002 | | | 963,117 | | | | 9.79 | | | | 453,600 | | | | 9.81 | | | | 13,880 | |
| Calendar 2003 | | | 3,435,161 | | | | 8.47 | | | | 1,549,485 | | | | 9.26 | | | | 43,433 | |
| Calendar 2004 | | | 413,225 | | | | 11.59 | | | | 114,600 | | | | 11.55 | | | | 6,112 | |
| |
| Totals | | | 9,283,052 | | | $ | 9.62 | | | | 4,437,345 | | | $ | 9.89 | | | $ | 133,245 | |
| |
11—STOCK PLANS
Stock option plans.The Company grants stock options to employees that allow them to purchase shares of Class A Common Stock.the Company’s common stock. These options are granted as an incentive for employees to contribute to the Company’s long-term success. Options are also granted to members of the Board of Directors and certain consultants. Generally, stock options are issued at their fair market value at the date of grant. Most options vest either a) annually over a three-year service period, or b) over a four-year vesting period, with 25% vesting at the end of the first year and the remaining 75% vesting monthly over the next three years. Options granted prior to 2005 generally expire ten years from the grant date.date, whereas options granted in 2005 generally expire seven years from the date of grant. At December 31, 2004, 3.42005, 10.9 million shares of Class A Common Stockcommon stock were authorized for grants of options or restricted stock under the 2003 Long Term Incentive Plan.
In February 2003, the Company’s stockholders approved the 2003 Long-Term Incentive Plan (“2003 Plan”) which replaced its 1993 Director Stock Option Plan, 1994 Long Term Option Plan, 1996 Long Term Stock Option Plan, 1998 Long Term Stock Option Plan and 1999 Stock Option Plan (collectively the “Previous Plans”). Under the 2003 Plan, 9,928,000 shares of
Class A Common Stockcommon stock were initially available for grant. Upon approval of the 2003 Plan, no further grants or awards were allowable under the Previous Plans. However, any outstanding options or awards under the Previous Plans remain outstanding until the earlier of their exercise, forfeiture, or expiry date.
A summary of stock option activity under the plans and agreement through December 31, 20042005 follows:
| | | | | | | | | | | | | | | | | |
| | | Class A Common Stock | | | Weighted | |
| | | Weighted | | | Number | | Average | |
| | | Under | | Average | | | of Options | | Exercise Price | |
| | | Option | | Exercise Price | | |
| Outstanding at September 30, 2001 | | 34,983,124 | | $ | 13.03 | | |
| Granted | | 5,629,441 | | $ | 9.42 | | |
| Exercised | | | (1,989,049 | ) | | $ | 8.92 | | |
| Canceled | | | (4,617,199 | ) | | $ | 14.12 | | |
| | | | |
| Outstanding at September 30, 2002 | | 34,006,317 | | $ | 12.52 | | |
| Granted | | 3,601,127 | | $ | 8.13 | | |
| Exercised | | | (131,343 | ) | | $ | 7.91 | | |
| Canceled | | | (1,012,162 | ) | | $ | 12.86 | | |
| | | | | |
| Outstanding at December 31, 2002 | | 36,463,939 | | $ | 12.10 | | | 36,463,939 | | $ | 12.10 | |
| Granted | | 2,598,070 | | $ | 9.03 | | | 2,598,070 | | $ | 9.03 | |
| Exercised | | | (4,278,704 | ) | | $ | 8.82 | | | | (4,278,704 | ) | | $ | 8.82 | |
| Canceled | | | (3,257,098 | ) | | $ | 12.82 | | | | (3,257,098 | ) | | $ | 12.82 | |
| | | | | |
| Outstanding at December 31, 2003 | | 31,526,207 | | $ | 12.21 | | | 31,526,207 | | $ | 12.21 | |
| Granted | | 5,144,399 | | $ | 12.21 | | | 5,144,399 | | $ | 12.21 | |
| Exercised | | | (7,363,604 | ) | | $ | 8.65 | | | | (7,363,604 | ) | | $ | 8.65 | |
| Canceled | | | (4,167,369 | ) | | $ | 14.23 | | | | (4,167,369 | ) | | $ | 14.23 | |
| | | | | |
| Outstanding at December 31, 2004 | | 25,139,633 | | $ | 12.92 | | | 25,139,633 | | $ | 12.92 | |
| Granted | | | 3,904,000 | | $ | 10.59 | |
| Exercised | | | | (2,902,439 | ) | | $ | 9.00 | |
| Canceled | | | | (8,527,603 | ) | | $ | 17.55 | |
| | | | | |
| Outstanding at December 31, 2005 | | | 17,613,591 | | $ | 10.81 | |
| | | | |
52
During the third quarter of 2005, the Company completed its offer to buy back certain vested and outstanding stock options for cash, which resulted in the tender and cancellation of 6,383,445 options. In conjunction with the buyback, the Company recorded a charge of approximately $6.0 million, including transaction and related costs. The charge is recorded in Other charges, net in the Consolidated Statements of Operations.
Options for the purchase of
10.7 million, 17.8 million, and 23.1 million shares of
Class A Common Stockcommon stock were exercisable at December 31,
2005, 2004, and 2003, respectively.
The following table summarizes information about stock options outstanding at December 31,
2004:58
2005:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Outstanding | | | Exercisable | |
| | | | | | | Weighted Average | | | Weighted | | | | | | | Weighted | |
| | | | | | | Remaining | | | Average | | | | | | | Average | |
| Range of | | Number | | | Contractual | | | Exercise | | | Number | | | Exercise | |
| Exercise Prices | | Outstanding | | | Life | | | Price | | | Exercisable | | | Price | |
| |
| $1.00 - $8.74 | | | 2,936,417 | | | | 5.65 | | | $ | 7.61 | | | | 2,421,279 | | | $ | 7.71 | |
| $8.75 — $10.31 | | | 5,385,386 | | | | 5.08 | | | $ | 9.78 | | | | 5,223,723 | | | $ | 9.77 | |
| $10.59 - $10.59 | | | 3,423,132 | | | | 6.46 | | | $ | 10.59 | | | | — | | | $ | — | |
| $10.74 - $12.45 | | | 4,131,255 | | | | 8.11 | | | $ | 12.15 | | | | 1,564,801 | | | $ | 12.03 | |
| $12.49 - $30.47 | | | 1,735,401 | | | | 4.66 | | | $ | 16.59 | | | | 1,465,820 | | | $ | 17.34 | |
| $31.56 - $31.56 | | | 2,000 | | | | 2.31 | | | $ | 31.56 | | | | 2,000 | | | $ | 31.56 | |
| | | |
| | | | 17,613,591 | | | | 6.11 | | | $ | 10.81 | | | | 10,677,623 | | | $ | 10.68 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Outstanding | | | Exercisable | |
| | | | | | | Weighted Average | | | Weighted | | | | | | | Weighted | |
| | | | | | | Remaining | | | Average | | | | | | | Average | |
| Range of | | Number | | | Contractual | | | Exercise | | | Number | | | Exercise | |
| Exercise Prices | | Outstanding | | | Life | | | Price | | | Exercisable | | | Price | |
| $ 1.00 - $ 8.50 | | | 4,218,603 | | | | 6.73 | | | $ | 7.58 | | | | 2,906,634 | | | $ | 7.74 | |
| $ 8.69 - $10.31 | | | 6,945,319 | | | | 6.09 | | | $ | 9.72 | | | | 6,273,957 | | | $ | 9.78 | |
| $10.48 - $12.45 | | | 4,705,256 | | | | 9.08 | | | $ | 12.15 | | | | 645,937 | | | $ | 11.38 | |
| $12.48 - $17.85 | | | 4,259,848 | | | | 5.34 | | | $ | 14.71 | | | | 3,644,771 | | | $ | 15.07 | |
| $18.50 - $22.71 | | | 4,624,447 | | | | 3.72 | | | $ | 20.36 | | | | 3,948,947 | | | $ | 19.96 | |
| $23.89 - $34.06 | | | 386,160 | | | | 2.28 | | | $ | 29.16 | | | | 386,160 | | | $ | 29.16 | |
| | | |
| | | | 25,139,633 | | | | 6.13 | | | $ | 12.92 | | | | 17,806,406 | | | $ | 13.27 | |
| | | |
Employee stock purchase plans. In January 1993, the Company adopted an employee stock purchase plan, and reserved an aggregate of 4,000,000 shares of Class A Common Stockcommon stock for issuance under thisthat plan. The 1993 plan expired during 2003. In March 2002, shareholders approved the 2002 Employee Stock Purchase Plan (the “2002 Plan”) with substantially identical terms. Eligible employees are permitted to purchase Class A Common Stockcommon stock through payroll deductions, which may not exceed 10% of an employee’s compensation (or $21,250 in any calendar year), at a price equal to 95% of the common stock price as reported by the NYSE at the end of each offering period. Prior to June 1, 2005, employees could purchase common stock under this program at a price equal to 85% of the Class A Common Stockcommon stock price as reported by the NYSE at the beginning or end of each offering period, whichever iswas lower. No shares were issued during Transition 2002. During Calendar2005, 2004, Calendarand 2003, 540,083, 443,959, and Fiscal 2002, 443,959, 544,883 and 551,109 shares were issued from treasury stock at an average purchase price of $9.22, $9.33, $7.24, and $7.86$7.24 per share, respectively, from these plans. At December 31, 2002 and September 30, 2002, 3.7 million shares were available for purchase under the 2002 plan. At December 31,2005, 2004 and 2003, the Company had 2.2 million, 2.7 million, and 3.2 million shares, respectively, available for purchase under this plan.
the 2002 Plan.
Restricted stock awards.Beginning in 1998, the Company awarded restricted stock under the 1991 Stock Option Plan and the 1998 Long Term Stock Option Plan. The restricted stock awards generally vest in six equal installments with the first installment vesting two years after the award and then annually thereafter for five years. The Company did not make any awards of restricted stock during 2003. In 2004, the Company made four restricted stock awards, and in 2005 it issued one replacement award.
The 2004 awards included two awards of restricted stock of 33,000 shares with market values of $11.96 and $12.78 respectively, on the date of grant, respectively, under the 2003 Plan in which the restrictions lapse over three years. AnIn addition, an additional award of 175,000 shares under the 2003 Plan (which(this award was forfeited in 2004), and an inducement award of 500,000 shares to the Company’s newour CEO (discussed below) were subject to performance basedperformance-based vesting. Except for the awards with performance basedperformance-based vesting, awardees are not required to provide consideration to the Company other than rendering service andservice. All restricted share awards have the right to vote the shares and to receive dividends. The employee may not sell the restricted stock during the vesting period.that is still subject to vesting. In 1999, the Company also granted 40,500 stock options with an exercise price of $1.00 per share that vest on the same basis as the restricted stock awards to certain international employees. Such stock options had a weighted-average fair market value of $22.81 per stock option on the date of grant.
In the fourth quarter of 2004 the Company announced that its CEO, Eugene A. Hall, had received an inducement grant of 500,000 shares of restricted stock for which market value on the date of grant was $12.05 per share. In the fourth quarter of 2005, the Company and Mr. Hall agreed to cancel this restricted stock award and replace it with a new award for the same amount of shares and on similar terms. This was done for tax reasons and the number of shares of restricted stock issued to Mr. Hall remains unchanged. By issuing a new restricted stock award under its stockholder approved 2003 Plan, the Company will be able to take a tax deduction when and if the restrictions lapse on the restricted stock award. The Company would not have been able to take advantage of this tax deduction on the 2004 award because the award had been made as an inducement grant, and consequently was not issued pursuant to a stockholder approved plan. The Company and Mr. Hall have entered into (i) a Termination of Restricted Stock Agreement to cancel the original award of 500,000 shares
53
of restricted stock which was made on October 15, 2004; and (ii) a Restricted Stock Agreement which makes a new grant to him of 500,000 shares of restricted stock under the 2003 Plan.
Similar to the award that was cancelled, the restrictions on this new award lapse as to (i) 300,000 shares when the Company’s common stock trades at an average price of $20 or more for sixty (60) consecutive trading days, (ii) 100,000 shares when the Company’s common stock trades at an average price of $25 or more for sixty (60) consecutive trading days, and (iii) 100,000 shares when the Company’s common stock trades at an average price of $30 or more for sixty (60) consecutive trading days, subject to Mr. Hall’s continued employment with the Company through each such date. Notwithstanding the preceding sentence, all restrictions shall lapse in full upon a change in control.
On the date Mr. Hall’s restricted stock award was replaced it had a probability-weighted present value of $4.4 million. The determination of the value of the award was based on the present value of estimated discounted cash flows, which takes into consideration such factors as the historical price and volatility of the Company’s common stock, as well as the probability that the Company’s common stock will reach the target prices. This value is used by the Company for purposes of calculating the pro forma net income and net income per share in accordance with SFAS No. 123 (see Footnote 1).
The Company had a total of
602,236530,202 and
99,024602,236 restricted shares of
Class A Common Stockcommon stock outstanding at December 31,
2005 and 2004,
and 2003, respectively.
There were no awards of restricted stock during Calendar 2003. At December 31,
2005 and 2004, the aggregate unamortized compensation expense for restricted stock awards and the $1 stock option grants was
$6.7 million and $7.6 million,
and isrespectively, which are included
asin Unearned compensation, net in the Consolidated Balance Sheet. Total compensation expense recognized for the restricted stock awards and the stock options granted with an exercise price of $1.00 per share was
$0.9$0.8 million, $0.9 million,
$0.3and $0.9 million,
$1.3 million, for Calendarin 2005, 2004,
Calendarand 2003,
Transition 2002, and for Fiscal 2002, respectively.
On October 15, 2004, the Company announced that its new CEO, Eugene A. Hall, had received an inducement grant of 500,000 shares of restricted stock for which 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) the Company’s 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. In accordance with APB 25, the Company’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 the closing price of the Company’s stock on the date the target is met times the number of shares associated with the applicable target. For example, if the Company’s average 60 day stock price is $22 per share and the stock closes at $22.50 per share, the first lapse shall result in the Company recording a $6.75 million non-cash compensation charge (300,000 shares at $22.50/share).
On October 15, 2004, Mr. Hall’s restricted stock award had a probability-weighted range of values from zero to $16.0 million with a mean net present value of approximately $3.7 million. The mean net present value represents the weighted-average of the range of potential values. The range of values was based on the present value of estimated discounted cash flows, which takes into consideration such factors as the historical price and volatility of the Company’s Class A common stock. The $3.7 million represents the fair value of the restricted stock amount under SFAS 123. The fair value of the restricted stock award for each price target is being amortized for SFAS 123 purposes over the expected vesting term of each target, ranging from 21 to 36 months.
12—10—COMPUTATION OF EARNINGS (LOSS) INCOME PER SHAREBasic earnings per share (“EPS”) is computed by dividing net
(loss) income
(loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in earnings. When the exercise of stock options or conversion of convertible debt is antidilutive they are excluded from the calculation.
The following table sets forth the reconciliation of the basic and diluted
(loss) earnings per share computations (in thousands, except per
share).59
share amounts):
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| |
Numerator: | | | | | | | | | | | | |
| Net (loss) income used for calculating basic and diluted (loss) income per common share | | $ | (2,437 | ) | | $ | 16,889 | | | $ | 23,589 | |
| | | |
| | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
| Weighted average number of common shares used in the calculation of basic income per share | | | 112,253 | | | | 123,603 | | | | 91,123 | |
| Common stock equivalents associated with stock compensation plans | | | — | | | | 2,723 | | | | 1,456 | |
| | | |
| Shares used in the calculation of diluted income per share | | | 112,253 | | | | 126,326 | | | | 92,579 | |
| | | |
| | | | | | | | | | | | | |
| (Loss) income per share: | | | | | | | | | | | | |
| Basic | | $ | (0.02 | ) | | $ | 0.14 | | | $ | 0.26 | |
| | | |
| Diluted | | $ | (0.02 | ) | | $ | 0.13 | | | $ | 0.25 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Calendar | | | Transition | | | Fiscal | |
| | | 2004 | | | 2003 | | | 2002 | | | 2002 | | | 2002 | |
Numerator: | | | | | | | | | | (Unaudited) | | | | | | | | |
| Net income (loss) | | $ | 16,889 | | | $ | 23,589 | | | $ | 15,118 | | | $ | (14,418 | ) | | $ | 48,423 | |
| After-tax interest on convertible long-term debt | | | — | | | | — | | | | — | | | | — | | | | 12,380 | |
| | | |
| Net income (loss) used for calculating diluted EPS | | $ | 16,889 | | | $ | 23,589 | | | $ | 15,118 | | | $ | (14,418 | ) | | $ | 60,803 | |
| | | |
Denominator: | | | | | | | | | | | | | | | | | | | | |
| Weighted average number of common shares used in the calculation of basic income per share | | | 123,603 | | | | 91,123 | | | | 83,329 | | | | 81,379 | | | | 83,586 | |
| Common stock equivalents associated with stock compensation plans | | | 2,723 | | | | 1,456 | | | | 1,711 | | | | — | | | | 1,976 | |
| Weighted average shares associated with convertible debt | | | — | | | | — | | | | — | | | | — | | | | 45,320 | |
| | | |
| Shares used in the calculation of diluted income per share | | | 126,326 | | | | 92,579 | | | | 85,040 | | | | 81,379 | | | | 130,882 | |
| | | |
| Net income (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.14 | | | $ | 0.26 | | | $ | 0.18 | | | $ | (0.18 | ) | | $ | 0.58 | |
| | | |
| Diluted | | $ | 0.13 | | | $ | 0.25 | | | $ | 0.18 | | | $ | (0.18 | ) | | $ | 0.46 | |
| | | |
In October 2005, the Company’s Board of Directors authorized a $100.0 million common share repurchase program. Repurchases under the program will be made from time-to-time through open market purchases and/or block trades. The Company intends to fund the repurchases from cash flow from operations but may also borrow under the Company’s existing credit facility. During the fourth quarter of 2005, the Company repurchased a significant number837,800 shares of its Class A and Class B Common Stock outstanding in Calendar 2004. Duringcommon stock under this program for a total purchase price of $11.1 million.
In the first half of Calendar 2004 the Company repurchased 413,225527,825 common 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 its $200.0 million Stock Repurchase Program. DuringIn addition, during the third quarter of 2004 the Company completed its “Dutch Auction Tender Offer”a tender offer in which it repurchased 11,339,01916,844,508 common shares of its Class A Common Stock and 5,505,489 shares of its Class B Common Stock at a purchase price of $13.30 and $12.50 per share, respectively. Additionally, the Company also repurchased 9,228,938 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 purchasestender was $346.2 million including transaction costs of $3.8 million. In conjunction with the tender offer, the Board of Directors terminated the $200.0 million Stock Repurchase Program duringin June 2004.
54
The following table presents the number of options to purchase shares (in millions) of Class A Common Stockcommon stock that were not included in the computation of diluted EPS because the effect would have been antidilutive. During periods with reported income, these options were antidilutive because their exercise prices were greater than the average market value of a share of Class A Common Stockcommon stock during the period. During periods with reported loss, all options outstanding had an antidilutive effect.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Calendar | | Transition | | Fiscal | | | |
| | | 2004 | | 2003 | | 2002 | | 2002 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | | (Unaudited) | | | |
| Antidilutive options (in millions) | | 12.3 | | 19.9 | | 21.4 | | 36.5 | | 14.5 | | | 11.4 | | 12.3 | | 19.9 | |
Average market price per share of Class A Common
Stock during periods with reported income | | $ | 12.03 | | $ | 9.49 | | $ | 10.25 | | — | | $ | 10.57 | | |
| Average market price per share of common stock during periods with reported income | | | $ | 10.88 | | $ | 12.03 | | $ | 9.49 | |
For
Calendar2005, 2004,
2003, and
2002, Transition 2002, and Fiscal 2002,2003, unvested restricted stock awards were not included in the computation of diluted income (loss) per share because the effect would have been antidilutive. Additionally, convertible notes
for Calendarin 2003
Calendar 2002 and Transition 2002 were not included in the EPS calculation using the “as if converted” method because the effect would have been antidilutive.
The following table provides information on the after-tax interest expense that was not added back to the numerator of the EPS calculation and the weighted average number of shares associated with the convertible debt that was not included in the denominator of the EPS calculation because the effect would have been antidilutive (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Calendar | | Transition | | Fiscal | | | |
| | | 2004 | | 2003 | | 2002 | | 2002 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | | (Unaudited) | | | |
| After-tax interest on convertible long-term debt | | $ | — | | $ | 10,147 | | $ | 12,566 | | $ | 3,227 | | N/A | | | $ | — | | $ | — | | $ | 10,147 | |
| Weighted average shares associated with convertible debt | | — | | 37,035 | | 45,995 | | 47,021 | | N/A | | | — | | — | | 37,035 | |
60
Following is a summary of the components of income (loss) before income taxes (in thousands):
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | Calendar | | Calendar | | Transition | | Fiscal | | | 2005 | | 2004 | | 2003 | |
| | | 2004 | | 2003 | | 2002 | | 2002 | | | |
| U.S. | | $ | 8,622 | | $ | (2,972 | ) | | $ | (18,357 | ) | | $ | 35,330 | | | $ | (6,607 | ) | | $ | 8,622 | | $ | (2,972 | ) |
| Non-U.S. | | 25,840 | | 38,400 | | | (1,665 | ) | | 38,081 | | | 12,045 | | 25,840 | | 38,400 | |
| | | | | |
| Income (loss) before income taxes | | $ | 34,462 | | $ | 35,428 | | $ | (20,022 | ) | | $ | 73,411 | | |
| Income before income taxes | | | $ | 5,438 | | $ | 34,462 | | $ | 35,428 | |
| | | | | |
The provision (benefit)expense for income taxes on the above income (loss) consists of the following components (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Calendar | | Calendar | | Transition | | Fiscal | | | |
| | | 2004 | | 2003 | | 2002 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| Current tax expense from operations: | | |
| | | | |
| Current tax (benefit) expense: | | |
| U.S. federal | | $ | 5,137 | | $ | (576 | ) | | $ | 276 | | $ | 5,591 | | | $ | (3,350 | ) | | $ | 5,137 | | $ | (576 | ) |
| State and local | | 1,812 | | 1,623 | | 507 | | 1,361 | | | 2,890 | | 1,812 | | 1,623 | |
| Foreign | | 10,076 | | 11,453 | | 1,194 | | 11,649 | | | 10,195 | | 10,076 | | 11,453 | |
| | | | | |
| Total current | | 17,025 | | 12,500 | | 1,977 | | 18,601 | | | 9,735 | | 17,025 | | 12,500 | |
| Deferred tax (benefit) expense: | | |
| U.S. federal | | | (4,405 | ) | | | (942 | ) | | | (5,774 | ) | | 3,330 | | | | (8,796 | ) | | | (4,405 | ) | | | (942 | ) |
| State and local | | | (2,659 | ) | | | (788 | ) | | | (956 | ) | | 911 | | | | (3,840 | ) | | | (2,659 | ) | | | (788 | ) |
| Foreign | | | (2,392 | ) | | | (2,861 | ) | | | (652 | ) | | | (212 | ) | | 416 | | | (2,392 | ) | | | (2,861 | ) |
| | | | | |
| Total deferred | | | (9,456 | ) | | | (4,591 | ) | | | (7,382 | ) | | 4,029 | | | | (12,220 | ) | | | (9,456 | ) | | | (4,591 | ) |
| | | | | |
| Total current and deferred | | 7,569 | | 7,909 | | | (5,405 | ) | | 22,630 | | | | (2,485 | ) | | 7,569 | | 7,909 | |
| Benefit from stock transactions with employees | | 10,004 | | 3,930 | | | (199 | ) | | 2,280 | | |
| Benefit from acquired tax benefits applied to reduce goodwil | | — | | — | | — | | 78 | | |
| Benefit relating to interest rate swap used to increase equity: | | | 283 | | — | | — | |
| Benefit from stock transactions with employees used to increase equity: | | | 4,472 | | 10,004 | | 3,930 | |
| Benefit of acquired tax assets used to reduce goodwill | | | 5,605 | | — | | — | |
| | | | | |
| Provision (benefit) for income taxes | | $ | 17,573 | | $ | 11,839 | | $ | (5,604 | ) | | $ | 24,988 | | |
| Total tax expense | | | $ | 7,875 | | $ | 17,573 | | $ | 11,839 | |
| | | | | |
55
Current and long-term deferred tax assets and liabilities are comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, | | | December 31, | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| Depreciation and amortization | | $ | 5,483 | | $ | 7,002 | | |
| | | | |
| Depreciation and software amortization | | | $ | 3,867 | | $ | 3,962 | |
| Expense accruals for book purposes | | 40,816 | | 33,814 | | | 66,424 | | 40,816 | |
| Loss and credit carryforwards | | 60,590 | | 41,821 | | | 74,751 | | 60,590 | |
| Intangible assets | | — | | 376 | | |
| Other | | 1,874 | | 2,037 | | | 3,010 | | 1,874 | |
| | | | | |
| Gross deferred tax asset | | 108,763 | | 85,050 | | | 148,052 | | 107,242 | |
| Repatriation of foreign earnings | | | (5,047 | ) | | — | | | | (1,430 | ) | | | (5,047 | ) |
| Intangible assets | | | (2,037 | ) | | — | | | | (7,211 | ) | | | (516 | ) |
| Prepaid expenses | | | (4,202 | ) | | | (2,429 | ) | | | | (4,349 | ) | | | (4,202 | ) |
| | | | | |
| Gross deferred tax liability | | | (11,286 | ) | | | (2,429 | ) | | | (12,990 | ) | | | (9,765 | ) |
| | | | |
| Valuation allowance | | | (41,008 | ) | | | (35,863 | ) | | | (66,647 | ) | | | (41,008 | ) |
| | | | | |
| Net deferred tax asset | | $ | 56,469 | | $ | 46,758 | | | $ | 68,415 | | $ | 56,469 | |
| | | | | |
Current and long-term net deferred tax assets were
$11.8 million and $56.6 million as of December 31, 2005, and $13.4 million and $43.1 million as of December 31, 2004,
and $8.9 million and $37.9 million as of December 31, 2003, respectively, and are included in Prepaid expenses and other current assets and Other assets in the Consolidated Balance Sheets.
The valuation allowance relates primarily to
domestic state and local and foreign
tax net operating
loss andlosses, capital loss carryforwards,
and foreign tax credits that more likely than not will expire unutilized. The net increase in
the valuation
allowanceallowances of approximately
$5.1$25.6 million in
Calendar 2004 was2005 relates primarily
due to
increases in foreign net operating losses,establishing a valuation allowances associated with Meta pre-acquisition assets. These assets include state and local
and foreign net
operatingoperation losses and
federaldomestic capital losses. A portion of the increase also relates to a valuation allowance established for foreign tax credits and current year capital losses. Approximately
$2.6$2.3 million of the valuation allowance will reduce additional paid-in-capital upon subsequent recognition of any related tax benefits
related toassociated with stock options.
61
Approximately $18.9 million of the valuation allowance will reduce goodwill upon subsequent recognition of any related tax benefits associated with various META deferred tax assets.
The Company has established full valuation allowances against domestic realized and unrealized capital losses, as their utilization remains uncertain. As of December 31, 2005, the Company had U.S. federal capital loss carryforwards of $34.4 million. $19.2 million of these capital losses expired as of December 31, 2005. However, these losses remain subject to utilization against potential audit adjustments associated with the current IRS exam. $3.6 million of the remaining capital loss carryovers will expire in 2006, $3.3 million will expire in 2007, and $8.3 million will expire during 2008 and 2009. The Company also had $84.8 million in state and local capital loss carryforwards, of which $69.6 million expired as of December 31, 2005. Again, these losses remain subject to state utilization depending upon adjustments associated with the current IRS exam. Of the remaining amount, $3.6 million will expire in 2006, $3.3 million will expire in 2007, and $8.3 million will expire during 2008 and 2009.
As of December 31, 2005, the Company had a federal net operating loss carryforward of $18.8 million, the majority of which will expire in 18 years. The Company also had state and local tax net operating loss carryforwards of $341.5 million, of which $88.7 million will expire within one to five years, $61.8 million will expire within six to fifteen years, and $191.0 million will expire within sixteen to twenty years. In addition, the Company had foreign net operating loss carryforwards of $40.6 million of which $12.3 million will expire in one to eleven years and $28.3 million that can be carried forward indefinitely
As of December 31, 2005 the Company also had foreign tax credit carryforwards of $15.0 million, of which $9.4 million will expire in 2010, and the remaining will expire in between 2011 and 2015.
In addition, the Company had federal alternative minimum tax credit carryforwards of $2.3 million, which can be carried forward indefinitely and research and development credit carryforwards of approximately $1.2 million which will expire between 2020 and 2025.
The differences between the U.S. federal statutory income tax rate and the Company’s effective tax rate on income
(loss) before income taxes are:
| | | | | | | | | | | | | | | | | |
| | | Calendar | | | Calendar | | | Transition | | | Fiscal | |
| | | 2004 | | | 2003 | | | 2002 | | | 2002 | |
| Statutory tax rate | | | 35.0 | % | | | 35.0 | % | | | (35.0 | )% | | | 35.0 | % |
| State income taxes, net of federal benefit | | | 0.8 | | | | 2.6 | | | | (2.9 | ) | | | 2.4 | |
| Foreign income taxed at a different rate | | | (0.9 | ) | | | (11.4 | ) | | | 5.6 | | | | (1.7 | ) |
| Non-taxable income | | | (1.1 | ) | | | (0.8 | ) | | | (0.3 | ) | | | (0.2 | ) |
| Exempt foreign trading gross receipts | | | (0.5 | ) | | | — | | | | — | | | | (0.4 | ) |
| Non-deductible meals and entertainment | | | 2.1 | | | | 1.7 | | | | 0.6 | | | | 0.6 | |
| Officers’ life insurance | | | — | | | | 0.1 | | | | 0.5 | | | | 0.5 | |
| Jobs Creation Act – repatriation of foreign earnings | | | 14.6 | | | | — | | | | — | | | | — | |
| Foreign tax credits | | | (3.1 | ) | | | 2.5 | | | | — | | | | — | |
| (Decrease) increase in valuation allowance | | | (4.1 | ) | | | 0.9 | | | | 3.0 | | | | (1.0 | ) |
| Non-deductible write-off of goodwill and currency translation adjustments | | | 3.8 | | | | — | | | | — | | | | — | |
| Other items | | | 4.4 | | | | 2.8 | | | | 0.5 | | | | (1.2 | ) |
| | | |
| Effective tax rate | | | 51.0 | % | | | 33.4 | % | | | (28.0 | )% | | | 34.0 | % |
| | | |
56
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | |
| Statutory tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| State income taxes, net of federal benefit | | | (4.3 | ) | | | 0.8 | | | | 2.6 | |
| Foreign income taxed at a different rate | | | 112.2 | | | | (0.9 | ) | | | (1.4 | ) |
| Non-taxable income | | | (4.3 | ) | | | (1.1 | ) | | | (0.8 | ) |
| Exempt foreign trading gross receipts | | | (1.7 | ) | | | (0.5 | ) | | | — | |
| Non-deductible meals and entertainment | | | 10.6 | | | | 2.1 | | | | 1.7 | |
| Non-deductible acquisition costs | | | 13.2 | | | | — | | | | — | |
| Officers’ life insurance | | | — | | | | — | | | | 0.1 | |
| Jobs Creation Act — repatriation of foreign earnings | | | (66.5 | ) | | | 14.6 | | | | — | |
| Foreign tax credits | | | (34.9 | ) | | | (3.1 | ) | | | 2.5 | |
| Record (release) valuation allowance | | | 111.0 | | | | 4.1 | | | | 0.9 | |
| (Release) increase reserve for tax contingencies | | | (24.3 | ) | | | 3.2 | | | | — | |
| Non-deductible goodwill and currency translation | | | — | | | | 3.8 | | | | — | |
| Other items (net) | | | (1.2 | ) | | | 1.2 | | | | 2.8 | |
| | | |
| Effective tax rate | | | 144.8 | % | | | 51.0 | % | | | 33.4 | % |
| | | |
The higher effective tax rate in Calendar 2004 as compared to 2003 is primarily attributable to repatriationincurring non-deductible restructuring charges and tax costs from repatriating foreign earnings. These increases were offset in part by a release of valuation allowance associated with foreign tax credits and non-deductible book write-offs of currency translation and goodwill. The Companycredits. In 2004, we took a $5.0 million deferred tax charge in anticipation of repatriating approximately $52.0 million in earnings from the Company’s non USour non-US subsidiaries in 2005. The anticipated repatriation qualifieswas expected to qualify for a one-time reduced tax rate pursuant to the American Jobs Creation Act of 2004. This(AJCA). The charge is the Company’s best current estimate of the tax cost related to the dividend repatriation. Such estimate may be revised as a result of additional guidance or clarifying language that may be issued by Congress and/or the Department of the Treasury, or any changes in the Company’s factual assumptions that may occur. The repatriation expense was partially offset by a deferred benefit of $3.5 for the generation of current year foreign tax credits and the$2.5 million to release of valuation allowance on prior year foreign tax credits that willwere expected to be usedutilized before they expired.
The increase in the effective tax rate for 2005, as compared to that of 2004, is principally due to the fact that the Company generated less income in low tax jurisdictions as compared to the prior year and recorded valuation allowances against capital losses and foreign tax credit carryforwards. The impact of these items is offset, foreign sourcein part, by benefits taken to reduce the overall tax expense on repatriated earnings as well as reductions for interest costs related to tax contingencies. The impact of the various positive and negative adjustments is amplified by lower pretax book income including the repatriated amounts. in 2005 as compared to 2004.
The Company also recorded charges in
Calendar 20042005 relating to
write-off certain goodwillthe acquisition and
currency translation adjustments. These chargesintegration of Meta which are not deductible for tax purposes. The impact of these items increased tax expense by approximately
$1.3 million.As$0.7 million or 13.2%
Undistributed earnings of December 31, 2004,subsidiaries outside of the Company had U.S. federal capital loss carryforwards of $26.4amounted to approximately $30.0 million of which $19.2 million will expire in one year, $3.6 million will expire in two years, and $3.6 million will expire in five years; foreign tax credit carryforwards of $12.7 million, of which $9.7 million will expire in six years, and the remaining will expire in seven to nine years; and federal alternative minimum tax credit carryforwards of $1.8 million which can be carried forward indefinitely. The Company had a federal net operating loss carryforward of $28.9 million, the majority of which will expire in 20 years, state and local tax net operating loss carryforwards of $250.2 million, of which $76.2 million will expire within one to five years, $40.2 million will expire within six to fifteen years, and $133.8 million will expire within sixteen to twenty years. The Company also had $76.8 million in state and local capital loss carryforwards, of which $69.6 million will expire as of December 31, 2005. These earnings have been and will continue to be permanently reinvested. Accordingly, no provision for U.S. federal and state income taxes has been provided thereon. These earnings could become subject to additional tax if they were distributed in the form of dividends or otherwise. It is not practicable to estimate the amount of additional tax that may be payable on the foreign earnings because of the complexities associated with the hypothetical calculation.
In March 2005, the Company repatriated approximately $52.0 million in cash from its non-US subsidiaries in order to take advantage of the beneficial provisions of the American Jobs Creation Act of 2004 (AJCA). The Company had previously recorded $5.0 million of tax expense in anticipation of the repatriation. In 2005, the Company took into account technical corrections issued by the Treasury Department. As a result of favorable provisions contained in the technical correction, the Company realized a tax benefit of $3.6 million to reduce the cumulative charge to $1.4 million. Additionally, as a consequence of the application of the technical corrections, the Company re-evaluated its ability to use foreign tax credits in the future and took a charge of $2.5 million to re-establish valuation allowance for foreign tax credits that more likely than not will expire in Calendarunused.
The Internal Revenue Service (“IRS”) has completed the field work portion of an audit of the Company’s federal income tax returns for tax years ended September 30, 1999, through 2002. In October 2005,
the Company received an Examination Report indicating proposed changes that primarily relate to the valuation of intangible assets licensed to a foreign subsidiary and the
remaining $3.6calculation of payments under a cost sharing arrangement between Gartner, Inc. and one of its foreign subsidiaries. Gartner disagrees with the proposed adjustments relating to valuation and the cost sharing arrangement and intends to vigorously dispute this matter through applicable IRS and judicial procedures, as appropriate. However, if the IRS were to ultimately prevail on the issues, it could result in additional taxable income for the years under examination of approximately $130.7 million
and an additional federal cash tax liability of approximately $41.0 million. The Company recorded a provision in prior periods based on its estimate of the amount for which the claim will
expirebe settled, and no additional amount was booked in
Calendar 2008. Lastly,the current period. Although the final resolution of the proposed adjustments is uncertain, the Company
had foreignbelieves the ultimate disposition of this matter will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations. The IRS has commenced an examination of tax
loss carryforwards of $19.1 million of which $7.3 million will expire in oneyears 2003 and 2004. There have been no significant developments to
ten years and $11.8 million that can be carried forward indefinitely.14—date.
Savings and investment plan.The Company has a savings and investment plan covering substantially all domestic employees. Company
57
contributions are based upon the level of employee contributions. In addition, the Company also contributes fixed and discretionary profit sharing contributions set by the Board of Directors. Amounts expensed in connection with the plan totaled
$10.6 million, $9.5 million,
and $9.3 million,
$1.9 million,for 2005, 2004, and
$9.5 million for Calendar 2004, Calendar 2003,
Transition 2002, and for Fiscal 2002, respectively.
Deferred compensation employee stock trust.The Company has supplemental deferred compensation arrangements for the benefit of certain officers, managers and other key employees. These arrangements are partially funded by life insurance contracts, which have been purchased by the Company. The plan permits the participants to diversify their investments. The value of the assets held, managed and invested, pursuant to the agreement was
$13.4$14.1 million and
$11.6$13.4 million at December 31,
20042005 and
2003,2004, respectively, and are included in Other assets. The corresponding deferred compensation liability of
$15.7$16.6 million and
$13.4$15.7 million at December 31,
20042005 and
2003,2004, respectively, is recorded at fair market value, and is adjusted with a corresponding charge or credit to compensation cost, to reflect the fair value of the amount owed to the employee and is included in Other liabilities. Total compensation expense recognized for the plan was
$0.3$0.2 million, $0.3 million,
$0.1 million, and
$0.6$0.3 million, for
Calendar2005, 2004,
Calendarand 2003,
Transition 2002 and Fiscal 2002, respectively.
62
Defined benefit pension plan.plans.The Company has a defined-benefit pension planplans in oneseveral of its international locations. The plan is statutory in nature, coverslocations covering approximately 85188 individuals and iswhich are accounted for in accordance with the requirements of SFAS 87.Statement of Financial Accounting Standards No. 87, - “Employers’ Accounting for Pensions” (SFAS No. 87). Benefits paid under the planplans are based on years of service and employee compensation and employees vestcompensation. None of these plans have plan assets as defined under the plan after five years of service. Benefits are paid under the plan through a reinsurance contract, which the Company maintains with a third-party insurance company.SFAS No. 87. The Company pays an annual insurance premiumCompany’s policy is to account for this coverage. Inmaterial defined benefit plans in accordance with the requirements of SFAS 87, the reinsurance contract does not qualify as a plan asset since it is maintained outside of the plan.
No. 87.
The following are the components of net periodic pension expense:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Calendar | | Fiscal | | | 2005 | | 2004 | | 2003 | |
| | | 2004 | | 2003 | | 2002 | | | |
| Service cost | | $ | 1,024 | | $ | 843 | | $ | 488 | | | $ | 1,502 | | $ | 1,024 | | $ | 843 | |
| Interest cost | | 280 | | 187 | | 90 | | | 353 | | 280 | | 187 | |
| Amortization of gain (loss) | | 78 | | — | | — | | |
| Recognition of actuarial loss | | | 235 | | 78 | | — | |
| | | | | |
| Net periodic pension cost | | $ | 1,382 | | $ | 1,030 | | $ | 578 | | | $ | 2,090 | | $ | 1,382 | | $ | 1,030 | |
| | | | | |
The following table provides information related to changes in the projected benefit obligation:obligations:
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | December 31, | |
| | | December 31, | | | 2005 | | 2004 | | 2003 | |
| | | 2004 | | 2003 | | 2002 | | | |
| Projected benefit obligation at beginning of year | | $ | 4,800 | | $ | 2,241 | | $ | 1,397 | | | $ | 8,300 | | $ | 4,800 | | $ | 2,241 | |
| Service cost | | 1,024 | | 843 | | 488 | | | 1,502 | | 1,024 | | 843 | |
| Interest cost | | 280 | | 187 | | 90 | | | 353 | | 280 | | 187 | |
| Actuarial gain (loss) | | 1,738 | | 1,016 | | 22 | | |
| Actuarial loss | | | 1,019 | | 1,738 | | 1,016 | |
| Benefits paid | | | | (52 | ) | | — | | — | |
| Acquisitions and new plans | | | 1,751 | | — | | — | |
| Foreign currency impact | | 458 | | 513 | | 106 | | | | (1,304 | ) | | 458 | | 513 | |
| | | | | |
| Projected benefit obligation at end of year | | $ | 8,300 | | $ | 4,800 | | $ | 2,103 | | | $ | 11,569 | | $ | 8,300 | | $ | 4,800 | |
| | | | | |
The following table provides information related to changes in the funded status of the plan:
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | December 31, | |
| | | December 31, | | | 2005 | | 2004 | | 2003 | |
| | | 2004 | | 2003 | | 2002 | | | |
| Funded status | | $ | 8,300 | | $ | 4,800 | | $ | 2,103 | | | $ | 11,569 | | $ | 8,300 | | $ | 4,800 | |
| Unrecognized net loss | | | (2,859 | ) | | | (1,077 | ) | | | (23 | ) | | | (3,240 | ) | | | (2,859 | ) | | | (1,077 | ) |
| | | | | |
| Net amount recognized | | $ | 5,442 | | $ | 3,723 | | $ | 2,080 | | | $ | 8,329 | | $ | 5,442 | | $ | 3,723 | |
| | | | | |
| | |
| Amounts recognized in the balance sheet consists of: | | | |
| Accrued pension benefit - other liabilities | | $ | 5,442 | | $ | 3,723 | | $ | 2,080 | | |
| Amounts recognized in the balance sheet consist of: | | |
| Accrued pension benefit — other liabilities | | | $ | 8,329 | | $ | 5,442 | | $ | 3,723 | |
| | | | | |
Assumptions used in the computation of net periodic pension expense are as follows:
| | | | | | | | | | | | | |
| | | Calendar | | Fiscal |
| | | 2004 | | 2003 | | 2002 |
| Weighted-average discount rate | | | 5.50 | % | | | 5.75 | % | | | 5.75 | % |
| Average compensation increase | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % |
58
| | | | | | | | | | | | | |
| | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | |
| Weighted- average discount rate | | | 3.70 | % | | | 5.50 | % | | | 5.75 | % |
| Average compensation increase | | | 3.27 | % | | | 3.50 | % | | | 3.50 | % |
Assumptions used in the computation of the benefit obligationobligations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Calendar | | Fiscal | | |
| | | 2004 | | 2003 | | 2002 | | 2005 | | 2004 | | 2003 | |
| Weighted-average discount rate | | | 4.50 | % | | | 5.50 | % | | | 6.00 | % | |
| | | | |
| Weighted- average discount rate | | | | 4.50 | % | | | 4.50 | % | | | 5.50 | % |
| Average compensation increase | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % |
63
15—13—SEGMENT INFORMATION
The Company manages its business in three reportable segments: research, consulting and events. Research consists primarily of subscription-based research products. Consulting consists primarily of consulting, measurement engagements and strategic advisory services. Events consists of various symposia, conferences and exhibitions.
The Company evaluates reportable segment performance and allocate resources based on gross contribution margin. Gross contribution, as presented below, is defined as operating income excluding certain
cost of sales and selling, general and administrative expenses, depreciation, amortization of intangibles and other charges. The accounting policies used by the reportable segments are the same as those used by the Company.
The Company earns
We earn revenue from clients in many countries. Other than the United States, there is no individual country in which revenues from external clients represent 10% or more of the Company’s consolidated revenues. Additionally, no single client accounted for 10% or more of total revenue and the loss of a single client, in management’s opinion, would not have a material adverse effect on revenues.
The Company does
We do not identify or allocate assets, including capital expenditures, by operating segment. Accordingly, assets are not being reported by segment because the information is not available by segment and is not reviewed in the evaluation of performance or making decisions in the allocation of resources.
The following tables present information about the Company’s reportable segments (in thousands). The “Other” column includes certain revenues and corporate and other expenses (primarily selling, general and administrative) unallocated to reportable segments, expenses allocated to operations that do not meet the segment reporting quantitative threshold, and other charges. There are no intersegment revenues:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Research | | Consulting | | Events | | Other | | Consolidated | | | Research | | Consulting | | Events | | Other | | Consolidated | |
Calendar 2004 | | |
| | | | |
2005 | | |
| Revenues | | $ | 480,486 | | $ | 259,419 | | $ | 138,393 | | $ | 15,523 | | $ | 893,821 | | | $ | 523,033 | | $ | 301,074 | | $ | 151,339 | | $ | 13,558 | | $ | 989,004 | |
| Gross Contribution | | 292,704 | | 92,711 | | 69,462 | | 13,940 | | 468,817 | | | 310,008 | | 125,678 | | 76,135 | | 12,184 | | 524,005 | |
| Corporate and other expenses | | | (426,158 | ) | | | (498,725 | ) |
| | | | | | | |
| Operating income | | $ | 42,659 | | | $ | 25,280 | |
| | | | | | | |
| | |
Calendar 2003 | | |
| Revenues | | $ | 466,907 | | $ | 258,628 | | $ | 119,355 | | $ | 13,556 | | $ | 858,446 | | |
| Gross Contribution | | 292,874 | | 86,778 | | 56,004 | | 10,081 | | 445,737 | | |
| Corporate and other expenses | | | (398,404 | ) | |
| | | | | |
| Operating income | | $ | 47,333 | | |
| | | | | |
| | |
Calendar 2002 (unaudited) | | |
| Revenues | | $ | 486,967 | | $ | 276,059 | | $ | 109,694 | | $ | 14,873 | | $ | 887,593 | | |
| Gross Contribution | | | 318,709 | | | 102,780 | | | 56,101 | | | 10,184 | | 487,774 | | |
| Corporate and other expenses | | | (438,233 | ) | |
| | | | | |
| Operating income | | $ | 49,541 | | |
| | | | | |
| | |
Transition 2002 | | |
| Revenues | | $ | 120,038 | | $ | 58,098 | | $ | 47,169 | | $ | 4,509 | | $ | 229,814 | | |
| Gross Contribution | | | 76,932 | | | 18,883 | | | 27,622 | | | 3,640 | | 127,077 | | |
| Corporate and other expenses | | | (139,963 | ) | |
| | | | | |
| Operating income | | $ | (12,886 | ) | |
| | | | | |
| | |
Fiscal 2002 | | |
| Revenues | | $ | 496,403 | | $ | 273,692 | | $ | 121,991 | | $ | 15,088 | | $ | 907,174 | | |
| Gross Contribution | | | 326,345 | | | 97,924 | | | 65,405 | | | 9,316 | | 498,990 | | |
| Corporate and other expenses | | | (402,807 | ) | |
| | | | | |
| Operating income | | $ | 96,183 | | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Research | | | Consulting | | | Events | | | Other | | | Consolidated | |
| | | |
2004 | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 480,486 | | | $ | 259,419 | | | $ | 138,393 | | | $ | 15,523 | | | $ | 893,821 | |
| Gross Contribution | | | 292,704 | | | | 92,711 | | | | 69,462 | | | | 13,940 | | | | 468,817 | |
| Corporate and other expenses | | | | | | | | | | | | | | | | | | | (426,158 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Operating income | | | | | | | | | | | | | | | | | | $ | 42,659 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
2003 | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 466,907 | | | $ | 258,628 | | | $ | 119,355 | | | $ | 13,556 | | | $ | 858,446 | |
| Gross Contribution | | | 292,874 | | | | 86,778 | | | | 56,004 | | | | 10,081 | | | | 445,737 | |
| Corporate and other expenses | | | | | | | | | | | | | | | | | | | (398,404 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Operating income | | | | | | | | | | | | | | | | | | $ | 47,333 | |
| | | | | | | | | | | | | | | | | | | | |
59
The Company’s consolidated revenues are generated primarily through direct sales to clients by domestic and international sales forces and a network of independent international sales agents.
The Company definesRevenues in the table below are reported based on where the sale is fulfilled; “Other
International Revenues” asInternational” revenues
are those attributable to all areas located outside of the United States
and Canada,
as well as Europe, the Middle East, and
Europe.Africa. Most of
the Company’sour products and services are provided on an integrated worldwide basis. Because of the integration of products and services delivery, it is not practical to separate precisely
the Company’sour revenues by geographic location.
64
Long-lived assets exclude goodwill and other intangible assets. Accordingly, the separation set forth in the table below is based upon internal allocations, which involve certain management estimates and judgments.
Summarized information by geographic location is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Calendar | | Transition | | Fiscal | | | |
| | | 2004 | | 2003 | | 2002 | | 2002 | | 2002 | | | 2005 | | 2004 | | 2003 | |
| | | (Unaudited) | | | |
| Revenues: | | |
| United States and Canada | | $ | 559,416 | | $ | 535,694 | | $ | 576,491 | | $ | 148,585 | | $ | 595,331 | | | $ | 610,980 | | $ | 559,416 | | $ | 535,694 | |
| Europe, Middle East and Africa | | 262,953 | | 252,264 | | 241,322 | | 62,412 | | 242,099 | | | 296,705 | | 262,953 | | 252,264 | |
| Other International | | 71,452 | | 70,488 | | 69,780 | | 18,817 | | 69,744 | | | 81,319 | | 71,452 | | 70,488 | |
| | | | | |
| Total revenues | | $ | 893,821 | | $ | 858,446 | | $ | 887,593 | | $ | 229,814 | | $ | 907,174 | | | $ | 989,004 | | $ | 893,821 | | $ | 858,446 | |
| | | | | |
| | |
| Long-lived assets: | | |
| United States and Canada | | $ | 74,200 | | $ | 67,081 | | $ | 74,298 | | �� | $ | 74,298 | | $ | 78,920 | | | $ | 70,767 | | $ | 74,200 | | $ | 67,081 | |
| Europe, Middle East and Africa | | 13,877 | | 16,400 | | 17,496 | | 17,496 | | 17,808 | | | 17,253 | | 13,877 | | 16,400 | |
| Other International | | 3,316 | | 3,793 | | 3,925 | | 3,925 | | 4,113 | | | 24 | | 3,316 | | 3,793 | |
| | | | | |
| Total long-lived assets | | $ | 91,393 | | $ | 87,274 | | $ | 95,719 | | $ | 95,719 | | $ | 100,841 | | | $ | 88,044 | | $ | 91,393 | | $ | 87,274 | |
| | | | | |
Long-lived assets consists of property and equipment, certain security deposits, and certain other long-term assets.
15—
14—VALUATION AND QUALIFYING ACCOUNTS The following table provides information regarding the Company’s allowance for doubtful accounts and returns and allowances, in thousands:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Additions | | | | | | | | | Additions | | | | | | | |
| | | Charged | | As a | | As a | | | | | Charged | | | | | | | |
| | | (Subtractions | | % of | | Additions | | % of | | | | | (Subtractions | | Additions | | | | | |
| | | Balance at | | Credited) | | Year- | | Charged | | Deductions | | Year- | | Balance | | | Balance at | | Credited) | | Charged | | Deductions | | Balance | |
| | | Beginning | | to Costs and | | End | | to Other | | from | | End | | at End | | | Beginning | | to Costs and | | to Other | | from | | at End | |
| | | of Year | | Expenses | | Amount | | Accounts (1) | | Reserve | | Amount | | of Year | | | of Year | | Expenses | | Accounts (1) | | Reserve | | of Year | |
Fiscal 2002: | | |
| Allowance for doubtful accounts and returns and allowances | | $ | 5,600 | | $ | 9,119 | | | 130 | % | | $ | — | | $ | 7,719 | | | 110 | % | | $ | 7,000 | | |
Transition 2002: | | |
| Allowance for doubtful accounts and returns and allowances | | $ | 7,000 | | $ | 2,329 | | | 33 | % | | $ | — | | $ | 2,329 | | | 33 | % | | $ | 7,000 | | |
| | | | |
Calendar 2003: | | |
| Allowance for doubtful accounts and returns and allowances | | $ | 7,000 | | $ | 8,276 | | | 92 | % | | $ | 2,000 | | $ | 8,276 | | | 92 | % | | $ | 9,000 | | | $ | 7,000 | | $ | 8,276 | | $ | 2,000 | | $ | 8,276 | | $ | 9,000 | |
Calendar 2004: | | |
| Allowance for doubtful accounts and returns and allowances | | $ | 9,000 | | $ | (3,700 | ) | | | (44 | )% | | $ | 13,283 | | $ | 10,133 | | | 120 | % | | $ | 8,450 | | | $ | 9,000 | | $ | (3,700 | ) | | $ | 13,283 | | $ | 10,133 | | $ | 8,450 | |
Calendar 2005: | | |
| Allowance for doubtful accounts and returns and allowances | | | $ | 8,450 | | $ | 966 | | $ | 6,089 | | $ | 7,605 | | $ | 7,900 | |
|
| (1) | | Amounts charged to revenues. For 2005, includes $0.9 million that was not charged against earnings but was an addition from the META acquisition. |
65
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this Report on Form 10-K to be signed on its behalf by the undersigned, duly authorized, in Stamford, Connecticut, on March 16, 2005.10, 2006.
60
| | | | | |
| | | | Gartner, Inc. |
Date: March 16, 200510, 2006 | | By: | | /s/ Eugene A. Hall |
| | | | |
| | | Eugene A. Hall |
| | | Chief Executive Officer |
Each person whose signature appears below appoints Eugene A. Hall and Christopher Lafond and each of them, acting individually, as his or her attorney-in-fact, each with full power of substitution, for him or her in all capacities, to sign all amendments to this Report on Form 10-K, and to file the same, with appropriate exhibits and other related documents, with the Securities and Exchange Commission. Each of the undersigned, ratifies and confirms his or her signatures as they may be signed by his or her
attorney–attorney—in-fact to any amendments to this Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| | | | | |
| Name | | Title | | Date |
| /s/ Eugene A. Hall | | | | |
Eugene A. Hall | | Director and Chief Executive Officer
(Principal Executive Officer) | | March 16, 2005 |
| 10, 2006 |
| /s/ Christopher Lafond | | | | |
Christopher Lafond | | Executive Vice President and
Chief Financial Officer
(Principal Financial and | | March 16, 2005 |
| | Accounting Officer) | | March 10, 2006 |
| | | | |
/s/ Michael J. BingleMichael J. Bingle | | Director | | March 16, 2005 |
| | | | |
Michael J. Bingle | | | | |
| | | | 10, 2006 |
| /s/ Richard J. BresslerRichard J. Bressler | | Director | | March 10, 2006 |
| /s/ Anne Sutherland FuchsAnne Sutherland Fuchs | | Director | | March 16, 2005 |
| | | | |
Anne Sutherland Fuchs | | | | |
| | | | 10, 2006 |
| /s/ William O. GrabeWilliam O. Grabe | | Director | | March 16, 2005 |
| | | | |
William O. Grabe | | | | |
| | | | 10, 2006 |
| /s/ Max D. HopperMax D. Hopper | | Director | | March 16, 2005 |
| | | | |
Max D. Hopper | | | | |
| | | | 10, 2006 |
/s/ Glenn HutchinsJohn R. JoyceJohn R. Joyce | | Director | | March 16, 2005 |
| | | | |
Glenn Hutchins | | | | |
| 10, 2006 |
| /s/ Stephen G. PagliucaStephen G. Pagliuca | | Director | | March 16, 2005 |
| | | | |
Stephen G. Pagliuca | | | | |
66
| | | | |
Name | | Title | | Date |
| | | | 10, 2006 |
| /s/ James C. SmithJames C. Smith | | Director | | March 16, 2005 |
| | | | |
James C. Smith | | | | |
| | | | 10, 2006 |
| /s/ Jeffrey W. UbbenJeffrey W. Ubben | | Director | | March 16, 2005 |
| | | | |
Jeffrey W. Ubben | | | | |
| | | | 10, 2006 |
| /s/ Maynard G. Webb, Jr.Maynard G. Webb, Jr. | | Director | | March 16, 2005 |
| | | | |
Maynard G. Webb, Jr. | | | | 10, 2006 |
6761