UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended March 31, 2002.
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 / /
As of May 13, 2002, 23,564,391 shares of the registrant's common stock
were outstanding.
FORRESTER RESEARCH, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 3
and December 31, 2001
Consolidated Statements of Income for the Three
Months Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the Three 5
Months Ended March 31, 2002 and 2001
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security-Holders 18
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORRESTER RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
ASSETS
MARCH 31, DECEMBER 31,
2002 2001
--------- ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 13,094 $ 17,747
Marketable securities 190,115 187,435
Accounts receivable, net 15,110 24,498
Deferred commissions 3,823 4,444
Prepaid income taxes 766 559
Prepaid expenses and other current assets 5,988 5,483
--------- ---------
Total current assets 228,896 240,166
--------- ---------
Long-term assets:
Property and equipment, net 16,399 21,258
Goodwill and other intangible assets, net 14,251 14,333
Deferred income taxes 19,919 19,387
Non-marketable investments and other assets 9,296 10,008
--------- ---------
Total long-term assets 59,865 64,986
--------- ---------
Total assets $ 288,761 $ 305,152
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,048 $ 2,667
Customer deposits 384 498
Accrued expenses 17,985 17,938
Accrued income taxes 2,444 3,721
Deferred revenue 53,380 59,930
--------- ---------
Total current liabilities 76,241 84,754
--------- ---------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value
Authorized -- 500 shares
Issued and outstanding -- none -- --
Common stock, $.01 par value
Authorized -- 125,000 shares
Issued and outstanding -- 23,269 and 23,052 shares as of
March 31, 2002 and December 31, 2001, respectively 233 230
Additional paid-in capital 158,461 156,043
Retained earnings 58,050 64,165
Treasury stock, at cost -- 185 shares as of March 31, 2002 (3,547) --
Accumulated other comprehensive loss (677) (40)
--------- ---------
Total stockholders' equity 212,520 220,398
--------- ---------
Total liabilities and stockholders' equity $ 288,761 $ 305,152
========= =========
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,
2002 2001
-------- --------
(UNAUDITED)
Revenues:
Core research $ 19,286 $ 35,352
Advisory services and other 6,770 8,293
-------- --------
Total revenues 26,056 43,645
-------- --------
Operating expenses:
Cost of services and fulfillment 8,981 12,297
Selling and marketing 8,472 17,746
General and administrative 3,326 4,976
Depreciation and amortization 2,148 2,722
Reorganization costs 9,088 --
-------- --------
Total operating expenses 32,015 37,741
(Loss) income from operations (5,959) 5,904
Other income:
Other income, net 1,560 1,757
Impairments of non-marketable investments (2,248) --
-------- --------
(Loss) income before income tax (benefit) provision (6,647) 7,661
Income tax (benefit) provision (532) 2,796
-------- --------
Net (loss) income $ (6,115) $ 4,865
======== ========
Basic net (loss) income per common share $ (0.26) $ 0.22
======== ========
Diluted net (loss) income per common share $ (0.26) $ 0.20
======== ========
Basic weighted average common shares outstanding 23,146 22,054
======== ========
Diluted weighted average common shares outstanding 23,146 24,670
======== ========
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,
2002 2001
-------- --------
(UNAUDITED)
Cash flows from operating activities:
Net (loss) income $ (6,115) $ 4,865
Adjustments to reconcile net (loss) income to net cash provided by operating
activities --
Depreciation and amortization 2,148 2,722
Impairments of non-marketable investments 2,248 --
Loss on disposals of property and equipment 92 --
Tax benefit from exercises of employee stock options -- 6,556
Deferred income taxes (532) (3,760)
Non-cash reorganization costs 2,772 --
Increase in provision for doubtful accounts -- 150
Changes in assets and liabilities --
Accounts receivable 9,579 20,119
Deferred commissions 621 1,510
Prepaid income taxes (212) (7)
Prepaid expenses and other current assets (528) (1,822)
Accounts payable (611) (2,107)
Customer deposits (143) 101
Accrued expenses 179 2,630
Accrued income taxes (1,327) --
Deferred revenue (6,519) (8,673)
-------- --------
Net cash provided by operating activities 1,652 22,284
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (244) (5,225)
Purchases of non-marketable investments (1,675) (3,318)
Increase in other assets 139 (8)
Purchases of marketable securities (21,782) (57,527)
Proceeds from sales and maturities of marketable securities 18,360 40,001
-------- --------
Net cash used in investing activities (5,202) (26,077)
-------- --------
Cash flows from financing activities:
Proceeds from exercises of employee stock options 2,421 6,553
Acquisition of treasury stock (3,547) --
-------- --------
Net cash (used in) provided by financing activities (1,126) 6,553
Effect of exchange rate changes on cash and cash equivalents 23 98
-------- --------
Net (decrease) increase in cash and cash equivalents (4,653) 2,858
Cash and cash equivalents, beginning of period 17,747 15,848
-------- --------
Cash and cash equivalents, end of period $ 13,094 $ 18,706
======== ========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 1,804 $ 7
======== ========
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 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, 2001. 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 three months ended March 31, 2002 may not be indicative of
the results that may be expected for the year ended December 31, 2002, or any
other period.
NOTE 2 - ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all
business combinations initiated after June 30, 2001, to be accounted for using
the purchase method. SFAS No. 141 also specifies criteria that acquired
intangible assets must meet to be recognized and reported apart from goodwill.
As a result of the adoption of SFAS No. 141 on June 30, 2001, Forrester
reclassified approximately $82,000 of assembled workforce related intangible
assets into goodwill. The adoption of SFAS No. 141 did not have a material
effect on Forrester's consolidated financial position or results of operations.
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. Forrester adopted
SFAS No. 142 effective January 1, 2002. In connection with the SFAS No. 142
transitional goodwill impairment evaluation, Forrester was required to perform
an assessment of whether there was an indication that goodwill in any reporting
units was impaired as of the date of adoption. Through an independently obtained
appraisal, it was determined that the carrying amount of the reporting unit with
goodwill did not exceed the fair value, and as a result no transitional
impairment loss exists.
Had the provisions of SFAS No. 142 been applied for the three months ended March
31, 2001, Forrester's net (loss) income and net (loss) income per share would
have been as follows:
THREE MONTHS ENDED MARCH 31,
2002 2001
--------- ---------
(in thousands, except
per share data)
Reported net (loss) income $ (6,115) $ 4,865
Effect of SFAS No. 142, net of tax -- 114
--------- ---------
Adjusted net (loss) income $ (6,115) $ 4,979
========= =========
Reported basic net (loss) income per common share $ (0.26) $ 0.22
Effect of SFAS No. 142, net of tax -- 0.01
--------- ---------
Adjusted basic net (loss) income per common share $ (0.26) $ 0.23
========= =========
Reported diluted net (loss) income per common share $ (0.26) $ 0.20
Effect of SFAS No. 142, net of tax -- 0.00
--------- ---------
Adjusted diluted net (loss) income per common share $ (0.26) $ 0.20
========= =========
Amortization expense related to identifiable intangible assets that will
continue to be amortized in the future was approximately $82,000 for the three
months ended March 31, 2002 and 2001, respectively. Additional amortization
expense in the three months ended March 31, 2001 related to goodwill that ceased
6
to be amortized with the adoption of SFAS No. 142 was approximately $179,000.
Estimated amortization expense related to identifiable intangible assets that
will continue to be amortized is as follows:
AMOUNT
(IN THOUSANDS)
Remaining nine months ending December 31, 2002 $ 247
Year ending December 31, 2003 279
Year ending December 31, 2004 129
Year ending December 31, 2005 129
Year ending December 31, 2006 129
Year ending December 31, 2007 94
------
Total $1,007
======
A summary of Forrester's intangible assets as of March 31, 2002 is as follows:
GROSS CARRYING ACCUMULATED NET
AMOUNT AMORTIZATION CARRYING AMOUNT
------ ------------ ---------------
(IN THOUSANDS)
Amortized intangible assets:
Customer base $ 900 $ 193 $ 707
Research content 600 300 300
------- ------- -------
Subtotal $ 1,500 $ 493 1,007
======= =======
Goodwill 13,244
-------
Total $14,251
=======
NOTE 3 - REORGANIZATIONS
On January 10, 2002, Forrester announced the 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 a 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. This 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 included
computer equipment, software, and furniture and fixtures related to terminated
employees and vacated locations in connection with the reorganization.
Costs related to the January 10, 2002 reorganization are as follows:
TOTAL NON-CASH CASH ACCRUED AS OF
CHARGE CHARGES PAYMENTS MARCH 31, 2002
------ ------- -------- --------------
(IN THOUSANDS)
Workforce reduction $3,545 $ -- $3,073 $ 472
Facility consolidation and other related costs 2,934 -- 1,183 1,751
Depreciable assets 2,772 2,772 -- --
------ ------ ------ ------
Total $9,251 $2,772 $4,256 $2,223
====== ====== ====== ======
7
The accrued costs related to the January 10, 2002 reorganization are expected to
be paid in the following periods:
ACCRUED AS OF
2002 2003 2004 2005 2006 MARCH 31, 2002
---- ---- ---- ---- ---- --------------
(IN THOUSANDS)
Workforce reduction $ 472 $ -- $ -- $ -- $ -- $ 472
Facility consolidation and
other related costs 1,170 199 146 146 90 1,751
------ ------ ------ ------ ------ ------
Total $1,642 $ 199 $ 146 $ 146 $ 90 $2,223
====== ====== ====== ====== ====== ======
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. As a result, Forrester reduced its work force by 111 positions,
closed sales offices in Atlanta, Los Angeles, Melbourne, New York, and Zurich,
and recorded a reorganization charge of approximately $3.1 million in the three
months ended September 30, 2001. Approximately 66% of the terminated employees
had been members of the sales force, while 12% and 22% had held research and
administrative roles, respectively. 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.
Costs related to the July 12, 2001 reorganization that were accrued as of
December 31, 2001 were utilized during the three months ended March 31, 2002 as
follows:
ACCRUED AS OF ACCRUED AS OF
DECEMBER 31, CASH EXCESS MARCH 31,
2001 PAYMENTS RESERVE 2002
---- -------- ------- ----
(IN THOUSANDS)
Workforce reduction $104 $ 49 $ 55 $ --
Facility consolidation and other
related costs 118 10 108 --
---- ---- ---- -------
Total $222 $ 59 $163 $ --
==== ==== ==== =======
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 4 - NET INCOME PER COMMON SHARE
Basic and diluted net income per common share for the three months ended March
31, 2002 were computed by dividing net income 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, 2001 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. Reconciliation of basic to diluted weighted
average shares outstanding is as follows:
8
THREE MONTHS ENDED
MARCH 31,
2002 2001
------ ------
(IN THOUSANDS)
Basic weighted average common shares outstanding 23,146 22,054
Weighted average common equivalent shares -- 2,616
------ ------
Diluted weighted average shares outstanding 23,146 24,670
====== ======
As of March 31, 2002 and 2001, approximately 5,851,000 and 601,000 stock
options, respectively, were excluded from the calculation of diluted weighted
average shares outstanding as the effect would have been anti-dilutive.
NOTE 5 - COMPREHENSIVE (LOSS) INCOME
The components of other comprehensive (loss) income for the three months ended
March 31, 2002 and 2001 are as follows:
THREE MONTHS ENDED
MARCH 31,
2002 2001
---- ----
(IN THOUSANDS)
Unrealized (loss) gain on marketable securities, net of taxes $ (742) $1,125
Cumulative translation adjustment 105 343
------ ------
Total other comprehensive (loss) income $ (637) $1,468
Reported net (loss) income (6,115) 4,865
------ ------
Total comprehensive (loss) income (6,752) 6,333
====== ======
NOTE 6 - NON-MARKETABLE INVESTMENTS
In June 2000, Forrester committed to invest $20.0 million in two private equity
investment funds over a period of up to five years. During the three months
ended March 31, 2002, Forrester contributed approximately $1.7 million to these
investment funds, resulting in total cumulative contributions of approximately
$8.9 million. The carrying value of the investment funds as of March 31, 2002
was approximately $6.4 million. During the three months ended March 31, 2002,
Forrester recorded an impairment to these investments of approximately $784,000,
which is included in the consolidated statement of income, increasing the total
cumulative impairments recorded to approximately $1,691,000 as of March 31,
2002. During the three months ended March 31, 2002, fund management charges of
approximately $121,000 were included in other income in the consolidated
statement of income, bringing the total cumulative fund management charges to
approximately $725,000. 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 investment funds, 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
9
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
quarter.
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. Revenues related to the Internet AdWatch
product were not material to Forrester's total revenues in the three months
ended March 31, 2001. This transaction resulted in a net gain to Forrester of
approximately $1.7 million during the three months ended September 30, 2001,
which was included in other income in the consolidated statement of income. The
investment in Evaliant is being accounted for using the cost method and,
accordingly, is being valued at cost unless an impairment in its value that is
other than temporary occurs or the investment is 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 during the three
months ended March 31, 2002, which was included in the consolidated statement of
income, reducing the carrying value to approximately $250,000 as of March 31,
2002. As of March 31, 2002, Forrester determined that no further impairment had
occurred.
NOTE 7 - STOCK REPURCHASE PROGRAM
In October 2001, Forrester announced a program authorizing the repurchase of up
to $50 million of its common stock. The shares repurchased will be used, among
other things, in connection with Forrester's employee stock option and stock
purchase plans and for potential acquisitions. During the three months ended
March 31, 2002, Forrester repurchased 185,000 shares of common stock at an
aggregate cost of approximately $3.5 million.
NOTE 8 - 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"). All of the
Operating Groups generate revenues through sales of the same core research,
strategic services, and events offerings. The Operating Groups for North
America, Europe, and Asia, MEA, and Latin America are comprised of sales forces
responsible for clients located in each respective region and research personnel
focused primarily on issues generally more relevant to clients in each of those
regions. 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. Due to the four Operating Groups having similarities in
economic characteristics, the nature of products and services provided,
production processes, class of client, and distribution methods used, they are
aggregated for presentation. Accordingly, the financial information disclosed in
the consolidated statement of income for the three months ended March 31, 2002
materially represents the aggregation of the Operating Groups.
Through December 31, 2001, Forrester viewed its operations and managed its
business principally as one segment, research services. As a result, the
financial information disclosed in the consolidated statement of income
materially represents all of the financial information related to Forrester's
principal operating segment through that date.
10
Net revenues by geographic client location and as a percentage of total revenues
are as follows:
THREE MONTHS ENDED MARCH 31,
2002 2001
------- -------
(IN THOUSANDS)
United States $18,671 $30,375
United Kingdom 2,374 3,401
Europe (excluding United Kingdom) 2,407 5,088
Canada 788 2,135
Other 1,816 2,646
------- -------
$26,056 $43,645
======= =======
THREE MONTHS ENDED MARCH 31,
2002 2001
---- ----
United States 72% 70%
United Kingdom 9 8
Europe (excluding United Kingdom) 9 11
Canada 3 5
Other 7 6
---- ----
100% 100%
==== ====
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. Under this
statement, it is required that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and it broadens the presentation of discontinued operations to include
more disposal transactions. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early adoption permitted.
The adoption of SFAS No. 144 did not have a material effect on Forrester's
consolidated financial position or results of operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as "expects," "believes," "anticipates," "intends," "plans,"
"estimates," or similar expressions are intended to identify these
forward-looking statements. These statements are based on our current plans and
expectations and involve risks and uncertainties that could cause actual future
activities and results of operations to be materially different from those set
forth in the forward-looking statements. Important factors that could cause
actual results to differ materially from those indicated by forward-looking
statements include, among others, the ability to attract and retain qualified
professional staff, fluctuations in our quarterly operating results, a decline
in renewals for our membership-based core research, loss of key management,
failure to anticipate and respond to market trends, our ability to develop and
offer new products and services, and competition. This list of factors is not
exhaustive. Other risks and uncertainties are discussed elsewhere in this report
and in further detail under the caption entitled "Risks and Uncertainties"
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2001 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 our 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. Our approach provides
companies with the strategies, data, and product evaluations they need to evolve
their business models and infrastructure to embrace broader on-line markets and
to scale their operations. We help our clients develop business strategies that
use technology to win customers, identify new markets, and gain competitive
operational advantages. Our products and services primarily benefit the senior
management, business strategists, and marketing and technology professionals at
Global 3,500 companies who use our prescriptive, executable research to
understand and capitalize on business models and emerging technologies.
We derive revenues from memberships to our core research and from our advisory
services and Forum and Summit events. 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 on a monthly basis
over the term of the contract. 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. Forum and Summit 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 they include
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.
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 decreased
approximately 47% to $90.1 million at March 31, 2002 from $170.4 million at
March 31, 2001. No single client accounted for more than 2% of agreement value
at March 31, 2002. In past years, a substantial portion of our client companies
renewed expiring contracts. Over the last 5 quarters, we have been
experiencing a decline in renewal rates. Approximately 50% of our client
companies with memberships expiring during the twelve months ended March 31,
2002 renewed one or more memberships for our products and services, compared
with 70% of client companies with memberships expiring during the twelve months
ended March 31, 2001.
12
Renewal rates are not necessarily indicative of the rate of future retention of
our revenue base. The declines in agreement value and renewal rate are
reflective of the more difficult economic environment and will lead to a
decrease in revenues during the three months ended June 30, 2002 as compared to
the corresponding three-month period in 2001.
On January 10, 2002, we announced the reduction of our work force by
approximately 126 positions in response to conditions and demands of the market
and a slower economy. As a result, we recorded a 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. This 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 included
computer equipment, software, and furniture and fixtures related to terminated
employees and vacated locations in connection with the reorganization.
Costs related to the January 10, 2002 reorganization are as follows:
TOTAL NON-CASH CASH ACCRUED AS OF
CHARGE CHARGES PAYMENTS MARCH 31, 2002
------ ------- -------- --------------
(IN THOUSANDS)
Workforce reduction $3,545 $ -- $3,073 $ 472
Facility consolidation and other related costs 2,934 -- 1,183 1,751
Depreciable assets 2,772 2,772 -- --
------ ------ ------ ------
Total $9,251 $2,772 $4,256 $2,223
====== ====== ====== ======
The accrued costs related to the January 10, 2002 reorganization are expected to
be paid in the following periods (in thousands):
ACCRUED AS OF
2002 2003 2004 2005 2006 MARCH 31, 2002
---- ---- ---- ---- ---- --------------
(IN THOUSANDS)
Workforce reduction $ 472 $ -- $ -- $ -- $ -- $ 472
Facility consolidation and
other related costs 1,170 199 146 146 90 1,751
------ ------ ------ ------ ------ ------
Total $1,642 $ 199 $ 146 $ 146 $ 90 $2,223
====== ====== ====== ====== ====== ======
On July 12, 2001, we announced a sales force reorganization and general work
force reduction in response to conditions and demands of the market and a slower
economy. As a result, we reduced our work force by 111 positions, closed sales
offices in Atlanta, Los Angeles, Melbourne, New York, and Zurich, and recorded a
reorganization charge of approximately $3.1 million in the three months ended
September 30, 2001. Approximately 66% of the terminated employees had been
members of the sales force, while 12% and 22% had held research and
administrative roles, respectively. 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.
13
Costs related to the July 12, 2001 reorganization that were accrued as of
December 31, 2001 were utilized during the three months ended March 31, 2002 as
follows:
ACCRUED AS OF
DECEMBER 31, CASH EXCESS ACCRUED AS OF
2001 PAYMENTS RESERVE MARCH 31, 2002
---- -------- ------- --------------
(IN THOUSANDS)
Workforce reduction $104 $ 49 $ 55 $ --
Facility consolidation and other
related costs 118 10 108 --
---- ---- ---- -------
Total $222 $ 59 $163 $ --
==== ==== ==== =======
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.
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. 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.
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 listing 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 a detailed discussion of the application of these and our other
accounting policies, see Note 1 in the Notes to Consolidated Financial
Statements of our December 31, 2001 Annual Report on Form 10-K, previously filed
with the SEC.
- - REVENUE RECOGNITION. We generally invoice our core research, advisory, and
other services when orders are received. The contract amount is recorded as
accounts receivable and deferred revenue when the client is invoiced. Core
research is generally recorded as revenue ratably over the term of the
agreement. Advisory and other services are recognized during the period in which
the services are performed. Furthermore, our revenue recognition determines the
timing of commission expenses that are deferred and expensed to operations as
the related revenue is recognized. We evaluate the recoverability of deferred
commissions at each balance sheet date. As of March 31, 2002, deferred revenues
and deferred commissions totaled $53.4 million and $3.8 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 $856,000 as of
March 31, 2002. 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.
14
- - NON-MARKETABLE INVESTMENTS. We hold minority interests in companies and equity
investment funds that totaled approximately $9.2 million as of March 31, 2002.
We record impairment charges when we believe that an investment has experienced
a decline in value that is other than temporary. Our estimates have led us to
record cumulative impairment charges that total approximately $6.4 million,
including approximately $2.2 million recorded in the three months ended March
31, 2002. 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. We have goodwill and other intangible
assets that totaled approximately $14.3 million as of March 31, 2002. Forrester
adopted SFAS No. 142 effective January 1, 2002. In connection with the SFAS No.
142 transitional goodwill impairment evaluation, Forrester was required to
perform an assessment of whether there was an indication that goodwill in any of
our reporting units was impaired as of the date of adoption. Through an
independently obtained appraisal, it was determined that the carrying amount of
our reporting unit with goodwill did not exceed the fair value, and as a result
no transitional impairment loss exists. Our judgments regarding the existence of
impairment indicators are based on market conditions and operational
performance. Future events could cause us to conclude that impairment indicators
exist and that goodwill or other intangible assets are impaired. Any resulting
impairment loss could have a material adverse impact on our financial condition
and results of operations.
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,
2002 2001
---- ----
Core research 74% 81%
Advisory services and other 26 19
---- ----
Total revenues 100 100
Cost of services and fulfillment 34 28
Selling and marketing 33 41
General and administrative 13 11
Depreciation and amortization 8 6
Reorganization costs 35 --
---- ----
(Loss) income from operations (23) 14
Other income, net 6 4
Impairment of non-marketable investments (9) --
---- ----
(Loss) income before income tax (benefit) provision (26) 18
Income tax (benefit) provision (2) 7
---- ----
Net (loss) income (24)% 11%
==== ====
THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001
REVENUES. Total revenues decreased 40% to $26.1 million in the three months
ended March 31, 2002 from $43.6 million in the three months ended March 31,
2001. Revenues from core research decreased 45% to $19.3 million in the three
months ended March 31, 2002 from $35.4 million in the three months ended March
31, 2001 and comprised 74% of total revenues for the quarter. Decreases in total
revenues and
15
revenues from core research were primarily attributable to decreases in the
number of client companies to 1,309 at March 31, 2002 from 2,136 at March 31,
2001, as well as lower average contract values. No single client company
accounted for more than 2% of revenues during the three months ended March 31,
2002 or 2001.
Advisory services and other revenues decreased 18% to $6.8 million in the
three months ended March 31, 2002 from $8.3 million in the three months ended
March 31, 2001. This decrease was primarily attributable to decreased demand for
advisory services and is reflected in the reduction of analyst staffing in our
research organization to 144 at March 31, 2002 from 227 at March 31, 2001.
Revenues attributable to customers outside the United States decreased 44%
to $7.4 million in the three months ended March 31, 2002 from $13.3 million in
the three months ended March 31, 2001. Revenues attributable to customers
outside the United States decreased as a percentage of total revenues to 28% for
the three months ended March 31, 2002 from 30% for the three months ended March
31, 2001. The decrease in international revenues as a percentage of total
revenues was primarily attributable to our not holding any European events in
the three months ended March 31, 2002 while holding one in the three months
ended March 31, 2001. The decrease in international revenues is primarily
attributable to a decline in revenues from core research related to decreases in
the number of client companies, as well as lower average contract values. We
invoice our international clients in U.S. dollars, except for those billed by
our UK Research Centre, which invoices its clients in British pounds sterling.
To date, the effect of changes in currency exchange rates have 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 34% in the three months ended
March 31, 2002 from 28% in the three months ended March 31, 2001. These expenses
decreased 27% to $9.0 million in the three months ended March 31, 2002 from
$12.3 million in the three months ended March 31, 2001. The increase in expense
as a percentage of revenues was primarily attributable to a greater amount of
overhead expenses being allocated to cost of services and fulfillment as a
result of the research organization comprising a greater proportion of total
headcount in 2002. The increase in expense as a percentage of revenues was also
due to increased survey costs and was compounded by the smaller revenue base in
2002. The expense decrease in the current period was principally due to lower
compensation expenses as a result of the reduction in analyst staffing in our
research organization to 144 at March 31, 2002 from 227 at March 31, 2001.
SELLING AND MARKETING. Selling and marketing expenses decreased as a
percentage of total revenues to 33% in the three months ended March 31, 2002
from 41% in the three months ended March 31, 2001. These expenses decreased 52%
to $8.5 million in the three months ended March 31, 2002 from $17.7 million in
the three months ended March 31, 2001. The decreases in expenses and expense as
a percentage of revenues were principally due to lower compensation and travel
expenses as a result of the reduction in the number of direct sales personnel to
136 at March 31, 2002 from 290 at March 31, 2001.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
as a percentage of total revenues to 13% in the three months ended March 31,
2002 from 11% in the three months ended March 31, 2001. These expenses decreased
33% to $3.3 million in the three months ended March 31, 2002 from $5.0 million
in the three months ended March 31, 2001. The increase in expense as a
percentage of revenues was principally due to a smaller revenue base in 2002.
The decrease in expenses was principally due to lower compensation expenses as a
result of the reduction in staffing in our technology, operations, finance, and
strategy groups to 91 at March 31, 2002 from 165 at March 31, 2001.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
decreased 21% to $2.1 million in the three months ended March 31, 2002 from $2.7
million in the three months ended March 31, 2001. The decrease in these expenses
was principally due to the write-off of depreciable assets in connection with
the reorganizations discussed previously, as well as decreased capital spending
in 2001 compared to 2000. The adoption of SFAS No. 142 also resulted in a
reduction in quarterly amortization of intangible assets to approximately
$82,000 in 2002 from approximately $261,000 in 2001.
OTHER INCOME. Other income, consisting primarily of interest income,
decreased 11% to $1.6 million in the three months ended March 31, 2002 from $1.8
million in the three months ended March 31, 2001. The decrease was principally
due to marketable securities producing lower effective yields due to a decline
16
in market interest rates. Impairments of non-marketable investments also
resulted in charges of $2.2 million during the three months ended March 31,
2002.
PROVISION FOR INCOME TAXES. During the three months ended March 31, 2002,
we recorded a tax benefit of $532,000 reflecting an effective tax rate of 8.0%.
During the three months ended March 31, 2001, we recorded a tax provision of
$2.8 million, which reflected an effective tax rate of 36.5%. The decrease in
our effective tax rate resulted primarily from our expected taxable income for
fiscal 2002 being mainly attributable to interest income from our marketable
securities, which are predominantly tax-exempt investments.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations during these periods primarily through funds
generated from operations. Memberships for core research, which constituted
approximately 74% of our revenues during the three months ended March 31, 2002,
are annually renewable and are generally payable in advance. We generated cash
from operating activities of $1.6 million and $22.3 million during the three
months ended March 31, 2002 and 2001, respectively. This decline in cash from
operations is primarily the result of the decrease in agreement value to $90.1
million at March 31, 2002 from $170.4 million at March 31, 2001, which is
reflected in lower accounts receivable and deferred revenue balances as of March
31, 2002. These declines in key business metrics are reflective of the more
difficult economic environment. The decline in cash from operations is also the
result of the $6.3 million cash portion of our $9.1 million reorganization
charge and a decrease in the tax benefit from exercises of employee stock
options.
During the three months ended March 31, 2002, we used $5.2 million of cash in
investing activities, consisting of $1.7 million for net purchases of
non-marketable investments and $3.4 million for net purchases of marketable
securities. We regularly invest excess funds in short-and intermediate-term
interest-bearing obligations of investment grade.
During the three months ended March 31, 2002, we used $1.1 million of cash in
financing activities, consisting of $3.5 million used for the acquisition of
treasury shares net of $2.4 million provided from the exercise of employee stock
options.
As of March 31, 2002, we had cash and cash equivalents of $13.1 million and
$190.1 million in marketable securities. 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 will be used, among other
things, in connection with our employee stock option and stock purchase plans
and for potential acquisitions. As of March 31, 2002, we had repurchased 185,000
shares of common stock at an aggregate cost of approximately $3.5 million.
In June 2000, we committed to invest $20.0 million in two private equity
investment funds over a period of up to five years. We have adopted a cash bonus
plan to pay bonuses, after the return of invested capital, measured by the
proceeds of a portion of the share of net profits from these investments, if
any, to certain key employees, subject to the terms and conditions of the plan.
The payment of such bonuses would result in compensation expense with respect to
the amounts so paid. As of March 31, 2002, we had contributed approximately $8.9
million to the funds. The timing and amount of future contributions are entirely
within the discretion of the investment funds.
As of March 31, 2002, we had recorded total write-downs to the private equity
funds of approximately $1.7 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
17
experience significant variations in our quarterly results unrelated to
our business operations. These variations could be due to significant gains or
losses or to significant compensation expenses. While gains may offset
compensation expenses in a particular quarter, there can be no assurance that
related gains and compensation expenses will occur in the same quarter.
As of March 31, 2002, we had future contractual obligations as follows:
FUTURE PAYMENTS DUE BY YEAR
----------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2002 2003 2004 2005 2006 2007
----------------------- ------- ------- ------- ------- ------- ------ -----
(IN THOUSANDS)
Operating leases $46,296 $ 5,950 $8,550 $8,816 $8,822 $7,269 $6,889
Unconditional purchase obligations 735 735 -- -- -- -- --
------- ------- ------ ------ ------ ------ ------
Total contractual cash obligations $47,031 $ 6,685 $8,550 $8,816 $8,822 $7,269 $6,889
======= ======= ====== ====== ====== ====== ======
We do not maintain any off-balance sheet financing arrangements.
18
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 13 months. These available-for-sale
securities are subject to interest rate risk and will fall in value if market
interest rates increase. We have the ability to hold our fixed income
investments until maturity. Therefore, we would not expect our operating results
or cash flows to be affected to any significant degree by a sudden change in
market interest rates on our securities portfolio. The following table provides
information about our investment portfolio. For investment securities, the table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates.
Principal amounts by expected maturity in U.S. Dollars are as follows:
FAIR VALUE
AT MARCH 31,
2002 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006
---- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Cash equivalents $ 11,935 $ 11,935 $ -- $ -- $ -- $ --
Weighted average
interest rate 2.09% 2.09% -- % -- -- --
Investments $ 190,115 $ 103,025 $ 38,180 $ 25,007 $ 16,822 $ 7,081
Weighted average
interest rate 3.39% 3.33% 3.18% 3.03% 3.94% 5.44%
Total portfolio $ 202,050 $ 114,960 $ 38,180 $ 25,007 $ 16,822 $ 7,081
Weighted average
interest rate 3.32% 3.20% 3.18% 3.03% 3.94% 5.44%
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 Europe, Canada, and Asia,
where we sell primarily in U.S. dollars. The introduction of the Euro as a
common currency for members of the European Monetary Union has not, to date, had
a significant impact on our financial position or results of operations. To
date, we have not entered into any hedging agreements. However, we are prepared
to hedge against fluctuations that the euro, or other foreign currencies, will
have on foreign exchange exposure if this exposure becomes material. As of March
31, 2002, the total assets related to non-US dollar denominated currencies that
are subject to foreign currency exchange risk was approximately $9.1 million.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 1996 Amended and Restated Stock Option Plan for Non-employee
Directors.
(b) Reports on Form 8-K
None.
20
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 15, 2002
By: /s/ Warren W. Hadley
-----------------------------------
Warren W. Hadley
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
Date: May 15, 2002
21