================================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington,WASHINGTON, D.C. 20549------------FORM 10-K
------------ [X]þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DecemberFOR THE FISCAL YEAR ENDED DECEMBER 31,
20032004OR
[ ]o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14443
GARTNER, INC.
(Exact(Exact name of Registrant as specified in itsCharter) Delaware 04-3099750 (State or Other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) P.O. Box 10212 56 Top Gallant Road Stamford, CT 06902-7747 (Address of principal executive offices) (Zip Code) Registrant'scharter)
Delaware
(State or other jurisdiction of
incorporation or organization)04-3099750
(I.R.S. Employer
Identification Number)P.O. Box 10212
56 Top Gallant Road
Stamford, CT
(Address of principal executive offices)06902-7747
(Zip Code)Registrant’s telephone number, including area code: (203) 316-1111
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Class On Which Registered -------------- ------------------- Common Stock, Class A, $.0005 Par Value New York Stock Exchange Common Stock, Class B, $.0005 Par Value New York Stock Exchange
Name of Each Exchange Title of Class On Which Registered Common Stock, Class A, $.0005 Par Value New York Stock Exchange Common Stock, Class B, $.0005 Par Value New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES
Xþ NO--- ---oIndicate 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.( )oIndicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)
YES X NO --- ---Yesþ NooThe aggregate market value of the voting stock held by persons other than those who may be deemed affiliates of the Registrant, as of
February 29,June 30, 2004, was approximately$934.7$745.8 million. This calculation does not reflect a determination that persons are affiliates for any other purposes.The number of shares outstanding of the
Registrant'sRegistrant’s capital stock as of February29, 200428, 2005 was102,525,36789,502,496 shares of Common Stock, Class A and28,175,14322,612,954 shares of Common Stock, Class B.DOCUMENTS INCORPORATED BY REFERENCE Portions of the Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders, or if no such proxy statement is filed by April 30, 2004, an amendment to this Annual Report on Form 10-K, are incorporated by reference into Part III of this Report. ================================================================================10-K.2GARTNER, INC.
2003
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
3 5 5 5 6 7 8 24 24 24 25 25 26 30 34 36 37 38 Report by Management 32of IndependentAuditors'Registered Public Accounting Firm41 Report 33of Independent Registered Public Accounting Firm42 Consolidated Balance Sheets 3443 Consolidated Statements of Operations 3544 Consolidated Statements of Stockholders'Stockholders’ Equity (Deficit) and Comprehensive Income (Loss)3645 Consolidated Statements of Cash Flows 3746 Notes to Consolidated Financial Statements 38 Schedule II - Valuation and Qualifying Accounts 5747 66 EX-10.15: EMPLOYMENT AGREEMENT EX-10.16: EMPLOYMENT AGREEMENT EX-21.1: SUBSIDIARIES OF THE REGISTRANT EX-23.1: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EX-31.1: CERTIFICATION EX-31.2: CERTIFICATION EX-32: CERTIFICATION 10-K.32
PART I
ITEM 1. BUSINESS.
GENERAL
Gartner, Inc., founded in 1979, is a leading independent provider of research and analysis on information technology, computer hardware, software, communications and related technology industries (the
"IT industry"“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"(“CIOs”) and other senior IT and business executives in corporations and government agencies. We also serve technology companies and the investment community.The foundation for all Gartner products is our independent research on IT issues. The findings from this research can be delivered through several different media, depending on a
client'sclient’s specific business needs, preferences and objectives:o Gartner Intelligence - research content and advice for IT professionals, technology companies and the investment community in the form of reports, briefings or events. o Gartner Executive Programs - peer networking services and membership programs designed specifically for CIOs and other senior executives. o Gartner Consulting - customized engagements that allow CIOs and other business executives to apply our knowledge to their specific situation, with an emphasis on outsourcing and IT management.
• 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.
• Consulting– consists primarily of consulting, measurement engagements and strategic advisory services (paid one-day analyst engagements) (“SAS”), which provide assessments of cost, performance, efficiency and quality focused on the IT industry.
• Events– consists of various symposia, conferences and exhibitions focused on the IT industry. MARKET OVERVIEW
In
today'stoday’s dynamic IT marketplace, vendors continually introduce new products with a wide variety of standards and shorter life cycles. The users of technology-– almost all organizations-– must keep abreast of these new developments, and make major financial commitments to new IT systems and products. To plan and purchase effectively, these users of technology need independent, objective, third-party research and consultative services. We believe that technology accounts for a significant portion of all capital spending.While the pace of IT investments has slowed over recent years, we believe there are indications of an upturn in demand in the technology sector.The intense scrutiny on technology spending ensures that our products and services remain necessary in the current economy because clients still need value-added, independent and objective research and analysis of the IT market.We are a leading provider of independent and objective research and analysis of the IT industry, and a source of insight about technology acquisition and deployment. Our global research community provides provocative thought leadership. We employ more research analysts than any competitor. Our experienced consultants combine our objective, independent research, with a practical, sought-after business perspective focused on the IT industry. Our events are among the
world'sworld’s largest of their kind; gathering highly qualified audiences of senior business executives, IT professionals, purchasers and vendors of IT products and services.PRODUCTS AND SERVICES
Gartner Intelligence o Research on IT issues on a global scale is the fundamental building block for all Gartner services.Our
research agenda is defined by clients' needs, focusing on the critical issues, opportunities and challenges they face every day. Research content, presented in the form of reports, briefings, updates and related tools, is delivered directly to the client's desktop. Our research analysts provide in-depth analysis on all aspects of technology and telecommunications including: hardware, software and systems, services, IT management, market data and forecasts, and vertical industry issues. o Events such as symposia and conferences give clients live access to insights developed from our research in a concentrated way. In 2003, Gartner events attracted nearly 28,000 participants. Gartner Symposium, offered each spring and fall in various international locations, is our largest and most strategic conference for senior IT10-K.4 and business professionals. Symposium is combined with ITxpo, an exhibition where the latest technologyprincipal products andsolutionsservices aredemonstrated. We also offer conferences on specialized topics such as: outsourcing, mobile wireless, customer relationship management, application integrationResearch, Consulting, andbusiness intelligence in many locations around the world. Gartner Executive Programs oEvents:
§ 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. Executive Programs (EXP) are exclusive membership programs designed to help CIOs and other executives become more effective in their enterprises. An EXP membership leverages the knowledge and expertise of Gartner in ways that are specific to the CIOs needs, and offers members-only communities for peer-based collaboration. Members also receive advice and counsel from a personal relationship manager who understands their goals and can ensure the most effective level of support from Gartner.
At December 31, 2003, EXP had a membership of more than 2,100 CIOs. oOur Best Practices Programs bring together senior business and IT leaders for exclusive events, multi-client research studies and ad hoc peer exchange forums. These programs allow clients to learn from the experiences of their peers and share best practices in order to solve common business problems, improve corporate performance and drive greater effectiveness.We facilitate valuable member-to-member relationships based on experience, issues, location, industryAt December 31, 2004, our various Executive Programs had a membership of approximately 2,700 CIOs andpersonal interests. Gartner Consulting o Sourcing (Outsourcing, Off-Shoring, BPO). Virtually every major enterprise today is considering the issue ofother senior IToutsourcing, offshore resources and business process outsourcing. Our consultants provide advice and project management support across the four stages of the outsourcing or off-shoring process: strategy, evaluation and selection of partners, contract development, and relationship management. o IT Management & Measurement. Successful IT organizations must operate with maximum effectiveness and efficiency while delivering services that address the business and process issues of their enterprise. Our consultants provide advice and support that leverages the intelligence of our research to address and solve the top issues of the IT organization. o Federal government. We are highly experienced in developing IT solutions that meet the unique challenges faced by federal agencies as they attempt to serve the public's needs. Budgeting, procurement and re-engineering are just some of the issues our consultants have addressed in the public sector arena. o Market & Business Strategies. The intelligence we gather through market research, client interaction and analysis is unique in the marketplace. Our consultants leverage this intelligence to assist technology companies in identifying market demand, improving products and defining the competitive landscape.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:
IT Management and Measurement. Successful IT organizations must operate with maximum effectiveness and efficiency while 3
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.
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. 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. 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. • EVENTS.Symposia and conferences give clients live access to insights developed from our research in a concentrated way. In 2004, Gartner events attracted nearly 31,000 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
1415 – 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, consulting and events.o Research products and services highlight industry developments, review new products and technologies, provide quantitative market research, and analyze industry trends within a particular technology or market sector. o Consulting consists primarily of consulting, measurement engagements and strategic advisory services (paid one-day analyst engagements) ("SAS"), which provide assessments of cost, performance, efficiency and quality focused on the IT industry. o Events consists of various symposia, conferences and exhibitions focused on the IT industry.COMPETITION
We believe that the principal competitive factors that differentiate us from our competitors are:
o The high quality, independence and objectivity of our research and analysis; o Our multi-faceted expertise across the IT industry and its technologies, both legacy and emerging;10-K.5 o Our position as a research company with broad consulting capabilities; o Our position as a consulting firm with research analysts; o The timely delivery of information; o The ability to offer products that meet changing market needs at competitive prices; and o Our superior customer service.
• The high quality, independence and objectivity of our research and analysis;
• Our multi-faceted expertise across the IT industry and its technologies, both legacy and emerging;
• Our position as a research company with broad consulting capabilities;
• Our position as a consulting firm with research analysts;
• The timely delivery of information;
• The ability to offer products that meet changing market needs at competitive prices; and
• Our superior customer service. We face competition from a significant number of independent providers of information products and services. We compete indirectly against consulting firms and other information providers, including electronic and print media companies. These indirect competitors could choose to compete directly with us in the future. Additionally, we face competition from our clients receiving information from free sources through the Internet. Limited barriers to entry exist in the markets in which we do business. As a result, new competitors may emerge and existing competitors may start to provide additional or complementary services. However, we believe the breadth and depth of our research assets position us well versus our competition. Increased competition may result in us losing market share, diminished value in our products and services, reduced pricing and increased sales and marketing expenditures.
INTELLECTUAL PROPERTY
Our success has resulted in part from proprietary methodologies, software, reusable knowledge capital and other intellectual property rights. We rely on a combination of copyright, patent, trademark, trade secret, confidentiality, non-compete and other contractual provisions to protect our intellectual property rights. We have policies related to confidentiality and ownership and to the use and protection of
Gartner'sGartner’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.
EMPLOYEES
As of December 31,
2003,2004, we had3,7293,625 employees, of which730661 were located at our headquarters in Stamford, Connecticut;1,6151,649 were located at our other facilities in the United States; and1,3841,315 were located outside of the United States.None of ourOur employeesare represented by a private non-governmentalmay be subject to4
collective bargaining
arrangement.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 December2003,2004, we announced a restructuring plan thatwe would be making moderate reductions to ourincluded a severance charge of $5.9 million as part of a workforceof approximately 200 employees, or 5%,reduction as we continue to align our business resources with revenue expectations.A portion of the reductions occurred inPursuant to that plan, during the fourth quarter of Calendar2003, and the remaining portion is expected2004, 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 Calendar2004.2005, which will result in an additional severance charge estimated at between $5.0 to $6.0 million.AVAILABLE INFORMATION
Our Internet address iswww.gartner.com and the investor relations section of our Web site is located at
www4.gartner.com/5_about/investor_information/ 44a.html.www.gartner.com/investors. We make available free of charge, on or through the investor relations section of our Web site, annual reports on Form 10-K, quarterly reports on Form 10-Q,transition report on Form 10-KT,current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.Also available at
http://www4.gartner.com/ir/asset_8465.jspwww.gartner.com/investors 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 theBoard'sBoard’s committees. This information is also available in print to any shareholder who requests it by writing to Investor Relations, Gartner, Inc., 56 Top Gallant Road, Stamford, CT 06902.ITEM 2. PROPERTIES.
Our corporate headquarters is located in approximately
224,000213,000 square feet of leased office space infourthree buildings located in Stamford, Connecticut, USA. These facilities accommodate research and analysis, marketing, sales, client support, production and corporate administration. The leases on these facilities expire in 2010. We have a significant presence in the United Kingdom with approximately 72,000 square feet of leased office space in two10-K.6buildings located in Egham,UK.UK, for which the leases expire in 2020 and 2025, respectively. We have34an additional 36 domestic and4250 international locations that support our research and analysis, domestic and international sales efforts and other functions. As part of our continuing effort to adjust our office space as needs change, we 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 from $6.0 to $7.0 million. We believe that our existing facilitiesand leasesare adequate for our currentneeds.needs and that additional space will be available as needed.ITEM 3. LEGAL PROCEEDINGS.
We are involved in legal proceedings and litigation arising in the ordinary course of business. We believe the outcome of all current proceedings, claims and litigation will not have a material effect on our financial position or results of operations when resolved in a future period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matter to a vote of our stockholders during the fourth quarter of the year covered by this Annual Report.
10-K.75
PART II
ITEM 5. MARKET FOR
REGISTRANT'SREGISTRANT’S COMMON EQUITY,ANDRELATED STOCKHOLDERMATTERS.MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.As of February
29, 2004,28, 2005, there were approximately300200 holders of record of our Class A Common Stock and approximately3,4613,029 holders of record of our Class B Common Stock. Our Class A and Class B Common Stock trade on the New York Stock Exchange under the symbols IT and ITB, respectively. The Class B Common Stock is identical in all respects to the Class A Common Stock, except that the Class B Common Stock is entitled to elect at least 80% of the members of our Board of Directors.While subject to periodic review,In February 2005, we announced that the
current policy of ourBoard of Directors approved the combination of our Class A and Class B Common Stock. The combination is subject toretain all earnings primarilystockholder approval at our annual meeting toprovide funds for continued growth.take place in the late spring or early summer of 2005.The following table sets forth the high and low closing prices for our Class A Common Stock and Class B Common Stock as reported on the New York Stock Exchange for the periods indicated.
CLASS A COMMON STOCK
2003 2002 2001 ------------------ ------------------- ---------------- High Low High Low High Low - ----------------------------------------------------------------------------------------------------Quarter ended March 31 $ 9.68 $ 6.76 $13.48 $11.00 $ 9.16 $6.01 Quarter ended June 30 $ 8.32 $ 6.45 $13.45 $ 9.82 $11.00 $5.80 Quarter ended September 30 $12.60 $ 7.50 $ 9.82 $ 7.75 $11.17 $8.40 Quarter ended December 31 $13.75 $11.12 $10.66 $ 4.90 $11.69 $8.50
2004 2003 High Low High Low Quarter ended March 31 $ 11.85 $ 11.00 $ 9.68 $ 6.76 Quarter ended June 30 $ 13.38 $ 11.70 $ 8.32 $ 6.45 Quarter ended September 30 $ 13.17 $ 11.25 $ 12.60 $ 7.50 Quarter ended December 31 $ 12.85 $ 11.43 $ 13.75 $ 11.12 CLASS B COMMON STOCK
2003 2002 2001 ------------------ ------------------- ---------------- High Low High Low High Low - ----------------------------------------------------------------------------------------------------Quarter ended March 31 $ 9.80 $ 6.83 $13.20 $10.86 $ 8.45 $5.81 Quarter ended June 30 $ 8.38 $ 6.85 $13.05 $ 9.00 $ 9.81 $5.50 Quarter ended September 30 $12.30 $ 7.48 $ 9.84 $ 7.67 $10.60 $8.05 Quarter ended December 31 $12.99 $10.70 $10.70 $ 5.20 $11.70 $8.07The following table provides information regarding
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
purchases ofcommon stock for treasury during the fourth quarter of Calendar2003 under our announced share repurchase program, which has authorized repurchases2004. 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
Common Stock andor Class B CommonStock totaling $200 million. This repurchase program was originally announced in July 2001 with an authorizationStock. While subject topurchase $75 millionperiodic review, the current policy of ourstock. The repurchase program was subsequently amended in July 2002Board of Directors is toincrease the authorizationretain all earnings primarily topurchase upprovide funds for continued growth. Our Credit Agreement, dated August 12, 2004, contains a negative covenant, which may limit our ability to$125 million ofpay dividends. In addition, ourstock,Amended andagain in July 2003Restated Security Holders Agreement with Silver Lake Partners, L.P. requires us toincrease the total authorizationobtain Silver Lake’s consent prior topurchase up to $200 million of our stock.
Maximum Class A Common Stock Class B Common Stock Shares Value of Shares ------------------------- ------------------------- Purchased That May Yet Average Average Under Be Purchased Total Shares Price Paid Total Shares Price Paid Announced Under Plan Purchased per Share Purchased per Share Plan (in thousands) - --------------------------------------------------------------------------------------------------------------------------------October 2003 -- $ -- -- $ -- -- November 2003 -- -- 73,700 12.36 73,700 December 2003 416,921 11.95 435,000 11.87 851,921 ------------------------------------------------------------------------------------- Total fourth quarter of Calendar 2003 416,921 $11.95 508,700 $11.94 925,621 $72,868 =====================================================================================10-K.8declaring or paying dividends.6
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
We changed our fiscal
year endyear-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 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. Allotherof 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.
Calendar Year Fiscal Year Ended September 30, ------------------------ Transition ------------------------------------------------- (In thousands, except per share data) 2003 2002 2002 2002 2001 2000 1999 - -----------------------------------------------------------------------------------------------------------------------------------STATEMENT OF OPERATIONS DATA Revenues: Research $ 466,907 $ 486,967 $ 120,038 $ 496,403 $ 535,114 $ 509,781 $ 479,045 Consulting 258,628 276,059 58,098 273,692 276,292 216,667 156,444 Events 119,355 109,694 47,169 121,991 132,684 108,589 75,581 Other 13,556 14,873 4,509 15,088 18,794 27,414 29,768 ----------------------------------------------------------------------------------------- Total revenues 858,446 887,593 229,814 907,174 962,884 862,451 740,838 Operating income (loss) 47,461 49,542 (12,886) 96,375 42,514 84,131 133,368 Income (loss) from continuing operations 23,693 15,117 (14,418) 48,578 (220) 53,124 88,271 Loss from discontinued operation -- -- -- -- (65,983) (27,578) - Net income (loss) $ 23,693 $ 15,117 $ (14,418) $ 48,578 $ (66,203) $ 25,546 $ 88,271 =================================================================================================================================== PER SHARE DATA Basic income (loss) per share: from continuing operations $ 0.26 $ 0.18 $ (0.18) $ 0.58 $ (0.00) $ 0.61 $ 0.87 from discontinued operation -- -- -- -- (0.77) (0.31) -- ----------------------------------------------------------------------------------------- $ 0.26 $ 0.18 $ (0.18) $ 0.58 $ (0.77) $ 0.30 $ 0.87 ----------------------------------------------------------------------------------------- Diluted income (loss) per share: from continuing operations $ 0.26 $ 0.18 $ (0.18) $ 0.47 $ (0.00) $ 0.59 $ 0.84 from discontinued operation -- -- -- -- (0.77) (0.28) (0.31) ----------------------------------------------------------------------------------------- $ 0.26 $ 0.18 $ (0.18) $ 0.47 $ (0.77) $ 0.31 $ 0.53 ----------------------------------------------------------------------------------------- Weighted average shares outstanding Basic 91,123 83,329 81,379 83,586 85,862 86,564 101,881 Diluted 92,579 85,040 81,379 130,882 85,862 97,889 104,603 =================================================================================================================================== OTHER DATA Cash and cash equivalents and marketable equity securities $ 229,962 $ 109,657 $ 109,657 $ 124,793 $ 40,378 $ 97,102 $ 88,894 Total assets 917,264 810,080 810,080 818,455 839,002 972,361 803,444 Long-term debt -- 351,539 351,539 346,300 326,200 307,254 250,000 Stockholders' equity (deficit) 375,746 (28,701) (28,701) (4,890) (34,518) 74,820 74,486 ===================================================================================================================================
Calendar Year Transition Fiscal Year Ended September 30, (In thousands, except per share data) 2004 2003 2002 2002 2002 2001 2000 STATEMENT OF OPERATIONS DATA Revenues: Research $ 480,486 $ 466,907 $ 486,967 $ 120,038 $ 496,403 $ 535,114 $ 509,781 Consulting 259,419 258,628 276,059 58,098 273,692 276,292 216,667 Events 138,393 119,355 109,694 47,169 121,991 132,684 108,589 Other 15,523 13,556 14,873 4,509 15,088 18,794 27,414 Total revenues 893,821 858,446 887,593 229,814 907,174 962,884 862,451 Operating income (loss) 42,659 47,333 49,541 (12,886 ) 96,183 42,043 84,131 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 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 ) $ 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 ) $ 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 Diluted 126,326 92,579 85,040 81,379 130,882 85,862 97,889 OTHER DATA Cash, cash equivalents and marketable equity securities $ 160,126 $ 229,962 $ 109,657 $ 109,657 $ 124,793 $ 40,378 $ 97,102 Total assets 861,194 918,732 808,909 808,909 814,003 835,148 972,361 Long-term debt 150,000 — 351,539 351,539 346,300 326,200 307,254 Stockholders’ equity (deficit) 130,048 374,790 (29,408 ) (29,408 ) (5,596 ) (34,998 ) 74,820 The following items impact the comparability of our data from continuing operations:
o Other charges, which included costs for severance, excess facilities and impairments of long-lived assets, on a pre-tax basis, of $29.7 million for Calendar 2003, $49.4 million for Calendar 2002, $32.2 million for Transition 2002, $17.2 million for Fiscal 2002, $46.6 million for Fiscal 2001, and $23.4 million for Fiscal 1999. o Pre-tax charges for the impairment of investments of $0.9 million for Calendar 2003, $4.2 million for Calendar 2002, $1.7 million for Transition 2002, $2.5 million for Fiscal 2002, and $30.4 million for Fiscal 2001. o Gains (losses) from the sale of investments or assets and associated insurance claims, on a pre-tax basis, of $5.5 million for Calendar 2003, $0.5 million for Calendar 2002, $1.3 million for Fiscal 2002, $(0.6) million for Fiscal 2001, and $29.6 million for Fiscal 2000. o A tax benefit of $14.5 million during Fiscal 2001 due to the utilization of foreign tax credits. o During Calendar 2003, our long-term debt was converted into equity.10-K.9
• During the third quarter of Calendar 2004, we completed a tender offer in which we repurchased approximately 11.3 million shares of our Class A common stock and 5.5 million shares of our Class B common stock. Additionally, we also repurchased approximately 9.2 million Class A 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 $35.8 million for Calendar 2004, $29.7 million for Calendar 2003, $49.4 million for Calendar 2002, $32.2 million for Transition 2002, $17.2 million for Fiscal 2002, $46.6 million for Fiscal 2001, and $0 for Fiscal 2000.
• Pre-tax charges for the impairment of investments of $3.0 million for Calendar 2004, $0.9 million for Calendar 2003, $4.2 million for Calendar 2002, $1.7 million for Transition 2002, $2.5 million for Fiscal 2002, $30.4 million for Fiscal 2001, and $0 for Fiscal 2000.
• Pre-tax goodwill impairment charges of $2.7 million for 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 $5.5 million for Calendar 2003, $0.5 7
million for Calendar 2002, $1.3 million for Fiscal 2002, $(0.6) million for Fiscal 2001, and $29.6 million for Fiscal 2000.
• 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'SMANAGEMENT’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,"“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“Factors That May Affect FutureResults"Results” below. Readers should not place undue reliance on these forward-looking statements, which reflectmanagement'smanagement’s opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur. Readers should review carefully any risk factors described in our reports filed with the Securities and Exchange Commission.OVERVIEW
With the convergence of IT and business, technology has become increasingly more important
-– not just to technology professionals, but also to business executives. We are an independent and objective research and advisory firm that helps IT and business executives use technology to build, guide and grow their enterprises.We employ a diversified business model that leverages the breadth and depth of our research intellectual capital while enabling us to maintain and grow our market-leading position and brand franchise. Our strategy is to align our resources and our infrastructure to leverage that intellectual capital into additional revenue streams through effective packaging, campaigning and cross-selling of our products and services. Our diversified business model provides multiple entry points and synergies that facilitate increased client spending on our research, consulting and events. A key strategy is to increase business volume with our most valuable clients, identifying relationships with the greatest sales potential and expanding those relationships by offering strategically relevant research and analysis.
We intend to maintain a balance between (1) pursuing opportunities and applying resources with a strict focus on growing our three core businesses and (2) generating profitability through a streamlined cost structure.
We have
been organized intothree business segments: research, consulting and events.o Research products and services highlight industry developments, review new products and technologies, provide quantitative market research, and analyze industry trends within a particular technology or market sector. o Consulting consists primarily of consulting, measurement engagements and strategic advisory services (paid one-day analyst engagements) ("SAS"), which provide assessments of cost, performance, efficiency and quality focused on the IT industry. o Events consists of various symposia, conferences and exhibitions focused on the IT industry. We have recently begun to undertake a plan to ensure that our business units are closely aligned with client need and market opportunity. As part of that process, we have begun to reorganize our business in to three distinct business units: o Gartner Intelligence will deliver content and advice to IT professionals, technology vendors and investors through vehicles such as Research, Events and SAS. o Gartner Executive Programs will offer membership and peer-networking services for chief information officers (CIOs) and other key executives, through offerings such as the highly successful EXP membership program. o Gartner Consulting will focus on customized engagements that allow CIOs and their counterparts to apply Gartner's knowledge to their specific business situations, with an emphasis on areas such as outsourcing and IT management.10-K.10 Organizing our business units around distinct client segments will allow us to make our existing products more relevant, accelerate the development of new products that provide solutions for specific client needs, and increase the Gartner value proposition overall. As part of implementing this plan, we will be analyzing whether or not it impacts how we report on our business segments. We will continue to report our segment information as we have historically until we complete the alignment of our financial reporting to this new structure and can then analyze what impact, if any, this alignment will have.
• 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.segments:
REVENUE CATEGORYBusiness 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 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-higher-spending clients, or increased spendingclients. - ------------------------------------------------------------------------------------------------------------------------------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. 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. ANNOUNCED ACQUISITION OF META GROUP, INC.
On December 27, 2004, we announced an agreement to acquire META Group, Inc. (“META”) in an all-cash transaction for $10.00 per share, or approximately $162 million, excluding transaction costs. META is a publicly owned, premier information technology and research firm based in Stamford, Connecticut with 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. META trades on the NASDAQ National Market under the symbol “METG.” The Boards of Directors of both companies have approved the transaction, and on January 31, 2005, we announced that notice had been received from the Federal Trade Commission of early termination of the waiting period under 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. Closing of the transaction, which is subject 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
Technology spending has decreased steadily over the past few years. As a result, sales of our IT related research have declined as well.During
this period,Calendar 2004, we havebeen focusedcontinued to focus 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 Calendar 2003 with two consecutive quarters of sequential increases in contract value after seven consecutive quarters of sequentially decreasing contract value.Our research client retention rates steadilyContract value increasedto 78%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, contract value was $509.2 million, up 6% from the $482.2 million at December 31, 2003,from 74%with roughly half of the increase due to the effects of foreign currency. The $509.2 million contract value represents our highest contract value since the first quarter of Calendar 2002. Our Research client retention rate at December 31,2002. We believe2004 increased to 80% from 78% at thetechnology market is showing signsprior year-end, while wallet retention increased to 95% from 89% over the same period.Consulting revenue for Calendar 2004 was flat when compared to Calendar 2003, despite the impact of
a recovery, and we believethe realignment in which we reduced headcount when we exited certain practices and geographies. Excluding the effects ofour business units discussed previously will help us grow during this expected recovery.foreign currency exchange rates, revenues would have decreased approximately 4% in Calendar 2004 compared to Calendar 2003. Our Consulting businessalso ended the year with a positive trend. Weended 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.As part ofDue to the realignment,previously discussed, we will be exiting certain less profitableconsultingpracticesbacklog decreased to $91.7 million at March 31, 2004, but quickly increased to $97.7 million at June 30, 2004 andgeographies.$103.4 million at September 30, 2004, as business ramped up in our areas of focus. Weexpect thisended the year with a backlog of $111.8 million, a $12.1 million increase over December 31, 2003. The realignmentto address ourhas also had a positive impact on sub-optimal utilization rates and our lack of scale in some regions. During Calendar 2004, our average consultant utilization rates increased to approximately 63% as compared to 54% in the prior year, while billable headcount declined to 493 at December 31, 2004, compared to 526 at December 31, 2003.Our Events business continues to deliver strong
results, particularly in an environment where few competitors have survived.results. Our emphasis on managing the Events portfolio to retain our long-time successful events and introduce promising new events has resulted in substantially improved overall revenueperformance.performance, with Calendar 2004 revenue up 16% over the prior year, as well as same event revenue, up 19% over the prior year. We achieved these results whilehosting fewerthe number of events57declined, with 56 held during Calendar2003,2004 as compared to 57 held in Calendar 2003.9
During Calendar 2004, we repurchased a significant number of shares of our Class A and Class B Common Stock. During the first half of 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
nine fewer than$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
2002.2004, 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 million 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 million 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
an importanta 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 interestexpense, and we ended the year with $376 million of stockholders' equity. In addition, our cash increased from $110 million at December 31, 2002 to $230 million at December 31, 2003, while repurchasing $43 million of our common stock. We have strong financial resources to support additional investments in growth.10-K.11expense.FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our quarterly and annual revenue,
andoperating 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
judgementsjudgments 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("(“SAB101"101”), and SAB No. 104, Revenue Recognition (“SAB 104”). Revenue by significant source is accounted for as follows:o Research revenues are derived from subscription contracts for research products. Revenues from research products are deferred and recognized ratably over the applicable contract term; o Consulting revenues are based primarily on fixed fees or time and materials for discrete projects. Revenues for such projects are recognized as work is delivered and/or services are provided and are evaluated on a contract by contract basis; o Events revenues are deferred and recognized upon the completion of the related symposium, conference or exhibition; and o Other revenues, principally software licensing fees, are recognized when a signed non-cancelable software license exists, delivery has occurred, collection is probable, and the fees are fixed or determinable. Revenue from software maintenance is deferred and recognized ratably over the term of the maintenance agreement, which is typically twelve months.
• Research revenues are derived from subscription contracts for research products. Revenues from research products are deferred and recognized ratably over the applicable contract term; • Consulting revenues are based primarily on fixed fees or time and materials for discrete projects. Revenues for such projects are recognized as work is delivered and/or services are provided and are evaluated on a contract by contract basis; • Events revenues are deferred and recognized upon the completion of the related symposium, conference or exhibition; and • Other revenues, principally software licensing fees, are recognized when a signed non-cancelable software license exists, delivery has occurred, collection is probable, and the fees are fixed or determinable. Revenue from software maintenance is deferred and recognized ratably over the term of the maintenance agreement, which is typically twelve months. • The majority of research contracts are billable upon signing, absent special terms granted on a limited basis from time to time. All research contracts are non-cancelable and non-refundable, except for government contracts that have a 30-day cancellation clause, but have not produced material cancellations to date. It is our policy to record the entire amount of the contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue, since the contract represents a legally enforceable claim. For those government contracts that permit termination, 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 million and $38.6 million at December 31, 2004 and December 31, 2003, respectively. In addition, at December 31, 2004 and December 31, 2003, we had not recognized uncollected receivables or deferred revenues, relating to government contracts that permit termination, of $4.2 and $6.6 million, respectively. 10
Uncollectible fees receivable
-– Provisions for bad debts are recognized as incurred. The measurement of likely and probable losses and the allowance for uncollectible fees receivable is based on historical loss experience, aging of outstanding receivables, an assessment of current economic conditions and the financial health of specific clients. This evaluation is inherently judgmental and requires material estimates. These valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectibility of fees receivable becomes available. Circumstances that could cause our valuation reserves to increase include changes in ourclients'clients’ liquidity and credit quality, other factors negatively impacting ourclients'clients’ ability to pay their obligations as they come due, and the effectiveness of our collection efforts. The followingtablestable provides our total feesreceivables,receivable, along with the related allowance for losses (in thousands):December 31, ------------------------ September 30, 2003 2002 2002 - ------------------------------------------------------------------------------- Total fees receivables $275,122 $290,068 $271,843 Allowance for losses (9,000) (7,000) (7,000) ------------------------------------------ Fees receivables, net $266,122 $283,068 $264,843 ==========================================
December 31, 2004 2003 Total fees receivable $ 266,139 $ 275,122 Allowance for losses (8,450 ) (9,000 ) Fees receivable, net $ 257,689 $ 266,122 Impairment of goodwill and other intangible assets
-– The evaluation of goodwill is performed in accordance with Statement of Financial Accounting Standards No. 142, -"Goodwill“Goodwill and Other IntangibleAssets" ("Assets” (”SFAS142"142”). Among other requirements, this standard eliminated goodwill amortization upon adoption and requiresanongoing annualassessment forassessments of goodwill impairment. The evaluation of other intangible assets is performed on a periodic basis.10-K.12These assessments require management to estimate the fair values of our reporting units based on estimates of future business operations and market and economic conditions in developing long-term forecasts. If we determine that the fair value of any reporting unit is less than its carrying amount, we must recognize an impairment charge, for the associated goodwill of that reporting unit, to earnings in our financial statements. Goodwill is evaluated for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger a review for impairment include the following:o Significant under-performance relative to historical or projected future operating results; o Significant changes in the manner of our use of acquired assets or the strategy for our overall business; o Significant negative industry or economic trends; o Significant decline in our stock price for a sustained period; and o Our market capitalization relative to net book value.
• 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 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 taxexposureexpense 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 balancesheet.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 woulddecreasebe charged against income in the period such determination was made.Contingencies and other loss reserves and accruals
-– Weestablish reservesrecord 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 Calendar2003,2004, we revised our previous estimates for costs and losses associated with excess facilities due to declines in market rates for expected sublease income and revised expected periods of sublease. As a result of these revised estimates, we recorded a charge for excess facilities of$9.7$2.3 million, which was included in Other charges along with severance, impairment, and other costs. Additionally, we record accruals for estimated incentive compensation costs during each year. Amounts accrued at theyear. Theend of each reporting period are based on our estimates and may require adjustment as the ultimate amount paidassociated withfor these incentives are sometimes not known until afteryear-end. During the fourth quarter of Calendar 2003, we lowered our estimates for incentive compensation accruals, including bonuses, based on Company performance by approximately $3.2 million as compared to the estimates recorded as of the end of the third quarter of Calendar 2003.year end.11
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 thatincludeinclude: 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 retain10-K.13the 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 aninvestment'sinvestment’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
$10.7 million at December 31, 2002, and $12.7 million at September 30, 2002(see Note4 -5 – Investments in the Notes to the Consolidated Financial Statements).CHANGE IN FISCAL YEAR
On October 30, 2002, we announced that
theour 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 2004, Calendar 2003, and Calendar 2002, unless otherwise indicated, are to the respective twelve-month period from January 1 through December 31.RESULTS OF OPERATIONS
CALENDAR 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. 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%. 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 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, and infrastructure to help 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.
Gain (loss) 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 – Investments in the Notes to the Consolidated Financial Statements for additional information.
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Gain (loss) on investments, net of $4.7 million 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 conversion of our outstanding convertible debt to equity during the fourth quarter of 2003 decreased our interest expense. However, due to the new credit agreement signed in the third quarter of 2004, interest expense will increase in the future.
Other (expense), 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 the impact 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 other charges, the effective tax rate would have been 32.7% in Calendar 2004, as compared to 33% in Calendar 2003.
SEGMENT RESULTS
We evaluate reportable segment performance and allocate resources based on gross contribution margin. Gross contribution is defined as operating income excluding certain selling, general and administrative expenses, depreciation, amortization of intangibles, 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 represents 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 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 493 at December 31, 2004 as compared to 526 at December 31, 2003, a 6% 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 30,999 in Calendar 2004 from 27,547 in Calendar 2003, a 12.5% increase, which is attributed to the popularity of the topics offerred.
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 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% to $858.4 million during Calendar 2003 from $887.6 million during Calendar 2002.
o Research revenues decreased 4% in Calendar 2003 to $466.9 million, compared to $487.0 million in Calendar 2002, and comprised approximately 54% and 55% of total revenues in Calendar 2003 and Calendar 2002, respectively. o Consulting revenues decreased 6% to $258.6 million in Calendar 2003, compared to $276.1 million in Calendar 2002, and comprised approximately 30% and 31% of total revenues in Calendar 2003 and Calendar 2002, respectively. o Events revenues were $119.4 million in Calendar 2003, an increase of 9% from the $109.7 million in Calendar 2002, and comprised approximately 14% of total revenues in Calendar 2003 versus 12% in Calendar 2002. o Other revenues, consisting principally of software licensing and maintenance fees, decreased 9% to $13.6 million in Calendar 2003 from $14.9 million in Calendar 2002.
• 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 increased in our
Europe, Middle East and Africa region ("EMEA")EMEA and the Other Internationalregion.regions. Revenues from sales to United States and Canadian clients decreased 7% to $535.7 million in Calendar 2003 from $576.5 million in Calendar 2002. Revenues from sales to clients in the EMEA region increased 5% to $252.3 million in Calendar 2003 from $241.3 million in Calendar 2002. Revenues from sales to clients in Other International regions increased 1% to $70.5 million in Calendar 2003 from $69.8 million in Calendar 2002.The decrease in our total revenues was a result of a decline in demand throughout the entire technology sector and the overall weakness in the economy, partially offset by the positive effects of foreign currency exchange rates. Excluding the effects of foreign currency translation, revenues would have decreased approximately 8%. See Segment Analysis section below for a further discussion of segment revenues.
Cost of services and product development increased 4% during Calendar 2003 to $410.7 million from $396.5 million during Calendar 2002. Excluding the effects of foreign currency translation, cost of services and product development would have decreased by 1%. As a percentage of sales, cost of services and product development increased to 47.8% from 44.7% due primarily to investments in Gartner EXP, membership programs, product development and costs associated with customer intelligence, higher conference related expenses and lower utilization rates for our consulting practice.
10-K.14Selling, general and administrative expenses decreased 4%, to
$333.3$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. The15
decrease in SG&A was primarily the result of lower sales commissions and our continued focus on streamlining our support organizations and restructuring efforts.
Depreciation expense for Calendar 2003 decreased 18% to $36.0 million, compared to $43.7 million for Calendar 2002. The decrease was due to a reduction in capital spending during Calendar 2002 and Calendar 2003 relative to the capital spending during Fiscal 2000 and 2001, which led to a decrease in depreciation expense. In addition, costs capitalized during Fiscal 2000 associated with the initial launch of the gartner.com Web site in January 2001 have been fully depreciated as of the beginning of Calendar 2003.
Amortization of intangibles decreased 34% when comparing Calendar 2003 to Calendar 2002 due to certain intangible assets having been fully amortized over the past year.
Other charges of $29.7 million during Calendar 2003 were for costs for employee severance and benefits associated with workforce reductions initiated under two separate actions, $5.4 million during the first quarter of Calendar 2003 and $14.6 million during the fourth quarter of Calendar 2003. Additionally, during the fourth quarter of Calendar 2003, we revised our estimates of previously recorded costs and losses associated with excess facilities and recorded $9.7 million of additional provisions. The revised estimate was due to a decline in market lease rates for expected subleases, as well as a reduction in estimated periods of subleases. The workforce reduction that occurred during the first quarter of Calendar 2003 was a continuation of the action taken in Transition 2002, which resulted in the termination of 92 employees, or approximately 2% of our workforce. The purpose of this reduction was to reduce costs in underperforming segments. The workforce reduction that occurred during the fourth quarter of Calendar 2003 resulted in the termination of 130 employees, or approximately 3% of our workforce. The purpose of this workforce reduction was part of an effort to streamline operations, to strengthen key consulting practices, and to align our organizational structure to focus on client needs.
We expect the remaining payments associated with the workforce reduction to be substantially completed by the end of the second quarter of 2004. We are funding all of these costs out of existing cash. We expect to record additional expenses for severance during the first quarter of 2004 of approximately $5 million to $8 million associated with the realignment plan initiated during the fourth quarter of Calendar 2003.During Calendar 2002, other charges were $49.4 million. These charges were the result of two actions, one during the first quarter of Calendar 2002 amounting to $17.2 million, and the other occurring during the fourth quarter of Calendar 2002, or Transition 2002, amounting to $32.2 million. Of the charges occurring during the first quarter of Calendar 2002, $10.0 million related to costs and losses associated with the elimination of excess facilities, principally leasehold improvements and ongoing lease costs and losses associated with sub-lease arrangements. In addition, approximately $5.8 million of these charges were associated with our workforce reduction initiated during the first quarter of Calendar 2002 and were for employee termination severance and benefits. This workforce reduction resulted in the termination of 92 employees, or approximately 2% of
the Company'sour workforce at that time. We expect the payments associated with the workforce reduction to be completed by the end of the first quarter of 2004. The remaining $1.4 million of expenses recorded as other charges during the first quarter of Calendar 2002 relates to the impairment of certain database-related assets. Of the $32.2 million of charges during the fourth quarter of Calendar 2002, $13.3 million related to costs and losses associated with our elimination of excess facilities, principally leased facilities and ongoing lease costs and losses associated with sub-lease arrangements. The remaining $18.9 million of these charges related to severance payments and related benefits associated with a workforce reduction, which included $0.6 million of non-cash compensation. This workforce reduction resulted in the elimination of approximately 175 positions, or approximately 4% of our workforce at the time.We are funding all of the remaining costs out of existing cash. Interest expense decreased during Calendar 2003 due to the conversion of our debt to equity in October 2003. The conversion of our debt has eliminated most of our interest expense since the conversion date.10-K.15Gain (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'sinvestee’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("(“SII"I”) and SI Venture Fund II("(“SIII"II”). SI I and SI II are venture capital funds engaged in making investments in early to mid-stage IT-based or Internet-enabled companies.We ownAt December 31, 2002 we owned 100% of SI I and 34% of SI II. See Note4 -5 – Investments in the Notes to the Consolidated Financial Statements for a further discussion of the gains and losses on investments.The impairment factors evaluated by management may change in subsequent periods, given that the entities underlying these investments operate in a volatile business environment. In addition, these entities may require additional financing to meet their cash and operational needs. However, there can be no assurance that such funds will be availableInterest expense decreased during Calendar 2003 due to the
extent needed, at terms acceptableconversion of our debt to equity in October 2003. The conversion of our debt has eliminated most of our interest expense since theentities, if at all. This could result in additional material non-cash impairment charges in the future.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 first quarter of Calendar 2002, partially offset by net foreign exchange losses.
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Provision for income taxes was 33.4% and 37.7% of income before income taxes for Calendar 2003 and 2002, respectively. Excluding the other charges for workforce reductions, excess facilities and asset impairments and the gains and losses from investments, the effective tax rate would have been 33% in Calendar 2003 as compared to 34% in Calendar 2002. The reduction in the effective tax rate for Calendar 2003, as compared to that of Calendar 2002, reflects the implementation of tax planning strategies.
Basic and diluted income per common share was $0.26 for Calendar 2003, compared to $0.18 for Calendar 2002. For Calendar 2003, basic and diluted EPS were negatively impacted by our restructuring costs and the impairment of an investment. Partially offsetting these items was the favorable impact of the insurance recovery. During Calendar 2002, the restructuring charges and impairment of investments had an unfavorable impact on basic and diluted EPS.SEGMENT RESULTS
During Calendar 2003, our business was managed through three reportable segments: Research, Consulting and Events. As announced in the fourth quarter of 2003, we are moving toward a client focus and realigning our business into three business units: Gartner Intelligence, Gartner Executive Programs, and Gartner Consulting. As this realignment is finalized during 2004, we will evaluate the needs, if any, to realign our segment reporting. Our segment discussion is based on our historical segments as managed through 2003.We evaluate reportable segment performance and allocate resources based on gross contribution margin. Gross contribution is defined as operating income excluding certain selling, general and administrative expenses, depreciation, amortization of intangibles, 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 decrease in research revenues was due to the overall weakness in the economy and the impact of this weakness on corporate information technology spending causing lower demand throughout the entire technology sector.
10-K.16Research gross contribution of $292.9 million for Calendar 2003 decreased 8% from $318.7 million for Calendar 2002, while gross contribution margin for Calendar 2003 decreased to 63% from 65% in the prior year. The decrease in gross contribution and gross contribution margin is a result of the lower revenues and costs associated with investments in Gartner EXP, Gartner G2, membership programs, product development and marketing and costs associated with customer intelligence.
Research contract value, an indicator of future research revenue, was $482.2 million at December 31, 2003, a decrease of 1% from $489.0 million at December 31, 2002. However, research contract value increased sequentially during both the third and fourth quarters of Calendar 2003 from $468.5 million at June 30, 2003 and $469.6 million at September 30, 2003. Prior to these sequential increases during Calendar 2003, contract value had decreased sequentially for
sevenfive consecutive quarters.We believe these sequential increases may be an indication of an upturn in demand for our products coinciding with potentially increasing demand in the technology sector.At December 31, 2003, our client retention rates increased 4 percentage points to 78% as compared to the same measure at December 31, 2002. Wallet retention increased 8 percentage points during Calendar 2003 to 89%. The client and wallet retention rates increased steadily over the four quarters of Calendar 2003.We believe these increases were a result of implementing a named account sales strategy with our sales staff and the focusing of their efforts on companies with revenues greater than $1 billion.Consulting
Consulting revenues decreased 6% during Calendar 2003 to $258.6 million from $276.1 million for Calendar 2002. Foreign currency exchange rates had a positive impact of approximately 5% during Calendar 2003. The decrease in revenues was caused by lower
billable headcount and lowerutilization.Workforce reductions over the past year have resulted in reduced billable headcount in response to the lower demand in the technology sector.Billable headcount for our Consulting business as of December 31, 2003has decreased approximately 11%increased to410526 at December 31, 2003 as compared to 459 at December 31, 2002.Consulting gross contribution of $86.8 million for Calendar 2003 decreased 16% from $102.8 million for Calendar 2002, and gross contribution margin for Calendar 2003 decreased to 34% from 37% in the prior year. The decrease in the gross contribution margin was primarily attributable to lower consultant utilization rates, which were approximately 53% during Calendar 2003 as compared to approximately 56% during Calendar 2002.
As part of our realignment that caused workforce reductions during the fourth quarter of Calendar 2003, we decided to exit certain lines of business and geographies within our Consulting business in order to focus on areas with potential for higher growth and profitability. The realignment is expected to address the sub-optimal utilization rates and our lack of scale in some regions. In the near term, this decision will affect overall revenue growth for Consulting as revenues from those areas exited are allowed to wind down, while new areas of focus are beginning to ramp up.Consulting backlog decreased 10% to $99.7 million at December 31, 2003, compared to $111.3 million at December 31, 2002, but increased sequentially during both the third and fourth quarters of Calendar 2003, when it was $91.0 million at June 30, 2003 and $92.8 million at September 30, 2003. Consulting backlog decreased as compared to the prior year due to the decline in demand throughout the entire technology sector, as technology customers continued to constrain spending.
As noted in the discussion of the Research segment, the sequential backlog increases in the latter half of Calendar 2003 may be an indication of increased demand in the technology sector.Events
Events revenues increased 9% to $119.4 million for Calendar 2003, compared to $109.7 million for Calendar 2002. Changes in foreign currency exchange rates had approximately a 5% favorable impact on revenues when comparing Calendar 2003 to Calendar 2002. Revenues have increased slightly despite having nine fewer events during Calendar 2003 as compared to Calendar 2002. The average revenue per event
hasincreased during Calendar 2003 due to the strong performance of our recurring events, as well as the addition of new events during Calendar 2003 that had higher revenues than the events that were eliminated.10-K.17Gross contribution of $56.0 million for Calendar 2003 was relatively consistent with Calendar 2002. As a percentage of revenues, gross
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contribution decreased to 47% during Calendar 2003 from 51% during Calendar 2002. The decrease in gross contribution margin was due primarily to increased personnel expenses and increased event marketing costs. During 2003, we invested more in marketing and promoting our events to maintain our attendance levels during a weak economy, especially in the technology sector.
FISCAL YEAR ENDED SEPTEMBER 30, 2002 VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 2001 Total revenues decreased 6%LIQUIDITY AND CAPITAL RESOURCES
Calendar 2004
Cash provided by operating activities during Calendar 2004 totaled $48.3 compared to
$907.2$136.3 million inFiscal 2002 compared to $962.9Calendar 2003. The net decrease in cash flow from operating activities of $88.0 millionin Fiscal 2001. o Research revenue decreased 7% in Fiscal 2002 to $496.4 million, compared to $535.1 million in Fiscal 2001, and comprised approximately 55% and 56% of total revenues in Fiscal 2002 and 2001, respectively. o Consulting revenue decreased 1% to $273.7 million in Fiscal 2002, compared to $276.3 million in Fiscal 2001, and comprised approximately 30% and 29% of total revenues in Fiscal 2002 and 2001, respectively. o Events revenue was $122.0 million in Fiscal 2002, a decrease of 8% from the $132.7 million in Fiscal 2001, and comprised approximately 13% of total revenues in Fiscal 2002 versus 14% in Fiscal 2001. o Other revenues, consisting principally of software licensing and maintenance fees, decreased 20% to $15.1 million in Fiscal 2002 from $18.8 million in Fiscal 2001. Revenue declined in our three defined geographic market areas: United States and Canada, EMEA, and Other International. Revenues from sales to United States and Canadian clients decreased 7% to $595.3 million in Fiscal 2002 from $641.9 million in Fiscal 2001. Revenues from sales to clients in the EMEA region decreased 3% to $242.1 million in Fiscal 2002 from $250.0 million in Fiscal 2001. Revenues from sales to Other International clients decreased 2% to $69.7 million in Fiscal 2002 from $71.1 million in Fiscal 2001. Cost of services and product development expenses were $403.7 million and $450.5 million for Fiscal 2002 and Fiscal 2001, respectively. The cost of services and product development expenses decreased as a percentage of total revenues to 45% from 47%. The decrease is attributable to reduced personnel costs associated with headcount reductions, more effective cost management of events and other cost savings, including reduced travel. Selling, general and administrative expenses decreased to $345.4 million in Fiscal 2002 from $370.1 million in Fiscal 2001. The decreasewas due toreduced payroll associated with lower headcount, reduced travel, telephone and other infrastructure costs across the entire company. Depreciation expense increased to $42.5several factors. We paid $27.0 million inFiscalbonuses 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, 2002from $40.9 million in Fiscal 2001, primarily due tobut are now being paid during theadditional depreciation from significant capital expenditures made during Fiscal 2001 for internal use software required to support the business and also due to the amortization of costs associated with the launch of gartner.com in January 2001. Amortization of intangibles of $1.9 million in Fiscal 2002 was down from $12.4 million in Fiscal 2001. The primary reason for the decrease was our adoption of SFAS 142 which eliminated the amortization of goodwill for Fiscal 2002. For Fiscal 2001, goodwill amortization was $9.5 million and, on an after-tax basis, was $8.4 million. As a result of adoption, diluted earnings per share for the year ended September 30, 2002 improved by $0.09. During Fiscal 2002, we recorded other charges of $17.2 million. Of these charges, $10.0 million related to costs and losses associated with our elimination of excess facilities, principally leased facilities and ongoing lease costs and losses associated with sub-lease arrangements. In addition, approximately $5.8 million of these charges are associated with a workforce reduction announced in January 2002 and were for employee termination severance payments and related benefits. This workforce reduction resulted in the elimination of approximately 100 positions, or approximately 2% of our workforce at the time, and the payment of $5.3 million of termination benefits during Fiscal 2002. The remaining $1.4 million relates to the impairment of certain database-related assets. Other charges totaled $46.6 million for Fiscal 2001. Of these charges, $24.8 million was associated with our workforce reduction10-K.18 announced in April 2001. This workforce reduction resulted in the elimination of 383 positions, or approximately 8% of our workforce at the time, and the payment of $6.4 million and $18.2 million of termination benefits during Fiscal 2002 and Fiscal 2001, respectively. The $24.8 million charge was comprised of employee termination severance payments and related benefits. Approximately $14.3 millionfirst half of theother charges were associated with the write-down of goodwill and other long-lived assets to net realizable valueyear as a result of ourdecisionchange 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 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 todiscontinue certain unprofitable products, and $7.5the 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 ofthe charge was associated primarily with the write-off of internally developed systems retiredcertain accrued liabilities booked inconnection with the launch of gartner.com. At December 31, 2003, an insignificant amount of severance costs remain to be paid during 2004. These costs will be paid from existing cash. The estimated costs associated with the excess facilities have been reevaluated as part of the charge taken duringthe fourth quarter of Calendar 2003discussed previously. Operating incomewere paid in the first quarter of 2004.Cash used in investing activities increased to
$96.4$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 inFiscal 2002Calendar 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
$42.5$3.0 million used inFiscal 2001. In Fiscal 2002,Calendar 2003. We purchased $352.3 million of ourUnited Statescommon stock for treasury during Calendar 2004, of which $346.2 million represents the tender offer andCanadian business andSilver 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 ourEuropean business experienced an increaseemployees as increases inoperating income of 119% and 113%, respectively. Our Other International business experienced an operating loss for the year, which was slightly lower thanour stock price caused ayear ago. On a consolidated basis, operating income as asignificantly larger percentage oftotal revenues was 11% and 4%, respectively, for Fiscal 2002 and 2001. Operating income was impacted, in part, by other charges of $17.2 million and $46.6 million in Fiscal 2002 and 2001, respectively, and additional costs associated with the re-architecture ofourInternet capabilities and our research methodology and delivery processes in Fiscal 2001. Excluding the other charges, operating income for Fiscal 2002 and 2001 was 13% and 9%, respectively, of total revenues. We decreased our staff by approximately 8%vested stock options to be in thesecond halfmoney during Calendar 2004 as compared to Calendar 2003. We borrowed $200 million related to the tender in the third quarter ofFiscal 2001 and 2% in mid-Fiscal 2002 and,Calendar 2004, receiving proceeds, net of debt issuance costs, of $197.2 million. We repaid $10 million of this debt in the fourth quarter ofFiscal 2001, decreased the expense-to-revenue ratio associated with our costCalendar 2004.At December 31, 2004, cash and cash equivalents totaled $160.1 million. The effect of
servicesexchange rates increased cash andselling, generalcash equivalents by $8.1 million during Calendar 2004, andadministrative expenses through various cost-reduction initiatives. The improvement in operating incomewasalso impacted by lower amortization of intangiblesdue to theadoptionweakening ofSFAS 142. Amortization of goodwill was $9.5 million in Fiscal 2001. Gain (loss) on investments, net for Fiscal 2002 includedthesale of 748,118 shares of CNET for $6.0 million, resulting in a pre-tax gain of $0.8 million. We acquired this investment as partial consideration for our sale of TechRepublic to CNET in July 2001. The remaining $2.4 million loss on investments during Fiscal 2002 wasU.S. dollar against certain foreign currencies, primarily theresult of impairment losses related to investments owned by us through SI I, SI IIEuro andother directly owned investments for other than temporary declines in value. See Note 4 - Investments in the Notes to Consolidated Financial Statements for a further discussion. Gain (loss) on investments, net in Fiscal 2001 of $27.5 million included the sale of shares of an investment, in which we held a minority interest, for net cash proceeds of $7.5 million and a pre-tax loss of $5.6 million. Fiscal 2001 also included a $5.0 million gain as a result of the sale of shares received from our venture capital funds, SI I, SI II and other securities for net cash proceeds of $6.9 million. The remaining loss of $26.9 million during Fiscal 2001 was primarily the result of impairment losses related to investments owned by us through SI I, SI II and other directly owned investments for other than temporary declines in value. See Note 4 - Investments in the Notes to Consolidated Financial Statements for a further discussion. Interest expense increased to $22.9 million in Fiscal 2002 from $22.4 million in Fiscal 2001. The increase relates primarily to increased interest expense on the 6% convertible long-term debt compared to Fiscal 2001. Interest income of $1.8 million in Fiscal 2002 was up from $1.6 million in Fiscal 2001 due to a higher average balance of funds available for investment, offset in part by lower interest earnings rates. Other expense, net decreased to $0.2 million in Fiscal 2002 from $3.7 million in Fiscal 2001. The decrease related primarily to lower foreign currency exchange losses of $2.7 and a $0.5 million gain from the sale of a business in Fiscal 2002. Provision for income taxes on continuing operations was $25.0 million in Fiscal 2002 compared to a benefit of $9.2 million in Fiscal 2001. The effective tax rate was 34% for Fiscal 2002. The effective tax rate in Fiscal 2001, less the impact of a one-time tax benefit of $14.5 million due to the utilization of foreign tax credits in the second half of Fiscal 2001 and other charges and losses on investments and related tax impact, was 37%. The reduction in the effective tax rate in Fiscal 2002 reflects on-going tax planning and the elimination of non-deductible amortization of goodwill pursuant to the adoption of SFAS 142. A more detailed analysis of the changes in the provision (benefit) for income taxes is provided in Note 12-Income Taxes of the Notes to Consolidated Financial Statements.10-K.19 Basic income (loss) per common share from continuing operations was $0.58 per share in Fiscal 2002 compared to $0.00 per share in Fiscal 2001. Diluted income (loss) per common share from continuing operations was $0.47 per share in Fiscal 2002 compared to $0.00 per share in Fiscal 2001. The elimination of goodwill amortization in accordance with SFAS 142 improved basic and diluted income per share from continuing operations by $0.10 and $0.09, respectively, for Fiscal 2002 as compared to Fiscal 2001. Segment Analysis Research Research revenues of $496.4 million in Fiscal 2002 were down 7% from $535.1 million in Fiscal 2001. The decline in revenues was due to lower demand throughout the entire technology sector and the overall weakness in the general economy. Research's gross contribution in Fiscal 2002 decreased 7% to $326.3 million from $352.6 million in Fiscal 2001. Research's gross contribution margin was 66% in Fiscal 2002 and 2001. Although revenues declined, gross contribution margin remained flat, in part due to reductions in expenses. The decline in gross contribution was due to lower revenues. Our research client retention rate was 75% for Fiscal 2002 compared to 74% for Fiscal 2001. Total research contract value decreased 11% to approximately $496.0 million at September 30, 2002 from $556.0 million at September 30, 2001. The decrease in contract value reflects a decline in demand throughout the entire technology sector as well as overall weakness in the general economy. Consulting Consulting revenues of $273.7 million in Fiscal 2002 were down 1% from $276.3 million in Fiscal 2001. Revenues for Fiscal 2002 reflect a strategic reduction in certain client segments and geographies based on market share, competitive advantage, client size and other factors. The reduction in revenue was partially offset by increases in average project size and length. Consulting's gross contribution increased by 13% to $97.9 million in Fiscal 2002 from $86.9 million in Fiscal 2001. Consulting's gross contribution margin of 36% in Fiscal 2002 increased from 31% in Fiscal 2001 primarily due to reduced expenses, higher utilization rates and higher billing rates. We reduced headcount and eliminated expenses in practice areas and markets where we did not have sufficient scale and volume. Consulting backlog decreased 10% to approximately $107.6 million at September 30, 2002 from $119.0 million at September 30, 2001. The decrease in backlog primarily reflects the overall weakness in the general economy. Events Events revenues of $122.0 million in Fiscal 2002 were down 8% from $132.7 million in Fiscal 2001. The decline was primarily due to: fewer events due to the strategic elimination of less profitable and unproven events with the expectation of obtaining greater attendee and exhibitor participation at higher-profit events; the overall weakness in the general economy; and lower travel budgets. Events' gross contribution increased by 3% to $65.4 million in Fiscal 2002 from $63.6 million in Fiscal 2001 with gross contribution margin of 54% in Fiscal 2002 compared to 48% in Fiscal 2001. The increase in gross contribution and margin was due to better cost management and the elimination of less profitable events. LIQUIDITY AND CAPITAL RESOURCESSterling.Calendar 2003
Cash provided by operating activities during Calendar 2003 was $136.3 million, compared to $145.8 million during Calendar 2002. The decrease was primarily due to lower cash-related earnings and a smaller decrease in receivables during Calendar 2003 compared to Calendar 2002. Cash-related earnings are income from continuing operations adjusted for the non-cash items included in income, such as depreciation and amortization, the accretion of interest and amortization of debt issue costs, along with other non-cash charges. Partially offsetting these decreases were higher bonus payments during Calendar 2002. Bonus payments were higher during Calendar 2002 due to our change in fiscal year from September 30 to December 31, effective January 1, 2003. Our Fiscal 2002 bonuses were paid during Transition 2002, or the fourth quarter of Calendar 2002, whereas, Calendar 2003 bonuses
will bewere paid during 2004.10-K.20Cash used in investing activities was $25.4 million for Calendar 2003, compared to $26.3 million for Calendar 2002. The decrease was due primarily to the proceeds received from an insurance recovery of $5.5 million during Calendar 2003 associated with a previously incurred loss on a claim resulting from the sale of a business in 2000. Additionally, during 2002 we spent $3.9 million to purchase the remaining 49.9% of People3, Inc. not previously owned by us. During Calendar 2003 and Calendar 2002, we funded $2.0 million and $1.5 million, respectively, of our investment commitment to SI II, reducing our remaining commitment as of December 31, 2003 to $4.0 million. Spending on property and equipment increased $7.8 million to $28.9 million during Calendar 2003, as compared to $21.1 million during the same period of 2002.
Cash used in financing activities totaled $3.0 million for Calendar 2003, compared to $42.2 million for Calendar 2002. We purchased $43.4 million of common stock for treasury during Calendar 2003, as compared to $59.9 million during Calendar 2002 (see further discussion
belowthat 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
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by $12.4 million during Calendar 2003, and was due to the weakening of the U.S. dollar against certain foreign currencies.
Fiscal Year 2002 Cash provided by operating activities during Fiscal 2002 was $145.6 million, compared to $73.5 million during Fiscal 2001. The increase was primarily due to significantly higher income from continuing operations, lower amounts of termination payments associated with workforce reductions and working capital management. Cash used in investing activities totaled $19.4 million for Fiscal 2002, compared to $44.6 million used in Fiscal 2001. Cash used in investing activities during Fiscal 2002 and 2001 included $19.6 million and $57.5 million, respectively, for additions to property, equipment and leasehold improvements. These additions in Fiscal 2002 were primarily the result of investments in infrastructure systems. These cash uses in Fiscal 2002 were partially offset by proceeds from the sale of marketable securities of $6.0 million. The additions to property, equipment and leasehold improvements in Fiscal 2001 were primarily the result of investments in gartner.com and other infrastructure systems. These cash uses in Fiscal 2001 were partially offset by proceeds from the sale of marketable securities and discontinued operations of $14.4 million and $10.5 million, respectively. Cash used for business acquisitions was $4.5 million and $12.0 million for Fiscal 2002 and 2001, respectively. Cash used in financing activities totaled $40.1 million in Fiscal 2002, compared to $18.9 million in Fiscal 2001. The cash used in financing activities in Fiscal 2002 resulted primarily from the purchase of $47.0 million of common stock for treasury (see discussion below under Stock Repurchases) and the repayment of credit facility loans of $15.0 million. These uses of cash were partially offset by proceeds of $22.2 million from the exercise of stock options and the employee stock purchase plan. The cash used in financing activities in Fiscal 2001 resulted primarily from the purchase of common stock for treasury of $37.9 million (see discussion below under Stock Repurchases), offset in part, by proceeds of $15.0 million from credit facility borrowings and by proceeds of $9.1 million from the exercise of stock options and the employee stock purchase plan. Total cash used by discontinued operations, sold in Fiscal 2001, was $34.2 million in Fiscal 2001. At September 30, 2002, cash and cash equivalents totaled $124.8 million. The effect of exchange rates increased cash and cash equivalents by $1.7 million for the year ended September 30, 2002, and was due to the weakening of the U.S. dollar against certain foreign currencies. In Fiscal 2001, the negative effect of exchange rates reduced cash and cash equivalents by $0.4 million.10-K.21Obligations and Commitments
We have a Credit Agreement that provides for a $200.0 million
unsecured seniorterm A loan facility and a five-year, $100 million revolving credit facility. During the third quarter 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, there was $190 million outstanding on the term loan facility and $3.5 million of letters of credit outstanding under the revolving credit facility. Based on specified covenant requirements, our borrowing availability at December 31, 2004 under the revolving credit facilityled by JPMorgan Chase Bank.was $59.2 million. Subsequent to December 31, 2004, we entered into an amendment of the Credit Agreement covenant requirements that 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.The facilities bear interest equal to LIBOR plus an applicable margin which varies based on specified leverage ratios. At December 31,
2003, there were no amounts outstanding under2004, thefacility. Wecurrent interest rate was 3.59%. The term A loan facility is payable in equal quarterly installments over a five-year period ending August 12, 2009. The credit facilities are subject to mandatory prepayments from a portion of proceeds from asset sales and proceeds from certain future debt issuances. The credit agreement includes customary affirmative, negative and financial covenantsunder this credit facility, and continued compliance with these covenants preclude us from borrowing the maximum amount of the credit facility from time to time. These covenants areprimarily based on our financial results and other measures such as contract value.As a resultThe facilities also include commitment fees on the unused portion ofthese covenants, our borrowing availability at December 31, 2003 was $184 million. This credit facility expires in July 2004. We expect to obtain athe revolving credit facility not subject toreplace the current facility upon expiration.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
Partners, L.P. ("SLP")and other noteholders. Interest accrued semi-annually by a corresponding increase in the face amount of the convertible notes.These notes were due and payable on April 17, 2005.In October 2003,ourthe notes were converted into 49,441,122 shares of Gartner Class A Common Stock. Theshares owned by SLP, as a result of this conversion, represent approximately 45.9% of our outstanding Class A Common Stock and approximately 36.1% on a combined basis with our outstanding Class B Common Stock, based upon shares outstanding as of December 31, 2003. Theconversion 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'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,
20032004 (in millions):
Less Than 2 - 3 4 - 5 More Than Total 1 Year Years Years 5 Years - -------------------------------------------------------------------------------------------------------------Operating leases $212.8 $29.0 $45.7 $35.6 $102.5 Severance associated with workforce reductions 12.8 12.8 -- -- -- SI II funding commitment 4.0 4.0 -- -- -- Other service agreements 5.7 2.6 2.4 0.7 -- ---------------------------------------------------------- Totals $235.3 $48.4 $48.1 $36.3 $102.5 ==========================================================
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 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, we anticipate repatriating $52.0 million in cash earnings from our non-US subsidiaries in early 2005.
We believe that our
currentexisting cash balances, together with cashanticipated to be provided byfrom our operating activities andborrowings availablethe additional borrowing capacity underthe existingour amended five-year revolving credit facility, will be sufficient for our expected short-term and foreseeable long-termcash needs inneeds. We are currently evaluating theordinary courseoption ofbusiness. If we were to require substantial amountsestablishing long-term debt as a permanent part ofadditionalour capitalto pursue business opportunities that may arise involving substantial investments of additional capital,structure. However, there can be no assurances that such capital will be available to us or will be available on commercially reasonable terms.10-K.22Tender 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$75.0 million of Class A and Class B Common Stock.OurThe Board of Directorshassubsequently increased the authorized stock repurchase program to a total authorization for repurchase of$200$200.0 million. On a cumulative basis at December 31,2003,2004, we have purchased$127.1$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
Class A Common Stock Class B Common Stock Total --------------------------- --------------------------- Cost(1) Calendar 2004 includes Other charges 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$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. Calendar 20033,435,161 8.47 1,549,485 9.26 43,433 ---------------------------------------------------------------------------- Totals 8,869,827 $ 9.53 4,322,745 $ 9.85 $127,132 ============================================================================includes Other charges of $5.4 million in the first quarter and $24.3 million in the fourth quarter.(2) Includes gains (losses) on investments of $(2.2) million and $(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 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. (3) The aggregate of the four quarters’ basic and diluted earnings per common share does not equal the reported full calendar amounts due to the effects of dilutive securities and rounding. (4) During the first and second quarters of Calendar 2004, and the fourth quarter of Calendar 2003, we recorded adjustments for certain incentive compensation accruals, including bonuses, that provided a benefit to operating income of approximately $2.8 million, $4.0 million, and $3.2 million, respectively. 20
FACTORS THAT MAY AFFECT FUTURE
RESULTSPERFORMANCEWe operate in a very competitive and rapidly changing environment that involves numerous risks and uncertainties, some of which are beyond our control. In addition, we and our clients are affected by the economy. The following section discusses many, but not all, of these risks and uncertainties.
Economic
Conditions.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. Therecenteconomic downturn in the United States and globally has led to constrained IT spending, which has impacted our business andmayif 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 onITtheir spending.Organizational and Product Integration Related to Acquisitions. We have made and may continue to make acquisitions of, or significant investments in, businesses that offer complementary products and services, 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.Environment. We face direct competition from a significant number of independent providers of information products and services, including information that can be found on the Internet free of charge. We also compete indirectly against consulting firms and other information providers, including electronic and print media companies, some of which may have greater financial, information gathering and marketing resources than we do. These indirect competitors could choose to compete directly with us in the future. In addition, limited barriers to entry exist in the markets in which we do business. As a result, additional new competitors may emerge and existing competitors may start to provide additional or complementary services. Additionally, technological advances may provide increased competition from a variety of sources.However, we believe the breadth and depth of our research assets position us well versus our competition.Increased competition may result in loss of market share, diminished value in our products and services, reduced pricing and increased marketing expenditures. We may not be successful if we cannot compete effectively on quality of research and analysis, timely delivery of information, customer service, the ability to offer products to meet changing market needs for information and analysis, or price.Renewal of Research Business by Existing Clients.Some of our success depends on renewals of our subscription-based research products and services, which constituted 54% of our revenues for Calendar 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
10-K.23pricing 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,and 74% at December 31, 2002,there can be no guarantee that we will continue to have this level of client renewals. Any material decline in renewal rates could have an adverse impact on our revenues and our financial condition.Non-Recurring Consulting Engagements.Consulting segment revenues constituted 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
21
consulting engagements is subject to numerous factors, including those described in this Annual Report. Any material decline in our ability to replace consulting arrangements could have an adverse impact on our revenues and our financial condition.
Restructuring, Reorganization and Management Team. Our future success depends, in significant part, upon the continued service and performance of our senior management and other key personnel. We have recently reorganized our business around specific client needs. As part of this reorganization, a number of key management positions have been filled by the promotion of current employees or the hiring of new employees. As part of this reorganization, we have restructured our workforce in order to streamline operations and strengthen key consulting practices. If the reorganization and restructuring of our business do not lead to the results we expect, our ability to effectively deliver our products, manage our company and carry out our business plan may be impaired.Hiring and Retention of
Employees.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.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.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.Operations. A substantial portion of our revenues is derived from sales outside of North America,38%37% for Calendar2003.2004. 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 of10-K.24these arrangements are terminated by our agent or us, we may not be able to replace the arrangement on beneficial terms or on a timelybasis, orbasis. Additionally, clients of the local distributor or sales agent may not want to continue to do business with us or our new agent.Branding.Branding. We believe that our
"Gartner"“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.Indebtedness. We have a $200.0 million senior revolving credit facility
under which we can incur significant additional indebtedness, although there were no amounts outstanding at December 31, 2003.as well as a $100 million revolving credit facility. The affirmative, negative and financial covenants ofthis debtthe credit facility could limit our future financial flexibility. As a result of these covenants, our borrowing availability at December 31,20032004 was$184.0 million.$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.AnyThe outstanding debt may limit the amount of cash or additional credit available to us, which could restrain our ability to expand or enhance products and services, respond to competitive pressures or pursue future business opportunities requiring substantial investments of additional capital.Organizational and Product Integration Related to Acquisitions. We have made and may continue to make acquisitions of, or significant investments in, businesses that offer complementary products and services. The risks involved in each acquisition or investment include the possibility of paying more than the value we derive from the acquisition, dilution of the interests of our current stockholders or decreased working capital, increased indebtedness, the assumption of undisclosed liabilities and unknown and unforeseen risks, the ability to integrate successfully the operations and personnel of the acquired business, the ability to retain key personnel of the acquired company, the time to train the sales force to market and sell the products of the acquired company, the potential disruption of our ongoing business and the distraction of management from our business. The realization of any of these risks could adversely affect our business.Enforcement of Our Intellectual Property
Rights.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.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 may22
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.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, the10-K.25timing of the development, introduction and marketing of new products and services, and competition in the industry. An inability to generate sufficient earnings and cash flow, and achieve our forecasts, may impact our operating and other activities. The potential fluctuations in our operating income could cause period-to-period comparisons of operating results not to be meaningful and may provide an unreliable indication of future operating results.Significant
Stockholder.Stockholders. Silver LakePartners, L.P. ("SLP")and its affiliates own approximately45.9%42.2% of ouroutstandingClass A Common Stock and approximately36.1%33.7% of our total common stock on a combined basiswith our outstanding Class B Common Stockas ofDecember 31, 2003.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.SLPSilver Lake is restricted from purchasing additional stock without our consent pursuant to the terms of aSecurityholders'Securityholders’ Agreement. ThisSecurityholders'Securityholders’ Agreement also provides that we cannot take certain actions, including acquisitions and sales of stock and/or assets withoutSLP'sSilver 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. WhileSLP does not holdneither Silver Lake nor ValueAct holds a majority of our outstanding shares,itthey 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.SLP'sTheir interests may differ from the interests of other stockholders.Anti-takeover
Protections.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 bythe requisite numberour Board ofdirectors.Directors. These provisions include:o The presence of a classified board of directors; o The existence of two classes of common stock with our Class B Common Stock having the ability to elect 80% of our Board of Directors o The ability of the Board of Directors to issue and determine the terms of preferred stock; o Advance notice requirements for inclusion of stockholder proposals at stockholder meetings; and o The anti-takeover provisions of Delaware law.
• 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 for the first 300,000 shares, $25 for the next 100,000 shares and $30 for the remaining 100,000 shares. If our 60 day average stock price exceeds the stipulated per share target during the 60 day measurement period, we will be required to record a non-cash compensation charge equal to the closing price 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 share and the stock closes at $22.50 per share, the first lapse shall result in us recording a $6.75 million non-cash compensation charge (300,000 shares at $22.50/share).
RECENTLY ISSUED ACCOUNTING STANDARDS
None.10-K.26In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 123R, Share-Based Payments (“SFAS 123R”). The rule 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 granted to employees. The revised rule is effective for periods beginning after June 15, 2005, but early adoption is permitted. We plan to adopt the new rule on July 1, 2005. We are currently assessing the impact the revised rule will have on our financial position, cash flows, and results of operations, but we believe it may have a material effect on our results of operations.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
As of December 31,
2003,2004, we havelimitedexposure to market risk for changes in interest rates sinceour long-term debt was converted to equity during the fourth quarter of Calendar 2003. Additionally,wehave no borrowings underhad $190.0 million drawn on our$200.0 millionunsecured senior revolving credit facility with JPMorgan Chase Bank. Under the revolving credit facility, the interest rate on borrowings is LIBOR plus an additional 100 to200150 basis points based on our debt-to-EBITDA ratio.WeHowever, we believe that an increase or decrease of 10% in the effective interest rate on available borrowings from our senior revolving credit facilityif fully utilized,would not have a material effect on our future results of operations. Each 25 basis point increase or decrease in interest rates would have an approximate $0.5 million annual effect under the revolving credit facilityifwhen fully utilized.Investment Risk
We are exposed to market risk as it relates to changes in the market value of our equity investments. We invest in equity securities of public and private companies directly and through SI
I, a wholly-owned affiliate, and SIII, of which we own34%. SI I and22% at December 31, 2004. SI IIareis engaged in making venture capital investments in early to mid-stage IT-based or Internet-enabled companies (see Note4 -5 – Investments in the Notes to the Consolidated Financial Statements). As of December 31,2003,2004, we had investments in equity securities totaling$10.9$7.0 million.Unrealized gains and losses were insignificant.These investments are inherently risky as the businesses are typically in early development stages and may never develop. Further, certain of these investments are in publicly traded companies whose shares are subject to significant market price volatility. Adverse changes in market conditions and poor operating results of the underlying investments may result in us incurring additional losses or an inability to recover the original carrying value of our investments. If there were a 100% adverse change in the value of our equity portfolio as of December 31,2003,2004, this would result in a non-cash impairment charge of$10.9$7.0 million.Additionally, we have a commitmentWe had no additional commitments to fundan additional $4.0 millionSI II as ofinvestments with SI II.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'stockholders’ equity(deficit)section of the Consolidated Balance Sheets. Our foreign subsidiaries generally collect revenues and pay expenses in currencies other than the United States dollar. Since the functional currencies of our foreign operations are generally denominated in the local currency of our subsidiaries, the foreign currency translation adjustments are reflected as a component ofstockholders'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 $(3.1) million during Calendar 2004, $0.5 million during Calendar 2003, $(0.4) million during Calendar 2002, $(0.1) million during Transition 2002, and $(0.8) million during Fiscal2002, and $(3.5) million during Fiscal 2001.2002.From time to time we enter into foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
At December 31, 2003, we had one foreign currency forward contract outstanding.Foreign exchange forward contracts are reflected at fair value with gains and losses recordedcurrentlyin earnings.The following table presents information about ourAt December 31, 2004, we had no foreign currency forwardcontract outstanding as of December 31, 2003, expressed in U.S. dollar equivalents.
Contract Amount Forward Unrealized Loss Currency Purchased Currency Sold (in thousands) Exchange Rate (in thousands) Expiration Date - -------------------------------------------------------------------------------------------------------------------Euros U.S. Dollars $2,000 1.2499 $-- January 26, 200410-K.27contracts or other derivative financial instruments outstanding.ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements
and schedule supporting such consolidated financial statementsfor Calendar 2004, Calendar 2003, Transition 2002 and foreach ofthefiscal years in the two-year periodFiscal year ended September 30, 2002, together with the reports of KPMG LLP, independentauditors,registered public accounting firm, datedFebruary 5, 2004,March 16, 2005, are included in this Annual Report on Form 10-K beginning on Page31.40.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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ITEM 9A. CONTROLS AND PROCEDURES
We have established disclosure controls and procedures that are designed to ensure that the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized and reported in a timely manner. Specifically, these controls and procedures ensure that the information is accumulated and communicated to our executive management team, including our chief executive officer and our chief financial officer, to allow timely decisions regarding required disclosure.Disclosure Controls
Management conducted an evaluation, as of December 31,
2003,2004, of the effectiveness of the design anddesignoperation 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 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. 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 controls over financial reporting, management has concluded that, as of December 31, 2004, 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.
Gartner’s independent registered public accountants KPMG LLP, have issued an attest report on management’s assessment of Gartner’s internal control of financial reporting. This report appears on page 42.
Changes in Internal Control Over Financial Reporting
During our most recent fiscal quarter, except as set forth below, there
have been no significant changeshas not occurred any change in our internal control over financial reportingduring(as such term is defined in Rules 13a- 15(f) and 15d- 15(f) under thequarter ended December 31, 2003Exchange Act) thathavehas materially affected, orareis reasonably likely to materially affect,the Company'sour internal control over financial reporting.10-K.28We 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.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information
requiredregarding 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 SecretaryPeter 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. Prior to
be furnishedjoining 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.
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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.
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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 Board 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,
item will be set forthMs. 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.
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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 defined under the
captions "Proposal One: Electionstandards ofDirectors," "Executive Officers"the New York Stock Exchange. The Governance Committee and"Sectionthe 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 16(a) Beneficial Ownership Reporting
Compliance" inComplianceSection 16(a) of the
Definitive Proxy StatementSecurities Exchange Act of 1934 requires our executive officers, directors and persons who beneficially own more than 10% of either class of our Common Stock tobe filed no later than April 30, 2004. If the Proxy Statement is not filedfile reports of ownership and changes of ownership with theCommissionSEC and to furnish us with copies of the reports they file. Based solely on our review of the reports received byApril 30, 2003, such information will be included inus, 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 anamendmentoption tothis Annual ReportLew 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 byApril 30,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
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table provides information
requiredabout 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 Intelligence2004 $ 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 nominees to be
furnishedelected to our Board.Mr. Hall’s initial base salary is $650,000, subject to annual adjustments by our Board or Compensation Committee. Mr. Hall’s annual target bonus is equal to 100% of his base salary and is based on the achievement of specified company and individual objectives. Mr. Hall’s bonus may be higher or lower than 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 defined in the agreement) or a Constructive Termination (as defined in the agreement) occurs, or if we do not renew the agreement upon its expiration and Mr. Hall terminates his employment within ninety days following the expiration of the agreement, Mr. Hall will be entitled 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
this item is incorporated by referenceperformance-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
information set forth underprior fiscal year); (c) acceleration in full of his option grant and thecaption "Executive Compensation"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 theProxy Statementagreement) 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
iftheProxy Statementdate that the agreement is terminated by either party, provided, however, that Gartner must give Mr. Christopher 12 months notice, or pay him out in lieu of notice.32
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
filedhave long-term employment agreements withthe Commissionany of our executive officers. Each of our executive officers is covered byApril 30, 2004, such informationGartner’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 beincludedentitled 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 anamendment to this Annual Report filed by April 30, 2004.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.
TheBased on our review of information
requiredon file with the Securities and Exchange Commission and our stock records, the following table provides certain 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 known by us tobe furnished pursuantown 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 tothis item will be set forth underapplicable community property laws, thecaption "Security Ownership of Certain Beneficial Owners and Management"persons named in theProxy Statement or if the Proxy Statement is not filedtable have sole voting and investment power withthe Commissionrespect to all shares of Common Stock shown as beneficially owned byApril 30, 2004, such information will be included in an amendment to this Annual Report filed by April 30, 2004.them.
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. (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. (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. 34
(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,
20032004 regarding the number of shares of our Class A Common Stock that may be issued under our equity compensation plans.
Column C Number of Securities Column A Column B Remaining Available Number of Securities Weighted-Average for Future Issuance to be Issued Upon Exercise Price of Under Equity Exercise of Outstanding Compensation Plans Outstanding Options, Options, Warrants (Excluding Securities Plan Category Warrants and Rights and Rights in Column A) Equity Compensation Plans Approved by Stockholders Stock option plans 14,469,349 (1) $ 14.81 3,436,249 (2) 2002 Employee Stock Purchase Plan — N/A 2,733,414 Equity Compensation Plans Not Approved by Stockholders 10,670,284 (3) 10.36 — Total 25,139,633 $ 12.92 6,169,663
Column C Number(1) Consists of Securities Column A Column B Remaining Available Numberthe 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 Securities Weighted-Average for Future Issuance to be Issued Upon Exercise Price of Under Equity Exercise of Outstanding Compensation Plans Outstanding Options, Options, Warrants (Excluding Securities Plan Category Warrants and Rights and Rights in Column A) - ---------------------------------------------------------------------------------------------------------------------------Equity Compensation Plans Approved by Stockholders Stock option plans 15,902,853(1) $14.24 7,515,897(2) 2002 Employee Stock Purchase Plan -- N/A 3,177,373 Equity Compensation Plans Not Approved by Stockholders 15,623,354(3) 10.16 -- ------------------------------------------------------------------- Total 31,526,207 $12.21 10,693,270 ===================================================================(1) Consists of the 1991 Stock Option Plan, the 1993 Directors Stock Option Plan, the 1994 Long-Term Option Plan, the 1996 Long-Term Option Plan, the 1998 Long Term Stock Option Plan and the 2003 Long Term Incentive Plan. (2) Consists of the 2003 Long-Term Incentive Plan. (3)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 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
information requireddetermination of the number of shares issued upon 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 connection 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 nominees to befurnished pursuantelected tothis item will be set forth underour Board. This obligation exists while Silver Lake owns Class A Common Stock representing at least 20 percent of thecaption "Certain Relationshipsamount of Class A Common Stock into which the notes were converted.Silver Lake purchased $112,200 in research and
Transactions"consulting services from us during 2004 and has contracted to purchase subscription research services from us in 2005 in theProxy Statement or ifamount of $113,700.RELATIONSHIPS WITH OTHER THIRD PARTIES
Several of our other directors are employed by companies that purchase our research and consulting services in the
Proxy Statement is not filed withordinary course of their business. The following table shows theCommissionamount of research and consulting services purchased byApril 30,each company during 2004such information will be included in an amendmentand the amount for which each company has signed commitments tothis Annual Report filed by April 30, 2004.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 36
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 information and certain statutory audits. KPMG also performed services for us in other business areas. The
informationfollowing 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
be furnished pursuantperiodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with thisitem will bepre-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 fees set forthunderon thecaption "Principal Accountant Fees and Services" inabove table were pre-approved by theProxy Statement or if the Proxy Statement is not filed with the Commission by April 30, 2004, such information will be included in an amendment to this Annual Report filed by April 30, 2004.10-K.29Audit Committee.37
PART IV
ITEM 15. EXHIBITS
CONSOLIDATEDAND FINANCIAL STATEMENTSCHEDULE AND REPORTS ON FORM 8-K.SCHEDULES.(a) 1. and 2. Consolidated Financial Statements and Schedules
The reports of our independent
auditors' report,registered public accounting firm and consolidated financial statementsand financial statement schedulelisted in the Index to Consolidated Financial Statementsand Scheduleon page3139 hereof are filed as part of this report.All
otherfinancial 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) 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. 3.1b(6) Certificate of Amendment of the Restated Certificate of Incorporation-February 1, 2001. 3.1c(4) Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock and Series B Junior Participating Preferred Stock of the Company-March 1, 2000. 3.2(5) Amended Bylaws, as amended through April 14, 2000.February 3, 2004.4.1(6) Form of Certificate for Common Stock, Class A-as of February 2001. 4.2(6) Form of Certificate for Common Stock, Class B-as of February 2001. 4.3(8) Amended and Restated Rights Agreement, dated as of August 31, 2002, between the Company and Mellon Investor Services LLC as(as successor Rights Agentwith related Exhibits. 4.4a(6) Amended and Restated Credit Agreement dated July 17, 2000 by and among the Company and certain financial institutions, including Chase Manhattan Bank in its capacity as a lender and as agent for the lenders. 4.4b(8)of Fleet National Bank).4.4(12) Amendment No. 31 to the Amended and Restated Rights Agreement, dated as of August 31, 2002, by and between Gartner, Inc. and Mellon Investor Services LLC (as successor Rights Agent of Fleet National Bank), dated June 30, 2003, by and between Gartner, Inc. and Mellon Investor Services LLC.4.5 (14) Credit Agreement, dated as of May 30, 2002. 4.4c(12)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, as Administrative Agent (the “Credit Agreement”)4.6(17) First Amendment, No. 4 to the Amended and Restated Credit Agreementdated as of March31, 2003. 4.4d(13) Amendment No. 53, 2005, to theAmended and RestatedCreditAgreement dated as of June 30, 2003.Agreement.10.1(1) Form of Indemnification Agreement. 10.2e(8)10.2(8) Amended and Restated Securityholders Agreement dated as of July 12, 2002 among the Company, Silver Lake Partners, L.P. and other parties thereto. 10.3a(2)10.3(2) Lease dated December 29, 1994 between Soundview Farms and the Company for premises at 56 Top Gallant Road, 70 Gatehouse Road, and 88 Gatehouse Road, Stamford, Connecticut. 10.3b(3)10.4(3) Lease dated May 16, 1997 between Soundview Farms and the Company for premises at 56 Top Gallant Road, 70 Gatehouse Road, 88 Gatehouse Road and 10 Signal Road, Stamford, Connecticut (amendment to lease dated December 29, 1994, see exhibit 10.3a). 10.4(5)10.5(2)+ 1991 Stock Option Plan as amended and restated on October 19, 1999. 10.6(5)ª1993 Director Stock Option Plan as amended and restated on April 14, 2000. 10.5a(13) 10.7(13)ª2002 Employee Stock Purchase Plan, as Amended and Restated February 5, 2003. 10.6(3)+ 10.8(3)ª1994 Long Term Stock Option Plan, as amended and restated on October 12, 1999. 10.7(3)+ 10.9(3)ª1998 Long Term Stock Option Plan, as amended and restated on October 12, 1999. 10.8(3)+ 10.10(3)ª1996 Long Term Stock Option Plan, as amended and restated on October 12, 1999. 10.9(10)+38
10.11(10)ª1999 Stock Option Plan 10.10(9)+Plan. 10.12(9)ª2003 Long-Term Incentive Plan 10.11(8)+Plan. 10.13 (15)ªEmployment Agreement between Michael D. Fleisher and the Company as of October 1, 2002. 10.12(8)+ Employment Agreement between Maureen O'ConnellEugene A. Hall and the Company dated as of October 15,20022004. 10.14(15)ªRestricted Stock Agreement by and effective as of September 23, 2002. 10.15(11)+ Employment agreementbetweenZachary MorowitzEugene A. Hall and the Company dated as ofJanuary 20,October 15, 2004. 10.15*ªEmployment Agreement between Gartner Group UK Limited and Alister Christopher dated September 23, 2003. 10.16*ªEmployment Agreement between Gartner Group UK Limited and Clive Taylor dated December 21, 2004. 21.1* Subsidiaries of Registrant. 23.1* Consent of Independent Auditors' Consent.Registered Public Accounting Firm24.1 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 Annual Report on Form 10-K as filed on December 21, 1995, SEC File No. 000-15144. (3) Incorporated by reference from the Company's Annual Report on Form 10-K filed on December 22, 1999. (4) Incorporated by reference from the Company's Form 8-K dated March 1, 2000 as filed on March 7, 2000. (5) Incorporated by reference from the Company's Annual Report on Form 10-K as filed on December 29, 2000.10-K.30 (6) Incorporated by reference from the Company's Annual Report on Form 10-K as filed on December 28, 2001. (7) Incorporated by reference from the Company's Form 10-Q as filed on February 13, 2002. (8) Incorporated by reference from the Company's Annual Report on Form 10-K as filed on December 29, 2002. (9) Incorporated by reference from the Company's Proxy Statement for its annual meeting dated February 13, 2003. (10) Incorporated by reference from the Company's Form S-8 as filed on February 16, 2002. (11) Incorporated by reference from the Company's Transition Report on Form 10-KT as filed on March 31, 2003. (12) Incorporated by reference from the Company's Form 10-Q as filed on May 15, 2003. (13) Incorporated by reference from the Company's Form 10-Q as filed on August 14, 2003. (b) Reports on Form 8-K The Company filed the following reports on Form 8-K during the last quarter of the year ended December 31, 2003: 1. Report on Form 8-K dated October 1, 2003 regarding the appointments of Maureen O'Connell as president and chief operating officer and Chris Lafond as executive vice president and chief financial officer. 2. Report on Form 8-K dated October 9, 2003 regarding the conversion of $300 million of original aggregate principal amount of 6% convertible subordinated notes into approximately 49.4 million shares of our Class A Common Stock. 3. Report on Form 8-K dated October 30, 2003 to furnish the Company's press release issued October 30, 2003, with respect to financial results for Gartner, Inc. for the quarter ended September 30, 2003. 4. Report on Form 8-K dated December 5, 2003 regarding a staff reduction and related accounting charge.10-K.31
(1) Incorporated by reference from the Company’s Registration Statement on Form S-1 (File No. 33-67576), as amended, effective October 4, 1993. (2) Incorporated by reference from the Company’s Annual Report on Form 10-K as filed on December 21, 1995, SEC File No. 000-15144. (3) Incorporated by reference from the Company’s Annual Report on Form 10-K filed on December 22, 1999. (4) Incorporated by reference from the Company’s Current Report on Form 8-K dated March 1, 2000 as filed on March 7, 2000. (5) 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) Incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed on February 13, 2002. (8) Incorporated by reference from the Company’s Annual Report on Form 10-K as filed on December 29, 2002. (9) Incorporated by reference from the Company’s Definitive Proxy Statement for its annual meeting dated February 13, 2003. (10) Incorporated by reference from the Company’s Form S-8 as filed on February 16, 2002. (11) Incorporated by reference from the Company’s Transition Report on Form 10-KT as filed on March 31, 2003. (12) Incorporated by reference from the Company’s 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. (16) Incorporated by reference from the Company’s Current Report on Form 8-K as filed on December 28, 2004. (17) Incorporated by reference from the Company Current Report on Form 8-K filed on March 7, 2005. 39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULEGARTNER, INC.
CONSOLIDATED FINANCIAL STATEMENTS
41 Report33of Independent Registered Public Accounting Firm42 43 44 45 46 47 10-K.32 Report by Management Management's Responsibility for Financial Reporting Management has prepared andAll financial statement schedules have been omitted because the information required is
responsible for the integrity and objectivity ofnot applicable or is shown in the consolidated financial statementsand related information included in the Annual Report. The consolidated financial statements, which include amounts based on management's best judgments and estimates, were prepared in conformity with accounting principles generally accepted in the United Statesor notes thereto.40
Report of
America. Financial information elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The Company maintains a system of internal controls designed to provide reasonable assurance at reasonable cost that assets are safeguarded and transactions are properly executed and recorded for the preparation of reliable financial information. The internal control system is augmented with written policies and procedures, an organizational structure providing division of responsibilities, careful selection and training of qualified financial people and a program of periodic audits performed by both an internal audit department and independent auditors. The Audit Committee of the Board of Directors, composed solely of non-employee directors, meets regularly with management, internal auditors and our independent accountants to ensure that each is meeting its responsibilities and to discuss matters concerning internal controls and financial reporting. Both the independent and internal auditors have unrestricted access to the Audit Committee. /s/ Michael D. Fleisher Michael D. Fleisher Chairman of the Board and Chief Executive Officer /s/ Christopher Lafond Christopher Lafond Chief Financial Officer10-K.33IndependentAuditors' ReportRegistered Public Accounting FirmThe Board of Directors and Stockholders
Gartner, Inc.:We have audited the accompanying consolidated
financial statementsbalance sheets of Gartner, Inc. and subsidiaries aslistedof December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive income (loss), and cash flows for each of the years in theaccompanying index. In connection with our audits oftwo-year period ended December 31, 2004, theconsolidated financial statements, we also have auditedthree-month period ended December 31, 2002, and thefinancial statement schedule as listed in the accompanying index.year ended September 30, 2002. These consolidated financial statementsand financial statement scheduleare the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statementsand financial statement schedulebased on our audits.We conducted our audits in accordance with
auditingthe standardsgenerally accepted inof theUnited States of America.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,
20032004 and2002, and September 30, 2002,2003, and the results of their operations and their cash flows forthe year ended December 31, 2003, the three-month period ended December 31, 2002, andeach of the years in the two-year period ended December 31, 2004, the three-month period ended December 31, 2002, and the year ended September 30, 2002, 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, 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, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
New York, New York
March 16, 200541
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, 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,
generally acceptedand that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of theUnited Statescompany; and (3) provide reasonable assurance regarding prevention or timely detection ofAmerica.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, 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,
the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly,Gartner, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by theinformation set forth therein. As discussedCommittee of Sponsoring Organizations of the Treadway Commission (COSO).We also have audited, in
Note 1,accordance with the standards of the Public Companyadopted StatementAccounting Oversight Board (United States), the consolidated balance sheets ofFinancial Accounting Standards No. 142, "GoodwillGartner, Inc. andOther Intangible Assets"subsidiaries as of December 31, 2004 and 2003, 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-year period ended December 31, 2004, the three-month period ended December 31, 2002, and the year ended September 30,2002. /s/2002, and our report dated March 16, 2005 expressed an unqualified opinion on those consolidated financial statements./s/ KPMG LLP
New York, New York
February 5, 200410-K.34
March 16, 200542
GARTNER, INC.
CONSOLIDATED BALANCE SHEETS(IN(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, ----------------------------- September 30, 2003 2002 2002 ----------------------------------------------ASSETS Current assets: Cash and cash equivalents $ 229,962 $ 109,657 $ 124,793 Fees receivable, net of allowances of $9,000, $7,000, and $7,000, respectively 266,122 283,068 264,843 Deferred commissions 27,751 25,016 26,366 Prepaid expenses and other current assets 25,642 24,201 32,636 ---------------------------------------------- Total current assets 549,477 441,942 448,638 Property, equipment and leasehold improvements, net 66,541 71,006 76,161 Goodwill 230,387 223,860 222,427 Intangible assets, net 985 2,254 2,731 Other assets 69,874 71,018 68,498 ---------------------------------------------- Total assets $ 917,264 $ 810,080 $ 818,455 ============================================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued liabilities $ 175,609 $ 134,667 $ 123,969 Deferred revenues 315,524 305,887 306,978 ---------------------------------------------- Total current liabilities 491,133 440,554 430,947 Convertible debt -- 351,539 346,300 Other liabilities 50,385 46,688 46,098 ---------------------------------------------- Total liabilities 541,518 838,781 823,345 Commitments and contingencies (see note 8) Stockholders' equity (deficit): Preferred stock: $.01 par value, authorized 5,000,000 shares; none issued or outstanding -- -- -- Common stock $.0005 par value, authorized 166,000,000 shares of Class A Common Stock and 84,000,000 shares of Class B Common Stock; issued 102,436,100 shares of Class A Common Stock (80,106,020 and 79,986,681 at December 31, 2002 and September 30, 2002) and 40,689,648 shares of Class B Common Stock at December 31, 2003 and 2002 and at September 30, 2002 72 60 60 Additional paid-in capital 408,504 368,090 366,723 Unearned compensation, net (1,846) (3,069) (3,467) Accumulated other comprehensive income (loss), net 1,530 (11,392) (14,085) Accumulated earnings 173,936 150,243 164,661 Treasury stock, at cost, 669,837 shares of Class A Common Stock (29,158,443 and 28,210,725 at December 31, 2002 and September 30, 2002) and 12,456,605 shares of Class B Common Stock (10,907,120 and 10,453,520 at December 31, 2002 and September 30, 2002) (206,450) (532,633) (518,782) ---------------------------------------------- Total stockholders' equity (deficit) 375,746 (28,701) (4,890) ---------------------------------------------- Total liabilities and stockholders' equity (deficit) $ 917,264 $ 810,080 $ 818,455 ==============================================
December 31, 2004 2003 ASSETS Current assets: Cash and cash equivalents $ 160,126 $ 229,962 Fees receivable, net of allowances of $8,450, and $9,000, respectively 257,689 266,122 Deferred commissions 32,978 27,751 Prepaid expenses and other current assets 37,052 30,465 Total current assets 487,845 554,300 Property, equipment and leasehold improvements, net 63,495 66,541 Goodwill 231,759 230,387 Intangible assets, net 138 985 Other assets 77,957 66,519 Total assets $ 861,194 $ 918,732 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 181,502 $ 180,432 Deferred revenues 307,696 315,524 Current portion of long-term debt 40,000 — Total current liabilities 529,198 495,956 Long-term debt 150,000 — Other liabilities 51,948 47,986 Total liabilities 731,146 543,942 Commitments and contingencies (see note 9) 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 Additional paid-in capital 485,713 408,504 Unearned compensation, net (7,553 ) (1,846 ) Accumulated other comprehensive income (loss), net 12,722 1,310 Accumulated earnings 190,089 173,200 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 ) Total stockholders’ equity 130,048 374,790 Total liabilities and stockholders’ equity $ 861,194 $ 918,732 See Notes to Consolidated Financial Statements.
10-K.3543
GARTNER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS(IN(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, Fiscal Year September 30, ------------------------- Transition ------------------------ 2003 2002 2002 2002 2001 -----------------------------------------------------------------Revenues: Unaudited Research $ 466,907 $ 486,967 $ 120,038 $ 496,403 $ 535,114 Consulting 258,628 276,059 58,098 273,692 276,292 Events 119,355 109,694 47,169 121,991 132,684 Other 13,556 14,873 4,509 15,088 18,794 ----------------------------------------------------------------- Total revenues 858,446 887,593 229,814 907,174 962,884 Costs and expenses: Cost of services and product development 410,666 396,489 108,600 403,718 450,471 Selling, general and administrative 333,283 346,495 90,306 345,382 370,096 Depreciation 36,045 43,726 11,146 42,504 40,873 Amortization of intangibles and goodwill 1,275 1,929 482 1,949 12,367 Other charges 29,716 49,412 32,166 17,246 46,563 ----------------------------------------------------------------- Total costs and expenses 810,985 838,051 242,700 810,799 920,370 ----------------------------------------------------------------- Operating income (loss) 47,461 49,542 (12,886) 96,375 42,514 Gain (loss) on investments, net 4,740 (4,137) (1,688) (1,578) (27,457) Interest income 2,296 1,968 635 1,845 1,616 Interest expense (19,402) (23,206) (5,942) (22,869) (22,391) Other income (expense), net 461 117 (141) (170) (3,674) ----------------------------------------------------------------- Income (loss) before income taxes 35,556 24,284 (20,022) 73,603 (9,392) Provision (benefit) for income taxes 11,863 9,167 (5,604) 25,025 (9,172) ----------------------------------------------------------------- Income (loss) from continuing operations 23,693 15,117 (14,418) 48,578 (220) Discontinued operation, net of taxes: Loss from discontinued operation -- -- -- -- (26,059) Loss on disposal of discontinued operation -- -- -- -- (39,924) ----------------------------------------------------------------- Loss from discontinued operation -- -- -- -- (65,983) ----------------------------------------------------------------- Net income (loss) $ 23,693 $ 15,117 $ (14,418) $ 48,578 $ (66,203) ================================================================= Net income (loss) per share: Basic: Income (loss) from continuing operations $ 0.26 $ 0.18 $ (0.18) $ 0.58 $ (0.00) Loss from discontinued operation -- -- -- -- (0.30) Loss on disposal of discontinued operation -- -- -- -- (0.47) ----------------------------------------------------------------- Net income (loss) $ 0.26 $ 0.18 $ (0.18) $ 0.58 $ (0.77) ================================================================= Diluted: Income (loss) from continuing operations $ 0.26 $ 0.18 $ (0.18) $ 0.47 $ (0.00) Loss from discontinued operation -- -- -- -- (0.30) Loss on disposal of discontinued operation -- -- -- -- (0.47) ----------------------------------------------------------------- Net income (loss) $ 0.26 $ 0.18 $ (0.18) $ 0.47 $ (0.77) ================================================================= Weighted average shares outstanding: Basic 91,123 83,329 81,379 83,586 85,862 Diluted 92,579 85,040 81,379 130,882 85,862
Fiscal Year Year Ended December 31, Transition September 30, 2004 2003 2002 2002 2002 Unaudited Revenues: Research $ 480,486 $ 466,907 $ 486,967 $ 120,038 $ 496,403 Consulting 259,419 258,628 276,059 58,098 273,692 Events 138,393 119,355 109,694 47,169 121,991 Other 15,523 13,556 14,873 4,509 15,088 Total revenues 893,821 858,446 887,593 229,814 907,174 Costs and expenses: Cost of services and product development 434,499 410,666 396,489 108,600 403,718 Selling, general and administrative 349,834 333,411 346,496 90,306 345,574 Depreciation 27,650 36,045 43,726 11,146 42,504 Amortization of intangibles 687 1,275 1,929 482 1,949 Goodwill impairments 2,711 — — — — Other charges 35,781 29,716 49,412 32,166 17,246 Total costs and expenses 851,162 811,113 838,052 242,700 810,991 Operating income (loss) 42,659 47,333 49,541 (12,886 ) 96,183 (Loss) gain on investments, net (2,958 ) 4,740 (4,137 ) (1,688 ) (1,578 ) Interest income 3,063 2,296 1,968 635 1,845 Interest expense (4,380 ) (19,402 ) (23,206 ) (5,942 ) (22,869 ) Other (expense) income, net (3,922 ) 461 119 (141 ) (170 ) 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 Net income (loss) $ 16,889 $ 23,589 $ 15,118 $ (14,418 ) $ 48,423 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 Weighted average shares outstanding: Basic 123,603 91,123 83,329 81,379 83,586 Diluted 126,326 92,579 85,040 81,379 130,882 See Notes to Consolidated Financial Statements.
10-K.3644
GARTNER, INC.
CONSOLIDATED STATEMENTS OFSTOCKHOLDERS'STOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)(IN(IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated Other Total Additional Unearned Comprehensive Stockholders' Common Paid-In Compensation Income (Loss), Accumulated Treasury Equity Stock Capital Net Net Earnings Stock (Deficit) - ------------------------------------------------------------------------------------------------------------------------------------Balance at September 30, 2000 $ 59 $ 333,828 $ (6,451) $ (1) $ 182,286 $ (434,901) $ 74,820 Comprehensive loss Net loss -- -- -- -- (66,203) -- (66,203) Other comprehensive loss Foreign currency translation adjustments -- -- -- 1,627 -- -- 1,627 Net unrealized loss on investments, net of tax of $12,811 -- -- -- (16,587) -- -- (16,587) -------- -------- Other comprehensive loss -- -- -- (14,960) -- -- (14,960) -------- Comprehensive loss (81,163) Issuances under stock plans -- 9,024 -- -- -- 15 9,039 Tax benefits of employee stock transactions -- 1,331 -- -- -- -- 1,331 Net settlement on forward purchase agreement -- (73) -- -- -- 9 (64) Purchase of shares for treasury stock -- -- -- -- -- (37,893) (37,893) Elimination of minority interest from sale of discontinued operation -- (2,056) -- -- -- -- (2,056) Exercise of options on subsidiary stock -- 56 -- -- -- 56 Stock compensation (net of forfeitures) -- 106 1,306 -- -- -- 1,412 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2001 59 342,216 (5,145) (14,961) 116,083 (472,770) (34,518) Comprehensive income Net income -- -- -- -- 48,578 -- 48,578 Other comprehensive income Foreign currency translation adjustments -- -- -- (69) -- -- (69) Net unrealized gain on investments, net of tax of $630 -- -- -- 945 -- -- 945 -------- -------- Other comprehensive income -- -- -- 876 -- -- 876 -------- Comprehensive income 49,454 Issuances under stock plans 1 21,130 -- -- -- 1,035 22,166 Tax benefits of employee stock transactions -- 2,280 -- -- -- -- 2,280 Purchase of shares for treasury stock -- -- -- -- -- (47,047) (47,047) Stock compensation (net of forfeitures) -- 1,097 1,678 -- -- -- 2,775 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2002 60 366,723 (3,467) (14,085) 164,661 (518,782) (4,890) Comprehensive loss Net loss -- -- -- -- (14,418) -- (14,418) Other comprehensive income Foreign currency translation adjustments -- -- -- 2,668 -- -- 2,668 Net unrealized gain on investments, net of tax of $17 -- -- -- 25 -- -- 25 -------- -------- Other comprehensive income -- -- -- 2,693 -- -- 2,693 -------- Comprehensive loss (11,725) Issuances under stock plans -- 1,016 -- -- -- 29 1,045 Tax benefits of employee stock transactions -- (199) -- -- -- -- (199) Purchase of shares for treasury stock -- -- -- -- -- (13,880) (13,880) Stock compensation (net of forfeitures) -- 550 398 -- -- -- 948 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 60 368,090 (3,069) (11,392) 150,243 (532,633) (28,701) Comprehensive income Net income -- -- -- -- 23,693 -- 23,693 Other comprehensive income Foreign currency translation adjustments -- -- -- 12,790 -- -- 12,790 Net unrealized gain on investments, net of tax of $55 -- -- -- 132 -- -- 132 -------- -------- Other comprehensive income -- -- -- 12,922 -- -- 12,922 -------- Comprehensive income 36,615 Issuances under stock plans 3 39,662 -- -- 1,991 41,656 Tax benefits of employee stock transactions 3,930 -- -- -- -- 3,930 Purchase of shares for treasury stock -- -- -- -- -- (43,434) (43,434) Conversion of debt into shares of Class A Common Stock 9 (3,027) -- -- -- 367,626 364,608 Stock compensation (net of forfeitures) -- (151) 1,223 -- -- -- 1,072 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 $ 72 $ 408,504 $ (1,846) $ 1,530 $ 173,936 $ (206,450) $ 375,746 - -----------------------------------------------------------------------------------------------------------------------------------
Accumulated Other Additional Unearned Comprehensive Total Common Paid-In Compensation, Income (Loss), Accumulated Treasury Stockholders' Stock Capital Net Net Earnings Stock Equity (Deficit) 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 ) Comprehensive income Net income — — — — 23,589 — 23,589 Other comprehensive income Foreign currency translation adjustments — — — 12,645 — — 12,645 Net unrealized gain on investments, net of tax of $55 — — — 132 — — 132 Other comprehensive income — — — 12,777 — — 12,777 Comprehensive income 36,366 Issuances under stock plans 3 39,662 — — — 1,990 41,655 Tax benefits of employee stock transactions — 3,930 — — — — 3,930 Purchase of shares for treasury stock — — — — — (43,434 ) (43,434 ) Conversion of debt into shares of Class A Common Stock 9 (3,027 ) — — — 367,627 364,609 Stock compensation (net of forfeitures) — (151 ) 1,223 — — — 1,072 Balance at December 31, 2003 72 408,504 (1,846 ) 1,310 173,200 (206,450 ) 374,790 Comprehensive income Net income — — — — 16,889 — 16,889 Other comprehensive income Foreign currency translation adjustments — — — 11,284 — — 11,284 Net unrealized gain on investments, net of tax of $0 — — — 128 — — 128 Other comprehensive income — — — 11,412 — — 11,412 Comprehensive income 28,301 Issuances under stock plans 3 60,199 — — — 7,714 67,916 Tax benefits of employee stock transactions — 10,004 — — — — 10,004 Purchase of shares for treasury stock — — — — — (352,262 ) (352,262 ) Common Stock — — — — — Stock compensation (net of forfeitures) — 7,006 (5,707 ) — — — 1,299 Balance at December 31, 2004 $ 75 $ 485,713 $ (7,553 ) $ 12,722 $ 190,089 $ (550,998 ) $ 130,048 45
GARTNER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS)
Fiscal Year Year Ended December 31, Transition September 30, 2004 2003 2002 2002 2002 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: Depreciation and amortization of intangibles 28,337 37,320 45,655 11,628 44,453 Non-cash compensation 1,299 1,072 3,286 945 2,775 Tax benefit associated with employee exercise of stock options 10,004 3,930 1,579 (199 ) 2,280 Deferred taxes (8,613 ) (4,567 ) (4,139 ) (7,383 ) 4,066 Loss (gain) from investments and sales of assets, net 2,958 (4,740 ) 3,644 1,688 1,085 Accretion of interest and amortization of debt issue costs 954 18,649 22,430 5,734 22,116 Goodwill impairments 2,711 — — — — Non-cash charges associated with impairment of long-lived assets 5,157 — 2,083 659 1,424 Changes in assets and liabilities: Fees receivable, net 13,711 29,980 42,686 (13,748 ) 40,299 Deferred commissions (5,197 ) (1,689 ) 15,602 1,616 9,046 Prepaid expenses and other current assets (788 ) 2,578 10,218 (2,443 ) 25,088 Other assets (5,850 ) 452 7,388 (481 ) 9,415 Deferred revenues (14,764 ) (4,467 ) (33,259 ) (5,683 ) (50,886 ) Accounts payable and accrued liabilities 1,393 34,230 13,535 23,238 (14,032 ) Cash provided by operating activities 48,201 136,337 145,826 1,153 145,552 Investing activities: Proceeds from insurance recovery — 5,464 — — — Purchases of businesses — — (3,858 ) — (4,537 ) Proceeds from sale of investments and assets — — 239 — 6,264 Investments — (1,960 ) (1,508 ) — (1,508 ) Prepaid acquisition costs for Meta (3,870 ) — — — — Additions to property, equipment and leasehold improvements (25,104 ) (28,928 ) (21,124 ) (5,866 ) (19,639 ) Cash used in investing activities (28,974 ) (25,424 ) (26,251 ) (5,866 ) (19,420 ) Financing activities: Proceeds from stock issued for stock plans 67,916 41,655 17,925 1,045 22,166 Proceeds from issuance of debt 200,000 — — — — Payments on debt (10,000 ) — — — (15,000 ) Payments for debt issuance and debt conversion costs (2,823 ) (1,182 ) (238 ) — (238 ) Purchases of stock via tender offer, including costs (346,150 ) — — — — Purchases of treasury stock (6,112 ) (43,434 ) (59,880 ) (13,880 ) (47,047 ) Cash used in financing activities (97,169 ) (2,961 ) (42,193 ) (12,835 ) (40,119 ) Net (decrease) increase in cash and cash equivalents (77,942 ) 107,952 77,382 (17,548 ) 86,013 Effects of exchange rates on cash and cash equivalents 8,106 12,353 4,844 2,412 1,652 Cash and cash equivalents, beginning of period 229,962 109,657 27,431 124,793 37,128 Cash and cash equivalents, end of period $ 160,126 $ 229,962 $ 109,657 $ 109,657 $ 124,793 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 2,591 $ 753 $ 667 $ 159 $ 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 ) Supplemental schedule of non-cash investing and financing activities: Transfer of investment to SI II $ (2,186 ) $ — $ — $ — $ — Conversion of convertible debt to shares of Class A Common Stock $ — $ 364,609 $ — $ — $ — Accretion of interest and debt discount on convertible debt $ — $ 16,456 $ 20,401 $ 5,239 $ 20,100 See Notes to Consolidated Financial Statements.
10-K.3746
GARTNER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31, Fiscal Year September 30, ----------------------- Transition ------------------------- 2003 2002 2002 2002 2001 ------------------------------------------------------------------Operating activities: Unaudited Net income (loss) $ 23,693 $ 15,117 $ (14,418) $ 48,578 $(66,203) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Loss from discontinued operation -- -- -- -- 65,983 Depreciation and amortization of intangibles and goodwill 37,320 45,655 11,628 44,453 53,240 Non-cash compensation 1,072 3,286 866 2,720 1,151 Tax benefit associated with employee exercise of stock options 3,930 1,579 (199) 2,280 1,331 Deferred taxes (4,567) (4,139) (7,383) 4,066 (34,973) (Gain) loss from investments and sales of assets, net (4,740) 3,644 1,688 1,085 27,457 Accretion of interest and amortization of debt issue costs 18,649 22,430 5,734 22,116 20,802 Non-cash charges associated with impairment of long- lived assets -- 2,083 659 1,424 18,888 Changes in assets and liabilities, excluding the effects of acquisitions and discontinued operation: Fees receivable, net 29,980 42,686 (13,748) 40,299 24,671 Deferred commissions (1,689) 15,602 1,616 9,046 11,902 Prepaid expenses and other current assets 3,829 13,790 1,129 26,069 (26,039) Other assets (937) 5,858 (673) 1,930 (2,401) Deferred revenues (4,467) (33,259) (5,683) (50,886) (35,488) Accounts payable and accrued liabilities 34,264 11,494 19,937 (7,628) 13,147 ------------------------------------------------------------------ Cash provided by operating activities 136,337 145,826 1,153 145,552 73,468 ------------------------------------------------------------------ Investing activities: Proceeds from insurance recovery 5,464 -- -- -- -- Purchases of businesses -- (3,858) -- (4,537) (12,011) Proceeds from sale of investments and assets -- 239 -- 6,264 14,437 Investments (1,960) (1,508) -- (1,508) -- Additions to property, equipment and leasehold improvements (28,928) (21,124) (5,866) (19,639) (57,546) Net proceeds from sale of discontinued operation -- -- -- -- 10,501 ------------------------------------------------------------------ Cash used in investing activities (25,424) (26,251) (5,866) (19,420) (44,619) ------------------------------------------------------------------ Financing activities: Proceeds from stock issued for stock plans 41,655 17,925 1,045 22,166 9,095 Proceeds from issuance of debt -- -- -- -- 15,000 Payments on debt -- -- -- (15,000) -- Payments for debt issuance and debt conversion costs (1,182) (238) -- (238) (5,000) Net cash settlement on forward purchase agreement -- -- -- -- (64) Purchases of treasury stock (43,434) (59,880) (13,880) (47,047) (37,893) ------------------------------------------------------------------ Cash used in financing activities (2,961) (42,193) (12,835) (40,119) (18,862) ------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 107,952 77,382 (17,548) 86,013 9,987 Cash used by discontinued operation -- -- -- -- (34,203) Effects of exchange rates on cash and cash equivalents 12,353 4,844 2,412 1,652 (354) Cash and cash equivalents, beginning of period 109,657 27,431 124,793 37,128 61,698 ------------------------------------------------------------------ Cash and cash equivalents, end of period $229,962 $ 109,657 $ 109,657 $ 124,793 $ 37,128 ================================================================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 753 $ 667 $ 159 $ 753 $ 1,589 Income taxes, net of refunds received of $744 during Calendar 2003, $17,589 during Calendar 2002 and $26,650 for Fiscal 2002 $ 12,174 $ 2,733 $ 5,105 $ (7,614) $ 14,729 Supplemental schedule of non-cash investing and financing activities: Conversion of convertible debt to shares of Class A Common Stock $364,608 $ -- $ -- $ -- $ -- Accretion of interest and debt discount on convertible debt $ 16,456 $ 20,401 $ 5,239 $ 20,100 $ 18,946See Notes to Consolidated Financial Statements.10-K.38 GARTNER, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1-SUMMARY1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
presentation.presentation. On October 30, 2002,wethe Company announced that the Board of Directors approved a changeof ourin the Company’s fiscal year end from September 30 to December 31, effective January 1, 2003. This change resulted in a three-month transitional period ending December 31, 2002. References to Transition 2002, unless otherwise indicated, refer to the three-month transitional period ended December 31, 2002. References to 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,"“Company,” “we,” “us,” or"our"“our” mean Gartner, Inc. and its subsidiaries.Principles of
consolidation.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 whichwe ownthe 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 whichwe dothe 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. Werecognition. The Company typicallyenterenters 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 isourCompany policy to record the entire amount of the contract that is billable as a fee receivable at the time the contract is signed, which represents a legally enforceable claim, and a corresponding amount as deferred revenue. For those government contracts that permit termination,we billthe Company bills the client the full amount billable under the contract but onlyrecordrecords a receivable equal to the earned portion of the contract. In addition,wethe Company onlyrecordrecords deferred revenue on these government contracts when cash is received. Deferred revenue attributable to government contracts was$38.6 million, $29.3$40.9 million and$28.9$38.6 million at December 31,2003, December 31, 2002,2004 andSeptember 30, 2002,2003, respectively. In addition, at December 31, 2004 and 2003,December 31, 2002 and September 30, 2002, wethe Company had not recognized receivables or deferred revenues relating to government contracts that permit termination of$6.6 million, $4.7$4.2 million, and$7.7$6.6 million, respectively, which had been billed but not yet collected.We recordThe Company records the commission obligation related to research contracts upon the signing of the contract andamortizeamortizes the corresponding deferred commission expense over the contract period in which the related revenues are earned.Consulting revenues, primarily derived from consulting, measurement and strategic advisory services (paid one-day analyst engagements), are based primarily on fixed fees or time and materials for discrete projects. Such revenues are recognized as work is delivered and as services are provided and are evaluated on a contract by contract basis. Unbilled fees receivables associated with consulting engagements were $27.9 million at December 31, 2004 and $24.3 million at December 31,
2003, $33.5 million at December 31, 2002, and $32.2 million at September 30, 2002.2003.Events revenues are deferred and recognized upon the completion of the related symposium, conference or exhibition. In addition,
we deferthe Company defers certain costs directly related to events andexpenseexpenses these costs in the period during which the related symposium, conference or exhibition occurs.OurThe 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 producingourCompany events, primarilyCompanypersonnel and non-event specific expenses, are expensed in the period incurred. At the end of each fiscal quarter,we assessthe 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,we recordthe Company records the expected loss in the period determined.10-K.39Other revenues includes software licensing fees which are recognized when a signed non-cancelable software license exists, delivery has occurred, collection is probable, and
ourthe 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.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. We accountsecurities. The Company accounts forourits investments in publicly traded equity securities under Statement of Financial Accounting Standards("SFAS"(“SFAS”) No. 115,"Accounting“Accounting for Certain Investments in Debt and Equity Securities."” These investments meet the criteria for classification as available for sale, givenourthe 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 marketable investments are recorded, net of tax, as a component of Accumulated other comprehensive income (loss), netwithin theStockholders'Stockholders’ equity(deficit)section of the Consolidated Balance Sheets. Realized gains and losses are recorded in Gain (loss) on investments, net within the Consolidated Statements of Operations. The cost of equity securities sold is based on specific identification.We assessThe Company assesses the need to record impairment losses on investments andrecordrecords such losses when the impairment of an investment is determined to be other than temporary in nature. In making this assessment,we considerthe Company considers the significance and duration of the decline in value and the valuation of comparable companies operating in the Internet and technology sectors. The impairment factorswe evaluatethe Company evaluates may change in subsequent periods, since the entities underlying these investments operate in a volatile business environment. In addition, these entities may require additional financing to meet their cash and operational needs; however, there can be no assurance that such funds will be available to the extent needed at terms acceptable to the entities, if at all. These impairment losses are reflected in Gain (loss) on investments, net within the Consolidated Statements of Operations.We accountThe Company accounts for investments that
we doit does 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 Note45 - Investments). The equity method is used to account for investments in entities that are not majority-owned and thatwe dothe Company does not control but over whichwe haveit has the ability to exercise significant influence.Property, equipment and leasehold
improvements.improvements. Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining term of the related leases. Property, equipment and leasehold improvements, less accumulated depreciation and amortization consist of the following (in thousands):
December 31, ---------------------------- September 30, Useful Life (Years) 2003 2002 2002 - ---------------------------------------------------------------------------------------------------------------------------Computer equipment and software 2 - 3 $ 146,700 $ 132,708 $ 128,795 Furniture and equipment 3 - 8 42,795 39,432 39,381 Leasehold improvements 2 - 15 44,871 37,703 37,510 ---------------------------------------------- 234,366 209,843 205,686 Less - accumulated depreciation and amortization (167,825) (138,837) (129,525) ---------------------------------------------- $ 66,541 $ 71,006 $ 76,161 ==============================================
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 ` At December 31,
20032004 and2002, and September 30, 2002,2003, capitalized development costs for internal use software were$13.1 million, $15.1$13.4 million and$15.6$13.1 million, respectively, net of accumulated amortization of$32.5 million, $27.9$17.4 million and$27.4$32.5 million respectively. Amortization of capitalized internal software development costs totaled $7.7 million, $10.6 million and $15.2 million (unaudited) during Calendar 2004, 2003, and 2002, respectively, $4.4 million during Transition 2002, and $15.7 millionand $14.3 millionduring Fiscal2002 and 2001, respectively.10-K.402002.Software development
costs. We capitalizecosts. 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 cease capitalization when the software product is available for general release to clients. Until these products reach technological feasibility, all costs related to development efforts are charged to expense. Once technological feasibility has been determined, additional costs incurred in development, including coding, testing, and documentation, are capitalized. Amortization of software development costs is provided on a product-by-product basis over the estimated economic life of the software, generally two years, using the straight-line method and is recorded within Depreciation. Amortization of capitalized computer software development costs begins when the products are available for general release to customers. Periodic reviews are performed to ensure that unamortized capitalized software development costs remain recoverable from future revenue. Capitalized software costs, net of accumulated amortization, were$1.1$0.3 million and$1.7$1.1 million at December 31, 2004 and 2003,and 2002, respectively and $1.7 million at September 30, 2002.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 millionand $1.0 millionin Fiscal2002 and 2001, respectively.2002.48
Intangible
assets.assets. Intangible assets are amortized using the straight-line method over their expected useful lives. Intangible assets subject to amortization included the following (in thousands):
December 31, -------------------------- September 30, Amortization Period (Years) 2003 2002 2002 - ---------------------------------------------------------------------------------------------------------Non-compete agreements: 2 - 5 Gross cost $ 13,257 $ 12,910 $ 12,829 Accumulated amortization (12,599) (11,157) (10,648) ------------------------------------------ Non-compete agreements, net 658 1,753 2,181 Trademarks and tradenames: 9 - 12 Gross cost 1,811 1,808 1,804 Accumulated amortization (1,484) (1,307) (1,254) ------------------------------------------ Trademarks and tradenames, net 327 501 550 ------------------------------------------ Intangible assets, net $ 985 $ 2,254 $ 2,731 ==========================================
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 ` Aggregate amortization expense related to intangible assets was $0.7 million, $1.3 million, and $1.9 million (unaudited) for Calendar 2004, 2003, and
Calendar2002, respectively, $0.5 million for Transition 2002, and $1.9 millionand $2.8 millionfor Fiscal2002 and 2001, respectively.2002. Estimated aggregate amortization expense for each of the next five Calendar years for intangible assets recorded in the Consolidated Balance Sheet as of December 31,20032004 is as follows (in thousands):Year ended December 31, ------------------------------------------------------------------ 2004 $710 2005 182 2006 69 2007 24 2008 -- ---- Total $985 ==== Goodwill.
Year ended December 31, 2005 $ 98 2006 37 2007 3 Total $ 138 Goodwill. Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the tangible and identifiable intangible net assets acquired. Effective October 1, 2001, the Company adopted SFAS No. 142,
"Goodwill“Goodwill and Other Intangible Assets."” The adoption of SFAS No. 142 eliminated goodwill amortization. Instead, goodwill is tested for impairment at the reporting unit level, at least annually. A reporting unit can be an operating segment or a business if discrete financial information is prepared and reviewed by management. Under the impairment test, if a reportingunit'sunit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the extent that the reportingunit'sunit’s carrying amount of goodwill exceeds the implied fair value of the goodwill. The fair value of reporting units were estimated using discounted cash flows, market multiples, and other valuation techniques.10-K.41The carrying amount of goodwill was allocated to the
Company'sCompany’s segments as follows (in thousands):December 31, ---------------------- September 30, 2003 2002 2002 - ----------------------------------------------------------------------- Research $128,896 $123,761 $122,567
December 31, 2004 2003 Research $ 131,921 $ 128,896 Consulting 67,150 68,803 Events 30,606 30,606 Other 2,082 2,082 Total goodwill $ 231,759 $ 230,387 During Calendar 2004, the Company recorded goodwill impairment charges of $2.7 million in the Consulting
68,803 67,411 67,081 Events 30,606 30,606 30,698 Other 2,082 2,082 2,081 ---------------------------------------- Total goodwill $230,387 $223,860 $222,427 ========================================segment related to certain operations in 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.The following selected pro forma information for Fiscal 2001 assumes the provisions of SFAS No. 142 had been applied at the beginning of the fiscal year (in thousands, except per share): Income (loss) from continuing operations: Reported loss from continuing operations $ (220) Add back: goodwill amortization, net of taxes 8,396 ------ Adjusted income from continuing operations $8,176 ====== Basic income (loss) per share from continuing operations: Reported basic loss per share from continuing operations $(0.00) Effect of goodwill amortization on loss per share 0.10 ------ Adjusted basic income per share from continuing operations $ 0.10 ====== Diluted income (loss) per share from continuing operations: Reported diluted loss per share from continuing operations $(0.00) Effect of goodwill amortization on loss per share 0.09 ------ Adjusted diluted income per share from continuing operations $ 0.09 ======49
Impairment of long-lived assets and intangible
assets. We reviewassets. 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 inmanagement'smanagement’s strategic direction as well as other economic and market variables.OurThe 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 reflectingourthe Company’s average cost of funds and the carrying value of the asset (see Note5 -6 — Other Charges).Foreign currency
translation.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 theStockholders'Stockholders’ equity(deficit)section of the Consolidated Balance Sheets. Income and expense items are translated at average exchange rates for the year. Currency transaction gains or losses arising from transactions denominated in currencies other than the functional currency of a subsidiary are included in results of operations within Other income (expense), net within the Consolidated Statements of Operations. Currency transaction gains (losses), net were $(3.9) million during Calendar 2004, $0.5 million during Calendar 2003, $(0.4) million (unaudited) during Calendar, 2002, $(0.1) million during Transition 2002, and $(0.8) million during Fiscal2002, and $(3.5)2002. The $(3.9) currency transaction loss in Calendar 2004 includes a foreign currency charge of $(3.1) millionduring Fiscal 2001.related to the closing of certain operations in South America.Income
taxes.taxes. Deferred tax assets and liabilities are recognized based on differences between the book and tax basis of assets and liabilities using presently enacted tax rates. The provision for income taxes is the sum of the amount of income tax paid or payable for the year as determined by applying the provisions of enacted tax laws to taxable income for that year and the net changes during the year in deferred tax assets and liabilities.Undistributed earnings of subsidiaries outside of the U.S. amounted to approximately $80 million as of December 31, 2003 and will be indefinitely reinvested. Accordingly, no material provision has been made for taxes that may be payable upon remittance of such earnings, nor is it practicable to determine the amount of any10-K.42 liability. We creditThe Company credits 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 ofourthe 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 million as of December 31, 2004, for which no deferred taxes had been previously recorded in accordance with Accounting Principles Board Opinion No. 23, “Accounting for Income Taxes - Special Areas” (“APB 23”). The Company anticipates repatriating approximately $52.0 million of this amount in early 2005. Pursuant to the American Jobs Creation Act of 2004, a deferred tax charge of $5.0 million was included in tax expense for 2004. This 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.Fair value of financial
instruments. Ourinstruments. 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.Although there were no amounts outstanding atAt December 31,
20032004, the Company had $190.0 million outstanding underaits senior revolving creditfacility, thefacility. The carrying amount ofany suchthese borrowingswould approximateapproximates fair value as theratesrate of interest on the revolving credit facilityapproximateapproximates current market rates of interest for similar instruments with comparable maturities.Concentrations of credit
risk.risk.Financial instruments that potentially subjectusthe Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable equity securities and fees receivable. Concentrations of credit risk with respect to fees receivable are limited due to the large number of clients comprising the client base and their dispersion across many different industries and geographic regions.Use of
estimates. We makeestimates. 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 inourthe Company’s preparation oftheits Consolidated Financial Statements. Actual results could differ from those estimates. Estimates are used when accounting for such items as allowance for doubtful accounts, investments, depreciation, amortization, income taxes and certain accrued liabilities.Accounting for stock-based
compensation. We havecompensation. The Company has several stock-based compensation plans.We apply Accounting Principles BoardThe Company applies APB Opinion No. 25,"Accounting“Accounting for Stock Issued toEmployees" ("Employees” (“APB25"25”) in accounting for our employee stock options and purchase rights and apply Statement of Financial Accounting Standards No. 123"Accounting“Accounting for Stock Issued toEmployees" ("Employees” (“SFAS123"123”) for disclosure purposes only. Under APB 25, the intrinsic value method is used to account for stock-based employee compensation plans. The SFAS 123 disclosures include pro forma net income and earnings per share as if the fair value-based method of accounting had been used. If compensation for employeeoptionsstock compensation had been determined based on SFAS 123,ourthe Company’s pro forma net income, and pro forma income per share would have been as follows (in thousands, except per share data):
Fiscal Calendar Transition ------------------------ 2003 2002 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------Net income (loss) as reported $ 23,693 $(14,418) $ 48,578 $ (66,203) Stock-based compensation expense included in net income (loss) 697 563 1,768 748 Pro forma employee stock-based compensation cost, net of tax (16,665) (5,814) (30,116) (40,915) --------------------------------------------------------- Pro forma income (loss) $ 7,725 $(19,669) $ 20,230 $(106,370) ========================================================= Basic income (loss) per share: As reported $ 0.26 $ (0.18) $ 0.58 $ (0.77) Pro forma $ 0.08 $ (0.24) $ 0.24 $ (1.24) ========================================================= Diluted income (loss) per share: As reported $ 0.26 $ (0.18) $ 0.47 $ (0.77) Pro forma $ 0.08 $ (0.24) $ 0.24 $ (1.24) =========================================================50
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
ourthe Company’s stock plans used to compute pro forma net income (loss) and diluted per share disclosures is the estimated fair value at grant date using the Black-Scholes option pricing model. The following weighted-average assumptions were utilized for stock options granted or modified:
Fiscal Calendar Transition ------------------------ 2003 2002 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------Expected life (in years) 3.6 3.4 3.5 3.1 Expected volatility 43% 47% 50% 65% Risk free interest rate 2.0% 2.2% 3.2% 3.2% Expected dividend yield 0.0% 0.0% 0.0% 0.0%10-K.43
Calendar Calendar Transition Fiscal 2004 2003 2002 2002 Expected life (in years) 3.8 3.6 3.4 3.5 Expected volatility 40 % 43 % 47 % 50 % Risk free interest rate 3.0 % 2.0 % 2.2 % 3.2 % Expected dividend yield 0.0 % 0.0 % 0.0 % 0.0 % The weighted average fair values of
ourthe Company’s stock options granted in Calendar 2004, Calendar 2003, Transition 2002 and Fiscal 2002and 2001are $4.20, $3.10, $2.93, and $3.67,and $3.77,respectively.Recently issued accounting
standards.standards. InJanuary 2003,December 2004, the Financial Accounting Standards Board("FASB")issued Statement of FinancialInterpretation ("FIN"Accounting Standards 123R, Share-Based Payments (“SFAS 123R”)No. 46 "Consolidation. The rule replaces SFAS 123 and APB 25 and will require the recognition ofVariable Interest Entities, an interpretationexpense for share-based payments, to include the value ofARB 51." FIN No. 46 provides guidancestock options granted to employees. The revised rule is effective for periods beginning after June 15, 2005, but early adoption is permitted. The Company plans to adopt the new rule on July 1, 2005. The Company is currently assessing the impact the revised rule will have on its financial position, cash flows, and results of operations, and believe it may have a material effect on theidentificationCompany’s results ofentities for which control is achieved through means other than through voting rights called "variable interest entities" or "VIEs" and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). This new model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties.operations.In
addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. We do not have any interests that would change its current reporting entity or require additional disclosure outlined in FIN No. 46. In AprilDecember 2003, the FASB issued SFAS No.149, "Amendment of Statement 133 on Derivative Instruments132 (Revised), “Employer’s Disclosures about Pensions andHedging Activities." This statement amendsOther Postretirement Benefits” (“SFAS 132R”). SFAS 132R requires additional disclosures relating to assets, obligations, cash flows andclarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities undernet periodic pension cost. SFASNo. 133. SFAS No. 149132R is effective forcontracts entered intofiscal years ending after December 31, 2003. The Company’s required SFAS 132R disclosure is included in Note 14 – Employee Benefits.2—ANNOUNCED ACQUISITION OF META
On December 27, 2004, the Company and META announced an agreement under which the Company will acquire META in an all-cash transaction for $10.00 per share, or
modified after June 30,approximately $162.0 million, excluding transaction costs. META is a publicly owned, premier information technology and research firm based in Stamford, Connecticut with 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. 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 Commission of early termination 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 SEC on February 17, 2005 and is scheduled to hold a special meeting of stockholders to approve the transaction on March 23, 2005. Closing of the transaction, which is subject to customary closing conditions, including approval by META’s stockholders, is expected to be effective April 1, 2005. See Note 9 – Commitments and Contingencies for additional information.51
3—CORRECTION OF SFAS 87 ACCOUNTING TREATMENT
Prior to Calendar 2004, the Company did not apply the requirements of SFAS 87 – “Employers’ Accounting for Pensions” (SFAS 87) to 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 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, the Company has restated its financial statements for
hedging relationships designated after June 30,Calendar 2003 and Fiscal 2002 tocertain preexisting contracts.record the pension expense as a correction of an error in prior periods. Theadoptioneffect ofSFAS No. 149 hadthese 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 noimpacteffect onour financial position,the previously reported liquidity or net operating cash flows for either Calendar 2003 orresults of operations.Fiscal 2002. InMay 2003,Calendar 2004, theFASB issuedCompany is recording pension expense in accordance with SFASNo. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"). SFAS 150 changes87.The following table sets forth the
accounting for certain financial instruments that under previous guidance issuers could account for as equity. It requires that those instruments be classified as liabilities in balance sheets. The guidance in SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective on July 1, 2003. The adoption of SFAS 150 had noimpacton our financial position, cash flows or results of operations. In December 2003, the Staffof theSecurities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition," which supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple-element revenue arrangements that was superseded as a resultrestatement on prior periods (in thousands, except per share data):
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 The effect of the
issuance of Emerging Issues Task Force ("EITF") 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescindsrestatement on theSEC's related "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" issued with SAB 101 that had been codified in SEC Topic 13, "Revenue Recognition." While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104, whichCompany’s previously reported annual financial statements waseffective upon issuance. The adoption of SAB 104 had no impact on our financial position, cash flows or results of operations. 2-BUSINESSnot material.4—BUSINESS ACQUISITIONS
Fiscal 2002
On June 10, 2002,wethe Company acquired the remaining 49.9% of People3, Inc., an authority on IT human capital. People3 has been integrated withourthe Company’s consulting segment. Prior to this acquisition,wethe Company owned 50.1% of People3 and consolidated its assets and liabilities and results of operations. Revenues in Fiscal 2002 were approximately $6.9 million. The purchase price was $3.9 million, of which $0.2 million was allocated to non-compete agreements, $0.3 million was allocated to database-related assets and $3.4 million was allocated to goodwill. The non-compete agreements are being amortized over the life of the agreements, three-years. The database-related assets are being amortized over their estimated useful life of five years. In December 2004, the Company decided to shutdown the operations of this non-core product line, the effects of which were immaterial.During Fiscal 2002,
wethe 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.10-K.44 Fiscal 2001 On October 2, 2000, we acquired all of5—INVESTMENTS
At December 31, 2004, the
assetsCompany’s investments in marketable equity securities andassumed the liabilities of Solista Global LLC ("Solista") for approximately $9.0 million in cash. Solista isother investments had aprovider of strategic consulting services that merge technologycost basis andbusiness expertise to help clients build strategies for the digital world. We accounted for the acquisition using the purchase method, and we allocated the purchase price to the assets acquired and the liabilities assumed, based upon estimated fair values at the date of the acquisition. The excess purchase price over thea fair value ofamounts assigned$7.0 million and are included in Other assets in the Consolidated Balance Sheet. At December 31, 2004, the Company had an unrealized gain of $0.1 million related to these investments.The Company owns 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, of which the Company owns 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
net tangible assets acquired was approximately $6.5liquidation of SI I, to include $0.8 million for the writedown ofwhich $6.0 million was allocated to goodwillthe investment and$0.5 million was allocated to non-compete agreements which were amortized over three years. During Fiscal 2001, we completed additional acquisitions for consideration of $3.0$0.7 million incash. The largestrelated shutdown charges. No charges were recorded on SI II in the fourth quarter ofthese wasCalendar 2004 related to theacquisition of an Events business for approximately $2.6 million. 3-DISCONTINUED OPERATION On July 2, 2001, we sold our subsidiary, TechRepublic, to CNET for approximately $23.5 million in cash and common stock of CNET, before reduction for certain termination benefits of $3.9 million. The gross proceeds were $14.3 million in cash and 755,058 shares of CNET common stock, which had a fair marketplanned sale since the carrying value of$12.21 per share on July 2, 2001. Our Consolidated Financial Statements have been restatedthe investment approximates its net realizable value. In the third quarter of Calendar 2004, the Company recorded a non-cash charge of $2.2 million related toreflectthedispositiontransfer ofthe TechRepublic segmentits investment in TruSecure to SI II, as well as adiscontinued operationdecrease inaccordance with APB No. 30. Accordingly, revenues, costsits ownership percentage in SI II of seven hundred basis points. As a result of this transfer andexpenses, and cash flowsthe decrease in ownership, the Company was relieved ofTechRepublic have been excluded from the respective captionsall 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
OperationsOperations. The carrying value of the Company’s investments held by SI I andConsolidated Statements of Cash Flows,SI II was zero andhave been reported through the date of disposition as "Loss from discontinued operation" and "Net cash used by discontinued operation," for all periods presented. During Fiscal 2001, we recorded a pre-tax loss of $66.4$6.7 million,($39.9 million after tax) to recognize the lossrespectively, at December 31, 2004. The investment in SI II is not presented separately on thesale. This pre-tax loss includesbalance sheet as awrite-down of $42.4 million of assets, primarily goodwill, to net realizable value, operating losses throughheld for sale asset as thedate of sale of $6.5 million, severance and related benefits of $8.3 million, and other sale-related costs and expenses, including costs associated with the closure of facilities, of $9.2 million. Summarized financial information for the discontinued operation for Fiscal 2001amount isas follows (in thousands): Statements of Operations Data ---------------------------------------------------------------- Revenues $ 12,368 ======== Loss before income taxes $(32,574) Benefit for income taxes (6,515) -------- Loss from discontinued operation, net $(26,059) ======== Loss on disposal before income taxes $(66,436) Benefit for income taxes (26,512) -------- Loss on disposal of discontinued operation, net $(39,924) ======== 4-INVESTMENTSnot material.At December 31, 2003,
ourthe Company’s investments in marketable equity securities and other investments had a cost basis and a fair value of $10.9million and are included in Other assets in the Consolidated Balance Sheet.million. Unrealized gains and losses at December 31, 2003 were individually insignificant. During Calendar 2003,wethe Company received proceeds of approximately $5.5 million, recorded as gain on investments, on insurance proceeds received associated with a negotiated settlement regarding a claim, which occurred in Fiscal 2000, arising from the sale of GartnerLearning. On September 1, 1998,wethe Company sold GartnerLearning, a division that provided technology based training and services for IT professionals, to NETg Inc.("NETg"(“NETg”), a subsidiary of Harcourt, Inc. (formerly Harcourt Brace & Company), andwethe Company recorded a pre-tax loss of approximately $2.0 million. In addition,wethe 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.The claim asserted that we had breached a contractual commitment under a joint venture agreement to co-produce a product when GartnerLearning was sold.10-K.45During Calendar 2003,
wethe Company recorded an impairment loss of $0.9 million on a minority-owned investment that is not publicly traded.WeThe Company evaluated the investment for impairment because of theinvestee'sinvestee’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,wethe Company wroteourthe investment down toour estimateestimated of fair value. The estimate of fair value was based upon a combination of valuation techniques including a discounted cash flow analysis of future projections of operating performance, market comparables and other available information.During Transition 2002,
wethe Company recognized impairment losses of $1.7 million associated withourthe Company’s investment in SIVenture Associates, LLC ("SI I"),I and SIVenture Fund II, LP ("SI II"), collectively "SI investments", described below under "SI and Other Investments - Related Party".II. During Fiscal 2002,wethe Company sold 748,118 shares of CNET for $6.0 million resulting in a pre-tax gain of $0.8million. Also during Fiscal 2002, wemillion, and recognized impairment losses related toourits SI investments of $2.5 million.During Fiscal 2001, we sold sharesThe Company’s share of
an investmentequity gains inwhich we held a minority interest for net cash proceeds of $7.5 million and a pre-tax loss of $5.6 million. In addition, we received additional stock distributions from our investment in SI Investments. During Fiscal 2001, we sold a portion of the shares received fromSI I and SI IIand other securities, for net cash proceeds of $6.9was $0.1 million fora pre-tax gain of $5.0 million. Duringboth Calendar 2004 and 2003, $0.01 million for Transition 2002, and $0.2 million for Fiscal2001, we recognized impairment losses of $26.5 million associated with our SI investments.2002.SI and Other Investments
-– Related PartyIn addition to equity securities owned directly throughThe Company owns 100% of SI I
a wholly owned affiliate, we also own 34%and 22% of SIII. Both entities are venture capital funds engaged in making investments in early to mid-stage IT-based or Internet-enabled companies.II at December 31, 2004. Both entities are managed by SI Services Company, L.L.C., an entity controlled byoura former CEO and Chairman of the Board, who continuesas an employee and Chairman Emeritusto be paid pursuant to the terms of his employment agreement with the Company, and certain ofourthe 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,we providethe Company provides access to research and the use of certain office space at no cost to SI Services Company, LLC.WeThe 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.WeThe Company made contributions to the SI investments of $2.0 million and $1.5 million during Calendar 2003 and Fiscal 2002, respectively.WeNo contributions were madeno contributionsduring Transition2002 or Fiscal 2001.2002. Of the $30.0 million commitment to SI II, $4.0 million remained unfunded at December 31,2003 and may be called by SI at any time. The carrying value2003. In the third quarter ofour investments held by SI I andCalendar 2004, the Company recorded a non-cash charge of $2.2 million related to the transfer of its investment in TruSecure to SI II,was $1.9 million and $4.8 million, respectively, at December 31, 2003. Our share of equity gainsas well as a decrease in ownership percentage in SII and SIIIwas $0.1 million for Calendar 2003, $0.01 million for Transition 2002 and $0.2 million for Fiscal 2002. For Fiscal 2001, our shareofequity losses in SI I and SI II was $0.3 million. During Transition 2002, we recognized impairment losses of $1.7 million. These impairment losses, related to equity securities owned through SI I and SI II for other than temporary declines in the value of certain investments, are reflected in Gain (loss) on investments, net in the Consolidated Statements of Operations. During Fiscal 2002, we recognized impairment losses of $2.5 million, in connection with our decision to actively pursue the sale of the investments held in the SI funds. During Fiscal 2001, we made an assessment of the carrying value of our investments and determined that the carrying value of certain investments were in excess of their fair value, based on valuations of comparable companies operating in the Internet and technology sectors.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
During the fourth quarter of Calendar 2004 the Company recorded Other charges of $11.9 million, of which $5.9 million 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, including costs of $7.7 million related to the departure of the Company’s President and COO and our former Chairman and CEO. This realignment resulted in the termination of 203 employees for the full year. The annualized savings from the termination of these
valuationsemployees should be53
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, during the fourth quarter of Calendar 2004, the Company revised its 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
the significance and duration of thea decline invalue, we recognized impairment lossesmarket lease rates for expected subleases, as well as a reduction in estimated periods of$26.5subleases. The Company also recorded a charge of $1.9 millionduring Fiscal 2001. The impairment factors we evaluated may changeinsubsequent periods, sincetheentities 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 availablefourth quarter of Calendar 2004 related to theextent needed at terms acceptablerestructuring of certain internal systems, and $1.8 million for charges related to theentities, if at all. This could result in additional material non-cash impairment charges in the future.10-K.46 5-OTHER CHARGESexit from certain international and other non-core operations.During Calendar 2003,
wethe Company recordedotherOther charges of $29.7 million. Of these charges, $20.0 million are associated withourthe 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 of 222 employees and the payment of $7.6 million during Calendar 2003.In connection with the workforce reduction announced in December 2003, we expect to incur additional severance charges during the first quarter of 2004.In addition, approximately $9.7 million of these charges relate to additional estimated costs and losses associated with excess facilities that were previously reserved for as other charges during Fiscal 2002 and Transition 2002. The increase in the estimated costs and losses on these facilities was a result of the continued decline in market rents for the associated facility, as well as changes in estimates of timing of sublease income.During Transition 2002,
wethe 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 withourthe 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% ofourthe Company’s workforce at the time, and the payment of $11.0 million of termination benefits during Calendar 2003.During Fiscal 2002,
wethe 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 withourthe 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% ofourthe Company’s workforce at the time.The remaining $1.4 million relates to the impairment of certain database-related assets. During Fiscal 2001, we recorded other charges of $46.6 million. Of these charges, $24.8 million are associated with our workforce reduction announced in April 2001. This workforce reduction resulted in the elimination of 383 positions, or approximately 8% of our workforce at the time. Approximately $14.3 million of the other charges are associated with the write-down of goodwill and other long-lived assets to net realizable value as a result of our decision to discontinue certain unprofitable products, and $7.5 million of the charge is associated primarily with the write-off of internally developed systems in connection with the launch of gartner.com and seat-based pricing.At December 31,
2003, $12.82004, $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 30,2004. We2005. 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.10-K.47The following table summarizes the activity related to the liability for the restructuring programs recorded as other charges (in thousands):
Workforce Excess Asset Reduction Facilities Impairments Costs Costs and Other Total - --------------------------------------------------------------------------------------------------Accrued liability at September 30, 2000 $ -- $ -- $ -- $ -- Charges during Fiscal 2001 24,780 -- 21,783 46,563 Non-cash charges -- -- (18,888) (18,888) Payments (18,181) -- (2,895) (21,076) ------------------------------------------------------- Accrued liability at September 30, 2001 $ 6,599 $ -- $ -- $ 6,599 Charges during Fiscal 2002 5,808 10,014 1,424 17,246 Non-cash charges (120) (2,663) (1,424) (4,207) Payments (11,629) (3,263) -- (14,892) ------------------------------------------------------- Accrued liability at September 30, 2002 $ 658 $ 4,088 $ -- $ 4,746 Charges during Transition 2002 18,899 13,267 -- 32,166 Non-cash charges (601) (659) -- (1,260) Payments (7,233) (760) -- (7,993) ------------------------------------------------------- Accrued liability at December 31, 2002 $ 11,723 $15,936 $ -- $ 27,659 Charges during Calendar 2003 20,000 9,716 -- 29,716 Non-cash charges (123) -- -- (123) Payments (18,784) (6,493) -- (25,277) ------------------------------------------------------- Accrued liability at December 31, 2003 $ 12,816 $19,159 $ -- $ 31,975 =======================================================6-ACCOUNTS
Workforce Excess Asset Reduction Facilities Impairments 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 Charges during Calendar 2003 20,000 9,716 — 29,716 Non-cash charges (123 ) — — (123 ) Payments (18,784 ) (6,493 ) — (25,277 ) Accrued liability at December 31, 2003 $ 12,816 $ 19,159 $ — $ 31,975 Charges during Calendar 2004 29,707 2,263 5,784 37,754 Non-cash charges (496 ) — (4,251 ) (4,747 ) Payments (32,759 ) (4,247 ) (35 ) (37,041 ) Accrued liability at December 31, 2004 $ 9,268 $ 17,175 $ 1,498 $ 27,941 54
7—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES AND OTHER ASSETS
Accounts payable and accrued liabilities consist of the following (in thousands):
December 31, ------------------------- September 30, 2003 2002 2002 - ------------------------------------------------------------------------------------------------------------Taxes payable $ 16,957 $ 14,612 $ 22,955 Payroll and related benefits payable 54,220 37,829 43,114 Commissions payable 19,350 15,919 14,504 Accounts payable 8,714 7,576 12,829 Severance associated with other charges (Note 5) 12,816 11,723 658 Excess facilities costs associated with other charges (Note 5) 19,159 15,936 4,088 Other accrued liabilities 44,393 31,072 25,821 ------------------------------------------ Total accounts payable and accrued liabilities $175,609 $134,667 $123,969 ==========================================7-DEBT We maintain
December 31, 2004 2003 Taxes payable $ 20,337 $ 16,957 Payroll and related benefits payable 58,433 54,220 Commissions payable 23,337 19,350 Accounts payable 12,706 8,714 Severance associated with other charges (Note 6) 9,268 12,816 Excess facilities costs associated with other charges (Note 6) 17,175 19,159 Other accrued liabilities 40,246 49,216 Total accounts payable and accrued liabilities $ 181,502 $ 180,432 Other assets consist of the following (in thousands):
December 31, 2004 2003 Security deposits $ 1,488 $ 1,333 Investment in unconsolidated subsidiaries 7,002 10,864 Non-current deferred tax assets 43,055 38,431 Benefit plan related assets 17,373 14,098 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 8—DEBT
The Company has an unsecured Credit Agreement with JPMorgan Chase Bank, as administrative agent for the participating financial institutions thereunder, providing for a maximum of
$200$200.0 million of borrowings under a senior term A facility, and a five year, $100.0 million revolving credit facility. During the third quarter 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, there was $190.0 million outstanding on the term loan facility and $3.5 million of letters of credit outstanding under the revolving credit facility.The facilities bear interest equal 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 payable in equal quarterly installments over a five year period ending August 12, 2009. The credit facilities are subject to mandatory prepayments from a portion of proceeds from 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
expires on July 16, 2004, with any borrowings under such facility maturing on that date,not subject tocertain customary conditions on the dateletters ofany such loan. We had no amounts outstanding at December 31, 2003 and 2002, and September 30, 2002. We paycredit. The Company paid a commitment fee of 0.30% to 0.50% on the unused revolving credit amount.Pursuant to certain financial covenants ofDuring Calendar 2004, therevolving credit facility, we had $184 million of available borrowings at December 31, 2003. These covenants are primarily based on financial results and other measures such as contract value. During Fiscal 2002, the weighted averageweighted-average interest rate on the borrowings, which were only outstanding duringOctoberthe third andNovemberfourth quarter, was 3.28%.Subsequent to December 31, 2004, the Company entered into an amendment of
2001, was 3.6%.the 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.On April 17, 2000,
wethe Company issued, in a private placement transaction, $300.0 million of 6% convertible subordinated notes (the"convertible notes"“convertible notes”) to Silver Lake Partners, L.P.("(“SilverLake"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 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'stockholders’ equity. Additionally, certain costs directly associated with the conversion, such as regulatory filing, banking and legal fees, totaling $0.6 million, were charged to equity.10-K.48As part of the original private placement transaction, two Silver Lake representatives were elected to our ten-member Board of Directors.
WeThe 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.We issueThe Company issues letters of credit in the ordinary course of business. At December 31,
2003, we2004, the Company had outstanding letters of credit with JPMorgan Chase Bank for$3.4$3.5 million.9—COMMITMENTS AND CONTINGENCIES
On 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
Bank of New York for $2.0 million and with others for $0.9 million. 8-COMMITMENTS AND CONTINGENCIES We leaseCompany leases various facilities, furniture and computer equipment under operating lease arrangements expiring between20042005 and 2025. Future minimum annual payments under non-cancelable operating lease agreements at December 31,20032004 are as follows (in thousands):Year ended December 31, ----------------------------------------------------------------- 2004 $ 29,026 2005 25,513 2006 20,234 2007 18,655 2008 16,862 Thereafter 102,515 -------- Total minimum lease payments $212,805 ========
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
and $26.9 millionfortheFiscal2002 and 2001, respectively. We2002. The Company alsohavehas commitments for office services, such as printing, copying, shipping and mail services, which expire at various dates in2005 and 2006.2005. The minimum obligation under these agreements is approximately$5.7$1.8 million in the aggregate.We areThe Company is involved in legal proceedings and litigation arising in the ordinary course of business.
We believeThe Company believes the outcome of all current proceedings, claims and litigation will not have a material effect onourthe Company’s financial position or results of operations when resolved in a future period.We haveThe Company has various agreements that may obligate
usit 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 whichweit customarilyagreeagrees 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 ofourthe Company’s obligations and the unique facts of each particular agreement. Historically, payments made byusthe Company under these agreements have not been material. As of December 31,2003, we were2004, the Company was not aware of any indemnification agreements that would require material payments.9-STOCKHOLDERS'10—STOCKHOLDERS’ EQUITY
(DEFICIT)Capital
stock.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 equivalent56
percentage of Class A Common Stock.
10-K.49In 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
ourthe 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 31, 2000 77,484,237 23,740,562 40,689,648 8,129,732 Issuances under stock plans 589,632 (772,285) -- -- Purchases for treasury -- 2,980,512 -- 12,088 Settlement of forward purchase agreement -- 672,365 -- -- Forfeitures of restricted stock (64,592) -- -- -- - ------------------------------------------------------------------------------------------------------------- Balance at September 30, 2001 78,009,277 26,621,154 40,689,648 8,141,820 Issuances under stock plans 1,989,240 (563,829) -- -- Purchases for treasury -- 2,153,400 -- 2,311,700 Forfeitures of restricted stock (11,836) -- -- -- - ------------------------------------------------------------------------------------------------------------- Balance at September 30, 2002 79,986,681 28,210,725 40,689,648 10,453,520 Issuances under stock plans 124,847 (15,399) -- -- Purchases for treasury -- 963,117 -- 453,600 Forfeitures of restricted stock (5,508) -- -- -- - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 80,106,020 29,158,443 40,689,648 10,907,120 Issuances under stock plans 4,037,656 (784,916) -- -- Purchases for treasury -- 3,435,161 -- 1,549,485 Issuance of shares upon conversion of debt 18,302,271 (31,138,851) -- -- Forfeitures of restricted stock (9,847) -- -- -- - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 102,436,100 669,837 40,689,648 12,456,605 =============================================================================================================
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.program. In July 2001,ourthe Company’s Board of Directors approved the repurchase of up to $75 million of Class A and Class B Common Stock.OurThe Board of Directorshassubsequently increased the authorized stock repurchase program to a total authorization for repurchase of $200 million. On a cumulative basis at December 31,2003, we have2004, the Company has purchased$127.1$133.2 million of our stock under this stock repurchase program.Forward purchase agreements. Beginning in 1997,In connection with theCompany entered into a seriestender offer, the Board offorward purchase agreements to effect the repurchase of 1,800,000 of its Class A Common Stock. These agreements were settled quarterly at the Company's option on a net basis in either shares of its own Class A Common Stock or cash. To the extent that the market price of the Company's Class A Common Stock on a settlement date is higher (lower) than the forward purchase price, the net differential is received (paid) by the Company. During Fiscal 2001, two settlements resulted in the Company delivering 491,789 shares of Class A Common Stock and paying approximately $64,000 in cash. During June 2001, the CompanyDirectors terminated theforward purchase agreement by reacquiring 1,164,154 shares of Class A Common Stock for approximately $9.7 million. There were no forward purchase agreements outstanding at December 31, 2003. 10-STOCKstock 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. Under our stock optionplanswe grant.The Company grants stock options to employees that allow them to purchase shares ofourClass A Common Stock.We grant theseThese options are granted as an incentive for employees to contribute toourthe Company’s long-term success.WeOptions are alsogrant optionsgranted to members ofourthe Board of Directors and certain consultants. Generally,we issuestock 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.Our optionsOptions generally expire ten years from the grant date. At December 31,2003, 7.52004, 3.4 million shares of Class A Common Stock were authorized for grants ofoptions.options or restricted stock under the 2003 Long Term Incentive Plan.In February 2003,
ourthe Company’s stockholders approved the 2003 Long-Term Incentive Plan("(“2003Plan"Plan”) which replacedourits 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"“Previous Plans”). Under the 2003 Plan, 9,928,000 shares of Class A Common Stock were initially available for grant. Upon approval of the 2003 Plan, no further grants or awards were allowable under the Previous Plans. However, any outstanding options or awards under the Previous Plans remain outstanding until the earlier of their exercise, forfeiture, or expiry date.10-K.50A summary of stock option activity under the plans and agreement through December 31,
20032004 follows:Class A Common Stock ------------------------------ Weighted Under Average Option Exercise Price - ----------------------------------------------------------------------- Outstanding at September 30, 2000 30,566,726 $14.67 Granted 10,339,620 $ 8.21 Exercised (592,832) $ 6.16 Canceled (5,330,390) $13.86 ------------------------------ Outstanding at September 30, 2001 34,983,124 $13.03 Granted 5,629,441 $ 9.42 Exercised (1,989,049) $ 8.92 Canceled (4,617,199) $14.12 ------------------------------ Outstanding at September 30, 2002 34,006,317 $12.52 Granted 3,601,127 $ 8.13 Exercised (131,343) $ 7.91 Canceled (1,012,162) $12.86 ------------------------------ Outstanding at December 31, 2002 36,463,939 $12.10 Granted 2,598,070 $ 9.03 Exercised (4,278,704) $ 8.82 Canceled (3,257,098) $12.82 ------------------------------ Outstanding at December 31, 2003 31,526,207 $12.21 ==============================
Class A Common Stock Weighted Under Average 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 Granted 2,598,070 $ 9.03 Exercised (4,278,704 ) $ 8.82 Canceled (3,257,098 ) $ 12.82 Outstanding at December 31, 2003 31,526,207 $ 12.21 Granted 5,144,399 $ 12.21 Exercised (7,363,604 ) $ 8.65 Canceled (4,167,369 ) $ 14.23 Outstanding at December 31, 2004 25,139,633 $ 12.92 Options for the purchase of
23.1 million, 21.917.8 million and17.623.1 million shares of Class A Common Stock were exercisable at December 31, 2004 and 2003,and 2002, and September 30, 2002,respectively.The following table summarizes information about stock options outstanding at December 31,
2003:2004:
Outstanding Exercisable ----------------------------- ----------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - --------------------------------------------------------------------------------------------------$ 1.00 - $ 7.95 6,698,168 7.09 $ 7.38 4,486,697 $ 7.50 $ 7.96 - $ 9.10 6,209,139 8.10 $ 8.88 3,102,138 $ 8.91 $ 9.23 - $10.31 6,330,934 6.19 $10.17 5,853,378 $10.23 $10.48 - $16.96 5,752,689 6.72 $13.96 4,582,581 $14.46 $17.44 - $22.71 6,131,617 4.52 $20.23 4,698,617 $19.94 $23.90 - $34.06 403,660 3.27 $29.01 403,660 $29.01 -------------------------------------------------------------------------- 31,526,207 6.49 $12.21 23,127,071 $12.66 ==========================================================================58
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.plans. In January 1993, the Company adopted an employee stock purchase plan, and reserved an aggregate of 4,000,000 shares of Class A Common Stock for issuance under this plan. The 1993 plan expired during 2003. In March 2002, shareholders approved the 2002 Employee Stock Purchase Plan with substantially identical terms. Eligible employees are permitted to purchase Class A Common Stock through payroll deductions, which may not exceed 10% of anemployee'semployee’s compensation (or $21,250 in any calendar year), at a price equal to 85% of the Class A Common Stock price as reported by the NYSE at the beginning or end of each offering period, whichever is lower. No shares were issued during Transition 2002. During Calendar 2004, Calendar 2003 and Fiscal 2002,551,388443,959, 544,883, and560,861551,109 shares were issued from treasury stock at an average purchase price of$7.25$9.33, $7.24, and$7.90$7.86 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, 2004 and 2003,wethe Company had 2.7 million and 3.2 million shares, respectively, available for purchase under this plan.Restricted stock
awards.awards.Beginning in 1998,we grantedthe Company awarded restricted stockawardsunder 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 thegrantaward and then annually thereafter for five years.RecipientsIn 2004, the Company made two awards of restricted stock of 33,000 shares with market values of $11.96 and $12.78, respectively, on the date of grant under the 2003 Plan in which the restrictions lapse over three years. An additional award of 175,000 shares under the 2003 Plan (which was forfeited in 2004), and an inducement award of 500,000 shares to the Company’s new CEO were subject to performance based vesting. Except for the awards with performance based vesting, awardees are not required to provide consideration to the Company other than rendering service and have the right to vote the shares and to receive dividends. Therestricted stockemployee may notbe sold bysell theemployeerestricted stock during the vesting period. In 1999,wethe Company alsoawardedgranted 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 aweighted10-K.51 averageweighted-average fair market value of $22.81 per stock option on the date of grant.WeThe Company had a total of 602,236 and 99,024 restricted shares of Class A Common Stock outstanding at December 31,
2003. There were 155,9932004 and178,167 restricted shares of Class A Common Stock outstanding at December 31, 2002 and September 30, 2002,2003, respectively. There were no awards of restricted stock during Calendar2003, Transition 2002, or Fiscal 2002 or 2001.2003. At December 31,2003,2004, the aggregate unamortized compensation expense for restricted stock awards and the $1 stock option grants was$1.8$7.6 million and is included as Unearned compensation, net in the Consolidated BalanceSheets.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 million, $0.9 million, $0.3 million, $1.3 million,and $1.1 millionfor Calendar 2004, Calendar 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
2001, respectively. 11-COMPUTATION$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—COMPUTATION OF EARNINGS (LOSS) PER SHAREFROM CONTINUING OPERATIONSBasic earnings per share
("EPS"(“EPS”) is computed by dividing net income (loss)from continuing operationsby the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in earnings. When the exercise of stock options or conversion of convertible debt is antidilutive they are excluded from the calculation.The following table sets forth the reconciliation of the basic and diluted earnings per share computations (in thousands, except per share).
Calendar Fiscal ----------------------- Transition -------------------- 2003 2002 2002 2002 2001 ------------------------------------------------------------- UnauditedNumerator: Income (loss) from continuing operations $23,693 $15,117 $(14,418) $ 48,578 $ (220) After-tax interest on convertible long-term debt -- -- -- 12,380 -- ------------------------------------------------------------- Income (loss) used for calculating diluted EPS $23,693 $15,117 $(14,418) $ 60,958 $ (220) ============================================================= Denominator: Weighted average number of common shares used in the calculation of basic income per share 91,123 83,329 81,379 83,586 85,862 Common stock equivalents associated with stock compensation plans 1,456 1,711 -- 1,976 -- Weighted average shares associated with convertible debt -- -- -- 45,320 -- ------------------------------------------------------------- Shares used in the calculation of diluted income per share 92,579 85,040 81,379 130,882 85,862 ============================================================= Income (loss) per share from continuing operations: Basic $ 0.26 $ 0.18 $ (0.18) $ 0.58 $ (0.00) ============================================================= Diluted $ 0.26 $ 0.18 $ (0.18) $ 0.47 $ (0.00) =============================================================59
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 The Company repurchased a significant number of its Class A and Class B Common Stock outstanding in Calendar 2004. During the first half of Calendar 2004, the Company repurchased 413,225 shares of its Class A Common Stock and 114,600 shares of its Class B Common Stock at an aggregate cost of $6.1 million under its Stock Repurchase Program. During the third quarter of 2004, the Company completed its “Dutch Auction Tender Offer” in which it repurchased 11,339,019 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 purchases was $346.2 million including transaction costs of $3.8 million. In conjunction with the tender offer, the Board of Directors terminated the Stock Repurchase Program during June 2004.
The following table presents the number of options to purchase shares (in millions) of Class A Common Stock that were not included in the computation of diluted EPS because the effect would have been antidilutive. During periods with reported income, these options were antidilutive because their exercise prices were greater than the average market value of a share of Class A Common Stock during the period. During periods with reported loss, all options outstanding had an antidilutive effect.
Calendar Transition Fiscal 2004 2003 2002 2002 2002 (Unaudited) Antidilutive options (in millions) 12.3 19.9 21.4 36.5 14.5 Average market price per share of Class A Common
Stock during periods with reported income$ 12.03 $ 9.49 $ 10.25 — $ 10.57 For Calendar 2004, 2003, and 2002, Transition 2002, and Fiscal
----------------------- Transition -------------------- 20032002,2002 2002 2001 ------------------------------------------------------------- UnauditedAntidilutive options (in millions) 19.9 21.4 36.5 14.5 35.0 Average market price per share of Class A Common Stock during periods with reported income $9.49 $10.25 -- $10.57 --For all periods shown,unvested restricted stock awards were not included in the computation of diluted income (loss) per share because the effect would have been antidilutive. Additionally, convertible notes forthe periods outstanding, duringCalendar 2003, Calendar 2002 and2002,Transition 2002and Fiscal 2001were not included in the EPS calculation using the"as“as ifconverted"converted” method because the effect would have been antidilutive.10-K.52The following table provides information on the after-tax interest expense that was not added back to the numerator of the EPS calculation and the weighted average number of shares associated with the convertible debt that was not included in the denominator of the EPS calculation because the effect would have been antidilutive (in thousands):
Calendar Transition Fiscal Fiscal 2003 2002 2002 2002 2001 ---------- --------------- ------------ -------- ----------(Unaudited) After-tax interest on convertible long-term debt $10,147 $12,566 $ 3,227 N/A $11,667 Weighted average shares associated with convertible debt 37,035 45,995 47,021 N/A 30,53412-INCOME
Calendar Transition Fiscal 2004 2003 2002 2002 2002 (Unaudited) After-tax interest on convertible long-term debt $ — $ 10,147 $ 12,566 $ 3,227 N/A Weighted average shares associated with convertible debt — 37,035 45,995 47,021 N/A 60
13—INCOME TAXES
Following is a summary of the components of income (loss) before
provision (benefit) forincome taxesloss from discontinued operation(in thousands):
Fiscal Calendar Transition ------------------------- 2003 2002 2002 2001 ----------------------------------------------------------U.S. $(2,972) $(18,357) $35,330 $(132,522) Non-U.S. 38,528 (1,665) 38,273 24,120 ---------------------------------------------------------- Total 35,556 (20,022) 73,603 (108,402) Loss from discontinued operation -- -- -- 99,010 ---------------------------------------------------------- Income (loss) from continuing operations before income taxes $35,556 $(20,022) $73,603 $ (9,392) ==========================================================
Calendar Calendar Transition Fiscal 2004 2003 2002 2002 U.S. $ 8,622 $ (2,972 ) $ (18,357 ) $ 35,330 Non-U.S. 25,840 38,400 (1,665 ) 38,081 Income (loss) before income taxes $ 34,462 $ 35,428 $ (20,022 ) $ 73,411 The provision (benefit) for income taxes on the above income (loss) consists of the following components (in thousands):
Fiscal Calendar Transition ------------------------- 2003 2002 2002 2001 ----------------------------------------------------------Current tax expense from operations: U.S. federal $ (576) $ 276 $ 5,591 $ 9,192 State and local 1,623 507 1,361 4,862 Foreign 11,453 1,194 11,649 10,258 ---------------------------------------------------------- Total current 12,500 1,977 18,601 24,312 Deferred tax (benefit) expense: U.S. federal (942) (5,774) 3,330 (29,355) State and local (788) (956) 911 (4,782) Foreign (2,837) (653) (175) (836) ---------------------------------------------------------- Total deferred (4,567) (7,383) 4,066 (34,973) ---------------------------------------------------------- Total current and deferred 7,933 (5,406) 22,667 (10,661) Benefit from stock transactions with employees 3,930 (198) 2,280 1,331 Benefit from acquired tax benefits applied to reduce goodwill -- -- 78 158 ---------------------------------------------------------- Income tax expense (benefit) on continuing operations 11,863 (5,604) 25,025 (9,172) Current taxes from loss on discontinued operation: U.S. federal -- -- -- (33,522) State and local -- -- -- (1,585) Deferred tax expense from loss on discontinued operation: U.S. federal -- -- -- 137 State and local -- -- -- 178 Benefit from acquired tax benefits applied to reduce goodwill -- -- -- 1,765 ---------------------------------------------------------- Provision (benefit) for income taxes $11,863 $(5,604) $25,025 $(42,199) ==========================================================
Calendar Calendar Transition Fiscal 2004 2003 2002 2002 Current tax expense from operations: U.S. federal $ 5,137 $ (576 ) $ 276 $ 5,591 State and local 1,812 1,623 507 1,361 Foreign 10,076 11,453 1,194 11,649 Total current 17,025 12,500 1,977 18,601 Deferred tax (benefit) expense: U.S. federal (4,405 ) (942 ) (5,774 ) 3,330 State and local (2,659 ) (788 ) (956 ) 911 Foreign (2,392 ) (2,861 ) (652 ) (212 ) Total deferred (9,456 ) (4,591 ) (7,382 ) 4,029 Total current and deferred 7,569 7,909 (5,405 ) 22,630 Benefit from stock transactions with employees 10,004 3,930 (199 ) 2,280 Benefit from acquired tax benefits applied to reduce goodwil — — — 78 Provision (benefit) for income taxes $ 17,573 $ 11,839 $ (5,604 ) $ 24,988 Current and long-term deferred tax assets and liabilities are comprised of the following (in thousands):
December 31, ------------------------- September 30, 2003 2002 2002 -----------------------------------------Depreciation and amortization $ 7,002 $ 6,800 $ 6,988 Expense accruals for book purposes 31,231 25,259 21,717 Loss and credit carryforwards 41,821 37,923 32,947 Intangible assets 376 1,835 - Equity interest -- -- 98 Other 2,037 2,047 3,183 ----------------------------------------- Gross deferred tax asset 82,467 73,864 64,933 Intangible assets -- -- (1,000) ----------------------------------------- Gross deferred tax liability -- -- (1,000) Valuation allowance (35,863) (32,250) (29,156) ----------------------------------------- Net deferred tax asset $ 46,604 $ 41,614 $ 34,777 =========================================10-K.53
December 31, 2004 2003 Depreciation and amortization $ 5,483 $ 7,002 Expense accruals for book purposes 40,816 33,814 Loss and credit carryforwards 60,590 41,821 Intangible assets — 376 Other 1,874 2,037 Gross deferred tax asset 108,763 85,050 Repatriation of foreign earnings (5,047 ) — Intangible assets (2,037 ) — Prepaid expenses (4,202 ) (2,429 ) Gross deferred tax liability (11,286 ) (2,429 ) Valuation allowance (41,008 ) (35,863 ) Net deferred tax asset $ 56,469 $ 46,758 Current and long-term net deferred tax assets were
$8.9$13.4 million and$37.7$43.1 million as of December 31,2003, $6.02004, and $8.9 million and$35.6$37.9 million as of December 31,2002, and $3.7 million and $31.1 million as of September 30, 2002,2003, 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 and capital loss carryforwards that more likely than not will expire unutilized. The net increase in the valuation allowance of approximately
$3.6$5.1 million in Calendar20032004 was primarily due to increases in foreign net operating losses, state and local net operating losses, and federal capital losses. Approximately$1.9$2.6 million of the valuation allowance will reduce additional paid-in-capital upon subsequent recognition of any related tax benefits related to stock options.61
The differences between the U.S. federal statutory income tax rate and the
Company'sCompany’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 % The higher effective tax rate in Calendar 2004 is primarily attributable to repatriation charges offset by foreign tax credits and non-deductible book write-offs of currency translation and goodwill. The Company took a $5.0 million deferred tax charge in anticipation of repatriating approximately $52.0 million in earnings from
continuing operations are:the Company’s non US subsidiaries in 2005. The anticipated repatriation qualifies for a one-time reduced tax rate pursuant to the American Jobs Creation Act of 2004. This 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 release of valuation allowance on prior year foreign tax credits that will be used to offset foreign source income including the repatriated amounts. The Company also recorded charges in Calendar 2004 to write-off certain goodwill and currency translation adjustments. These charges are not deductible for tax purposes. The impact of these items increased tax expense by approximately $1.3 million.
Fiscal Calendar Transition ------------------------ 2003 2002 2002 2001 --------------------------------------------------Statutory tax rate 35.0% (35.0%) 35.0% (35.0%) State income taxes, net of federal benefit 2.6 (2.9) 2.4 3.6 Foreign income taxed at a different rate (11.4) 5.6 (1.8) 13.2 Non-deductible goodwill -- -- -- 18.1 Non-taxable income (0.8) (0.3) (0.2) (0.3) Exempt foreign trading gross receipts -- -- (0.4) (13.5) Non-deductible meals and entertainment 1.7 0.6 0.6 5.6 Officers' life insurance 0.1 0.5 0.5 12.7 Valuation allowance on losses from minority-owned investments 0.9 3.0 0.5 88.5 Valuation allowance on (utilization of) foreign tax credits 2.5 -- (1.5) (185.1) Other items 2.8 0.5 (1.1) (5.5) ------------------------------------------------- Effective tax rate 33.4% (28.0%) 34.0% (97.7%) =================================================As of December 31,
2003, we2004, the Company had U.S. federal capital loss carryforwards of$24.3$26.4 million, of which $19.2 million will expire inthree years,one year, $3.6 million will expirewithin fourin two years, andthe remaining $1.5$3.6 million will expire in fiveto six years,years; foreign tax credit carryforwards of$8.8$12.7 million, of which $9.7 million will expire inthree to foursix years, andotherthe 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.WeThe Company had a federal net operating loss carryforward of$6.7$28.9 million, the majority of which will expire in1920 years, state and local tax net operating loss carryforwards of$172.5$250.2 million, of which$43.5$76.2 million will expire within one to five years,$28.2$40.2 million will expire within six to fifteen years, and$100.8$133.8 million will expire within sixteen to twenty years.WeThe Company also had$73.8$76.8 million in state and local capital loss carryforwards, of which $69.6 million will expirein three years,as of December 31, 2004, $3.6 million will expire infour yearsCalendar 2005 and the remaining$0.6$3.6 million will expire infive to six years.Calendar 2008. Lastly,wethe Company had foreign tax loss carryforwards of$14.2$19.1 million of which$4.2$7.3 million will expire in one to ten years and$10.0$11.8 million that can be carried forward indefinitely.13-EMPLOYEE14—EMPLOYEE BENEFITS
We haveSavings and investment plan.The Company has a savings and investment plan covering substantially all domestic employees.
We contribute amounts to this planCompany contributions are based upon the level oftheemployee contributions. In addition,wethe Company alsocontributecontributes fixed and discretionary profit sharing contributions set by the Board of Directors. Amounts expensed in connection with the plan totaled $9.5 million, $9.3 million, $1.9 million, and $9.5 millionand $10.5 millionfor Calendar 2004, Calendar 2003, Transition 2002, and for Fiscal 2002,and 2001,respectively.Deferred compensation employee stock trust.
We haveThe 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 byus.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$11.6 million, $9.3$13.4 million and$8.1$11.6 million at December 31,2003, December 31, 20022004 andSeptember 30, 2002,2003, respectively, and are included in Other assets. The corresponding deferred compensation liability of$13.4 million, $10.8$15.7 million and$9.6$13.4 million at December 31,2003, December 31, 20022004 andSeptember 30, 2002,2003, respectively, is recorded atthefair market value,of the assets held in a rabbi trustand 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 million, $0.3 million, $0.1 million, and $0.6 million, for Calendar 2004, Calendar 2003, Transition 2002 and Fiscal 2002,respectively,respectively.62
Defined benefit pension plan.The Company has a defined-benefit pension plan in one of its international locations. The plan is statutory in nature, covers approximately 85 individuals, and is accounted for in accordance with the requirements of SFAS 87. Benefits paid under the plan are based on years of service and employee compensation and employees vest 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. The Company pays an annual insurance premium for this coverage. In accordance with the requirements of SFAS 87, the reinsurance contract does not qualify as
compareda plan asset since it is maintained outside of the plan.The following are the components of net periodic pension expense:
Calendar Fiscal 2004 2003 2002 Service cost $ 1,024 $ 843 $ 488 Interest cost 280 187 90 Amortization of gain (loss) 78 — — Net periodic pension cost $ 1,382 $ 1,030 $ 578 The following table provides information related to
$0.1 millionchanges in the projected benefit obligation:
December 31, 2004 2003 2002 Projected benefit obligation at beginning of year $ 4,800 $ 2,241 $ 1,397 Service cost 1,024 843 488 Interest cost 280 187 90 Actuarial gain (loss) 1,738 1,016 22 Foreign currency impact 458 513 106 Projected benefit obligation at end of year $ 8,300 $ 4,800 $ 2,103 The following table provides information related to changes in the funded status of
income for Fiscal 2001.10-K.54 14-SEGMENTthe plan:
December 31, 2004 2003 2002 Funded status $ 8,300 $ 4,800 $ 2,103 Unrecognized net loss (2,859 ) (1,077 ) (23 ) Net amount recognized $ 5,442 $ 3,723 $ 2,080 Amounts recognized in the balance sheet consists of: Accrued pension benefit - other liabilities $ 5,442 $ 3,723 $ 2,080 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 % Assumptions used in the computation of the benefit obligation are as follows:
Calendar Fiscal 2004 2003 2002 Weighted-average discount rate 4.50 % 5.50 % 6.00 % Average compensation increase 3.50 % 3.50 % 3.50 % 63
15—SEGMENT INFORMATION
We manage ourThe 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.
We evaluateThe 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 selling, general and administrative expenses, depreciation, amortization of intangibles and other charges. The accounting policies used by the reportable segments are the same as those used by the Company.
We earnThe Company earns 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
ourthe Company’s consolidated revenues. Additionally, no single client accounted for 10% or more of total revenue and the loss of a single client, inmanagement'smanagement’s opinion, would not have a material adverse effect on revenues.We doThe Company does not identify or allocate assets, including capital expenditures, by operating segment. Accordingly, assets are not being reported by segment because the information is not available by segment and is not reviewed in the evaluation of performance or making decisions in the allocation of resources.
The following tables present information about reportable segments (in thousands). The
"Other"“Other” column includes certain revenues and corporate and other expenses (primarily selling, general and administrative) unallocated to reportable segments, expenses allocated to operations that do not meet the segment reporting quantitative threshold, and other charges. There are no intersegment revenues:
Research Consulting Events Other Consolidated -------------------------------------------------------------------Calendar 2003 Revenues $466,907 $258,628 $119,355 $13,556 $ 858,446 Gross Contribution 292,874 86,778 56,004 10,081 445,737 Corporate and other expenses (398,276) --------- Operating income $ 47,461 ========= Calendar 2002 (unaudited) Revenues $486,967 $276,059 $109,694 $14,873 $ 887,593 Gross Contribution 318,709 102,780 56,101 10,184 487,774 Corporate and other expenses (438,232) --------- Operating income $ 49,542 ========= Transition 2002 Revenues $120,038 $ 58,098 $ 47,169 $ 4,509 $ 229,814 Gross Contribution $ 76,932 $ 18,883 $ 27,622 $ 3,640 127,077 Corporate and other expenses (139,963) --------- Operating income $ (12,886) ========= Fiscal 2002 Revenues $496,403 $273,692 $121,991 $15,088 $ 907,174 Gross Contribution 326,345 97,924 65,405 9,316 498,990 Corporate and other expenses (402,615) --------- Operating income $ 96,375 ========= Fiscal 2001 Revenues $535,114 $276,292 $132,684 $18,794 $ 962,884 Gross Contribution 352,574 86,949 63,625 4,227 507,375 Corporate and other expenses (464,861) --------- Operating income $ 42,514 =========Our
Research Consulting Events Other Consolidated Calendar 2004Revenues $ 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 Calendar 2003Revenues $ 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 2002Revenues $ 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 2002Revenues $ 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 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.
We define "OtherThe Company defines “Other InternationalRevenues"Revenues” as revenues attributable to all areas located outside of the United States, Canada and Europe. Most ofourthe Company’s 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 preciselyourthe Company’s 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.
10-K.55Summarized information by geographic location is as follows (in thousands):
Calendar Transition Fiscal 2004 2003 2002 2002 2002 (Unaudited) Revenues: United States and Canada $ 559,416 $ 535,694 $ 576,491 $ 148,585 $ 595,331 Europe, Middle East and Africa 262,953 252,264 241,322 62,412 242,099 Other International 71,452 70,488 69,780 18,817 69,744 Total revenues $ 893,821 $ 858,446 $ 887,593 $ 229,814 $ 907,174 Long-lived assets: United States and Canada $ 74,200 $ 67,081 $ 74,298 �� $ 74,298 $ 78,920 Europe, Middle East and Africa 13,877 16,400 17,496 17,496 17,808 Other International 3,316 3,793 3,925 3,925 4,113 Total long-lived assets $ 91,393 $ 87,274 $ 95,719 $ 95,719 $ 100,841 Long-lived assets consists of property and equipment, certain security deposits, and certain other long-term assets.
15—VALUATION AND QUALIFYING ACCOUNTS
The following table provides information regarding the Company’s allowance for doubtful accounts and returns and allowances, in thousands:
Additions Charged As a As a (Subtractions % of Additions % of Balance at Credited) Year- Charged Deductions Year- Balance Beginning to Costs and End to Other from End at End of Year Expenses Amount Accounts (1) Reserve Amount 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 Calendar 2004:Allowance for doubtful accounts and returns and allowances $ 9,000 $ (3,700 ) (44 )% $ 13,283 $ 10,133 120 % $ 8,450
Calendar Fiscal ----------------------------- Transition ------------------------ 2003 2002 2002 2002 2001 -----------------------------------------------------------------------Revenues: (Unaudited) United States and Canada $535,694 $576,491 $148,585 $595,331 $641,877 Europe, Middle East and Africa 252,264 241,322 62,412 242,099 249,953 Other International 70,488 69,780 18,817 69,744 71,054 ----------------------------------------------------------------------- Total revenues $858,446 $887,593 $229,814 $907,174 $962,884 ======================================================================= Long-lived assets: United States and Canada $ 67,081 $ 74,298 $ 74,298 $ 78,920 $ 98,931 Europe, Middle East and Africa 16,400 17,496 17,496 17,808 21,732 Other International 3,793 3,925 3,925 4,113 5,096 ----------------------------------------------------------------------- Total long-lived assets $ 87,274 $ 95,719 $ 95,719 $100,841 $125,759 =======================================================================15-QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share data)
Calendar 2003 First Second Third Fourth(5) - ----------------------------------------------------------------------------------------------------Revenues $204,282 $213,318 $196,904 $243,942 Operating income (loss)(1) 2,789 19,846 13,991 10,835 Net (loss) income (2) (1,512) 12,854 5,474 6,877 Net (loss) income per share: Basic $ (0.02) $ 0.16 $ 0.07 $ 0.05 Diluted (4) (0.02) 0.13 0.07 0.05Fiscal 2002 First Second Third Fourth - ----------------------------------------------------------------------------------------------------Revenues $249,395 $201,095 $236,157 $220,527 Operating income (loss) (1) 33,947 (1,371) 34,678 29,121 Net income (loss) (2) 19,043 (4,316) 18,255 15,596 Net income (loss) per share: Basic (3) $ 0.23 $ (0.05) $ 0.22 $ 0.19 Diluted (4) 0.17 (0.05) 0.16 0.15Amounts charged to revenues. (1) Includes other charges of $5.4 million in the first quarter of Calendar 2003, $24.3 million in the fourth quarter of Calendar 2003, and $17.2 million in the second quarter of Fiscal 2002. (2) Includes gains (losses) on investments of $0.0 million, $5.5 million, $0.1 million, and $(0.9) million for each of the first, second, third and fourth quarters of Calendar 2003, respectively, and $0.9 million, $0.1 million, $(2.5) million, and $0.0 million for the first, second, third and fourth quarters of Fiscal 2002, respectively. (3) The aggregate of the four quarters' basic earnings per common share does not total the reported full fiscal year amount due to the effect of rounding. (4) The aggregate of the four quarters' diluted earnings per common share does not total the reported full calendar and fiscal year amounts due to the effect of dilutive securities and rounding. (5) During the fourth quarter of Calendar 2003, we recorded adjustments for certain incentive compensation accruals, including bonuses, that provided a benefit to operating income during the quarter of approximately $3.2 million, in the aggregate.10-K.5665
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this Report on Form 10-K to be signed on its behalf by the undersigned, duly authorized, in Stamford, Connecticut, on March
12, 2004. Gartner, Inc. /s/ Michael D. Fleisher Date: March 12, 2004 By: _____________________________ Michael D. Fleisher Chairman of the Board and Chief Executive Officer16, 2005.
Gartner, Inc. Date: March 16, 2005 By: /s/ Eugene A. Hall Eugene A. Hall Chief Executive Officer POWER OF ATTORNEY
Each person whose signature appears below appoints
Michael D. FleisherEugene 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 herattorney-in-factattorney–in-fact to any amendments to this Report.Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Name Title Date /s/ MICHAEL D. FLEISHER/s/ Eugene A. Hall
Eugene A. HallDirector and Chairman of the Board March 12, 2004 - ---------------------------and Chief Executive OfficerMichael D. Fleisher (Principal
(Principal Executive Officer)/s/ CHRISTOPHER LAFONDMarch 16, 2005 /s/ Christopher Lafond
Christopher LafondExecutive Vice President and March 12, 2004 - ---------------------------
Chief Financial OfficerChristopher Lafond (Principal
(Principal Financial andMarch 16, 2005 Accounting Officer) /s/ ANNE SUTHERLAND FUCHS/s/ Michael J. Bingle Director March 12, 2004 - ---------------------------16, 2005Michael J. Bingle /s/ Anne Sutherland Fuchs /s/ WILLIAM O. GRABEDirector March 12, 2004 - ---------------------------16, 2005Anne Sutherland Fuchs /s/ William O. Grabe /s/ MAX D. HOPPERDirector March 12, 2004 - ---------------------------16, 2005William O. Grabe /s/ Max D. Hopper /s/ GLENN HUTCHINSDirector March 12, 2004 - ---------------------------16, 2005Max D. Hopper /s/ Glenn Hutchins /s/ STEPHEN G. PAGLIUCADirector March 12, 2004 - ---------------------------16, 2005Glenn Hutchins /s/ Stephen G. Pagliuca /s/ JAMES C. SMITHDirector March 12, 2004 - ---------------------------16, 2005Stephen G. Pagliuca 66
Name Title Date /s/ James C. Smith /s/ DAVID J. ROUXDirector March 12, 2004 - --------------------------- David J. Roux /s/ DENNIS G. SISCO16, 2005James C. Smith /s/ Jeffrey W. Ubben Director March 12, 2004 - --------------------------- Dennis G. Sisco /s/ MAYNARD G. WEBB, JR. Director March 12, 2004 - ---------------------------16, 2005Jeffrey W. Ubben /s/ Maynard G. Webb, Jr. Director March 16, 2005 Maynard G. Webb, Jr. 10-K.57 GARTNER, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Additions As a Additions As a Balance at Charged to % of Charged Deductions % of Balance Beginning Costs and Year-End to Other from Year-End at End of Year Expenses Amount Accounts (1) Reserve Amount of Year - --------------------------------------------------------------------------------------------------------------------------Fiscal 2001: Allowance for doubtful accounts $5,003 $5,037 90% $ -- $4,440 79% $5,600 and returns and allowances Fiscal 2002: Allowance for doubtful accounts $5,600 $9,119 130% $ -- $7,719 110% $7,000 and returns and allowances Transition 2002: Allowance for doubtful accounts $7,000 $2,329 33% $ -- $2,329 33% $7,000 and returns and allowances Calendar 2003: Allowance for doubtful accounts $7,000 $8,276 92% $2,000 $8,276 92% $9,000 and returns and allowances(1) Amounts charged to revenues.67