UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KT
|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM OCTOBER 1, 2002 TO DECEMBER 31, 2002
COMMISSION FILE NUMBER 0-14443
GARTNER, INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-3099750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. BOX 10212 06902-7747
56 TOP GALLANT ROAD (Zip Code)
STAMFORD, CT
(Address of principal executive offices)
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
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 |X| NO | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KT or any amendment to
this Form 10-KT. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes |X| No | |
The aggregate market value of the voting stock held by persons other than those
who may be deemed affiliates of the Registrant, as of March 28, 2002, was
approximately $1,094.4 million. This calculation does not reflect a
determination that persons are affiliates for any other purposes.
The number of shares outstanding of the registrant's capital stock as of March
1, 2003 was 50,623,191 shares of Common Stock, Class A and 29,751,828 shares of
Common Stock, Class B.
DOCUMENTS INCORPORATED BY REFERENCE
None.
GARTNER, INC.
2002 TRANSITION REPORT ON FORM 10-KT
TABLE OF CONTENTS
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 5
Item 6. Selected Consolidated Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 22
Item 8. Consolidated Financial Statements and Supplementary Data 23
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 35
Item 13. Certain Relationships and Related Transactions 37
Item 14. Controls and Procedures 37
PART IV
Item 15. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K 38
Report by Management 42
Independent Auditors' Report 43
Consolidated Balance Sheets 44
Consolidated Statements of Operations 45
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) 46
Consolidated Statements of Cash Flows 47
Notes to Consolidated Financial Statements 48
Certifications Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 as Adopted Pursuant
to Section 302 of the Sarbanes - Oxley Act of 2002 73 & 74
Independent Auditors' Report on Consolidated Financial Statement Schedule 75
Schedule II - Valuation and Qualifying Accounts 76
2
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"). We provide
comprehensive coverage of the IT industry to approximately 10,000 client
organizations. We are organized into three business segments: research,
consulting and events.
- RESEARCH products and services highlight industry developments, review new
products and technologies, provide quantitative market research, and
analyze industry trends within a particular technology or market sector.
- CONSULTING consists primarily of consulting, measurement engagements and
strategic advisory services (paid one-day analyst engagements) ("SAS"),
which provide assessments of cost, performance, efficiency and quality
focused on the IT industry.
- EVENTS consists of various symposia, conferences and exhibitions focused
on the IT industry.
On October 30, 2002, we announced that the Board of Directors 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 ended December
31, 2002. This discussion compares: (i) the three month transitional period
ended December 31, 2002 with the three months ended December 31, 2001; (ii) our
fiscal year 2002 (twelve months ended September 30, 2002) with fiscal year 2001;
and (iii) our fiscal year 2001 with fiscal year 2000.
MARKET OVERVIEW
In today'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.
While the pace of IT investments has slowed significantly, we believe that
technology accounts for a significant portion of all capital spending. The
intense scrutiny on technology spending ensures 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. Hundreds of
our experienced consultants combine our objective, independent research with a
practical, sought-after business perspective focused on the IT industry. Our
events are among the world's largest of their kind; gathering highly qualified
audiences of senior business executives, IT professionals, purchasers and
vendors of IT products and services.
PRODUCTS AND SERVICES
Our principal products and services are Research, Consulting and Events.
- RESEARCH. We devote an experienced research team to each significant IT
product category. Our staff researches, publishes reports and responds to
telephone and e-mail inquiries from clients. Clients receive information
through a number of electronic delivery formats - primarily gartner.com -
as well as CD-ROM and print media. Most clients purchase annually
renewable subscription contracts for our research products. Our research
products include highlights of industry developments and trends, new
product and technology evaluations, quantitative market research, and
comparative analysis of an individual organization's IT operations. We
also provide clients with IT trends and vendor strategies, statistical
analysis, growth projections, and market share rankings of suppliers and
vendors. This information is useful to IT manufacturers and the financial
community; it also helps business leaders formulate, implement and execute
their growth strategies. Our research products and services include our
core research business, Dataquest, Gartner Executive Programs ("EXP") and
GartnerG2. Dataquest helps IT and telecom vendors and investors formulate
product and investment plans, evaluate competition, assess market
position, and define future strategies. Gartner EXP is a program for CIOs
and other senior IT executives, offering concierge-level service and a
personalized research program. GartnerG2 is an advisory service that helps
business leaders and strategists drive business growth and manage
technology's impact on business models and processes.
- CONSULTING. Our consulting staff provides customized project consulting on
the delivery, deployment and management of high-tech products and
services. We offer consulting through a number of specialized practices,
including: IT Strategy & Management, Measurement, Strategic Sourcing,
Public Sector and General Advisory Services. Our measurement services
provide performance management, benchmarking, continuous improvement and
best practices services. SAS engagements, performed by Gartner research
analysts, provide a customized assessment of the client's specific
business requirements.
3
- EVENTS. Gartner Events include symposia, conferences and exhibitions that
provide comprehensive coverage of IT issues and forecasts of key IT
industry segments. Our flagship event is Symposia/ITxpo, which is held
twice a year across the world. Fall Symposium/ITxpo typically takes place
in Orlando, Florida; Cannes, France; Tokyo, Japan; and Sydney, Australia.
Spring Symposium/ITxpo typically takes place in San Diego, California;
Florence, Italy; and Johannesburg, South Africa. Throughout the year, we
sponsor other conferences, seminars and briefings throughout the world.
Our events provide premier educational and networking opportunities for
top IT decision-makers and technology providers.
COMPETITION
We believe that the principal competitive factors that differentiate us from our
competitors are:
- high quality, independence and objectivity of our research and analysis;
- multi-faceted expertise across the IT industry and its technologies, both
legacy and emerging;
- our position as a research company with broad consulting capabilities, and
a consulting firm with research analysts;
- timely delivery of information;
- the ability to offer products that meet changing market needs at
competitive prices; and
- 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. 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.
RESEARCH AND INNOVATION
We are committed to developing leading-edge ideas. We believe that research and
innovation have been major factors in our success and will help us continue to
grow in the future. We use our research to help create, commercialize and
disseminate innovative technology-related research and analysis. Our research,
consulting and events are designed to generate early insights into how
technology can be used to create business solutions for our clients and to
develop business strategies with significant value.
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's intellectual property, and we also enter
into agreements with our employees as appropriate.
We recognize the value of intellectual property in the new marketplace and
vigorously identify, create and protect our intellectual property.
EMPLOYEES
As of December 31, 2002, we had 3,905 employees, of which 712 employees were
located at our headquarters in Stamford, Connecticut; 1,720 were located at our
other facilities in the United States; and 1,473 were located outside of the
United States. None of our employees is represented by a private
non-governmental collective bargaining arrangement. We have experienced no work
stoppages and consider our relations with employees to be favorable. On February
6, 2003, we announced that we expect to make moderate reductions to our
workforce as we continue to align our business resources with revenue
expectations.
AVAILABLE INFORMATION
Our Internet address is www.gartner.com and the investor relations section of
our website is located at
www.4.gartner.com/5_about/investor_information/44a.html. We make available free
of charge, on or through the investor relations section of our website, annual
reports on Form 10-K, quarterly reports on Form 10-Q and 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
4
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission.
ITEM 2. PROPERTIES.
Our headquarters is located in approximately 224,000 square feet of leased
office space in four buildings located in Stamford, CT. 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 two buildings located in Egham, UK. We
have 36 domestic and 45 international locations that support our research and
analysis, domestic and international sales efforts and other functions. We
believe that our existing facilities and leases are adequate for our current
needs.
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
three-month transitional period ended December 31, 2002 covered by this
Transition Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of March 1, 2003, there were approximately 325 holders of record of our Class
A Common Stock and approximately 3,656 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, the current policy of our Board of
Directors is to retain all earnings primarily to provide funds for continued
growth.
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
THREE MONTH FISCAL YEAR 2002 FISCAL YEAR 2001
TRANSITIONAL PERIOD ---------------------- ----------------------
ENDED DECEMBER 31, 2002
-----------------------
HIGH LOW HIGH LOW HIGH LOW
-------- -------- -------- -------- -------- --------
Quarter ended December 31 $ 10.66 $ 4.90 $ 11.69 $ 8.50 $ 12.38 $ 5.66
Quarter ended March 31 $ 13.48 $ 11.00 $ 9.16 $ 6.01
Quarter ended June 30 $ 13.45 $ 9.82 $ 11.00 $ 5.80
Quarter ended September 30 $ 9.82 $ 7.75 $ 11.17 $ 8.40
CLASS B COMMON STOCK
THREE MONTH FISCAL YEAR 2002 FISCAL YEAR 2001
TRANSITIONAL PERIOD ---------------------- ----------------------
ENDED DECEMBER 31, 2002
-----------------------
HIGH LOW HIGH LOW HIGH LOW
-------- -------- -------- -------- -------- --------
Quarter ended December 31 $ 10.70 $ 5.20 $ 11.70 $ 8.07 $ 10.94 $ 4.95
Quarter ended March 31 $ 13.20 $ 10.86 $ 8.45 $ 5.81
Quarter ended June 30 $ 13.05 $ 9.00 $ 9.81 $ 5.50
Quarter ended September 30 $ 9.84 $ 7.67 $ 10.60 $ 8.05
5
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, DECEMBER 31,
2002(1) 2001
(UNAUDITED)
------------ ------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Research ......................................... $ 120,038 $ 129,474
Consulting ....................................... 58,098 55,731
Events ........................................... 47,169 59,466
Other ............................................ 4,509 4,724
--------- ---------
Total revenues ............................... 229,814 249,395
Cost of Services and product development .............. 108,600 115,829
Selling, general and administrative ................... 90,306 89,193
Depreciation and amortization ......................... 11,628 10,426
Other charges ......................................... 32,166 --
--------- ---------
Total operating costs and expenses .................... 242,700 215,448
--------- ---------
Operating (loss) income ............................... (12,886) 33,947
Net gain (loss) on sale of investments ................ -- 792
Net (loss) gain from minority-owned investments ....... (1,688) 79
Interest income ....................................... 635 511
Interest expense ...................................... (5,942) (5,604)
Loss on debt extinguishment ........................... -- --
Other expense, net .................................... (141) (428)
--------- ---------
(Loss) income from continuing operations before
income taxes .......................................... (20,022) 29,297
(Benefit) provision for income taxes .................. (5,604) 10,254
--------- ---------
(Loss) income from continuing operations .............. (14,418) 19,043
Loss from discontinued operation, net of taxes ....... -- --
--------- ---------
Net (loss) income ..................................... $ (14,418) $ 19,043
========= =========
Weighted average shares outstanding:
Basic ................................................. 81,379 83,883
Diluted ............................................... 81,379 129,578
NET (LOSS) INCOME PER SHARE:
Basic:
(Loss) income from continuing operations ......... $ (0.18) $ 0.23
Loss from discontinued operation ................. -- --
--------- ---------
Net (loss) income ................................ $ (0.18) $ 0.23
========= =========
Diluted:
(Loss) income from continuing operations ......... $ (0.18) $ 0.17
Loss from discontinued operation ................. -- --
--------- ---------
Net (loss) income ................................ $ (0.18) $ 0.17
========= =========
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and marketable equity
securities ............................................ $ 109,657 $ 27,506
Fees receivable, net .................................. 283,068 315,194
Other current assets .................................. 66,540 104,544
--------- ---------
Total current assets ......................... 459,265 447,244
Property, equipment, and leasehold improvements, net .. 71,006 94,540
Intangibles and other assets .......................... 297,132 287,622
--------- ---------
Total assets ................................. $ 827,403 $ 829,406
========= =========
Deferred revenues ..................................... $ 305,887 $ 325,808
Other current liabilities ............................. 151,990 138,079
--------- ---------
Total current liabilities .................... 457,877 463,887
Long-term debt ........................................ 351,539 331,138
Other liabilities ..................................... 46,688 44,135
Stockholders' (deficit) equity ........................ (28,701) (9,754)
--------- ---------
Total liabilities and stockholders' (deficit) equity .. $ 827,403 $ 829,406
========= =========
FISCAL YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Research ......................................... $ 496,403 $ 535,114 $ 509,781 $ 479,045 $ 433,141
Consulting ....................................... 273,692 276,292 216,667 156,444 116,929
Events ........................................... 121,991 132,684 108,589 75,581 49,121
Other ............................................ 15,088 18,794 27,414 29,768 48,740
--------- --------- --------- --------- ---------
Total revenues ............................... 907,174 962,884 862,451 740,838 647,931
Cost of Services and product development .............. 403,718 450,471 395,603 298,695 252,206
Selling, general and administrative ................... 345,382 370,096 341,874 253,716 215,416
Depreciation and amortization ......................... 44,453 53,240 40,843 31,633 27,266
Other charges ......................................... 17,246 46,563 -- 23,426 7,313
--------- --------- --------- --------- ---------
Total operating costs and expenses .................... 810,799 920,370 778,320 607,470 502,201
--------- --------- --------- --------- ---------
Operating (loss) income ............................... 96,375 42,514 84,131 133,368 145,730
Net gain (loss) on sale of investments ................ 787 (640) 29,630 -- (1,973)
Net (loss) gain from minority-owned investments ....... (2,365) (26,817) (775) (846) (511)
Interest income ....................................... 1,845 1,616 3,936 9,518 9,650
Interest expense ...................................... (22,869) (22,391) (24,900) (1,272) (94)
Loss on debt extinguishment ........................... -- -- (2,881) -- --
Other expense, net .................................... (170) (3,674) (722) (1,521) (1,681)
--------- --------- --------- --------- ---------
(Loss) income from continuing operations before
income taxes .......................................... 73,603 (9,392) 88,419 139,247 151,121
(Benefit) provision for income taxes .................. 25,025 (9,172) 35,295 50,976 62,774
--------- --------- --------- --------- ---------
(Loss) income from continuing operations .............. 48,578 (220) 53,124 88,271 88,347
Loss from discontinued operation, net of taxes ....... -- (65,983) (27,578) -- --
--------- --------- --------- --------- ---------
Net (loss) income ..................................... $ 48,578 $ (66,203) $ 25,546 $ 88,271 $ 88,347
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic ................................................. 83,586 85,862 86,564 101,881 100,194
Diluted ............................................... 130,882 85,862 89,108 104,603 105,699
NET (LOSS) INCOME PER SHARE:
Basic:
(Loss) income from continuing operations ......... $ 0.58 $ (0.00) $ 0.61 $ 0.87 $ 0.88
Loss from discontinued operation ................. -- (0.77) (0.31) -- --
--------- --------- --------- --------- ---------
Net (loss) income ................................ $ 0.58 $ (0.77) $ 0.30 $ 0.87 $ 0.88
========= ========= ========= ========= =========
Diluted:
(Loss) income from continuing operations ......... $ 0.47 $ (0.00) $ 0.60 $ 0.84 $ 0.84
Loss from discontinued operation ................. -- (0.77) (0.31) -- --
--------- --------- --------- --------- ---------
Net (loss) income ................................ $ 0.47 $ (0.77) $ 0.29 $ 0.84 $ 0.84
========= ========= ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and marketable equity
securities ............................................ $ 124,793 $ 40,378 $ 97,102 $ 88,894 $ 218,684
Fees receivable, net .................................. 264,843 300,306 323,849 282,047 239,243
Other current assets .................................. 65,397 105,690 157,823 61,243 53,152
--------- --------- --------- --------- ---------
Total current assets ......................... 455,033 446,374 578,774 432,184 511,079
Property, equipment, and leasehold improvements, net .. 76,161 100,288 88,402 63,592 50,801
Intangibles and other assets .......................... 293,656 292,340 305,185 307,668 270,991
--------- --------- --------- --------- ---------
Total assets ................................. $ 824,850 $ 839,002 $ 972,361 $ 803,444 $ 832,871
========= ========= ========= ========= =========
Deferred revenues ..................................... $ 306,978 $ 351,263 $ 384,966 $ 354,517 $ 288,013
Other current liabilities ............................. 130,364 152,751 170,051 105,056 116,292
--------- --------- --------- --------- ---------
Total current liabilities .................... 437,342 504,014 555,017 459,573 404,305
Long-term debt ........................................ 346,300 326,200 307,254 250,000 --
Other liabilities ..................................... 46,098 43,306 35,270 19,385 13,628
Stockholders' (deficit) equity ........................ (4,890) (34,518) 74,820 74,486 414,938
--------- --------- --------- --------- ---------
Total liabilities and stockholders' (deficit) equity .. $ 824,850 $ 839,002 $ 972,361 $ 803,444 $ 832,871
========= ========= ========= ========= =========
----------
(1) The Company changed its fiscal year end from September 30 to December 31,
effective January 1, 2003. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Transition Report on Form 10-KT
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," "expects," "should," "believes," `plans,"
"anticipates," "estimates," "predicts," "potential," "continue," or other words
of similar meaning. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
discussed in, or implied by, the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Factors That May Affect Future Results" below. Readers should not place undue
reliance on these forward-looking statements, which reflect management's opinion
only as of the date on which they were made. Except as required by law, we
disclaim any obligation to review or update these forward-looking statements to
reflect events or circumstances as they occur. Readers should review carefully
any risk factors described in our reports filed with the Securities and Exchange
Commission.
BUSINESS STRATEGY
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) generating profitability through a
streamlined cost structure and (2) pursuing opportunities and applying resources
with a strict focus on growing our core research business.
Our primary objectives:
- RIGOROUS EXPENSE CONTROL
- Leverage our global infrastructure to effectively control worldwide
costs;
- Broaden the use of our inside, desk-based sales channel, which has a
lower cost of sales than our other sales channels;
- Eliminate non-strategic, less profitable products, processes and
geographic markets; and
- Reduce our cost of delivery.
- ENHANCED PRODUCTIVITY & CLIENT SATISFACTION
- Continually analyze and assess our client, product and market
portfolios;
- Optimize analyst productivity and consultant utilization measures;
and
- Strengthen client retention rates and other indicators of client
satisfaction.
- LONG-TERM RESEARCH GROWTH
- Invest modestly in initiatives aligned with our core competencies
that are capable of delivering results, including - but not limited
to Gartner EXP and GartnerG2;
- Refine product packaging, delivery, marketing, sales and account
management capabilities;
- Increase the percentage of multi-service client relationships;
- Leverage and expand existing client relationships with key
decision-makers for our products and services; and
- Identify and gain new clients within our most important and target
audience.
7
- FINANCIAL MANAGEMENT
- Increase liquidity and strengthen our balance sheet; and
- Manage capital expenditures, foreign exchange exposure and tax
planning.
BUSINESS MEASURES
We believe the following business measurements are important performance
indicators for our business segments.
REVENUE CATEGORY BUSINESS MEASUREMENTS
---------------- ---------------------
Research CONTRACT VALUE represents the value attributable
to all of our subscription-related research
products that recognize revenue on a ratable
basis. Contract value is calculated as the
annualized value of all subscription research
contracts in effect at a specific point in time,
without regard to the duration of the contract.
CLIENT RETENTION RATE represents a measure of
client satisfaction and renewed business
relationships at a specific point in time. Client
retention is calculated on a percentage basis by
dividing our current clients who were also clients
a year ago, by all clients from a year ago.
Consulting CONSULTING BACKLOG represents future revenue to be
derived from in-process consulting, measurement
and strategic advisory services engagements.
Events DEFERRED EVENTS REVENUE represents billings and
relates directly to our future symposia,
conferences and exhibitions. Events revenues are
deferred and recognized upon the completion of the
related symposium, conference or exhibition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Our quarterly and annual revenue and operating income fluctuate as a result of
many factors, including the timing of the execution of research contracts, the
extent of completion of consulting engagements, the timing of Symposia and other
events, all of which occur to a greater extent in the quarter ended December 31,
the amount of new business generated, the mix of domestic and international
business, changes in market demand for our products and services, the timing of
the development, introduction and marketing of new products and services, and
competition in the industry. The potential fluctuations in our operating 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 judgements
and estimates. Specific risks for these critical accounting policies are
described below.
REVENUE RECOGNITION - We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). Revenue by significant source is accounted for as follows:
- Research revenues are derived from subscription contracts for
research products. Revenues from research products are deferred and
recognized ratably over the applicable contract term;
- Consulting revenues are based primarily on fixed fees or time and
materials for discrete projects. Revenues for such projects are
recognized as work is delivered and/or services are provided and are
evaluated on a contract by contract basis;
- Events revenues are deferred and recognized upon the completion of
the related symposium, conference or exhibition; and
- Other revenues, principally software licensing fees, are recognized
when a signed non-cancelable software license exists, delivery has
occurred, collection is probable, and the fees are fixed or
determinable. Revenue from software maintenance is deferred and
recognized ratably over the term of the maintenance agreement, which
is typically twelve months.
UNCOLLECTIBLE ACCOUNTS RECEIVABLE - Provisions for bad debts are recognized as
incurred. The measurement of likely and probable losses and the allowance for
uncollectible accounts receivable is based on historical loss experience, aging
of outstanding receivables, an assessment of current economic conditions and the
financial health of specific clients. This evaluation is inherently judgmental
and requires material estimates. These valuation reserves are periodically
re-evaluated and adjusted as more information about the ultimate collectibility
of accounts receivable becomes available. Circumstances that could cause our
valuation reserves to increase include changes in our clients' liquidity and
credit quality, other factors negatively impacting our clients' ability to pay
their obligations as they come due,
8
and the quality of our collection efforts. Total trade receivables at December
31, 2002 were $290.1 million, against which an allowance for losses of
approximately $7.0 million was provided. Total trade receivables at September
30, 2002 were $271.8 million, against which an allowance for losses of
approximately $7.0 million was provided.
IMPAIRMENT OF INVESTMENT SECURITIES - A charge to earnings is made when a market
decline below cost is other than temporary. Management regularly reviews each
investment security for impairment based on criteria that include the length of
time and the extent to which market value has been less than cost, the financial
condition and near-term prospects of the issuer, the valuation of comparable
companies and our intent and ability to retain the investment for a period of
time sufficient to allow for any anticipated recovery in market value. Future
adverse changes in market conditions or poor operating results of underlying
investments could result in losses or an inability to recover the carrying value
of the investments that may not be reflected in an investment's current carrying
value, thereby possibly requiring an impairment charge in the future. Total
investments in equity securities was $10.7 million and $12.7 million at December
31, 2002 and September 30, 2002, respectively (see Note 5 - Investments in the
Notes to the Consolidated Financial Statements).
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS - The evaluation of goodwill
is performed in accordance with SFAS No. 142, - "Goodwill and Other Intangible
Assets." Among other requirements, this standard eliminated goodwill
amortization upon adoption and required an initial assessment for goodwill
impairment within six months of adoption and at least annually thereafter. The
evaluation of other intangible assets is performed on a periodic basis. These
assessments require management to estimate the fair value of our reporting units
based on estimates of future business operations and market and economic
conditions in developing long-term forecasts. If we determine the fair values
are less than the carrying amount of goodwill recorded on our Consolidated
Balance Sheets, we must recognize an impairment in our financial statements.
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 which could trigger a review for
impairment include the following:
- Significant under-performance relative to historical or projected
future operating results;
- Significant changes in the manner of our use of acquired assets or
the strategy for our overall business;
- Significant negative industry or economic trends;
- Significant decline in our stock price for a sustained period; and
- Our market capitalization relative to net book value.
Due to the numerous variables associated with our judgements 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.
ACCOUNTING FOR INCOME TAXES - As we prepare our consolidated financial
statements, we estimate our income taxes in each of the jurisdictions where we
operate. This process involves estimating our current tax exposure together with
assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We record
a valuation allowance to reduce our deferred tax assets when future realization
is in question. We consider future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance. In the event we determine that we would be able to realize our
deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should we determine that we would not be able
to realize all or part of our net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
CONTINGENCIES AND OTHER LOSS RESERVES - We establish reserves for severance
costs, contract terminations and asset impairments as a result of actions we
undertake to streamline our organization, reposition certain businesses and
reduce ongoing costs. Estimates of costs to be incurred to complete these
actions, such as future lease payments, sublease income, the fair value of
assets, and severance and related benefits, are based on assumptions at the time
the actions are initiated. To the extent actual costs differ from those
estimates, reserve levels may need to be adjusted. In addition, these actions
may be revised due to changes in business conditions that we did not foresee at
the time such plans were approved.
RESULTS OF OPERATIONS
THE THREE MONTH TRANSITIONAL PERIOD ENDED DECEMBER 31, 2002 VERSUS THE THREE
MONTHS ENDED DECEMBER 31, 2001
Total revenues decreased 8% to $229.8 million in the three month transitional
period ended December 31, 2002 ("Transition 2002") compared to $249.4 million in
the three months ended December 31, 2001 ("Transition 2001"). The Transition
2001 revenues and cost of services for the consulting segment have been
reclassified to include reimbursable out-of-pocket expenses in accordance with
new accounting requirements adopted during the 2002 fiscal year (see Note 1 -
Summary of Significant Accounting Policies: Recently Issued
9
Accounting Standards in the Notes to Consolidated Financial Statements). See
Segment Analysis on page 11.
- RESEARCH revenue decreased 7% in Transition 2002 to $120.0 million,
compared to $129.5 million in Transition 2001, and comprised approximately
52% of total revenues in both Transition 2002 and 2001.
- CONSULTING revenue increased 4% in Transition 2002 to $58.1 million,
compared to $55.7 million in Transition 2001, and comprised approximately
25% and 22% of total revenues in Transition 2002 and 2001, respectively.
- EVENTS revenue was $47.2 million in Transition 2002, a decrease of 21%
from the $59.5 million in Transition 2001, and comprised approximately 21%
of total revenues in Transition 2002 versus 24% in Transition 2001.
- OTHER revenues, consisting principally of software licensing and
maintenance fees, decreased 4% in Transition 2002 to $4.5 million from
$4.7 million in Transition 2001.
Revenue declined in two of our three defined geographic market areas: United
States and Canada, Europe, and Other International, primarily due to the decline
in our Research revenue as a result of lower demand in the entire technology
sector and overall weakness in the general economy and lower Events revenue as a
result of reduced vendor spending at the Fall Symposium. Revenues from sales to
United States and Canadian clients decreased 11% to $148.6 million in Transition
2002 from $167.4 million in Transition 2001. Revenues from sales to European
clients decreased 1% to $62.4 million in Transition 2002 from $63.2 million in
Transition 2001. Revenues from sales to Other International clients remained
flat at $18.8 million in both Transition 2002 and 2001.
Cost of services and product development expenses decreased to $108.6 million in
Transition 2002 from $115.8 million in Transition 2001. The decrease is
attributable to reduced personnel costs associated with headcount reductions,
more effective cost management of events and a decrease in Events expense
associated with the elimination of less profitable events, offset by additional
bonus payments made to employees.
Selling, general and administrative expenses increased to $90.3 million in
Transition 2002 from $89.2 million in Transition 2001. The increase was due to
additional employee benefits expenses as well as marketing expenses in
Transition 2002.
Depreciation expense increased to $11.1 million in Transition 2002 from $9.9
million in Transition 2001, primarily due to the impact of significant capital
expenditures in fiscal 2002 for internal use software development required to
support the business. Amortization of intangibles was $0.5 million in both
Transition 2002 and 2001.
During Transition 2002, we recorded other charges of $32.2 million. Of these
charges, $13.3 million relates 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 relates to a workforce reduction, which includes
$0.6 million of non-cash compensation, announced in October 2002 and represents
severance payments and related benefits for terminated employees. This workforce
reduction resulted in the elimination of approximately 175 positions, or
approximately 4% of our workforce at the time, and the payment of $6.9 million
of termination benefits during Transition 2002. At December 31, 2002, $11.4
million remains to be paid on account of these other charges recorded in
Transition 2002. The payments are expected to be made primarily over the next
two to three years. We are funding all of these costs out of operating cash
flows (see Note 6 - Other Charges in the Notes to the Consolidated Financial
Statements).
In Transition 2002 we recorded an operating loss of ($12.9) million compared to
operating income of $33.9 million in Transition 2001. In Transition 2002, both
our United States and Canadian businesses and our European business experienced
an operating loss of ($5.5) million and ($5.9) million, respectively. Included
in the Transition 2002 operating results of our United States and Canadian
businesses and our European business were other charges of $21.0 million and
$10.0 million, respectively. Our Other International business experienced an
operating loss for the period, which was slightly lower than the prior year
period. On a consolidated basis, we incurred an operating loss for Transition
2002 largely due to the recording of other charges of $32.2 million, lower
Events revenue due to a decrease in vendor spending at the Fall Symposium, and
higher expenses for benefits and bonuses related to our European business.
Excluding the other charges, operating income for Transition 2002 and 2001 was
8% and 13%, respectively, of total revenues.
Net gain (loss) from the sale of investments for Transition 2001 reflects the
sale of 748,118 shares of CNET Networks, Inc. ("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.
Net loss from minority-owned investments in Transition 2002 of ($1.7) million
was primarily the result of impairment losses related to investments owned by us
through SI Venture Associates ("SI I"), SI Venture Fund II ("SI II") and other
directly owned investments for other than temporary declines in value. These
investments are comprised of early to mid-stage IT-based or Internet-enabled
companies. We made an assessment of the carrying value of our investments and
determined that certain investments were in excess of their fair value due to
the significance and duration of the decline in valuation of comparable
companies operating in the internet and technology sectors (see Note 5 -
Investments in the Notes to Consolidated Financial Statements). The impairment
factors evaluated by management may
10
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 available to
the extent needed, at terms acceptable to the entities, if at all. This could
result in additional material non-cash impairment charges in the future. We are
continuing efforts to sell all of our investments owned through SI I and SI II.
Interest expense increased to $5.9 million in Transition 2002 from $5.6 million
in Transition 2001. The increase relates primarily to increased interest expense
on the 6% convertible long-term debt compared to Transition 2001. Interest
accrues semi-annually by a corresponding increase in the face amount of the
convertible notes. Interest income of $0.6 million in Transition 2002 was up
from $0.5 million in Transition 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 $0.1 million in Transition 2002 from $0.4 million in
Transition 2001. The decrease relates primarily to lower foreign currency
exchange losses of $0.1 million in Transition 2002.
Benefit for income taxes was $5.6 million in Transition 2002 compared to a
provision for income taxes of $25.0 million for Fiscal 2002. The effective tax
rate was 28% for Transition 2002. The effective tax rate in fiscal 2002, was
34%. The reduction in the effective tax rate for Transition 2002 is due
primarily to the impact of our foreign results. Due to the seasonality of
Gartner's operations and other factors, including the timing of expenses,
Transition 2002 resulted in losses in certain low taxed foreign jurisdictions
compared to the results that Gartner has experienced on an annual basis. Since
the Company's foreign earnings (losses) are taxed (benefited) at a lower tax
rate as compared to U.S. earnings (losses), the tax benefit for the three-month
transitional period is lower than what would be expected on a full year basis.
Basic income (loss) per share was ($0.18) per share in Transition 2002 compared
to $0.23 per share in Transition 2001. Diluted income (loss) per share from
continuing operations of ($0.18) per share in Transition 2002 compared to $0.17
per share in Transition 2001. The (loss) per common share for the Transition
2002 is attributed to the $32.2 million Other Charge. (See Note 6 - Other
Charges in the Notes to Consolidated Financial Statements.)
SEGMENT ANALYSIS
We evaluate reportable segment performance and allocate resources based on gross
contribution margin. Gross contribution is defined as operating income excluding
certain selling, general and administrative expenses, depreciation, amortization
of intangibles and other charges.
Research
Research revenues of $120.0 million in Transition 2002 were down 7% from $129.5
million in Transition 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 Transition 2002 decreased 9% to $76.9
million from $84.6 million in Transition 2001. Research's gross contribution
margin was 64% in Transition 2002 and 65% in Transition 2001. The decline in
gross contribution was due to lower revenues.
Our research client retention rate was 74% for Transition 2002 compared to 73%
for Transition 2001. Total research contract value decreased 8% to approximately
$489.0 million at December 31, 2002 from $533.7 million at December 31, 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 $58.1 million in Transition 2002 were up 4% from $55.7
million in Transition 2001. The increase in revenues reflects higher consultant
utilization and billing rates in Transition 2002. Consulting's gross
contribution increased by 35% to $18.9 million in Transition 2002 from $14.0
million in Transition 2001. Consulting's gross contribution margin of 33% in
Transition 2002 increased from 25% in Transition 2001 primarily due to reduced
expenses and headcount, higher utilization rates and higher billing rates. We
have reduced headcount and eliminated expenses in practice areas and markets
where we do not have sufficient scale and volume.
Consulting backlog decreased 8% to approximately $111.3 million at December 31,
2002 from $120.5 million at December 31, 2001. The decrease in backlog primarily
reflects the overall weakness in the general economy.
Events
Events revenues of $47.2 million in Transition 2002 were down 21% from $59.5
million in Transition 2001. The decline was primarily due to: (1) fewer events
due to the strategic elimination of less profitable and unproven events, (2) the
overall weakness in the general economy, (3) lower travel budgets, and 4)
reduced vendor spending at the Fall Symposium held in Orlando, Florida. Events'
gross contribution decreased by 25% to $27.6 million in Transition 2002 from
$36.9 million in Transition 2001 with gross contribution margin of 58% in
Transition 2002 compared to 62% in Transition 2001. The decrease in gross
contribution and margin was due to reduced vendor spending at the Fall
Symposium.
Deferred events revenue decreased 20% to approximately $27.4 million at December
31, 2002 from $34.3 million at December 31, 2001. The decrease in deferred
Events revenue was due primarily to seasonality in our Events calendar, fewer
events as described above, and a
11
change in vendor billing terms.
SUBSEQUENT EVENTS
On February 6, 2003, we announced that we expect to incur an estimated charge of
about $5 million in the quarter ending March 31, 2003, for reductions in our
workforce. This anticipated charge relates to restructuring which could not be
completed and taken during Transition 2002.
On February 13, 2003, our shareholders approved the 2003 Long-term Incentive
Plan under which 9,928,000 shares of Class A Common Stock are reserved and
available for distribution to the employees and members of the Board of
Directors. This new plan will replace and consolidate our existing stock option
plans. As of February 13, 2003, no new grants or awards may be made under our
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.
Any outstanding grants and awards under these plans will remain outstanding
until exercised, cancelled or they expire subject to the terms and conditions of
such plans.
FISCAL YEAR ENDED SEPTEMBER 30, 2002 VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 2001
Total revenues decreased 6% to $907.2 million in fiscal 2002 compared to $962.9
million in fiscal 2001. The fiscal 2001 revenues and cost of services for the
consulting segment have been reclassified to include reimbursable out-of-pocket
expenses in accordance with new accounting requirements adopted in 2002 (see
Note 1 - Summary of Significant Accounting Policies: Recently Issued Accounting
Standards in the Notes to Consolidated Financial Statements).
- 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.
- 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.
- 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.
- 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, Europe, 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 European clients 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 decrease was due to reduced
payroll associated with lower headcount, reduced travel, telephone and other
infrastructure costs across the entire company.
Depreciation expense increased to $42.5 million in fiscal 2002 from $40.9
million in fiscal 2001, primarily due to the depreciation of significant capital
expenditures in the previous year for internal use software development 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 the early
adoption of SFAS No. 142. For the year ended September 30, 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 relates 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 are 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 the
fiscal year ended September 30, 2002. The remaining $1.4 million relates to the
impairment of certain database-related assets. Other charges
12
totaled $46.6 million for the fiscal year ended September 30, 2001. Of these
charges, $24.8 million was 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, and the payment of
$6.4 million and $18.2 million of termination benefits during the fiscal years
ended September 30, 2002 and 2001, respectively. The $24.8 million charge is
comprised of employee termination severance payments and related benefits.
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 retired in connection with the launch of gartner.com and
seat-based pricing. At September 30, 2002, $4.7 million remains to be paid,
relating to the other charges recorded in both 2001 and 2002. The payments are
expected to be made primarily over the next two to three years. We are funding
all of these costs out of operating cash flows.
Operating income increased to $96.4 million in fiscal 2002 compared to $42.5
million in fiscal 2001. In fiscal 2002, our United States and Canadian business
and our European business experienced an increase in operating income of 119%
and 113%, respectively. Our Other International business experienced an
operating loss for the year, which was slightly lower than a year ago. On a
consolidated basis, operating income as a percentage of total 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 of
our Internet 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% in the second half of fiscal 2001 and 2% in mid-fiscal 2002
and, in the fourth quarter of 2001, decreased the expense-to-revenue ratio
associated with our cost of services and selling, general and administrative
expenses through various cost-reduction initiatives. The improvement in
operating income was also impacted by lower amortization of intangibles due to
the adoption of SFAS No. 142. Amortization of goodwill was $9.5 million in
fiscal 2001.
Net gain (loss) from the sale of investments for the year ended September 30,
2002 reflected the sale of 748,118 shares of CNET Networks, Inc. ("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. Net loss on the sale of investments in fiscal 2001 of $0.6 million
includes the sale of our remaining 1,922,795 shares of Jupiter Media Metrix
("Jupiter") for net cash proceeds of $7.5 million for a pre-tax loss of $5.6
million, offset in part by 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
for a pre-tax gain of $5.0 million.
Net loss from minority-owned investments in fiscal 2002 and 2001 of $2.4 million
and $26.8 million, respectively, were 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. These investments are
comprised of early to mid-stage IT-based or Internet-enabled companies. We made
an assessment of the carrying value of our investments and determined that
certain investments were in excess of their fair value due to the significance
and duration of the decline in valuation of comparable companies operating in
the internet and technology sectors (see Note 5 - Investments in the Notes to
Consolidated Financial Statements). 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 available to
the extent needed, at terms acceptable to the entities, if at all. This could
result in additional material non-cash impairment charges in the future. We are
continuing efforts to sell all of our investments owned through SI I and SI II.
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 relates primarily to lower
foreign currency exchange losses of $2.7 and a $0.5 million gain from the sale
of a business in the second quarter of 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 the year ended September 30, 2002. The effective tax rate in
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 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 No. 142. A more detailed analysis of the changes in the provision
(benefit) for income taxes is provided in Note 14 - Income Taxes of the Notes to
Consolidated Financial Statements.
Basic income (loss) per 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 share from continuing operations of $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 No. 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.
13
SEGMENT ANALYSIS
We evaluate reportable segment performance and allocate resources based on gross
contribution margin. Gross contribution is defined as operating income excluding
certain selling, general and administrative expenses, depreciation, amortization
of intangibles and other charges.
Research
Research revenues of $496.4 million in fiscal 2002 were down 7% from $535.1
million in 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 strategy is to expand our research
business with larger clients.
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 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 continue to focus on larger
engagements and on a limited set of practices and markets in which we can
achieve significant penetration. We have reduced headcount and eliminated
expenses in practice areas and markets where we do 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 2001. The decline was primarily due to (1) 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, (2) the overall weakness in the general economy and (3)
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 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.
Deferred events revenue decreased 24% to approximately $53.6 million at
September 30, 2002 from $70.5 million at September 30, 2001. The decrease in
deferred events revenue was due primarily to less favorable economic conditions
and to fewer events as described above and changes in billing terms.
FISCAL YEAR ENDED SEPTEMBER 30, 2001 VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 2000
Total revenues increased 12% to $962.9 million in fiscal 2001 compared to $862.5
million in fiscal 2000.
- RESEARCH revenue increased 5% in fiscal 2001 to $535.1 million, compared
to $509.8 million in fiscal 2000, and comprised approximately 56% and 59%
of total revenues in fiscal 2001 and 2000, respectively.
- CONSULTING revenue increased 28% to $276.3 million in fiscal 2001,
compared to $216.7 million in fiscal 2000, and comprised approximately 29%
and 25% of total revenues in fiscal 2001 and 2000, respectively.
- EVENTS revenue was $132.7 million in fiscal 2001, an increase of 22% over
the $108.6 million in fiscal 2000, and comprised approximately 14% of
total revenues in fiscal 2001 versus 13% in fiscal 2000.
- OTHER revenues, consisting principally of software licensing and
maintenance fees, decreased 31% to $18.8 million in fiscal 2001 from $27.4
million in fiscal 2000.
Revenue grew in our three defined geographic market areas: United States and
Canada, Europe, and Other International. Revenues from sales to United States
and Canadian clients increased 13% to $641.9 million in fiscal 2001 from $569.5
million in fiscal 2000. Revenues from sales to European clients increased 8% to
$250 million in fiscal 2001 from $231.6 million in fiscal 2000. Revenues from
sales to Other International clients increased by 16% to $71.1 million in fiscal
2001 from $61.4 million in fiscal 2000.
14
Cost of services and product development expenses were $450.5 million and $395.6
million for fiscal 2001 and fiscal 2000, respectively. The costs of services and
product development expenses increased as a percentage of total revenues to 47%
from 46%. The increase is attributable to growth in personnel costs associated
with the development and delivery of products and services.
Selling, general and administrative expenses increased to $370.1 million in
fiscal 2001 from $341.9 million in fiscal 2000. The increase was due to
recruiting and facilities costs related to the growth in personnel as well as
increases in sales costs associated with revenue growth.
Depreciation expense increased to $40.9 million in fiscal 2001 from $27.8
million in fiscal 2000, primarily due to capital spending and internal use
software development costs required to support business growth, including the
launch of the new gartner.com web site in January 2001. Amortization of
intangibles of $12.4 million in fiscal 2001 was down from $13.0 million in
fiscal 2000.
During 2001, we recorded other charges of $46.6 million. Of these charges, $24.8
million are associated with the workforce reduction announced in April 2001.
This workforce reduction has 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 the 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 September
30, 2001, $6.6 million of the termination benefits relating to the workforce
reduction remained to be paid. We are funding these costs out of operating cash
flows.
Operating income decreased 49% to $42.5 million in fiscal 2001 compared to $84.1
million in fiscal 2000. In fiscal 2001, our United States and Canadian business,
and European business experienced declines in operating income of 49% and 21%,
respectively. Our Other International business experienced an operating loss for
the year. These operating results were all impacted by the other charges
recorded during fiscal 2001. On a consolidated basis, operating income as a
percentage of total revenues was 4% and 10%, respectively, for fiscal 2001 and
2000. Operating income was impacted, in part, by other charges and costs
associated with the re-architecture of our Internet capabilities and research
methodology and delivery processes, and higher growth in lower margin
consultative services. Excluding the other charges, operating income for fiscal
2001 was 9% of total revenues. We decreased our staff by approximately 8% in the
second half of fiscal 2001 and, in the fourth quarter, decreased the expense to
revenue ratio on selling, general and administrative expense by 2.4 percentage
points as compared to the fourth quarter of the previous year. As a result of
our cost reduction initiatives, operating margin improved from 8% for the first
six months of the fiscal year to 11% for the second half, all excluding other
charges.
Net loss on sale of investments in fiscal 2001 of $0.6 million includes the sale
of the remaining 1,922,795 shares of Jupiter for net cash proceeds of $7.5
million for a pre-tax loss of $5.6 million, offset in part by the sale of shares
received from our venture capital funds, SI I and SI II, for net cash proceeds
of $6.0 million for a pre-tax gain of $5.0 million. Net gain on sale of
investments in fiscal 2000 reflects the sale of 1,995,950 shares of Jupiter for
net cash proceeds of $55.5 million for a pre-tax gain of $42.9 million. This
gain was partially offset by the sale of our 8% investment in NETg, Inc., a
subsidiary of Harcourt, Inc., to an affiliate of Harcourt, Inc. for $36.0
million in cash that resulted in a pre-tax loss of approximately $6.6 million.
We acquired this investment as consideration for our sale of GartnerLearning in
September 1998. In addition, in fiscal 2000 we settled a claim arising from the
sale of GartnerLearning to NETg, Inc. The claim asserted that we had breached a
contractual commitment under a joint venture to co-produce a product when the
business was sold. The claim was settled for approximately $6.7 million and has
been recorded as a loss on sale of investments.
Net loss from minority-owned investments in fiscal 2001 of $26.8 million 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. We made an assessment of the carrying value of our
investments and determined that certain investments were in excess of their fair
value due to the significance and duration of the decline in valuation of
comparable companies operating in the internet and technology sectors (see Note
5 - Investments in the Notes to Consolidated Financial Statements). 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 available to the extent needed, at terms
acceptable to the entities, if at all. This could result in additional material
non-cash impairment charges in the future.
Interest expense decreased to $22.4 million in fiscal 2001 from $24.9 million in
fiscal 2000. The decrease related primarily to lower interest rates and lower
revolving credit borrowings compared to fiscal 2000. Interest income of $1.6
million in fiscal 2001 was down from $3.9 million in fiscal 2000 due to a lower
average balance of funds available for investment and due to lower interest
rates. Other expense, net increased to $3.7 million in fiscal 2001 from $0.7
million in fiscal 2000. The increase relates primarily to foreign currency
exchange losses.
Provision for income taxes on continuing operations was a benefit of $9.2
million in fiscal 2001 compared to a provision of $35.3 million in fiscal 2000.
The effective tax rate in 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 the year and other charges and losses on investments and related tax impact,
was 37% compared to 40% for
15
fiscal 2000. The decrease in the effective tax rate from fiscal 2000 is due to
on-going tax planning initiatives. A more detailed analysis of the changes in
the provision (benefit) for income taxes is provided in Note 14 of the Notes to
Consolidated Financial Statements.Basic income (loss) per common share from
continuing operations was $(0.00) per common share in fiscal 2001 compared to
$0.61 per common share in fiscal 2000. Diluted income (loss) per common share
from continuing operations decreased to $(0.00) per share in fiscal 2001
compared to $0.60 per share in fiscal 2000.
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. The proceeds were $14.3 million in cash and 755,058 shares
of CNET common stock, which had a fair market value of $12.21 per share on July
2, 2001. From July 2, 2001 through September 30, 2001, the market value of the
CNET shares declined substantially; as a result, we recorded a $3.9 million
impairment charge in net loss from minority-owned investments representing an
other than temporary decline in market value of the CNET common stock. The
Consolidated Financial Statements have been restated to reflect the disposition
of the TechRepublic segment as a discontinued operation in accordance with APB
Opinion No. 30. Accordingly, revenues, costs and expenses, assets, liabilities,
and cash flows of TechRepublic have been excluded from the respective captions
in the Consolidated Statements of Operations, Consolidated Balance Sheets and
Consolidated Statements of Cash Flows, and have been reported through the date
of disposition as "Loss from discontinued operation," "Net assets of
discontinued operation," and "Net cash used by discontinued operation," for all
periods presented. During 2001, we recorded a pre-tax loss of $66.4 million
($39.9 million after tax) to recognize the loss on the sale of TechRepublic.
This pre-tax loss includes a write-down of $42.4 million of assets, primarily
goodwill, to net realizable value, operating losses through the date 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.
SEGMENT ANALYSIS
Research
Research revenues grew 5% to $535.1 million in fiscal 2001, as compared to
$509.8 million in the prior fiscal year. The increase was due primarily to
higher client retention in North America, the continued successful migration of
clients from legacy to seat-based pricing, the increased penetration of new
buying centers within existing clients and continued focus on the growth of
GartnerG2 and Gartner EXP. The new pricing structure provides broader access to
research compared to the traditional individual research subscription. During
fiscal 2001, we launched GartnerG2, a new research service designed specifically
to help business executives use technology to enhance business growth and
productivity. Research gross contribution in fiscal 2001 increased to $352.6
million from $341.1 million in fiscal 2000. Gross contribution margin decreased
slightly to 66% in fiscal 2001 from 67% in fiscal 2000, primarily a result of
the investments in gartner.com and the launch of GartnerG2. Gross contribution
margin increased to 67% for the second half of fiscal 2001 from 64% for the
first half, due in large part to cost reduction measures instituted during the
year.
Consulting
Consulting revenues grew 28% to $276.3 million in fiscal 2001 as compared to
$216.7 million in the prior fiscal year. The increase was due primarily to an
increase in the number of projects, increased project size, and increases in
billing rates. Consulting gross contribution increased by 15% to $86.9 million
in fiscal 2001 from $75.7 million in fiscal 2000. Consulting gross contribution
margin of 31% in fiscal 2001 decreased from 35% in fiscal 2000, primarily due to
increases in compensation expense related to the hiring of additional personnel
in the first half of fiscal 2001, coupled by an increase in non-billable
services, such as training, participation in annual symposia events, and
increased selling activity. Gross contribution margin increased to 39% for the
second half of fiscal 2001 from 22% for the first half, due in large part to
cost reduction measures instituted during the year.
Events
Events revenues grew 22% to $132.7 million in fiscal 2001 as compared to $108.6
million in the prior fiscal year. The increase was due to greater attendance at
existing and new events, as well as increased sponsorship and exhibit revenues.
Events' gross contribution increased by 26% to $63.6 million in fiscal 2001 from
$50.6 million in fiscal 2000, with gross contribution margin of 48% in 2001
compared to 47% in fiscal 2000. The increase in gross contribution margin was
due to the leveraging of existing events and an overall increase in sponsorship
and exhibitor sales.
LIQUIDITY AND CAPITAL RESOURCES
Transition 2002
Cash provided by operating activities during Transition 2002 was $1.2 million,
compared to $6.9 million during Transition 2001. The decrease was primarily due
to additional bonus and commissions payments compared with the prior year
period, termination payments associated with workforce reductions and changes in
balance sheet working capital accounts.
Cash used in investing activities totaled $5.9 million for Transition 2002,
compared to $5.1 million used in Transition 2001. Cash used in investing
activities during Transition 2002 and 2001 included $5.9 million and $4.4
million, respectively, for additions to property, equipment and leasehold
improvements. These additions in Transition 2002 were primarily the result of
investments in infrastructure
16
systems. The additions to property, equipment and leasehold improvements in
Transition 2001 were primarily the result of investments in gartner.com and
other infrastructure systems. Cash used for business acquisitions was $0.0
million and $0.7 million for Transition 2002 and 2001, respectively.
Cash used in financing activities totaled $12.8 million in Transition 2002,
compared to $10.8 million in Transition 2001. The cash used in financing
activities in Transition 2002 resulted primarily from the purchase of treasury
stock of $13.9 million (see discussion below under Stock Repurchases), offset,
in part, by proceeds from the exercise of stock options and the employee stock
purchase plan of ($1.0 million). The cash used in financing activities in
Transition 2001 resulted primarily from the repayment of credit facility loans
of ($15.0 million) and the purchase of treasury stock of $1.0 million (see
discussion below under Stock Repurchases), offset, in part, by proceeds from the
exercise of stock options and the employee stock purchase plan of ($5.3
million).
At December 31, 2002, cash and cash equivalents totaled $109.7 million. The
effect of exchange rates increased cash and cash equivalents by $2.4 million for
Transition 2002, primarily due to the weakening of the U.S. dollar against
certain foreign currencies. In Transition 2001, the negative effect of exchange
rates reduced cash and cash equivalents by $0.8 million.
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 changes in balance
sheet working capital accounts.
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 treasury stock of $47.0 million
(see discussion below under Stock Repurchases) and the repayment of credit
facility loans ($15.0 million), offset, in part, by proceeds from the exercise
of stock options and the employee stock purchase plan ($22.2 million). The cash
used in financing activities in fiscal 2001 resulted primarily from the purchase
of treasury stock of $37.9 million (see discussion below under Stock
Repurchases), offset in part, by proceeds from credit facility borrowings ($15.0
million) and by proceeds from the exercise of stock options and the employee
stock purchase plan ($9.1 million).
Total cash used by discontinued operations, sold in fiscal 2001, was $34.2
million in fiscal 2001 and $30.1 million in fiscal 2000.
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.
OBLIGATIONS AND COMMITMENTS
We have a $200.0 million unsecured senior revolving credit facility led by
JPMorgan Chase Bank. At December 31, 2002, there were no amounts outstanding
under the facility. We are subject to certain customary affirmative, negative
and financial covenants under this credit facility, and continued compliance
with these covenants preclude us from borrowing the maximum amount of the credit
facility from time to time. These covenants are primarily based on financial
results and other measures such as contract value. As a result of these
covenants, our borrowing availability at December 31, 2002 was $58.7 million
compared with $118.9 million at September 30, 2002. The decrease in borrowing
availability at December 31, 2002 is largely attributed to the net loss of
($14.4) million as a result of the $32.2 million of Other charges.
On April 17, 2000, we issued $300.0 million of 6% convertible subordinated notes
to Silver Lake Partners, L.P. and certain of Silver Lake's affiliates ("SLP") in
a private placement transaction. Interest accrues semi-annually by a
corresponding increase in the face amount of the notes. Accordingly, $51.5
million has been added to the face amount of the notes, resulting in a balance
outstanding of $351.5 million at December 31, 2002. These notes are due and
payable on April 17, 2005.
On or after April 17, 2003, subject to satisfaction of certain customary
conditions, we may redeem all of the convertible notes provided that (1) the
average closing price of our Class A Common Stock for the twenty consecutive
trading days immediately preceding the date the redemption notice is given
equals or exceeds $11.175 (150% of the adjusted conversion price of $7.45 per
share), and (2) the closing
17
price of our Class A Common Stock on the trading day immediately preceding the
date the redemption notice is given also equals or exceeds $11.175. The
redemption price is the face amount of the notes plus all accrued interest. If
we initiate the redemption, SLP has the option of receiving payment in cash,
Class A Common Stock (at a conversion price of $7.45 per share), or a
combination of cash and stock. We are under no obligation to initiate any such
redemption.
Commencing on April 18, 2003, or prior to that date should there be a change in
control of the Company, SLP may convert all or a portion of the notes to stock.
If SLP initiates the conversion, we have the option of redeeming all the notes
for cash at the market price of our Common Stock on the date the notice of
conversion is given. Additionally, if we were to redeem all of the notes for
cash in response to SLP's election to convert the notes to Class A Common Stock,
we could incur a significant earnings charge at the time of the redemption equal
to the difference between the market value of our Class A Common Stock at the
time of redemption at the conversion price of $7.45 per share and the carrying
value of the notes. At December 31, 2002, the notes were convertible into 47.3
million shares with a total market value of $434.7 million, using our December
31, 2002 Class A Common Stock market price of $9.20 per share.
On the maturity date, April 17, 2005, we must satisfy any remaining notes for
cash equal to the face amount of the notes plus accrued interest; if none of the
notes has been redeemed or converted by that date, such amount will be $403.2
million.
We also issue letters of credit in the ordinary course of business. As of
December 31, 2002, we had letters of credit outstanding with JPMorgan Chase Bank
for $1.2 million, The Bank of New York for $2.0 million, and others for $0.1
million.
We lease various facilities, furniture and computer equipment under operating
lease arrangements expiring between 2003 and 2025. Future commitments under
non-cancelable operating lease agreements are $30.5 million, $23.5 million,
$20.5 million, $17.4 million and $16.8 million for calendar years 2003, 2004,
2005, 2006 and 2007, respectively.
The obligations remaining at December 31, 2002 relative to the Other charges
recorded in Transition 2002 and during fiscal 2002 and 2001 were $27.7 million
in the aggregate: $15.9 million is for the costs of facility reductions,
principally lease payments, and $11.7 million is for involuntary employee
termination severance and benefits. Payments for involuntary termination
severance and benefits will be made primarily over the next two quarters.
Payments relating to facility reductions will be made over the remaining lease
terms with the majority occurring over the next two to three years.
We had a total remaining investment commitment to SI II of $5.9 million at
December 31, 2002, which may be called by SI II at any time.
We believe that our current cash balances, together with cash anticipated to be
provided by operating activities and borrowings available under the existing
credit facility, will be sufficient for our expected short-term and foreseeable
long-term cash needs in the ordinary course of business. If we were to require
substantial amounts of additional capital to pursue business opportunities that
may arise involving substantial investments of additional capital, or for the
possible redemption of the convertible notes, there can be no assurances that
such capital will be available to us or will be available on commercially
reasonable terms.
Stock Repurchases
On July 19, 2001, our Board of Directors approved the repurchase of up to $75.0
million of Class A and Class B Common Stock. On July 25, 2002, the Board of
Directors increased the authorized stock repurchase program to $125 million of
our Class A and Class B Common Stock. We expect to make repurchases from time to
time over the next two years through open market purchases, block trades or
otherwise. Repurchases are subject to the availability of the stock, prevailing
market conditions, the trading price of the stock, and our financial
performance. Repurchases will be funded from cash flow from operations and
possible borrowings under our existing credit facility. Through December 31,
2002, we repurchased 8,207,926 shares of our common stock for approximately
$83.7 million out of the $125 million approved for the stock repurchase program
at an average price of $10.20 per share.
18
Stock repurchases are summarized below:
Total Cost Cost Per
Total Shares $000 Share
------------ ---------- --------
FISCAL 2000
Recapitalization 4,500,200 $49,877 $11.08
========= ======= ======
FISCAL 2001
Recapitalization 666,491 $ 5,416 $ 8.13
Stock Repurchase Program:
Purchased from IMS Health, Inc. and
affiliates on August 29, 2001 (1) 1,867,149 $18,447 $ 9.88
Open market purchases (1) 458,960 $ 4,325 $ 9.42
Termination of forward purchase
Agreement 1,164,154 $ 9,705 $ 8.34
--------- ------- ------
Total fiscal 2001 4,156,754 $37,893 $ 9.12
========= ======= ======
FISCAL 2002
Stock Repurchase Program (1) 4,465,100 $47,047 $10.54
========= ======= ======
TRANSITION 2002
Stock Repurchase Program (1) 1,416,717 $13,880 $ 9.80
========= ======= ======
(1) REPRESENTS CUMULATIVE REPURCHASES
PURSUANT TO THE $125 MILLION STOCK
REPURCHASE PROGRAM 8,207,926 $83,699 $10.20
========= ======= ======
FACTORS THAT MAY AFFECT FUTURE RESULTS
We operate in a very competitive and rapidly changing environment that involves
numerous risks and uncertainties, some of which are beyond our control. In
addition, our clients and we are affected by the economy. The following section
discusses many, but not all, of these risks and uncertainties.
Economic Conditions. Our revenues and results of operations are influenced by
economic conditions in general and more particularly by business conditions in
the IT industry. A general economic downturn or recession, anywhere in the
world, could negatively effect demand for our products and services and may
substantially reduce existing and potential client information
technology-related budgets. The current economic downturn in the United States
and globally has led to constrained IT spending which has impacted our business
and may materially and adversely affect our business, financial condition and
results of operations, including the ability to maintain continued customer
renewals and achieve contract value, backlog and deferred events revenue. To the
extent our clients are in the IT industry, the severe decline in that sector has
also had a significant impact on IT spending.
Acts of Terrorism or War. Acts of terrorism, acts of war and other unforeseen
events, may cause damage or disruption to our properties, business, employees,
suppliers, distributors and clients, which could have an adverse effect on our
business, financial condition and operating results. Such events may also result
in an economic slowdown in the United States or elsewhere, which could adversely
affect our business, financial condition and operating results.
Competitive Environment. We face direct competition from a significant number of
independent providers of information products and services. We also compete
indirectly against consulting firms and other information providers, including
electronic and print media companies, some of which may have greater financial,
information gathering and marketing resources than we do. These indirect
competitors could choose to compete directly with us in the future. In addition,
limited barriers to entry exist in the markets in which we compete. 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. Although
our market share has been increasing, increased competition may result in loss
of market share, diminished value in our products and services, reduced pricing
and increased marketing expenditures. We may not be successful if we cannot
compete effectively on quality of research and analysis, timely delivery of
information, customer service, the ability to offer products to meet changing
market needs for information and analysis, or price.
19
Renewal of Research Business by Existing Clients. Some of our success depends on
renewals of our subscription-based research products and services, which
constituted 52% for Transition 2002 and 55%, 56% and 59% of our business for
Fiscal 2002, 2001 and 2000, respectively. These research subscription agreements
have terms that generally range from twelve to thirty months. Our ability to
maintain contract renewals is subject to numerous factors, including those
described in this Transition Report. Client retention rates were 74% for
Transition 2002 and 75%, 74% and 74% for Fiscal 2002, 2001 and 2000,
respectively. 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
25% for Transition 2002 and 30%, 29% and 25% of our revenues for Fiscal 2002,
2001 and 2000, respectively. Such consulting engagements typically are
project-based and non-recurring. Our ability to replace consulting engagements
is subject to numerous factors, including those described in this Transition
Report. Any material decline in our ability to replace consulting arrangements
could have an adverse impact on our revenues and our financial condition.
Hiring and Retention of Employees. Our success depends heavily upon the quality
of our senior management, research analysts, consultants, sales and other key
personnel. We face competition for the limited pool of these qualified
professionals from, among others, technology companies, market research firms,
consulting firms, financial services companies and electronic and print media
companies, some of which have a greater ability to attract and compensate these
professionals. Some of the personnel that we attempt to hire are subject to
non-compete agreements that could impede our short-term recruitment efforts. Any
failure to retain key personnel or hire and train additional qualified
personnel, as required to support the evolving needs of clients or growth in our
business, could adversely affect the quality of our products and services, and
therefore, our future business and operating results.
Maintenance of Existing Products and Services. We operate in a rapidly evolving
market, and our success depends upon our ability to deliver high quality and
timely research and analysis to our clients. Any failure to continue to provide
credible and reliable information that is useful to our clients could have a
material adverse effect on future business and operating results. Further, if
our predictions prove to be wrong or are not substantiated by appropriate
research, our reputation may suffer and demand for our products and services may
decline. In addition, we must continue to improve our methods for delivering our
products and services in a cost-effective manner. Failure to increase and
improve our electronic delivery capabilities could adversely affect our future
business and operating results.
Introduction of New Products and Services. The market for our products and
services is characterized by rapidly changing needs for information and
analysis. To maintain our competitive position, we must continue to enhance and
improve our products and services, develop or acquire new products and services
in a timely manner, and appropriately position and price new products and
services relative to the marketplace and our costs of producing them. Any
failure to achieve successful client acceptance of new products and services
could have a material adverse effect on our business, results of operations or
financial position.
International Operations. A substantial portion of our revenues is derived from
sales outside of North America as follows: 35% for Transition 2002, and 34%, 33%
and 34% of our business for Fiscal 2002, 2001 and 2000, respectively. As a
result, our operating results are subject to the risks inherent in international
business activities, including general political and economic conditions in each
country, changes in market demand as a result of exchange rate fluctuations and
tariffs and other trade barriers, challenges in staffing and managing foreign
operations, changes in regulatory requirements, compliance with numerous foreign
laws and regulations, different or overlapping tax structures, higher levels of
United States taxation on foreign income, and the difficulty of enforcing client
agreements, collecting accounts receivable and protecting intellectual property
rights in international jurisdictions. We rely on local distributors or sales
agents in some international locations. If any of these arrangements are
terminated by our agent or us, we may not be able to replace the arrangement on
beneficial terms or on a timely basis or clients of the local distributor or
sales agent may not want to continue to do business with us or our new agent.
Branding. We believe that our "Gartner" brand is critical to our efforts to
attract and retain clients and that the importance of brand recognition will
increase as competition increases. We may expand our marketing activities to
promote and strengthen the Gartner brand and may need to increase our marketing
budget, hire additional marketing and public relations personnel, expend
additional sums to protect the brand and otherwise increase expenditures to
create and maintain client brand loyalty. If we fail to effectively promote and
maintain the Gartner brand, or incur excessive expenses in doing so, our future
business and operating results could be materially and adversely impacted.
Investment Activities. We maintain investments in equity securities in private
and publicly traded companies through direct ownership and through wholly and
partially owned venture capital funds. The companies we invest in are primarily
early to mid-stage IT-based and Internet-enabled businesses. There are numerous
risks related to such investments, due to their nature and the volatile public
markets, including significant delay or failure of anticipated returns. In
addition, these entities may require additional financing to meet their cash and
operational needs; however, there can be no assurance that such funds will be
available to the extent needed at terms acceptable to the entities, if at all.
As a result, our financial results and financial position could be materially
impacted.
20
Indebtedness. We have incurred significant indebtedness through our 6%
convertible notes, of which $351.5 million was outstanding at December 31, 2002.
Additionally, we have a $200.0 million senior revolving credit facility under
which we can incur significant additional indebtedness. The affirmative,
negative and financial covenants of these debt facilities could limit our future
financial flexibility. As a result of these covenants, our borrowing
availability at December 31, 2002 was $58.7 million. The associated debt service
costs could impair future operating results. Our outstanding debt may limit the
amount of cash or additional credit available to us, which could restrain our
ability to expand or enhance products and services, respond to competitive
pressures or pursue future business opportunities requiring substantial
investments of additional capital. On the maturity date of the 6% convertible
notes, April 17, 2005, we must satisfy any remaining notes for cash equal to the
face amount of the notes plus accrued interest; if none of the notes have been
redeemed or converted by that date, such amount will be $403.2 million. The
payment of this amount could materially adversely impact our future business and
operating results.
Convertible Notes. Commencing on April 18, 2003, or sooner in certain
circumstances upon a change in control of the Company, the holders of our 6%
convertible notes (of which $351.5 million was outstanding at December 31, 2002)
may elect to convert all or a portion of the notes to shares of our Class A
Common Stock. If all or a substantial portion of the notes are converted, the
note holders will own a substantial number of shares of our Class A Common
Stock. At December 31, 2002, the notes were convertible into 47.3 million shares
of our Class A Common Stock, which would constitute 37% of our combined Class A
and Class B Common Stock outstanding on that date. This is based upon the
conversion price of $7.45 per share. If the holders elect to convert the notes,
we may redeem them. See "Obligations and Commitments" and "Indebtedness" above.
If we do not redeem the notes and all or a substantial portion of the notes are
converted, the holder of the notes (SLP) will become our largest shareholder
(based upon our shareholder base as of December 31, 2002). This, in turn, may
(1) give SLP the ability to exercise significant control over the Company; (2)
create significant dilution for other shareholders; and (3) cause volatility in
our stock price. If we want to redeem the convertible notes in response to the
note holders' election to convert, or on our own under certain circumstances,
there can be no assurance that we will be able to obtain sufficient capital on a
commercially reasonable basis, or at all, in order to fund a redemption. Even if
we could obtain sufficient capital to fund a redemption, it could materially
adversely impact our future business and operating results.
Organizational and Product Integration Related to Acquisitions. We have made and
may continue to make acquisitions of, or significant investments in, businesses
that offer complementary products and services. The risks involved in each
acquisition or investment include the possibility of paying more than the value
we derive from the acquisition, dilution of the interests of our current
stockholders or decreased working capital, increased indebtedness, the
assumption of undisclosed liabilities and unknown and unforeseen risks, the
ability to integrate successfully the operations and personnel of the acquired
business, the ability to retain key personnel of the acquired company, the time
to train the sales force to market and sell the products of the acquired
company, the potential disruption of our ongoing business and the distraction of
management from our business. The realization of any of these risks could
adversely affect our business.
Enforcement of Our Intellectual Property Rights. We rely on a combination of
copyright, patent, trademark, trade secret, confidentiality, non-compete and
other contractual provisions to protect our intellectual property rights.
Despite our efforts to protect our intellectual property rights, unauthorized
third parties may obtain and use technology or other information that we regard
as proprietary. Our intellectual property rights may not survive a legal
challenge to their validity or provide significant protection for us. The laws
of certain countries do not protect our proprietary rights to the same extent as
the laws of the United States. Accordingly, we may not be able to protect our
intellectual property against unauthorized third-party copying or use, which
could adversely affect our competitive position. Our employees are subject to
non-compete agreements. When the non-competition period expires, former
employees may compete against us. If a former employee chooses to compete
against us prior to the expiration of the non-competition period, there is no
assurance that we will be successful in our efforts to enforce the non-compete
provision.
Possibility of Infringement Claims. Third parties may assert infringement claims
against us. Regardless of the merits, responding to any such claim could be time
consuming, result in costly litigation and require us to enter into royalty and
licensing agreements which may not be offered or available on reasonable terms.
If a successful claim is made against us and we fail to develop or license a
substitute technology, our business, results of operations or financial position
could be materially adversely affected.
Agreements with IMS Health Incorporated. In connection with our recapitalization
in July 1999, we agreed to certain restrictions on business activity to reduce
the risk to IMS Health and its stockholders of substantial tax liabilities
associated with the spin-off by IMS Health of its equity interest in us. We also
agreed to assume the risk of such tax liabilities if we were to undertake
certain business activities that give rise to the liabilities. As a result, we
may be limited in our ability to undertake acquisitions involving the issuance
of a significant amount of stock unless we were to seek and obtain a ruling from
the IRS that the transaction will not give rise to such tax liabilities. In
addition, we agreed to certain limits on the purchase of our Common Stock under
the terms of the recapitalization.
Potential Fluctuations in Operating Results. Our quarterly and annual operating
income may fluctuate in the future as a result of many factors, including the
timing of the execution of research contracts, which typically occurs in the
fourth calendar quarter, the extent of completion of consulting engagements, the
timing of symposia and other events, which also occur to a greater extent in the
fourth calendar quarter, the amount of new business generated, the mix of
domestic and international business, changes in market demand for our products
and services, the timing of the development, introduction and marketing of new
products and services, and competition in
21
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS No. 145") was issued. FASB Statement No. 4
required all gains and losses from the extinguishment of debt to be reported as
extraordinary items and Statement No. 64 related to the same matter. SFAS No.
145 requires gains and losses from certain debt extinguishment to not be
reported as extraordinary items when the use of debt extinguishment is part of
the risk management strategy. Statement No. 44 was issued to establish
transitional requirements for motor carriers relative to intangible assets.
Those transitions are completed, therefore Statement No. 44 is no longer
necessary. SFAS No. 145 also amends Statement No. 13 requiring sale-leaseback
accounting for certain lease modifications. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002. The provisions relating to sale-leaseback
are effective for transactions after May 15, 2002. We adopted SFAS No. 145 in
Transition 2002. Accordingly, the Loss from the extinguishment of debt of $2.9
million, or $(0.02) per share in fiscal 2000 was reclassified to continuing
operations.
In June 2002, Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities" ("SFAS 146") was issued.
This Statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force Issue
("EITF") 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS 146 and EITF 94-3 relates
to the timing of liability recognition. Under SFAS 146, a liability for a cost
associated with an exit or disposal activity is recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost was recognized at the
date of an entity's commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. We accounted for the exit and disposal activities during Transition 2002,
in accordance with EITF 94-3 and, accordingly, charged to our statement of
operations in Transition 2002 all appropriate exit costs for plans approved by
management before December 31, 2002 (see Note 6 - Other Charges in the Notes to
Consolidated Financial Statements).
In December 2002, Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
148") was issued. SFAS 148 amends SFAS No. 123, "Stock-Based Compensation"
("SFAS 123"), to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosure in both annual and interim financial
statements about the effects on reported net income of an entity's method of
accounting for stock-based employee compensation. The disclosure provisions of
SFAS 148 are effective for fiscal years ending after December 15, 2002 and have
been incorporated into the financial statements and accompanying footnotes
included in this Transition Report on Form 10-KT.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
As of December 31, 2002, we have exposure to market risk for changes in interest
rates primarily from borrowings under long-term debt which consists of a $200.0
million unsecured senior revolving credit facility with JPMorgan Chase Bank and
$351.5 million of 6% convertible subordinated notes (see Note 10--Debt in the
Notes to Consolidated Financial Statements). At December 31, 2002, there were no
amounts outstanding under the revolving credit facility and our borrowing
availability was $58.7 million. Under the revolving credit facility, the
interest rate on borrowings is LIBOR plus an additional 100 to 200 basis points
based on our debt-to-EBITDA ratio. We believe that an increase or decrease of
10% in the effective interest rate on available borrowings from our senior
revolving credit facility, if fully utilized, would not have a material effect
on our future results of operations. If markets were to decline, we could be
required to accrue interest on the 6% convertible debt that would exceed those
based on current market rates. Each 25 basis point decrease in interest would
have an associated annual opportunity cost of approximately $0.9 million based
on the December 31, 2002 balance. Each 25 basis point increase or decrease in
interest rates would have an approximate $0.5 million annual effect under the
revolving credit facility if fully utilized.
Investment Risk
We are exposed to market risk as it relates to changes in the market value of
our equity investments. We invest in equity securities of public and private
companies directly and through SI I, a wholly-owned affiliate, and SI II, of
which we own 34%. SI I and SI II are engaged in making venture capital
investments in early to mid-stage IT-based or Internet-enabled companies (see
Note 5 - Investments in the Notes to the Consolidated Financial Statements). As
of December 31, 2002, we had investments in equity securities totaling $10.7
million. Unrealized losses of $25,272 have been recorded net of deferred taxes
of $16,848 as a separate component of accumulated other comprehensive (loss)
income in the stockholders' (deficit) equity section of the Consolidated Balance
Sheets. These investments are inherently risky as the businesses are typically
in early development stages and may never develop. Further, certain of these
investments are in publicly traded companies whose shares are subject to
significant market price volatility. Adverse changes in market conditions and
22
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, 2002, this would result in a non-cash impairment
charge of $10.7 million. We are continuing efforts to sell all of our
investments owned through SI I and SI II.
Foreign Currency Exchange Risk
We face two risks related to foreign currency exchange: translation risk and
transaction risk. Amounts invested in our foreign operations are translated into
U.S. dollars at the exchange rates in effect at the balance sheet date. The
resulting translation adjustments are recorded as a component of accumulated
other comprehensive income (loss) in the stockholders' equity (deficit) section
of the Consolidated Balance Sheets. Our foreign subsidiaries generally collect
revenues and pay expenses in currencies other than the United States dollar.
Since the functional currency of our foreign operations are generally
denominated in the local currency of our subsidiaries, the foreign currency
translation adjustments are reflected as a component of stockholders' equity and
do not impact operating results. Revenues and expenses in foreign currencies
translate into higher or lower revenues and expenses in U.S. dollars as the U.S.
dollar weakens or strengthens against other currencies. Therefore, changes in
exchange rates may negatively affect our consolidated revenues and expenses (as
expressed in U.S. dollars) from foreign operations. Currency transaction gains
or losses arising from transactions in currencies other than the functional
currency are included in results of operations.
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, 2002, we had
three foreign currency forward contracts outstanding. Foreign exchange forward
contracts are reflected at fair value with gains and losses recorded currently
in earnings.
The following table presents information about our foreign currency forward
contracts outstanding as of December 31, 2002, expressed in U.S. dollar
equivalents.
UNREALIZED GAIN (LOSS)
CURRENCY CURRENCY CONTRACT FORWARD AT DECEMBER 31, 2002
PURCHASED SOLD AMOUNT EXCHANGE RATE $000 EXPIRATION DATE
--------- ---- ------ ------------- ---- ---------------
Swiss Francs U.S. Dollars $4.9 million 1.4000 $ 45 January 24, 2003
Norwegian Krona U.S. Dollars $1.0 million 7.0949 $ 13 January 24, 2003
Euros U.S. Dollars $5.3 million 1.0370 $ 55 January 24, 2003
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements and schedule supporting such consolidated
financial statements for Transition 2002 and for each of the fiscal years in the
three-year period ended September 30, 2002, together with the reports of KPMG
LLP, independent auditors, dated February 4, 2003, are included in this
Transition Report on Form 10-KT beginning on Page 41.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL INFORMATION ABOUT OUR BOARD OF DIRECTORS
Each of our directors is elected for a three-year staggered term. Our Board's
ten directors are divided into three classes: Class I, Class II and Class III.
Each director is further designated as a Common A Director or a Common B
Director. Holders of our Class A Common Stock elect two directors and holders of
our Class B Common Stock elect eight directors. One class of directors is
elected at each Annual Meeting.
The following table shows when each class of directors is elected, how many of
those directors are Common A or Common B directors and how each director is
classified:
23
Number of Names of Number of Names of
Common A Common A Common B Common B
Directors Directors Directors Directors
Class I: Term Expires 2006 0 None 3 Hutchins, Pagliuca, Roux
and every 3 years thereafter
Class II: Term Expires 2004 1 Webb 2 Fuchs, Sisco
and every 3 years thereafter
Class III: Term Expires 2005 1 Grabe 3 Fleisher, Hopper, Smith
and every 3 years thereafter
On October 17, 2002, Kenneth Roman, a Class III director whose term would have
expired at the 2005 Annual Meeting, retired from our Board. Our Board elected
James Smith to fill the vacancy. Mr. Smith's term expires at the 2005 Annual
Meeting.
None of our directors or executive officers is related to another director or
executive officer by blood, marriage or adoption. Mr. Fleisher's employment
agreement provides that we will include him on the slate of nominees to be
elected to our Board during the term of his agreement. See "Item 11. Executive
Compensation - Employment Agreements with Named Executive Officers." Mr.
Hutchins and Mr. Roux serve as directors pursuant to an agreement we entered
into in connection with the issuance of our convertible notes in April 2000. See
"Item 13. Certain Relationships and Transactions - Relationship with Silver Lake
Partners, L.P." There are no other arrangements between any director or nominee
and any other person pursuant to which the director or nominee was selected.
INFORMATION ABOUT CLASS I DIRECTORS (TERM EXPIRES AT 2006 ANNUAL MEETING)
CLASS I COMMON A DIRECTORS
There are currently no Common A Directors in Class I.
CLASS I COMMON B DIRECTORS
GLENN H. HUTCHINS, age 47, has been a director since April 2000. Mr.
Hutchins is a managing member of Silver Lake Technology Management, L.L.C.,
which he co-founded in January 1999. Silver Lake Technology Management is a
manager of technology private equity firms, including Silver Lake Partners,
L.P., and is the general partner of Silver Lake Partners, L.P. 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., CARE, Inc., Instinet Group Incorporated and Seagate Technology.
He is also a trustee of Lawrenceville School. Mr. Hutchins holds a bachelor's
degree from Harvard College, an M.B.A. degree from Harvard Business School and a
J.D. degree from Harvard Law School.
STEPHEN G. PAGLIUCA, age 48, has 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., Instinet Group Incorporated and FTD. Mr.
Pagliuca, a certified public accountant, holds a bachelor's degree from Duke
University and an M.B.A. degree from Harvard Business School.
DAVID J. ROUX, age 46, has been a director since July 2001. Mr. Roux is a
managing member of Silver Lake Technology Management, L.L.C., which he
co-founded in January 1999. Silver Lake Technology Management is a manager of
technology private equity firms, including Silver Lake Partners, L.P., and is
the general partner of Silver Lake Partners, L.P. From February 1998 to November
1998, he served as the Chief Executive Officer and President of Liberate
Technologies, a software platform provider. From September 1994 to December
1998, Mr. Roux held various management positions with Oracle Corporation, a
systems and applications software provider, most recently as Executive Vice
President of Corporate Development. Mr. Roux is a director of Seagate
Technology, VERITAS Software Corporation and a number of private companies. Mr.
Roux holds a bachelor's degree from Harvard College, an M.B.A. degree from
Harvard Business School and a M. Phil. degree from Kings College, Cambridge
University in the United Kingdom.
24
INFORMATION ABOUT CLASS II DIRECTORS (TERM EXPIRES AT 2004 ANNUAL MEETING)
CLASS II COMMON A DIRECTOR
MAYNARD G. WEBB, JR., age 47, 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.
CLASS II COMMON B DIRECTORS
ANNE SUTHERLAND FUCHS, age 55, has been a director since July 1999. On
January 1, 2003, Ms. Fuchs became a consultant to private equity firms. Prior to
this, Ms. Fuchs was employed by LVMH Moet 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.
DENNIS G. SISCO, age 56, has been a director since October 1990. Since
January 1998, Mr. Sisco has been a partner in Behrman Capital, a private equity
firm. From January 1997 through December 1997, Mr. Sisco served as the President
of Storm Ridge Capital, a venture capital firm. From December 1988 to February
1997, Dun & Bradstreet Corporation and Cognizant Corporation employed him in
various capacities, most recently as Executive Vice President of Cognizant
Corporation with responsibility for several operating units and business
development. Mr. Sisco is a director of Mercator Software, Inc. and is on the
Board of Trustees of McDaniel College. Mr. Sisco holds a bachelor's degree from
McDaniel College.
INFORMATION ABOUT CLASS III DIRECTORS (TERM EXPIRES AT 2005 ANNUAL MEETING)
CLASS III COMMON A DIRECTOR
WILLIAM O. GRABE, age 64, has been a director since April 1993. Since
January 1994, Mr. Grabe has been a general partner of General Atlantic Partners,
an investment 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 Bottomline
Technologies, Compuware Corporation, Digital China Holdings Limited, Exact
Holding N.V., and FirePond, Inc. 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.
CLASS III COMMON B DIRECTORS
MICHAEL D. FLEISHER, age 38, has been Chairman of our Board since October
2001, a director and our Chief Executive Officer since October 1999, and our
President since May 2001. From February 1999 to October 1999, he served as our
Chief Financial Officer and Executive Vice President, Finance and
Administration. Mr. Fleisher joined Gartner in April 1993 and has held several
other management positions, including Executive Vice President and President,
Emerging Business; Vice President, Business Development; and Director, Strategic
Planning. Prior to joining Gartner, Mr. Fleisher worked at Bain Capital, Inc.
where he was involved in the buyout of Gartner by management and Bain Capital
from Saatchi & Saatchi in October 1990. Mr. Fleisher is a director of Ameritrade
Holding Corp. and is on the board of NYC 2012, Inc. Mr. Fleisher holds a
bachelor's degree from the Wharton School of the University of Pennsylvania.
MAX D. HOPPER, age 68, has 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 ACCRUE Software, Inc., Digex, Inc., Perficient, Inc. and United
Stationers, Inc. Mr. Hopper holds a bachelor's degree from the University of
Houston.
JAMES C. SMITH, age 62, has been a director since October 2002. Mr. Smith
is 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 holds a bachelor's degree from
Northeastern University.
25
EXECUTIVE OFFICERS
Listed below are the names, ages and titles of our executive
officers:
NAME AGE TITLE
---- --- -----
Michael D. Fleisher 38 Chairman of the Board, Chief Executive Officer and President
Maureen E. O'Connell 41 Executive Vice President, Chief Financial and Administrative
Officer
Robert E. Knapp 44 Executive Vice President, Research and Advisory Services
Zachary Morowitz 46 Executive Vice President, Corporate Development
Steven Tait 43 Executive Vice President, Sales and Client Operations
MR. FLEISHER has been Chairman of our Board since October 2001, a director
and Chief Executive Officer since October 1999 and our President since May 2001.
For more information on Mr. Fleisher's business experience, see the description
provided under "Information About Class III Directors" above.
MS. O'CONNELL has been Executive Vice President, Chief Financial and
Administrative Officer since late September 2002. Prior to joining us, Ms.
O'Connell served as Chief Financial Officer at Barnes & Noble from March 2000
through September 2002. Prior to that, Ms. O'Connell was Chief Financial Officer
at Publishers Clearing House, BMG Direct, Primedia, and at two Primedia
divisions. Ms. O'Connell holds a bachelor's degree from the Stern School of
Business at New York University and is a certified public accountant.
MR. KNAPP has been Executive Vice President, Research and Advisory
Services since June 2001. Mr. Knapp joined us in August 2000 as Executive Vice
President and Chief Marketing Officer. From 1993 to July 2000, Mr. Knapp was a
chief client officer at Siegelgale, a branding and e-services firm, where he
directed all strategy and consulting services for the firm worldwide. Prior to
Siegelgale, Mr. Knapp held various positions at Lotas Minard Patton McIver, BBDO
and Lintas Worldwide. Mr. Knapp holds a bachelor's degree from the University of
Miami.
MR. MOROWITZ has been Executive Vice President, Corporate Development
since October 2002. From October 1999 to October 2002, Mr. Morowitz served as
Senior Vice President, Corporate Development. Mr. Morowitz joined us in 1993 and
has held several other management positions, including Senior Vice President,
Worldwide Events; Senior Vice President, Product & Service Development; and Vice
President, Business Development. Prior to joining us, Mr. Morowitz was Chief
Operating Officer at New Science Associates, a company we acquired in 1993. Mr.
Morowitz holds a bachelor's and a master's degree from the University of
California at Berkeley.
MR. TAIT has been Executive Vice President, Sales and Client Operations
since June 2001. Mr. Tait joined us in July 2000 as Senior Vice President, Sales
and Client Operations. Prior to joining us, Mr. Tait was employed by Xerox
Corporation for 18 years. During that time, Mr. Tait held a number of positions
including Vice President, Xerox Offsite Document Management Services; Vice
President, Xerox Global Services Business Unit; CEO and President, Xerox
Connect; and Vice President, Xerox Professional Services. Mr. Tait holds a
bachelor's degree from Coventry University in England. Mr. Tait has resigned his
position as of March 31, 2003.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers, directors and persons who beneficially own more than 10% of
either class of our Common Stock to file reports of ownership and changes of
ownership with the SEC and to furnish us with copies of the reports they file.
Based solely on our review of the reports received by us, or written
representations from certain reporting persons, during Transition 2002, we
believe that all reports were timely filed, except as follows: Messrs. Grabe,
Hopper, Roman (resigned October 17, 2002), Pagliuca, Sisco and Webb and Ms.
Fuchs filed late Form 4's reporting the receipt of director common stock
equivalents; Mr. Webb had an additional late Form 4 filing reporting one late
transaction, and Mr. Smith's initial filing on Form 3 was late.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table provides information about compensation paid by us
during Transition 2002 (October 1, 2002 to December 31, 2002) and the fiscal
years ended September 30, 2000, 2001 and 2002 to (i) our Chief Executive Officer
and (ii) each of our other executive officers who were serving in such capacity
at the end of Transition 2002 (collectively, the "Named Executive Officers"):
26
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
NAME AND PRINCIPAL FISCAL UNDERLYING ALL OTHER
POSITION YEAR ANNUAL COMPENSATION(1) OPTIONS(#) COMPENSATION($)(3)
-------- ---- ---------------------- ---------- ------------------
SALARY ($) BONUS ($)(2)
---------- ------------
Michael D. Fleisher (4) T2002 $162,500 -- 250,000 $ 1,718
Chief Executive Officer 2002 450,000 $450,000 500,000 16,451
And President 2001 450,000 360,000 -- 10,383
2000 450,000 803,250 500,000 10,362
Maureen O'Connell(5) T2002 $125,000 $400,000 650,000 $ 1,550
Executive Vice President
and Chief Financial and
Administrative Officer
Robert E. Knapp (6) T2002 $ 97,500 -- 100,000 --
Executive Vice President, 2002 325,000 $250,000 150,000 $ 7,550
Research and Advisory 2001 325,000 200,000 100,000 5,283
Services 2000 49,376 75,000 250,000 60,625
Zachary Morowitz(7) T2002 $ 68,750 -- 200,000 $ 4,010
Executive Vice President,
Corporate Development
Steven Tait (8) T2002 $ 90,000 -- 100,000 --
Executive Vice President, 2002 300,000 $200,000 150,000 $110,121
Sales and Client Operations 2001 300,000 160,000 175,000 7,400
----------
(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 period noted although such
amounts are payable in the subsequent fiscal year. The amounts shown
exclude bonuses paid in the period noted but earned in prior period. The
bonus award indicated for Mr. Fleisher for fiscal 2000 include 75 percent
of a retention bonus approved in fiscal 1999 but not earned until fiscal
2000 (the other 25 percent was earned in fiscal 1999). For fiscal 2000,
the retention portion of this bonus award was $135,000 for Mr. Fleisher.
The T2002 bonus amount for Ms. O'Connell represents her sign-on bonus.
(3) For Transition 2002, the amount shown represents (i) premiums paid for
life insurance as follows: Mr. Fleisher - $1,172; Ms. O'Connell - $1,550;
and Mr. Morowitz- $4,010; (ii) premiums paid for long term disability
insurance: Mr. Fleisher - $546. For fiscal 2002, the amount shown
represents (i) premiums paid for life insurance as follows: Mr. Fleisher -
$8,213; Mr. Knapp - $1,450; and Mr. Tait - $2,850; (ii) premiums paid for
long term disability insurance: Mr. Fleisher - $2,138; (iii) matching and
profit sharing contributions under our 401(k) plan as follows: Mr.
Fleisher - $6,100; Mr. Knapp - $6,100; and Mr. Tait - $6,100; and (iv)
relocation expenses for Mr. Tait - $101,171.
(4) Mr. Fleisher was appointed Chief Executive Officer in October 1999 and
President in May 2001.
(5) Ms. O'Connell was appointed Executive Vice President and Chief Financial
and Administrative Officer effective September 23, 2002.
(6) Mr. Knapp was appointed Executive Vice President in August 2000.
(7) Mr. Morowitz was appointed Executive Vice President, Corporate Development
effective October 1, 2002.
(8) Mr. Tait was appointed Executive Vice President in June 2001. Mr. Tait has
announced his resignation effective March 31, 2003.
27
OPTIONS GRANTED IN TRANSITION 2002 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
Transition 2002:
INDIVIDUAL GRANT (1) POTENTIAL REALIZABLE
-------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL OPTIONS STOCK PRICE RATES OF
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR OPTION TERM (2)
UNDERLYING EMPLOYEES PRICE EXPIRATION --------------------------------
NAME OPTIONS IN T2002 PER SHARE DATE 5% 10%
---- ------- -------- --------- ---- -- ---
Michael D. Fleisher 250,000 6.94% $ 6.64 10/10/12 $1,043,965 $2,645,612
Maureen O'Connell 650,000 18.05% 6.64 10/10/12 2,714,309 6,878,592
Robert E. Knapp 100,000 2.78% 6.64 10/10/12 417,586 1,058,245
Zachary Morowitz 200,000 5.55% 6.64 10/10/12 835,172 2,116,490
Steven Tait 100,000 2.78% 6.64 10/10/12 417,586 1,058,245
----------
(1) These options were granted under our 1996 or 1998 Long Term Stock Option
Plans and are subject to the terms of the applicable plan. Twenty-five
percent of the options become exercisable on the first anniversary of the
grant date and 2.08% of the options become exercisable monthly thereafter.
(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 TRANSITION 2002 BY THE NAMED EXECUTIVE OFFICERS AND
DECEMBER 31, 2002 OPTION VALUES
The following table provides information regarding options exercised by
each Named Executive Officer during Transition 2002, the number of unexercised
options at December 31, 2002 and the value of unexercised "in-the-money" options
at December 31, 2002:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT DECEMBER 31, 2002 AT DECEMBER 31, 2002 (1)
ACQUIRED VALUE ---------------------------- ------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Michael D. Fleisher -- -- 1,114,501 834,999 $104,110 $ 746,250
Maureen O'Connell -- -- -- 650,000 -- 1,664,000
Robert E. Knapp -- -- 247,917 352,083 13,125 287,875
Zachary Morowitz -- -- 98,709 304,291 28,158 533,250
Steven Tait -- -- 157,813 342,187 13,125 287,875
----------
(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, 2002, which was $9.20 per share.
28
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: $40,000 per director, 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 $1,500 per chair of each committee of our Board; payable in the same manner as the Annual Fee.
Chair Fee:
Attendance Fee for Board None; however, we reimburse directors for their expenses to attend meetings.
Meetings:
Attendance Fee for Committee Commencing on November 1, 2002, $1,000 per committee meeting attended.
Meetings:
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 5 years from the date of grant (10 years under the 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.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
MR. FLEISHER. Mr. Fleisher entered into an Employment Agreement effective
October 1, 2002 (the "Fleisher Agreement"). Mr. Fleisher's new compensation
package was designed to compensate him for the additional responsibilities he
holds as Chairman of our Board and was determined after considering compensation
levels of other chairmen and chief executive officers at comparable companies.
Under the Fleisher Agreement, he will serve as Chairman and Chief Executive
Officer through September 30, 2005, and thereafter for subsequent one year
periods unless either party provides ninety days' written notice of its
intention not to renew. During the term of the Fleisher Agreement, Mr. Fleisher
will be included on our slate of nominees to be elected to our Board.
Under the Fleisher Agreement, Mr. Fleisher will receive a base salary of
$650,000 for fiscal 2003; thereafter his base salary is subject to annual
adjustments by our Board or Compensation Committee. For fiscal 2003, Mr.
Fleisher's target bonus is between $650,000 and $975,000; thereafter our Board
or Compensation Committee will establish the annual target bonus, and the bonus
will be payable based on achievement of specified objectives. Under the Fleisher
Agreement, Mr. Fleisher received a grant of 250,000 stock options on October 1,
2002, and will receive additional grants of 250,000 options each on October 1,
2003 and October 1, 2004. These stock options will vest 25% one year after grant
and 2.08% per month thereafter, subject to continuous status as an employee or
consultant.
Mr. Fleisher's employment is at will and may be terminated by him or us
upon sixty days' notice. If we terminate Mr. Fleisher's employment involuntarily
without Business Reasons (as defined in the Fleisher Agreement) or a
Constructive Termination (as defined in the Fleisher Agreement) occurs, or if we
do not renew the Fleisher Agreement upon its expiration, Mr. Fleisher will be
entitled to receive: (a) his base salary for two years following the Termination
Date (as defined in the Fleisher Agreement) at the rate then in effect, payable
in accordance with our regular payroll schedule; (b) his target bonus for the
year in which the Termination Date occurs, target bonus for the next fiscal
year, and a pro-rated portion of his target bonus for the balance of the two
year severance period, payable concurrently with our payment of bonuses to other
executives; (c) acceleration in full of vesting of all equity arrangements
subject to vesting and granted prior to October 1, 2002; (d) continued vesting
during the Severance Period (as defined in the Fleisher Agreement) of all
outstanding equity awards granted on or after October 1, 2002; (e) the ability
to exercise all equity arrangements for either one year following the
Termination Date or one year following the end of the Severance Period; (f) at
our cost, group health benefits pursuant to our standard programs for himself,
his spouse and any children for two years after the Termination Date or until he
obtains other employment, if that occurs sooner; and (g)
29
reasonable office support for one year following the Termination Date, or until
he obtains other employment, if that occurs sooner. We will not be required to
continue to pay the bonus specified in clause (b) above if Mr. Fleisher violates
his non-competition obligations to us.
If a Change in Control (as defined in the Fleisher Agreement) occurs, upon
the Change in Control Mr. Fleisher will be entitled to receive: (a) three times
his base salary then in effect; (b) three times his minimum target bonus for the
fiscal year in which the Change in Control occurs (plus any unpaid bonus from
the prior fiscal year); (c) acceleration in full of vesting of all equity
arrangements subject to vesting; (d) the ability to exercise all options
received for either 90 days or one year following the Change in Control; (e) 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 (f)
any Gross-Up Payments (as defined in the Fleisher Agreement) for Mr. Fleisher's
excise tax liabilities.
If Mr. Fleisher's employment is terminated due to his disability, Mr.
Fleisher will be entitled to receive (a) base salary for three years after the
Termination Date at the rate then in effect; (b) his minimum target bonus for
the fiscal year in which the termination occurs, payable on the Termination
Date; (c) following the end of the fiscal year in which the termination occurs,
any bonus that would have been payable in excess of the minimum target bonus for
the year in which the termination occurs; (d) acceleration in full of vesting of
all equity arrangements subject to vesting, and all options will remain
exercisable for either 90 days or one year after the Termination Date; and (e)
at our cost, group health benefits pursuant to our standard programs for
himself, his spouse and any children for three years after the Termination Date.
We may deduct from the salary specified in clause (a) above, any payments
received by Mr. Fleisher under any disability benefit program maintained by us.
MS. O'CONNELL. Ms. O'Connell entered into an Employment Agreement
effective September 23, 2002 (the "O'Connell Agreement"). Under the O'Connell
Agreement, she will serve as Executive Vice President and Chief Financial and
Administrative Officer through September 30, 2005, and thereafter for subsequent
one year periods unless either party provides ninety days' written notice of its
intention not to renew.
Under the O'Connell Agreement, Ms. O'Connell will receive a base salary of
$500,000 for fiscal 2003; thereafter her base salary is subject to annual
adjustments by our Board or Compensation Committee. For fiscal 2003, Ms.
O'Connell's target bonus is between $400,000 and $800,000; thereafter our Board
or Compensation Committee will establish the annual target bonus, and the bonus
will be payable based on achievement of specified objectives. Under the
O'Connell Agreement, Ms. O'Connell received a grant of 650,000 stock options on
October 17, 2002. These stock options will vest 25% one year after grant and
2.08% per month thereafter, subject to continuous status as an employee or
consultant. Ms. O'Connell also received a sign-on bonus of $400,000.
Ms. O'Connell's employment is at will and may be terminated by her or us
upon thirty days' notice. If we terminate Ms. O'Connell's employment
involuntarily without Business Reasons (as defined in the O'Connell Agreement)
or a Constructive Termination (as defined in the O'Connell Agreement) occurs, or
if we do not renew the O'Connell Agreement upon its expiration, Ms. O'Connell
will be entitled to receive: (a) her base salary for two years following the
Termination Date (as defined in the O'Connell Agreement) at the rate then in
effect, payable in accordance with our regular payroll schedule; (b) her target
bonus for the year in which the Termination Date occurs, target bonus for the
next fiscal year, and a pro-rated portion of her target bonus for the balance of
the two year severance period, payable concurrently with our payment of bonuses
to other executives; (c) continued vesting during the Severance Period (as
defined in the O'Connell Agreement) of all outstanding equity awards; (d) the
ability to exercise all equity arrangements for one year following the Severance
Period; (e) at our cost, group health benefits pursuant to our standard programs
for herself, her spouse and any children for two years after the Termination
Date or until she obtains other employment, if that occurs sooner; and (f)
reasonable office support for one year following the Termination Date, or until
she obtains other employment, if that occurs sooner. We will not be required to
continue to pay the bonus specified in clause (b) above if Ms. O'Connell
violates her non-competition obligations to us.
If a Change in Control (as defined in the O'Connell Agreement) occurs,
upon the Change in Control, Ms. O'Connell will be entitled to receive: (a) three
times her base salary then in effect; (b) three times her minimum target bonus
for the fiscal year in which the Change in Control occurs (plus any unpaid bonus
from the prior fiscal year); (c) acceleration in full of vesting of all
outstanding equity arrangements subject to vesting; (d) the ability to exercise
all options received for one year following the Change in Control or termination
of employment, whichever is later; (e) at our cost, group health benefits
pursuant to our standard programs for herself, her spouse and any children for
three years after the Change in Control; and (f) any Gross-Up Payments (as
defined in the O'Connell Agreement) for Ms. O'Connell's excise tax liabilities.
If Ms. O'Connell's employment is terminated due to her disability, Ms.
O'Connell will be entitled to receive: (a) base salary for three years after the
Termination Date at the rate then in effect; (b) her minimum target bonus for
the fiscal year in which the termination occurs, payable on the Termination
Date; (c) following the end of the fiscal year in which the termination occurs,
any bonus that would have been payable in excess of the minimum target bonus for
the year in which the termination occurs; (d) acceleration in full of vesting of
all outstanding stock options, and all options will remain exercisable for one
year after the Termination Date; and (e) at our cost, group health benefits
pursuant to our standard programs for herself, her spouse and any children for
three years after the Termination Date. We may deduct from the salary specified
in clause (a) above, any payments received by Ms. O'Connell under any disability
benefit program maintained by us.
MR. KNAPP AND MR. TAIT. Mr. Knapp entered into an employment agreement
effective August 7, 2000, as amended by Addendum No. 1 to Employment Agreement
dated February 1, 2001 (the "Knapp Agreement"). Under the Knapp Agreement, he
will serve as Executive Vice President through September 30, 2003, and
thereafter for subsequent one year periods unless either party provides ninety
days' written notice of its intention not to renew. Mr. Tait entered into an
employment agreement effective June 15, 2001 (the "Tait Agreement"). Under the
Tait Agreement, he will serve as Executive Vice President through September 30,
2003, and thereafter for subsequent one year periods unless either party
provides ninety days' written notice of its intention not to renew. Mr. Tait has
resigned his position as of March 31, 2003.
During fiscal 2003, Mr. Knapp will receive a base salary of $390,000 and
Mr. Tait will receive a base salary of $360,000. These salaries are subject to
annual adjustments by our Board or our Compensation Committee. For fiscal 2003,
Mr. Knapp's bonus target is between $250,000 and $500,000 and Mr. Tait's bonus
target is between $200,000 and $400,000. These target bonuses will be
established annually by our Board or our Compensation Committee, and will be
payable based on achievement of specified objectives.
30
Mr. Knapp's and Mr. Tait's employment is at will and may be terminated by
them or us upon sixty days' notice. Mr. Tait has resigned his position as of
March 31, 2003. If we terminate their employment involuntarily without Business
Reasons (as defined in the respective Agreements) or if a Constructive
Termination (as defined in the respective Agreements) occurs, other than
following a Change in Control, each will be entitled to receive: (a) his base
salary for three years following the Termination Date at the rate then in
effect, payable in accordance with our regular payroll schedule; (b) his minimum
bonus for the fiscal year in which the termination occurs, plus any unpaid bonus
from the prior fiscal year, payable on the Termination Date; (c) following the
end of the fiscal year in which the termination occurs, a pro rata share (based
on the proportion of the year during which he was employed) of the bonus that
would have been payable in excess of the target bonus for the year in which the
termination occurs; (d) following the end of the first fiscal year following the
fiscal year in which the Termination Date occurs, his minimum target bonus for
such following fiscal year (or, if the target bonus for such year was not
previously set, then his minimum target bonus for the fiscal year in which the
Termination Date occurred); (e) acceleration in full of vesting of all
outstanding equity arrangements subject to vesting, and all options and other
exercisable rights will remain exercisable for one year after the Termination
Date; (f) group health benefits pursuant to our standard programs for himself,
his spouse and any children for three years after the Termination Date; and (g)
automobile benefits for one year. We will not be required to continue to pay the
salary or bonus specified in clauses (a) through (d) above if the executive
violates his non-competition obligations to us. Mr. Tait's resignation effective
March 31, 2003 is deemed a Constructive Termination under his Agreement.
If a Change in Control (as defined in the respective Agreement) occurs,
upon the Change in Control each will be entitled to receive: (a) three times his
base salary then in effect; (b) three times his target bonus for the fiscal year
in which the Change in Control occurs (plus any unpaid bonus from the prior
fiscal year); (c) acceleration in full of vesting of all outstanding equity
arrangements subject to vesting, and all options and other exercisable rights
will remain exercisable for one year after the Change in Control; (d) group
health benefits pursuant to our standard programs for himself, his spouse and
any children for three years after the Termination Date; and (e) any Gross-Up
Payments (as defined in the respective Agreement) for his excise tax
liabilities.
If Mr. Knapp's or Mr. Tait's employment is terminated due to his
disability, he will be entitled to receive: (a) base salary for three years
after the Termination Date at the rate then in effect; (b) his minimum target
bonus for the fiscal year in which the termination occurs, plus any unpaid bonus
from the prior fiscal year, payable on the Termination Date; (c) following the
end of the fiscal year in which the termination occurs, any bonus that would
have been payable in excess of the minimum target bonus for the year in which
the termination occurs; (d) acceleration in full of vesting of all outstanding
stock options, and all options will remain exercisable for one year after the
Termination Date; and (e) group health benefits pursuant to our standard
programs for himself, his spouse and any children for one and one half years
after the Termination Date. We may deduct from the salary specified in clause
(a) above, any payments received by the executive under any disability benefit
program maintained by us.
MR. MOROWITZ.. Mr. Morowitz entered into an employment agreement effective
October 1, 2002 (the "Morowitz Agreement"). Under the Morowitz Agreement, he
will serve as Executive Vice President through September 30, 2005, and
thereafter for subsequent one year periods unless either party provides ninety
days' written notice of its intention not to renew.
During Fiscal 2003, Mr. Morowitz will receive a base salary of $275,000
and his target bonus is between $135,000 and $270,000. This salary and target
bonus is subject to annual adjustment by our Board or our Compensation
Committee, and the bonus will be payable based on achievement of specified
objectives.
Mr. Morowitz' employment is at will and may be terminated by him or us
upon sixty days' notice. If we terminate his employment involuntarily without
Business Reasons (as defined in the Morowitz Agreement) or if a Constructive
Termination (as defined in the Morowitz Agreement) occurs, other than following
a Change in Control, he will be entitled to receive: (a) his base salary for two
years following the Termination Date (the "Severance Period") at the rate then
in effect, payable in accordance with our regular payroll schedule; (b) his
minimum bonus for the fiscal year in which the termination occurs, plus any
unpaid bonus from the prior fiscal year, payable concurrently with the Company's
payment of bonuses to other Company executives for the year in which the
termination occurs; (c) his target bonus for the year in which the termination
occurs, his target bonus for the next fiscal year, and a pro rata share of
target bonus for the balance of the Severance Period; (d) acceleration in full
of vesting of all outstanding equity arrangements subject to vesting, and all
options and other exercisable rights granted prior to the effective date of the
Morowitz Agreement will remain exercisable for one year after the Termination
Date and all such rights granted after such effective date shall remain
exercisable for one year after the Severance Period; (e) continued vesting of
all such equity arrangements during the Severance Period; (f) group health
benefits pursuant to our standard programs for himself, his spouse and any
children for two years after the Termination Date; and (g) office support for
one year. We will not be required to continue to pay the bonus specified in
clause (c) above if the executive violates his non-competition obligations to
us.
If a Change in Control (as defined in the Morowitz Agreement) occurs, upon
the Change in Control he will be entitled to receive: (a) three times his base
salary then in effect; (b) three times his target bonus for the fiscal year in
which the Change in Control occurs (plus any unpaid bonus from the prior fiscal
year); (c) acceleration in full of vesting of all outstanding equity
arrangements subject to vesting, and all options and other exercisable rights
having an exercise price equal to or less than fair market value on the date of
the Morowitz Agreement will remain exercisable for one year after the Change in
Control, and all other equity arrangements will remain in
31
effect for 90 days after the Change in Control; (d) group health benefits
pursuant to our standard programs for himself, his spouse and any children for
three years after the Termination Date; and (e) any Gross-Up Payments (as
defined in the Morowitz Agreement) for his excise tax liabilities.
If Mr. Morowitz' employment is terminated due to his disability, he will
be entitled to receive: (a) base salary for three years after the Termination
Date at the rate then in effect; (b) his minimum target bonus for the fiscal
year in which the termination occurs, plus any unpaid bonus from the prior
fiscal year, payable on the Termination Date; (c) following the end of the
fiscal year in which the termination occurs, any bonus that would have been
payable in excess of the minimum target bonus for the year in which the
termination occurs; (d) acceleration in full of vesting of all outstanding stock
options, and all options having an exercise price equal to or less than fair
market value on the date of the Morowitz Agreement will remain exercisable for
one year after the Termination Date, and all other equity arrangements will
remain in effect for 90 days after the Termination Date; and (e) group health
benefits pursuant to our standard programs for himself, his spouse and any
children for three years after the Termination Date. We may deduct from the
salary specified in clause (a) above, any payments received by the executive
under any disability benefit program maintained by us.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee currently consists of Messrs. Roux, 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.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Our role is to set overall compensation principles and review Gartner's
entire compensation program annually. We also review and establish the
individual compensation levels for our executive officers and consider the
advice of independent, outside consultants in determining whether the amounts
and types of compensation we pay our executive officers are appropriate. We also
administer our employee stock purchase plan and stock option plans. In
discharging these responsibilities, we consult with outside compensation
consultants, attorneys and other specialists.
The goal of our compensation program is to attract, motivate and retain
highly talented individuals. Our guiding philosophy is that compensation should
be linked to performance. We believe that the better an individual performs, the
higher the individual's compensation should be. Our compensation program is
designed to balance short and long term financial objectives, build stockholder
value and reward individual, group and corporate performance. We believe that
individual compensation should be tied to our financial performance so that when
our performance is better than established objectives, individuals should be
paid more and when our financial performance does not meet our established
objectives, incentive award payments should be reduced. The proportion of an
individual's total compensation that varies with individual and corporate
performance objectives should increase as the individual's business
responsibilities increase. In addition, we believe that the total compensation
package must be competitive with other companies in our industry to ensure that
we continue to attract, motivate and retain the people who are critical to our
long-term success.
We believe that our employees should own our stock. We provide employees
at all levels with several ways to become stockholders. We have stock option
plans under which we have made discretionary stock option grants to broad
segments of the employee population worldwide. We also have an employee stock
purchase plan that enables employees to purchase our Class A Common Stock at a
discount through payroll deductions and a 401(k) savings plan that allows U.S.
employees to invest in our Class A Common Stock. Our goal is to have market
competitive stock programs that encourage each employee to act like an owner of
the business.
Compensation for our executive officers consists of three principal
components: base salary, short-term incentives and long-term incentives.
Base Salary. We set base salaries by evaluating the responsibilities of
the position and the experience of the individual. We reference the competitive
marketplace for executive talent and conduct surveys periodically for comparable
positions at companies with whom we compare for compensation purposes.
Short-Term Incentives (Cash Bonuses). We designed the annual bonus
component of incentive compensation to align pay with our short-term (annual)
performance. The full bonus is tied to achievement of financial performance
objectives established by our Board on an annual basis.
Long-Term Incentives (Stock Plans). The principal equity component of
executive compensation is options granted under our stock option plans. Stock
option awards are granted at the commencement of employment, with additional
options granted from time to time for promotions and performance. We believe
that ownership of our stock is a key element of our compensation program and
that stock options provide a retention incentive for our executive officers and
align their personal objectives with long-term stock price appreciation.
32
CEO Compensation. We believe that since assuming responsibilities as Chairman of
our Board in late 2001, Mr. Fleisher has demonstrated highly effective
leadership in a difficult economic environment. He has been responsible for
implementing a number of initiatives that have strengthened our company and we
believe position it well for the challenges of the future. Mr. Fleisher entered
into an Employment Agreement effective October 1, 2002 (the "Fleisher
Agreement"). Mr. Fleisher's new compensation package was designed to compensate
him for the additional responsibilities he holds as Chairman of our Board and
was determined after considering compensation levels of other chairmen and chief
executive officers at comparable companies. Under the Fleisher Agreement, Mr.
Fleisher will serve as Chairman and Chief Executive Officer through September
30, 2005, and thereafter for subsequent one year periods unless either party
provides ninety days' written notice of its intention not to renew. During the
term of the Fleisher Agreement, Mr. Fleisher will be included on our slate of
nominees to be elected to our Board.
Under the Fleisher Agreement, Mr. Fleisher will receive a base salary of
$650,000 for Fiscal 2003; thereafter his base salary is subject to annual
adjustments by our Board or this Committee. For Fiscal 2003, Mr. Fleisher's
target bonus is between $650,000 and $975,000; thereafter the Board or this
Committee will establish the annual target bonus, and the bonus will be payable
based on achievement of specified objectives. Under the Fleisher Agreement, Mr.
Fleisher received a grant of 250,000 stock options on October 1, 2002, and will
receive additional grants of 250,000 options each on October 1, 2003 and October
1, 2004. These stock options will vest 25% one year after grant and 2.08% per
month thereafter, subject to continuous status as an employee or consultant. The
number of stock options awarded to Mr. Fleisher was not directly tied to
specific measures of corporate performance. However, the value of these stock
options to Mr. Fleisher is dependent upon the growth in our stock price between
the date of grant and the date of exercise.
Other Compensation. Other elements of executive compensation include life
insurance and long-term disability insurance programs and participation in our
company-wide profit sharing plan under which a specified percentage of operating
profit is distributed equally among all employees. Executive officers are
eligible for company-wide medical benefits, a supplemental life insurance
program, a 401(k) plan under which we provide matching contributions to all
participants and a payroll deduction employee stock purchase plan under which
participants may purchase our Class A Common Stock at 85% of the lower of the
fair market value of our Class A Common Stock at the beginning or end of each
six-month offering period (up to a maximum stock value of the lesser of $25,000
per calendar year or 10 percent of salary).
COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS
(as of March 15, 2003)
Maynard G. Webb, Jr. (Chairman)
David J. Roux
James C. Smith
33
COMPARISON OF TOTAL CUMULATIVE STOCKHOLDER RETURN
The following graph compares our Class A Common Stock performance to the
performance of Standard & Poor's Stock 400 Index and a Peer Group Index.
Our peer group consists of Forrester Research, Inc., Giga Information
Group, Inc. and Meta Group, Inc. These companies represent the most significant
publicly traded companies that we believe compete with us in our most important
line of business: independent research and analysis on information technology,
computer hardware, software, communications and related technology industries.
There are no publicly traded information technology research companies that also
compete with us in our consulting and events businesses.
The comparison assumes $100.00 was invested on September 30, 1997 in our
Class A Common Stock and in each of the indices, and assumes the reinvestment of
dividends, if any.
The comparisons in the graph below are provided in response to SEC
disclosure requirements and are not intended to forecast or be indicative of
future performance of our Class A Common Stock.
[PERFORMANCE CHART]
DATE GARTNER CLASS A S&P MID CAP 400 PEER INDEX
9/30/1997 100.00 100.00 100.00
9/30/1998 69.58 93.67 121.08
9/30/1999 57.31 117.47 100.32
9/30/2000 41.64 168.14 207.35
9/30/2001 32.41 136.26 146.63
9/30/2002 38.86 127.83 90.67
12/31/2002 44.14 134.86 60.63
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Based on our review of information on 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 March 1, 2003 by: (i) each person (or group of affiliated persons) which
is known by us to own beneficially more than five percent of our Class A or
Class B Common Stock, (ii) each of our directors, (iii) each Named Executive
Officer, and (iv) all directors and current executive officers as a group.
Except as indicated in the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares shown as
owned beneficially by them, subject to community property laws where applicable.
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER CLASS A SHARES CLASS A CLASS B SHARES CLASS B
------------------------ -------------- ------- -------------- -------
Silver Lake Partners, L.P. (1) 47,717,570 48.5% -- --
320 Park Avenue
New York, NY 10022
VA Partners, L.L.C. (2) 7,233,600 13.7% 4,256,846 14.3%
One Maritime Plaza, Suite 1400,
San Francisco, CA 94111
Wellington Management Company, LLP (3) 5,207,353 9.9% -- --
75 State Street, Boston, MA 02109
Shapiro Capital Management Company, Inc.(4) -- -- 3,642,530 12.2%
3060 Peachtree Road, N.W., Atlanta, GA 30305
First Manhattan Co. (5) -- -- 1,737,479 5.8%
437 Madison Avenue, New York, NY 10022
Reich & Tang Asset Management, LLC (6) -- -- 2,638,000 8.9%
600 Fifth Avenue, New York, N.Y. 10020
High Rock Capital, LLC (7)
28 State Street, BostonA 02109 -- -- 2,193,360 7.4%
Farallon Capital Management, L.L.C. et al (8) -- -- 1,551,180 5.2%
One Maritime Plaza, Suite 11325
San Francisco, CA 94111
Franklin Resources, Inc. (9) -- -- 1,661,096 5.6%
777 Mariners Island Boulevard,
San Mateo, CA 94404
Michael D. Fleisher (10) 1,349,942 2.6% 3,000 *
Anne Sutherland Fuchs (11) 34,001 * -- --
William O. Grabe (12) 95,001 * -- --
Max D. Hopper (13) 42,001 * -- --
Glenn H. Hutchins -- -- -- --
Stephen G. Pagliuca (14) 91,501 * -- --
David J. Roux -- -- -- --
Dennis G. Sisco (15) 26,001 * 1,089 *
James C. Smith -- -- -- --
Maynard G. Webb, Jr. (16) 25,000 -- -- --
Maureen O'Connell -- -- -- --
Robert E. Knapp (17) 273,348 * -- --
Zachary Morowitz (18) 138,622 * -- --
Steven Tait (19) 171,655 * -- --
All current directors and current executive
officers as a group (14 persons) (20) 2,344,467 4.5% 4,089 *
* Less than 1%
35
----------
(1) See "Item 13. Certain Relationships and Related Party Transactions -
Relationship with Silver Lake Partners, L.P."
(2) The shares shown as beneficially owned by VA Partners, L.L.C. were
reported in its Amended Schedules 13D filed with the SEC on January 27,
2003 (Class A) and February 3, 2003 (Class B). Such Schedules indicate
that VA Partners, L.L.C. beneficially owns such shares as general partner
or investment manager of ValueAct Capital Partners, L.P., ValueAct Capital
Partners II, L.P. and ValueAct Capital International, Ltd. Such Schedules
also indicate that such shares are beneficially owned by Jeffrey W. Ubben,
George F. Hamel, Jr. and Peter H. Kamin, who are each managing members,
principal owners and controlling persons of VA Partners, L.L.C., and
directors and principal executive officers of ValueAct Capital
International, Ltd. Such Schedules indicate that VA Partners, L.L.C. and
the individuals have shared voting and dispositive power over all the
shares, but that the other entities have shared voting and dispositive
power over the shares held by each.
(3) The shares shown as beneficially owned by Wellington Management Company,
LLP were reported in its Amended Schedule 13G filed with the SEC on
February 12, 2003. Such Schedule indicates that Wellington has shared
voting power with respect to 4,276,100 shares and shared dispositive power
with respect to all 5,207,353 shares.
(4) The shares shown as beneficially owned by Shapiro Capital Management
Company, Inc. were reported in its Schedule 13G filed with the SEC on
February 6, 2003.
(5) The shares shown as beneficially owned by First Manhattan Co. were
reported in its Amended Schedule 13G filed with the SEC on February 13,
2003. Such Schedule indicates that First Manhattan Co. has sole voting
power and sole dispositive power with respect to 255,875 shares, shared
voting power with respect to 1,297,720 shares and shared dispositive power
with respect to 1,481,604 shares.
(6) The shares shown as beneficially owned by Reich and Tang Asset Management,
LLC were reported in its Schedule 13G filed with the SEC on February 6,
2003. Such Schedule indicates that Reich and Tang Asset Management has
shared voting and dispositive power with respect to such shares.
(7) The shares shown as beneficially owned by High Rock Capital, LLC were
reported in its Schedule 13G filed with the SEC on February 7, 2003. Such
Schedule indicates that High Rock Capital, LLC has sole voting power with
respect to 1,678,500 shares and sole dispositive power with respect to
2,077,460 shares, and High Rock Asset Management LLC has sole voting power
and sole dispositive power with respect to 115,900 shares.
(8) The shares shown as beneficially owned by Farallon Capital Management,
L.L.C. et al were reported in its Schedule 13G filed with the SEC on
February 3, 2003. Such Schedule indicates that Farallon Partners, L.L.C.
beneficially owns 915,990 of such shares as general partner of Farallon
Capital Partners, L.P., Farallon Capital Institutional Partners, L.P.,
Farallon Capital Institutional Partners II, L.P., Farallon Capital
Institutional Partners III, L.P. and Tinicum Partners, L.P., and Farallon
Capital Management, L.L.C. beneficially owns 639,190 of such shares held
in managed accounts as to which it acts as investment adviser. Such
Schedule also indicates that all of the shares are beneficially owned by
David I. Cohen, Joseph F. Downes, William F. Duhamel, Richard B. Fried,
Monica R. Landry, William F. Mellin, Stephen L. Millham, Thomas F. Steyer
and Marck C. Wehrly, who are each managing members of Farallon Partners,
L.L.C. and Farallon Capital Management, L.L.C. Such Schedule further
indicates that these individuals have shared voting and dispositive power
over all the shares, but the limited partnerships have shared voting and
dispositive power over the shares held by each. Additionally, such
Schedule shows that Farallon Partners, L.L.C. has shared voting and
dispositive power over the shares held by the limited partnerships, and
Farallon Capital Management, L.L.C. has shared voting and dispositive
power over shares held in certain managed accounts.
(9) The shares shown as beneficially owned by Franklin Resources, Inc. were
reported in its Amended Schedule 13G filed with the SEC on February 14,
2002. Such Schedule indicates that investment advisory subsidiaries, and
other affiliates of, Franklin Resources, Inc., have, in the aggregate,
sole voting and dispositive power with respect to all 1,661,096 shares.
(10) Includes 1,239,500 shares of Class A Common Stock issuable upon the
exercise of stock options that are exercisable within 60 days of March 1,
2003.
(11) Includes 29,001 shares of Class A Common Stock issuable upon the exercise
of stock options that are exercisable within 60 days of March 1, 2003.
(11) Includes 21,001 shares of Class A Common Stock issuable upon the exercise
of stock options that are exercisable within 60 days of March 1, 2003.
(12) Includes 21,001 shares of Class A Common Stock issuable upon the exercise
of stock options that are exercisable within 60 days of March 1, 2003.
(13) Includes 21,001 shares of Class A Common Stock issuable upon the exercise
of stock options that are exercisable within 60 days of March 1, 2003.
(14) Includes 21,001 shares of Class A Common Stock issuable upon the exercise
of stock options that are exercisable within 60 days of March 1, 2003, and
includes 10,000 shares of Class A Common Stock that are owned by Mr.
Pagliuca indirectly.
36
(15) Includes 5,000 shares of Class A Common Stock issuable upon the exercise
of stock options that are exercisable within 60 days of March 1, 2003.
(17) Includes 268,750 shares of Class A Common Stock issuable upon the exercise
of stock options that are exercisable within 60 days of March 1, 2003, and
4,598 shares of Class A Common Stock that are held by Mr. Knapp indirectly
through our 401(k) plan.
(18) Includes 111,208 shares of Class A Common Stock issuable upon the exercise
of stock options that are exercisable within 60 days of March 1, 2003.
(18) Includes 184,896 shares of Class A Common Stock issuable upon the exercise
of stock options that are exercisable within 60 days of March 1, 2003.
(19) Includes 1,922,359 shares of Class A Common Stock issuable upon the
exercise of stock options that are exercisable within 60 days of March 1,
2003.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2002 regarding
compensation plans under which shares of our Class A Common Stock are authorized
for issuance:
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION
EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS THE FIRST COLUMN)
------------- -------------------- -------------------- -------------------------
Equity compensation plans
approved by stockholders
Employee stock option plans(1) 16,426,934 $14.63 735,590
Employee stock purchase plans(2) 0 N/A 4,125,885
Equity compensation plans not
approved by stockholders(3) 20,037,005 $10.01 2,428,952
---------- ------ ---------
TOTAL 36,463,939 $12.10 7,290,427
----------
(1) Consists of the 1993 Director Stock Option Plan, 1994 Long Term Option
Plan, 1996 Long Term Stock Option Plan and 1998 Long Term Stock Option
Plan.
(2) Consists of the 1993 Employee Stock Purchase Plan and 2002 Employee Stock
Purchase Plan.
(3) Consists of the 1999 Stock Option Plan.
On February 13, 2003, our stockholders approved the 2003 Long-Term
Incentive Plan (the "2003 Plan"). The 2003 Plan replaces the 1993 Director Stock
Option Plan, 1994 Long Term Option Plan, 1996 Long Term Stock Option Plan, 1998
Long Term Stock Option Plan and the 1999 Stock Option Plan (the "Existing
Plans"). No further awards will be made under the Existing Plans, and any awards
outstanding under the Existing Plans will continue to be subject to their
respective terms. With the exception of the 1999 Plan, our stockholders have now
approved all of our broad-based equity incentive plans.
The 1999 Plan permitted our Compensation Committee to grant non-qualified
and incentive stock options and other types of awards relating to our Class A
Common Stock to eligible employees and to set the terms and conditions of the
awards. Directors and executive officers were not eligible to receive grants
under this plan. All awards under the 1999 Plan were non-qualified stock options
and are fully exercisable in (i) three equal installments in the three years
following the date of grant; or (ii) twenty-five percent of the options become
exercisable on the first anniversary of the grant date and 2.08% of the options
become exercisable monthly thereafter. All awards under the 1999 Plan have a
term of ten years, assuming continued employment.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY 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 connection with the issuance of the Notes, we
agreed that Silver Lake would recommend two nominees for director and we would
include the Silver Lake nominees on our slate of nominees to be elected to our
Board. This obligation exists while Silver Lake owns the Notes, or Class A
Common Stock that, on an "as converted" basis, represents at least 20 percent of
our Class A Common Stock into which the Notes were convertible when they were
issued. The Notes first become convertible on April 18, 2003. As of March 31,
2003, if Silver Lake were to convert the Notes into shares, it would own 48.5%
of our Class A Common Stock and 37.2% of the combined Class A Common Stock and
Class B Common Stock. Mr. Hutchins and Mr. Roux are each a director nominated by
Silver Lake. See Note 10 - Debt of the Notes to Consolidated Financial
Statements.
Mr. Hutchins is a managing member of the general partner of Silver Lake
and is a member of some of the affiliates of Silver Lake and receives
compensation from those affiliates. Mr. Roux is a managing member of the general
partner of Silver Lake and is a member of some of the affiliates of Silver Lake
and receives compensation from those affiliates.
Silver Lake has contracted to purchase subscription research services from
us for the period from September 1, 2002 to February 28, 2004 for $169,756.
RELATIONSHIPS WITH OTHER THIRD PARTIES
Several of our other directors are employed by companies that purchase our
research and consulting services in the ordinary course of their business.
During Transition 2002, Bain Capital, Inc. purchased research services for
$44,100; Behrman Capital purchased research services for $40,500; eBay, Inc.
purchased research services for $16,500; General Atlantic Partners purchased
research services for $101,250; and Ameritrade Holding Corporation purchased
research services for $30,950.
Bain Capital, Inc. has contracted to purchase research services for
$176,400 and $132,300 during 2003 and 2004, respectively. Behrman Capital has
contracted to purchase research services for $81,000 during 2003. eBay has
contracted to purchase research services for $49,500 during 2003. General
Atlantic Partners Corporation has contracted to purchase research services for
$405,000 and $202,500 during 2003 and 2004, respectively. Ameritrade Holding
Corporation has contracted to purchase research services for $123,800 and
$92,850 during 2003 and 2004, respectively.
LOANS TO EXECUTIVE OFFICERS
As of January 1, 2003, there were no outstanding loans to executive
officers. On December 17, 2001 we provided a $400,000 term loan to Mr. Tait, our
Executive Vice President, Sales and Client Operations, which was repaid in full
on or before December 31, 2002 in connection with his planned termination of
employment. The interest rate on the loan was 3.97%, compounded annually. The
largest aggregate amount of indebtedness outstanding during Transition 2002 was
$416,743.
ITEM 14. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
We have established disclosure controls and procedures that are designed to
ensure that the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934, as amended (the "Act"), is recorded,
processed, summarized and reported in a timely manner. Specifically, these
controls and procedures ensure that the information is accumulated and
communicated to our executive management team, including our chief executive
officer and our chief financial officer, to allow timely decisions regarding
required disclosure.
37
Within 90 days prior to the filing of our Transition Report on Form 10-KT for
the three month transition period ended December 31, 2002, the Company conducted
an evaluation, under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
of the effectiveness and design of our disclosure controls and procedures. Based
upon that evaluation, our chief executive officer and chief financial officer
have concluded that the Company's disclosure controls and procedures are
effective in alerting them in a timely manner to material Company information
required to be disclosed by us in reports filed under the Act.
(b) Changes in Internal Controls.
Subsequent to the date of the evaluation, there have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls and procedures, nor were any corrective actions
required with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) 1. and 2. Consolidated Financial Statements and Schedules
The independent auditors' report, consolidated financial statements and
financial statement schedule listed in the Index to Consolidated Financial
Statements and Schedule on page 42 hereof are filed as part of this report.
All other financial statement schedules not listed in the Index have been
omitted because the information required is not applicable or is shown in the
financial statements or notes thereto.
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
3.1a(6) Amended and Restated Certificate of
Incorporation-July 16, 1999.
3.1b(7) 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(6) Amended Bylaws, as amended through April 14, 2000.
4.1(7) Form of Certificate for Common Stock, Class A-as
of February 2001.
4.2(7) Form of Certificate for Common Stock, Class B-as
of February 2001.
4.3(10) Amended and Restated Rights Agreement, dated as of
August 31, 2002, between the Company and Mellon
Investor Services LLC, as Rights Agent, with
related Exhibits.
4.4a(7) 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(10) Amendment No. 3 to the Amended and Restated Credit
Agreement dated as of May 30, 2002.
10.1(1) Form of Indemnification Agreement.
10.2a(5) Securities Purchase Agreement dated as of March
21, 2000 between the Company, Silver Lake
Partners, L.P., Silver Lake Technology Investors,
L.L.C. and other parties thereto.
38
10.2b(5) Amendment to the Securities Purchase Agreement
dated as of April 17, 2000 between the Company,
Silver Lake Partners, L.P., Silver Lake Technology
Investors, and the other parties thereto.
10.2c(7) Letter Agreement dated September 6, 2001 relating
to the Securities Purchase Agreement and 6%
Convertible Junior Subordinated Promissory Notes.
10.2d(10) Form of Amended and Restated 6% Convertible Junior
Subordinated Promissory Note due April 17, 2005.
10.2e(10) 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) 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) 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(6)+ 1993 Director Stock Option Plan as amended and
restated on April 14, 2000.
10.5(9)+ 2002 Employee Stock Purchase Plan.
10.6(3)+ 1994 Long Term Stock Option Plan, as amended and
restated on October 12, 1999.
10.7(3)+ 1998 Long Term Stock Option Plan, as amended and
restated on October 12, 1999.
10.8(3)+ 1996 Long Term Stock Option Plan, as amended and
restated on October 12, 1999.
10.9(12)+ 1999 Stock Option Plan
10.10(11)+ 2003 Long-Term Incentive Plan
10.11(10)+ Employment Agreement between Michael D. Fleisher
and the Company as of October 1, 2002.
10.12(10)+ Employment Agreement between Maureen O'Connell and
the Company dated as of October 15, 2002 and
effective as of September 23, 2002.
10.13a(6)+ Employment Agreement between Robert E. Knapp and
the Company dated as of August 7, 2000.
10.13b(7)+ Addendum No. 1 to Employment Agreement between
Robert E. Knapp and the Company as of February 1,
2001.
10.14(8)+ Employment Agreement between Steven Tait and the
Company dated as of June 15, 2001.
10.15*+ Employment agreement between Zachary Morowitz and
the Company dated as of January 20, 2003.
21.1* Subsidiaries of Registrant.
39
23.1* Independent Auditors' Consent.
24.1 Power of Attorney (see Signature Page).
ADDITIONAL EXHIBITS
99.1(13)* Certification of Chief Executive Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2(13)* Certification of Chief Financial Officer under
Section 906 of the Sarbanes-Oxley act of 2002.
* Filed with this document.
+ 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.
(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 Form 8-K dated April 17, 2000
as filed on April 25, 2000.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed on December 29, 2000.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed on December 28, 2001.
(8) Incorporated by reference from the Company's Form 10-Q as filed on
February 13, 2002.
(9) Incorporated by reference from the Company's Form S-8 as filed on June 26,
2002.
(10) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed on December 29, 2002.
(11) Incorporated by reference from the Company's Proxy Statement for its
annual meeting dated February 13, 2003.
(12) Incorporated by reference from the Company's Form S-8 as filed on February
16, 2002.
(13) This document is being furnished in accordance with SEC Release Nos.
33-8212 and 34-47551.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on October 13, 2002 reporting the
change of the Company's fiscal year end from September 30 to December 31.
40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
GARTNER, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Report by Management .................................................................................................. 42
Independent Auditors' Report .......................................................................................... 43
Consolidated Balance Sheets as of December 31, 2002 and September 30, 2002 and 2001 ................................... 44
Consolidated Statements of Operations for the Three Month Periods Ended December 31, 2002
and 2001 (Unaudited), and the Years Ended September 30, 2002, 2001 and 2000 ........................................... 45
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) for the Three Month
Period Ended December 31, 2002 and for Years Ended September 30, 2002, 2001 ........................................... 46
Consolidated Statements of Cash Flows for the Three Month Periods Ended December 31, 2002
and 2001 (Unaudited), and the Years Ended September 30, 2002, 2001 and 2000 ........................................... 47
Notes to Consolidated Financial Statements ............................................................................ 48
Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302
of the Sarbanes - Oxley Act of 2002 ................................................................................... 73 & 74
Independent Auditors' Report on Consolidated Financial Statement Schedule ............................................. 75
Schedule II--Valuation and Qualifying Accounts for the Three Months Ended December 31, 2002,
and the Years Ended September 30, 2002, 2001 and 2000 ................................................................. 76
41
Report by Management
Management's Responsibility for Financial Reporting
Management has prepared and is responsible for the integrity and
objectivity of the consolidated financial statements and related information
included in the Transition Report. The consolidated financial statements, which
include amounts based on management's best judgments and estimates, were
prepared in conformity with generally accepted accounting principles. Financial
information elsewhere in this Transition 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 internal auditors and
independent public accountants.
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/ Maureen E. O'Connell
----------------------------
Maureen E. O'Connell
Chief Financial Officer
42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Gartner, Inc.:
We have audited the accompanying consolidated balance sheets of Gartner, Inc.
and subsidiaries as of December 31, 2002, September 30, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity (deficit)
and comprehensive income (loss) and cash flows for the three month period ended
December 31, 2002, and each of the years in the three-year period ended
September 30, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2002, September 30, 2002 and 2001, and the
results of their operations and their cash flows for the three month period
ended December 31, 2002, and each of the years in the three-year period ended
September 30, 2002, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Notes 1 and 8, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" effective
October 1, 2001.
/s/ KPMG LLP
New York, New York
February 4, 2003
43
GARTNER, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, September 30, September 30,
2002 2002 2001
------------ ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 109,657 $ 124,793 $ 37,128
Marketable equity securities ............................................. -- -- 3,250
Fees receivable, net of allowances of $7,000 at December 31, 2002 and
September 30, 2002 and $5,600 at September 30, 2001 ...................... 283,068 264,843 300,306
Deferred commissions ..................................................... 25,016 26,366 34,822
Prepaid expenses and other current assets ................................ 41,524 39,031 70,868
--------- --------- ---------
Total current assets .................................................. 459,265 455,033 446,374
Property, equipment and leasehold improvements, net .......................... 71,006 76,161 100,288
Goodwill ..................................................................... 223,860 222,427 216,856
Intangible assets, net ....................................................... 2,254 2,731 5,377
Other assets ................................................................. 71,018 68,498 70,107
--------- --------- ---------
Total assets ............................................................. $ 827,403 $ 824,850 $ 839,002
========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities ................................. $ 151,990 $ 130,364 $ 137,751
Deferred revenues ........................................................ 305,887 306,978 351,263
Short-term debt .......................................................... -- -- 15,000
--------- --------- ---------
Total current liabilities ............................................. 457,877 437,342 504,014
--------- --------- ---------
Long-term convertible debt ................................................... 351,539 346,300 326,200
Other liabilities ............................................................ 46,688 46,098 43,306
Stockholders' 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 80,106,020 shares
of Class A Common Stock (79,986,681 and 77,737,660 at September 30,
2002 and 2001) and 40,689,648 shares of Class B Common Stock at
December 31, 2002 and at September 30, 2002 and 2001 ..................... 60 60 59
Additional paid-in capital ................................................... 368,090 366,723 342,216
Unearned compensation, net ................................................... (3,069) (3,467) (5,145)
Accumulated other comprehensive loss, net .................................... (11,392) (14,085) (14,961)
Accumulated earnings ......................................................... 150,243 164,661 116,083
Treasury stock, at cost, 29,158,443 shares of Class A Common Stock
(28,210,725 and 26,621,154 at September 30, 2002 and 2001) and 10,907,120
Shares of Class B Common Stock (10,453,520 and 8,141,820 at September 30,
2002 and 2001) ............................................................... (532,633) (518,782) (472,770)
--------- --------- ---------
Total stockholders' deficit .............................................. (28,701) (4,890) (34,518)
--------- --------- ---------
Total liabilities and stockholders' deficit ........................... $ 827,403 $ 824,850 $ 839,002
========= ========= =========
See Notes to Consolidated Financial Statements.
44
GARTNER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE
MONTH
TRANSITIONAL THREE MONTHS
PERIOD ENDED ENDED DECEMBER YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 2002 31, 2001 2002 2001 2000
----------------- -------------- --------- --------- ---------
UNAUDITED
Revenues:
Research ...................................... $ 120,038 $ 129,474 $ 496,403 $ 535,114 $ 509,781
Consulting .................................... 58,098 55,731 273,692 276,292 216,667
Events ........................................ 47,169 59,466 121,991 132,684 108,589
Other ......................................... 4,509 4,724 15,088 18,794 27,414
--------- --------- --------- --------- ---------
Total revenues ............................. 229,814 249,395 907,174 962,884 862,451
Costs and expenses:
Cost of services and product development ...... 108,600 115,829 403,718 450,471 395,603
Selling, general and administrative ........... 90,306 89,193 345,382 370,096 341,874
Depreciation .................................. 11,146 9,924 42,504 40,873 27,839
Amortization of intangibles ................... 482 502 1,949 12,367 13,004
Other charges ................................. 32,166 -- 17,246 46,563 --
--------- --------- --------- --------- ---------
Total costs and expenses ................... 242,700 215,448 810,799 920,370 778,320
--------- --------- --------- --------- ---------
Operating (loss) income ........................... (12,886) 33,947 96,375 42,514 84,131
Net gain (loss) on sale of investments ............ -- 792 787 (640) 29,630
Net (loss) gain from minority-owned investments ... (1,688) 79 (2,365) (26,817) (775)
Interest income ................................... 635 511 1,845 1,616 3,936
Interest expense .................................. (5,942) (5,604) (22,869) (22,391) (24,900)
Loss on debt extinguishment ....................... -- -- -- -- (2,881)
Other expense, net ................................ (141) (428) (170) (3,674) (722)
--------- --------- --------- --------- ---------
(Loss) income from continuing operations before
income taxes ................................... (20,022) 29,297 73,603 (9,392) 88,419
(Benefit) provision for income taxes ............. (5,604) 10,254 25,025 (9,172) 35,295
--------- --------- --------- --------- ---------
(Loss) income from continuing operations .......... (14,418) 19,043 48,578 (220) 53,124
Discontinued operation, net of taxes:
Loss from discontinued operation ............... -- -- -- (26,059) (27,578)
Loss on disposal of discontinued operation ..... -- -- -- (39,924) --
--------- --------- --------- --------- ---------
Loss from discontinued operation ........... -- -- -- (65,983) (27,578)
Net (loss) income ................................. $ (14,418) $ 19,043 $ 48,578 $ (66,203) $ 25,546
========= ========= ========= ========= =========
Net (loss) income per share:
Basic:
(Loss) income from continuing operations ...... $ (0.18) $ 0.23 $ 0.58 $ (0.00) $ 0.61
Loss from discontinued operation ........... -- -- -- (0.30) (0.31)
Loss on disposal of discontinued operation . -- -- -- (0.47) --
--------- --------- --------- --------- ---------
Net (loss) income .......................... $ (0.18) $ 0.23 $ 0.58 $ (0.77) $ 0.30
========= ========= ========= ========= =========
Diluted:
(Loss) income from continuing operations ... $ (0.18) $ 0.17 $ 0.47 $ (0.00) $ 0.60
Loss from discontinued operation ........... -- -- -- (0.30) (0.31)
Loss on disposal of discontinued operation . -- -- -- (0.47) --
--------- --------- --------- --------- ---------
Net (loss) income .......................... $ (0.18) $ 0.17 $ 0.47 $ (0.77) $ 0.29
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic ......................................... 81,379 83,883 83,586 85,862 86,564
========= ========= ========= ========= =========
Diluted ....................................... 81,379 129,578 130,882 85,862 89,108
========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements.
45
GARTNER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL UNEARNED
PREFERRED COMMON PAID-IN COMPENSATION,
STOCK STOCK CAPITAL NET
--------- ------ ---------- -------------
Balance at September 30, 1999 ................................. $ -- $58 $ 314,829 $(8,280)
Net income .................................................... -- -- -- --
Foreign currency translation adjustments ...................... -- -- -- --
Net unrealized gain on marketable investments,
Net of tax benefit of $12,084 ................................. -- -- -- --
Comprehensive income ................................. -- -- -- --
Issuance of 1,379,306 shares of Class A
Common Stock upon exercise of stock
options .................................................. -- 1 8,091 --
Issuance from treasury stock of 394,279
shares of Class A Common Stock for
purchases by employees ................................... -- -- 5,008 --
Tax benefits of stock transactions with
employees ................................................ -- -- 4,179 --
Net share settlement of 155,792 shares of
Class A Common Stock on forward
purchase agreement ....................................... -- -- -- --
Net cash settlement paid on forward purchase
agreement ................................................ -- -- (8,200) --
Restricted stock net of forfeitures of 27,500 shares of
Class A Common Stock .......................................... -- -- (719) 719
Acquisition of 2,493,500 shares of Class A and
2,006,700 shares of Class B Common Stock ................. -- -- -- --
Increase in carrying value of Jupiter Media
Metrix ................................................... -- -- 8,321 --
Issuance of 2,074 shares of Class A Common
Stock issued for services rendered ....................... -- -- 42 --
Option to purchase subsidiary shares .......................... -- -- 1,000 --
Return of 37,013 shares of Class A Common
Stock related to acquisitions ............................ -- -- (723) --
Issuance of subsidiary stock related to an
acquisition ............................................. -- -- 2,000 --
Amortization of unearned compensation ......................... -- -- -- 1,110
---- --- --------- -------
Balance at September 30, 2000 ................................. -- 59 333,828 (6,451)
Net loss ...................................................... -- -- -- --
Foreign currency translation adjustments ...................... -- -- -- --
Change in net unrealized loss on marketable investments, net
of tax benefit of $12,811 ................................. -- -- -- --
Comprehensive loss ................................... -- -- -- --
Issuance of 592,832 shares of Class A Common
Stock upon exercise of stock options ..................... -- -- 3,650 --
Issuance from treasury stock of 769,085
shares of Class A Common Stock for
purchases by employees ................................... -- -- 5,374 --
Tax benefits of stock transactions with
employees ................................................ -- -- 1,331 --
Net settlement paid of 491,789 shares of Class A Common
Stock and $64 on forward
purchase agreement ....................................... -- -- (73) --
Acquisition of 4,144,666 shares of Class A and
12,088 shares of Class B Common Stock ................... -- -- -- --
Elimination of minority interest from
sale of discontinued operation ........................... -- -- (2,056) --
Issuance of subsidiary stock upon exercise of stock options ... -- -- 56 --
Compensation from modification of stock options related to
employee terminations ..................................... -- -- 261 --
Amortization of unearned compensation ......................... -- -- -- 1,151
Issuance of 81,290 shares of Class A Common
Stock upon earnout of restricted shares and
forfeiture of unvested restricted share awards ............ -- -- (155) 155
---- --- --------- -------
Balance at September 30, 2001 ................................. -- 59 342,216 (5,145)
Net income .................................................... -- -- -- --
Foreign currency translation adjustments ...................... -- -- -- --
Change in net unrealized loss on marketable investments, net
of tax benefit of $630 .................................... -- -- -- --
Comprehensive income ................................. -- -- -- --
Issuance of 1,989,049 shares of Class A Common
Stock upon exercise of stock options ..................... -- 1 17,730 --
Issuance from treasury stock of 560,861
shares of Class A Common Stock for
purchases by employees ................................... -- -- 3,400 --
Tax benefits of stock transactions with
employees ................................................ -- -- 2,280 --
Acquisition of 2,153,400 shares of Class A and
2,311,700 shares of Class B Common Stock ................ -- -- -- --
Issuance of 3,159 shares of Class A Common
Stock for directors compensation .......................... -- -- 55 --
Compensation from modification of stock options related to
employee terminations ..................................... -- -- 1,403 --
Amortization of unearned compensation ......................... -- -- -- 1,317
Issuance of 81,613 shares of Class A Common
Stock upon earnout of restricted shares and
forfeiture of unvested restricted share awards ............ -- -- (361) 361
---- --- --------- -------
Balance at September 30, 2002 ................................. -- 60 366,723 (3,467)
Net loss ...................................................... -- -- -- --
Foreign currency translation adjustments ...................... -- -- -- --
Change in net unrealized loss on marketable
investments, net of tax benefit of $17 .................... -- -- -- --
Comprehensive loss ................................... -- -- -- --
Issuance of 131,343 shares of Class A Common
Stock upon exercise of stock options ..................... -- -- 1,011 --
Issuance from treasury stock of 750
shares of Class A Common Stock for
purchases by employees ................................... -- -- 5 --
Tax benefits of stock transactions with
Employees ................................................ -- -- (199) --
Acquisition of 963,117 shares of Class A
Common Stock and 453,600 shares of Class B
Common Stock .................................................. -- -- -- --
Issuance of 7,319 shares of Class A Common
Stock for directors compensation .......................... -- -- 82 --
Compensation from modification of stock options
related to employee terminations .......................... -- -- 601 --
Amortization of unearned compensation ......................... -- -- -- 265
Issuance of 16,667 shares of Class A Common
Stock upon earnout of restricted shares ................... -- -- (133) 133
---- --- --------- -------
Balance at December 31, 2002 .................................. $ -- $60 $ 368,090 $(3,069)
==== === ========= =======
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME ACCUMULATED TREASURY EQUITY
(LOSS) NET EARNINGS STOCK (DEFICIT)
------------- ----------- -------- -------------
Balance at September 30, 1999 ................................. $ (3,830) $ 156,740 $(385,031) $ 74,486
Net income .................................................... -- 25,546 -- 25,546
Foreign currency translation adjustments ...................... (11,667) -- -- (11,667)
Net unrealized gain on marketable investments,
Net of tax benefit of $12,084 ................................. 15,496 -- -- 15,496
--------
Comprehensive income ................................. -- -- -- 29,375
Issuance of 1,379,306 shares of Class A
Common Stock upon exercise of stock
options .................................................. -- -- -- 8,092
Issuance from treasury stock of 394,279
shares of Class A Common Stock for
purchases by employees ................................... -- -- 8 5,016
Tax benefits of stock transactions with
employees ................................................ -- -- -- 4,179
Net share settlement of 155,792 shares of
Class A Common Stock on forward
purchase agreement ....................................... -- -- -- --
Net cash settlement paid on forward purchase
agreement ................................................ -- -- -- (8,200)
Restricted stock net of forfeitures of 27,500 shares of
Class A Common Stock .......................................... -- -- -- --
Acquisition of 2,493,500 shares of Class A and
2,006,700 shares of Class B Common Stock ................. -- -- (49,877) (49,877)
Increase in carrying value of Jupiter Media
Metrix ................................................... -- -- -- 8,321
Issuance of 2,074 shares of Class A Common
Stock issued for services rendered ....................... -- -- -- 42
Option to purchase subsidiary shares .......................... -- -- -- 1,000
Return of 37,013 shares of Class A Common
Stock related to acquisitions ............................ -- -- (1) (724)
Issuance of subsidiary stock related to an
acquisition ............................................. -- -- -- 2,000
Amortization of unearned compensation ......................... -- -- -- 1,110
-------- --------- --------- --------
Balance at September 30, 2000 ................................. (1) 182,286 (434,901) 74,820
Net loss ...................................................... -- (66,203) -- (66,203)
Foreign currency translation adjustments ...................... 1,627 -- -- 1,627
Change in net unrealized loss on marketable investments, net
of tax benefit of $12,811 ................................. (16,587) -- -- (16,587)
--------
Comprehensive loss ................................... -- -- -- (81,163)
Issuance of 592,832 shares of Class A Common
Stock upon exercise of stock options ..................... -- -- -- 3,650
Issuance from treasury stock of 769,085
shares of Class A Common Stock for
purchases by employees ................................... -- -- 15 5,389
Tax benefits of stock transactions with
employees ................................................ -- -- -- 1,331
Net settlement paid of 491,789 shares of Class A Common
Stock and $64 on forward
purchase agreement ....................................... -- -- 9 (64)
Acquisition of 4,144,666 shares of Class A and
12,088 shares of Class B Common Stock ................... -- -- (37,893) (37,893)
Elimination of minority interest from
sale of discontinued operation ........................... -- -- -- (2,056)
Issuance of subsidiary stock upon exercise of stock options ... -- -- -- 56
Compensation from modification of stock options related to
employee terminations ..................................... -- -- -- 261
Amortization of unearned compensation ......................... -- -- -- 1,151
Issuance of 81,290 shares of Class A Common
Stock upon earnout of restricted shares and
forfeiture of unvested restricted share awards ............ -- -- -- --
-------- --------- --------- --------
Balance at September 30, 2001 ................................. (14,961) 116,083 (472,770) (34,518)
Net income .................................................... -- 48,578 -- 48,578
Foreign currency translation adjustments ...................... (69) -- -- (69)
Change in net unrealized loss on marketable investments, net
of tax benefit of $630 .................................... 945 -- -- 945
--------
Comprehensive income ................................. -- -- -- 49,454
Issuance of 1,989,049 shares of Class A Common
Stock upon exercise of stock options ..................... -- -- 5 17,736
Issuance from treasury stock of 560,861
shares of Class A Common Stock for
purchases by employees ................................... -- -- 1,030 4,430
Tax benefits of stock transactions with
employees ................................................ -- -- -- 2,280
Acquisition of 2,153,400 shares of Class A and
2,311,700 shares of Class B Common Stock ................ -- -- (47,047) (47,047)
Issuance of 3,159 shares of Class A Common
Stock for directors compensation .......................... -- -- -- 55
Compensation from modification of stock options related to
employee terminations ..................................... -- -- -- 1,403
Amortization of unearned compensation ......................... -- -- -- 1,317
Issuance of 81,613 shares of Class A Common
Stock upon earnout of restricted shares and
forfeiture of unvested restricted share awards ............ -- -- -- --
-------- --------- --------- --------
Balance at September 30, 2002 ................................. (14,085) 164,661 (518,782) (4,890)
Net loss ...................................................... -- (14,418) -- (14,418)
Foreign currency translation adjustments ...................... 2,668 -- -- 2,668
Change in net unrealized loss on marketable
investments, net of tax benefit of $17 .................... 25 -- -- 25
--------
Comprehensive loss ................................... -- -- -- (11,725)
Issuance of 131,343 shares of Class A Common
Stock upon exercise of stock options ..................... -- -- 26 1,037
Issuance from treasury stock of 750
shares of Class A Common Stock for
purchases by employees ................................... -- -- 3 8
Tax benefits of stock transactions with
Employees ................................................ -- -- -- (199)
Acquisition of 963,117 shares of Class A
Common Stock and 453,600 shares of Class B
Common Stock .................................................. -- -- (13,880) (13,880)
Issuance of 7,319 shares of Class A Common
Stock for directors compensation .......................... -- -- -- 82
Compensation from modification of stock options
related to employee terminations .......................... -- -- -- 601
Amortization of unearned compensation ......................... -- -- -- 265
Issuance of 16,667 shares of Class A Common
Stock upon earnout of restricted shares ................... -- -- -- --
-------- --------- --------- --------
Balance at December 31, 2002 .................................. $(11,392) $ 150,243 $(532,633) $(28,701)
======== ========= ========= ========
See Notes to Consolidated Financial Statements.
46
GARTNER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE FOR THE THREE
MONTH MONTHS
TRANSITIONAL ENDED
PERIOD ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 2002 2001 2002 2001 2000
----------------- -------------- --------- -------- ---------
UNAUDITED
Operating activities:
Net (loss) income ................................. $ (14,418) $ 19,043 $ 48,578 $(66,203) $ 25,546
Adjustments to reconcile net (loss) income to cash
provided by operating activities of continuing
operations:
Loss from discontinued operation .................. -- -- -- 65,983 27,578
Depreciation ...................................... 11,146 9,924 42,504 40,873 27,839
Amortization of intangibles ....................... 482 502 1,949 12,367 13,004
Non-cash compensation ............................. 866 300 2,720 1,151 2,151
Tax benefit associated with employee exercise of
stock options ..................................... (199) 502 2,280 1,331 4,179
Provision for doubtful accounts ................... 2,329 1,913 9,119 5,037 4,256
Deferred tax (benefit) expense .................... (7,383) 822 4,066 (34,973) (10,159)
Net loss (gain) on sale of investments ............ -- (792) (787) 640 (29,630)
Net loss (gain) from minority-owned investments ... 1,688 (79) 2,365 26,817 775
Accretion of interest and amortization of debt
issuance costs .................................... 5,734 5,420 22,116 20,802 9,520
Non-cash charges associated with impairment of
long-lived assets ................................. 659 -- 1,424 18,888 --
Net gain from sale of business .................... -- -- (493) -- --
Loss on debt extinguishment ....................... -- -- -- -- 2,881
Acquisition-related tax benefit applied to reduce
goodwill .......................................... -- -- -- 158 966
Changes in assets and liabilities, excluding effects of
acquisitions and discontinued operation:
Fees receivable ................................... (16,077) (18,048) 31,180 19,634 (51,633)
Deferred commissions .............................. 1,616 (4,940) 9,046 11,902 (16,552)
Prepaid expenses and other current assets ......... 1,129 13,408 26,069 (26,039) (4,500)
Other assets ...................................... (673) 1,424 1,930 (2,559) (11,245)
Accounts payable and accrued liabilities .......... 19,937 815 (7,628) 13,147 72,362
Deferred revenues ................................. (5,683) (23,310) (50,886) (35,488) 36,993
--------- -------- --------- -------- ---------
Cash provided by operating activities .................. 1,153 6,904 145,552 73,468 104,331
--------- -------- --------- -------- ---------
Investing activities:
Payments for businesses acquired (excluding cash
acquired) ......................................... -- (679) (4,537) (12,011) (115,162)
Proceeds from sale of investments ................. -- -- 6,025 14,437 91,516
Proceeds from sale of business .................... -- -- 239 -- --
Payments for investments .......................... -- -- (1,508) -- (20,427)
Addition of property, equipment, leasehold
improvements and capitalized software ............. (5,866) (4,381) (19,639) (57,546) (54,565)
Net proceeds from sale of discontinued operation .. -- -- -- 10,501 --
--------- -------- --------- -------- ---------
Cash used in investing activities ...................... (5,866) (5,060) (19,420) (44,619) (98,638)
--------- -------- --------- -------- ---------
Financing activities:
Proceeds from the exercise of stock options ....... 1,037 5,283 17,736 3,706 8,092
Proceeds from Employee Stock Purchase Plans ....... 8 3 4,430 5,389 5,016
Net cash settlement on forward purchase agreement . (13,880) -- -- (64) (8,200)
Purchases of treasury stock ....................... -- (1,047) (47,047) (37,893) (49,877)
Proceeds from issuance of debt .................... -- -- -- 15,000 420,000
Payments on debt .................................. -- (15,000) (15,000) -- (370,000)
Capitalized payments for debt issuance costs ...... -- -- (238) (5,000) (3,993)
--------- -------- --------- -------- ---------
Cash (used in) provided by financing activities ........ (12,835) (10,761) (40,119) (18,862) 1,038
--------- -------- --------- -------- ---------
Net (decrease) increase in cash and cash equivalents ... (17,548) (8,917) 86,013 9,987 6,731
Cash used by discontinued operation .................... -- -- -- (34,203) (30,096)
Effect of exchange rates on cash and cash equivalents .. 2,412 (780) 1,652 (354) (3,831)
Cash and cash equivalents, beginning of period ......... 124,793 37,128 37,128 61,698 88,894
--------- -------- --------- -------- ---------
Cash and cash equivalents, end of period ............... $ 109,657 $ 27,431 $ 124,793 $ 37,128 $ 61,698
========= ======== ========= ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .......................................... $ 159 $ 245 $ 753 $ 1,589 $ 14,964
Income taxes paid, net of refunds received. The
September 30, 2002 amount is net of $26,650 of
refunds and December 31, 2001 amount is net of
$9,061 of refunds ................................. $ 5,105 $ (5,242) $ (7,614) $ 14,729 $ 13,685
Supplemental schedule of non-cash investing and
financing activities:
Stock issued by Company and subsidiary in
connection with acquisitions ...................... $ -- $ -- $ -- $ -- $ 2,000
Option to purchase subsidiary shares issued by
Company ........................................... $ -- $ -- $ -- $ -- $ 1,000
See Notes to Consolidated Financial Statements.
47
GARTNER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. On October 30, 2002, the Company announced that the
Board of Directors approved a change of the Company's fiscal year end from
September 30 to December 31, effective January 1, 2003. This change resulted in
a three-month transitional period ending December 31, 2002. References to
Transition 2002, unless otherwise indicated, refer to the three-month
transitional period ended December 31, 2002. References to Fiscal 2002, Fiscal
2001 and Fiscal 2000, unless otherwise indicated, are to the respective fiscal
year period from October 1 through September 30. The unaudited financial
information for the three months ended December 31, 2001 is presented for
comparative purposes. Certain prior year amounts have been reclassified to
conform to the current year presentation.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Investments in
companies in which the Company owns less than 50% but has the ability to
exercise significant influence over operating and financial policies are
accounted for using the equity method. All other investments for which the
Company does not have the ability to exercise significant influence are
accounted for under the cost method of accounting. The results of operations for
acquisitions of companies accounted for using the purchase method have been
included in the Consolidated Statements of Operations beginning on the closing
date of acquisition.
REVENUE AND COMMISSION EXPENSE RECOGNITION. The Company typically enters
into annually renewable subscription contracts for research products. Revenue
from research products is deferred and recognized ratably over the applicable
contract terms. The majority of research contracts are billable upon signing,
absent special terms granted on a limited basis from time to time. All research
contracts are non-cancelable and non-refundable, except for government contracts
that have a 30-day cancellation clause but have not produced material
cancellations to date. With the exception of certain government contracts which
permit termination and contracts with special billing terms, it is the Company's
policy to record the entire amount of the contract that is billable as a fee
receivable at the time the contract is signed, which represents a legally
enforceable claim, and a corresponding amount as deferred revenue. For those
government contracts that permit termination, the Company bills the client the
full amount billable under the contract but only records a receivable equal to
the earned portion of the contract. In addition, the Company only records
deferred revenue on these government contracts when cash is received. Deferred
revenue attributable to government contracts was $29.3 million, $28.9 million
and $24.5 million at December 31, 2002, September 30, 2002 and September 31,
2001, respectively. In addition, at December 31, 2002 and September 30, 2002,
the Company had not recognized receivables or deferred revenues relating to
government contracts that permit termination of $4.7 million and $7.7 million,
respectively, which had been billed but not yet collected. The Company records
the commission obligation related to research contracts upon the signing of the
contract and amortizes the corresponding deferred commission expense over the
contract period in which the related revenues are earned.
Consulting revenues, primarily derived from consulting, measurement and
strategic advisory services (paid one-day analyst engagements), are recognized
as work is delivered and as services are provided and are evaluated on a
contract by contract basis.
Events revenue is deferred and recognized upon the completion of the
related symposium, conference or exhibition. In addition, the Company defers
certain costs directly related to events and expenses these costs in the period
during which the related symposium, conference or exhibition occurs. The
Company's policy is to defer only those costs, primarily prepaid site and
production services costs, which are incremental and are directly attributable
to a specific event. Other costs of organizing and producing the Company's
events, primarily Company personnel and non-event specific expenses, are
expensed in the period incurred. At the end of each fiscal quarter, management
assesses on an event-by-event basis whether expected direct costs of producing a
scheduled event will exceed expected revenues. If such costs are expected to
exceed revenues, the Company records the expected loss in the period determined.
Other revenues includes software licensing fees which are recognized when
a signed non-cancelable software license exists, delivery has occurred,
collection is probable, and the Company's fees are fixed or determinable.
Revenue from software maintenance is deferred and recognized ratably over the
term of each maintenance agreement, which is typically twelve months.
CASH AND CASH EQUIVALENTS. All highly liquid investments with original
maturities of three months or less are classified as cash equivalents. The
carrying value of these investments approximates fair value based upon their
short-term maturity. Investments with maturities of more than three months are
classified as marketable securities.
INVESTMENTS IN EQUITY SECURITIES. The Company accounts for its investments
in publicly traded equity securities under Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities. These investments, which meet the criteria for classification
as available for sale, are recorded at fair value and are included as Marketable
Equity Securities on the Consolidated Balance Sheets given the Company's ability
and intent to sell such investments within a one year period. Unrealized gains
and losses on these marketable investments are recorded, net of tax, as a
component of Accumulated other comprehensive income (loss), net within the
Stockholders' equity (deficit) section of the Consolidated Balance Sheets.
Realized gains and losses are recorded in Net gain (loss) from sale of
investments within the Consolidated Statements of Operations. The cost of equity
48
securities sold is based on specific identification. The Company assesses the
need to record impairment losses on investments and records such losses when the
impairment of an investment is determined to be other than temporary in nature.
In making this assessment, the Company 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 factors the 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 Net loss from minority-owned investments
within the Consolidated Statements of Operations. Investments for which the
Company does not have the ability to exercise significant influence are
accounted for under the cost method of accounting. Accordingly, these
investments are carried at the lower of cost or net realizable value and are
included in Other assets in the Consolidated Balance Sheets (see Note 5 -
Investments). The equity method is used to account for investments in entities
that are not majority-owned and that the Company does not control but does have
the ability to exercise significant influence.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Property, equipment and
leasehold improvements are stated at cost less accumulated depreciation and
amortization. Property and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized using the straight-line method over the shorter of the estimated
useful lives of the assets or the remaining term of the related leases.
SOFTWARE DEVELOPMENT COSTS. The Company capitalizes certain computer
software development costs and enhancements after the establishment of
technological feasibility, limited to the net realizable value of the software
product, and ceases 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. Amortization of capitalized computer software
development costs begins when the products are available for general release to
customers. Additionally, the Company capitalizes certain costs incurred to
purchase or to create and implement internal use software. Periodic reviews are
performed to ensure that unamortized capitalized software development costs
remain recoverable from future revenue.
GOODWILL AND INTANGIBLE ASSETS. Intangible assets include non-compete
agreements, trademarks and tradenames. 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 early SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 eliminates goodwill amortization upon adoption and
requires an initial assessment for goodwill impairment within six months after
initial adoption and at least annually thereafter. No goodwill amortization was
recognized during Transitional 2002 or during the fiscal year ended September
30, 2002. The Company completed its initial transitional goodwill impairment
assessment in the second fiscal quarter of 2002 and determined that there was no
impairment of goodwill and no impairment charge to be recorded as a cumulative
effect of a change in accounting principle in accordance with SFAS No. 142.
Non-compete agreements are being amortized on a straight-line basis over the
period of the agreement ranging from two to five years. Tradenames are being
amortized on a straight-line basis over their estimated useful lives ranging
from nine to twelve years. In addition, no impairment was recognized as a result
of the Company's annual evaluation.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS. The Company reviews
long-lived assets and intangible assets other than goodwill for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the respective asset may not be recoverable. Such evaluation may be based on a
number of factors including current and projected operating results and cash
flows, changes in management's strategic direction as well as other economic and
market variables. Management's policy regarding long-lived assets and intangible
assets other than goodwill is to evaluate the recoverability of these assets by
determining whether the balance can be recovered through undiscounted future
operating cash flows. Should events or circumstances indicate that the carrying
value might not be recoverable based on undiscounted future operating cash
flows, an impairment loss would be recognized. The amount of impairment, if any,
is measured based on the difference between projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds and the carrying value of the asset (see Note 6 -- Other Charges).
FOREIGN CURRENCY TRANSLATION. All assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at fiscal year-end exchange rates.
The resulting translation adjustments are recorded as foreign currency
translation adjustments, as a component of Accumulated other comprehensive
income (loss) within the 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 are
included in results of operations within Other expense, net within the
Consolidated Statements of Operations.
INCOME TAXES. Deferred tax assets and liabilities are recognized based on
differences between the book and tax basis of assets and liabilities using
presently enacted tax rates. The provision for income taxes is the sum of the
amount of income tax paid or payable for the year as determined by applying the
provisions of enacted tax laws to taxable income for that year and the net
changes during the year
49
in deferred tax assets and liabilities. Undistributed earnings of subsidiaries
outside of the U.S. amounted to approximately $41 million as of December 31,
2002 and will either be indefinitely reinvested or remitted substantially free
of U.S. tax. 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 any liability. The 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 of the Company's common stock on the date of
exercise and the exercise price.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments
include cash and cash equivalents, fees receivable, accounts payable, and
accruals which are short-term in nature. The carrying amounts of these financial
instruments approximate their fair value. Investments in publicly traded equity
securities are valued based on quoted market prices. Investments in equity
securities that are not publicly traded are valued at the lower of cost or net
realizable value, which approximates fair market value.
Long-term convertible debt consists of 6% convertible subordinated notes
(see Note 10--Debt). Although there were no amounts outstanding at December 31,
2002 under a senior revolving credit facility, the carrying amount of any such
borrowings would approximate fair value as the rates of interest on the
revolving credit facility approximate current market rates of interest for
similar instruments with comparable maturities.
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially
subject the 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. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles in the United States of
America requires management to make 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. 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.
RECENTLY ISSUED ACCOUNTING STANDARDS. In April 2002, Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS No. 145") was issued. FASB Statement No. 4 required all gains and losses
from the extinguishment of debt to be reported as extraordinary items and
Statement No. 64 related to the same matter. FAS 145 requires gains and losses
from certain debt extinguishment to not be reported as extraordinary items when
the use of debt extinguishment is part of the risk management strategy.
Statement No. 44 was issued to establish transitional requirements for motor
carriers relative to intangible assets. Since those transitions are completed,
Statement No. 44 is no longer applicable. SFAS No. 145 also amends Statement No.
13 requiring sale-leaseback accounting for certain lease modifications. SFAS No.
145 is effective for fiscal years beginning after May 15, 2002 (fiscal 2003 for
Gartner). The provisions relating to sale-leaseback are effective for
transactions after May 15, 2002. We adopted SFAS No. 145 in Transition 2002.
Accordingly, the extraordinary loss from the extinguishment of debt of $2.9
million or $(0.02) per share in fiscal 2000 was reclassified to continuing
operations.
In July 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146")
was issued. This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue ("EITF") 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The principle difference between SFAS 146
and EITF 94-3 relates to the timing of liability recognition. Under SFAS 146, a
liability for a cost associated with an exit or disposal activity is recognized
when the liability is incurred. Under EITF 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002.
In December 2002, Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
148") was issued. SFAS 148 amends SFAS No. 123, "Stock-Based Compensation"
("SFAS 123"), to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosure in both annual and interim financial
statements about the effects on reported net income of an entity's method of
accounting for stock-based employee compensation. The disclosure provisions of
SFAS 148 are effective for fiscal years ending after December 15, 2002 and have
been incorporated into these financial statements and accompanying footnotes.
The following are the pro forma net income (loss) and net income (loss)
per share for Transition 2002 and for Fiscal 2002, 2001, and 2000 had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant date for grants under those
plans (in thousands, except per share data):
50
FOR THE THREE
MONTH
TRANSITIONAL
PERIOD ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 2002 2002 2001 2000
----------------- ---- ---- ----
Net income (loss)
As reported $ (14,418) $ 48,578 $ (66,203) $ 25,546
Pro forma $ (19,532) $ 20,230 $ (106,370) $ (3,325)
Net income (loss) per diluted
Share
As reported $ (0.18) $ 0.47 $ (0.77) $ 0.29
Pro forma $ (0.24) $ 0.25 $ (1.24) $ (0.04)
The fair value of the 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:
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
2002 2002 2001 2000
---- ---- ---- ----
Expected life (in years) 3.4 3.5 3.1 3.1 - 5.2
Expected volatility 47% 50% 65% 44%
Risk free interest rate 2.2% 3.2% 3.2% 5.76% - 6.08%
Expected dividend yield 0.00% 0.00% 0.00% 0.00%
The weighted average fair values of the Company's stock options granted in
Transition 2002 and Fiscal 2002, 2001 and 2000 are $2.93, $3.67, $3.77 and
$6.63, respectively.
2--BUSINESS ACQUISITIONS
FISCAL 2002
On June 10, 2002, the Company acquired the remaining 49.9% of People3,
Inc., a leading authority on IT human capital. People3 has been integrated with
the Company's consulting segment. Prior to this acquisition, the Company owned
50.1% of People3 and consolidated its assets and liabilities and results of
operations with those of the Company. 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 three-year non-compete
agreement. The database-related assets are being amortized over their estimated
useful life of five years.
During Fiscal 2002, the Company completed additional acquisitions for
total consideration of approximately $0.7 million, of which $0.1 million was
allocated to tangible assets, $0.8 million was allocated to goodwill, $0.2
million was allocated to non-compete agreements and $0.4 million was allocated
to liabilities assumed. The non-compete agreements are being amortized over the
five-year non-compete agreement.
FISCAL 2001
On October 2, 2000, the Company acquired all of the assets and assumed the
liabilities of Solista Global LLC ("Solista") for approximately $9.0 million in
cash. Solista is a provider of strategic consulting services that merge
technology and business expertise to help clients build strategies for the
digital world. The acquisition was accounted for by the purchase method and the
purchase price was allocated to the assets acquired and the liabilities assumed,
based upon estimated fair values at the date of the acquisition. The excess
purchase price over the fair value of amounts assigned to the net tangible
assets acquired was approximately $6.5 million, of which $6.0 million was
allocated to goodwill. In addition, $0.5 million of the purchase price was
allocated to non-compete agreements which are being amortized over three years.
See Note 8 - Intangible Assets, Net.
During Fiscal 2001, the Company completed additional acquisitions for
consideration of $3.0 million in cash. The largest of these was the acquisition
of an Events business for approximately $2.6 million.
FISCAL 2000
On December 10, 1999, the Company acquired all of the assets and assumed
the liabilities of Rendall and Associates, Inc. ("Rendall") for $12.0 million in
cash. Rendall provides strategic planning advice, feasibility and competitive
analysis and research on the telecommunications market, technologies, regulation
and public policies. Additionally, Rendall provides technical expertise in
broadband
51
technologies. The acquisition was accounted for by the purchase method and the
purchase price was allocated to the assets acquired and the liabilities assumed,
based upon estimated fair values at the date of the acquisition. The excess
purchase price over the fair value of amounts assigned to the net tangible
assets acquired was approximately $11.1 million, of which $9.9 million was
allocated to goodwill. In addition, $1.2 million of the purchase price was
allocated to a non-compete agreement, which is being amortized over 5 years.
On November 30, 1999, the Company acquired all the outstanding shares of
Computer Financial Consultants Limited ("CFC") for $16.0 million in cash. CFC
provides senior executives in IT and purchasing with assistance intended to
enhance the procurement of IT related products and services. The acquisition was
accounted for by the purchase method and the purchase price was allocated to the
assets acquired and the liabilities assumed, based upon estimated fair values at
the date of the acquisition. The excess purchase price over the fair value of
amounts assigned to the net tangible assets acquired was approximately $11.6
million, of which $11.0 million was allocated to goodwill. In addition, $0.6
million of the purchase price was allocated to a non-compete agreement, which is
being amortized over 5 years.
During Fiscal 2000, the Company completed additional acquisitions for
consideration of $87.1 million in cash and a $1.0 million note payable,
including the acquisition of TechRepublic for $75.8 million (see Note 3 -
Discontinued Operation).
3--DISCONTINUED OPERATION
On July 2, 2001, the Company sold its 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 market value of $12.21 per share on July 2, 2001. The Consolidated
Financial Statements of the Company have been restated to reflect the
disposition of the TechRepublic segment as a discontinued operation in
accordance with APB Opinion No. 30. Accordingly, revenues, costs and expenses,
assets, liabilities, and cash flows of TechRepublic have been excluded from the
respective captions in the Consolidated Statements of Operations, Consolidated
Balance Sheets and Consolidated Statements of Cash Flows, and have been reported
through the date of disposition as "Loss from discontinued operation," "Net
assets of discontinued operation," and "Net cash used by discontinued
operation," for all periods presented.
During Fiscal 2001, the Company recorded a pre-tax loss of $66.4 million
($39.9 million after tax) to recognize the loss on the sale. This pre-tax loss
includes a write-down of $42.4 million of assets, primarily goodwill, to net
realizable value, operating losses through the date 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 is as
follows (in thousands):
Statements of Operations Data
Year Ended September 30,
2001 2000
-------- --------
Revenues $ 12,368 $ 4,077
======== ========
Loss before income taxes $(32,574) $(35,199)
(Benefit) for income taxes (6,515) (7,621)
-------- --------
Loss from discontinued operation, net $(26,059) $(27,578)
======== ========
Loss on disposal before income taxes $(66,436) $ --
(Benefit) for income taxes (26,512) --
-------- --------
Loss on disposal of discontinued operation, net $(39,924) $ --
======== ========
4--NET GAIN (LOSS) ON SALE OF INVESTMENTS
During Fiscal 2002, the Company sold 748,118 shares of CNET for $6.0
million resulting in a pre-tax gain of $0.8 million.
During Fiscal 2001, the Company sold its remaining 1,922,795 shares of
Jupiter Media Metrix ("Jupiter") for net cash proceeds of $7.5 million at an
average price of $3.91 per share for a pre-tax loss of $5.6 million. In addition
the Company received additional stock distributions from its investment in SI
Venture Associates, LLC ("SI I"), and SI Venture Fund II, LP ("SI II"). During
Fiscal 2001, the Company sold a portion of the shares received from SI I and SI
II, and other securities, for net cash proceeds of $6.9 million for a pre-tax
gain of $5.0 million.
52
On June 30, 2000, the Company sold its 8% investment in NETg, Inc.
("NETg") for $36.0 million in cash to an affiliate of Harcourt, Inc. resulting
in a pre-tax loss of approximately $6.6 million. The Company received the cash
proceeds on July 7, 2000. In addition, the Company recorded an additional loss
in connection with a negotiated settlement of a joint venture agreement
associated with the sale of GartnerLearning for approximately $6.7 million.
On October 7, 1999, Jupiter completed its initial public offering at
$21.00 per share of common stock. Upon completion of Jupiter's initial public
offering, the Company owned 4,028,503 shares of Jupiter's outstanding common
stock. The change in the Company's proportionate share of Jupiter's equity
resulted in the Company's write-up of the investment by approximately $15.4
million and increases in deferred tax liability and additional paid-in capital
of approximately $7.1 million and $8.3 million, respectively. During fiscal
2000, the Company's ownership interest decreased below 20% of Jupiter's
outstanding common stock. Because the Company had concluded it no longer
exercised significant influence over Jupiter, it changed its method of
accounting for this investment from the equity method to the cost method. During
the year ended September 30, 2000, the Company sold 1,995,950 shares for net
cash proceeds of $55.5 million at an average price of $27.81 per share for a
pre-tax gain of $42.9 million. In September 2000, Jupiter merged with Media
Metrix, Inc., creating Jupiter. Jupiter shareholders received 0.946 shares of
Jupiter for each share of Jupiter that they owned. At the date of the merger,
the Company owned 2,032,553 shares of the former Jupiter, which were exchanged
for shares of Jupiter.
5--INVESTMENTS
A summary of the Company's investments in marketable equity securities and
other investments at December 31, 2002 and at September 30, 2002 and 2001 is as
follows (in thousands):
As of December 31, 2002: Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---- ------- -------
Other investments $10,921 -- $ (202) $10,719
------- ---- ------- -------
Total $10,921 -- $ (202) $10,719
======= ==== ======= =======
As of September 30, 2002: Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---- ------- -------
Other investments $12,921 -- $ (244) $12,677
------- ---- ------- -------
Total $12,921 -- $ (244) $12,677
======= ==== ======= =======
As of September 30, 2001: Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---- ------- -------
Marketable equity securities available for sale $ 5,287 $ 2 $(2,039) $ 3,250
Other investments 15,030 426 (208) 15,248
------- ---- ------- -------
Total $20,317 $428 $(2,247) $18,498
======= ==== ======= =======
CNET Shares
At September 30, 2001, marketable equity securities were comprised of
755,058 shares of CNET received in connection with the sale of TechRepublic,
which has a fair value of $12.21 per share, or $9.2 million on July 2, 2001, the
closing date. Subsequent to the closing, the market value of the CNET shares
declined substantially; accordingly, in the fourth quarter of Fiscal 2001, the
Company recorded a $3.9 million impairment charge in net loss from
minority-owned investments, representing an other than temporary decline in
market value of the CNET common stock. At September 30, 2001, these shares were
reflected in the Consolidated Balance Sheets at their fair market value of $3.3
million after giving effect to an additional $2.0 million of unrealized losses.
During Fiscal 2002, 748,118 shares of CNET were sold for $6.0 million at an
average price per share of $8.05 resulting in a pre-tax gain of $0.8 million.
The remaining 6,940 CNET shares were written off for a loss of $49 thousand.
SI and Other Investments - Related Party
In addition to equity securities owned directly through SI I, a wholly
owned affiliate, the Company also owns 34% of SI II. Both entities are venture
capital funds engaged in making investments in early to mid-stage IT-based or
Internet-enabled companies. Both entities are managed by SI Services Company,
L.L.C., an entity controlled by the Company's former Chairman of the Board, who
continues as an employee and Chairman Emeritus of the Company, and certain of
the Company's former officers and employees. Management fees incurred for SI
Services Company, L.L.C. are approximately $1.2 million per year. In addition,
the Company provides access to research and the use of certain office space at
no cost to SI Services Company, LLC. The Company had a total original investment
commitment to SI I and SI II of $10.0 million and $30.0 million, respectively.
The commitment to SI I was fully funded in prior years. Of the $30.0 million
commitment to SI II, $5.9 million remained unfunded at December 31, 2002 and
September 30, 2002 and may be called by SI at any time.
53
Other investments is comprised of investments in SI I, SI II and
cost-based investments. The carrying value of the Company's investments held by
SI I and SI II were $2.3 million and $3.7 million, respectively, at December 31,
2002. The carrying value of other cost-based investments was $4.7 million at
December 31, 2002 and September 30, 2002 and 2001. The other cost-based
investments represent the Company's 9% investment in Trusecure Corporation, a
company that provides internet security assurance through awareness and
continuous certification of products and systems. Trusecure's revenues were $29
million for the year ended December 31, 2001. The Company sells certain
Trusecure services. The revenue recognized on Trusecure services sold by the
Company was $0.8 million in Transition 2002 and 2001 and $3.7 million, $1.2
million and $0.2 million in Fiscal 2002, 2001 and 2000, respectively.
The Company's share of equity gains in SI I and SI II was $0.01 million
for Transition 2002 and 2001 and $0.2 million for Fiscal 2002. The Company's
share of equity losses was $0.3 million and $0.5 million for the fiscal years
ended September 30, 2001 and 2000, respectively. During Transition 2002, the
Company 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 "Net
loss from minority-owned investments" in the Consolidated Statements of
Operations. During the fiscal year ended September 30, 2002, the Company
recognized impairment losses of $2.5 million, in connection with the Company's
decision to actively pursue the sale of the investments held in the SI funds.
During Fiscal 2001, the Company recognized impairment losses of $26.5 million.
The Company made an assessment of the carrying value of its investments and
determined that certain investments were in excess of their fair value due to
the significance and duration of the decline and due to the valuation of
comparable companies operating in the Internet and technology sectors. The
impairment factors the Company evaluated 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. This could result in additional material non-cash
impairment charges in the future.
6--OTHER CHARGES
During Transition 2002, the Company recorded other charges of $32.2
million. Of these charges, $13.3 million relates to costs and losses associated
with the elimination and reduction of excess facilities, principally leased
facilities and ongoing lease costs and losses associated with sub-lease
arrangements. In addition, approximately $18.9 million of these charges are
associated with the Company's workforce reduction and are for employee
termination severance payments and related benefits. This workforce reduction
has resulted in the elimination of 175 positions, or approximately 4% of the
Company's workforce, and the payment of $6.9 million of termination benefits
during Transition 2002.
During Fiscal 2002, the Company recorded other charges of $17.2 million.
Of these charges, $10.0 million relates to costs and losses associated with the
elimination of excess facilities, principally leased facilities and ongoing
lease costs and losses associated with sub-lease arrangements. In addition,
approximately $5.8 million of these charges are associated with the Company's
workforce reduction announced in January 2002 and are for employee termination
severance payments and related benefits. This workforce reduction has resulted
in the elimination of approximately 100 positions, or approximately 2% of the
Company's workforce, 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.
During Fiscal 2001, the Company recorded other charges of $46.6 million.
Of these charges, $24.8 million are associated with the Company's workforce
reduction announced in April 2001. This workforce reduction has resulted in the
elimination of 383 positions, or approximately 8% of the Company's workforce,
and the payment of $6.4 million and $18.2 million of termination severance
payments and related benefits during Fiscal 2002 and 2001, respectively.
Approximately $14.3 million of the other charges are associated with the
write-down of goodwill and other long-lived assets to net realizable value as a
result of the Company's decision to discontinue certain unprofitable products,
and $7.5 million of the charge is associated primarily with the write-off of
internally developed systems in connection with the launch of gartner.com and
seat-based pricing.
At December 31, 2002, $11.7 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, 2003. The Company is funding these costs
out of operating cash flows.
Following is a reconciliation of the other charges recorded in Transition
2002, Fiscal 2002, and Fiscal 2001 (in thousands):
54
Accrued Accrued
liability at Additions in liability at
September transition Non-cash December
30, 2002 period charges Payments 31, 2002
-------- -------- -------- -------- -------
Facilities reductions $ 4,088 $ 13,267 $ (659) $ (760) $15,936
Workforce reductions:
Fiscal 2001 234 -- -- (139) 95
Fiscal 2002 424 -- -- (187) 237
Transition 2002 -- 18,899 (601)(1) (6,907) 11,391
------- -------- -------- -------- -------
Total $ 4,746 $ 32,166 $ (1,260) $ (7,993) $27,659
======= ======== ======== ======== =======
Accrued Accrued
liability at liability at
September Additions in Non-cash September
30, 2001 Fiscal 2002 charges Payments 30, 2002
-------- ----------- -------- -------- -------
Facilities reductions $ -- $ 10,014 $ (2,663) $ (3,263) $ 4,088
Workforce reductions:
Fiscal 2001 6,599 -- -- (6,365) 234
Fiscal 2002 -- 5,808 (120)(1) (5,264) 424
Asset impairment -- 1,424 (1,424) -- --
------- -------- -------- -------- -------
Total $ 6,599 $ 17,246 $ (4,207) $(14,892) $ 4,746
======= ======== ======== ======== =======
Accrued Accrued
liability at liability at
September Additions in Non-cash September
30, 2000 Fiscal 2001 charges Payments 30, 2001
-------- ----------- -------- -------- -------
Workforce reductions: $ -- $ 24,780 $ -- $(18,181) $ 6,599
Asset impairment and other costs
-- 21,783 (18,888) (2,895) --
------- -------- -------- -------- -------
Total $ -- $ 46,563 $(18,888) $(21,076) $ 6,599
======= ======== ======== ======== =======
7--PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment and leasehold improvements, less accumulated depreciation
and amortization consist of the following (in thousands):
September 30,
Useful December
Life (Years) 31, 2002 2002 2001
----------- --------- --------- ---------
Computer equipment and software 2-3 $ 132,708 $ 128,795 $ 117,062
Furniture and equipment 3-8 39,432 39,381 49,040
Leasehold improvements 2-15 37,703 37,510 39,758
--------- --------- ---------
209,843 205,686 205,860
Less - accumulated depreciation and amortization (138,837) (129,525) (105,572)
--------- --------- ---------
$ 71,006 $ 76,161 $ 100,288
========= ========= =========
At December 31, 2002 and 2001, and September 30, 2002 and 2001,
capitalized development costs for internal use software were $15.1 million,
$31.5 million, $15.6 million and $27.3 million, respectively, net of accumulated
amortization of $27.9 million, $25.7 million, $27.4 million and $24.7 million,
respectively. Amortization of capitalized internal software development costs
totaled $4.4
----------
(1) The non-cash charges for Transition 2002 and Fiscal 2002 workforce
reductions result from the establishment of a new measurement date for
certain stock options upon the modification of their exercise term.
55
million and $4.9 million during Transition 2002 and Transition 2001,
respectively, and $15.7 million, $14.3 million and $7.2 million in Fiscal 2002,
2001 and 2000, respectively.
8--INTANGIBLE ASSETS, NET
Effective October 1, 2001, the Company adopted early SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 eliminates goodwill amortization upon
adoption and requires an initial assessment for goodwill impairment within six
months after initial adoption and at least annually thereafter. Accordingly, no
goodwill amortization was recognized during Transition 2002 and Fiscal 2002. The
Company completed its initial transitional goodwill impairment assessment in the
second quarter of Fiscal 2002 and determined that there was no impairment of
goodwill and no impairment charge to be recorded as a cumulative effect of a
change in accounting principle in accordance with SFAS No. 142. Our next annual
impairment assessment will be completed in the second quarter of Fiscal 2003.
The following table reconciles the reported net income (loss) and income (loss)
per share from continuing operations to the respective pro forma amount adjusted
to exclude goodwill amortization.
FOR THE THREE
MONTH
TRANSITIONAL
PERIOD ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 2002 2002 2001 2000
----------------- ---- ---- ----
In thousands, except per share
(LOSS) INCOME FROM CONTINUING OPERATIONS:
Reported (loss) income from continuing operations (14,418) $ 48,578 $ (220) $ 53,124
Add back: Goodwill amortization, net of taxes -- -- 8,396 8,985
---------- ---------- ---------- ----------
Adjusted (loss) income from continuing operations (14,418) $ 48,578 $ 8,176 $ 62,109
========== ========== ========== ==========
BASIC (LOSS) INCOME PER SHARE FROM CONTINUING
OPERATIONS:
Reported (loss) income from continuing operations $ (0.18) $ 0.58 $ (0.00) $ 0.61
Add back: Goodwill amortization, net of taxes -- -- 0.10 0.11
---------- ---------- ---------- ----------
Adjusted (loss) income from continuing operations $ (0.18) $ 0.58 $ 0.10 $ 0.72
========== ========== ========== ==========
DILUTED (LOSS) INCOME PER SHARE FROM CONTINUING
OPERATIONS:
Reported (loss) income from continuing operations $ (0.18) $ 0.47 $ (0.00) $ 0.60
Add back: Goodwill amortization, net of taxes -- -- 0.09 0.10
---------- ---------- ---------- ----------
Adjusted (loss) income from continuing operations $ (0.18) $ 0.47 $ 0.09 $ 0.70
========== ========== ========== ==========
56
Included in the Company's balance sheet as of December 31, 2002, and as of
September 30, 2002 and 2001 are the following categories of acquired intangible
assets (in thousands).
December 31, 2002
Amortization Accumulated
Period (Years) Gross cost amortization Net
---------- ------------ ---
Goodwill
Research $154,007 $(30,246) $123,761
Consulting 76,068 (8,657) 67,411
Events 33,607 (3,001) 30,606
Other 2,580 (498) 2,082
-------- -------- --------
Total goodwill 266,262 (42,402) 223,860
Intangible assets with finite lives
Non-compete agreements 2 - 5 12,910 (11,157) 1,753
Trademarks and tradenames 9 - 12 1,808 (1,307) 501
-------- -------- --------
Total $280,980 $(54,866) $226,114
======== ======== ========
September 30, 2002
Amortization Accumulated
Period (Years) Gross cost amortization Net
---------- ------------ ---
Goodwill
Research $152,609 $(30,042) $122,567
Consulting 75,712 (8,631) 67,081
Events 33,699 (3,001) 30,698
Other 2,579 (498) 2,081
-------- -------- --------
Total goodwill 264,599 (42,172) 222,427
Intangible assets with finite lives
Non-compete agreements 2 - 5 12,829 (10,648) 2,181
Trademarks and tradenames 9 - 12 1,804 (1,254) 550
-------- -------- --------
Total $279,232 $(54,074) $225,158
======== ======== ========
September 30, 2001
Amortization Accumulated
Period (Years) Gross cost amortization Net
---------- ------------ ---
Goodwill
Research $149,887 $(29,750) $120,137
Consulting 72,962 (8,742) 64,220
Events 33,419 (3,001) 30,418
Other 2,579 (498) 2,081
-------- -------- --------
Total goodwill 258,847 (41,991) 216,856
Intangible assets with finite lives
Non-compete agreements 2 - 5 12,567 (8,948) 3,619
Trademarks and tradenames 9 - 12 3,442 (1,684) 1,758
-------- -------- --------
Total $274,856 $(52,623) $222,233
======== ======== ========
Amortization related to intangible assets with finite lives was $0.5 million for
Transition 2002 and 2001 and $1.9 million, $2.8 million and $3.4 million for
Fiscal 2002, 2001 and 2000, respectively. In accordance with SFAS No. 142, the
Company reassessed the useful lives of all other intangible assets. There were
no changes to such lives and there are no expected residual values associated
with these intangible assets. Non-compete agreements are amortized over the term
of the individual contracts, generally two to five years, and trademarks and
tradenames are amortized over a period of nine to twelve years.
57
Estimated future amortization expense for the next five years is as follows (in
thousands):
Year ended December 31,
-----------------------
2003 $1,228
2004 $ 624
2005 $ 181
2006 $ 87
2007 $ 29
9--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
September 30,
December 31,
2002 2002 2001
-------- -------- --------
Taxes payable $ 19,973 $ 22,955 $ 25,628
Payroll and related benefits payable 37,829 43,114 35,529
Commissions payable 15,919 14,504 19,987
Accounts payable 7,576 12,829 14,509
Other charges (see Note 6) 27,659 4,746 6,599
Other accrued liabilities 43,034 32,216 35,499
-------- -------- --------
$151,990 $130,364 $137,751
======== ======== ========
10--DEBT
On July 16, 1999, the Company entered into an unsecured Credit Agreement
with JPMorgan Chase Bank, as administrative agent for the participating
financial institutions thereunder, providing for a maximum of $500.0 million of
credit facilities, consisting of a $350.0 million term loan and a $150.0 million
senior revolving credit facility. On February 25, 2000, the Company modified
certain financial and other covenants to permit the issuance of convertible
debt. Loans under the revolving facility were to be available for five years
maturing on July 16, 2004, subject to certain customary conditions on the date
of any such loan. On July 17, 2000, the Company entered into a second amendment
to the Credit Agreement. Under this amendment, the Company agreed to refinance
all existing indebtedness and to repay in full and terminate the term loans
drawn under the existing Credit Agreement. At December 31, 2002, the Company had
a senior revolving credit facility, as amended, totaling a maximum aggregate
principal amount of up to $200.0 million of which $0.0 million was outstanding.
In connection with the extinguishment of the $350.0 million term loan, the
Company wrote off $1.7 million, net of the related tax benefit of $1.2 million,
of deferred debt issuance costs in the fourth quarter of fiscal 2000.
At December 31, 2002 and September 30, 2002, there were no amounts
outstanding under the revolving credit facility. At September 30, 2001, $15.0
million was outstanding under the revolving credit facility. A commitment fee of
0.30% to 0.50% is paid on the unused revolving credit amount. Pursuant to
certain financial covenants of the revolving credit facility, the Company had
$58.7 million of available borrowings at December 31, 2002. These covenants are
primarily based on financial results and other measures such as contract value.
The weighted average interest rate on borrowings, which were only outstanding
during October and November of 2001, was 3.6% for the year ended September 30,
2002. The weighted average interest rate on borrowings was 6.8% for the year
ended September 30, 2001.
On April 17, 2000, the Company issued in a private placement transaction,
$300.0 million of 6% convertible subordinated notes (the "convertible notes") to
Silver Lake Partners, L.P. ("Silver Lake") and certain of Silver Lake's
affiliates. The convertible notes mature in April 2005 and accrue interest at 6%
per annum. Interest accrues semi-annually by a corresponding increase in the
face amount of the convertible notes commencing September 15, 2000. Accordingly,
$51.5 million has been added to the face amount of the convertible notes'
balance outstanding as of December 31, 2002.
As part of the transaction, two Silver Lake representatives were elected
to the Company's ten-member Board of Directors. The Company also granted to
Silver Lake the right to acquire 5% of any Company subsidiary that is spun off
or spun out at 80% of the initial public offering price. The Company valued the
option at $1.0 million, which was recorded as a discount to the convertible
notes, and is being amortized to interest expense over the five-year term.
On April 18, 2000, $200.0 million of the proceeds were used to pay down
term loan borrowings under the Credit Agreement with JPMorgan Chase Bank. The
Company incurred $7.9 million of transaction and advisory fees related to the
transaction. These fees were accounted for as debt issuance costs and are being
amortized over the five-year term of the debt using the effective interest
method.
58
The convertible notes were originally convertible into shares of the
Company's Class A Common Stock, commencing April 17, 2003, at an initial price
of $15.87 per share. In accordance with the original terms of the note, on the
first anniversary date of issuance of the convertible notes, April 17, 2001, the
conversion price was adjusted, or reset, to be equal to the lower of the initial
conversion price of $15.87 per share, or the average closing price over the
thirty trading day period ending April 17, 2001 if less than $14.43, a price
equal to a 10% premium to the average closing price over that same period. On
April 17, 2001, the conversion price was reduced to $7.45 per share. The number
of shares of Class A Common Stock issuable upon conversion of the notes as of
December 31, 2002 was 47.3 million shares with a total market value of $434.7
million, using the Company's December 31, 2002 market price of $9.20 per share.
On or after April 17, 2003, subject to satisfaction of certain customary
conditions, the Company may redeem all of the convertible notes for cash
provided that (1) the average closing price of the Class A Common Stock for the
twenty consecutive trading days immediately preceding the date the redemption
notice is given equals or exceeds 150% of the adjusted conversion price of $7.45
per share, and (2) the closing price of the Class A Common Stock on the trading
day immediately preceding the date the redemption notice is given also equals or
exceeds 150% of the adjusted conversion price. The redemption price is the face
amount of the notes plus all accrued interest. If the Company initiates the
redemption, Silver Lake has the option of receiving payment in cash, stock, or a
combination of cash and stock.
Commencing on April 18, 2003, Silver Lake may elect to convert all or a
portion of the notes to stock. If Silver Lake initiates the conversion, the
Company has the option of redeeming all such notes for cash at a price based on
the number of shares into which the notes would be converted and the market
price on the date the notice of conversion is given.
On the maturity date, April 17, 2005, the Company must satisfy any
remaining notes for cash.
The Company issues letters of credit in the ordinary course of business.
At December 31, 2002, the Company had outstanding letters of credit with
JPMoragan Chase Bank for $1.2 million, The Bank of New York for $2.0 million and
with others for $0.1 million.
11--COMMITMENTS AND CONTINGENCIES
The Company leases various facilities, furniture and computer equipment
under operating lease arrangements expiring between 2003 and 2025. Future
minimum annual payments under non-cancelable operating lease agreements at
December 31, 2002 are as follows (in thousands):
Year Ended December 31,
-----------------------
2003 $ 30,500
2004 23,470
2005 20,487
2006 17,369
2007 16,726
Thereafter 105,811
--------
Total minimum lease payments $214,363
========
Rental expense for operating leases was $7 million for Transition 2002 and
$27.6 million, $26.9 million, and $22.4 million for the fiscal years ended
September 30, 2002, 2001 and 2000, respectively. The Company has commitments
with one company for printing equipment, which expires during 2005. The minimum
obligation under the agreement is $.9 million in the aggregate.
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. The Company believes the outcome of all current
proceedings, claims and litigation will not have a material effect on the
Company's financial position or results of operations when resolved in a future
period.
12--STOCKHOLDERS' EQUITY (DEFICIT)
CAPITAL STOCK. Class A Common Stock and Class B Common Stock stockholders
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.
STOCK OPTION PLANS. The Company's 1991 Stock Option Plan expired on April
25, 2001. As a result, as of December 31, 2002 and September 30, 2002, no
options were available for future grant under this plan.
59
In January 1993, the Company adopted the 1993 Director Option Plan, a
stock option plan for directors, and reserved an aggregate of 1,200,000 shares
of Class A Common Stock for issuance under this plan. The plan currently
provides for the automatic grant of 15,000 options to purchase shares of Class A
Common Stock to each non-employee director upon first becoming an outside
director and the automatic grant of an option to purchase an additional 7,000
shares of Class A Common Stock annually based on continuous service as an
outside director. The exercise price of each option granted under the plan is
equal to the fair market value of the Class A Common Stock at the date of grant.
Options granted are subject to yearly vesting over a three-year period after the
date of grant. Non-employee directors are also compensated in common stock
equivalents payable under this plan. At December 31, 2002 and September 30, 2002
and 2001, 363,447, 384,995 and 420,738 options were available for grant,
respectively.
In October 1994, the Board of Directors and stockholders of the Company
approved the adoption of a Long-Term Stock Option Plan and the reservation of an
aggregate of 6,560,000 shares of Class A Common Stock for issuance thereunder.
The purpose of the plan is intended to provide to senior personnel long-term
equity participation in the Company as an incentive to promote the long-term
success of the Company. The exercise price of each option granted under the plan
is equal to the fair market value of the Class A Common Stock at the date of
grant. Prior to 2001, options granted under the plan vest and become fully
exercisable five years following the date of grant, based on continued
employment, and have a term of ten years from the date of grant assuming
continued employment. Vesting and exercisability accelerates upon achievement of
certain financial performance targets determined by the Board of Directors. If
the financial performance targets are met for the year of grant in accordance
with parameters as set by the Board at its sole discretion, 25% of the shares
granted become exercisable on the first anniversary date following the date of
grant and, if cumulative financial performance targets are met for both the
first and second years following the date of grant, a second 25% become
exercisable three years following the date of grant. If cumulative financial
performance targets are met for all three years following the date of grant, a
third 25% become exercisable on the fourth anniversary date following the date
of grant and the final 25% become exercisable on the fifth anniversary following
the date of grant. Based on cumulative performance through December 30, 2002,
1,181,800 shares were exercisable on December 31, 2002. An additional 197,208
shares, not subject to accelerated vesting, were exercisable on December 31,
2002. Options granted in Fiscal 2001, Fiscal 2002 and Transition 2002 under the
1994 plan vest over four years, with 25% vesting after one year and the
remaining 75% vesting monthly over the next three years. At December 31, 2002
and September 30, 2002 and 2001, 30,250, 30,250 and 419,250 options were
available for grant, respectively.
In October 1996, the Company adopted the 1996 Long Term Stock Option Plan.
Under the terms of the plan, the Board of Directors may grant non-qualified and
incentive options, entitling employees to purchase shares of the Company's
common stock at the fair market value at the date of option grant. A total of
1,800,000 shares of Class A Common Stock was reserved for issuance under this
plan. Prior to 2002, all options granted under the plan vest and become fully
exercisable six years following the date of grant, based on continued
employment, and have a term of ten years from the date of grant assuming
continued employment. Prior to 2002, vesting and exercisability accelerates upon
achievement of certain financial performance targets determined by the Board of
Directors. If financial performance targets are met in the year of grant in
accordance with parameters as set by the Board at its sole discretion, 25% of
the shares granted become exercisable on the third anniversary date following
the date of grant. If cumulative financial performance targets are met for both
the first and second years following the date of grant, a second 25% become
exercisable three years following the date of grant. If financial performance
targets are met cumulatively for all three years following the date of grant, a
third 25% become exercisable on the fourth anniversary date following the date
of grant and the final 25% become exercisable on the fifth anniversary following
the date of grant. Based on cumulative performance for 1997 to 1999, 692,000
options were exercisable on December 31, 2002. No additional acceleration of
vesting is possible. Options granted in fiscal 2002 and the transitional period
ended December 31, 2002 under the 1996 plan vest over four years, with 25%
vesting after one year and the remaining 75% vesting monthly over the next three
years. An additional 184,042 shares not subject to accelerated vesting, were
exercisable on December 31, 2002. At December 31, 2002 and September 30, 2002
and 2001, 13,042, 568,458 and 952,125 options to purchase common stock were
available for grant, respectively.
In October 1998, the Company adopted the 1998 Long Term Stock Option Plan.
Under the terms of the plan, the Board of Directors may grant non-qualified and
incentive options, entitling employees to purchase shares of the Company's
common stock at the fair market value at the date of option or restricted stock
awards. A total of 2,500,000 shares of Class A Common Stock was reserved for
issuance under this plan. Options currently granted under the plan generally
vest and become fully exercisable six years following the date of grant, based
on continued employment, and have a term of ten years from the date of grant
assuming continued employment. Vesting and exercisability accelerates upon
achievement of certain financial performance targets determined by the Board of
Directors. If financial performance targets are met in the year of grant in
accordance with parameters as set by the Board at its sole discretion, 25% of
the shares granted become exercisable on the third anniversary date following
the date of grant. If cumulative financial performance targets are met for both
the first and second years following the date of grant, a second 25% become
exercisable three years following the date of grant. If financial performance
targets are met cumulatively for all three years following the date of grant, a
third 25% become exercisable on the fourth anniversary date following the date
of grant and the final 25% become exercisable on the fifth anniversary following
the date of grant. Based on cumulative performance through December 31, 2002, no
vesting has accelerated. Options granted since September 30, 1999 vest over four
years, with 25% vesting after one year and the remaining 75% vesting monthly
over the next three years. At December 31, 2002 and September 30, 2002 and 2001,
328,851, 1,024,344 and 838,509 options to purchase common stock were available
for grant, respectively.
60
In November 1999, the Company adopted the 1999 Stock Option Plan. Under
the terms of the plan, the Board of Directors may grant non-qualified and
incentive stock options and other awards to eligible employees and consultants.
The Company's directors and most highly compensated executive officers are not
eligible for awards under the plan. A total of 20,000,000 shares of Class A
Common Stock was reserved for issuance under this 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. On July 25, 2002, the Board of Directors approved
an amendment to the plan increasing the shares reserved by 3,500,000 to
23,500,000. At December 31, 2002 and September 30, 2002 and 2001, 2,428,952,
3,990,266 and 2,767,349 options to purchase common stock were available for
grant, respectively.
A summary of stock option activity under the plans and agreement through
December 31, 2002 follows:
Class A Common Stock Weighted
Under Average Exercise
Option Price
----------- -------
Outstanding at September 30, 1999 17,789,568 $17.475
Granted 18,256,310 $11.859
Exercised (1,379,306) $ 5.886
Canceled (4,099,846) $17.240
----------- -------
Outstanding at September 30, 2000 30,566,726 $14.669
Granted 10,339,620 $ 8.207
Exercised (592,832) $ 6.156
Canceled (5,330,390) $13.859
----------- -------
Outstanding at September 30, 2001 34,983,124 $13.029
Granted 5,629,441 $ 9.416
Exercised (1,989,049) $ 8.918
Canceled (4,617,199) $14.115
----------- -------
Outstanding at September 30, 2002 34,006,317 $12.524
Granted 3,601,127 $ 8.130
Exercised (131,343) $ 7.905
Canceled (1,012,162) $12.859
----------- -------
Outstanding at December 31, 2002 36,463,939 $12.096
=========== =======
Options for the purchase of 21,895,683 and 17,590,919 shares of Class A
Common Stock were exercisable at December 31, 2002 and September 30, 2002,
respectively.
The following table summarizes information about stock options outstanding at
December 31, 2002:
Outstanding Exercisable
----------------------------- --------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (Years) Price Exercisable Price
--------------- ----------- ------- ----- ----------- -----
$ 1.00 - 7.95 7,697,644 7.34 $ 7.38 4,292,610 $ 7.49
$ 7.99 - 9.94 8,757,097 8.90 $ 9.05 2,240,478 $ 9.13
$10.09 - 10.31 6,895,137 6.85 $10.31 6,214,081 $10.31
$10.40 - 16.96 5,790,911 7.29 $14.11 3,597,364 $14.48
$17.44 - 22.71 6,899,330 5.54 $20.27 5,149,830 $19.95
$23.90 - 37.29 423,820 4.14 $29.15 401,320 $29.08
---------- ----------
36,463,939 7.23 $12.10 21,895,683 $12.93
========== ==========
EMPLOYEE STOCK PURCHASE PLANS. In January 1993, the Company adopted an
employee stock purchase plan, and reserved an aggregate of 4,000,000 shares of
Class A Common Stock for issuance under this plan. 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 an employee'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. Eligible international employees can purchase shares
at a price that is calculated monthly with no corresponding discount. No shares
were issued during Transition 2002. During Fiscal 2002, 560,861 shares were
issued from treasury stock at an average purchase price of $7.90
61
per share from the 2002 plan. At December 31, 2002 and September 30, 2002,
3,722,256 shares were available for purchase under the 2002 plan. At December
31, 2002 and September 30, 2002 and 2001, 403,629, 403,629 and 676,994 shares
were available for purchase under the 1993 plan.
RESTRICTED STOCK AWARDS. Beginning in 1998, the Company granted restricted
stock awards under the 1991 Stock Option Plan and the 1998 Long Term Stock
Option Plan. The restricted stock awards vest in six equal installments with the
first installment vesting two years after the grant and then annually thereafter
for five years. Recipients 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. The restricted stock may not be sold by the employee
during the vesting period. In 1999, the Company also awarded 40,500 stock
options under the 1998 Long Term Stock Option Plan with an exercise price of
$1.00 per share that vest on the same basis as the restricted stock awards to
certain international employees. Such stock options had a weighted average fair
market value of $22.81 per stock option on the date of grant. At December 31,
2002, a total of 155,993 restricted shares of Class A Common Stock were
outstanding at a weighted average market value, as of the original award date,
of $23.45 per share. At September 30, 2002, a total of 178,167 restricted shares
of Class A Common Stock were outstanding at a weighted average market value, as
of the original award date, of $23.31 per share. At September 30, 2001, a total
of 271,666 restricted shares of Class A Common Stock were outstanding at a
weighted average market value, as of the original award date, of $23.14 per
share. There were no awards of restricted stock since Fiscal 2000. In 2000, the
Company awarded restricted stock of 50,000 shares with a fair market value of
$13.00 per share. During Transition 2002, there were forfeitures and
acceleration of awards of 5,507 and 1,500 shares, respectively. At December 31,
2002, the aggregate unamortized compensation expense for restricted stock awards
and the $1 stock option grants was $3.1 million and is included as Unearned
compensation in the Consolidated Balance Sheets. During Fiscal 2002, there were
forfeitures and acceleration of awards of 11,836 and 9,335 shares, respectively.
Total compensation expense recognized for the restricted stock awards and option
grants was $0.3 million, $0.3 million, $1.3 million, $1.1 million and $1.1
million for Transition 2002 and 2001 and for Fiscal 2002, 2001 and 2000,
respectively.
DEFERRED COMPENSATION EMPLOYEE STOCK TRUST. The Company has supplemental
deferred compensation arrangements for the benefit of certain officers, managers
and other key employees. These arrangements are partially funded by life
insurance contracts, which have been purchased by the Company. The plan permits
the participants to diversify their investments. The value of the assets held,
managed and invested, pursuant to the agreement was $9.3 million and $8.1
million at December 31, 2002 and September 30, 2002, respectively, and are
included in other assets. The corresponding deferred compensation liability of
$10.8 million and $9.6 million at December 31, 2002 and September 30, 2002, is
recorded at the fair market value of the shares held in a rabbi trust and
adjusted, with a corresponding charge or credit to compensation cost, to reflect
the fair value of the amount owed to the employee. Total compensation expense
recognized for the plan was $0.1 million, $0.2 million and $0.6 million, for
Transition 2002 and 2001 and for Fiscal 2002, respectively, as compared to $0.1
million of income for Fiscal 2001.
FORWARD PURCHASE AGREEMENTS. Beginning in 1997, the Company entered into a
series of forward 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 2000, four
settlements resulted in the Company receiving 155,792 shares of Class A Common
Stock and paying approximately $8.2 million in cash. 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 Company
terminated the forward 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, 2002.
STOCK REPURCHASES. On July 19, 2001, the Company's Board of Directors
approved the repurchase of up to $75.0 million of Class A and Class B Common
Stock. On July 25, 2002, the Company's Board of Directors increased the
authorized stock repurchase program from the previously approved $75 million to
up to $125 million of its Class A and Class B Common Stock.
62
Stock repurchases are summarized below:
Total Cost Per
Total Shares Cost $000 Share
------------ --------- --------
FISCAL 2000
Recapitalization 4,500,200 $49,877 $11.08
========= ======= ======
FISCAL 2001
Recapitalization 666,491 $ 5,416 $ 8.13
Stock Repurchase Program:
Purchased from IMS Health, Inc. and
affiliates on August 29, 2001 (1) 1,867,149 $18,447 $ 9.88
Open market purchases (1) 458,960 $ 4,325 $ 9.42
Termination of forward purchase agreement 1,164,154 $ 9,705 $ 8.34
--------- ------- ------
Total fiscal 2001 4,156,754 $37,893 $ 9.12
========= ======= ======
FISCAL 2002
Stock Repurchase Program (1) 4,465,100 $47,047 $10.54
========= ======= ======
TRANSITION 2002
Stock Repurchase Program (1) 1,416,717 $13,880 $ 9.80
========= ======= ======
(1) REPRESENTS CUMULATIVE REPURCHASES
PURSUANT TO THE $125 MILLION STOCK
REPURCHASE PROGRAM 8,207,926 $83,699 $10.20
========= ======= ======
13--COMPUTATION OF EARNINGS PER SHARE FROM CONTINUING OPERATIONS
Basic earnings per share ("EPS") is computed by dividing income (loss)
from continuing operations by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in earnings. When the exercise of stock options is
antidilutive they are excluded from the calculation.
63
The following table sets forth the reconciliation of the basic and diluted
earnings per share computations (in thousands, except per share).
FOR THE THREE
MONTH
TRANSITIONAL THREE MONTHS
PERIOD ENDED ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 2002 DECEMBER 31, 2001 2002 2001 2000
----------------- ----------------- -------- -------- -------
(UNAUDITED)
Numerator:
(Loss) income from continuing
operations $(14,418) $ 19,043 $ 48,578 $ (220) $53,124
Add-back after-tax interest on
convertible long-term debt -- 3,041 12,380 -- --
-------- -------- -------- -------- -------
(Loss) income from continuing
operations applicable to common
stock $(14,418) $ 22,084 $ 60,958 $ (220) $53,124
======== ======== ======== ======== =======
Denominator:
Denominator for basic (loss) income
per share - weighted average
number of common shares
outstanding 81,379 83,883 83,586 85,862 86,564
Effect of dilutive securities:
Weighted average number of
common shares under convertible
long-term debt -- 44,322 45,320 -- --
Weighted average number of
options and other compensation
shares outstanding -- 1,373 1,976 -- 2,544
-------- -------- -------- -------- -------
Dilutive potential common shares -- 45,695 47,296 -- 2,544
-------- -------- -------- -------- -------
Denominator for diluted (loss)
income per share - adjusted
weighted average number of
common shares outstanding 81,379 129,578 130,882 85,862 89,108
======== ======== ======== ======== =======
(Loss) income per share from
continuing operations:
Basic $ (0.18) $ 0.23 $ 0.58 $ (0.00) $ 0.61
Diluted $ (0.18) $ 0.17 $ 0.47 $ (0.00) $ 0.60
For Transition 2002, options to purchase 26.6 million shares of Class A
Common Stock of the Company with exercise prices greater than the average fair
market value of $8.54 were not included in the computation of diluted loss per
share because the effect would have been antidilutive. For Fiscal 2002, options
to purchase 14.5 million shares of Class A Common Stock of the Company with
exercise prices greater than the average fair market value of $10.57 were not
included in the computation of diluted income per share because the effect would
have been antidilutive. For Fiscal 2001, options to purchase 35.0 million shares
of Class A Common Stock of the Company were not included in the computation of
diluted loss per share because the effect would have been antidilutive. For
Fiscal 2000, options to purchase 14.3 million shares of Class A Common Stock of
the Company with exercise prices greater than the average fair market value of
$13.78 were not included in the computation of diluted income (loss) per share
because the effect would have been antidilutive. For Fiscal 2002, 2001 and 2000,
unvested restricted stock awards were not included in the computation of diluted
income (loss) per share because the effect would have been antidilutive. For all
periods shown, unvested restricted stock awards were not included in the
computation of diluted (loss) income per share because the effect would have
been antidilutive. Additionally, convertible notes outstanding for Fiscal 2001
and 2000, representing 30.5 million and 8.8 million common shares, if converted,
and the related interest expense of $18.8 million and $8.2 million,
respectively, were not included in the computation of diluted income (loss) per
share because the effect would have been antidilutive.
64
14--INCOME TAXES
Following is a summary of the components of (loss) income before (benefit)
provision for income taxes, loss from discontinued operations and extraordinary
loss (in thousands):
FOR THE THREE
MONTH
TRANSITION
PERIOD ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 2002 2002 2001 2000
----------------- ---- ---- ----
U.S. $(18,357) $ 35,330 $(132,522) $ 27,016
Non-U.S (1,665) 38,273 24,120 26,204
-------- -------- --------- --------
Total (20,022) 73,603 (108,402) 53,220
Loss from discontinued operation -- -- 99,010 35,199
-------- -------- --------- --------
(Loss) income from continuing operations before income taxes $(20,022) $ 73,603 $ (9,392) $ 88,419
======== ======== ========= ========
The (benefit) provision for income taxes on the above income consists of the
following components (in thousands):
FOR THE THREE
MONTH
TRANSITION
PERIOD ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 2002 2002 2001 2000
----------------- ---- ---- ----
Current tax expense from operations:
U.S. federal $ 276 $ 5,591 $ 9,192 $ 22,634
State and local 507 1,361 4,862 11,430
Foreign 1,194 11,649 10,258 7,211
-------- -------- --------- --------
Total current 1,977 18,601 24,312 41,275
Deferred tax (benefit) expense:
U.S. federal (5,774) 3,330 (29,355) (5,768)
State and local (956) 911 (4,782) (2,754)
Foreign (653) (175) (836) (1,637)
-------- -------- --------- --------
Total deferred (7,383) 4,066 (34,973) (10,159)
-------- -------- --------- --------
Total current and deferred (5,406) 22,667 (10,661) 31,116
Benefit of stock transactions with employees (198) 2,280 1,331 4,179
Benefit of purchased tax benefits applied to reduce goodwill -- 78 158 --
-------- -------- --------- --------
Income tax expense (benefit) on continuing operations (5,604) 25,025 (9,172) 35,295
Current taxes from loss on discontinued operations:
U.S. federal -- -- (33,522) (7,985)
State and local -- -- (1,585) (287)
Deferred tax expense (benefit) from loss on discontinued operations: -- -- 137 (135)
U.S. federal -- -- 178 (180)
State and local
Benefit of purchased tax benefits applied to reduce goodwill on
loss from discontinued operation -- -- 1,765 966
-------- -------- --------- --------
$ (5,604) $ 25,025 $ (42,199) $ 27,674
======== ======== ========= ========
65
Current and long-term deferred tax assets and liabilities are comprised of the
following (in thousands):
December 31, September 30, September 30,
2002 2002 2001
------------ ------------- -------------
Depreciation and amortization $ 6,800 $ 6,988 $ 5,426
Expense accruals for book purposes 25,259 21,717 29,530
Loss and credit carryforwards 37,923 32,947 26,832
Intangible assets 1,835 -- --
Equity interest -- 98 727
Other 2,047 3,183 4,078
-------- -------- --------
Gross deferred tax asset 73,864 64,933 66,593
-------- -------- --------
Intangible assets -- (1,000) (1,215)
-------- -------- --------
Gross deferred tax liability -- (1,000) (1,215)
-------- -------- --------
Valuation allowance (32,250) (29,156) (26,072)
-------- -------- --------
Net deferred tax asset $ 41,614 $ 34,777 $ 39,306
======== ======== ========
Current and long-term net deferred tax assets were $6.0 million and $35.6
million, as of December 31, 2002, $3.7 million and $31.1 million, as of
September 30, 2002, and $9.9 million and $29.4 million, as of September 30,
2001, respectively, and are included in Prepaid expenses and other current
assets and Other assets in the Consolidated Balance Sheets.
The valuation allowance relates 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
$3.1 million in the transitional period was primarily due to net losses from
minority owned investments that were fully value reserved for state and local
tax purposes. Approximately $1.9 million of the valuation allowance will reduce
additional paid-in-capital upon subsequent recognition of any related tax
benefits related to stock options.
The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate on income (loss) from continuing operations are:
Three months
ended Year ended September 30,
December 31, 2002 2002 2001 2000
----------------- ---- ---- ----
Statutory tax rate (35.0%) 35.0% (35.0%) 35.0%
State income taxes, net of federal benefit (2.9) 2.4 3.6 6.9
Foreign income taxed at a different rate 5.6 (1.8) 13.2 (2.5)
Non-deductible goodwill and direct acquisition costs -- -- 18.1 2.2
Non-taxable income (0.3) (0.2) (0.3) (0.1)
Exempt foreign trading gross receipts -- (0.4) (13.5) (0.8)
Non-deductible meals and entertainment expense 0.6 0.6 5.6 0.6
Officers life insurance 0.5 0.5 12.7 (0.3)
Valuation allowance on losses from minority-owned investments 3.0 0.5 88.5 --
Utilization of foreign tax credits -- (1.5) (185.1) --
Other items 0.5 (1.1) (5.5) (1.0)
----- ----- ----- -----
Effective tax rate (28.0%) 34.0% (97.7%) 40.0%
===== ===== ===== =====
As of December 31, 2002, the Company had U.S. federal capital loss carryforwards
of $22.5 million, of which $19.2 million will expire in three to four years and
the remaining $3.3 million will expire in four to five years, foreign tax credit
carryforwards of $8.8 million which will expire in three to four years and other
federal tax credit carryforwards of $1.8 million which can be carried forward
indefinitely. The Company had a federal net operating loss carryforward of $6.5
million which will expire in 20 years, state and local tax net operating loss
carryforwards of $136.9 million, of which $31.6 million will expire within one
to five years, $25.7 million will expire within six to fifteen years, and $79.6
million will expire within sixteen to twenty years. The Company also had $72.9
million in state and local capital loss carryforwards, of which $69.6 million
will expire in three to four years and the remaining $3.3 million will expire in
four to five years. Lastly, the Company had foreign tax loss carryforwards of
$9.1 million of which $3.5 million will expire in one to ten years and $5.6
million that can be carried forward indefinitely.
15--EMPLOYEE BENEFITS
The Company has a savings and investment plan covering substantially all
domestic employees. The Company contributes amounts to this plan based upon the
level of the employee contributions. In addition, the Company also contributes
fixed and discretionary profit sharing contributions set by the Board of
Directors. Amounts expensed in connection with the plan totaled $1.9
66
million, $9.5 million, $10.5 million, and $8.5 million for Transition 2002 and
for Fiscal 2002, 2001 and 2000, respectively.
16--SEGMENT INFORMATION
The Company previously managed its business in four reportable segments
organized on the basis of differences in its related products and services. With
the discontinuance and sale of TechRepublic (see Note 3--Discontinued
Operation), three reportable segments remain: research, consulting and events.
Research consists primarily of subscription-based research products. Consulting
consists primarily of consulting, measurement engagements and strategic advisory
services. Events consists of various symposia, conferences and exhibitions.
The Company evaluates reportable segment performance and allocates
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.
The Company earns revenue from clients in many countries. Other than the
United States, the Company's country of domicile, there is no individual country
in which revenues from external clients represent 10% or more of the Company's
consolidated revenues. Additionally, no single client accounted for 10% or more
of total revenue and the loss of a single client, in management's opinion, would
not have a material adverse effect on revenues.
The Company does 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" 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:
Three Month Transitional Period Ended
December 31, 2002 Research Consulting Events Other Consolidated
---------------------------------------- -------- ---------- ------ ----- ------------
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)
Net gain on sale of investments --
Net loss from minority-owned investments (1,688)
Interest income 635
Interest expense (5,942)
Other expense, net (141)
---------
Loss from continuing operations before
income taxes $ (20,022)
Three Month Transitional Period Ended
December 31, 2001 (UNAUDITED) Research Consulting Events Other Consolidated
---------------------------------------- -------- ---------- ------ ----- ------------
Revenues $129,474 $ 55,731 $ 59,466 $ 4,724 $ 249,395
Gross contribution 84,568 14,027 36,926 2,774 138,295
Corporate and other expenses (104,348)
Net gain on sale of investments 792
Net gain from minority-owned investments 79
Interest income 511
Interest expense (5,604)
Other expense, net (428)
---------
Income from continuing operations before
income taxes $ 29,297
67
Year Ended September 30, 2002 Research Consulting Events Other Consolidated
---------------------------------------- -------- ---------- ------ ----- ------------
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)
Net gain on sale of investments 787
Net loss from minority-owned investments (2,365)
Interest income 1,845
Interest expense (22,869)
Other expense, net (170)
---------
Income from continuing operations before
income taxes $ 73,603
Year Ended September 30, 2001 Research Consulting Events Other Consolidated
---------------------------------------- -------- ---------- ------ ----- ------------
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)
Net loss on sale of investments (640)
Net loss from minority-owned investments (26,817)
Interest income 1,616
Interest expense (22,391)
Other expense, net (3,674)
---------
Loss from continuing operations before
income taxes $ (9,392)
Year Ended September 30, 2000 Research Consulting Events Other Consolidated
---------------------------------------- -------- ---------- ------ ----- ------------
Revenues $509,781 $216,667 $108,589 $ 27,414 $ 862,451
Gross contribution 341,061 75,652 50,604 11,231 478,548
Corporate and other expenses (394,417)
Net gain on sale of investments 29,630
Net loss from minority-owned investments (775)
Interest income 3,936
Interest expense (24,900)
Loss on debt extinguishment (2,881)
Other expense, net (722)
---------
Income from continuing operations before
income taxes $ 88,419
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 distributors. The Company defines "Europe Revenues" as
revenues attributable to clients located in England and the European region and
"Other International Revenues" as revenues attributable to all areas located
outside of the United States, Canada and Europe. Most products and services of
the Company are provided on an integrated worldwide basis. Because of the
integration of products and services delivery, it is not practical to separate
precisely the revenues and operating income (loss) of the Company by geographic
location. Accordingly, the separation set forth in the table below is based upon
internal allocations, which involve certain management estimates and judgments.
European identifiable tangible assets consist primarily of the assets of
the European subsidiaries and include the accounts receivable balances carried
directly by the subsidiaries located in England, France and Germany. All other
European customer receivables are maintained by, and therefore are included as
identifiable assets of, the United States operations.
68
Summarized information by geographic location is as follows (in thousands):
For the Three
Month
Transitional Three Month Year Ended September 30,
Period Ended Period Ended
December 31, 2002 December 31, 2001 2002 2001 2000
----------------- ----------------- ---- ---- ----
UNAUDITED
United States and Canada:
Revenues $ 148,585 $167,424 $ 595,331 $ 641,877 $569,488
Other charges $ 20,937 $ -- $ 7,541 $ 35,677 $ --
Operating (loss) income $ (5,528) $ 18,251 $ 69,640 $ 31,773 $ 62,903
Operating income, excluding other charges $ 15,409 $ 18,251 $ 77,181 $ 67,450 $ 62,903
Identifiable tangible assets $ 386,087 $435,276 $ 404,308 $ 423,738 $476,755
Long-lived assets $ 301,347 $318,134 $ 304,031 $ 321,832 $341,648
Europe:
Revenues $ 62,412 $ 63,189 $ 242,099 $ 249,953 $231,576
Other charges $ 10,019 $ -- $ 6,977 $ 9,908 $ --
Operating (loss) income $ (5,867) $ 14,528 $ 29,691 $ 13,918 $ 17,577
Operating income, excluding other charges $ 4,152 $ 14,528 $ 36,668 $ 23,826 $ 17,577
Identifiable tangible assets $ 179,272 $138,303 $ 156,853 $ 155,855 $171,420
Long-lived assets $ 58,515 $ 54,747 $ 57,008 $ 59,171 $ 56,918
Other International:
Revenues $ 18,817 $ 18,781 $ 69,744 $ 71,054 $ 61,387
Other charges $ 1,210 $ -- $ 2,728 $ 978 $ --
Operating (loss) income $ (1,491) $ 1,168 $ (2,956) $ (3,177) $ 3,651
Operating (loss) income, excluding other
charges $ (281) $ 1,168 $ (228) $ (2,199) $ 3,651
Identifiable tangible assets $ 35,930 $ 33,856 $ 38,531 $ 37,176 $ 32,846
Long-lived assets $ 8,276 $ 12,172 $ 8,778 $ 11,625 $ 10,383
17--QUARTERLY FINANCIAL DATA
(in thousands, except per share data)
Three month transitional period ended December 31, 2002 1st
---------
Revenues $ 229,814
Operating loss (1) $ (12,886)
Loss from continuing operations $ (20,022)
Loss from discontinued operation, net of taxes --
Net loss $ (20,022)
Diluted loss per common share (3):
Loss from continuing operations $ (0.18)
Loss on discontinued operation --
Net loss $ (0.18)
Year Ended September 30, 2002 (Unaudited) 1st 2nd 3rd 4th
--------- --------- --------- ---------
Revenues $ 249,395 $ 201,095 $ 236,157 $ 220,527
Operating income (loss) (1) $ 33,947 $ (1,371) $ 34,678 $ 29,121
Income (loss) from continuing operations $ 19,043 $ (4,316) $ 18,255 $ 15,596
Income (loss) from discontinued operation, net of
Taxes -- -- -- --
Net income (loss) $ 19,043 $ (4,316) $ 18,255 $ 15,596
Diluted earnings (loss) per common share (3):
Income (loss) from continuing operations $ 0.17 $ (0.05) $ 0.16 $ 0.15
Income (loss) on discontinued operation -- -- -- --
Net income (loss) $ 0.17 $ (0.05) $ 0.16 $ 0.15
69
Year Ended September 30, 2001 (Unaudited) 1st 2nd 3rd 4th
--------- --------- --------- ---------
Revenues $ 257,779 $ 227,276 $ 250,075 $ 227,754
Operating income (loss)(1) $ 30,180 $ 8,021 $ (3,459) $ 7,772
Income (loss) from continuing operations (2) $ 17,697 $ (1,382) $ (10,219) $ (6,316)
Income (loss) from discontinued operation, net of
Taxes $ (13,800) $ (52,198) $ 1,765 $ (1,750)
Net income (loss) (2) $ 3,897 $ (53,580) $ (8,454) $ (8,066)
Diluted earnings (loss) per common share (3):
Income (loss) from continuing operations $ 0.20 $ (0.02) $ (0.12) $ (0.08)
Income (loss) on discontinued operation $ (0.16) $ (0.60) $ 0.02 $ (0.02)
Net income (loss) $ 0.04 $ (0.62) $ (0.10) $ (0.10)
(1) Includes other charges of $32.2 million in the three-month transitional
period ended December 31, 2002, $17.2 million in the quarter ended March
31, 2002, $31.1 million in the quarter ended March 31, 2001 and $15.5
million in the quarter ended September 30, 2001.
(2) Includes net losses from minority-owned investments of $2.5 million for
the quarter ended June 30, 2002 and $1.7 million, $3.4 million, $6.6
million and $15.1 million for each of the four quarters in the fiscal year
ended September 30, 2001. Also includes benefits for income taxes from the
utilization of foreign tax credits of $2.9 million in the quarter ended
June 30, 2001 and $11.6 million in the quarter ended September 30, 2001.
(3) The aggregate of the four quarters' diluted earnings per common share does
not total the reported full fiscal year amount due to the effect of
dilutive securities and rounding.
18--SUBSEQUENT EVENTS - UNAUDITED
On February 6, 2003, the Company announced that it expects to incur an
estimated charge of about $5 million in the quarter ending March 31, 2003 for
reductions in its workforce. This anticipated change relates to restructuring
which could not be completed and taken during Transition 2002.
On February 13, 2003, the Company's shareholders approved the 2003
Long-term Incentive Plan under which 9,928,000 shares of Class A Common Stock
are reserved and available for distribution to the Company's employees and
members of its Board of Directors. As of that date, no new grants or awards may
be made under the Company's 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. As a result, the Company cancelled 3.2 million
shares that would have been otherwise available for grant or award under these
plans. Any outstanding grants and awards under these plans will remain
outstanding until exercised, cancelled or expired subject to the terms and
conditions of such plans.
70
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this Report on Form 10-KT to be signed on its behalf by
the undersigned, duly authorized, in Stamford, Connecticut, on March 28, 2003.
Gartner, Inc.
Date: March 31, 2003 By: /s/ MICHAEL D. FLEISHER
-------------------------------
Michael D. Fleisher
Chairman of the Board, Chief
Executive Officer and President
POWER OF ATTORNEY
Each person whose signature appears below appoints Michael D. Fleisher and
Maureen E. O'Connell 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-KT, and to file the
same, with appropriate exhibits and other related documents, with the Securities
and Exchange Commission. Each of the undersigned, ratifies and confirms his or
her signatures as they may be signed by his or her attorney-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 Director and Chairman of the Board, March 31, 2003
---------------------------- Chief Executive Officer and
Michael D. Fleisher President
(Principal Executive Officer)
/s/ MAUREEN E. O'CONNELL Executive Vice President Chief March 31, 2003
---------------------------- Financial and Administrative Officer
Maureen E. O'Connell (Principal Financial and Accounting Officer)
/s/ ANNE SUTHERLAND FUCHS Director March 31, 2003
----------------------------
Anne Sutherland Fuchs
/s/ WILLIAM O. GRABE Director March 31, 2003
----------------------------
William O. Grabe
/s/ MAX D. HOPPER Director March 31, 2003
----------------------------
Max D. Hopper
/s/ GLENN HUTCHINS Director March 31, 2003
----------------------------
Glenn Hutchins
/s/ STEPHEN G. PAGLIUCA Director March 31, 2003
----------------------------
Stephen G. Pagliuca
71
/s/ JAMES C. SMITH Director March 31, 2003
----------------------------
James C. Smith
/s/ DAVID J. ROUX Director March 31, 2003
----------------------------
David J. Roux
/s/ DENNIS G. SISCO Director March 31, 2003
----------------------------
Dennis G. Sisco
/s/ MAYNARD G. WEBB, JR. Director March 31, 2003
----------------------------
Maynard G. Webb, Jr.
72
CERTIFICATION PURSUANT TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(1) I have reviewed this Transition Report on Form 10-KT (the "10-KT") of
Gartner, Inc.;
(2) Based on my knowledge, this 10-KT does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this 10-KT;
(3) Based on my knowledge, the financial statements, and other financial
information included in this "10-KT", fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this 10-KT;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this 10-KT is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this 10-KT (the "Evaluation Date"); and
c) presented in this 10-KT our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on my most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this 10-KT whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Michael D. Fleisher
-----------------------
Michael D. Fleisher
Chief Executive Officer
March 31, 2003
73
CERTIFICATION PURSUANT TO
RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(1) I have reviewed this Transition Report on Form 10-KT (the "10-KT") of
Gartner, Inc.;
(2) Based on my knowledge, this 10-KT does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this 10-KT;
(3) Based on my knowledge, the financial statements, and other financial
information included in this 10-KT, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this 10-KT;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this 10-KT is being prepared;
b) evaluated the effectiveness of the registrant disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this 10-KT (the "Evaluation Date"); and
c) presented in this 10-KT our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certified officers and I have disclosed, based
on my most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors;
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this 10-KT whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Maureen E. O'Connell
------------------------
Maureen E. O'Connell
Chief Financial Officer
March 31, 2003
74
INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Gartner, Inc.:
Under date of February 4, 2003, we reported on the consolidated balance sheets
of Gartner, Inc. and subsidiaries as of December 31, 2002, September 30, 2002
and 2001, and the related consolidated statements of operations, stockholders'
equity (deficit) and comprehensive income (loss) and cash flows for the three
month period ended December 31, 2002, and each of the years in the three-year
period ended September 30, 2002, which are included in the September 30, 2002
Annual Report on Form 10-KT. Our report contains an explanatory paragraph
indicating that the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" effective October 1, 2001. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule of Valuation and Qualifying Accounts in the Form 10-KT. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
February 4, 2003
75
GARTNER, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
As %
Additions of Additions As %
Balance at Charged to year Charged Deductions of year Balance at
Beginning Costs and End to Other from End End of
of Year Expenses Amt. Accounts Reserve Amt. Year
------- -------- ---- -------- ------- ---- ----
YEAR ENDED SEPTEMBER 30, 2000
Allowance for doubtful $4,938 $4,256 85% $46 $4,237 85% $5,003
accounts and returns and
allowances...........
YEAR ENDED SEPTEMBER 30, 2001
Allowance for doubtful $5,003 $5,037 90% $-- $4,440 79% $5,600
accounts and returns and
allowances...........
YEAR ENDED SEPTEMBER 30, 2002
Allowance for doubtful $5,600 $9,119 130% $-- $7,719 110% $7,000
accounts and returns and
allowances...........
THREE MONTH TRANSITIONAL
PERIOD ENDED DECEMBER 31, 2002
Allowance for doubtful $7,000 $2,329 33% $-- $2,329 33% $7,000
accounts and returns and
allowances...........
76