UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-14443 GARTNER, INC. (Exact name of Registrant as specified in its charter) Delaware 04-3099750 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 56 Top Gallant Road 06904-2212 P.O. Box 10212 (Zip Code) Stamford, CT (Address of principal executive offices) Registrant's telephone number, including area code: (203) 316-1111 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) YES [X] NO [ ]. The number of shares outstanding of the Registrant's capital stock as of October 31, 2003 was 100,522,836 shares of Class A Common Stock and 28,741,743 shares of Class B Common Stock.
TABLE OF CONTENTS Page PART I FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 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 ITEM 4: CONTROLS AND PROCEDURES 28 PART II OTHER INFORMATION 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 (In thousands) September 30, December 31, 2003 2002 --------- --------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 206,937 $ 109,657 Fees receivable, net 221,347 283,068 Deferred commissions 23,267 25,016 Prepaid expenses and other current assets 24,729 30,425 --------- --------- Total current assets 476,280 448,166 Property, equipment and leasehold improvements, net 61,451 71,006 Goodwill and other intangibles, net 227,777 226,114 Other assets 71,850 71,018 --------- --------- TOTAL ASSETS $ 837,358 $ 816,304 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities $ 134,556 $ 140,891 Deferred revenues 301,681 305,887 --------- --------- Total current liabilities 436,237 446,778 Convertible debt 367,625 351,539 Other liabilities 48,927 46,688 --------- --------- TOTAL LIABILITIES 852,789 845,005 STOCKHOLDERS' DEFICIT Preferred stock - - Common stock 61 60 Additional paid-in capital 389,052 368,090 Unearned compensation, net (2,184) (3,069) Accumulated other comprehensive loss, net (5,695) (11,392) Accumulated earnings 167,059 150,243 Treasury stock, at cost (563,724) (532,633) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (15,431) (28,701) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 837,358 $ 816,304 ========= ========= See the accompanying notes to the condensed consolidated financial statements. 3
GARTNER, INC. Condensed Consolidated Statements of Operations (Unaudited, in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 -------- -------- -------- -------- Revenues: Research $115,830 $122,575 $349,347 $366,929 Consulting 62,998 79,457 191,302 217,961 Events 15,904 14,987 64,705 62,525 Other 2,172 3,508 9,150 10,364 -------- -------- -------- -------- Total revenues 196,904 220,527 614,504 657,779 Costs and expenses: Cost of services and product development 94,378 93,503 300,151 287,889 Selling, general and administrative 79,169 85,745 243,403 256,189 Depreciation 9,046 11,659 27,835 32,580 Amortization of intangibles 320 499 1,063 1,447 Other charges - - 5,426 17,246 -------- -------- -------- -------- Total costs and expenses 182,913 191,406 577,878 595,351 -------- -------- -------- -------- Operating income 13,991 29,121 36,626 62,428 Gain (loss) on investments 102 5 5,624 (2,449) Interest income 531 575 1,560 1,333 Interest expense (6,305) (5,893) (18,488) (17,264) Other (expense) income, net (148) (178) 348 258 -------- -------- -------- -------- Income before income taxes 8,171 23,630 25,670 44,306 Provision for income taxes 2,697 8,034 8,854 14,771 -------- -------- -------- -------- Net income $ 5,474 $ 15,596 $ 16,816 $ 29,535 ======== ======== ======== ======== Basic income per common share $ 0.07 $ 0.19 $ 0.21 $ 0.35 Diluted income per common share $ 0.07 $ 0.15 $ 0.21 $ 0.30 Weighted average shares outstanding: Basic 78,026 82,130 79,251 83,487 Diluted 128,934 129,210 128,363 131,355 See the accompanying notes to the condensed consolidated financial statements. 4
GARTNER, INC. Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) Nine Months Ended September 30, 2003 2002 -------- -------- OPERATING ACTIVITIES: Net income $ 16,816 $ 29,535 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of intangibles 28,898 34,027 Non-cash compensation 758 2,420 Tax benefit associated with employee exercise of stock options 1,423 1,778 Deferred taxes 88 3,244 (Gain) loss from investments and sales of assets, net (5,624) 1,956 Accretion of interest and amortization of debt issue costs 17,909 16,696 Non-cash charges associated with impairment of long-lived assets - 1,424 Changes in assets and liabilities: Fees receivable, net 68,646 56,434 Deferred commissions 2,249 13,986 Prepaid expenses and other current assets 7,524 12,661 Other assets (2,014) 6,531 Deferred revenues (11,964) (27,576) Accounts payable and accrued liabilities (8,781) (8,443) -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES 115,928 144,673 -------- -------- INVESTING ACTIVITIES: Proceeds from insurance recovery 5,464 - Purchases of businesses - (3,858) Proceeds from sale of assets - 239 Investments (1,507) (1,508) Additions to property, equipment and leasehold improvements (16,401) (15,258) -------- -------- CASH USED IN INVESTING ACTIVITIES (12,444) (20,385) -------- -------- FINANCING ACTIVITIES: Proceeds from stock issued for stock plans 20,956 16,880 Payments for debt issuance costs (570) (238) Purchase of treasury stock (32,380) (46,000) -------- -------- CASH USED IN FINANCING ACTIVITIES (11,994) (29,358) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 91,490 94,930 EFFECTS OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 5,790 2,432 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 109,657 27,431 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $206,937 $124,793 ======== ======== See the accompanying notes to the condensed consolidated financial statements. 5
GARTNER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of Presentation On October 30, 2002, Gartner, Inc. (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 quarterly periods of 2002, unless otherwise indicated, are to the calendar quarters of 2002. Certain prior year amounts have been reclassified to conform to the current year presentation. These interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes of the Company filed in our Transition Report on Form 10-KT for the transition period from October 1, 2002 to December 31, 2002. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of operating revenues and expenses. These estimates are based on management's knowledge and judgments. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The results of operations for the three and nine months ended September 30, 2003 may not be indicative of the results of operations for the remainder of 2003. Note 2 - Recent Accounting Pronouncements In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123." This amendment provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirement of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. The Company continues to account for stock-based compensation according to Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". The adoption of SFAS No. 148 in the first quarter of 2003 required the Company to provide prominent disclosures about the effects of SFAS No. 123 on reported income and required it to disclose these effects in the interim financial statements (see Note 5). In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 became effective for contracts entered into or modified after June 30, 2003, for hedging relationships designated after June 30, 2003, and to certain preexisting contracts. The adoption of SFAS No. 149 had no impact on the Company's financial position, cash flows or results of operations. 6
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 changes the accounting for certain financial instruments that under previous guidance issuers could account for as equity. It requires that those instruments be classified as liabilities in balance sheets. The guidance in SFAS No. 150 became effective on July 1, 2003. The adoption of SFAS 150 had no impact on the Company's financial position, cash flows or results of operations. Note 3 - Comprehensive Income The components of comprehensive income for the three and nine months ended September 30, 2003 and 2002 are as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 -------- -------- -------- -------- Net income $ 5,474 $ 15,596 $ 16,816 $ 29,535 Other comprehensive (loss) income: Foreign currency translation adjustments (259) 701 5,696 586 Net unrealized gains (losses) on investments, net of tax 8 (48) 1 (393) -------- -------- -------- -------- Other comprehensive (loss) income (251) 653 5,697 193 -------- -------- -------- -------- Comprehensive income $ 5,223 $ 16,249 $ 22,513 $ 29,728 ======== ======== ======== ======== The balance of unrealized holding losses, net of tax, at September 30, 2003 was $0.1 million. 7
Note 4 - Computations of Income per Share of Common Stock The following table sets forth the reconciliation of the basic and diluted income per share (in thousands, except per share data): Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 -------- -------- -------- -------- NUMERATOR: Net income used for calculating basic income per share $ 5,474 $ 15,596 $ 16,816 $ 29,535 After-tax interest on convertible long-term debt 3,341 3,149 9,908 9,339 -------- -------- -------- -------- Income used for calculating diluted income per share $ 8,815 $ 18,745 $ 26,724 $ 38,874 ======== ======== ======== ======== DENOMINATOR: Weighted average number of common shares used in the calculation of basic income per share 78,026 82,130 79,251 83,487 Common stock equivalents associated with stock compensation plans 1,878 750 797 2,215 Weighted average number of shares associated with convertible long-term debt 49,030 46,330 48,315 45,653 -------- -------- -------- -------- Shares used in the calculation of diluted income per share 128,934 129,210 128,363 131,355 ======== ======== ======== ======== Basic income per share $ 0.07 $ 0.19 $ 0.21 $ 0.35 ======== ======== ======== ======== Diluted income per share $ 0.07 $ 0.15 $ 0.21 $ 0.30 ======== ======== ======== ======== For the three and nine months ended September 30, 2003 and 2002, unvested restricted stock awards were not included in the computation of diluted income per share because the effect would have been anti-dilutive. For the three months ended September 30, 2003 and 2002, options to purchase 19.0 million and 26.5 million shares, respectively, of Class A Common Stock of the Company were not included in the computation of diluted income per share because the effect would have been anti-dilutive. For the nine months ended September 30, 2003 and 2002, options to purchase 26.7 million and 14.2 million shares, respectively, of Class A Common Stock of the Company were not included in the computation of diluted income per share because the effect would have been anti-dilutive. Note 5 - Accounting for Stock-Based Compensation The Company has several stock-based compensation plans. The Company applies APB No. 25 "Accounting for Stock Issued to Employees" in accounting for its employee stock options and purchase rights and applies SFAS No. 123 "Accounting for Stock Issued to Employees" for disclosure purposes only. Under APB No. 25, the intrinsic value method is used to account for stock-based employee compensation plans. The SFAS No. 123 disclosures include pro forma net income and earnings per share as if the fair value-based method of accounting had been used. If compensation for employee options had been determined based on SFAS No. 123, the Company's pro forma net income, and pro forma income per share would have been as follows (in thousands, except per share data): 8
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 --------- ---------- ---------- ---------- Net income as reported $ 5,474 $ 15,596 $ 16,816 $ 29,535 Add: Stock-based compensation expense included in net income as reported, net of tax 161 1,186 493 1,573 Deduct: Pro forma employee stock-based compensation cost, net of tax (4,314) (7,447) (13,614) (22,206) --------- ---------- ---------- ---------- Pro forma net income $ 1,321 $ 9,335 $ 3,695 $ 8,902 ========= ========== ========== ========== Basic income per share: As reported $ 0.07 $ 0.19 $ 0.21 $ 0.35 Pro forma $ 0.02 $ 0.11 $ 0.05 $ 0.11 Diluted income per share: As reported $ 0.07 $ 0.15 $ 0.21 $ 0.30 Pro forma $ 0.02 $ 0.10 $ 0.05 $ 0.10 The fair value of the Company's stock plans was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for options granted in the following periods: Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Expected dividend yield 0% 0% 0% 0% Expected stock price volatility 43% 50% 43% 50% Risk-free interest rate 2.2% 3.2% 1.9% 3.2% Expected life in years 4.0 3.5 3.4 3.5 Note 6 - Gain on Investments On September 1, 1998, the Company sold GartnerLearning, a division of the Company that provided technology based training and services for IT professionals to NETg Inc. ("NETg"), a subsidiary of Harcourt, Inc. (formerly Harcourt Brace & Company), and recorded a pre-tax loss of approximately $2.0 million. In addition, the Company recorded an additional loss of $6.7 million during the twelve month period ended September 30, 2000 in connection with a negotiated settlement of a claim arising from the sale of GartnerLearning. The claim asserted that the Company had breached a contractual commitment under a joint venture agreement to co-produce a product when GartnerLearning was sold. During the second quarter of 2003, the Company received proceeds of approximately $5.5 million on an insurance claim associated with the 2000 negotiated settlement. Note 7 - Segment Information The Company manages its business in three reportable segments organized on the basis of differences in its products and services: Research, Consulting, and Events. Research consists primarily of subscription-based 9
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. The following tables present information about reportable segments (in thousands). The "Other" column consists primarily of software sales and certain other revenues and related expenses that do not meet the segment reporting quantitative thresholds. There are no inter-segment revenues. Research Consulting Events Other Consolidated --------- ---------- --------- --------- ------------ THREE MONTHS ENDED SEPTEMBER 30, 2003: Revenues $ 115,830 $ 62,998 $ 15,904 $ 2,172 $ 196,904 Gross Contribution 73,330 21,680 5,163 1,375 101,548 Corporate and other expenses (87,557) --------- Operating income $ 13,991 ========= THREE MONTHS ENDED SEPTEMBER 30, 2002: Revenues $ 122,575 $ 79,457 $ 14,987 $ 3,508 $ 220,527 Gross Contribution 79,149 33,608 6,508 2,646 121,911 Corporate and other expenses (92,790) --------- Operating income $ 29,121 ========= NINE MONTHS ENDED SEPTEMBER 30, 2003: Revenues $ 349,347 $ 191,302 $ 64,705 $ 9,150 $ 614,504 Gross Contribution 222,381 65,308 24,095 6,335 318,119 Corporate and other expenses (281,493) --------- Operating income $ 36,626 ========= NINE MONTHS ENDED SEPTEMBER 30, 2002: Revenues $ 366,929 $ 217,961 $ 62,525 $ 10,364 $ 657,779 Gross Contribution 241,777 83,897 28,479 6,544 360,697 Corporate and other expenses (298,269) --------- Operating income $ 62,428 ========= 10
Note 8 - Intangible Assets The following table presents the Company's intangible assets subject to amortization (in thousands): September 30, 2003 December 31, 2002 ---------------------------------- ---------------------------------- Accumulated Accumulated Gross Amortization Net Gross Amortization Net -------- ------------ -------- -------- ------------ -------- Non-compete agreements $ 13,062 $(12,235) $ 827 $ 12,910 $(11,157) $ 1,753 Trademarks & tradenames 1,811 (1,444) 367 1,808 (1,307) 501 -------- -------- -------- -------- -------- -------- Total $ 14,873 $(13,679) $ 1,194 $ 14,718 $(12,464) $ 2,254 ======== ======== ======== ======== ======== ======== Aggregate amortization expense for the three and nine-month periods ended September 30, 2003 was $0.3 million and $1.1 million, respectively. Aggregate amortization expense for the three and nine-month periods ended September 30, 2002 were $0.5 million and $1.4 million, respectively. The estimated future amortization expense of purchased intangibles is as follows (in thousands): 2003 (remaining three months) $ 210 2004 709 2005 182 2006 69 2007 24 ------ $1,194 ====== Note 9 - Other Charges During the first quarter of 2003, the Company recorded other charges of $5.4 million associated with workforce reductions initiated during that quarter. The charge was for costs for employee termination severance payments and related benefits. This workforce reduction resulted in the termination of 92 employees and the payment of $4.6 million during the nine months ended September 30, 2003. Other charges recorded in prior periods included: - - During Transition 2002, the Company recorded other charges of $32.2 million. Of these charges, $13.3 million related to estimated 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. Approximately $18.9 million of these charges were for employee termination severance payments and benefits associated with a workforce reduction, which resulted in the termination of 175 employees initiated during that period. During the nine months ended September 30, 2003, the Company paid $10.3 million of termination benefits associated with this workforce reduction. - - 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 leased facilities and ongoing lease costs and losses associated with sub-lease arrangements. Approximately $5.8 million of these charges were associated with the Company's workforce reduction initiated during that period and were for related employee termination severance payments and benefits. This workforce reduction resulted in the elimination of approximately 100 positions. The remaining $1.4 million related to the impairment of certain database-related assets. 11
- - During the twelve months ended September 30, 2001, the Company recorded other charges of $46.6 million. Of these charges, $24.8 million were associated with the Company's workforce reduction, which resulted in the elimination of 383 positions, initiated in April 2001. During the nine months ended September 30, 2003, the Company paid $0.1 million of termination severance payments and related benefits associated with this workforce reduction. Approximately $14.3 million of the other charges were 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. The following table summarizes the activity related to the liability for the restructuring programs recorded as other charges (in thousands): Workforce Excess Reduction Facilities Asset Costs Costs Impairments Total --------- ------- ----------- ------- Accrued Liability at December 31, 2001 $ 2,889 $ - $ - $ 2,889 Charges during nine months ended September 30, 2002 5,808 10,014 1,424 17,246 Non-cash charges (120) (2,663) (1,424) (4,207) Payments (7,919) (3,263) - (11,182) --------- ------- ------- ------- Accrued Liability at September 30, 2002 658 4,088 - 4,746 Charges during Transition 2002 18,899 13,267 - 32,166 Non-cash charges (601) (659) - (1,260) Payments (7,233) (760) - (7,993) --------- ------- ------- ------- Accrued Liability at December 31, 2002 11,723 15,936 - 27,659 Charges during nine months ended September 30, 2003 5,426 - - 5,426 Payments (15,038) (5,158) - (20,196) --------- ------- ------- ------- Accrued Liability at September 30, 2003 $ 2,111 $10,778 $ - $12,889 ========= ======= ======= ======= 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. The Company expects to pay the remaining workforce reduction costs by the end of the first quarter of 2004. Note 10 - Stock Repurchase Program On July 17, 2001, the Company's Board of Directors approved the repurchase of up to $75 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. On July 24, 2003, the Company's Board of Directors authorized an additional increase of $75 million in the stock repurchase program bringing the total authorization to date to $200 million. During the nine months ended September 30, 2003, the Company repurchased 3,018,240 shares of its Class A Common Stock and 1,040,785 shares of its Class B Common Stock at an aggregate cost of $32.4 million under this program. On a cumulative basis at September 30, 2003, the Company has purchased $116.1 million of its stock under this stock repurchase program. 12
Note 11 - Contingencies The Company is involved in legal proceedings and litigation arising in the ordinary course of business. The Company believes the outcome of all current proceedings, claims and litigation will not have a material effect on the Company's financial position or results of operations when resolved in a future period. The Company has various agreements in which it may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations related to such matters as title to assets sold and licensed or certain intellectual property rights. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of the Company's obligations and the unique facts of each particular agreement. Historically, payments made by the Company under these agreements have not been material. As of September 30, 2003, management was not aware of any indemnification agreements that would require material payments. Note 12 - Subsequent Event As announced on October 9, 2003, the Company converted into common stock the $300 million original face amount, 6% convertible subordinated notes held by Silver Lake Partners ("SLP") and other noteholders. The notes were converted, based upon a $7.45 conversion price, into 49,441,122 shares of Gartner Class A common stock, representing approximately 49.5% of Gartner Class A Common Stock outstanding and 38.4% of the total of Class A Common Stock and Class B Common Stock, based upon shares outstanding as of September 30, 2003 and giving effect to this conversion as if it had occurred on that date. The conversion was in accordance with the original terms of the notes. The transaction during October of 2003 resulted in converting the original face amount of $300 million plus accrued interest of $68.3 million into equity. The unamortized balances of debt issue costs of $2.8 million and debt discount of $0.3 million as of the conversion date will be netted against the outstanding principal and interest balances, resulting in a $365.2 million increase to stockholders' equity. Additionally, certain costs directly associated with the conversion will be charged to equity. 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of the following Management's Discussion and Analysis (MD&A) is to help facilitate the understanding of significant factors influencing the operating results, financial condition and cash flows of Gartner, Inc. Additionally, the MD&A also conveys our expectations of the potential impact of known trends, events or uncertainties that may impact future results. You should read this discussion in conjunction with our condensed consolidated financial statements and related notes included in this report and our consolidated financial statements and related notes in our Transition Report on Form 10-KT for the three month transition period ended December 31, 2002. Historical results and percentage relationships are not necessarily indicative of operating results for future periods. References to "the Company," "we," "our," and "us" are to Gartner, Inc. and its subsidiaries. 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 the quarters of 2002 are to the calendar quarters of 2002. FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as "may," "will," "expects," "should," "believes," "plans," "anticipates," "estimates," "predicts," "potential," "continue," or other words of similar meaning. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Factors That May Affect Future Results," "Euro Conversion," and elsewhere in this report and in our Transition Report on Form 10-KT for the three month transition period ended December 31, 2002. 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. 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. 14
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 committed business to be derived from in-process consulting, measurement and strategic advisory services engagements, for which future revenue is expected. CRITICAL ACCOUNTING POLICIES The preparation of financial statements requires the application of appropriate accounting policies. The policies discussed below are considered by management to be critical to an understanding of Gartner's financial statements because their application requires the most significant management judgments. Specific risks for these critical accounting policies are described below. REVENUE RECOGNITION - We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. 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. The majority of research contracts are billable upon signing, absent special terms granted on a limited basis from time to time. All research contracts are non-cancelable and non-refundable, except for government contracts that have a 30-day cancellation clause, but have not produced material cancellations to date. It is our policy to record the entire amount of the contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue, since the contract represents a legally enforceable claim. For those government contracts that permit termination, the Company bills the client the full amount billable under the contract but only records a receivable equal to the earned portion of the contract. In addition, the Company only records deferred revenue on these government contracts when cash is received. Deferred revenues attributable to government contracts were $40.8 million and $29.3 million at September 30, 2003 and December 31, 2002, respectively. In addition, at September 30, 2003 and December 31, 2002, the Company had not recognized uncollected receivables or deferred revenues, relating to government contracts that permit termination, of $6.8 million and $4.7 million, respectively. 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 15
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, and the quality of our collection efforts. Total trade receivables at September 30, 2003 were $228.3 million, against which an allowance for losses of approximately $7.0 million was provided. Total trade receivables at December 31, 2002 were $290.1 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 were $11.5 million and $10.7 million at September 30, 2003 and December 31, 2002, respectively. 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 requires an annual assessment for goodwill impairment. 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 value of a reporting unit is less than its carrying amount, we must recognize an impairment of our goodwill associated with such reporting unit in our financial statements. The carrying amount of goodwill at September 30, 2003 was $225.5 million. 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 in determining whether an impairment may exist include: significant under-performance relative to historical or projected future operating results, significant changes in the manner of our use of acquired assets or the strategy for our overall business, and significant negative industry or economic trends. Due to the numerous variables associated with our judgments and assumptions relating to the valuation of the reporting units and the effects of changes in circumstances affecting these valuations, both the precision and reliability of the resulting estimates are subject to uncertainty. 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 16
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, lease costs associated with excess facilities, contract terminations and asset impairments as a result of actions we undertake to streamline our organization, reposition certain businesses and reduce ongoing costs. Estimates of costs to be incurred to complete these actions, such as future lease payments, sublease income, the fair value of assets, and severance and related benefits, are based on assumptions at the time the actions are initiated. To the extent actual costs differ from those estimates, reserve levels may need to be adjusted. In addition, these actions may be revised due to changes in business conditions that we did not foresee at the time such plans were approved. RESULTS OF OPERATIONS OVERALL RESULTS TOTAL REVENUES decreased 11% in the third quarter of 2003 to $196.9 million compared to $220.5 million for the third quarter of 2002 and decreased 7%, or $43.3 million, when comparing the first nine months of 2003 to the first nine months of 2002. The decrease in total revenues was a result of a decline in demand throughout the entire technology sector and the overall weakness in the economy generally, partially offset by the positive effects of foreign currency exchange rates. Excluding the effects of foreign currency translation, revenues would have decreased 13% for the quarter and 10% for the nine-month period. The decrease in revenues for the third quarter of 2003 as compared to the third quarter of 2002 was due to a larger decrease in consulting revenues when comparing the quarterly periods as compared to the decrease on a year-to-date basis. Please refer to the section of this MD&A entitled "Segment Results" for a further discussion of revenues by segment. COST OF SERVICES AND PRODUCT DEVELOPMENT increased $0.9 million, or 1%, to $94.4 million in the third quarter of 2003 from $93.5 million in the third quarter of 2002 and increased 4%, or $12.3 million, when comparing the first nine months of 2003 to the first nine months of 2002. Excluding the effects of foreign currency translation, cost of services and product development would have decreased by 2% for the quarter and been relatively consistent when comparing the nine-month periods. The increase in cost of services and product development as a percentage of sales during 2003 resulted primarily from investments in Gartner EXP, Gartner G2, membership programs, product development and database management, higher conference related expenses, and lower utilization rates for our consulting practice. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $6.5 million, or 8%, to $79.2 million in the third quarter of 2003 from $85.7 million in the third quarter of 2002. SG&A expenses also decreased 5%, or $12.8 million, when comparing the first nine months of 2003 to the first nine months of 2002. The effects of foreign currency translation had minimal impact on the quarterly comparison, but SG&A would have decreased by 8% had it not been for the negative effect of foreign currency translation when comparing the nine-month periods. The decrease in SG&A was primarily the result of lower headcount and lower commission expenses, partially offset by the effects of foreign currency translation exchange rates. DEPRECIATION EXPENSE for the third quarter of 2003 decreased 22% to $9.0 million, compared to $11.7 million for the third quarter of 2002 and decreased 15%, or $4.7 million, when comparing the first nine months of 2003 to the first nine months of 2002. The decrease was due to a reduction in capital spending during 2002 and 2003 relative to the capital spending during 2000 and 2001, which has led to a decrease 17
in depreciation expense. In addition, costs capitalized during 2000 associated with the initial launch of the gartner.com web site in January 2001 have been fully depreciated as of the beginning of 2003. AMORTIZATION OF INTANGIBLES decreased when comparing the quarterly and nine month period ending September 30, 2003 to the same period in 2002 due to certain intangible assets having been fully amortized over the past year. OTHER CHARGES of $5.4 million during the first nine months of 2003 were for costs for employee termination severance and benefits associated with workforce reductions initiated during the first quarter of 2003. This workforce reduction has resulted in the termination of 92 employees, or approximately 2% of the Company's workforce. During the first nine months of 2002, other charges were $17.2 million. Of these charges, $10.0 million related to costs and losses associated with the elimination of excess facilities, principally leasehold improvements and ongoing lease costs and losses associated with sub-lease arrangements. In addition, approximately $5.8 million of these charges were associated with our workforce reduction initiated during the first quarter of 2002 and were for employee termination severance and benefits. This workforce reduction resulted in the termination of 92 employees, or approximately 2% of the Company's workforce at that time. We expect the payments associated with the workforce reduction to be completed by the end of the first quarter of 2004. The remaining $1.4 million of expenses recorded as other charges during 2003 relates to the impairment of certain database-related assets. We are funding all of these costs out of operating cash flows. INTEREST EXPENSE increased when comparing the quarterly and nine-month periods of 2003 to the same periods in 2002 due to the compounding of interest on our long-term convertible debt. GAIN (LOSS) ON INVESTMENTS for the nine months ended September 30, 2003 includes a $5.5 million insurance recovery received during the second quarter of 2003 associated with previously incurred losses arising from the sale of a business. The loss on investments for the nine month period ended September 30, 2002 was caused primarily by the recognition of impairment losses related to equity securities owned by us through two limited partnerships, SI I and SI II. SI I and SI II are venture capital funds engaged in making investments in early to mid-stage IT-based or Internet-enabled companies. We own 100% of SI I and 34% of SI II. OTHER (EXPENSE) INCOME, NET for the third quarter and the first nine months of 2003 consists primarily of net foreign exchange losses and gains. Other (expense) income, net for the third quarter of 2002 also consists primarily of net foreign exchange gains. For the nine months ended September 30, 2002, other (expense) income, net includes a $0.5 million gain from the sale of certain assets during the first quarter of 2002, partially offset by net foreign exchange losses. PROVISION FOR INCOME TAXES was 33.0% and 34.5% of income before income taxes for the three and nine months ended September 30, 2003, respectively. Excluding the effect of the insurance recovery, the tax rate for the nine months ended September 30, 2003 was approximately 33% as compared to 34% for the nine months ended September 30, 2002. The reduction in the effective tax rate for the 2003 year, as compared to the 2002 year, reflects the implementation of tax planning strategies. BASIC AND DILUTED INCOME PER COMMON SHARE was $0.07 for the third quarter of 2003, compared to $0.19 and $0.15, respectively, for the third quarter of 2002. Basic and diluted income per common share was $0.21 for the nine months ended September 30, 2003, and was $0.35 and $0.30, respectively, for the nine months ended September 30, 2002. For the first nine months of 2003, the insurance recovery received during the second quarter had a favorable impact of $0.03. Our restructuring costs recorded as other charges offset the favorable impact of the insurance recovery by unfavorably impacting diluted 18
income per share by $0.03. During the first nine months of 2002, the impairment of investments had an unfavorable impact of $0.01, and the restructuring charges during the first nine months of 2002 impacted diluted income per share by $0.09 unfavorably. SEGMENT RESULTS We evaluate reportable segment performance and allocate resources based on gross contribution margin. Gross contribution is defined as operating income excluding certain selling, general and administrative expenses, depreciation, amortization of intangibles and other charges. Gross contribution margin is defined as gross contribution as a percentage of revenues. RESEARCH Research revenues decreased 6% when comparing the third quarters of 2003 and 2002 and decreased 5% when comparing the first nine months of 2003 with the same period of 2002. Foreign currency exchange rates favorably impacted research revenues by 2% when comparing the quarterly periods and 4% when comparing the nine month periods. The decrease in research revenues was due to the overall weakness in the economy and the impact of this weakness on corporate information technology spending causing lower demand throughout the entire technology sector. Research gross contribution of $73.3 million for the third quarter of 2003 decreased 7% from $79.1 million for the third quarter of 2002, while gross contribution margin for the third quarter of 2003 decreased to 63% from 65% in the prior year period. For the nine months ended September 30, 2003, gross contribution decreased to $222.4 million, or a 64% contribution margin, from $241.8 million, or a 66% contribution margin. The decrease in gross contribution and gross contribution margin is a result of the lower revenues and costs associated with investments in Gartner EXP, Gartner G2, membership programs, product development and marketing and database management. Research contract value was $469.6 million at September 30, 2003, a decrease of 5% from $496.0 million at September 30, 2002; however, contract value increased sequentially from $468.5 million at June 30, 2003. At September 30, 2003, our client retention rates increased 1% to 76% as compared to the same measure at the end of the second quarter of 2003 and has increased 2% as compared to the same measure at the end of the first quarter of 2003. The decrease in contract value as compared to the prior year reflects a decline in demand throughout the entire technology and finance industries as our large clients in these industries continue to constrain their spending. CONSULTING Consulting revenues decreased 21% for the third quarter of 2003 and decreased 12% for the first nine months of 2003 as compared to the same periods of 2002. Foreign currency exchange rates had a positive impact of 3% on the quarterly comparison and 5% on the nine-month comparison. The decrease in revenues was caused by lower demand, which has resulted in lower billable headcount and lower utilization. Workforce reductions over the past year have resulted in reduced billable headcount in response to the lower demand in the technology sector. Billable headcount for our consulting business as of September 30, 2003 has decreased approximately 14% as compared to September 30, 2003. Consulting gross contribution of $21.7 million for the third quarter of 2003 decreased 35% from $33.6 million for the third quarter of 2002, and contribution margin for the third quarter of 2003 decreased to 34% from 42% in the prior year quarter. Gross contribution of $65.3 million for the first nine months of 2003 decreased 22% from $83.9 million for the same period of 2002, with contribution margin for the 19
period decreasing to 34% from 38%. The decrease in the gross contribution margin was primarily attributable to lower consultant utilization rates. Consulting backlog, which represents future revenues to be recognized from in-process consulting, measurement and strategic advisory services engagements decreased 14% to $92.8 million at September 30, 2003, compared to $107.6 million at September 30, 2002, but increased as compared to the June 30, 2003 backlog of 91.0 million. Consulting backlog decreased as compared to the prior year due to the decline in demand throughout the entire technology sector, as technology customers continue to constrain spending. EVENTS Events revenues increased 6% to $15.9 million for the third quarter of 2003, compared to $15.0 million for the third quarter of 2002, and increased 3% when comparing the first nine months of each year. Changes in foreign currency exchange rates had a 3% favorable impact on revenues when comparing both the quarterly and nine-month periods on a year over year basis. Revenues have increased slightly despite having three fewer events during the third quarter of 2003 as compared to the third quarter of 2002 and ten fewer on a year-to-date basis in 2003 as compared to 2002. The average revenue per event has increased during 2003 due to the strong performance of new events added during 2003 as compared to the events that were discontinued. Gross contribution of $5.2 million, or 32% of revenues, for the third quarter of 2003 decreased from $6.5 million, or 43% of revenues, for the third quarter of 2002. Gross contribution of $24.1 million, or 37% of revenues, for the first nine months of 2003 decreased from $28.5 million, or 46% of revenues, for the first nine months of 2002. The decrease in gross contribution margin was due primarily to increased personnel expenses and increased event marketing costs. During 2003, we have invested more in marketing and promoting our events to maintain our attendance levels during a weak economy, especially in the technology sector. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities totaled $115.9 million for the nine months ended September 30, 2003 compared to $144.7 million for the nine months ended September 30, 2002. The net decrease in cash flow from operating activities of $28.8 million was due primarily to lower operating income during 2003. Additionally, we incurred $9.0 million of higher payments relating to our restructuring programs during the first nine months of 2003 as compared to the first nine months of 2002. Partially offsetting these decreases in operating cash flow was improved working capital management, including improved collections of receivables. Cash used in investing activities was $12.4 million for the nine months ended September 30, 2003, compared to $20.4 million for the nine months ended September 30, 2002. The decrease was due primarily to the proceeds received from an insurance recovery of $5.5 million during 2003 associated with a previously incurred loss on a claim resulting from the sale of a business in 2000. Additionally, during 2002 we spent $4.0 million to purchase the remaining 49.9% of People 3, Inc. not previously owned by us. During each of the first nine months of 2003 and 2002, we funded $1.5 million of our investment commitment to SI II, reducing our remaining commitment as of September 30, 2003 to $4.4 million. Spending on property and equipment increased $1.1 million to $16.4 million during the first nine months of 2003 as compared to $15.3 million during the same period of 2002. 20
Cash used in financing activities totaled $12.0 million for the nine months ended September 30, 2003, compared to $29.4 million for the nine months ended September 30, 2002. We purchased $32.4 million of common stock for treasury during the first nine months of 2003 as compared to $46.0 million during the same period in the prior year. We received proceeds of $21.0 million from the exercise of stock options and the purchase of stock by employees participating in the employee stock purchase plan during the first nine months of 2003 as compared to $16.9 million during the same period in the prior year. We have a $200.0 million unsecured senior revolving credit facility led by JPMorgan Chase Bank. At September 30, 2003, 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 September 30, 2003 was $46.9 million. As discussed in the following paragraph, during October 2003 our convertible debt was converted into shares of Class A common stock. Upon conversion of our convertible debt, our borrowing availability under this credit facility is $200.0 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. ("SLP") and other noteholders. Interest accrued semi-annually by a corresponding increase in the face amount of the convertible notes. Accordingly, $68.0 million has been added to the face amount of the convertible notes' balance outstanding at September 30, 2003, resulting in a balance outstanding of $368.0 million on that date, before reducing this balance for unamortized debt discount of $0.4 million. These notes were due and payable on April 17, 2005. On October 7, 2003, we converted into common stock the 6% convertible subordinated notes held by SLP and other noteholders. The notes were converted based upon a $7.45 conversion price into 49,441,122 shares of Gartner Class A common stock. After the conversion, the noteholders own, in the aggregate, approximately 49.5% of Gartner Class A Common Stock outstanding and 38.4% of the total of Class A Common Stock and Class B Common Stock outstanding, based upon shares outstanding as of September 30, 2003 and giving effect of this conversion as if it had occurred on that date. The conversion resulted in converting the original face amount of $300 million plus accrued interest of $68.3 million to equity. The unamortized balances of debt issue costs of $2.8 million and debt discount of $0.3 million as of the conversion date will be netted with the debt balances, resulting in a net credit of $365.2 million dollars recorded as an increase to stockholders' equity. Additionally, costs directly associated with the conversion will be charged to equity. 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, other than 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 not more than 20% of the directors, and Class B Common Stock stockholders are entitled to one vote per share on the election of Class B directors, which constitute at least 80% of the directors. In addition, any Class B Common Stock holder who owns more than 15% of the outstanding Class B Common Stock, will not be able to vote all of his or her Class B Common Stock in the election of directors unless such holder owns an equivalent percentage of Class A Common Stock. We also issue letters of credit in the ordinary course of business. As of September 30, 2003, we had letters of credit outstanding with JPMorgan Chase Bank for $1.4 million, The Bank of New York for $2.0 million, and others for $0.1 million. 21
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, there can be no assurances that such capital will be available to us or will be available on commercially reasonable terms. Stock Repurchase Program On July 17, 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, our 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. On July 24, 2003, the Company's Board of Directors authorized an additional increase of $75 million in the stock repurchase program bringing the total authorization to date to $200 million. During the nine months ended September 30, 2003, we repurchased 3,018,240 shares of our Class A Common Stock and 1,040,785 shares of our Class B Common Stock at an aggregate cost of $32.4 million under this program. On a cumulative basis at September 30, 2003, the Company has purchased $116.1 million of its stock under this program. 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. BUSINESS AND TRENDS Our quarterly and annual revenue and operating income fluctuate as a result of many factors, including the timing of the execution of research contracts, the extent of completion of consulting engagements, the timing of Symposia and other events, all of which occur to a greater extent in the fourth quarter, the amount of new business generated, the mix of domestic and international business, changes in market demand for our products and services, the timing of the development, introduction and marketing of new products and services, and competition in the industry. The potential fluctuations in our operating income could cause period-to-period comparisons of operating results not to be meaningful and could provide an unreliable indication of future operating results. Over the past couple of years, we have seen a decrease in overall technology spending due to the economic environment. In response to the decrease in technology spending, we have attempted to constrain spending and have implemented cost reduction programs to reduce workforce and facilities costs. The timing of the cost reductions does not necessarily coincide with the timing of decreases in revenues, but is anticipated to provide future benefit in the form of lower expenses. While we have reduced certain costs, we also plan to maintain a level of spending sufficient for us to be in a position to grow if and when economic conditions improve. RECENT ACCOUNTING PRONOUNCEMENTS In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123." This amendment provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirement of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 22
is effective for fiscal years ending after December 15, 2002. We continue to account for stock-based compensation according to Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". The adoption of SFAS No. 148 in the first quarter of 2003 required us to provide prominent disclosures about the effects of SFAS No. 123 on reported income and required us to disclose these effects in the interim financial statements (see Note 5 to the Condensed Consolidated Financial Statements). In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, for hedging relationships designated after June 30, 2003, and to certain preexisting contracts. The adoption of SFAS No. 149 had no impact on our financial position, cash flows or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"). SFAS 150 changes the accounting for certain financial instruments that under previous guidance issuers could account for as equity. It requires that those instruments be classified as liabilities in balance sheets. The guidance in SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective on July 1, 2003. The adoption of SFAS 150 had no impact on our financial position, cash flows or results of operations. 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, 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 do business. As a result, additional new competitors may emerge and existing competitors 23
may start to provide additional or complementary services. Additionally, technological advances may provide increased competition from a variety of sources. However, we believe the breadth and depth of our research assets position us well versus our competition. Increased competition may result in loss of market share, diminished value in our products and services, reduced pricing and increased marketing expenditures. We may not be successful if we cannot compete effectively on quality of research and analysis, timely delivery of information, customer service, the ability to offer products to meet changing market needs for information and analysis, or price. Renewal of Research Business by Existing Clients. Some of our success depends on renewals of our subscription-based research products and services, which constituted 57% of total revenues for the first nine months of 2003 and 2002. These research subscription agreements have terms that generally range from twelve to thirty months. Our ability to maintain contract renewals is subject to numerous factors, including those described in this Quarterly Report. Client retention rates were 76% and 75% for the third quarters of 2003 and 2002, respectively. Any material decline in retention rates or the amount of spending by clients could have an adverse impact on our revenues and our financial condition. Non-Recurring Consulting Engagements. Consulting segment revenues constituted 31% and 33% of total revenues for the first nine months of 2003 and 2002, 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 Quarterly 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. 24
International Operations. A substantial portion of our revenues is derived from sales outside of North America. As a result, our operating results are subject to the risks inherent in international business activities, including general political and economic conditions in each country, changes in market demand as a result of exchange rate fluctuations and tariffs and other trade barriers, challenges in staffing and managing foreign operations, changes in regulatory requirements, compliance with numerous foreign laws and regulations, different or overlapping tax structures, higher levels of United States taxation on foreign income, and the difficulty of enforcing client agreements, collecting accounts receivable and protecting intellectual property rights in international jurisdictions. We rely on local distributors or sales agents in some international locations. If any of these arrangements are terminated 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. Indebtedness. We have a $200.0 million senior revolving credit facility under which we can incur significant additional indebtedness, although there were no amounts outstanding at September 30, 2003. 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 September 30, 2003 was $46.9 million, and subsequent to the conversion of our convertible debt in October 2003, our borrowing availability is $200.0 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. 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. 25
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. Potential Fluctuations in Operating Results. Our quarterly and annual operating income may fluctuate in the future as a result of many factors, including the timing of the execution of research contracts, which typically occurs in the fourth calendar quarter, the extent of completion of consulting engagements, the timing of symposia and other events, which also occur to a greater extent in the fourth calendar quarter, the amount of new business generated, the mix of domestic and international business, changes in market demand for our products and services, the timing of the development, introduction and marketing of new products and services, and competition in the industry. An inability to generate sufficient earnings and cash flow, and achieve our forecasts, may impact our operating and other activities. The potential fluctuations in our operating income could cause period-to-period comparisons of operating results not to be meaningful and may provide an unreliable indication of future operating results. Significant Stockholder. Silver Lake Partners, L.P. ("SLP") and their affiliates own approximately 46.7% of our Class A Common Stock and approximately 36.3% on a combined basis with our Class B Common Stock. Currently, the owners of our Class A Common Stock are only entitled to vote for two of the 10 members of our board of directors and vote together with the holders of the Class B Common Stock as a single class on all other matters coming before the stockholders. SLP is restricted from purchasing additional stock without our consent pursuant to the terms of a Securityholders' Agreement. This Securityholders' Agreement also provides that we cannot take certain actions, including acquisitions and sales of stock and/or assets without SLP's consent. While SLP does not hold a majority of our outstanding shares, it may be able to exercise significant influence over matters requiring stockholder approval, including the election of directors and the approval of mergers, consolidations and sales of our assets. SLP's interests may differ from the interests of other stockholders. Anti-takeover Protections. Provisions our certificate of incorporation and bylaws and Delaware law may make it difficult for any party to acquire control of us in a transaction not approved by the requisite number of directors. These provisions include: - the presence of a classified board of directors; - the existence of two classes of common stock with our Class B Common Stock having the ability to elect 80% of our Board of Directors - the ability of the board of directors to issue and determine the terms of preferred stock; 26
- advance notice requirements for inclusion of stockholder proposals at stockholder meetings; and - the anti-takeover provisions of Delaware law. These provisions could delay or prevent a change of control or change in management that might provide stockholders with a premium to the market price of their Common Stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk As of September 30, 2003, 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 $368.0 million of 6% convertible subordinated notes. At September 30, 2003, there were no amounts outstanding under the revolving credit facility and our borrowing availability was $46.9 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. Since our convertible debt has been converted to shares of our Class A Common Stock during October of 2003, a decrease in market interest rates would no longer have an associated opportunity cost. 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. As of September 30, 2003, we had investments in equity securities totaling $11.5 million. Unrealized gains and losses net of deferred taxes are recorded as a separate component of accumulated other comprehensive loss in the stockholders' deficit 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 poor operating results of the underlying investments may result in us incurring additional losses or an inability to recover the original carrying value of our investments. If there were a 100% adverse change in the value of our equity portfolio as of September 30, 2003, this would result in a non-cash impairment charge of $11.6 million. Additionally, we have a commitment to fund an additional $4.5 million of investments with SI I and SI II. 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 loss in the stockholders' 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 27
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 September 30, 2003, we had one foreign currency forward contract 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 contract outstanding as of September 30, 2003, expressed in millions of U.S. dollar equivalents. Currency Contract Forward Currency Purchased Sold Amount Rate Expiration Date - ------------------- ---------- ------ ------ ---------------- Great Britain Pound US Dollars $ 4.4 0.6051 October 27, 2003 The gains and losses on this contract at September 30, 2003 were not significant. ITEM 4. CONTROLS AND PROCEDURES We have established disclosure controls and procedures that are designed to ensure that the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized and reported in a timely manner. Specifically, these controls and procedures ensure that the information is accumulated and communicated to our executive management team, including our chief executive officer and our chief financial officer, to allow timely decisions regarding required disclosure. Management conducted an evaluation, as of September 30, 2003, of the effectiveness and design of our disclosure controls and procedures, under the supervision and with the participation of our chief executive officer and chief financial officer. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are effective in alerting them in a timely manner to material Company information required to be disclosed by us in reports filed under the Act. In addition, there have been no significant changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 28
PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ------------------------------------------------------------- 31.1 Certification of chief executive officer under Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of chief financial officer under Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification under Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K The Company filed a Report on Form 8-K dated July 31, 2003 to furnish the Company's press release issued July 31, 2003, with respect to financial results for Gartner, Inc. for the quarter ended June 30, 2003. The Company filed a Report on Form 8-K dated September 23, 2003 to furnish the Company's press release issued September 19, 2003, with respect to the Company's receipt of notice from holders holding $300 million of original aggregate principal amount of 6% convertible subordinated notes of their decision to convert 100% of the outstanding notes into approximately 49 million shares of Gartner's Class A Common Stock. Items 1, 2, 3, 4, and 5 of Part II 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 November 14, 2003 /s/ Christopher Lafond --------------------------------- Christopher Lafond Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 30
EXHIBIT 31.1 CERTIFICATION I, Michael D. Fleisher, certify that: (1) I have reviewed this Quarterly Report on Form 10-Q of Gartner, Inc.; (2) Based on my knowledge, this report 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 report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, 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 report; (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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Michael D. Fleisher - --------------------------------- Michael D. Fleisher Chief Executive Officer November 14, 2003
EXHIBIT 31.2 CERTIFICATION I, Christopher Lafond, certify that: (1) I have reviewed this Quarterly Report on Form 10-Q (the "10-Q") of Gartner, Inc.; (2) Based on my knowledge, this report 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 report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, 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 report; (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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Christopher Lafond - --------------------------------- Christopher Lafond Chief Financial Officer November 14, 2003
EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Gartner, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), as Chief Executive Officer of the Company and Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopteD pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael D. Fleisher - --------------------------------- Name: Michael D. Fleisher Title: Chief Executive Officer Date: November 14, 2003 /s/ Christopher Lafond - --------------------------------- Name: Christopher Lafond Title: Chief Financial Officer Date: November 14, 2003 A signed original of this written statement required by Section 906 has been provided to Gartner, Inc. and will be retained by Gartner, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.