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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 MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER: 000-21433
FORRESTER RESEARCH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2797789
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
400 TECHNOLOGY SQUARE
CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 613 - 6000
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 Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of May 8, 2003, 22,487,852 shares of the registrant's common stock were
outstanding.
1
FORRESTER RESEARCH, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 3
Consolidated Statements of Income for the Three Month Periods Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16
ITEM 4. Controls and Procedures 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities and Use of Proceeds 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security-Holders 18
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORRESTER RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
MARCH 31, DECEMBER 31,
2003 2002
--------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 23,916 $ 11,479
Marketable securities 116,708 183,152
Accounts receivable, net 22,624 17,791
Deferred commissions 4,732 3,524
Prepaid expenses and other current assets 8,144 5,902
--------- ---------
Total current assets 176,124 221,848
Long-term assets:
Property and equipment, net 12,002 10,674
Goodwill 69,251 13,244
Intangible assets, net 19,320 760
Deferred income taxes 20,902 21,630
Non-marketable investments and other assets 12,313 10,117
--------- ---------
Total long-term assets 133,788 56,425
--------- ---------
Total assets $ 309,912 $ 278,273
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,299 $ 1,601
Accrued expenses 29,384 20,681
Capital lease obligations 208 --
Deferred revenue 67,392 42,123
--------- ---------
Total current liabilities 99,283 64,405
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value
Authorized-- 500 shares
Issued and outstanding-- none
Common stock, $.01 par value
Authorized -- 125,000 shares
Issued -- 24,091 and 24,045 shares as of March 31, 2003 and December 31,
2002, respectively
Outstanding-- 22,501 and 22,841 shares as of March 31, 2003 and December 31, 2002,
respectively 241 240
Additional paid-in capital 168,538 167,935
Retained earnings 66,531 64,754
Treasury stock, at cost-- 1,590 and 1,204 shares as of March 31, 2003 and December
31, 2002, respectively (25,330) (20,085)
Accumulated other comprehensive income 649 1,024
--------- ---------
Total stockholders' equity 210,629 213,868
--------- ---------
Total liabilities and stockholders' equity $ 309,912 $ 278,273
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
-------- --------
(UNAUDITED)
Revenues:
Research services $ 18,821 $ 19,810
Advisory services and other 5,976 6,246
-------- --------
Total revenues 24,797 26,056
-------- --------
Operating expenses:
Cost of services and fulfillment 9,525 8,981
Selling and marketing 8,067 8,472
General and administrative 3,308 3,326
Depreciation 1,693 2,066
Amortization of intangible assets 924 82
Reorganization costs -- 9,088
-------- --------
Total operating expenses 23,517 32,015
-------- --------
Income (loss) from operations 1,280 (5,959)
Other income (expense):
Other income, net 1,595 1,560
Impairments of non-marketable investments (300) (2,248)
-------- --------
Income (loss) before income tax provision
(benefit) 2,575 (6,647)
Income tax provision (benefit) 798 (532)
-------- --------
Net income (loss) $ 1,777 $ (6,115)
======== ========
Basic net income (loss) per common share $ 0.08 $ (0.26)
======== ========
Diluted net income (loss) per common share $ 0.08 $ (0.26)
======== ========
Basic weighted average common shares outstanding 22,739 23,146
======== ========
Diluted weighted average common shares outstanding 22,920 23,146
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002
--------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss) $ 1,777 $ (6,115)
Adjustments to reconcile net income (loss) to net cash provided by operating activities--
Depreciation 1,693 2,066
Amortization of intangible assets 924 82
Impairments of non-marketable investments 300 2,248
Loss on disposals of property and equipment -- 92
Tax benefit from exercises of employee stock options 81 --
Deferred income taxes 728 (532)
Non-cash reorganization costs -- 2,772
Realized gain on sale of marketable securities (509) --
Amortization of premium on marketable securities 207 158
Changes in assets and liabilities, net of acquisition--
Accounts receivable 5,803 9,579
Deferred commissions 192 621
Prepaid expenses and other current assets (169) (740)
Accounts payable (807) (611)
Accrued expenses (5,657) (1,291)
Deferred revenue (925) (6,519)
--------- ---------
Net cash provided by operating activities 3,638 1,810
--------- ---------
Cash flows from investing activities:
Acquisition of Giga Information Group, Inc., net of cash acquired (51,549) --
Purchases of property and equipment (69) (244)
Purchases of non-marketable investments (1,250) (1,675)
Decrease in other assets 123 139
Purchases of marketable securities (77,884) (21,782)
Proceeds from sales and maturities of marketable securities 144,196 18,202
--------- ---------
Net cash provided by (used in) investing activities 13,567 (5,360)
--------- ---------
Cash flows from financing activities:
Proceeds from exercises of employee stock options 523 2,421
Acquisition of treasury stock (3,245) (3,547)
Structured stock repurchase (2,000) --
--------- ---------
Net cash used in financing activities (4,722) (1,126)
Effect of exchange rate changes on cash and cash equivalents (46) 23
--------- ---------
Net increase (decrease) in cash and cash equivalents 12,437 (4,653)
Cash and cash equivalents, beginning of period 11,479 17,747
--------- ---------
Cash and cash equivalents, end of period $ 23,916 $ 13,094
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 605 $ 1,804
--------- ---------
On February 28, 2003, Forrester acquired Giga Information Group, Inc. as follows--
Fair value of assets acquired $ 99,027 $ --
Purchase price (62,477) --
--------- ---------
Liabilities assumed $ 36,550 $ --
========= =========
The accompanying notes are an integral part of these consolidated financial
statements
5
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") for
reporting on Form 10-Q. Accordingly, certain information and footnote
disclosures required for complete financial statements are not included herein.
It is recommended that these financial statements be read in conjunction with
the consolidated financial statements and related notes that appear in the
Annual Report of Forrester Research, Inc. ("Forrester") as reported on Form 10-K
for the year ended December 31, 2002. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of the financial position, results of operations, and
cash flows as of the dates and for the periods presented have been included. The
results of operations for the period ended March 31, 2003 may not be indicative
of the results that may be expected for the year ended December 31, 2003, or any
other period. Certain amounts in the prior period financial statements have been
reclassified to conform to the current year's presentation.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, requires the measurement of the fair value of stock
options or warrants to be included in the statement of income or disclosed in
the notes to financial statements. Forrester has determined it will continue to
account for stock-based compensation for employees under Accounting Principles
Board Opinion ("APB") No. 25 and elect the disclosure-only alternative under
SFAS No. 123. There is no compensation expense related to option grants
reflected in the accompanying financial statements.
If compensation cost for Forrester's stock option plans had been determined
using the fair value method prescribed in SFAS No. 123, net income (loss) for
the three months ended March 31, 2003 and 2002 would have been approximately as
follows (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
------- -------
(IN THOUSANDS)
Net income (loss) as reported $ 1,777 $(6,115)
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards (1,130) (1,828)
------- -------
Pro-forma net income (loss) $ 647 $(7,943)
======= =======
Basic and diluted net income (loss) per share - as
reported $ 0.08 $ (0.26)
------- -------
Basic and diluted net income (loss) per share - pro
forma $ 0.03 $ (0.34)
======= =======
Income Taxes
Forrester provides for income taxes on an interim basis according to
management's estimate of the effective tax rate expected to be applicable for
the full fiscal year ending December 31.
NOTE 2 - ACQUISITION OF GIGA
In the first quarter of 2003, Forrester acquired Giga Information Group, Inc.
("Giga"), a global technology advisory firm, pursuant to a cash tender offer and
second step merger. The acquisition increased agreement value and the number of
client companies and is expected to reduce operating expenses of the combined
entity through economies of scale. The aggregate purchase price was $62,477,000
in cash which consisted of $60,347,000 for the acquisition of all outstanding
shares of Giga common stock of which $56,056,000 was paid in March 2003;
$947,000 of estimated direct acquisition costs of which $744,000 were paid
during the three months ended March 31, 2003; and $1,183,000 for severance
related to 27 employees of Giga terminated as a result of the acquisition of
which $51,000 was paid during the three months ended March 31, 2003. The results
of Giga's operations have been included in Forrester's consolidated financial
statements since February 28, 2003.
6
The following table summarizes the estimated fair values of the Giga assets
acquired and liabilities assumed at the date of acquisition. Forrester is in
the process of determining whether electing to treat this transaction as an
asset purchase for tax purposes would be beneficial; accordingly, the
allocation of the purchase price is subject to refinement, and the
deductibility of the acquired intangibles for tax purposes is unknown as of
March 31, 2003. The allocation of the purchase price is expected to be
completed during the three month period ended June 30, 2003.
FEBRUARY 28,
2003
--------------
(IN THOUSANDS)
Assets
Cash $ 5,302
Accounts receivable 10,458
Prepaid expenses and other current assets 3,457
Property and equipment, net 2,952
Goodwill 56,007
Intangible assets 19,484
Non-marketable investments and other assets 1,367
-------
Total assets $99,027
-------
Liabilities
Accounts payable $ 1,485
Accrued expenses 8,672
Capital lease obligations 208
Deferred revenue 26,185
-------
Total liabilities $36,550
-------
Net assets acquired $62,477
=======
The acquired intangible assets are being amortized using an accelerated method
according to the expected cash flows to be received from the underlying assets
over their respective lives as follows:
ASSIGNED USEFUL
VALUE LIFE
------- -------
(IN THOUSANDS)
Amortized intangible assets
Customer relationships $17,071 5 years
Research content 1,844 1 year
Registered trademarks 570 1 year
-------
Subtotal $19,484
=======
Amortization expense during the three months ended March 31, 2003 related to the
intangible assets acquired from Giga was $842,000.
The following table presents pro forma financial information as if the
acquisition of Giga had been completed as of January 1, 2002.
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2003 2002
--------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $34,310 $ 41,745
Income (loss) from operations $ 837 $ (7,279)
Net income (loss) $ 995 $ (4,754)
Basic net income (loss) per common share $ 0.04 $ (0.21)
Diluted net income (loss) per common share $ 0.04 $ (0.21)
7
NOTE 3 - INTANGIBLE ASSETS
A summary of Forrester's amortizable intangible assets as of March 31, 2003 is
as follows:
GROSS CARRYING ACCUMULATED NET
AMOUNT AMORTIZATION CARRYING AMOUNT
-------------- ------------ ---------------
(IN THOUSANDS)
Amortized intangible assets:
Customer relationships $17,971 $ 963 $17,008
Research content 2,444 654 1,790
Registered trademarks 570 47 522
------- ------- -------
Subtotal $20,984 $ 1,664 $19,320
======= ======= =======
Amortization expense related to identifiable intangible assets was approximately
$924,000 and $82,000 during the three months ended March 31, 2003 and 2002,
respectively. Estimated amortization expense related to identifiable intangible
assets that will continue to be amortized is as follows:
AMOUNTS
(IN THOUSANDS)
--------------
Remaining nine months ending December 31, 2003 $ 7,775
Year ending December 31, 2004 5,541
Year ending December 31, 2005 2,998
Year ending December 31, 2006 1,785
Year ending December 31, 2007 1,074
Year ending December 31, 2008 147
-------
Total $19,320
=======
NOTE 4 - REORGANIZATIONS
On July 24, 2002, Forrester announced a reduction of its work force by
approximately 21 positions in response to conditions and demands of the market.
As a result, Forrester recorded a reorganization charge of approximately $2.6
million in the three months ended September 30, 2002. Approximately 31% of the
terminated employees had been members of the sales force, while 41% and 28% had
held research and administrative roles, respectively. The charge consisted
primarily of severance and related benefits costs, office consolidation costs,
such as contractual lease commitments for space that was vacated, the write-off
of related leasehold improvements, and other payments for professional services
incurred in connection with the reorganization. Additional depreciable assets
that were written off consisted primarily of computer equipment, software and
furniture and fixtures related to vacated locations in connection with the
reorganization.
The costs related to the July 24, 2002 reorganization which were paid during
the three months ended March 31, 2003 are as follows:
ACCRUED AS OF ACCRUED AS OF
DECEMBER 31, CASH MARCH 31,
2002 PAYMENTS 2003
------------- -------- -------------
(IN THOUSANDS)
Workforce reduction $ 51 $ 51 $ --
Facility consolidation and other
related costs 661 60 601
---- ---- ----
Total $712 $111 $601
==== ==== ====
The accrued costs related to the July 24, 2002 reorganization are expected to be
paid in the following periods:
ACCRUED AS OF
2003 2004 2005 2006 MARCH 31, 2003
---- ---- ---- ----- --------------
(IN THOUSANDS)
Facility consolidation and other
related costs $149 $193 $183 $ 76 $601
On January 10, 2002, Forrester announced a reduction of its work force by
approximately 126 positions in response to conditions and demands of the market
and a slower economy. As a result, Forrester recorded an initial reorganization
charge of approximately $9.3 million in the three months ended March 31, 2002.
Approximately 39% of the terminated employees had been members of the sales
force, while 33% and 28% had held research and administrative roles,
respectively. The initial charge consisted primarily of severance and related
benefits costs, office consolidation costs, such as contractual lease
commitments for space that was vacated, the write-off of related leasehold
improvements, and other payments for
8
professional services incurred in connection with the reorganization. Additional
depreciable assets that were written off included computer equipment, software,
and furniture and fixtures related to terminated employees and vacated locations
in connection with the reorganization.
During the three months ended September 30, 2002, Forrester revised the
estimates of the January 10, 2002 reorganization charge to provide for
additional losses for office consolidation costs and the write-off of related
leasehold improvements due to deteriorating real estate market conditions. As a
result, Forrester recorded an additional reorganization charge during the three
months ended September 30, 2002 of approximately $593,000. Forrester also
concluded that approximately $74,000 of the initial reorganization charge
associated with severance was excess, and accordingly, reversed that amount
through reorganization costs in the statement of income during the three months
ended September 30, 2002.
Total costs related to the January 10, 2002 reorganization are as follows:
TOTAL
INITIAL SUBSEQUENT NON-CASH CASH ACCRUED AS OF CASH ACCRUED AS OF
CHARGE REVISION CHARGES PAYMENTS DECEMBER 31, 2002 PAYMENTS MARCH 31, 2003
------ ---------- -------- -------- --------------------- -------- --------------
(IN THOUSANDS)
Workforce reduction $3,545 $ (74) $ -- $3,471 $ -- $ -- $ --
Facility consolidation and other
related costs 2,934 502 -- 598 2,838 430 2,408
Depreciable assets 2,772 91 2,863 -- -- -- --
------ ------ ------ ------ ------ ------ -------
Total $9,251 $ 519 $2,863 $4,069 $2,838 $ 430 $ 2,408
====== ====== ====== ====== ====== ====== =======
The accrued costs related to the January 10, 2002 reorganization are expected to
be paid in the following periods:
ACCRUED AS OF
2003 2004 2005 2006 MARCH 31, 2003
------ ------ ------ ------ --------------
(IN THOUSANDS)
Facility consolidation and other
related costs $ 754 $1,011 $ 416 $ 227 $2,408
On July 12, 2001, Forrester announced a sales force reorganization and general
work force reduction in response to conditions and demands of the market and a
slower economy and recorded a reorganization charge of approximately $3.1
million in the three months ended September 30, 2001. This charge consisted
primarily of severance and related benefits costs from the work force reduction.
This charge also included office consolidation costs, such as contractual lease
commitments for space that was vacated, the write-off of related leasehold
improvements, and other payments for professional services incurred in
connection with the reorganization. Additional depreciable assets that were
written off included computer equipment, software, and furniture and fixtures
related to terminated employees and vacated locations in connection with the
reorganization. During the three months ended March 31, 2002, management
concluded that approximately $163,000 of the reorganization charge was excess,
and accordingly, reversed that amount through reorganization costs in the
statement of income during that period.
NOTE 5 - NET INCOME PER COMMON SHARE
Basic and diluted net loss per common share for the three months ended March 31,
2002 were computed by dividing net loss by the basic weighted average number of
common shares outstanding during the period. Diluted net income per common share
for the three months ended March 31, 2003 was computed by dividing net income by
the diluted weighted average number of common shares outstanding during the
period. The weighted average number of common equivalent shares outstanding has
been determined in accordance with the treasury-stock method. Common stock
equivalents consist of common stock issuable on the exercise of outstanding
options when dilutive. A reconciliation of basic to diluted weighted average
shares outstanding is as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
------ ------
(IN THOUSANDS)
Basic weighted average common shares outstanding 22,739 23,146
Weighted average common equivalent shares 181 --
------ ------
Diluted weighted average shares outstanding 22,920 23,146
====== ======
During the three-month periods ended March 31, 2003 and 2002, approximately
3,065,000 and 3,244,000 stock options, respectively, were excluded from the
calculation of diluted weighted average shares outstanding as the effect would
have been anti-dilutive.
9
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income (loss) for the three month periods
ended March 31, 2003 and 2002 are as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
-------- --------
(IN THOUSANDS)
Unrealized gain on marketable securities, net of taxes $ (434) $ (742)
Cumulative translation adjustment 59 105
-------- --------
Total other comprehensive loss $ (375) $ (637)
Reported net income (loss) 1,777 (6,115)
-------- --------
Total comprehensive income (loss) $ 1,402 $ (6,752)
======== ========
NOTE 7 - NON-MARKETABLE INVESTMENTS
In June 2000, Forrester committed to invest $20.0 million in two private equity
investment funds over a period of up to five years. During the three months
ended March 31, 2002 and 2003, Forrester contributed approximately $1.7 million
and $1.3 million to these investment funds, respectively, resulting in total
cumulative contributions of approximately $13.5 million to date. One of these
investments is being accounted for using the cost method and, accordingly, is
valued at cost unless an other than temporary impairment in its value occurs or
the investment is liquidated. The other investment is being accounted for using
the equity method. The carrying value of the investment funds as of March 31,
2003 was approximately $8.6 million. During the three months ended March 31,
2002 and 2003, Forrester recorded impairments to these investments of
approximately $784,000 and $300,000, respectively, which are included in the
consolidated statements of income, increasing the total cumulative impairments
recorded to approximately $3.6 million as of March 31, 2003. During the three
months ended March 31, 2002 and 2003, fund management charges of approximately
$121,000 were included in other income (expense) in the consolidated statements
of income, bringing the total cumulative fund management charges paid by
Forrester to approximately $1.3 million. Fund management charges are recorded as
a reduction of the investments' carrying value. Forrester has adopted a cash
bonus plan to pay bonuses, after the return of invested capital, measured by the
proceeds of a portion of its share of net profits from these investments, if
any, to certain key employees, subject to the terms and conditions of the plan.
The payment of such bonuses would result in compensation expense with respect to
the amounts so paid.
The timing of the recognition of future gains or losses from these investment
funds is beyond Forrester's control. As a result, it is not possible to predict
when Forrester will recognize such gains or losses, if Forrester will award cash
bonuses based on the net profit from such investments, or when Forrester will
incur compensation expense in connection with the payment of such bonuses. If
the investment funds realize large gains or losses on their investments,
Forrester could experience significant variations in its quarterly results
unrelated to its business operations. These variations could be due to
significant gains or losses or to significant compensation expenses. While gains
may offset compensation expenses in a particular quarter, there can be no
assurance that related gains and compensation expenses will occur in the same
quarters.
As part of the acquisition of Giga discussed in Note 2, Forrester acquired an
equity investment in GigaGroup S.A. GigaGroup S.A. was created in 2000 through
the spin-off of Giga's French subsidiary, and holds an exclusive agreement to
distribute all Giga research and services in France, Belgium, Netherlands,
Luxemburg, Switzerland, Italy, Spain, and Portugal. In November 2002, GigaGroup
S.A. acquired CXP International, a provider of IT advisory services in France.
As a result, Giga owned 11.4% of the combined enterprise. The fair value of the
equity investment acquired as a result of the acquisition of Giga was valued at
approximately $1.2 million. This investment is being accounted for using the
cost method and, accordingly, is being valued at cost unless a permanent
impairment in its value occurs or the investment is liquidated.
In September 2001, Forrester sold its Internet AdWatch product to Evaliant Media
Resources, LLC ("Evaliant"), a privately held international provider of online
advertising data, in exchange for membership interests in Evaliant representing
approximately an 8% ownership interest. The investment in Evaliant was accounted
for using the cost method and, accordingly, was valued at cost unless an
impairment in its value that is other than temporary occurred or the investment
was liquidated. In March 2002, Forrester determined that its investment had been
impaired. As a result, Forrester recorded a write-down of approximately
$1,464,000, which was included in the consolidated statement of income during
the three months ended March 31, 2002, reducing the carrying value to
approximately $250,000. Substantially all of Evaliant's assets were sold in June
2002 resulting in no gain or loss to Forrester on the transaction.
NOTE 8 - STOCK REPURCHASE
In October 2001, Forrester announced a program authorizing the repurchase of up
to $50 million of its common stock. The shares repurchased may be used, among
other things, in connection with Forrester's employee stock option and stock
purchase plans and for potential acquisitions. During the three months ended
March 31, 2003, Forrester repurchased 242,135 shares of common stock at an
aggregate cost of approximately $3.2 million.
During the three months ended December 31, 2002, Forrester entered into a
structured stock repurchase agreement giving it the right to acquire shares of
Forrester common stock in exchange for an up-front net payment of $2.0 million
which was recorded in stockholders equity as a reduction of additional paid in
capital as of December 31, 2002. Upon expiration of the agreement in February
2003, Forrester received 144,291 shares of Forrester common stock and
reclassified the up-front net payment from additional paid-in capital to
treasury stock.
During the three months ended March 31, 2003, Forrester entered into a similar
agreement in exchange for an up-front net payment of $2.0 million expiring in
June 2003. Pursuant to the agreement, if Forrester's stock price is above $12.47
on the expiration date, Forrester will have the investment
10
of $2.0 million returned with a premium. If Forrester's stock price is below
$12.47 on the expiration date, Forrester will receive approximately 169,000
shares of Forrester common stock. The $2.0 million up-front net payment is
recorded in stockholder's equity as a reduction of additional paid-in capital in
the accompanying consolidated balance sheet.
NOTE 9 - SEGMENT AND ENTERPRISE WIDE REPORTING
As of January 1, 2002, Forrester implemented a structure under which its
operations are managed within the following four operating groups ("Operating
Groups"): (i) North America, (ii) Europe, (iii) Global, and (iv) Asia, Middle
East, Africa, and Latin America ("Asia, MEA, and Latin America"). The operations
of Giga are currently being assimilated into these existing Operating Groups.
All of the Operating Groups generate revenues through sales of the same core
research, strategic services, and events offerings. Each of the Operating Groups
for North America, Europe, and Asia, MEA, and Latin America is comprised of
sales forces responsible for clients located in such Operating Group's region
and research personnel focused primarily on issues generally more relevant to
clients in that region. The Global Operating Group is comprised of a sales force
responsible for Forrester's largest clients, and its research staff focuses on
topics of more universal appeal. Because the four Operating Groups have similar
economic characteristics, production processes, and class of client, provide
similar products and services, and use similar distribution methods, they are
aggregated for presentation in Forrester's financial statements. Accordingly,
the financial information disclosed in the consolidated statements of income for
the three months ended March 31, 2003 and 2002 represent the aggregation of the
Operating Groups.
Net revenues by geographic client location and as a percentage of total revenues
are as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
------- -------
(IN THOUSANDS)
United States $17,915 $18,671
United Kingdom 2,035 2,374
Europe (excluding United Kingdom) 2,305 2,407
Canada 925 788
Other 1,617 1,816
------- -------
$24,797 $26,056
======= =======
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
------ ------
United States 72% 72%
United Kingdom 8 9
Europe (excluding United Kingdom) 9 9
Canada 4 3
Other 7 7
--- ---
100% 100%
=== ===
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") issued EITF No. 00-21,
Revenue Arrangements with Multiple Deliverables. Under EITF 00-21, revenues for
contracts which contain multiple deliverables are allocated among the separate
units based on their relative fair values. The provisions of EITF 00-21 are
effective for contracts entered into in fiscal periods beginning after June 15,
2003. Forrester is currently evaluating the impact, if any, of EITF 00-21 on
Forrester's consolidated financial position and results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation for Variable Interest Entities, an
Interpretation of ARB No. 51 which requires all variable interest entities
("VIEs") to be consolidated by the primary beneficiary. The primary beneficiary
is the entity that holds the majority of the beneficial interest in the VIE. In
addition, the interpretation expands the disclosure requirements for both
variable interest entities that are consolidated as well as VIEs from which the
entity is the holder of a significant amount of beneficial interests, but not
the majority. FIN 46 is effective for all VIEs created or acquired after January
31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period beginning after
June 15, 2003. The adoption of this interpretation is not expected to be
material to Forrester's consolidated financial position or results of
operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Words such
as "expects," "believes," "anticipates," "intends," "plans," "estimates," or
similar expressions are intended to identify these forward-looking statements.
These statements are based on our current plans and expectations and involve
risks and uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual results to
differ materially from those indicated by forward-looking statements include,
among others, our ability to successfully integrate Giga into our operations,
the ability to attract and retain qualified professional staff, fluctuations in
our quarterly operating results, a decline in renewals for our membership-based
core research, loss of key management, failure to anticipate and respond to
market trends, our ability to develop and offer new products and services, and
competition. This list of factors is not exhaustive. Other risks and
uncertainties are discussed elsewhere in this report and in further detail under
the caption entitled "Risks and Uncertainties" included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 which has been filed with
the SEC. We undertake no obligation to update publicly any forward looking
statements, whether as a result of new information, future events, or otherwise.
Unless the context otherwise requires, references in this Quarterly Report to
"we," "us," and "our" refer to Forrester Research, Inc. and its Subsidiaries.
We are a leading independent emerging-technology research firm that conducts
research and analysis on the impact of emerging technologies on business,
consumers, and society. We provide our clients with an integrated perspective on
technology and business, which we call the WholeView. This approach provides
companies with the strategies, data, and product evaluations they need to win
customers, identify new markets, and gain competitive operational advantages.
Our products and services primarily are targeted to benefit the senior
management, business strategists, and marketing and technology professionals at
$1 billion-plus companies who use our prescriptive, executable research to
understand and capitalize on business models and emerging technologies.
In the first quarter of 2003, Forrester acquired Giga Information Group, Inc.
("Giga"), a global technology advisory firm, pursuant to a cash tender offer and
second step merger. Giga provides objective research, pragmatic advice and
personalized consulting on technology information. Emphasizing close interaction
among analysts and clients, Giga enables companies to make better strategic
decisions that are designed to maximize technology investments and achieve
business results. The results of Giga's operations have been included in
Forrester's consolidated financial statements since February 28, 2003.
As a combined entity, we continue to derive revenues from memberships to our
research services, from our advisory services, and from our events and
conferences. We offer contracts for our products and services that are typically
renewable annually and payable in advance. Accordingly, a substantial portion of
our billings are initially recorded as deferred revenue. Research revenues are
recognized ratably over the term of the contract. Accordingly, a substantial
portion of our billings is recorded as deferred revenues. Our advisory services
clients purchase such services to supplement their memberships to our research.
Billings attributable to advisory services are initially recorded as deferred
revenue and recognized as revenue when performed. Event billings are also
initially recorded as deferred revenue and are recognized upon completion of
each event. Consequently, changes in the number and value of client contracts,
both net decreases as well as net increases, impact our revenues and other
results over a period of several months.
Our operating expenses consist of cost of services and fulfillment, selling and
marketing expenses, general and administrative expenses, and depreciation and
amortization. Cost of services and fulfillment represents the costs associated
with the production and delivery of our products and services, and it includes
the costs of salaries, bonuses, and related benefits for research personnel and
all associated editorial, travel, and support services. Selling and marketing
expenses include salaries, employee benefits, travel expenses, promotional
costs, sales commissions, and other costs incurred in marketing and selling our
products and services. General and administrative expenses include the costs of
the technology, operations, finance, and strategy groups and our other
administrative functions. Depreciation expense represents the depreciation of
our fixed assets over their estimated useful lives. Amortization of intangible
assets represents amortization of our identifiable intangible assets acquired
from our acquisitions.
We believe that the "agreement value" of contracts to purchase research and
advisory services provides a significant measure of our business volume. We
calculate agreement value as the total revenues recognizable from all research
and advisory service contracts in force at a given time, without regard to how
much revenue has already been recognized. Agreement value increased
approximately 38% to $124.1 million as of March 31, 2003 from $90.1 million as
of March 31, 2002 and increased approximately 51% from $78.1 million as of
December 31, 2002. The increase in agreement value is attributable to the
acquisition of Giga in February 2003 which accounted for $55.2 million of
agreement value as of March 31, 2003. No clients accounted for more than 2% of
agreement value at March 31, 2003 or March 31, 2002. In past years, a
substantial portion of our client companies renewed expiring contracts.
Approximately 62% of Forrester client companies with memberships expiring during
the twelve months ended March 31, 2003 renewed one or more memberships for our
products and services, compared with 50% of client companies with memberships
expiring during the twelve months ended March 31, 2002. The acquisition of Giga
accounted for 3% of the increase in renewal rates. Renewal rates are not
necessarily indicative of the rate of future retention of our revenue base.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including but
not limited to, those related to our revenue recognition, allowance for doubtful
accounts, non-marketable investments, and goodwill and other intangible assets
and income taxes. Management bases its estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We have identified the following policies as critical to our business operations
and the understanding of our results of operations. This is not a comprehensive
list of all of our accounting policies. In many cases, the accounting treatment
of a particular transaction is specifically dictated by generally accepted
accounting principles, with no need for management's judgment in their
application. There are also areas in which management's judgment in selecting
any available alternative would not produce a materially different result. For
further discussion of the application of these and
12
our other accounting policies, see Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Notes to Consolidated
Financial Statements in our December 31, 2002 Annual Report on Form 10-K,
previously filed with the SEC.
- - REVENUE RECOGNITION. We generally invoice our research services,
advisory services, and other services when orders are received. The
contract amount is recorded as accounts receivable and deferred revenue
when the client is invoiced. Research services are generally recorded
as revenue ratably over the term of the agreement. Advisory services
and other services are recognized during the period in which the
services are performed. Furthermore, our revenue recognition determines
the timing of commission expenses that are deferred and expensed to
operations as the related revenue is recognized. We evaluate the
recoverability of deferred commissions at each balance sheet date. As
of March 31, 2003, deferred revenues and deferred commissions totaled
$67.4 million and $4.7 million, respectively.
- - ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our
customers to make contractually obligated payments that totaled
approximately $1.4 million as of March 31, 2003. Management
specifically analyzes accounts receivable and historical bad debts,
customer concentrations, current economic trends, and changes in our
customer payment terms when evaluating the adequacy of the allowance
for doubtful accounts. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
- - NON-MARKETABLE INVESTMENTS. We hold minority interests in companies and
equity investment funds that totaled approximately $12.1 million as of
March 31, 2003. Our investments are in companies that are not publicly
traded, and, therefore, no established market for these securities
exists. We have a policy in place to review the fair value of our
investments on a regular basis to evaluate the carrying value of the
investments in these companies. We record impairment charges when we
believe that an investment has experienced a decline in value that is
other than temporary. We recorded impairment charges that totaled
approximately $300,000 and $2.2 million during the three months ended
March 31, 2003 and March 31, 2002, respectively. 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.
- - GOODWILL. We have goodwill related to our European operations and our
acquisition of Giga that totaled approximately $69.3 million as of
March 31, 2003, prior to the final allocation of purchase price from
the Giga acquisition. Forrester is in the process of determining
whether electing to treat this transaction as an asset purchase for tax
purposes would be beneficial; accordingly, the allocation of the
purchase price is subject to refinement and the deductibility of the
acquired intangibles for tax purposes is unknown as of March 31, 2003.
The allocation of the purchase price is expected to be completed
during the three month period ended June 30, 2003. SFAS No. 142
requires that goodwill and intangible assets with indefinite lives no
longer be amortized but instead be measured for impairment at least
annually or whenever events indicate that there may be an impairment.
In order to determine if an impairment exists, we obtain an independent
appraisal which determines if the carrying amount of the reporting unit
exceeds the fair value. The estimates of the reporting unit's fair
value are based on market conditions and operational performance. We
have selected November 30th as the date of performing the annual
goodwill impairment test. As of March 31, 2003, we believe that the
carrying value of our goodwill is not impaired. Future events could
cause us to conclude that impairment indicators exist and that goodwill
associated with our acquired businesses are impaired. Any resulting
impairment loss could have a material adverse impact on our financial
condition and results of operations.
- - INCOME TAXES. We have deferred tax assets related to temporary
differences between the financial statement and tax bases of assets and
liabilities as well as operating loss carryforwards that totaled
approximately $20.9 million as of March 31, 2003. In assessing the
realizability of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible and
the carryforwards expire. Although realization is not assured, based
upon the level of historical taxable income of Forrester and
projections for Forrester's future taxable income over the periods
during which the deferred tax assets are deductible and the
carryforwards expire, management believes it is more likely than not
that Forrester will realize the benefits of these deductible
differences. The amount of the deferred tax asset considered
realizable, however, could be reduced if estimates of future taxable
income during the carry-forward periods are reduced.
13
RESULTS OF OPERATIONS
The following table sets forth selected financial data as a percentage of total
revenues for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
------- -------
Research services 76% 76%
Advisory services and other 24 24
---- ----
Total revenues 100 100
Cost of services and fulfillment 38 34
Selling and marketing 33 33
General and administrative 13 13
Depreciation 7 8
Amortization of intangible assets 4 --
Reorganization costs -- 35
---- ----
Income (loss) from operations 5 (23)
Other income, net 6 6
Impairments of non-marketable investments (1) (8)
---- ----
Income (loss) before income tax provision (benefit) 10 (25)
Income tax provision (benefit) 3 (2)
---- ----
Net income (loss) 7% (23)%
==== ====
THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
REVENUES. Total revenues decreased 5% to $24.8 million in the three months ended
March 31, 2003 from $26.0 million in the three months ended March 31, 2002. The
acquisition of Giga closed on February 28, 2003 and, as such, Giga's operations
have been included in the consolidated financial statements since February 28,
2003 resulting in additional total revenues of $5.4 million in March 2003.
Revenues from research services decreased 5% to $18.8 million in the three
months ended March 31, 2003 from $19.8 million in the three months ended March
31, 2002 and comprised 76% of total revenues during each respective three-month
period then ended. Decreases in total revenues and revenues from research
services were primarily attributable to lower agreement value (without taking
into account the increase in agreement value due to the Giga acquisition) and
fewer client companies compared to the same three-month period in 2002. The
lower agreement value (without taking into account the increase in agreement
value due to the Giga acquisition) is primarily the result of a more difficult
economic environment. No single client company accounted for more than 2% of
revenues during the three months ended March 31, 2003 or 2002.
Advisory services and other revenues decreased 4% to $6.0 million in the three
months ended March 31, 2003 from $6.2 million in the three months ended March
31, 2002. During the three months ended March 31, 2003, we held one Forrester
Forum, one Forrester Summit and two Giga events as compared to one Forrester
Forum and two Forrester Summit's held during the three months ended March 31,
2002. The decrease in advisory services and other revenues is primarily
attributable to lower attendance at events held during the three months ended
March 31, 2003 compared to the three months ended March 31, 2002.
Revenues attributable to customers outside the United States decreased 7% to
$6.9 million in the three months ended March 31, 2003 from $7.4 million in the
three months ended March 31, 2002. During March 2003, Giga's revenues
attributable to customers outside the United States were $1.6 million. Revenues
attributable to customers outside the United States remained constant as a
percentage of total revenues at 28% for both the three months ended March 31,
2003 and 2002. The decrease in international revenues in dollars is primarily
attributable to a decline in revenues from research services resulting from the
more difficult economic environment. We invoice our international clients in
U.S. dollars, British pounds sterling, and the euro. The effect of changes in
currency exchange rates has historically not had a significant impact on our
results of operations.
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment increased as
a percentage of total revenues to 38% in the three months ended March 31, 2003
from 34% in the three months ended March 31, 2002. These expenses increased 6%
to $9.5 million in the three months ended March 31, 2003 from $9.0 million in
the three months ended March 31, 2002. The increase in expense and expense as a
percentage of revenues was primarily attributable to the increase in headcount
in our research organization as a result of the acquisition of Giga from 121 at
March 31, 2002 to 202 at March 31, 2003. The acquisition of Giga resulted in an
additional 91 research personnel.
SELLING AND MARKETING. Selling and marketing expenses remained constant as a
percentage of total revenues at 33% during the three months ended March 31, 2003
and March 31, 2002. These expenses decreased 5% to $8.1 million in the three
months ended March 31, 2003 from $8.5 million in the three months ended March
31, 2002. The decrease in expenses was principally due to a decrease in
compensation expenses for selling and marketing personnel as a result of the
decrease in Forrester's stand-alone sales and marketing headcount from 152 at
March 31, 2002 to 140 at March 31, 2003. This decrease was partially offset by
an increase in compensation expense in March 2003 related to 89 selling and
marketing personnel acquired as a result of the acquisition of Giga.
14
GENERAL AND ADMINISTRATIVE. General and administrative expenses remained
constant as a percentage of total revenues at 13% in the three months ended
March 31, 2003 and March 31, 2002. These expenses decreased 1% during the three
months ended March 31, 2003 in comparison to the three months ended March 31,
2002. The decrease in expenses was principally due to a decrease in compensation
expenses for general and administrative personnel as a result of the workforce
reduction in July 2002 in Forrester's stand-alone general and administrative
headcount from 91 at March 31, 2002 to 67 at March 31, 2003. This decrease in
expenses is partially offset by an increase in compensation expense in March
2003 related to the addition of 30 general and administrative personnel acquired
as a result of the acquisition of Giga.
DEPRECIATION. Depreciation expense decreased 18% to $1.7 million in the three
months ended March 31, 2003 from $2.1 million in the three months ended March
31, 2002. The decrease in these expenses was principally due to continued lower
capital expenditures as well as the write-off of certain depreciable assets in
connection with the workforce reorganizations in July 2002 partially offset by
additional depreciation expense from fixed assets acquired as part of the
acquisition of Giga.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets increased
to $924,000 in the three months ended March 31, 2003 from $82,000 in the three
months ended March 31, 2002. This increase in amortization expense is a result
of the amortization of intangible assets from the acquisition of Giga.
OTHER INCOME. Other income, consisting primarily of interest income, remained
consistent at $1.6 million during the three months ended March 31, 2003 and
2002. The consistency is principally due to realized gains on sales of
marketable securities of $509,000 partially offset by declines in interest
income from marketable securities due to lower cash and investment balances
available for investment as a result of the cash paid for the acquisition of
Giga.
IMPAIRMENTS OF NON-MARKETABLE INVESTMENTS. Impairments of non-marketable
investments resulted in charges of $300,000 during the three months ended March
31, 2003 compared to $2.2 million during the three months ended March 31, 2002.
PROVISION FOR INCOME TAXES. During the three months ended March 31, 2003, we
recorded an income tax provision of $798,000 reflecting an effective tax rate of
31.0%. During the three months ended March 31, 2002, we recorded a tax benefit
of $532,000, which reflected an effective tax rate of 8%. The increase in our
effective tax rate for fiscal year 2003 resulted primarily from our tax-exempt
investment income comprising a smaller percentage of our estimated total pre-tax
income in 2003 as compared to 2002.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through funds generated from
operations. Memberships for research services, which constituted approximately
76% of our revenues during the three months ended March 31, 2003, are annually
renewable and are generally payable in advance. We generated cash from operating
activities of $3.6 million and $1.8 million during the three months ended March
31, 2003 and 2002, respectively. This increase in cash from operations is
primarily the result of incurring a loss during the three month period ended
March 31, 2002 of $6,115 versus net income during the three month period ended
March 31, 2003 of $1,777.
During the three months ended March 31, 2003, we generated $13.6 million of cash
from investing activities, consisting primarily of $66.3 million received from
net sales of marketable securities, offset by $51.5 million for the purchase of
Giga and $1.3 million for net purchases of non-marketable investments. We
regularly invest excess funds in short-and intermediate-term interest-bearing
obligations of investment grade.
During the three months ended March 31, 2003, we used $4.7 million of cash in
financing activities, consisting of $3.2 million for repurchases of our common
stock and $2.0 million for the investment in a structured stock repurchase
program offset by $523,000 in proceeds from the exercise of employee stock
options.
In the first quarter of 2003, Forrester acquired Giga, a global technology
advisory firm, pursuant to a cash tender offer and second step merger. The
aggregate purchase price was $62,477,000 in cash which consisted of $60,347,000
for the acquisition of all outstanding shares of common stock of Giga of which
$56,054,000 was paid in March 2003; $947,000 of estimated direct acquisition
costs of which $744,000 were paid during the three months ended March 31, 2003;
and $1,183,000 for severance related to 27 employees terminated as a result of
the acquisition of which $51,000 was paid during the three months ended March
31, 2003. The remaining payments for the acquisition of the stock and the direct
acquisition costs are expected to be made during the three months ended June 30,
2003. The remaining severance payments are expected to be completed by March 31,
2004. We expect to incur $1 million to $2 million in additional integration
costs during the year ended December 31, 2003.
As of March 31, 2003, we had cash and cash equivalents of $23.9 million and
marketable securities of $116.7 million. We do not have a line of credit and do
not anticipate the need for one in the foreseeable future. We plan to continue
to introduce new products and services and expect to make minimal investments in
our infrastructure during the next 12 months. We believe that our current cash
balance, marketable securities, and cash flows from operations will satisfy
working capital, financing activities, and capital expenditure requirements for
at least the next two years.
In October 2001, we announced a program authorizing the repurchase of up to $50
million of our common stock. The shares repurchased may be used, among other
things, in connection with our employee stock option and stock purchase plans
and for potential acquisitions. As of March 31, 2003, we had repurchased
1,590,133 shares of common stock at an aggregate cost of approximately $25.3
million.
15
During the three months ended March 31, 2003, we entered into a structured stock
repurchase agreement giving us the right to acquire shares of our common stock
in exchange for an up-front net payment of $2.0 million. This agreement expires
in June 2003. Pursuant to the agreement, if our stock price is above $12.47 on
the expiration date, we will have the investment of $2.0 million returned with a
premium. If our stock price is below $12.47 on the expiration date, we will
receive approximately 169,000 shares of our common stock. The $2.0 million
up-front net payment is recorded in stockholder's equity as a reduction of
additional paid-in capital in the accompanying consolidated balance sheet.
In June 2000, we committed to invest $20.0 million in two private equity
investment funds over a period of up to five years. We have adopted a cash bonus
plan to pay bonuses, after the return of invested capital, measured by the
proceeds of a portion of the share of net profits from these investments, if
any, to certain key employees, subject to the terms and conditions of the plan.
The payment of such bonuses would result in compensation expense with respect to
the amounts so paid. As of March 31, 2003, we had contributed approximately
$13.5 million to the funds. The timing and amount of future contributions are
entirely within the discretion of the investment funds.
As of March 31, 2003, we had recorded total write-downs to the private equity
funds of approximately $3.6 million as a result of the impairment of certain
investments within the funds. The timing of the recognition of future gains or
losses from the investment funds is beyond our control. As a result, it is not
possible to predict when we will recognize such gains or losses, if we will
award cash bonuses based on the net profit from such investments, or when we
will incur compensation expense in connection with the payment of such bonuses.
If the investment funds realize large gains or losses on their investments, we
could experience significant variations in our quarterly results unrelated to
our business operations. These variations could be due to significant gains or
losses or to significant compensation expenses. While gains may offset
compensation expenses in a particular quarter, there can be no assurance that
related gains and compensation expenses will occur in the same quarter.
As of March 31, 2003, we had future contractual obligations as follows*:
FUTURE PAYMENTS DUE BY YEAR
------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2003 2004 2005 2006 2007 2008
- ---------------------------------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
Operating leases $41,274 $ 7,288 $ 9,564 $ 9,476 $ 7,106 $ 3,088 $ 4,752
Capital leases 217 217 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total contractual cash obligations $41,491 $ 7,505 $ 9,564 $ 9,476 $ 7,106 $ 3,088 $ 4,752
======= ======= ======= ======= ======= ======= =======
- ------------------
* The above table does not include the remaining $6.5 million of capital
commitments to the private equity funds described above due to the uncertainty
in timing of capital calls made by such funds to pay this remaining capital
commitment. The above table also does not include future minimum rentals to be
received under subleases of $5.0 million.
We do not maintain any off-balance sheet financing arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
INTEREST RATE SENSITIVITY. We maintain an investment portfolio consisting mainly
of corporate, federal agency, and state and municipal obligations with a
weighted-average maturity of approximately 15 months. These available-for-sale
securities are subject to interest rate risk and will fall in value if market
interest rates increase. We have the ability to hold our fixed income
investments until maturity. Therefore, we would not expect our operating results
or cash flows to be affected to any significant degree by a sudden change in
market interest rates on our securities portfolio. The following table provides
information about our investment portfolio. For investment securities, the table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates.
Principal amounts by expected maturity in U.S. dollars are as follows:
FAIR VALUE
AT MARCH 31,
2003 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
----------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Cash equivalents $ 9,489 $ 9,489 $ -- $ -- $ -- $ --
Weighted average interest
rate 1.73% 1.73% -- -- -- --
Investments $ 116,708 $ 37,913 $ 11,730 $ 30,459 $ 18,840 $ 17,766
Weighted average interest
rate 3.16% 2.11% 3.35% 3.27% 4.13% 4.10%
Total portfolio $ 126,197 $ 47,402 $ 11,730 $ 30,459 $ 18,840 $ 17,766
Weighted average interest
rate 3.06% 2.03% 3.35% 3.27% 4.13% 4.10%
16
FOREIGN CURRENCY EXCHANGE. On a global level, we face exposure to movements in
foreign currency exchange rates. This exposure may change over time as business
practices evolve and could have a material adverse impact on our financial
results. Historically, our primary exposure has been related to non-U.S.
dollar-denominated operating expenses in Canada and Asia, where we sell
primarily in U.S. dollars. The introduction of the Euro as a common currency for
members of the European Monetary Union has not, to date, had a significant
impact on our financial position or results of operations. To date, we have not
entered into any hedging agreements. However, we are prepared to hedge against
fluctuations that the Euro, or other foreign currencies, will have on foreign
exchange exposure if this exposure becomes material. As of March 31, 2003, the
total assets related to non-US dollar denominated currencies that are subject to
foreign currency exchange risk was approximately $15.3 million.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES. Within 90 days before filing this report, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures. Our disclosure controls and procedures are the controls
and other procedures that we designed to ensure that we record, process,
summarize and report in a timely manner the information we must disclose in
reports that we file with or submit to the SEC. George F. Colony, our Chairman
and Chief Executive Officer, and Warren Hadley, our Treasurer and Chief
Financial Officer, reviewed and participated in this evaluation. Based on this
evaluation, Messrs. Colony and Hadley concluded that, as of the date of their
evaluation, our disclosure controls were effective.
INTERNAL CONTROLS. Since the date of the evaluation described above, there have
not been any significant changes in our internal controls or in other factors
that could significantly affect those controls.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Forrester is not currently a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
Accompanying this Form 10-Q are the certificates of the Chief Executive Officer
and the Chief Financial Officer required by Section 1350, Chapter 63 of Title
18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, copies of which are furnished as an exhibit to this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger dated as of January 20, 2003 among Forrester
Research, Inc., Whitcomb Acquisition Corp., and Giga Information Group,
Inc. (incorporated by reference to Forrester's Current Report on Form 8-K filed
on January 22, 2003).
99.1 Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Forrester filed a Current Report on Form 8-K on January 22, 2003 disclosing
under Item 5 that it had entered into an Agreement and Plan of Merger for the
acquisition of all of the outstanding common stock of Giga Information Group,
Inc. ("Giga").
Forrester filed a Current Report on Form 8-K on March 14, 2003 disclosing under
Item 2 that it had completed the acquisition of Giga.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORRESTER RESEARCH, INC.
By: /s/ George F. Colony
---------------------------------
George F. Colony
Chairman of the Board of Directors
and Chief Executive Officer (principal
executive officer)
Date: May 9, 2003
By: /s/ Warren Hadley
---------------------------------
Warren Hadley
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
Date: May 9, 2003
19
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
I, George F. Colony, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Forrester
Research, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ George F. Colony
------------------------------------------
George F. Colony
Chairman of the Board and Chief Executive Officer
(Principal executive officer)
20
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
I, Warren Hadley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Forrester
Research, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Warren Hadley
----------------------------------------
Warren Hadley
Chief Financial Officer and Treasurer
(Principal financial and accounting officer)
21
Exhibit Index
Exhibit No. Document
- ----------- --------
2.1 Agreement and Plan of Merger dated as of January 20, 2003 among
Forrester Research, Inc., Whitcomb Acquisition Corp., and Giga
Information Group, Inc. (incorporated by reference to
Forrester's Current Report on Form 8-K filed on January 22,
2003).
99.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.