UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-14443
GARTNER, INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-3099750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
56 Top Gallant Road 06904-2212
P.O. Box 10212 (Zip Code)
Stamford, CT
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 316-1111
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
The number of shares outstanding of the Registrant's capital stock as
of April 30, 2002 was 52,536,632 shares of Class A Common Stock and 31,912,528
shares of Class B Common Stock.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page
----
ITEM 1: FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at March 31, 2002 and
September 30, 2001 3
Condensed Consolidated Statements of Operations for the
Three and Six Months ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
Six Months ended March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 27
PART II OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 29
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GARTNER, INC.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
March 31, 2002 September 30, 2001
-------------- ------------------
ASSETS
Current assets:
Cash and cash
Cash and cash equivalents $ 78,780 $ 37,128
Marketable equity securities 47 3,250
Fees receivable, net 291,597 300,306
Deferred commissions 35,366 34,822
Prepaid expenses and other current assets 41,681 73,315
--------- ---------
Total current assets 447,471 448,821
Property, equipment and leasehold improvements, net 86,366 100,288
Intangible assets, net 218,658 222,233
Other assets 65,250 67,660
--------- ---------
Total assets $ 817,745 $ 839,002
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 140,653 $ 161,251
Deferred revenues 332,917 351,263
Short-term debt -- 15,000
--------- ---------
Total current liabilities 473,570 527,514
--------- ---------
Long-term convertible debt 336,102 326,200
Other liabilities 21,202 19,806
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock -- --
Common stock 60 59
Additional paid-in capital 362,353 342,216
Unearned compensation, net (4,499) (5,145)
Accumulated other comprehensive loss, net (16,397) (14,961)
Accumulated earnings 130,810 116,083
Treasury stock, at cost (485,456) (472,770)
--------- ---------
Total stockholders' equity (deficit) (13,129) (34,518)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 817,745 $ 839,002
========= =========
3
See the accompanying notes to the condensed consolidated financial statements.
GARTNER, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)
Three months ended Six months ended
March 31, March 31,
------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues:
Research $ 122,735 $ 132,745 $ 252,209 $ 271,927
Consulting 65,893 71,349 121,624 123,176
Events 9,100 17,370 68,566 79,835
Other 3,367 5,812 8,091 10,117
--------- --------- --------- ---------
Total revenues 201,095 227,276 450,490 485,055
--------- --------- --------- ---------
Costs and expenses:
Cost of services and product development 88,341 111,656 204,170 236,652
Selling, general and administrative 86,032 93,808 175,225 185,609
Depreciation 10,344 10,599 20,268 18,114
Amortization of intangibles 503 3,192 1,005 6,479
Other charges 17,246 -- 17,246 --
--------- --------- --------- ---------
Total costs and expenses 202,466 219,255 417,914 446,854
--------- --------- --------- ---------
(1,371) 8,021 32,576 38,201
Operating income (loss)
Net gain (loss) on sale of investments -- (507) 792 4,811
Net gain (loss) from minority-owned investments 78 (3,373) 157 (5,073)
Interest income 300 550 811 928
Interest expense (5,631) (5,861) (11,235) (11,372)
Other expense, net (16) (1,024) (444) (1,598)
--------- --------- --------- ---------
Income (loss) from continuing operations before provision
(benefit) for income taxes (6,640) (2,194) 22,657 25,897
Provision (benefit) for income taxes (2,324) (812) 7,930 9,582
--------- --------- --------- ---------
Income (loss) from continuing operations (4,316) (1,382) 14,727 16,315
Loss from discontinued operation, net of taxes (See Note 5) -- (52,198) -- (65,998)
--------- --------- --------- ---------
Net income (loss) $ (4,316) $ (53,580) $ 14,727 $ (49,683)
========= ========= ========= =========
Basic income (loss) per common share:
Income (loss) from continuing operations $ (0.05) $ (0.02) $ 0.17 $ 0.19
Loss from discontinued operation -- (0.60) -- (0.76)
--------- --------- --------- ---------
Net income (loss) $ (0.05) $ (0.62) $ 0.17 $ (0.58)
========= ========= ========= =========
Diluted income (loss) per common share:
Income (loss) from continuing operations $ (0.05) $ (0.02) $ 0.16 $ 0.19
Loss from discontinued operation -- (0.60) -- (0.76)
--------- --------- --------- ---------
Net income (loss) $ (0.05) $ (0.62) $ 0.16 $ (0.57)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 84,613 86,551 84,248 86,300
Diluted 84,613 86,551 131,226 86,862
See the accompanying notes to the condensed consolidated financial statements.
4
GARTNER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Six months ended
March 31,
-----------------------
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 14,727 $(49,683)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss from discontinued operation -- 65,998
Depreciation and amortization of intangibles 21,273 24,593
Deferred compensation 598 439
Tax benefit associated with employee exercise of stock options 1,691 904
Provision for doubtful accounts 4,620 1,640
Deferred revenues (14,759) (25,941)
Deferred tax benefit 677 569
Net (gain) on sale of investments (792) (4,811)
Net (gain) loss from minority-owned investments (157) 5,073
Accretion of interest and amortization of debt issue costs 10,874 10,411
Gain from sale of business (493) --
Non-cash charges for facility and workforce reductions 17,246 --
Changes in assets and liabilities, excluding effects of acquisitions and discontinued operation:
Decrease in fees receivable 1,712 13,235
(Increase) decrease in deferred commissions (730) 9,983
Decrease in prepaid expenses and other current assets 30,585 1,650
Decrease in other assets 1,071 4,864
Decrease in accounts payable and accrued liabilities (32,734) (48,344)
-------- --------
Cash provided by operating activities 55,409 10,580
-------- --------
INVESTING ACTIVITIES:
Payment for businesses acquired (excluding cash acquired) (778) (8,842)
Proceeds from sale of investments 6,023 10,795
Proceeds from sale of business 239 --
Additions of property, equipment and leasehold improvements (8,913) (27,924)
-------- --------
Cash used in investing activities (3,429) (25,971)
-------- --------
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 16,189 1,668
Proceeds from Employee Stock Purchase Plan offering 2,559 3,005
Proceeds from issuance of debt -- 20,321
Payments on debt (15,000) --
Payments for debt issuance costs -- (5,000)
Purchase of treasury stock (13,200) (2,995)
-------- --------
Cash provided by (used in) financing activities (9,452) 16,999
-------- --------
Net increase in cash and cash equivalents 42,528 1,608
Cash used by discontinued operation -- (31,846)
Effects of exchange rates on cash and cash equivalents (876) (20)
Cash and cash equivalents, beginning of period 37,128 61,698
-------- --------
Cash and cash equivalents, end of period $ 78,780 $ 31,440
======== ========
See the accompanying notes to the condensed consolidated financial statements.
5
GARTNER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The fiscal year of Gartner, Inc. represents the period from October 1 through
September 30. References to "the Company" are to Gartner, Inc. and its
subsidiaries. All references to 2002 and 2001, unless otherwise indicated, are
to the three and six months ended March 31, 2002 and 2001, respectively.
Note 2 - Interim Condensed Consolidated Financial Statements
These interim condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and should be read
in conjunction with the consolidated financial statements and related notes of
Gartner, Inc. filed in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2001. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported amounts of operating revenues and expenses.
These estimates are based on management's knowledge and judgments. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of financial position,
results of operations and cash flows at the dates and for the periods presented
have been included. The results of continuing operations for the three and six
months ended March 31, 2002 may not be indicative of the results of continuing
operations for the remainder of fiscal 2002. In addition, certain
reclassifications have been made to the prior year financial statements to
conform to the current year's presentation.
Note 3 - Income Statement Classification of Reimbursements for Out-of-Pocket
Expenses Incurred - Emerging Issues Task Force ("EITF") No. 01-14
On January 1, 2002, the Company adopted EITF No. 01-14 requiring
characterization of reimbursements received for out-of-pocket expenses as
revenues. Out-of-pocket expenses are incidental expenses incurred as part of
on-going operations and include, but are not limited to, expenses related to
airfare, mileage, hotel stays, out-of-town meals, photocopies and
telecommunication and facsimile charges. This consensus must be applied to
financial reporting periods beginning after December 15, 2001 with
reclassification of prior periods for comparability. For the three months ended
March 31, 2002 and 2001, adoption of the consensus caused both revenues and cost
of services and product development in the consulting segment to increase by
$2.2 million and $2.5 million, respectively. For the six months ended March 31,
2002 and 2001, adoption of the consensus caused both revenues and cost of
services and product development in the consulting segment to increase by $4.4
million and $4.7 million, respectively.
Note 4 - Business Combinations and Goodwill and Other Intangible Assets
On July 1, 2001, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations." As a result, the purchase method of
accounting will be used for all business combinations initiated after June 30,
2001. During the quarter ended December 31, 2001, the Company acquired AIMS
Management Consultants Private Limited, a company in India that provides
quantitative research content. The purchase price, net of cash received, was
$0.8 million, of which $0.1 million was
6
allocated to tangible assets, $0.7 million was allocated to goodwill, $0.1
million was allocated to non-compete agreements and $0.1 million was allocated
to liabilities assumed.
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 the six months ended March 31, 2002.
The Company has completed its initial transitional goodwill impairment
assessment 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 in the second fiscal
quarter of 2002.
The following table reconciles the reported net income (loss) and income (loss)
per share from continuing operations for the three and six months ended March
31, 2002 and 2001 to the respective pro forma amount adjusted to exclude
goodwill amortization.
In thousands, except per share Three months ended Six months ended
March 31, March 31,
----------- --------- ------- ----------
2002 2001 2002 2001
----------- --------- ------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS:
Reported income (loss) from continuing operations $ (4,316) $ (1,382) $14,727 $ 16,315
Add back: Goodwill amortization, net of taxes -- 2,161 -- 4,385
----------- --------- ------- ----------
Adjusted income (loss) from continuing operations $ (4,316) $ 779 $14,727 $ 20,700
=========== ========= ======= ==========
BASIC INCOME (LOSS) PER SHARE FROM CONTINUING
OPERATIONS:
Reported income (loss) from continuing operations $ (0.05) $ (0.02) $ 0.17 $ 0.19
Add back: Goodwill amortization, net of taxes -- 0.03 -- 0.05
----------- --------- ------- ----------
Adjusted income (loss) from continuing operations $ (0.05) $ 0.01 $ 0.17 $ 0.24
=========== ========= ======= ==========
DILUTED INCOME (LOSS) PER SHARE FROM CONTINUING
OPERATIONS:
Reported income (loss) from continuing operations $ (0.05) $ (0.02) $ 0.16 $ 0.19
Add back: Goodwill amortization, net of taxes -- 0.03 -- 0.05
----------- --------- ------- ----------
Adjusted income (loss) from continuing operations $ (0.05) $ 0.01 $ 0.16 $ 0.24
=========== ========= ======= ==========
7
Included in the Company's balance sheet as of March 31, 2002 are the following
categories of acquired intangible assets (in thousands).
Accumulated
Gross cost amortization Net
---------- ------------ --------
Goodwill
Research $149,776 $(29,661) $120,115
Consulting 71,524 (8,601) 62,923
Events 33,441 (3,001) 30,440
Other 2,579 (497) 2,082
-------- -------- --------
Total goodwill 257,320 (41,760) 215,560
Intangible assets with finite lives
Non-compete agreements 12,466 (9,643) 2,823
Trademarks and tradenames 1,470 (1,195) 275
-------- -------- --------
Total $271,256 $(52,598) $218,658
======== ======== ========
Amortization related to intangible assets with finite lives was $0.5 million and
$0.8 million for the three months ended March 31, 2002 and 2001, respectively,
and was $1.0 million and $1.5 million for the six months ended March 31, 2002
and 2001, 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 four years, and trademarks and tradenames are
amortized over a period of nine to twelve years.
Note 5 - Discontinued Operation
On July 2, 2001, the Company sold its subsidiary, TechRepublic, to CNET
Networks, Inc. ("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. The consolidated financial
statements reflect the disposition of the TechRepublic segment as a discontinued
operation in accordance with APB Opinion No. 30. Accordingly, revenues, costs
and expenses and cash flows of TechRepublic have been excluded from the
respective captions in the Condensed Consolidated Statements of Operations and
Condensed Consolidated Statements of Cash Flows, and have been reported through
the date of disposition as "Loss from discontinued operation, net of taxes" and
"Net cash used by discontinued operation."
8
Summarized financial information for the discontinued operation is as follows
(in thousands):
Statements of Operations Data
Three months ended Six months ended
March 31, 2001 March 31, 2001
------------------ ----------------
Revenues $ 4,222 $ 8,702
======== ========
Loss from discontinued operation before income taxes $(15,618) $(32,574)
(Benefit) for income taxes (3,359) (6,515)
-------- --------
Loss from discontinued operation, net of taxes $(12,259) $(26,059)
-------- --------
Loss on disposal of discontinued operation, before income taxes
$(68,860) $(68,860)
(Benefit) for income taxes (28,921) (28,921)
-------- --------
Loss on disposal, net of taxes $(39,939) $(39,939)
-------- --------
Loss from discontinued operation, net of taxes $(52,198) $(65,998)
======== ========
Note 6 - Investments
A summary of the Company's investments in marketable equity securities and other
investments at March 31, 2002 and September 30, 2001 are as follows (in
thousands):
At March 31, 2002:
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
------- ---------- ---------- ----------
Marketable equity securities $ 57 $ 3 $ (13) $ 47
Other investments 14,408 -- -- 14,408
------- ------- ------- -------
Total $14,465 $ 3 $ (13) $14,455
======= ======= ======= =======
At September 30, 2001:
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
------- ---------- ---------- ----------
Marketable equity securities $ 5,287 $ 2 $(2,039) $ 3,250
Other investments 15,248 -- -- 15,248
------- ------- ------- -------
Total $20,535 $ 2 $(2,039) $18,498
======= ======= ======= =======
At September 30, 2001, marketable equity securities were comprised of 755,058
shares of CNET received in connection with the sale of TechRepublic, which had 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
Condensed Consolidated Balance Sheet at their fair market value of $3.2 million
after giving effect to an additional $2.0 million of unrealized losses. During
the three months ended December 31, 2001,
9
747,208 shares of CNET were sold for $6.0 million at a per share price of $8.06
resulting in a pre-tax gain of $0.8 million. The cash proceeds were received in
January 2002.
In addition to equity securities owned directly by the Company and through SI
Ventures, L.L.C. ("SI I"), a wholly owned affiliate, the Company also owns 34%
of SI Venture Fund II, L.P. ("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 of the Company, and certain of the Company's former officers and
employees. Management fees paid to 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, L.L.C. 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 has been fully
funded in prior years. Of the commitment to SI II, $7.4 million remained
unfunded at March 31, 2002. The remaining commitment is expected to be funded in
fiscal 2002.
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 $3.2 million and $6.5 million, respectively, at March 31, 2002. The
carrying value of other cost-based investments was $4.7 million at March 31,
2002. The Company's share of equity gains was $0.1 million and $0.2 million for
the three and six months ended March 31, 2002, respectively, and was less than
$0.1 million for 2001. During the three and six months ended March 31, 2001, the
Company recognized impairment losses of $3.4 million and $5.1 million,
respectively, related to equity securities owned through SI I and SI II for
other than temporary declines in the value of certain investments which is
reflected in "Net gain (loss) from minority-owned investments" in the Condensed
Consolidated Statements of Operations. 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.
10
Note 7 - Computations of Income (Loss) per Share of Common Stock
The following table sets forth the reconciliation of the basic and diluted
earnings (loss) per share from continuing operations (in thousands, except per
share data):
Three months ended Six months ended
March 31, March 31,
----------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Basic income per share:
Income (loss) from continuing operations $ (4,316) $ (1,382) $ 14,727 $ 16,315
Denominator for basic income per share-weighted average number of
common shares outstanding 84,613 86,551 84,248 86,300
-------- -------- -------- --------
Basic income (loss) per common share from continuing operations $ (0.05) $ (0.02) $ 0.17 $ 0.19
======== ======== ======== ========
Diluted income per share:
Income from continuing operations $ (4,316) $ (1,382) $ 14,727 $ 16,315
After-tax interest on convertible long-term debt -- -- 6,099 --
-------- -------- -------- --------
Income for purposes of computing diluted income per share $ (4,316) $ (1,382) $ 20,826 $ 16,315
======== ======== ======== ========
Weighted average number of common shares outstanding 84,613 86,551 84,248 86,300
Weighted average number of shares relating to convertible long-term
debt outstanding -- -- 44,651 --
Weighted average number of stock compensation shares outstanding -- -- 2,327 562
-------- -------- -------- --------
Denominator for diluted income per share-adjusted weighted average
number of common shares outstanding 84,613 86,551 131,226 86,862
======== ======== ======== ========
Diluted income (loss) per common share from continuing operations $ (0.05) $ (0.02) $ 0.16 $ 0.19
======== ======== ======== ========
For the three and six months ended March 31, 2002 and 2001, unvested restricted
stock awards were not included in the computation of diluted income (loss) per
share because the effect would have been anti-dilutive. For the three months
ended March 31, 2002 and 2001, options to purchase 36.7 million and 34.5 million
shares, respectively, 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
anti-dilutive. For the three months ended March 31, 2002 and 2001, a convertible
note outstanding issued to Silver Lake Partners, LP ("SLP"), representing
approximately 45.2 million and 20.0 million shares of Class A Common Stock,
respectively, if converted, and the related interest expense of $5.1 million and
$4.8 million, respectively, was not included in the computation of diluted
income (loss) per share, because the effect would have been anti-dilutive. For
the six months ended March 31, 2001, the convertible note outstanding was not
included in the computation of diluted income (loss) per share, because the
effect would have been anti-dilutive.
11
Note 8 - Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in equity, except those
resulting from investments by owners and distributions to owners. The components
of comprehensive income (loss) for the three and six months ended March 31, 2002
and 2001 are as follows (in thousands):
Three months ended Six months ended
March 31, March 31,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income (loss) $ (4,316) $(53,580) $ 14,727 $(49,683)
Foreign currency translation gain (loss) (1,799) (2,242) (2,454) 221
Change in unrealized holding gain (loss) on marketable equity
securities (319) (8,216) 1,018 (18,554)
-------- -------- -------- --------
Comprehensive income (loss) $ (6,434) $(64,038) $ 13,291 $(68,016)
======== ======== ======== ========
The balance of net unrealized holding losses at March 31, 2002 was $0.1 million.
Note 9 - Segment Information
The Company previously managed its business in four reportable segments
organized on the basis of differences in its products and services: Research,
Consulting, Events and TechRepublic. With the discontinuance of the TechRepublic
operation (See Note 5), three reportable segments remain: Research, Consulting
and Events. Research consists primarily of subscription-based research products.
Consulting consists primarily of consulting and measurement engagements. Events
consists of various symposia, expositions and conferences.
The Company evaluates reportable segment performance and allocates resources
based on gross contribution margin. Gross contribution, as presented below, is
the profit or loss from operations before interest income and expense, certain
selling, general and administrative costs, amortization, income taxes, other
expenses, and foreign exchange gains and losses. The accounting policies used by
the reportable segments are the same as those used by the Company.
The Company does not identify or allocate assets, including capital
expenditures, by operating segment. Accordingly, assets are not reported by
segment because the information is not available and is not reviewed in the
evaluation of segment performance.
12
The following tables present information about reportable segments (in
thousands). The "Other" column consists primarily of software sales and certain
other revenues and related expenses that do not meet the segment reporting
quantitative thresholds. There are no inter-segment revenues:
Three months ended March 31, 2002 Research Consulting Events Other Consolidated
- --------------------------------- -------- ---------- ------ ------ ------------
Revenues $122,735 $65,893 $9,100 $3,367 $201,095
Gross contribution 82,984 22,533 4,225 1,530 111,272
Corporate and other expenses (112,643)
Net gain from minority-owned investments 78
Interest income 300
Interest expense (5,631)
Other expense, net (16)
Loss from continuing operations before
benefit for income taxes (6,640)
Three months ended March 31, 2001 Research Consulting Events Other Consolidated
- --------------------------------- -------- ---------- ------- ------ ------------
Revenues $132,745 $71,349 $17,370 $5,812 $227,276
Gross contribution 83,999 21,589 4,068 (86) 109,570
Corporate and other expenses (101,549)
Net loss on sale of investments (507)
Net loss from minority-owned investments (3,373)
Interest income 550
Interest expense (5,861)
Other expense, net (1,024)
Loss from continuing operations before
benefit for income taxes (2,194)
Six months ended March 31, 2002 Research Consulting Events Other Consolidated
- ------------------------------- -------- ---------- ------ ------ ------------
Revenues $252,209 $121,624 $68,566 $8,091 $450,490
Gross contribution 167,552 36,560 41,151 4,304 249,567
Corporate and other expenses (216,991)
Net gain on sale of investments 792
Net gain from minority-owned investments 157
Interest income 811
Interest expense (11,235)
Other expense, net (444)
Income from continuing operations before
provision for income taxes 22,657
Six months ended March 31, 2001 Research Consulting Events Other Consolidated
- ------------------------------- -------- ---------- ------- ------- ------------
Revenues $271,927 $123,176 $79,835 $10,117 $485,055
Gross contribution 175,249 27,442 39,694 1,233 243,618
Corporate and other expenses (205,417)
Net gain on sale of investments 4,811
Net loss from minority-owned investments (5,073)
Interest income 928
Interest expense (11,372)
Other expense, net (1,598)
Income from continuing operations before
provision for income taxes 25,897
13
Note 10 - Other Charges
During the three months ended March 31, 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 leasehold
improvements 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 and are for employee
termination severance and 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 $2.6 million of termination benefits during the
quarter ended March 31, 2002. Payments relating to the fiscal 2001 workforce
reduction for the three and six months ended March 31, 2002 were $2.3 million
and $6.1 million, respectively. The remaining $1.4 million relates to the
impairment of certain database-related assets. Payments for the involuntary
termination severance and benefits remaining at March 31, 2002 will be primarily
made over the next three quarters. Payments relating to facility reductions will
be made over the remaining lease terms with the majority occurring over the next
several years.
The Company is funding the cash costs out of operating cash flows.
Following is a reconciliation of the other charges recorded in fiscal 2001 and
2002 (in thousands):
Accrued Accrued
liability at liability at
September 30, Additions in Non-cash March 31,
2001 Fiscal 2002 charges Payments 2002
----------------- ---------------- -------------- --------------- ----------------
Facilities reductions $ - $10,014 $ (2,663) $(1,417) $ 5,934
Workforce reductions:
Fiscal 2001 6,599 - - (6,061) 538
Fiscal 2002 - 5,808 (270) (2,554) 2,984
Asset impairment - 1,424 (1,424) - -
----------------- ---------------- -------------- --------------- ----------------
Total $ 6,599 $ 17,246 $ (4,357) $ (10,032) $ 9,456
================= ================ ============== =============== ================
The non-cash charges for workforce reductions result from the establishment of a
new measurement date for certain stock options upon the modification of the
exercise term.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
References to "the Company," "we," "our," and "us" are to Gartner, Inc. and its
subsidiaries. All references to 2002 and 2001, unless otherwise indicated, are
to the three and six months ended March 31, 2002 and 2001, respectively.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended. Forward-looking statements are any statements other than
statements of historical fact, including statements regarding our expectations,
beliefs, hopes, intentions or strategies regarding the future. In some cases,
forward-looking statements can be identified by the use of words such as "may,"
"will," "expects," "should," "believes," "plans," "anticipates," "estimates,"
"predicts,"
14
"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," "Euro Conversion," and elsewhere in this report and in our
Annual Report on Form 10-K for the year ended September 30, 2001. Readers should
not place undue reliance on these forward-looking statements, which reflect
management's opinion only as of the date on which they were made. Except as
required by law, we disclaim any obligation to review or update these
forward-looking statements to reflect events or circumstances as they occur.
Readers also should review carefully any risk factors described in other reports
filed by us with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires the application of appropriate
accounting policies. The policies discussed below are considered by management
to be critical to an understanding of Gartner's financial statements because
their application requires the most significant management judgements. 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"). SAB 101 requires four basic criteria to be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services rendered; (3) the fee is fixed and determinable; and (4)
collectibility is reasonably assured.
o Research contracts are typically annually renewable subscriptions for
research products. Revenues from research products are deferred and
recognized ratably over the contract term.
o Consulting revenues, primarily derived from consulting and measurement
engagements and strategic advisory services, are recognized as work is
performed on a contract by contract basis.
o Events revenues are deferred and recognized upon the completion of the
related symposium, conference or exhibition.
o 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.
Uncollectible accounts receivable - Provisions for bad debts are recognized as
incurred. The measurement of losses and the allowance for uncollectible accounts
receivable is based on historical loss experience, an assessment of current
economic conditions and the financial health of specific clients. Total trade
receivables at March 31, 2002 was $298.3 million, against which an allowance for
losses of approximately $6.7 million was provided. Total trade receivables at
September 30, 2001 was $305.9 million, against which an allowance for losses of
approximately $5.6 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, and our intent and ability to
retain the investment for a period of time sufficient to allow for any
anticipated recovery in market value. Total investments in equity securities was
$14.5 million at March 31, 2002 (See Note 6 - "Investments" in the notes to the
condensed consolidated financial statements).
Impairment of goodwill and other intangible assets - The evaluation of
intangible assets is performed on a periodic basis and losses are recorded when
the assets carrying value is not recoverable through future
15
cash flows. The assessments require management to estimate future business
operations and market and economic conditions in developing long-term forecasts.
Goodwill is evaluated for impairment at least annually.
RESULTS OF OPERATIONS
OVERALL RESULTS
TOTAL REVENUES decreased 12% in the second quarter of fiscal 2002 to $201.1
million compared to $227.3 million for the second quarter of fiscal 2001. Total
revenues decreased 7% for the six months ended March 31, 2002 to $450.5 million,
compared to $485.1 million for the six months ended March 31, 2001. The
decreases in total revenues resulted from the decline in demand throughout the
entire technology sector and the overall weakness in the general economy.
Revenues for the consulting segment include reimbursable out of pocket expenses
in accordance with EITF 01-14, "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred." These expenses
were previously reported on a net basis within costs and expenses. Prior period
amounts have been restated. The reimbursable out-of-pocket expenses were between
$2.2 million and $2.5 million per quarter for all periods presented (See Note 3
- - "Income Statement Classification of Reimbursements for Out-of-Pocket Expenses
Incurred -Emerging Issues Task Force ("EITF") No. 01-14").
o Research revenues decreased 8% in the second quarter of fiscal 2002 to
$122.7 million, compared to $132.7 million in the second quarter of
fiscal 2001, and comprised 61% and 58% of total revenues in fiscal 2002
and 2001, respectively. Research revenues decreased 7% for the six
months ended March 31, 2002 to $252.2 million, compared to $271.9
million for the same period in fiscal 2001 and comprised 56% of total
revenues in fiscal 2002 and 2001.
o Consulting revenues decreased 8% in the second quarter of fiscal 2002
to $65.9 million, compared to $71.3 million in the second quarter of
fiscal 2001, and comprised 33% and 31% of total revenues in fiscal 2002
and 2001, respectively. Consulting revenues decreased 1% for the six
months ended March 31, 2002 to $121.6 million, compared to $123.2
million for the same period in fiscal 2001 and comprised 27% and 25% of
total revenues in fiscal 2002 and 2001, respectively.
o Events revenues decreased 48% in the second quarter of fiscal 2002 to
$9.1 million, compared to $17.4 million in the second quarter of fiscal
2001, and comprised 5% and 8% of total revenues in fiscal 2002 and
2001, respectively. Events revenues decreased 14% for the six months
ended March 31, 2002 to $68.6 million, compared to $79.8 million for
the same period in fiscal 2001 and comprised 15% and 16% of total
revenues in fiscal 2002 and 2001, respectively.
o Other revenues, consisting principally of software licensing, decreased
42% in the second quarter of fiscal 2002 to $3.4 million, compared to
$5.8 million in the second quarter of fiscal 2001 and comprised 1% and
3% of total revenues in fiscal 2002 and 2001, respectively. Other
revenues decreased 20% for the six months ended March 31, 2002 to $8.1
million, compared to $10.1 million for the same period in fiscal 2001
and comprised 2% of total revenues in fiscal 2002 and 2001.
COST OF SERVICES AND PRODUCT DEVELOPMENT decreased $23.3 million, or 21%, to
$88.3 million in the second quarter of fiscal 2002 from $111.7 million in the
second quarter of fiscal 2001. Cost of services and product development
decreased $32.5 million, or 14%, to $204.2 million for the six months ended
March 31, 2002 from $236.7 million in the same period of fiscal 2001. The
decrease in cost of services and product development resulted from the continued
emphasis on cost reductions, including the effects
16
of the workforce reductions during fiscal 2001 and the second quarter of fiscal
2002. Cost of services and product development is expected to continue to be
favorably impacted as a result of our on-going initiatives.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $7.8 million, or 8%, to
$86.0 million in the second quarter of fiscal 2002 from $93.8 million in the
second quarter of fiscal 2001. Selling, general and administrative expenses
decreased $10.4 million, or 6%, to $175.2 million for the six months ended March
31, 2002 from $185.6 million for the same period of fiscal 2001. These decreases
were primarily the result of sales cost reductions on increased leverage of our
inside sales organization, facility reductions, workforce reductions in fiscal
2001 and 2002, increased productivity in human resources, finance and
information technology functions, outsourcing and other efforts to closely
manage these expenses. The decreases in selling, general and administrative
expenses were partially offset by an increase in provisions for doubtful
accounts to $4.6 million for the six months ended March 31, 2002, compared to
$1.6 million for the same period in fiscal 2001. The increase in provision for
doubtful accounts reflects the weakness in the economy and higher amounts of
recent loss experience. Selling, general and administrative expenses are
expected to continue to be favorably impacted as a result of our ongoing
initiatives.
DEPRECIATION EXPENSE for the second quarter of fiscal 2002 decreased 2% to $10.3
million, compared to $10.6 million for the second quarter of fiscal 2001. The
decrease was primarily due to a decrease in fiscal 2002 capital spending,
including internal use software development costs. Depreciation expense for the
six months ended March 31, 2002 increased 12% to $20.3 million, compared to
$18.1 million for the same period of fiscal 2001. The increase was primarily due
to fiscal 2001 capital spending, including internal use software development
costs required to support the measurement and software businesses and the launch
of the gartner.com web site in January 2001.
AMORTIZATION OF INTANGIBLES of $0.5 million for the second quarter of fiscal
2002 decreased from $3.2 million for the same period in fiscal 2001.
Amortization of intangibles of $1.0 million for the six months ended March 31,
2002 decreased from $6.5 million for the same period in fiscal 2001. The primary
reason for the decreases was the early adoption of SFAS No. 142 - "Goodwill and
Other Intangible Assets." The standard eliminates goodwill amortization upon
adoption and requires an initial assessment for goodwill impairment within six
months of adoption and at least annually thereafter. As a result of adoption,
diluted earnings per share for the three and six months ended March 31, 2002
improved by $0.03 and $0.05, respectively.
OTHER CHARGES during the three months ended March 31, 2002 were $17.2 million.
Of these charges, $10.0 million relates to costs and losses associated with the
elimination of excess facilities, principally leasehold improvements and ongoing
lease costs and losses associated with sub-lease arrangements. In addition,
approximately $5.8 million of these charges are associated with the Company's
workforce reduction and are for employee termination severance and 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
$2.6 million of termination benefits during the quarter ended March 31, 2002.
The remaining $1.4 million relates to the impairment of certain database-related
assets. The Company is funding all of these costs out of operating cash flows.
OPERATING LOSS was $1.4 million in the second quarter of fiscal 2002 compared to
income of $8.0 million in the second quarter of fiscal 2001. Operating income
for the six months ended March 31, 2002 was $32.6 million, compared to $38.2
million for the same period in fiscal 2001. The decline in operating income was
due to the other charges recorded in the second quarter of fiscal 2002 for
workforce and facility reductions and lower revenues, offset partially by
reductions in both cost of services and product
17
development and selling, general and administrative expenses, in part due to
leveraging our inside sales organization, and lower amortization of intangibles
due to the adoption of SFAS 142. Excluding these other charges of $17.2 million,
operating income would be $15.9 million and $49.8 million for the second quarter
and six months ended March 31, 2002, respectively. Operating income also
reflects offset by NET GAIN (LOSS) ON SALE OF INVESTMENTS in the six months
ended March 31, 2002 reflected the first quarter sale of 747,208 shares of CNET
Networks, Inc. ("CNET") for $6.0 million resulting in a pre-tax gain of $0.8
million. During the three months ended March 31, 2001, we sold 385,000 shares of
Jupiter Media Metrix for net cash proceeds of $2.0 million for a pre-tax loss of
$0.7 million. For the six months ended March 31, 2001, we sold 746,000 shares of
Jupiter Media Metrix for net cash proceeds of $5.9 million and a pre-tax gain of
$0.8 million; In addition, we received additional stock distributions from our
investment in SI I and SI II. During the six months ended March 31, 2001, we
sold a portion of the shares received as distributions for cash proceeds of $4.6
million for a pre-tax gain of $3.8 million; In addition, for the six months
ended March 31, 2001, various other investments were sold for cash proceeds of
$0.3 million and a gain of $0.2 million.
NET GAIN (LOSS) FROM MINORITY-OWNED INVESTMENTS were a gain of $0.1 million for
the second quarter of fiscal 2002 and a loss of $3.4 million for the second
quarter of fiscal 2001. Net gain (loss) from minority-owned investments were a
gain of $0.2 million for the six months ended March 31, 2002 and a loss of $5.1
million for the six months ended March 31, 2001. The losses in fiscal 2001 were
the result of impairment losses related to equity securities owned by us through
SI I and SI II.
INTEREST EXPENSE decreased slightly to $5.6 million in the second quarter of
fiscal 2002 from $5.9 million in the second quarter of fiscal 2001. Interest
expense decreased slightly to $11.2 million for the six months ended March 31,
2002 from $11.4 million for the same period in fiscal 2001. The decreases
related primarily to lower amounts outstanding under our credit facility offset,
in part, by increased amounts outstanding under our long-term convertible debt
due to the addition of interest to the principal balance.
OTHER EXPENSE, NET for the second quarter of fiscal 2002 includes net foreign
currency exchange losses of $0.5 million and a $0.5 million gain from the sale
of a business. This compares with foreign exchange losses of $1.0 million for
the second quarter of fiscal 2001. Other expense, net for the six months ended
March 31, 2002 includes net foreign currency exchange losses of $1.1 million, a
$0.5 million gain from the sale of a business and other gains of $0.2 million.
This compares with foreign exchange losses of $1.6 million for the six months
ended March 31, 2001. The business during the quarter ended March 31, 2002 sold
provides research on the healthcare market.
PROVISION (BENEFIT) FOR INCOME TAXES was a benefit of $2.3 million in the second
quarter of fiscal 2002, compared to a benefit of $0.8 million in the same
quarter of fiscal 2001. Provision for income taxes was $7.9 million for the six
months ended March 31, 2002, compared to $9.6 million for the same period in
fiscal 2001. The effective tax rate was 35% for the three and six-month periods
ended March 31, 2002 and 37% for the three and six-month periods ended March 31,
2001. The reduction in the effective tax rate reflects on-going tax planning and
the elimination of non-deductible amortization of goodwill pursuant to the
adoption of SFAS No. 142.
BASIC AND DILUTED INCOME PER COMMON SHARE from continuing operations was a loss
of $0.05 for the second quarter of fiscal 2002, compared to a loss of $0.02 for
the second quarter of fiscal 2001. Total diluted income per common share was a
loss of $0.05 for the second quarter of fiscal 2002, compared with a loss of
$0.62 for the second quarter of fiscal 2001. The fiscal 2001 quarter included a
diluted loss from discontinued operations of $0.60 per common share. The
elimination of goodwill amortization in accordance with the adoption of SFAS No.
142 improved basic and diluted income per share from
18
continuing operations by $0.03 for the second quarter of fiscal 2002 as compared
to fiscal 2001. Excluding the effect of other charges of $17.2 million, net gain
from minority-owned investments of $0.1 million and gain from the sale of a
business of $0.5 million, net of tax benefits of $5.8 million on these items,
diluted or "normalized" income per share from continuing operations was $0.07
per share for the second quarter of fiscal 2002 compared to $0.04 per share for
the second quarter of fiscal 2001. The fiscal 2001 amount excludes amortization
of goodwill of $2.4 million, which was eliminated in fiscal 2002 with the
adoption of SFAS No. 142, net loss from sale of investments of $0.5 million, net
loss from minority-owned investments of $3.4 million, net of tax benefits of
$1.7 million on these items. Diluted income per share from continuing operations
was $0.16 for the six months ended March 31, 2002, compared to $0.19 for the
same period in fiscal 2001. Total diluted income per common share was $0.16 for
the six months ended March 31, 2002, compared with a loss of $0.57 for the same
period in fiscal 2001. The fiscal 2001 period included a diluted loss from
discontinued operations of $0.76 per common share. The elimination of goodwill
amortization in accordance with the adoption of SFAS No. 142 improved diluted
income per share from continuing operations by $0.05 for the six months ended
March 31, 2002 as compared to a year ago. Excluding the effect of other charges
of $17.2 million, net gain from sale of investments of $0.8 million, net gain
from minority-owned investments of $0.2 million and gain from the sale of a
business of $0.5 million, net of tax benefits of $5.5 million on these items,
diluted normalized income per share was $0.24 per share for the six months ended
March 31, 2002, equal to the $0.24 per share for the six months ended March 31,
2001. The fiscal 2001 amount excludes amortization of goodwill of $5.0 million,
which was eliminated in fiscal 2002 with the adoption of SFAS No. 142, net gain
from sale of investments of $4.8 million and net loss from minority-owned
investments of $5.1 million, net of tax benefits of $0.7 million on these items.
Discontinued Operation - TechRepublic
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. Our consolidated financial statements reflect the disposition of the
TechRepublic segment as a discontinued operation in accordance with APB Opinion
No. 30. Accordingly, revenues, costs and expenses and cash flows of TechRepublic
have been excluded from the respective captions in the Condensed Consolidated
Statements of Operations and Condensed Consolidated Statements of Cash Flows,
and have been reported through the date of disposition as "Loss from
discontinued operation, net of taxes" and "Net cash used by discontinued
operation."
BUSINESS AND TRENDS
Historically, research revenues have typically increased in the first quarter of
the fiscal year over the immediately preceding quarter primarily due to the
increase in contract value at the end of the prior fiscal year. Historically,
events revenues have increased similarly due to annual conferences and
exhibition events held in the first quarter. Additionally, operating income
margin (operating income as a percentage of total revenues) has typically
improved in the first quarter of the fiscal year over the immediately preceding
quarter due to the increase in research revenue upon which we were able to
further leverage our selling, general and administrative expenses, plus
operating income generated from the first quarter Symposium and ITxpo exhibition
events. Although operating income margins historically have generally not been
as high in the remaining quarters, the full year impact of acquisitions and
strategic initiatives and other factors may result in operating margin trends in
the future that are not comparable to historical trends.
Research contracts are generally billable upon signing and are non-cancellable
and non-refundable, except
19
for government contracts which have a 30-day cancellation clause. Government
contracts have not produced material cancellations to date. With the exception
of those government contracts which permit cancellation, it is our policy to
record at the time of signing a contract the entire amount of the contract
billable as a fee receivable, which represents a legally enforceable claim, and
a corresponding amount as deferred revenue. For government contracts which
permit cancellation, we bill the client the full amount billable under the
contract, but only record a receivable equal to the earned portion of the
contract. In addition, we only record deferred revenue on these contracts when
cash is received. Deferred revenues attributable to government contracts were
$34.7 million and $24.5 million at March 31, 2002 and September 30, 2001,
respectively. In addition, at March 31, 2002 and September 30, 2001, we had
billed but not yet collected $7.3 million and $13.3 million, respectively, on
government contracts which permit cancellation. Accordingly, we have not
recorded the receivable and associated deferred revenue for these contracts. We
record the commission obligation related to research contracts upon the signing
of the contract and amortize the corresponding deferred commission expense over
the contract period in which the related revenues are earned.
SEGMENT RESULTS
We evaluate reportable segment performance and allocate resources based on gross
contribution margin. Gross contribution is defined as operating income excluding
certain selling, general and administrative expenses, depreciation, amortization
of intangibles and other charges.
Research
Research revenues decreased 8% to $122.7 million for the three months ended
March 31, 2002, compared to $132.7 million for the three months ended March 31,
2001. The decrease was due to lower demand throughout the entire technology
sector and to the overall weakness in the general economy. Research gross
contribution of $83.0 million for the three months ended March 31, 2002,
decreased 1% from $84.0 million for the three months ended March 31, 2001. The
decrease in gross contribution reflects the general weakness in the economy and
our investments in growth initiatives such as GartnerG2, a new research service
designed specifically for business executives, and Gartner Executive Programs, a
concierge-quality service and personalized programs for senior IT executives.
Gross contribution margin for the quarter ended March 31, 2002 increased to 68%
from 63% in the prior year. Research contract value, which consists of the
annualized value of all subscription-based research products with ratable
revenue recognition, was $511.2 million at March 31, 2002, a decrease of 8% from
$558.1 million at March 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 decreased 8% to $65.9 million for the three months ended
March 31, 2002, compared to $71.3 million for the three months ended March 31,
2001. The adoption of EITF No. 01-14 (See Note 3) caused both revenues and cost
of services and product development for the three months ended March 31, 2002
and 2001 to increase by $2.2 million and $2.5 million, respectively. Results for
fiscal 2002 reflect a reduction in certain client segments and geographies and
increases in average project size and length. Consulting gross contribution of
$22.5 million for the second quarter of fiscal 2002 increased 4% from $21.6
million for the second quarter of fiscal 2001. Gross contribution margin for the
second quarter of fiscal 2002 increased to 34% from 30% for the same period in
the prior year. Consulting gross contribution and margin increased over the same
period of the prior year due primarily to the reduction in headcount by 60
people and elimination of expenses in practice areas and markets that do not
have sufficient scale and volume. We continue to focus on larger engagements and
on a limited set of practices
20
and markets in which we can achieve significant penetration. Consulting backlog,
which represents future revenues to be recognized from in-process consulting,
measurement and strategic advisory services engagements increased 14% to $127.5
million at March 31, 2002, compared to $111.9 million at March 31, 2001.
Events
Events revenues decreased 48% to $9.1 million for the three months ended March
31, 2002, compared to $17.4 million for the three months ended March 31, 2001.
The decline was primarily due to fewer events as we have eliminated unproven,
low-profit events with the expectation of obtaining greater attendee and
exhibitor participation at fewer events, and to the timing of Spring
Symposium/Itxpo in Europe, which was held in the second quarter of 2001 and the
third quarter of 2002. The decrease in revenues due to the timing of events was
approximately $3.0 million. Gross contribution of $4.2 million for the three
months ended March 31, 2002 increased 4% from $4.1 million for the three months
ended March 31, 2001. Gross contribution margin for the second quarter of fiscal
2002 of 46% increased from 23% for the second quarter of fiscal 2001. The
improvement in gross contribution and margin was due primarily to cost saving
measures and higher net prices. Deferred revenue for events decreased 5% to
$54.3 million at March 31, 2002 as compared to $56.8 million at March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $55.4 million for the six months
ended March 31, 2002, compared to cash provided by operating activities of $10.6
million for the six months ended March 31, 2001. The net improvement of $44.8
million was due primarily to higher earnings before depreciation and
amortization, other charges and discontinued operations, and to tax refunds, and
changes in balance sheet accounts, particularly fees receivable and accounts
payable and accrued liabilities. Accounts payable and accrued liabilities were
favorably impacted by our ongoing cost reductions. At September 30, 2001, the
federal tax refunds of $27.5 million, for capital loss and foreign tax credit
carrybacks, were included in prepaid expenses and other current assets in the
Condensed Consolidated Balance Sheets. The refunds were received during the
first and second quarters of fiscal 2002.
Cash used in investing activities was $3.4 million for the six months ended
March 31, 2002, compared to $26.0 million for the six months ended March 31,
2001. The decrease was due primarily to lower amounts spent on capital
expenditures and business acquisitions during fiscal 2002.
Cash used in financing activities totaled $9.5 million for the six months ended
March 31, 2002, compared to cash provided by financing activities of $17.0
million for the six months ended March 31, 2001. The cash used in financing
activities during fiscal 2002 resulted primarily from the $15.0 million used for
the payment of short-term debt and the $13.2 million used for the repurchase of
treasury stock offset, in part, by proceeds from the exercise of stock options.
During fiscal 2001, $20.3 million was provided from short-term borrowings. The
effect of exchange rates reduced reported cash and cash equivalent balances by
$0.9 million for the six months ended March 31, 2002. The decrease for the six
months ended March 31, 2001 was insignificant. Total cash used by the
discontinued operation was $31.8 million for the six months ended March 31,
2001. At March 31, 2002, cash and cash equivalents totaled $78.8 million,
compared to $31.4 million at March 31, 2001.
21
OBLIGATIONS AND COMMITMENTS
We have a $200.0 million unsecured senior revolving credit facility led by
JPMorgan Chase Bank. At March 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 could preclude us from borrowing the maximum amount of the
credit facility. As a result of these covenants, our borrowing availability at
March 31, 2002 was $110.8 million.
On April 17, 2000, we issued in a private placement transaction, $300.0 million
of 6% convertible subordinated notes to Silver Lake Partners, L.P. and certain
of Silver Lake's affiliates ("SLP"). Interest accrues semi-annually by a
corresponding increase in the face amount of the convertible notes. Accordingly,
$36.1 million has been added to the face amount of the convertible notes'
balance outstanding at March 31, 2002, resulting in a balance outstanding of
$336.1 million. 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 for cash 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 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 a price based on the number of shares into which the notes would be
converted (at a conversion price of $7.45 per share) and the market price on the
date the notice of conversion is given. 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 would 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 March 31, 2002, the notes were
convertible into 45.2 million shares with a total market value of $583.1
million, using our March 31, 2002 Class A Common Stock market price of $12.90
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 have been redeemed or converted on that date, such amount will
be $403.2 million.
We also issue letters of credit in the ordinary course of business. As of March
31, 2002, we had letters of credit outstanding with JPMorgan Chase Bank for $3.8
million, The Bank of New York for $2.0 million, and Safeco Insurance Company of
America for $0.3 million.
We lease various facilities, furniture and computer equipment under operating
lease arrangements expiring between 2002 and 2036. Future commitments under
non-cancellable operating lease agreements are $14 million for April 1, 2002
through September 30, 2002, and are $24 million, $22 million, $19 million and
$16 million for fiscal 2003, 2004, 2005 and 2006, respectively.
At March 31, 2002, we had involuntary employee termination severance and benefit
obligations remaining relative to our fiscal 2001 workforce reduction of $0.5
million, which we anticipate paying primarily in the third quarter of fiscal
2002. The obligations remaining at March 31, 2002 relative to the other charges
recorded in the second quarter of fiscal 2002 were $9.3 million, $5.9 million of
which is for
22
the costs of facility reductions, principally lease payments and $3.4 million of
which is for involuntary employee termination severance and benefits. Payments
for involuntary termination severance and benefits will be primarily made over
the next three quarters. Payments relating to facility reductions will be made
over the remaining lease terms with the majority occurring over the next several
years.
We have a total remaining investment commitment to the SI II of $7.4 million at
March 31, 2002. This remaining commitment is expected to be funded in fiscal
2002.
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 Repurchase Program
During the three months ended March 31, 2002, pursuant to the stock repurchase
program announced in July 2001, we purchased 1,000,700 shares of our common
stock in the open market at an average price of $12.15 per share and a total
cost of $12.2 million. For the six months ended March 31, 2002, we purchased
1,095,100 shares of our common stock in the open market at an average price of
$12.05 per share and a total cost of $13.2 million. Through March 31, 2002, we
repurchased 3.4 million shares of our common stock for approximately $36 million
out of the $75 million approved for the stock repurchase program at an average
price of $10.51 per share.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE.
We operate in a very competitive and rapidly changing environment that involves
numerous risks and uncertainties, some of which are beyond our control. In
addition, both we and our clients are affected by the condition of the general
economy. The following section discusses many, but not all, of these risks and
uncertainties.
General Economic Conditions. Our revenues and results of operations are
influenced by general economic conditions. A general economic downturn or a
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 may materially and adversely affect our business,
financial condition and results of operations, including the ability to achieve
continued customer renewals and achieve new contract value, backlog and deferred
events revenue. The recent less favorable economic conditions and the September
11th terrorist attacks have led to constrained IT spending impacting our overall
business and some unwillingness on the part of clients to travel, thereby
impacting our events business.
Competitive Environment. We face competition from a significant number of
independent providers of information products and services, and the internal
marketing and planning organizations of our current and prospective clients. We
also 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. 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
23
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.
Hiring and Retention of Employees. Our success depends heavily upon the quality
of our senior management, sales personnel, analysts, consultants and other key
personnel. We face competition for these qualified professionals from, among
others, technology companies, market research firms, consulting firms, and
electronic and print media companies. 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 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 and to anticipate and understand the
changing needs of 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. Failure to increase and improve our Internet capabilities could
adversely affect our future business and operating results.
Introduction of New Products and Services. The market for our products and
services are 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 market place and our costs of producing them. Any
failure to successfully do so 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
international sales. 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, 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 and protecting intellectual property rights in
international jurisdictions. Additionally, we rely on local distributors or
sales agents in some international locations. If any of these arrangements are
terminated, we may not be able to replace the arrangement on beneficial terms or
on a timely basis 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 brand loyalty among clients. If we fail to
24
effectively promote and maintain the Gartner brand, or incur excessive expenses
in attempting to do 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. The risks related
to such investments, due to their nature and the volatile public markets,
include the possibilities that anticipated returns may not materialize or could
be significantly delayed. 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 or
financial position could be materially impacted.
Indebtedness. Through our $336 million convertible notes we have incurred
significant indebtedness. Additionally, we have a senior revolving credit
facility under which we can incur significant additional indebtedness. The
associated debt service could impair future operating results. Further, the
outstanding debt could limit the amount of cash or additional credit available
to us, which in turn could restrain our ability to expand or enhance products
and services, respond to competitive pressures or pursue business opportunities
that may arise in the future and involve substantial investments of additional
capital. Although we have the right to redeem the convertible notes in 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 were able to obtain sufficient capital, it could
materially adversely impact our future business and operating results. 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 have been redeemed or converted on 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 prior thereto in certain
circumstances upon a change in control of us, the holders of our $336 million
convertible notes 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 March 31, 2002, all the notes were convertible into 45.2
million shares, or 34.7% of our Class A and Class B Common Stock that would then
be outstanding, based upon the conversion price of $7.45 per share. We may
redeem the notes if the holders elect to convert them (see "Obligations and
Commitments"). If we do not redeem the notes and all or a substantial portion of
the notes are converted, our stockholders may experience significant dilution of
their current stockholdings, the holders may be able to exercise significant
control over us and the price of our Common stock may be affected negatively if
such shares of our Common Stock are sold in the open market.
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, diluting the interests of our current
stockholders or decreasing working capital, 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 the Company's Intellectual Rights. We rely on a combination of
copyright, patent, trademark, trade secrets, confidentiality, non-compete and
other contractual procedures to protect our
25
intellectual property rights. Despite our efforts to protect our intellectual
property rights, it may be possible for unauthorized third parties to obtain and
use technology or other information that we regard as proprietary. In addition,
our intellectual property rights may not survive a legal challenge to their
validity or provide significant protection for us. Furthermore, the laws of
certain countries do not protect our proprietary rights to the same extent as do
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 can decide to compete against us. Further, 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.
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 have certain limits in purchasing our common stock under the terms
of the recapitalization.
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.
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, the performance of consulting
engagements, the timing of Symposia and other events, the amount of new business
generated, the mix of domestic and international business, changes in market
demand for our products and services, the timing of the development,
introduction and marketing of new products and services, and competition in the
industry. An inability to generate sufficient earnings and cash flow, and
achieve our forecasts, may impact our operating and other activities.
EURO CONVERSION
Twelve of the fifteen member countries of the European Union previously
established fixed conversion rates between their sovereign currencies and a new
currency called the "euro" and adopted the euro as their common legal currency.
Effective January 1, 2002, participating countries adopted the euro as their
single currency. The participating countries issued new euro-denominated bills
and coins for use in cash transactions. Legacy currency will no longer be legal
tender for any transactions beginning July 1, 2002, making conversion to the
euro complete. We do not believe that the translation of financial transactions
into euros has had, or will have, a significant effect on our results of
operations, liquidity or financial condition. Additionally, we do not anticipate
any material impact from the euro conversion on our financial information
systems, which accommodate multiple currencies. Costs associated with the
adoption of the euro have not been and are not expected to be significant and
are being expensed as incurred.
26
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective October 1, 2001, the beginning of our fiscal year, we adopted early
Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for
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 in the first
quarter of fiscal 2002. We completed the transitional goodwill impairment
assessment during the second quarter ended March 31, 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 (see Note 4 - "Business Combinations and Goodwill and Other Intangible
Assets" in the Notes to the Condensed Consolidated Financial Statements).
In November 2001, the Emerging Issues Task Force reached a consensus on issue
No. 01-14, "Income Statement Characterization of Reimbursements Received for
`Out-of-Pocket' Expenses Incurred." The consensus requires reimbursements
received for out-of-pocket expenses incurred to be characterized as revenue in
the statements of operations. Out-of-pocket expenses are incidental expenses
incurred as part of ongoing operations and include, but are not limited to,
expenses related to airfare, mileage, hotel stays, out-of-town meals,
photocopies and telecommunication and facsimile charges. This consensus must be
applied to financial reporting periods beginning after December 15, 2001 with
reclassification of prior periods for comparability. We have adopted the
consensus beginning with the second quarter of our fiscal year which began on
January 1, 2002, and in accordance with the consensus, have restated prior
periods. For the three months ended ended March 31, 2002 and 2001, adoption of
the consensus caused both revenues and cost of services and product development
in the consulting segment to increase by $2.2 million and $2.5 million,
respectively. For the six months ended March 31, 2002 and 2001, adoption of the
consensus caused both revenues and cost of services and product development in
the consulting segment to increase by $4.4 million and $4.7 million,
respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
borrowing under long-term debt which consists of a $200.0 million multi-bank
unsecured senior revolving credit facility led by JPMorgan Chase Bank and $336.1
million of 6% convertible subordinated notes. At March 31, 2002, there were no
amounts outstanding under the revolving credit facility. Under the revolving
credit facility, the interest rate on borrowings is based on 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 the senior revolving credit facility, if fully utilized, will
not have a material effect on future results of operations. The conversion price
of the convertible notes, which have a fixed interest rate, is $7.45 per share.
The number of shares of Class A Common Stock issuable upon conversion of the
notes on March 31, 2002 was 45.2 million shares with a total market value of
$583.1 million, using our March 31, 2002 Class A Common Stock market price of
$12.90 per share. Commencing on April 17, 2003, or prior thereto in certain
circumstances upon a change in control of us, the note holder can convert the
notes into shares of Class A Common Stock. Although we have the right to redeem
the notes in certain circumstances, including after a conversion election, there
can be no assurance that we will be able to obtain sufficient capital on a
commercially reasonable basis, or at all, to fund a redemption.
We are exposed to market risk as it relates to changes in the market value of
equity investments. We invest in equity securities of public and private
companies directly and through SI I and SI II. We own
27
100% of SI I and 34% of SI II. SI I and SI II are engaged in making venture
capital investments in early- to mid-stage IT-based or Internet-enabled
companies (see Note 6 - "Investments" in the Notes to the Condensed Consolidated
Financial Statements). As of March 31, 2002, we had equity investments totaling
$14.5 million. These investments are inherently risky as the businesses are
typically in early development stages and may never develop. Furthermore,
certain of these investments are in publicly traded companies whose shares are
subject to significant market price volatility. Adverse changes in market
conditions and poor operating results of the underlying investments may result
in us incurring additional losses or an inability to recover the carrying value
of our investments. We do not attempt to reduce or eliminate the market exposure
on our investments in equity securities and may incur additional losses related
to these investments. If there were a 100% adverse change in the value of our
equity portfolio as of March 31, 2002, this would result in a non-cash
impairment charge of $14.5 million.
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 loss in the stockholders' equity (deficit) section of the
Condensed 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 is generally the
local currency, foreign currency translation adjustments are reflected as a
component of stockholders' equity (deficit) 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. The devaluation of the peso in Argentina by approximately
30% as of March 31, 2002 is not expected to have any significant impact on us
due to the relatively small investment we have there relative to the entire
company. We have generally not entered into foreign currency forward exchange
contracts or other derivative financial instruments to hedge the effects of
adverse fluctuations in foreign currency exchange rates. At March 31, 2002, we
had only one foreign currency forward contract outstanding. The contract
requires us to sell U.S. dollars and purchase Japanese yen. The contract amount
is $1.0 million, is for a one-year term expiring on September 25, 2002, and
contains a forward exchange rate of 114.26 Japanese yen. The foreign currency
forward contract was entered into to offset the foreign exchange effects of our
Japanese yen intercompany payable, which had a value at March 31, 2002 of $0.9
million. The forward contract and the intercompany payable are each reflected at
fair value with gains and losses recorded currently in earnings.
28
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on March 6, 2002. At such meeting,
the Class A and B stockholders elected the following persons to the Board of
Directors by the following votes:
Shares voted for each Shares withheld from
Name Share Class director each director
- ------------------------------- ------------------- ----------------------- --------------------------
William O. Grabe Class A 47,043,645 937,109
Michael D. Fleisher Class B 28,547,087 93,610
Max D. Hopper Class B 28,544,938 95,759
Kenneth Roman Class B 28,544,001 96,696
The stockholders approved the Company's 2002 Employee Stock Purchase Plan. The
vote was 59,712,526 shares for, 2,804,523 shares against and 1,561,897 shares
abstained.
The stockholders ratified the appointment of KPMG LLP as independent auditors
for the Company for the 2002 fiscal year. The vote was 75,294,474 shares for,
1,233,312 shares against and 93,665 shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the fiscal quarter
ended March 31, 2002.
Items 1, 2, 3, and 5 are not applicable and have been omitted.
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Gartner, Inc.
Date May 14, 2002 /s/ Regina M. Paolillo
-----------------------------------
Regina M. Paolillo
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
30
