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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, 2004
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 4, 2004, 22,061,193 shares of the registrant's common stock were
outstanding.
FORRESTER RESEARCH, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 3
Consolidated Statements of Income for the Three Month Periods Ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2004 and 2003 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 19
ITEM 4. Controls and Procedures 20
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 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)
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 38,431 $ 22,385
Marketable securities 89,331 104,348
Accounts receivable, net 25,342 40,013
Deferred commissions 5,799 5,999
Prepaid expenses and other current assets 8,277 7,079
----------- ------------
Total current assets 167,180 179,824
Long-term assets:
Property and equipment, net 7,769 8,266
Goodwill 56,858 57,006
Intangible assets, net 11,112 13,456
Deferred income taxes 40,097 40,159
Non-marketable investments 11,162 10,284
Other assets 1,888 1,980
----------- ------------
Total long-term assets 128,886 131,151
----------- ------------
Total assets $ 296,066 $ 310,975
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,013 $ 2,566
Accrued expenses 25,535 31,457
Deferred revenue 67,233 68,630
----------- ------------
Total current liabilities 94,781 102,653
----------- ------------
Stockholders' equity:
Preferred stock, $.01 par value
Authorized - 500 shares
Issued and outstanding - none - -
Common stock, $.01 par value
Authorized - 125,000 shares
Issued - 24,417 and 24,355 shares as of March 31, 2004 and
December 31, 2003, respectively
Outstanding - 22,053 and 22,461 shares as of March 31, 2004 and December 31, 2003,
respectively 244 243
Additional paid-in capital 174,000 172,523
Retained earnings 66,688 66,945
Treasury stock, at cost -- 2,364 and 1,894 shares as of March 31, 2004 and December
31, 2003, respectively (38,487) (30,300)
Accumulated other comprehensive loss (1,160) (1,089)
----------- ------------
Total stockholders' equity 201,285 208,322
----------- ------------
Total liabilities and stockholders' equity $ 296,066 $ 310,975
=========== ============
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,
----------------------
2004 2003
----------------------
(UNAUDITED)
Revenues:
Research services $ 22,989 $ 18,506
Advisory services and other 8,740 5,976
--------- ---------
Total revenues 31,729 24,482
--------- ---------
Operating expenses:
Cost of services and fulfillment 13,139 9,525
Selling and marketing 11,060 7,752
General and administrative 3,411 3,308
Depreciation 1,031 1,693
Amortization of intangible assets 2,344 924
Reorganization costs 1,957 -
--------- ---------
Total operating expenses 32,942 23,202
--------- ---------
(Loss) income from operations (1,213) 1,280
Other income (expense):
Other income, net 826 1,595
Impairments of non-marketable investments - (300)
--------- ---------
(Loss) income before income tax (benefit) provision (387) 2,575
Income tax (benefit) provision (130) 798
--------- ---------
Net (loss) income $ (257) $ 1,777
========= =========
Basic net (loss) income per common share $ (0.01) $ 0.08
========= =========
Diluted net (loss) income per common share $ (0.01) $ 0.08
========= =========
Basic weighted average common shares outstanding 22,255 22,739
========= =========
Diluted weighted average common shares outstanding 22,255 22,920
========= =========
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,
----------------------------
2004 2003
------------- ------------
(UNAUDITED)
Cash flows from operating activities:
Net (loss) income $ (257) $ 1,777
Adjustments to reconcile net (loss) income to net cash provided by operating activities --
Depreciation 1,031 1,693
Amortization of intangible assets 2,344 924
Impairment of non-marketable investment - 300
Tax benefit from exercises of employee stock options 90 81
Deferred income taxes (1) 728
Realized gain on sale of marketable securities - (509)
Amortization of premium on marketable securities 173 207
Changes in assets and liabilities, net of acquisition --
Accounts receivable 15,586 5,803
Deferred commissions 200 192
Prepaid expenses and other current assets (872) (169)
Accounts payable (658) (807)
Accrued expenses (5,862) (5,657)
Deferred revenue (2,295) (925)
------------- ------------
Net cash provided by operating activities 9,479 3,638
------------- ------------
Cash flows from investing activities:
Acquisition of Giga Information Group, Inc., net of cash acquired - (51,549)
Purchases of property and equipment (530) (69)
Purchases of non-marketable investments (963) (1,250)
Decrease in other assets 269 123
Purchases of marketable securities (34,060) (77,884)
Proceeds from sales and maturities of marketable securities 49,150 144,196
------------- ------------
Net cash provided by investing activities 13,866 13,567
------------- ------------
Cash flows from financing activities:
Proceeds from exercises of employee stock options 512 523
Acquisition of treasury stock (6,187) (3,245)
Structured stock repurchase (1,500) (2,000)
------------- ------------
Net cash used in financing activities (7,175) (4,722)
Effect of exchange rate changes on cash and cash equivalents (124) (46)
------------- ------------
Net increase in cash and cash equivalents 16,046 12,437
Cash and cash equivalents, beginning of period 22,385 11,479
------------- ------------
Cash and cash equivalents, end of period $ 38,431 $ 23,916
============= ============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 419 $ 605
------------- ------------
On February 28, 2003, Forrester acquired Giga Information Group, Inc. as follows -
Fair value of assets acquired $ 98,663
Purchase price (62,510)
------------
Liabilities assumed $ 36,153
============
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, 2003. 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, 2004 may not be indicative
of the results that may be expected for the year ended December 31, 2004, 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", and SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure", 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 (loss) income for
the three months ended March 31, 2004 and 2003 would have been approximately as
follows (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
--------- ---------
(IN THOUSANDS)
Net (loss) income as reported $ (257) $ 1,777
Less: Total stock-based employee compensation expense
determined under fair value based method for all
awards (1,218) (1,130)
--------- ---------
Pro-forma net (loss) income $ (1,475) $ 647
========= =========
Basic and diluted net (loss) income per share - as
reported $ (0.01) $ 0.08
--------- ---------
Basic and diluted net (loss) income per share - pro
forma $ (0.07) $ 0.03
========= =========
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 - ACQUISITIONS
(a) Giga Information Group, Inc.
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 has reduced operating expenses of the combined entity
through economies of scale. The aggregate purchase price was $62,510,000 in cash
which consisted of $60,347,000 for the acquisition of all outstanding shares of
Giga common stock; $981,000 of estimated direct acquisition costs; and
$1,182,000 for severance related to 27 employees of Giga terminated as a result
of the acquisition. The results of Giga's operations
6
have been included in Forrester's consolidated financial statements since
February 28, 2003. Forrester elected to treat the acquisition of Giga as a stock
purchase for income tax purposes, and accordingly, the goodwill and intangible
assets are not deductible for income tax purposes.
The following table summarizes the estimated fair values of the Giga assets
acquired and liabilities assumed.
FEBRUARY 28,
2003
--------------
(IN
THOUSANDS)
Assets
Cash $ 5,302
Accounts receivable 10,458
Prepaid expenses and other current assets 1,396
Property and equipment, net 2,108
Goodwill 39,883
Intangible assets 19,484
Deferred Income Taxes 18,666
Non-marketable investments and other assets 1,366
--------------
Total assets $ 98,663
--------------
Liabilities
Accounts payable $ 1,485
Accrued expenses 9,655
Capital lease obligations 204
Deferred revenue 24,809
--------------
Total liabilities $ 36,153
--------------
Net assets acquired $ 62,510
==============
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 related to the intangible assets acquired from Giga was
$2,057,000 and $842,000 during the three months ended March 31, 2004 and 2003,
respectively.
The following table presents pro forma financial information as if the
acquisition of Giga had been completed as of January 1, 2003.
THREE MONTHS ENDED
MARCH 31,
2003
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues $ 34,310
Income from operations $ 837
Net income $ 995
Basic and diluted net income per common share $ 0.04
(b) GigaGroup S.A.
As part of the acquisition of Giga discussed above, Forrester acquired
an equity investment in GigaGroup S.A. ("GigaGroup"). GigaGroup was created in
2000 through the spin-off of Giga's French subsidiary, and held an
7
exclusive agreement to distribute all Giga research and certain services in
France, Belgium, Netherlands, Luxemburg, Switzerland, Italy, Spain, and
Portugal. During 2003, prior to the acquisition discussed below, Forrester
recognized revenues of approximately $964,000 related to this distribution
agreement.
On November 30, 2003, Forrester acquired the assets of GigaGroup. The
acquisition increased the number of client companies and allows Forrester to
sell Giga research and services in France, Belgium, Netherlands, Luxemburg,
Switzerland, Italy, Spain and Portugal. The aggregate purchase price of
$4,088,000 consisted of $2,866,000 in cash, $82,000 of direct acquisition costs,
$521,000 of outstanding accounts receivable due to Forrester and the
contribution of the equity investment in GigaGroup valued at $619,000. Prior to
the acquisition, the equity investment of $1,215,000 was accounted for using the
cost method and, accordingly, was valued at cost unless a permanent impairment
in its value occurred or the investment was liquidated. In connection with the
acquisition, an impairment of $596,000 to the carrying value of the investment
was included in impairments of non-marketable investments in the consolidated
statements of income and, as such, the remaining value of the investment of
$619,000 was included in the purchase price.
Forrester elected to treat the acquisition of GigaGroup as an asset
purchase for income tax purposes and, as such, the goodwill and intangible
assets are deductible for income tax purposes.
The results of GigaGroup's operations have been included in Forrester's
consolidated financial statements since December 1, 2003. GigaGroup's historical
financial position and results of operations prior to the date of acquisition
were not material to Forrester's financial position and results of operations.
The following table summarizes the estimated fair values of the
GigaGroup assets acquired and liabilities assumed at the date of acquisition.
Forrester is continuing to finalize certain estimates and appraisals related to
the purchase price allocation and expects to finalize the purchase accounting in
2004.
NOVEMBER 30,
2003
--------------
(IN THOUSANDS)
Assets:
Accounts receivable $ 548
Goodwill 3,731
Intangible assets 1,990
Other assets 91
--------------
Total assets $ 6,360
--------------
Liabilities:
Accrued expenses $ 1,215
Deferred revenue 1,057
--------------
Total liabilities $ 2,272
--------------
Net assets acquired $ 4,088
==============
The acquired intangible asset is being amortized using an accelerated
method according to the expected cash flows to be received from the underlying
asset over its respective life as follows:
ASSIGNED USEFUL
VALUE LIFE
---------- -------
(IN THOUSANDS)
Amortized intangible asset:
Customer relationships $ 1,990 5 years
----------
Subtotal $ 1,990
==========
8
Amortization expense related to the intangible assets acquired from GigaGroup
was $255,000 during the three months ended March 31, 2004.
NOTE 3 - INTANGIBLE ASSETS
A summary of Forrester's amortizable intangible assets as of March 31, 2004 is
as follows:
GROSS CARRYING ACCUMULATED NET
AMOUNT AMORTIZATION CARRYING AMOUNT
-------------- -------------- ---------------
(IN THOUSANDS)
Amortized intangible assets:
Customer relationships $ 19,960 $ 8,848 $ 11,112
Research content 2,444 2,444 -
Registered trademarks 570 570 -
-------------- -------------- ---------------
Subtotal $ 22,974 $ 11,862 $ 11,112
============== ============== ===============
Amortization expense related to identifiable intangible assets was approximately
$2,344,000 and $924,000 during the three months ended March 31, 2004 and 2003,
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, 2004 $ 4,096
Year ending December 31, 2005 3,496
Year ending December 31, 2006 2,062
Year ending December 31, 2007 1,228
Year ending December 31, 2008 230
--------------
Total $ 11,112
==============
NOTE 4 - REORGANIZATIONS
On January 28, 2004, Forrester announced a reduction of its workforce by
approximately 15 positions in connection with the integration of GigaGroup's
European operations. As a result, Forrester recorded a reorganization charge of
$1,957,000 during the three months ended March 31, 2004. Approximately 53% of
the terminated employees had been members of the sales force, while 27% and 20%
had held administrative and research roles, respectively. The charge consisted
primarily of severance and related benefit costs, and other payments for
professional services incurred in connection with the reorganization.
The costs related to the January 28, 2004 reorganization are as follows:
ACCRUED AS OF
TOTAL CASH MARCH 31,
CHARGE PAYMENTS 2004
------ -------- -------------
(IN THOUSANDS)
Workforce reduction $1,957 $ 554 $ 1,403
These accrued costs related to the January 2004 reorganization are expected to
be paid by December 31, 2004.
In connection with prior reorganizations of its workforce, Forrester has
consolidated its office space. As a result of those consolidations, Forrester
has aggregate accrued facility consolidation costs of $2.4 million as of March
31, 2004. The activity related to these costs during the three months ended
March 31, 2004 is as follows:
ACCRUED AS
OF ACCRUED AS OF
DECEMBER 31, CASH MARCH 31,
2003 PAYMENTS 2004
------------ -------- -------------
(IN THOUSANDS)
Facility costs $ 2,806 $ 371 $ 2,435
9
These accrued facility costs are expected to be paid in the following periods:
TOTAL 2004 2005 2006
--------- -------- --------- --------
(IN THOUSANDS)
Facility costs $ 2,435 $ 1,026 $ 1,239 $ 170
NOTE 5 - NET (LOSS) INCOME PER COMMON SHARE
Basic and diluted net loss per common share for the three months ended March 31,
2004 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,
---------------------
2004 2003
------- -------
(IN THOUSANDS)
Basic weighted average common shares outstanding 22,255 22,739
Weighted average common equivalent shares - 181
------- -------
Diluted weighted average shares outstanding 22,255 22,920
======= =======
During the three-month periods ended March 31, 2004 and 2003, options to
purchase approximately 5,022,000 and 3,065,000 shares of common stock,
respectively, were excluded from the calculation of diluted weighted average
shares outstanding as the effect would have been anti-dilutive.
NOTE 6 - COMPREHENSIVE (LOSS) INCOME
The components of total comprehensive (loss) income for the three month periods
ended March 31, 2004 and 2003 are as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
-------- ---------
(IN THOUSANDS)
Unrealized gain (loss) on marketable securities, net of taxes $ 183 $ (434)
Cumulative translation adjustment (254) 59
-------- ---------
Total other comprehensive loss $ (71) $ (375)
Reported net (loss) income (257) 1,777
-------- ---------
Total comprehensive (loss) income $ (328) $ 1,402
======== =========
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, 2004 and 2003, Forrester contributed approximately $963,000 and
$1.3 million to these investment funds, respectively, resulting in total
cumulative contributions of approximately $16.5 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,
2004 was approximately $11.2 million. During the three months ended March 31,
2003, Forrester recorded an impairment to one of these investments of
approximately $300,000 which is included in the consolidated statements of
income. As of March 31, 2004, the total cumulative impairments recorded is
approximately $4.2 million. During the three months ended March 31, 2004 and
2003, fund management charges of approximately $84,000 and $121,000,
respectively, were included in other income, net in the consolidated statements
of income, bringing the total cumulative fund management charges paid by
Forrester to approximately $1.7 million as of March 31, 2004. 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
10
the terms and conditions of the plan. The payment of such bonuses would result
in compensation expense with respect to the amounts so paid.
In December 2003, Forrester committed to invest an additional $2.0 million over
an expected period of 2 years in an annex fund of one of the two private equity
investment funds. The annex fund investment is outside of the scope of the
previously mentioned bonus plan. As of March 31, 2004, Forrester made no
contributions to this annex fund.
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.
NOTE 8 - OTHER ASSETS
Other assets consist primarily of capitalized third-party survey costs which are
being amortized over their expected period of benefit.
NOTE 9 - 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. As of March 31, 2004, Forrester
had repurchased approximately 2,364,000 shares of common stock at an aggregate
cost of approximately $38.5 million.
During the three months ended March 31, 2004, Forrester entered into a
structured stock repurchase agreement giving Forrester the right to acquire
shares of Forrester's common stock in exchange for an up-front net payment of
$1.5 million. This agreement expires in May 2004. Pursuant to the agreement, if
Forrester's stock price is above a certain price on the expiration date,
Forrester will have the investment of $1.5 million returned with a premium. If
Forrester's stock price is below a certain price on the expiration date,
Forrester will receive approximately 86,000 shares of Forrester's common stock.
The $1.5 million up-front net payment is recorded in stockholders' equity as a
reduction of additional paid-in capital in the accompanying consolidated balance
sheet.
During the three-month period ended December 31, 2003, Forrester entered into a
similar agreement in exchange for an up-front net payment of $2.0 million. Upon
expiration of this agreement in February 2004, Forrester received 119,000 shares
which was recorded as treasury stock.
NOTE 10 - SEGMENT AND ENTERPRISE WIDE REPORTING
Forrester's operations are managed within the following three operating groups
("Operating Groups"): (i) North America, (ii) Europe, and (iii) World Markets,
which includes Asia, Middle East, Africa, and Latin America. All of the
Operating Groups generate revenues through sales of the same research, advisory
and other service offerings. Each of the Operating Groups for North America,
Europe, and World Markets is composed 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. Because
the three Operating Groups have similar economic characteristics, production
processes, and classes of clients, provide similar products and services, and
use similar distribution methods, they are aggregated for presentation in
Forrester's consolidated financial statements. Accordingly, the financial
information disclosed in the consolidated statements of income for the three
months ended March 31, 2004 and 2003 represent the aggregation of the Operating
Groups.
11
Net revenues by geographic client location and as a percentage of total revenues
are as follows:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
--------- ---------
(IN THOUSANDS)
United States $ 21,074 $ 17,600
United Kingdom 2,925 2,035
Europe (excluding United Kingdom) 4,338 2,305
Canada 1,609 925
Other 1,783 1,617
--------- ---------
$ 31,729 $ 24,482
========= =========
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
----- ------
United States 66% 72%
United Kingdom 9 8
Europe (excluding United Kingdom) 14 9
Canada 5 4
Other 6 7
----- ------
100% 100%
===== ======
NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board ("FASB") issued a
proposed Statement, "Share-Based Payment", that addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and would generally require that such transactions be accounted
for using a fair value-based method. As discussed in Note 1, Forrester currently
accounts for share-based compensation transactions using APB Opinion No. 25. If
this statement is issued, the adoption of this interpretation will have a
material negative impact on Forrester's consolidated financial position and
results of operations, the level of which Forrester is currently assessing.
NOTE 12 - SUBSEQUENT EVENT
In April 2004, Forrester relocated its San Francisco office and expects to
recognize reorganization charges of approximately $1.5 million to $2.0 million
for fixed asset write-offs and $4.0 million to $4.5 million in rent expense in
connection with office space vacated as a result of the relocation.
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, statements about the potential
success of WholeView 2 and other product offerings, the ability to achieve all
of the anticipated benefits from the acquisition of Giga Information Group, the
amount of the charge and any cost savings related to reductions in force and
associated actions, and our ability to achieve success as the economy improves.
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 future
activities and results to differ include, among others, our ability to
anticipate business and economic conditions, market trends, competition, the
ability to attract and retain professional staff, possible variations in our
quarterly operating results, risks associated with our ability to offer new
products and services, the actual amount of the charge and any cost savings
related to reductions in force and associated actions, and our dependence on
renewals of our membership-based research services and on key personnel. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events, or otherwise.
We are a leading independent technology research firm that conducts research and
analysis on the impact of technologies on business, consumers, and society. We
provide our clients with an integrated perspective on technology and business,
which we call the WholeView 2. 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 companies with
revenues of $1 billion-plus who use our prescriptive, executable research to
understand and capitalize on business models and emerging technologies.
We derive revenues from memberships to our research product offerings and from
our advisory services and events available through what we refer to as Research,
Data, Consulting, and Community offerings. Contracts for our research products
are available through our Research, Data, or Community offerings and are
typically renewable annually and payable in advance. Research revenues are
recognized as revenue ratably over the term of the contract. Accordingly, a
substantial portion of our billings are initially recorded as deferred revenue.
Advisory services are available through our Data, Consulting, and Community
offerings to supplement and complement memberships to our research. Billings
attributable to advisory services are initially recorded as deferred revenue and
are recognized as revenue when performed. Event billings are also initially
recorded as deferred revenue and are recognized as revenue 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 primary operating expenses consist of cost of services and fulfillment,
selling and marketing expenses, general and administrative expenses,
depreciation and amortization of intangible assets. Cost of services and
fulfillment represents the costs associated with the production and delivery of
our products and services, and 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.
In February 2003, we acquired Giga Information Group, Inc. ("Giga"), a global
technology advisory firm, pursuant to a cash tender offer and second step
merger. The results of Giga's operations have been included in our consolidated
financial statements since February 28, 2003.
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
13
recognized. Agreement value decreased approximately 3% to $120.7 million as of
March 31, 2004 from $124.1 million as of March 31, 2003 and decreased
approximately 4% from $126.3 million as of December 31, 2003 primarily due to
slower than anticipated new business partially offset by improving client
retention rates, dollar retention rates and enrichment rates. Client retention,
measured as the number of client companies who renewed with memberships as a
percentage of those that would have expired, was 71% during the twelve months
ended March 31, 2004 as compared with 62% during the twelve months ended March
31, 2003. Dollar retention, measured as the dollar value of research contracts
renewed as a percentage of the dollar value of research contracts expiring, was
83% during the twelve months ended March 31, 2004 as compared with 73% during
the twelve months ended March 31, 2003. Enrichment, measured as the dollar value
of renewed contracts as a percentage of the dollar value of the corresponding
expiring contracts, was 99% during the twelve months ended March 31, 2004 as
compared with 89% during the twelve months ended March 31, 2003. Client
retention, dollar retention, and enrichment are not necessarily indicative of
the rate of future retention of our revenue base. No single client accounted for
more than 3% of agreement value at March 31, 2004 or 2003.
Reorganization
On January 28, 2004, we announced a reduction of our workforce by approximately
15 positions in connection with the integration of Giga's European operations.
As a result, we recorded a reorganization charge of approximately $2.0 million
during the three months ended March 31, 2004. Approximately 53% of the
terminated employees had been members of the sales force, while 27% and 20% had
held administrative and research roles, respectively. The charge consisted
primarily of severance and related benefit costs, and other payments for
professional services incurred in connection with the reorganization.
The costs related to the January 28, 2004 reorganization are as follows:
ACCRUED AS OF
TOTAL CASH MARCH 31,
CHARGE PAYMENTS 2004
------- -------- -------------
(IN THOUSANDS)
Workforce reduction $ 1,957 $ 554 $ 1,403
These accrued costs related to the January 2004 reorganization are expected to
be paid by December 31, 2004.
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, goodwill, 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 consider the following accounting policies to be those that require the most
subjective judgment or those most important to the portrayal of our financial
condition and results of operations. If actual results differ significantly from
management's estimates and projections, there could be a material effect on our
financial statements. 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 Annual Report on Form 10-K for the year ended
December 31, 2003, previously filed with the SEC.
- - REVENUE RECOGNITION. We generate revenues from licensing research,
performing advisory services, and hosting events. We execute contracts
that govern the terms and conditions of each arrangement.
14
Revenues from contracts that contain multiple deliverables are
allocated among the separate units based on their relative fair values;
however, the amount recognized is limited to the amount that is not
contingent on future performance conditions. Research service revenues
are recognized ratably over the term of the agreement. Advisory service
revenues are recognized during the period in which the services are
performed. Events revenues are recognized upon completion of the
events. Reimbursed out of pocket expenses are recorded as advisory
revenue. 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, 2004,
deferred revenues and deferred commissions totaled $67.2 million and
$5.8 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 $1.4 million as of March 31, 2004. 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, and if the financial
condition of our customers were to improve, the allowances may be
reduced accordingly.
- - NON-MARKETABLE INVESTMENTS. We hold minority interests in companies and
equity investment funds that totaled approximately $11.2 million as of
March 31, 2004. Our investments are in companies that are not publicly
traded, and, therefore, because no established market for these
securities exists, the estimate of the fair value of our investments
requires significant judgment. 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 which consists
primarily of reviewing the investee's revenue and earnings trends
relative to predefined milestones and overall business prospects. We
record impairment charges when we believe that an investment has
experienced a decline in value that is other than temporary. We did not
record any impairment charges during the three months ended March 31,
2004 and recorded impairment charges that totaled approximately
$300,000 during the three months ended March 31, 2003. 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 AND OTHER INTANGIBLE ASSETS. At March 31, 2004, we had
goodwill and identified intangible assets with finite lives related to
our acquisitions that totaled approximately $56.9 million and $11.1
million, respectively. SFAS No. 142, Goodwill and Other Intangible
Assets, 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. Absent an event that indicates a specific impairment may
exist, we have selected November 30th as the date of performing the
annual goodwill impairment test. As of March 31, 2004, 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.
Intangible assets with finite lives are valued according to the future
cash flows they are estimated to produce. These assigned values are
amortized on an accelerated basis which matches the periods those cash
flows are estimated to be produced. We continually evaluate whether
events or circumstances have occurred that indicate that the estimated
remaining useful life of our intangible assets may warrant revision or
that the carrying value of these assets may be impaired. To compute
whether assets have been impaired, the estimated undiscounted future
cash flows for the estimated remaining useful life of the assets are
compared to the carrying value. To the extent that the future cash
flows are less than the carrying value, the assets are written down to
the estimated fair value of the asset.
- - 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 $40.1 million as of March 31, 2004. 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
15
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 our historical taxable income and
projections for our 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 we 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
MARCH 31,
-------------------
2004 2003
------ -------
Research services 72% 76%
Advisory services and other 28 24
------ -------
Total revenues 100 100
Cost of services and fulfillment 41 38
Selling and marketing 35 33
General and administrative 11 13
Depreciation 3 7
Amortization of intangible assets 8 4
Reorganization costs 6 -
------ -------
(Loss) income from operations (4) 5
Other income, net 3 6
Impairments of non-marketable investments - (1)
------ -------
(Loss) income before income tax (benefit) provision (1) 10
Income tax (benefit) provision - 3
------ -------
Net (loss) income (1)% 7%
====== =======
THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003
REVENUES. Total revenues increased 30% to $31.7 million in the three months
ended March 31, 2004 from $24.5 million in the three months ended March 31,
2003. The increase in revenue is primarily attributable to the timing of the
acquisition of Giga. Giga's results of operations have been included in our
consolidated financial statements for three months during the quarter ended
March 31, 2004 as compared to one month during the quarter ended March 31, 2003.
Revenues from research services increased 24% to $23.0 million in the three
months ended March 31, 2004 from $18.5 million in the three months ended March
31, 2003 and comprised 72% and 76% of total revenues during the three-month
periods ended March 31, 2004 and 2003, respectively. The increase in revenues is
primarily attributable to the acquisition of Giga in February 2003 as discussed
above. The decrease in research revenues as a percentage of total revenues is
primarily attributable to shifting customer demand towards our advisory
services. No single client company accounted for more than 3% of revenues during
the three months ended March 31, 2004 or 2003.
Advisory services and other revenues increased 46% to $8.7 million in the three
months ended March 31, 2004 from $6.0 million in the three months ended March
31, 2003. During the three months ended March 31, 2004, we held one event as
compared to four events held during the three months ended March 31, 2003. The
increase in advisory services and other revenues is primarily attributable to an
increase in the number of research employees delivering advisory services to an
increased number of clients as a result of the acquisition of Giga, as well as
increased demand for advisory services which more than offset the decrease in
revenue from events due to the number of events held.
Revenues attributable to customers outside the United States increased 55% to
$10.7 million in the three months ended March 31, 2004 from $6.9 million in the
three months ended March 31, 2003. Revenues attributable to customers outside
the United States increased as a percentage of total revenues to 34% during the
three months
16
ended March 31, 2004 from 28% during the three months ended March 31, 2003. The
increases in international revenues and international revenues as a percentage
of total revenues are primarily attributable to the acquisition of GigaGroup in
November 2003 and currency translation, which accounted for approximately 10% of
the dollar amount of the increase in our total revenues. We invoice our
international clients in U.S. dollars, British pounds sterling and the euro.
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment increased as
a percentage of total revenues to 41% in the three months ended March 31, 2004
from 38% in the three months ended March 31, 2003. These expenses increased 38%
to $13.1 million in the three months ended March 31, 2004 from $9.5 million in
the three months ended March 31, 2003. The increases in expenses and expenses as
a percentage of revenues are primarily attributable to increased compensation
expense resulting from an increase in average headcount from the acquisition of
Giga, which provided for an additional 91 research personnel. The increases in
expenses and expenses as a percentage of revenues are also attributable to
increased amortization of survey costs.
SELLING AND MARKETING. Selling and marketing expenses increased as a percentage
of total revenues to 35% during the three months ended March 31, 2004 from 33%
during the three months ended March 31, 2003. These expenses increased 43% to
$11.1 million in the three months ended March 31, 2004 from $7.8 million in the
three months ended March 31, 2003. The increases in expenses and expenses as a
percentage of total revenues are primarily attributable to increased
compensation expense and increased travel expense resulting from an increase in
average headcount from 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% during the three months ended March 31, 2004
from 13% during the three months ended March 31, 2003. These expenses increased
3% to $3.4 million in the three months ended March 31, 2004 from $3.3 million in
the three months ended March 31, 2003. 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. The increase in expenses is primarily attributable
to increased professional fees.
DEPRECIATION. Depreciation expense decreased 39% to $1.0 million in the three
months ended March 31, 2004 from $1.7 million in the three months ended March
31, 2003. The decrease in these expenses was principally due to computer
equipment and software purchased prior to 2002 becoming fully depreciated
together with low capital expenditures in 2002 and 2003.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets increased
to $2.3 million in the three months ended March 31, 2004 from $924,000 in the
three months ended March 31, 2003. This increase in amortization expense is the
result of the timing of the acquisition of Giga during the first quarter of 2003
as well as amortization of intangible assets as a result of acquisition of
GigaGroup in November 2003.
OTHER INCOME. Other income, consisting primarily of interest income, decreased
48% to $826,000 during the three months ended March 31, 2004 from $1.6 million
during the three months ended March 31, 2003. 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.
REORGANIZATION COSTS. Reorganization costs in the three months ended March 31,
2004 consisted primarily of severance and related benefits costs in connection
with the elimination of approximately 15 positions in January 2004.
IMPAIRMENTS OF NON-MARKETABLE INVESTMENTS. There was no charge for impairments
of non-marketable investments during the three months ended March 31, 2004.
Impairments of non-marketable investments resulted in net charges of $300,000
during the three months ended March 31, 2003.
PROVISION FOR INCOME TAXES. During the three months ended March 31, 2004, we
recorded an income tax benefit of $130,000 reflecting an effective tax rate of
33.5%. During the three months ended March 31, 2003, we recorded an income tax
provision of $798,000, which reflected an effective tax rate of 31%. The
increase in our effective tax rate for fiscal year 2004 resulted primarily from
our tax-exempt investment income comprising a smaller percentage of our
estimated total pre-tax income in 2004 as compared to 2003.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through funds generated from
operations. Memberships for research services, which constituted approximately
72% of our revenues during the three months ended March 31, 2004, are
17
annually renewable and are generally payable in advance. We generated cash from
operating activities of $9.5 million and $3.6 million during the three months
ended March 31, 2004 and 2003, respectively. The increase in cash provided from
operations is primarily attributable to a decrease in accounts receivable
resulting from customer payments.
During the three months ended March 31, 2004, we generated $13.9 million of cash
from investing activities, consisting primarily of $15.1 million received from
net sales of marketable securities, offset by $963,000 for net purchases of
non-marketable investments and $530,000 for purchases of capital expenditures.
We regularly invest excess funds in short-and intermediate-term interest-bearing
obligations of investment grade.
In the first quarter of 2003, we acquired Giga pursuant to a cash tender offer
and second step merger. The aggregate purchase price was $62,510,000 in cash
which consisted of $60,347,000 for the acquisition of all outstanding shares of
Giga common stock; $981,000 of direct acquisition costs; and $1,182,000 for
severance related to 27 employees terminated as a result of the acquisition.
As part of the acquisition of Giga, we received an equity investment in
GigaGroup S.A. ("GigaGroup"). In November 2003, we acquired the assets of
GigaGroup for a total purchase price of $4.1 million, consisting of $2.9 million
in cash, $82,000 in direct acquisition costs, $521,000 of outstanding accounts
receivable due to us, and the contribution of the equity investment in GigaGroup
valued at $619,000.
In June 2000, we committed to invest $20.0 million in two private equity
investment funds over a period of up to five years. As of March 31, 2004, we had
contributed approximately $16.5 million to the funds. The timing and amount of
future contributions are entirely within the discretion of the investment funds.
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. To date, we have not paid any bonuses under this plan.
In December 2003, we committed to invest an additional $2.0 million over an
expected period of 2 years in an annex fund of one of the private equity
investment funds. The timing of this additional investment is within the
discretion of the fund.
During the three months ended March 31, 2004, we used $7.2 million of cash in
financing activities, consisting of $6.2 million for repurchases of our common
stock and $1.5 million for the investment in a structured stock repurchase
program, offset by $512,000 in proceeds from the exercise of employee stock
options.
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, 2004, we had repurchased
2,364,000 shares of common stock at an aggregate cost of approximately $38.5
million.
During the three months ended March 31, 2004, 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 $1.5 million. This agreement expires
in May 2004. Pursuant to the agreement, if our stock price is above a certain
price on the expiration date, we will have the investment of $1.5 million
returned with a premium. If our stock price is below a certain price on the
expiration date, we will receive approximately 86,000 shares of our common
stock. The $1.5 million up-front net payment is recorded in stockholders' equity
as a reduction of additional paid-in capital in the accompanying consolidated
balance sheet.
During the three months ended December 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 which was recorded
as a reduction of additional paid-in-capital. Upon expiration of the agreement
in February 2004, we received approximately 119,000 shares of our common stock
and reclassified the up-front net payment from additional paid-in-capital to
treasury stock.
As of March 31, 2004, we had cash and cash equivalents of $38.4 million and
marketable securities of $89.3 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.
18
As of March 31, 2004, we had future contractual obligations as follows*:
FUTURE PAYMENTS DUE BY YEAR
-----------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006 2007 2008 THEREAFTER
- ---------------------------------- --------- -------- -------- -------- -------- ------- ----------
(IN THOUSANDS)
Operating leases $ 41,732 $ 9,725 $ 11,605 $ 8,530 $ 3,833 $ 2,314 $ 5,725
Purchase obligations 1,458 1,458 - - - - -
--------- -------- -------- -------- -------- ------- ----------
Total contractual cash obligations $ 43,190 $ 11,183 $ 11,605 $ 8,530 $ 3,833 $ 2,314 $ 5,725
========= ======== ======== ======== ======== ======= ==========
- ------------
* The above table does not include the remaining $5.5 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 $3.2 million.
We do not maintain any off-balance sheet financing arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 14 months. These available-for-sale
securities are subject to interest rate risk and will decline 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,
2004 FY 2004 FY 2005 FY 2006 FY 2007
------------ ---------- --------- --------- ---------
Cash equivalents $ 27,500 $ 27,500 $ - $ - $ -
Weighted average interest rate 1.12% 1.12% - - -
Investments $ 89,331 $ 40,824 $ 13,500 $ 17,395 $ 17,612
Weighted average interest rate 3.02% 1.76% 3.82% 4.25% 4.10%
Total portfolio $ 116,831 $ 68,324 $ 13,500 $ 17,395 $ 17,612
Weighted average interest rate 2.57% 1.50% 3.82% 4.25% 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. However, during the
three-months ended March 31, 2004, currency translation resulted in a 3%
increase in our revenues. 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, 2004, the total assets related
to non-U.S. dollar denominated currencies that are subject to foreign currency
exchange risk were approximately $19.0 million.
19
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 March
31, 2004. 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 quarter ended March 31, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
20
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 2001, we announced a program authorizing the repurchase of up to $50
million of our common stock ("the stock repurchase program"). During each of the
three months in the quarter ended March 31, 2004, we purchased the following
shares of our common stock under the stock repurchase program:
MAXIMUM DOLLAR VALUE
THAT MAY YET BE
AVERAGE PURCHASED UNDER THE
TOTAL NUMBER OF PRICE PAID STOCK REPURCHASE
PERIOD SHARES PURCHASED PER SHARE PROGRAM
- ------------------------ ---------------- ---------- --------------------
(in thousands)
January 1 - January 31 21,200 $ 16.42 $ 19,352
February 1 - February 29 356,187 $ 17.10 $ 13,263
March 1 - March 31 91,700 $ 19.08 $ 11,513
---------------- ---------- --------------------
Total 469,087 $ 17.45 $ 11,513
================ ========== ====================
All purchases of our common stock were made under the stock repurchase program.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of the Principal Executive Officer
31.2 Certification of the Principal Financial Officer
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K on January 28, 2004 furnishing under Item
12 our first quarter press release dated January 28, 2004.
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: May 7, 2004
By: /s/ Warren Hadley
-------------------------------------------
Warren Hadley
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
Date: May 7, 2004
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Exhibit Index
EXHIBIT NO. DOCUMENT
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31.1 Certification of the Principal Executive Officer
31.2 Certification of the Principal Financial Officer
32.1 Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
23