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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 JUNE 30, 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 August 12, 2003, 22,453,502 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 June 30, 2003 and December 31, 2002 3
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 20
ITEM 4. Controls and Procedures 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities and Use of Proceeds 21
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security-Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORRESTER RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 13,881 $ 11,479
Marketable securities 121,749 183,152
Accounts receivable, net 18,028 17,791
Deferred commissions 4,784 3,524
Prepaid expenses and other current assets 7,733 5,902
----------- ----------
Total current assets 166,175 221,848
Long-term assets:
Property and equipment, net 10,427 10,674
Goodwill 56,126 13,244
Intangible assets, net 16,712 760
Deferred income taxes 35,367 21,630
Non-marketable investments and other assets 12,176 10,117
----------- ----------
Total long-term assets 130,808 56,425
----------- ----------
Total assets $ 296,983 $ 278,273
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,956 $ 1,601
Accrued expenses 24,272 20,681
Deferred revenue 59,487 42,123
----------- ----------
Total current liabilities 86,715 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-- 24,135 and 24,045 shares as of June 30, 2003 and December 31,
2002, respectively
Outstanding--22,412 and 22,841 shares as of June 30, 2003 and December
31, 2002, Respectively 242 240
Additional paid-in capital 169,651 167,935
Retained earnings 66,672 64,754
Treasury stock, at cost--1,723 and 1,204 shares as of June 30, 2003 and
December 31, 2002, respectively (27,380) (20,085)
Accumulated other comprehensive income 1,083 1,024
----------- ----------
Total stockholders' equity 210,268 213,868
----------- ----------
Total liabilities and stockholders' equity $ 296,983 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
--------- --------- --------- ---------
(UNAUDITED)
Revenues:
Research services $ 26,611 $ 18,008 $ 45,432 $ 37,818
Advisory services and other 8,113 7,425 14,089 13,671
--------- --------- --------- ---------
Total revenues 34,724 25,433 59,521 51,489
--------- --------- --------- ---------
Operating expenses:
Cost of services and fulfillment 14,330 8,873 23,855 17,854
Selling and marketing 11,768 8,254 19,835 16,726
General and administrative 3,781 3,375 7,058 6,701
Depreciation 1,839 1,988 3,532 4,054
Amortization of intangible assets 2,608 82 3,532 164
Integration costs 740 -- 771 --
Reorganization costs -- -- -- 9,088
--------- --------- --------- ---------
Total operating expenses 35,066 22,572 58,583 54,587
--------- --------- --------- ---------
(Loss) income from operations (342) 2,861 938 (3,098)
Other income (expense):
Other income, net 819 1,481 2,414 3,041
Impairments of non-marketable investments, net (272) (486) (572) (2,734)
--------- --------- --------- ---------
Income (loss) before income tax provision (benefit) 205 3,856 2,780 (2,791)
Income tax provision (benefit) 64 309 862 (223)
--------- --------- --------- ---------
Net income (loss) $ 141 $ 3,547 $ 1,918 $ (2,568)
========= ========= ========= =========
Basic net income (loss) per common share $ 0.01 $ 0.15 $ 0.08 $ (0.11)
========= ========= ========= =========
Diluted net income (loss) per common share $ 0.01 $ 0.15 $ 0.08 $ (0.11)
========= ========= ========= =========
Basic weighted average common shares outstanding 22,515 23,354 22,627 23,250
========= ========= ========= =========
Diluted weighted average common shares outstanding 22,718 23,989 22,819 23,250
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2003 2002
----------- ----------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss) $ 1,918 $ (2,568)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities--
Depreciation 3,532 4,054
Amortization of intangible assets 3,532 164
Impairments of non-marketable investments, net 572 2,734
Loss on disposals of property and equipment -- 92
Tax benefit from exercises of employee stock options 155 1,996
Deferred income taxes 793 (2,222)
Non-cash reorganization costs -- 2,772
Increase in provision for doubtful accounts -- 196
Realized gains on sales of marketable securities (509) --
Amortization of premium on marketable securities 413 376
Changes in assets and liabilities, net of acquisition--
Accounts receivable 10,534 12,176
Deferred commissions (1,260) 1,023
Prepaid expenses and other current assets 1,758 (932)
Accounts payable (207) (433)
Accrued expenses (7,649) (2,911)
Deferred revenue (8,710) (14,206)
----------- ----------
Net cash provided by operating activities 4,872 2,311
----------- ----------
Cash flows from investing activities:
Acquisition of Giga Information Group, Inc., net of cash acquired (56,066) --
Purchases of property and equipment (1,017) (966)
Purchases of non-marketable investments (2,150) (2,625)
Decrease in other assets 75 259
Purchases of marketable securities (126,158) (92,995)
Proceeds from sales and maturities of marketable securities 188,766 94,017
----------- ----------
Net cash provided by (used in) investing activities 3,450 (2,310)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,457 7,912
Acquisition of treasury stock (5,295) (7,920)
Structured stock repurchase (1,892) --
----------- ----------
Net cash used in financing activities (5,730) (8)
Effect of exchange rate changes on cash and cash equivalents (190) (37)
----------- ----------
Net increase (decrease) in cash and cash equivalents 2,402 (44)
Cash and cash equivalents, beginning of period 11,479 17,747
----------- ----------
Cash and cash equivalents, end of period $ 13,881 $ 17,703
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 838 $ 2,087
----------- ----------
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 periods ended June 30, 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 and six months period ended June 30, 2003 and 2002 would have been
approximately as follows (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
Net income (loss) as reported $ 141 $ 3,547 $ 1,918 $ (2,568)
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards 1,738 3,413 3,375 5,400
--------- --------- --------- ---------
Pro-forma net (loss) income $ (1,597) $ 134 $ (1,457) $ (7,968)
========= ========= ========= =========
Basic and diluted net income (loss) per share - as reported $ 0.01 $ 0.15 $ 0.08 $ (0.11)
--------- --------- --------- ---------
Basic and diluted net (loss) income per share - pro forma $ (0.07) $ 0.01 $ (0.06) $ (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 $59,974,000 was paid as of June 30, 2003;
$947,000 of estimated direct acquisition costs of which $870,000 was paid as of
June 30, 2003; and $1,183,000 for severance related to 27 employees of Giga
terminated as a result of the acquisition of which $524,000 was paid as of June
30, 2003. The results of Giga's operations have been included in Forrester's
consolidated financial statements since February 28, 2003. During the three
months ended June 30, 2003, Forrester elected to treat the acquisition of Giga
6
as a stock purchase for income tax purposes and, as such, recorded the fair
value of the related deferred tax assets and liabilities acquired. Accordingly,
the goodwill and intangible assets are not deductible for income tax purposes.
Integration costs related to the acquisition of Giga are primarily related to
orientation events to familiarize Forrester and Giga employees and data
migration.
The following table summarizes the estimated fair values of the Giga assets
acquired and liabilities assumed at the date of acquisition.
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 2,109
Goodwill 42,881
Intangible assets 19,484
Deferred income taxes 14,698
Non-marketable investments and other assets 1,367
----------
Total assets $ 99,756
----------
Liabilities:
Accounts payable $ 1,485
Accrued expenses 9,401
Capital lease obligations 208
Deferred revenue 26,185
----------
Total liabilities $ 37,279
----------
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 $ 17,070 5 years
Research content 1,844 1 year
Registered trademarks 570 1 year
----------
Subtotal $ 19,484
==========
Amortization expense during the three and six months ended June 30, 2003 related
to the intangible assets acquired from Giga was $2,526,000 and $3,368,000,
respectively.
The following table presents pro forma financial information as if the
acquisition of Giga had been completed as of January 1, 2002.
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
-------------- -----------------------------
2002 2003 2002
-------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 42,124 $ 69,034 $ 83,869
Income (loss) from operations $ 656 $ 495 $ (6,623)
Net income (loss) $ 605 $ 1,136 $ (4,149)
Basic net income (loss) per common share $ 0.03 $ 0.05 $ (0.18)
Diluted net income (loss) per common share $ 0.03 $ 0.05 $ (0.18)
7
NOTE 3 - INTANGIBLE ASSETS
A summary of Forrester's amortizable intangible assets as of June 30, 2003 is as
follows:
GROSS CARRYING ACCUMULATED NET
AMOUNT AMORTIZATION CARRYING AMOUNT
-------------- ------------ ---------------
(IN THOUSANDS)
Amortized intangible assets:
Customer relationships $ 17,970 $ 2,917 $ 15,053
Research content 2,444 1,165 1,279
Registered trademarks 570 190 380
---------- -------- ----------
Subtotal $ 20,984 $ 4,272 $ 16,712
========== ======== ==========
Amortization expense related to identifiable intangible assets was approximately
$2,608,000 and $82,000 during the three months ended June 30, 2003 and 2002,
respectively, and $3,532,000 and $164,000 during the six months ended June 30,
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 six months ending December 31, 2003 $ 5,167
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 $ 16,712
==========
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
six months ended June 30, 2003 are as follows:
ACCRUED AS OF ACCRUED AS OF
DECEMBER 31, CASH JUNE 30,
2002 PAYMENTS 2003
------------- -------- -------------
(IN THOUSANDS)
Workforce reduction $ 51 $ 51 $ --
Facility consolidation and other related costs 661 106 556
------ ------ ------
Total $ 712 $ 156 $ 556
====== ====== ======
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 JUNE 30, 2003
------ ------ ------ ----- -------------
(IN THOUSANDS)
Facility consolidation and other related costs $ 104 $ 193 $ 183 $ 76 $ 556
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
8
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 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:
ACCRUED ACCRUED
AS OF CASH AS OF
DECEMBER 31,2002 PAYMENTS JUNE 30, 2003
---------------- -------- -------------
(IN THOUSANDS)
Workforce reduction $ -- $ -- $ --
Facility consolidation
and other related costs 2,838 755 2,083
Depreciable assets -- -- --
------- ------ -------
Total $ 2,838 $ 755 $ 2,083
======= ====== =======
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 JUNE 30, 2003
----- -------- ---- ---- -------------
(IN THOUSANDS)
Facility consolidation and other
related costs $ 429 $ 1,011 $ 416 $ 227 $ 2,083
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 (LOSS) PER COMMON SHARE
Basic and diluted net loss per common share for the six months ended June 30,
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 June 30, 2003 and 2002 and for the six months ended
June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
(IN THOUSANDS)
Basic weighted average common shares outstanding 22,515 23,354 22,627 23,250
Weighted average common equivalent shares 203 635 192 --
------ ------ ------ ------
Diluted weighted average shares outstanding 22,718 23,989 22,819 23,250
====== ====== ====== ======
9
During the three month periods ended June 30, 2003 and 2002, approximately
3,124,000 and 2,809,000 stock options, respectively, were excluded from the
calculation of diluted weighted average shares outstanding as the effect would
have been anti-dilutive.
During the six month periods ended June 30, 2003 and 2002, approximately
3,194,000 and 5,216,000 stock options, respectively, were excluded from the
calculation of diluted weighted average shares outstanding as the effect would
have been anti-dilutive.
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income (loss) for the three and six months
ended June 30, 2003 and 2002 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------
2003 2002 2003 2002
-------- -------- -------- ---------
(IN THOUSANDS)
Unrealized gain on marketable securities, net of taxes $ 728 $ 1,131 $ 294 $ 389
Cumulative translation adjustment (52) (520) 7 (415)
-------- -------- -------- ---------
Total other comprehensive income (loss) $ 676 $ 611 $ 301 $ (26)
Reported net income (loss) 141 3,547 1,918 (2,568)
-------- -------- -------- ---------
Total comprehensive income (loss) $ 817 $ 4,158 $ 2,219 $ (2,594)
======== ======== ======== =========
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 six months ended
June 30, 2003 and 2002, Forrester contributed approximately $2.2 million and
$2.6 million to these investment funds, respectively, resulting in total
cumulative contributions of approximately $14.4 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 June 30,
2003 was approximately $8.4 million. During the three months ended June 30, 2003
and 2002, Forrester recorded net impairments to these investments of
approximately $561,000 and $215,000, respectively. During the six months ended
June 30, 2003 and 2002, Forrester recorded net impairments to these investments
of approximately $861,000 and $999,000, respectively, which are included in the
consolidated statements of income, increasing the total cumulative net
impairments recorded to approximately $4.2 million as of June 30, 2003. During
the three months ended June 30, 2003, one of the private equity investment funds
distributed publicly-listed common stock to Forrester. The common stock is
classified as an available-for-sale investment and is recorded at market value
of $782,000 as of June 30, 2003. Forrester recorded a gain on the distribution
of $419,000 in the consolidated statement of income as a reduction of
impairments of non-marketable investments. During the three months ended June
30, 2003 and 2002, fund management charges of approximately $121,000 were
included in other income in the consolidated statements of income. During the
six months ended June 30, 2003 and 2002, fund management charges of
approximately $242,000 were included in other income in the consolidated
statement of income, bringing the total cumulative fund management charges paid
by Forrester to approximately $1.4 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
10
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 July 2000, Forrester invested $1.6 million to purchase preferred shares of
ComScore Networks, Inc. ("comScore"), a provider of infrastructure services
which utilizes proprietary technology to accumulate comprehensive information on
consumer buying behavior, resulting in approximately a 1.2% ownership interest.
This investment is being accounted for using the cost method and, accordingly,
is valued at cost unless a permanent impairment in its value occurs or the
investment is liquidated. In September 2001, Forrester determined that its
investment in comScore had been permanently impaired due to an additional round
of financing at a significantly lower valuation. As a result, Forrester recorded
a write-down of $836,000 to impairments of non-marketable investments in the
consolidated statement of income. In June 2002, Forrester determined that its
investment in comScore had been permanently impaired due to an additional round
of financing at a significantly lower valuation. As a result, Forrester recorded
a further write-down of $271,000 to impairments of non-marketable investments in
the statement of income. In June 2003, Forrester determined that its investment
in comScore had been permanently impaired due to an additional round of
financing at a significantly lower valuation. As a result, Forrester recorded a
further write-down of $130,000 in the consolidated statement of income.
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 six months ended June
30, 2003, Forrester repurchased approximately 375,000 shares of common stock at
an aggregate cost of approximately $5.3 million. During the six months ended
June 30, 2002, Forrester repurchased approximately 414,000 shares of common
stock at an aggregate cost of approximately $7.9 million.
During the three months ended June 30, 2003, 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 expiring in
August 2003. Pursuant to the agreement, if Forrester's stock price is above
$15.47 on the expiration date, Forrester will have the investment of $2.0
million returned with a premium. If Forrester's stock price is below $15.47 on
the expiration date, Forrester will receive approximately 136,000 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.
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 recorded as a
reduction of additional paid-in-capital. Upon expiration of the agreement in
June 2003, Forrester received approximately $2.1 million of cash which was
recorded as an increase to additional paid-in capital.
During the three months ended December 31, 2002, Forrester entered into a
similar agreement 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.
11
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
research, strategic advisory 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 and six months ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(IN THOUSANDS)
United States $ 24,672 $ 18,328 $ 42,587 $ 36,999
United Kingdom 3,274 2,103 5,310 4,477
Europe (excluding United Kingdom) 3,088 2,475 5,393 4,882
Canada 1,867 807 2,791 1,595
Other 1,823 1,720 3,440 3,536
--------- --------- --------- ---------
$ 34,724 $ 25,433 $ 59,521 $ 51,489
========= ========= ========= =========
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- ------
United States 71% 72% 72% 72%
United Kingdom 10 10 9 9
Europe (excluding United Kingdom) 9 8 9 9
Canada 5 3 4 3
Other 5 7 6 7
---- ---- ---- ----
100% 100% 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 that qualify for separation are
allocated among the separate units in proportion to 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 (of which there were none). 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.
NOTE 11 - SUBSEQUENT EVENT
On August 5, 2003, in connection with the integration of Giga, Forrester
announced a general workforce reduction. As a result, Forrester reduced its
workforce by 30 positions and expects to record a charge of approximately $1.0
million to $2.0 million in the quarter ending September 30, 2002. This charge
will consist primarily of severance and related expenses from the workforce
reduction.
12
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 include, but are not limited to, Forrester's financial and
operating targets for the third quarter of and full-year 2003, statements about
the potential success of WholeView and other product offerings, the anticipated
cost savings related to the reorganizations and reductions in force in full-year
2003, Forrester's ability to successfully integrate Giga, and the ability of
Forrester to achieve success as the economy improves. These statements are based
on Forrester's 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 future
activities and results to differ include, among others, Forrester's ability to
successfully integrate Giga into Forrester's operations, Forrester's ability to
anticipate business and economic conditions, market trends, competition, the
ability to attract and retain professional staff, possible variations in
Forrester's quarterly operating results, risks associated with Forrester's
ability to offer new products and services, the actual amount of the charge
related to the reorganization and the reduction in force, and Forrester's
dependence on renewals of its membership-based research services and on key
personnel. 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. Overhead costs are allocated over these categories
according to the number of employees in each group. 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. Integration costs
are related to our acquisition of Giga Information Group, Inc., and are
primarily related to orientation events and data migration.
13
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 42% to $116.0 million as of June 30, 2003 from $81.6 million as of
June 30, 2002 and increased approximately 49% from $78.1 million as of December
31, 2002. The increase in agreement value is attributable to the acquisition of
Giga in February 2003. Agreement value decreased approximately 7% to $116.0
million as of June 30, 2003 from $124.1 million as of March 31, 2003. This
decrease in agreement value is attributable to the more difficult economic
environment, and we expect that agreement value will further decline during
the three-month period ended September 30, 2003 as compared to the three-month
period ending June 30, 2003. No clients accounted for more than 2% of agreement
value at June 30, 2003 or June 30, 2002. In past years, a substantial portion
of our client companies renewed expiring contracts. Approximately 60% of
Forrester client companies with memberships expiring during the twelve months
ended June 30, 2003 renewed one or more memberships for our products and
services, compared with 52% of client companies with memberships expiring
during the twelve months ended June 30, 2002. Renewal rates are not necessarily
indicative of the rate of future retention of our revenue base.
On August 5, 2003, in connection with the integration of Giga, Forrester
announced a general workforce reduction. As a result, Forrester reduced its
workforce by 30 positions and expects to record a charge of approximately $1.0
million to $2.0 million in the quarter ending September 30, 2002. This charge
will consist primarily of severance and related expenses from the workforce
reduction.
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 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 June 30, 2003, deferred revenues and deferred commissions totaled
$59.5 million and $4.8 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 $1.3 million as of June 30, 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 $11.8 million as of
June 30, 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
14
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 net impairment charges that totaled
approximately $272,000 and $486,000 during the three months ended June
30, 2003 and 2002, respectively, and $572,000 and $2.7 million during
the six months ended June 30, 2003 and June 30, 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 $56.1 million as of 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 June 30, 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 (primarily from
stock option exercises and the acquisition of Giga) that totaled
approximately $35.4 million as of June 30, 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.
RESULTS OF OPERATIONS
The following table sets forth selected financial data as a percentage of total
revenues for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
Research services 77% 71% 76% 73%
Advisory services and other 23 29 24 27
---- ---- ---- ----
Total revenues 100 100 100 100
Cost of services and fulfillment 41 35 40 35
Selling and marketing 34 33 33 32
General and administrative 11 13 12 13
Depreciation 5 8 6 8
Amortization of intangible assets 8 -- 6 --
Integration costs 2 -- 1 --
Reorganization costs -- -- -- 18
---- ---- ---- ----
(Loss) income from operations (1) 11 2 (6)
Other income, net 2 6 4 6
Impairments of non-marketable investments (1) (2) (1) (5)
---- ---- ---- ----
Income (loss) before income tax provision (benefit) -- 15 5 (5)
Income tax provision (benefit) -- 1 2 --
---- ---- ---- ----
Net income (loss) --% 14% 3% (5)%
==== ==== ==== ====
15
THREE MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
REVENUES. Total revenues increased 37% to $34.7 million in the three months
ended June 30, 2003 from $25.4 million in the three months ended June 30, 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.
Revenues from research services increased 48% to $26.6 million in the three
months ended June 30, 2003 from $18.0 million in the three months ended June 30,
2002 and comprised 77% and 71% of total revenues during the three months ended
June 30, 2003 and 2002, respectively. Increases in total revenues and revenues
from research services were primarily attributable to increases in agreement
value and client companies as a result of the Giga acquisition. No single client
company accounted for more than 2% of revenues during the three months ended
June 30, 2003 or 2002.
Advisory services and other revenues increased 9% to $8.1 million in the three
months ended June 30, 2003 from $7.4 million in the three months ended June 30,
2002. During the three months ended June 30, 2003, we held two Forrester Forums
and two GigaWorld events as compared to two Forrester Forums and two Forrester
Summit's held during the three months ended June 30, 2002. The increase in
advisory services and other revenues is primarily attributable to an increase in
the number of clients and research employees delivering advisory services to 203
employees at June 30, 2003 from 118 employees at June 30, 2002. The increased
headcount in our research organization is primarily attributable to the
acquisition of Giga.
Revenues attributable to customers outside the United States increased 41% to
$10.1 million in the three months ended June 30, 2003 from $7.1 million in the
three months ended June 30, 2002. Revenues attributable to customers outside the
United States increased as a percentage of total revenues to 29% during the
three months ended June 30, 2003 from 28% during the three months ended June 30,
2002. The increase in international revenues in dollars is primarily
attributable to the acquisition of Giga. The increase in international revenues
as a percentage of total revenues is primarily attributable to two events that
were held in Europe during the three months ended June 30, 2003, versus only one
event during the three months ended June 30, 2002. 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 41% in the three months ended June 30, 2003
from 35% in the three months ended June 30, 2002. These expenses increased 62%
to $14.3 million in the three months ended June 30, 2003 from $8.9 million in
the three months ended June 30, 2002. The increase in expense was primarily
attributable to greater compensation costs, as headcount in our research
organization increased to 203 employees at June 30, 2003 from 118 employees at
June 30, 2002. The increased headcount in our research organization is primarily
attributable to the acquisition of Giga, which provided for an additional 91
research personnel. The increase in expense as a percentage of revenues was
primarily due to greater compensation costs and the increase in the number of
events held during the period as a result of the Giga acquisition without a
corresponding revenue increase.
SELLING AND MARKETING. Selling and marketing expenses increased as a percentage
of total revenues to 34% in the three months ended June 30, 2003 from 32% in the
three months ended June 30, 2002. These expenses increased 43% to $11.8 million
in the three months ended June 30, 2003 from $8.3 million in the three months
ended June 30, 2002. The increase in expenses and expenses as a percentage of
total revenues was primarily attributable to greater compensation costs, as
headcount in our sales organization increased to 207 employees at June 30, 2003
from 127 employees at June 30, 2002. The increased headcount in our sales
organization is primarily attributable to the acquisition of Giga, which
provided for an additional 82 sales personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased as a
percentage of total revenues to 11% in the three months ended June 30, 2003 from
13% in the three months ended June 30, 2002. These expenses increased 12% to
$3.8 million in the three months ended June 30, 2003 from $3.4 million in the
three months ended June 30, 2002. The increase in expenses was primarily due to
greater compensation costs, professional fees, and rent expenses as a result of
the Giga acquisition. The decrease in expenses as a percentage of revenues is
primarily attributable to an increased revenue base as a result of the
acquisition of Giga.
DEPRECIATION. Depreciation expense decreased 7% to $1.8 million in the three
months ended June 30, 2003 from $2.0 million in the three months ended June 30,
2002. The decrease in these expenses was principally due to 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 and other capital expenditures
during the three months ended June 30, 2003.
16
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets increased
to $2.6 million in the three months ended June 30, 2003 from $82,000 in the
three months ended June 30, 2002. This increase in amortization expense is
attributable to the amortization of intangible assets acquired in connection
with the acquisition of Giga.
INTEGRATION COSTS. Integration costs are related to our acquisition of Giga,
and are primarily related to orientation events to familiarize Forrester and
Giga employees and data migration.
OTHER INCOME, NET. Other income, consisting primarily of interest income,
decreased 45% to $819,000 during the three months ended June 30, 2003 from $1.5
million during the three months ended June 30, 2002. The decrease is primarily
attributable to declines in interest income resulting from lower cash and
investment balances available for investment as a result of the cash paid for
the acquisition of Giga, coupled with lower returns on invested capital.
IMPAIRMENTS OF NON-MARKETABLE INVESTMENTS. Impairments of non-marketable
investments resulted in net charges of $272,000 during the three months ended
June 30, 2003 compared to $486,000 during the three months ended June 30, 2002.
PROVISION FOR INCOME TAXES. During the three months ended June 30, 2003, we
recorded an income tax provision of $61,000 reflecting an effective tax rate of
31%. During the three months ended June 30, 2002, we recorded a tax provision of
$309,000, 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.
SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
REVENUES. Total revenues increased 16% to $59.5 million in the six months ended
June 30, 2003 from $51.5 million in the six months ended June 30, 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.
Revenues from research services increased 20% to $45.4 million in the six months
ended June 30, 2003 from $37.8 million in the six months ended June 30, 2002 and
comprised 76% and 73% of total revenues during the six months ended June 30,
2003 and 2002, respectively. Increases in total revenues and revenues from
research services were primarily attributable to increases in agreement value
and client companies as a result of the Giga acquisition compared to the same
six-month period in 2002. No single client company accounted for more than 2% of
revenues during the six months ended June 30, 2003 or 2002.
Advisory services and other revenues increased 3% to $14.1 million in the six
months ended June 30, 2003 from $13.7 million in the six months ended June 30,
2002. During the six months ended June 30, 2003, we held three Forrester Forums,
one Forrester Summit and four Giga events as compared to three Forrester Forums
and four Forrester Summit's held during the six months ended June 30, 2002. The
increase in advisory services and other revenues is primarily attributable to an
increase in the number of research employees delivering advisory services to 203
employees at June 30, 2003 from 118 employees at June 30, 2002. The increased
headcount in our research organization is primarily attributable to the
acquisition of Giga.
Revenues attributable to customers outside the United States increased 17% to
$16.9 million in the six months ended June 30, 2003 from $14.5 million in the
six months ended June 30, 2002. Revenues attributable to customers outside the
United States remained constant as a percentage of total revenues at 28% during
the six months ended June 30, 2003 and 2002. The increase in international
revenues in dollars is primarily attributable to the acquisition of Giga.
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment increased as
a percentage of total revenues to 40% in the six months ended June 30, 2003 from
35% in the six months ended June 30, 2002. These expenses increased 34% to $23.9
million in the six months ended June 30, 2003 from $17.9 million in the six
months ended June 30, 2002. The increase in expense was primarily attributable
to greater compensation costs, as headcount in our research organization
increased to 203 employees at June 30, 2003 from 118 employees at June 30, 2002.
The increased headcount in our research organization is primarily attributable
to the acquisition of Giga, which provided for an additional 91 research
personnel. The increase in expense as a percentage of revenues was primarily due
to greater compensation costs and the increase in the number of events held
during the period as a result of the Giga acquisition without a corresponding
revenue increase.
17
SELLING AND MARKETING. Selling and marketing expenses increased as a percentage
of total revenues to 33% in the six months ended June 30, 2003 from 32% in the
six months ended June 30, 2002. These expenses increased 19% to $19.8 million in
the six months ended June 30, 2003 from $16.7 million in the six months ended
June 30, 2002. The increase in expenses and expenses as a percentage of total
revenues was primarily attributable to greater compensation costs, as headcount
in our sales organization increased to 207 employees at June 30, 2003 from 127
employees at June 30, 2002. The increased headcount in our sales organization is
primarily attributable to the acquisition of Giga, which provided for an
additional 82 sales personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased as a
percentage of total revenues to 12% in the six months ended June 30, 2003 from
13% in the six months ended June 30, 2002. These expenses increased 5% to $7.1
million in the six months ended June 30, 2003 from $6.7 million in the six
months ended June 30, 2002. The increase in expenses was primarily due to
greater compensation costs, professional fees, and rent expenses as a result of
the Giga acquisition. The decrease in expenses as a percentage of revenues is
primarily attributable to an increased revenue base as a result of the
acquisition of Giga.
DEPRECIATION. Depreciation expense decreased 13% to $3.5 million in the six
months ended June 30, 2003 from $4.1 million in the six months ended June 30,
2002. The decrease in these expenses was principally due to 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 and other capital expenditures
during the six months ended June 30, 2003.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets increased
to $3.5 million in the six months ended June 30, 2003 from $164,000 in the six
months ended June 30, 2002. This increase in amortization expense is a result of
the amortization of intangible assets acquired in connection with the
acquisition of Giga.
INTEGRATION COSTS. Integration costs are related to our acquisition of Giga
Information Group, Inc., and are primarily related to orientation events to
familiarize Forrester and Giga employees and data migration.
OTHER INCOME, NET. Other income, consisting primarily of interest income,
decreased 21% to $2.4 million during the six months ended June 30, 2003 from
$3.0 million during the six months ended June 30, 2002. The decrease is
primarily due to declines in interest income resulting from lower cash and
investment balances available for investment as a result of the cash paid for
the acquisition of Giga, coupled with lower returns on invested capital. Other
income for the six months ended June 30, 2003 includes realized gains on the
sales of marketable securities of $509,000 compared to minimal gains on the
sales of marketable securities during the six months ended June 30, 2002.
IMPAIRMENTS OF NON-MARKETABLE INVESTMENTS. Impairments of non-marketable
investments resulted in net charges of $572,000 during the six months ended June
30, 2003 compared to $2.7 million during the six months ended June 30, 2002.
PROVISION FOR INCOME TAXES. During the six months ended June 30, 2003, we
recorded an income tax provision of $862,000 reflecting an effective tax rate of
31%. During the six months ended June 30, 2002, we recorded a tax benefit of
$223,000, 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 six months ended June 30, 2003, are annually
renewable and are generally payable in advance. We generated cash from operating
activities of $4.9 million and $2.3 million during the six months ended June 30,
2003 and 2002, respectively.
During the six months ended June 30, 2003, we generated $3.5 million of cash
from investing activities, consisting primarily of $62.6 million received from
net sales of marketable securities, offset by $56.1 million for the purchase of
Giga, $2.2 million for net purchases of non-marketable investments and $1.0 for
purchases of property and equipment. We regularly invest excess funds in
short-and intermediate-term interest-bearing obligations of investment grade.
During the six months ended June 30, 2003, we used $5.7 million of cash in
financing activities, consisting of $5.3 million for repurchases of our common
stock and $1.9 million for the net investment in structured stock repurchase
18
programs, offset by $1.5 million in proceeds from the exercise of employee stock
options and issuance of common stock under our employee stock purchase plan.
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
acquisition increased agreement value and the number of client companies and is
expected to reduce the 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 $59,974,000 was paid as of June 30, 2003; $947,000 of
estimated direct acquisition costs of which $870,000 was paid as of June 30,
2003; and $1,183,000 for severance related to 27 employees of Giga terminated as
a result of the acquisition of which $524,000 was paid as of June 30, 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 September 30, 2003.
The remaining severance payments are expected to be completed by March 31, 2004.
As of June 30, 2003, we had cash and cash equivalents of $13.9 million and
marketable securities of $121.7 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 June 30, 2003, we had repurchased 1.7
million shares of common stock at an aggregate cost of approximately $27.4
million.
During the three months ended June 30, 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 expiring in August 2003.
Pursuant to the agreement, if our stock price is above $15.47 on the expiration
date, we will have the investment of $2.0 million returned with a premium. If
our stock price is below $15.47 on the expiration date, we will receive
approximately 136,000 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.
During the three months ended March 31, 2003, we entered into a similar
agreement in exchange for an up-front net payment of $2.0 million recorded as a
reduction of additional paid-in-capital. Upon expiration of the agreement in
June 2003, we received approximately $2.1 million of cash which was recorded as
additional paid-in capital.
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 June 30, 2003, we had contributed approximately $14.4
million to the funds. The timing and amount of future contributions are entirely
within the discretion of the investment funds.
As of June 30, 2003, we had recorded total write-downs to the private equity
funds of approximately $4.2 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 June 30, 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 $ 43,384 $ 5,715 $ 11,240 $ 10,809 $ 7,780 $ 3,088 $ 4,752
======== ======== ========= ======== ======== ======= =======
19
- ------------
* The above table does not include the remaining $5.6 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 $5.4 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 JUNE 30,
2003 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
----------- ---------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Cash equivalents $ 5,048 $ 5,048 $ -- $ -- $ -- $ --
Weighted average interest rate 1.26% 1.26% -- -- -- --
Investments $ 121,749 $ 61,904 $ 11,722 $14,366 $ 15,761 $ 17,996
Weighted average interest rate 2.94% 1.94% 3.35% 3.80% 4.41% 4.10%
Total portfolio $ 126,797 $ 66,170 $ 11,722 $14,366 $ 15,761 $ 17,996
Weighted average interest rate 2.87% 1.89% 3.35% 3.80% 4.41% 4.10%
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 June 30, 2003, the
total assets related to non-US dollar denominated currencies that are subject to
foreign currency exchange risk was approximately $11.4 million.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management, with the
participation of our principal executive officer and principal financial
officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based on such evaluation,
our principal executive officer and principal financial officer have concluded
that as of such date, our disclosure controls and procedures were designed to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable SEC rules and forms and were
effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in our
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the period covered by
this Quarterly Report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
20
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
The Annual Meeting of Stockholders was held on May 13, 2003. At this meeting,
Robert M. Galford was re-elected as a Class III Director of the Board of
Directors. Below are the votes by which such Director was elected:
Total Vote Total Vote Withheld
For Director From Director
- --------------------------------------------------------------
Robert M. Galford 20,333,799 168,174
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Section 13a-15 of
the Securities Exchange Act of 1934.
31.2 Certification of the Chief Financial Officer pursuant to Section 13a-15 of
the Securities Exchange Act of 1934.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350.
(b) Reports on Form 8-K
Forrester filed a Current Report on Form 8-K on April 30, 2003 disclosing under
Item 9 the Company's first quarter press release dated April 30, 2003.
On May 13, 2003, Forrester filed Amendment No. 1 to its Current Report on Form
8-K (originally filed on March 14, 2003) disclosing under Item 7 the
supplemental financial statements required from the acquisition of Giga.
21
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: August 14, 2003
By: /s/ Warren Hadley
-----------------------------------
Warren Hadley
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
Date: August 14, 2003
22
Exhibit Index
EXHIBIT NO. DOCUMENT
- ----------- --------
31.1 Certification of the Chief Executive Officer pursuant to Section 13a-15 of the Securities
Exchange Act of 1934.
31.2 Certification of the Chief Financial Officer pursuant to Section 13a-15 of the Securities
Exchange Act of 1934.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350.