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 June 30, 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 August 12, 2002, 23,380,177 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 June 30, 2002 3
and December 31, 2001
Consolidated Statements of Income for the Three
and Six Month Periods Ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities 21
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security-Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORRESTER RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 17,703 $ 17,747
Marketable securities 186,426 187,435
Accounts receivable, net 12,206 24,498
Deferred commissions 3,421 4,444
Prepaid income taxes 1,085 559
Prepaid expenses and other current assets 6,087 5,483
--------- ---------
Total current assets 226,928 240,166
Long-term assets:
Property and equipment, net 15,386 21,258
Goodwill and other intangible assets, net 14,169 14,333
Deferred income taxes 21,609 19,387
Non-marketable investments and other assets 9,640 10,008
--------- ---------
Total long-term assets 60,804 64,986
--------- ---------
Total assets $ 287,732 $ 305,152
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,267 $ 2,667
Customer deposits 413 498
Accrued expenses 17,112 17,938
Accrued income taxes 2,219 3,721
Deferred revenue 45,934 59,930
--------- ---------
Total current liabilities 67,945 84,754
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value
Authorized -- 500 shares
Issued and outstanding -- none
Common stock, $.01 par value
Authorized -- 125,000 shares Issued - 23,745 and
23,052 shares as of June 30, 2002 and
December 31, 2001, respectively 237 230
Additional paid-in capital 165,944 156,043
Retained earnings 61,597 64,165
Treasury stock, at cost -- 414 shares and
no shares as of June 30, 2002 and
December 31, 2001, respectively (7,920) --
Accumulated other comprehensive loss (71) (40)
--------- ---------
Total stockholders' equity 219,787 220,398
--------- ---------
Total liabilities and stockholders' equity $ 287,732 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- -------
(unaudited)
Revenues:
Core research $ 17,221 $ 32,963 $ 36,507 $68,315
Advisory services and other 8,212 13,451 14,982 21,744
-------- -------- -------- -------
Total revenues 25,433 46,414 $ 51,489 $90,059
-------- -------- -------- -------
Operating expenses:
Cost of services and fulfillment 8,873 15,138 17,854 27,436
Selling and marketing 8,254 16,909 16,726 34,654
General and administrative 3,375 4,790 6,701 9,766
Depreciation and amortization 2,070 2,777 4,218 5,499
Reorganization costs -- -- 9,088 --
-------- -------- -------- -------
Total operating expenses 22,572 39,614 54,587 77,355
-------- -------- -------- -------
Income (loss) from operations 2,861 6,800 (3,098) 12,704
Other income:
Other income, net 1,481 2,148 3,041 3,905
Impairments of non-marketable investments (486) -- (2,734) --
-------- -------- -------- -------
Income (loss) before income tax provision (benefit) 3,856 8,948 (2,791) 16,609
Income tax provision (benefit) 309 3,266 (223) 6,062
-------- -------- -------- -------
Net income (loss) $ 3,547 $ 5,682 $ (2,568) $10,547
======== ======== ======== =======
Basic net income (loss) per common share $ 0.15 $ 0.25 $ (0.11) $ 0.47
======== ======== ======== =======
Diluted net income (loss) per common share $ 0.15 $ 0.24 $ (0.11) $ 0.44
======== ======== ======== =======
Basic weighted average common shares outstanding 23,354 22,451 23,250 22,253
======== ======== ======== =======
Diluted weighted average common shares outstanding 23,989 23,722 23,250 24,196
======== ======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED
JUNE 30,
2002 2001
-------- ---------
(unaudited)
Cash flows from operating activities:
Net (loss) income $ (2,568) $ 10,547
Adjustments to reconcile net (loss) income to net cash
provided by operating activities --
Depreciation and amortization 4,218 5,499
Impairments of non-marketable investments 2,734 --
Loss on disposals of property and equipment 92 254
Tax benefit from exercises of employee stock options 1,996 7,464
Deferred income taxes (2,222) (1,880)
Non-cash reorganization costs 2,772 --
Increase in provision for doubtful accounts 196 335
Amortization of premium on marketable securities 376 126
Changes in assets and liabilities --
Accounts receivable 12,176 29,997
Deferred commissions 1,023 2,856
Prepaid income taxes (482) 2,935
Prepaid expenses and other current assets (450) (959)
Accounts payable (433) (905)
Customer deposits (85) 74
Accrued expenses (1,403) 276
Accrued income taxes (1,423) --
Deferred revenue (14,206) (25,749)
-------- ---------
Net cash provided by operating activities 2,311 30,744
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment (966) (7,647)
Purchases of non-marketable investments (2,625) (3,318)
Decrease in other assets 259 93
Purchases of marketable securities (92,995) (123,345)
Proceeds from sales and maturities of marketable securities 94,017 98,801
-------- ---------
Net cash used in investing activities (2,310) (35,416)
-------- ---------
Cash flows from financing activities:
Proceeds from exercises of employee stock options 7,912 9,988
Acquisition of treasury stock (7,920) --
-------- ---------
Net cash (used in) provided by financing activities (8) 9,988
Effect of exchange rate changes on cash and cash equivalents (37) (301)
-------- ---------
Net (decrease) increase in cash and cash equivalents (44) 5,015
Cash and cash equivalents, beginning of period 17,747 15,848
-------- ---------
Cash and cash equivalents, end of period $ 17,703 $ 20,863
======== =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 2,087 $ 550
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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 periods ended June 30, 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 existed.
Had the provisions of SFAS No. 142 been applied for the three and six months
ended June 30, 2001, Forrester's net income (loss) and net income (loss) per
share would have been as follows:
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
--------- --------- --------- ----------
(in thousands, except per share data)
Reported net income (loss) $ 3,547 $ 5,682 $ (2,568) $ 10,547
Effect of SFAS No. 142, net
of tax -- 114 -- 228
--------- --------- --------- ----------
Adjusted net income (loss) $ 3,547 $ 5,796 $ (2,568) $ 10,775
========= ========= ========= ==========
Reported basic net income (loss)
per common share $ 0.15 $ 0.25 $ (0.11) $ 0.47
Effect of SFAS No. 142, net of tax -- 0.01 -- 0.01
--------- --------- --------- ----------
Adjusted basic net income (loss)
per common share $ 0.15 $ 0.26 $ (0.11) $ 0.48
========= ========= ========= ==========
Reported diluted net income (loss)
per common share $ 0.15 $ 0.24 $ (0.11) $ 0.44
Effect of SFAS No. 142, net of tax -- 0.00 -- 0.01
--------- --------- --------- ----------
Adjusted diluted net income (loss)
per common share $ 0.15 $ 0.24 $ (0.11) $ 0.45
========= ========= ========= ==========
- -----------------------------------------------------------------------------------------------
6
Amortization expense related to identifiable intangible assets that will
continue to be amortized in the future was approximately $82,000 and $164,000
for the three and six months ended June 30, 2002 and 2001, respectively. The
additional amortization expense of approximately $179,000 and $345,000 in the
three and six months ended June 30, 2001, respectively, related to goodwill
that ceased to be amortized with the adoption of SFAS No. 142. Estimated
amortization expense related to identifiable intangible assets that will
continue to be amortized is as follows:
AMOUNT
(IN THOUSANDS)
Remaining six months ending December 31, 2002 $ 164
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 95
------
Total $ 925
======
A summary of Forrester's intangible assets as of June 30, 2002 is as follows:
GROSS CARRYING ACCUMULATED NET
AMOUNT AMORTIZATION CARRYING AMOUNT
------ ------------ ---------------
(IN THOUSANDS)
Amortized intangible assets:
Customer base $ 900 $ 225 $ 675
Research content 600 350 250
------- ------- -------
Subtotal $ 1,500 $ 575 925
======= =======
Goodwill 13,244
-------
Total $14,169
=======
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 JUNE 30, 2002
------ -------- -------- --------------
(IN THOUSANDS)
Workforce reduction $3,545 $ -- $3,344 $ 201
Facility consolidation and other related costs 2,934 -- 1,397 1,537
Depreciable assets 2,772 2,772 -- --
------ ------ ------ ------
Total $9,251 $2,772 $4,741 $1,738
====== ====== ====== ======
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 JUNE 30, 2002
------ ------ ------ ------ ------ -------------
(IN THOUSANDS)
Workforce reduction $ 201 $ -- $ -- $ -- $ -- $ 201
Facility consolidation and
other related costs 956 199 146 146 90 1,537
------ ------ ------ ------ ------ ------
Total $1,157 $ 199 $ 146 $ 146 $ 90 $1,738
====== ====== ====== ====== ====== ======
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 entirely during the three months ended March 31,
2002 as follows:
ACCRUED AS OF ACCRUED AS OF
DECEMBER 31, CASH EXCESS JUNE 30,
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 six month period ended
June 30, 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 month period ended June 30, 2002 and the three and
six months ended June 30, 2001 were 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------ ------ ------ ------
(IN THOUSANDS)
Basic weighted average common shares outstanding 23,354 22,451 23,250 22,253
Weighted average common equivalent shares 635 1,271 -- 1,943
------ ------ ------ ------
Diluted weighted average shares outstanding 23,989 23,722 23,250 24,196
====== ====== ====== ======
During the three-month periods ended June 30, 2002 and June 30, 2001,
approximately 2,809,000 and 2,828,000 stock options, respectively, were excluded
from the calculation of diluted weighted average shares outstanding as the
effect would have been anti-dilutive.
During the six-month periods ended June 30, 2002 and June 30, 2001,
approximately 5,216,000 and 725,000 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 INCOME (LOSS)
The components of other comprehensive income (loss) for the three and six months
ended June 30, 2002 and 2001 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------ ------ ------ ------
(IN THOUSANDS)
Unrealized gain (loss) on marketable
securities, net of taxes $1,131 $ (183) $ 389 $ 942
Cumulative translation adjustment (520) (302) (415) 41
------ ------ ------ ------
Total other comprehensive income (loss) $ 611 $ (485) $ (26) $ 983
Reported net income (loss) 3,547 5,682 (2,568) 10,547
------ ------ ------ ------
Total comprehensive income (loss) 4,158 5,197 (2,594) 11,530
====== ====== ====== ======
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 six months ended
June 30, 2002, Forrester contributed approximately $2.6 million to these
investment funds, resulting in total cumulative contributions of approximately
$9.9 million. The carrying value of the investment funds as of June 30, 2002 was
approximately $7.0 million. During the three and six months ended June 30, 2002,
Forrester recorded impairments to these investments of approximately $215,000
and $999,000, respectively, which are included in the consolidated statements of
income, increasing the total cumulative impairments recorded to approximately
$1,906,000 as of June 30, 2002. During the three and six months ended June 30,
2002, fund management charges of approximately $121,000 and $242,000,
respectively, were included in other income in the consolidated statements of
income, bringing the total cumulative fund management charges to approximately
$946,000. 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 July 2000, Forrester invested $1.6 million to purchase preferred shares of
comScore Networks, Inc. ("comScore"), a provider of infrastructure services
which utilizes proprietary technology to accumulate comprehensive information on
consumer buying behavior, resulting in approximately a 1.2% ownership interest.
This investment is being accounted for using the cost method and, accordingly,
is valued at cost unless a permanent impairment in its value occurs or the
investment is liquidated. In September 2001, Forrester determined that its
investment in comScore had been permanently impaired due to an additional round
of financing at a significantly lower valuation. As a result, Forrester recorded
a write-down of $836,000 to impairments of non-marketable investments in the
statement of income for the three-month period ended September 30, 2001. In June
2002, Forrester determined that its investment in comScore had been permanently
impaired due to an additional round of financing at a significantly lower
valuation. As a result, Forrester recorded a further write-down of $271,000 to
impairments of non-marketable investments in the statement of income for the
three-month period ended June 30, 2002. As of June 30, 2002, Forrester
determined that no further permanent impairment had occurred.
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 six months ended
June 30, 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, which was included
in the consolidated statement of income during the three months ended March 31,
2002, reducing the carrying value to approximately $250,000 as of March 31, 2002
and June 30, 2002. As of June 30, 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 six months ended June
30, 2002, Forrester repurchased 413,500 shares of common stock at an aggregate
cost of approximately $7.9 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. Each of the Operating Groups for North
America, Europe, and Asia, MEA, and Latin America is comprised of sales forces
responsible for clients located in such Operating Group's region and research
personnel focused primarily on issues generally more relevant to clients in that
region. The Global Operating Group is comprised of a sales force responsible for
Forrester's largest clients, and its research staff focuses on topics of more
universal appeal. Because the four Operating Groups have similar economic
characteristics, production processes, and class of client, provide similar
products and services, and use similar distribution methods, they are aggregated
for presentation in Forrester's financial statements. Accordingly, the financial
information disclosed in the consolidated statements of income for the three and
six months ended June 30, 2002 represent 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 statements of income
represent 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------- ------- ------- -------
(IN THOUSANDS)
United States $18,328 $32,907 $36,999 $63,282
United Kingdom 2,103 3,711 4,477 7,112
Europe (excluding United Kingdom) 2,475 5,011 4,882 10,099
Canada 807 2,389 1,595 4,524
Other 1,720 2,396 3,536 5,042
------- ------- ------- -------
$25,433 $46,414 $51,489 $90,059
======= ======= ======= =======
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
United States 72% 71% 72% 70%
United Kingdom 8 8 9 8
Europe (excluding United Kingdom) 10 11 9 11
Canada 3 5 3 5
Other 7 5 7 6
---- ---- ---- ----
100% 100% 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, one accounting model is required to be used for long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired. This
statement broadens the presentation of discontinued operations to include more
disposal transactions. This statement is 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.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement supersedes Emerging Issues Task
Force (EITF) No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity." Under this statement, a liability
for a cost associated with a disposal or exit activity is recognized at fair
value when the liability is incurred rather than at the date of an entity's
commitment to an exit plan as required under EITF 94-3. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early adoption permitted. Forrester is currently
evaluating the impact of SFAS No. 146 on Forrester's consolidated financial
position and results of operations.
NOTE 10 - SUBSEQUENT EVENT
On July 24, 2002, in response to conditions and demands of the market and a
slower economy, Forrester announced a general workforce reduction. As a result,
Forrester reduced its workforce by 21 positions and expects to record a charge
of approximately $1.0 million to $2.0 million in the quarter ending September
30, 2002. This charge will consist primarily of severance and related expenses
from the reduction of the workforce.
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, the actual amount of the charge for the July 2002 workforce reduction,
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 its Subsidiaries.
We are a leading independent 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 $81.6 million at June 30, 2002 from $155.2 million at June
30, 2001. No single client accounted for more than 2% of agreement value at June
30, 2002. In past years, a substantial portion of our client companies renewed
expiring contracts. Approximately 52% of our client companies with memberships
expiring during the twelve months ended June 30, 2002 renewed one or more
memberships for our products and services, compared with 64% of client companies
with memberships expiring during the twelve months ended June 30, 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 rates are
reflective of the more difficult economic environment and will lead to a
decrease in revenues during the three- and nine- month periods ended September
30, 2002 as compared to the corresponding three- and nine-month periods in 2001.
On July 24, 2002, in response to conditions and demands of the market and a
slower economy, we announced a general workforce reduction. As a result, we
reduced our workforce by 21 positions and expect to record a charge of
approximately $1.0 million to $2.0 million in the quarter ending September 30,
2002. This charge will consist primarily of severance and related expenses from
the reduction of the workforce.
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 June 30, 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 JUNE 30, 2002
------ -------- -------- -------------
(IN THOUSANDS)
Workforce reduction $3,545 $ -- $3,344 $ 201
Facility consolidation and other related costs 2,934 -- 1,397 1,537
Depreciable assets 2,772 2,772 -- --
------ ------ ------ ------
Total $9,251 $2,772 $4,741 $1,738
====== ====== ====== ======
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 JUNE 30, 2002
---- ---- ---- ---- ---- -------------
(IN THOUSANDS)
Workforce reduction $ 201 $ -- $ -- $ -- $ -- $ 201
Facility consolidation and
other related costs 956 199 146 146 90 1,537
------ ------ ------ ------ ------ ------
Total $1,157 $ 199 $ 146 $ 146 $ 90 $1,738
====== ====== ====== ====== ====== ======
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 ACCRUED AS OF
DECEMBER 31, CASH EXCESS JUNE 30,
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.
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 is not a comprehensive
list of all of our accounting policies. In many cases, the accounting treatment
of a particular transaction is specifically dictated by generally accepted
accounting principles, with no need for management's judgment in their
application. There are also areas in which management's judgment in selecting
any available alternative would not produce a materially different result. For
further discussion of the application of these and our other accounting
policies, see Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Notes to Consolidated Financial Statements in our
December 31, 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 June 30, 2002, deferred revenues
and deferred commissions totaled $45.9 million and $3.4 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 $960,000 as of
June 30, 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 $9.5 million as of June 30, 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 $6.9 million,
including approximately $2.7 million recorded in the six months ended June 30,
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 $14.2 million as of June 30, 2002. We adopted
SFAS No. 142 effective January 1, 2002. In connection with the SFAS No. 142
transitional goodwill impairment evaluation, we were 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
Core research 68% 71% 71% 76%
Advisory services and other 32 29 29 24
--- --- --- ---
Total revenues 100 100 100 100
Cost of services and fulfillment 35 33 35 30
Selling and marketing 33 36 32 39
General and administrative 13 10 13 11
Depreciation and amortization 8 6 8 6
Reorganization costs -- -- 18 --
--- --- --- ---
Income (loss) from operations 11 15 (6) 14
Other income, net 6 4 6 4
Impairments of non-marketable
investments (2) -- (5) --
--- --- --- ---
Income (loss) before income tax
provision (benefit) 15 19 (5) 18
Income tax provision (benefit) 1 7 -- 6
--- --- --- ---
Net income (loss) 14% 12% (5)% 12%
=== === === ===
THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
REVENUES. Total revenues decreased 45% to $25.4 million in the three months
ended June 30, 2002 from $46.4 million in the three months ended June 30, 2001.
Revenues from core research decreased 48% to $17.2 million in the three months
ended June 30, 2002 from $33.0 million in the three months ended June 30, 2001
and comprised 68% of total revenues for the quarter. Decreases in total revenues
and revenues from core research were primarily attributable to decreases in the
number of client companies to 1,200 at June 30, 2002 from 1,952 at June 30,
2001, as well as lower average contract values. No single client company
accounted for more than 2% of revenues during the three months ended June 30,
2002 or 2001.
Advisory services and other revenues decreased 39% to $8.2 million in the three
months ended June 30, 2002 from $13.5 million in the three months ended June 30,
2001. This decrease was primarily attributable to our having held two Forums and
two Summits during the three months ended June 30, 2002 while we held five
Forums and one Summit during the three months ended June 30, 2001. The decrease
is also due to the reduction of analyst staffing in our research organization to
141 at June 30, 2002 from 207 at June 30, 2001.
15
Revenues attributable to customers outside the United States decreased 47% to
$7.1 million in the three months ended June 30, 2002 from $13.5 million in the
three months ended June 30, 2001. Revenues attributable to customers outside the
United States decreased as a percentage of total revenues to 28% for the three
months ended June 30, 2002 from 29% for the three months ended June 30, 2001.
The decrease in international revenues in dollars and as a percentage of total
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 35% in the three months ended June 30, 2002
from 33% in the three months ended June 30, 2001. These expenses decreased 41%
to $8.9 million in the three months ended June 30, 2002 from $15.1 million in
the three months ended June 30, 2001. The increase in expense as a percentage
of revenues was primarily attributable to cost of services and fulfillment
expenses, particularly compensation-related and survey costs, not decreasing at
the same rate as the decrease in revenues. 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 141 at June 30,
2002 from 207 at June 30, 2001 as well as a reduction in the size and number of
events hosted during the three month period ended June 30, 2002.
SELLING AND MARKETING. Selling and marketing expenses decreased as a percentage
of total revenues to 33% in the three months ended June 30, 2002 from 36% in
the three months ended June 30, 2001. These expenses decreased 51% to $8.3
million in the three months ended June 30, 2002 from $16.9 million in the three
months ended June 30, 2001. The decreases in expenses and expenses as a
percentage of revenues were principally due to a reduction in travel expenses
as a result of the reduction in the number of direct sales personnel to 127 at
June 30, 2002 from 264 at June 30, 2001. The decrease in expenses was also due
to lower compensation as a result of the workforce reductions in July 2001 and
January 2002. The decreases in expenses as a percentage of revenue was also due
lower recruiting expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased as a
percentage of total revenues to 13% in the three months ended June 30, 2002 from
10% in the three months ended June 30, 2001. These expenses decreased 30% to
$3.4 million in the three months ended June 30, 2002 from $4.8 million in the
three months ended June 30, 2001. The increase in expenses 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 85 at June 30, 2002 from 143 at June 30, 2001.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses decreased
25% to $2.1 million in the three months ended June 30, 2002 from $2.8 million in
the three months ended June 30, 2001. The decrease in these expenses was
principally due to continuing lower capital expenditures as well as the
write-off of depreciable assets in connection with the workforce reorganizations
in July 2001 and January 2002 discussed previously. 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
31% to $1.5 million in the three months ended June 30, 2002 from $2.1 million in
the three months ended June 30, 2001. The decrease was principally due to
marketable securities producing lower effective yields due to a decline in
market interest rates. Impairments of non-marketable investments also resulted
in charges of $486,000 during the three months ended June 30, 2002.
PROVISION FOR INCOME TAXES. During the three months ended June 30, 2002, we
recorded a tax provision of $309,000 reflecting an effective tax rate of 8.0%.
During the three months ended June 30, 2001, we recorded a tax provision of $3.3
million, which reflected an effective tax rate of 36.5%. The decrease in our
effective tax rate resulted primarily from our tax-exempt investment income
comprising a larger percentage of our estimated pre-tax income in 2002.
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
REVENUES. Total revenues decreased 43% to $51.5 million in the six months ended
June 30, 2002 from $90.1 million in the six months ended June 30, 2001. Revenues
from core research decreased 47% to $36.5 million in the six months ended June
30, 2002 from $68.3 million in the six months ended June 30, 2001 and comprised
71% of total revenues for the six months ended June 30, 2002. Decreases in total
revenues and revenues from core research were primarily attributable to
decreases in the number of client companies to 1,200 at June 30, 2002 from 1,952
at June 30, 2001, as well as lower average contract values. No single client
company accounted for more than 2% of revenues during the three months ended
June 30, 2002 or 2001.
Advisory services and other revenues decreased 31% to $15.0 million in the six
months ended June 30, 2002 from $21.7 million in the six months ended June 30,
2001. This decrease was primarily attributable to our having held three Forums
and four Summits during the six months ended June 30, 2002 while we held six
Forums and three Summits during the six months ended June 30, 2001. The decrease
is also due to the reduction of analyst staffing in our research organization to
141 at June 30, 2002 from 207 at June 30, 2001.
16
Revenues attributable to customers outside the United States decreased 46% to
$14.5 million in the six months ended June 30, 2002 from $26.8 million in the
six months ended June 30, 2001. Revenues attributable to customers outside the
United States decreased as a percentage of total revenues to 28% for the six
months ended June 30, 2002 from 30% for the six months ended June 30, 2001. The
decrease in international revenues in dollars and as a percentage of total
revenues was 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 35% in the six months ended June 30, 2002 from
30% in the six months ended June 30, 2001. These expenses decreased 35% to $17.9
million in the six months ended June 30, 2002 from $27.4 million in the six
months ended June 30, 2001. The increase in expense as a percentage of revenues
was primarily attributable to cost of services and fulfillment expenses,
particularly compensation-related and survey costs, not decreasing at the same
rate as the decrease in revenues. The expense decrease in the six-month period
ended June 30, 2002 was principally due to lower compensation expenses as a
result of the reduction in analyst staffing in our research organization to 141
at June 30, 2002 from 207 at June 30, 2001 as well as a reduction in the size
and number of events hosted during the three month period ended June 30, 2002.
SELLING AND MARKETING. Selling and marketing expenses decreased as a percentage
of total revenues to 32% in the six months ended June 30, 2002 from 39% in the
six months ended June 30, 2001. These expenses decreased 52% to $16.7 million
in the six months ended June 30, 2002 from $34.7 million in the six months
ended June 30, 2001. The decreases in expenses and expenses as a percentage of
revenues were principally due to a reduction in travel expenses as a result of
the reduction in the number of direct sales personnel to 127 at June 30, 2002
from 264 at June 30, 2001. The decrease in expenses was also due to lower
compensation as a result of the workforce reductions in July 2001 and January
2002. The decreases in expenses as a percentage of revenue was also due lower
recruiting expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased as a
percentage of total revenues to 13% in the six months ended June 30, 2002 from
11% in the six months ended June 30, 2001. These expenses decreased 31% to $6.7
million in the six months ended June 30, 2002 from $9.8 million in the six
months ended June 30, 2001. The increase in expenses 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 85 at
June 30, 2002 from 143 at June 30, 2001.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses decreased
23% to $4.2 million in the six months ended June 30, 2002 from $5.5 million in
the six months ended June 30, 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
2002 and 2001 compared to 2000. The adoption of SFAS No. 142 also resulted in a
reduction in amortization of intangible assets to approximately $164,000 in the
six months ended June 30, 2002 from approximately $522,000 in the six months
ended June 30, 2001.
OTHER INCOME. Other income, consisting primarily of interest income, decreased
22% to $3.0 million in the six months ended June 30, 2002 from $3.9 million in
the six months ended June 30, 2001. The decrease was principally due to
marketable securities producing lower effective yields due to a decline in
market interest rates. Impairments of non-marketable investments also resulted
in charges of $2.7 million during the six months ended June 30, 2002.
PROVISION FOR INCOME TAXES. During the six months ended June 30, 2002, we
recorded a tax benefit of $223,000 reflecting an effective tax rate of 8.0%.
During the six months ended June 30, 2001, we recorded a tax provision of $6.1
million, which reflected an effective tax rate of 36.5%. The decrease in our
effective tax rate resulted primarily from our tax-exempt investment income
comprising a larger percentage of our estimated pre-tax income in 2002.
17
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 71% of our revenues during the six months ended June 30, 2002, are
annually renewable and are generally payable in advance. We generated cash from
operating activities of $2.3 million and $30.7 million during the six months
ended June 30, 2002 and 2001, respectively. This decline in cash from operations
is primarily the result of the decrease in agreement value to $81.6 million at
June 30, 2002 from $155.2 million at June 30, 2001, which is reflected in lower
accounts receivable and deferred revenue balances as of June 30, 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 attributable to
the workforce reduction in January 2002 and a decrease in the tax benefit from
exercises of employee stock options.
During the six months ended June 30, 2002, we used $2.3 million of cash in
investing activities, consisting of $2.6 million for net purchases of
non-marketable investments, $1.0 million of capital expenditures offset by $1.0
million received from net proceeds of marketable securities and a $259,000
decrease in other assets. We regularly invest excess funds in short-and
intermediate-term interest-bearing obligations of investment grade.
During the six months ended June 30, 2002, we used $7.9 million for the
repurchase of our common stock and received $7.9 million in proceeds from the
exercise of employee stock options.
As of June 30, 2002, we had cash and cash equivalents of $17.7 million and
$186.4 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 June 30, 2002, we had repurchased 413,500
shares of common stock at an aggregate cost of approximately $7.9 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
18
profits from these investments, if any, to certain key employees, subject to the
terms and conditions of the plan. The payment of such bonuses would result in
compensation expense with respect to the amounts so paid. As of June 30, 2002,
we had contributed approximately $9.9 million to the funds. The timing and
amount of future contributions are entirely within the discretion of the
investment funds.
As of June 30, 2002, we had recorded total write-downs to the private equity
funds of approximately $1.9 million as a result of the impairment of certain
investments within the funds. The timing of the recognition of future gains or
losses from the investment funds is beyond our control. As a result, it is not
possible to predict when we will recognize such gains or losses, if we will
award cash bonuses based on the net profit from such investments, or when we
will incur compensation expense in connection with the payment of such bonuses.
If the investment funds realize large gains or losses on their investments, we
could experience significant variations in our quarterly results unrelated to
our business operations. These variations could be due to significant gains or
losses or to significant compensation expenses. While gains may offset
compensation expenses in a particular quarter, there can be no assurance that
related gains and compensation expenses will occur in the same quarter.
As of June 30, 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 $44,916 $ 4,630 $8,550 $8,816 $8,822 $7,269 $6,889
Unconditional purchase obligations 735 675 -- -- -- -- --
------- ------- ------ ------ ------ ------ ------
Total contractual cash obligations $45,651 $ 5,305 $8,550 $8,816 $8,822 $7,269 $6,889
======= ======= ====== ====== ====== ====== ======
*The above table does not include the remaining $10.1 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.
We do not maintain any off-balance sheet financing arrangements.
19
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 16 months. These available-for-sale
securities are subject to interest rate risk and will fall in value if market
interest rates increase. We have the ability to hold our fixed income
investments until maturity. Therefore, we would not expect our operating results
or cash flows to be affected to any significant degree by a sudden change in
market interest rates on our securities portfolio. The following table provides
information about our investment portfolio. For investment securities, the table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates.
Principal amounts by expected maturity in U.S. Dollars are as follows:
FAIR VALUE
AT JUNE 30,
2002 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
----------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Cash equivalents $ 15,680 $15,680 $ -- $ -- $ -- $ -- $ --
Weighted average
interest rate 1.47% 1.47% --% -- -- -- --
Investments $186,426 $72,520 $40,817 $32,400 $18,269 $13,982 $8,438
Weighted average
interest rate 3.39% 3.04% 3.11% 3.06% 3.89% 4.77% 4.80%
Total portfolio $202,106 $88,200 $40,817 $32,400 $18,269 $13,982 $8,438
Weighted average
interest rate 3.21% 2.76% 3.11% 3.06% 3.89% 4.77% 4.80%
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 June 30, 2002, the
total assets related to non-US dollar denominated currencies that are subject to
foreign currency exchange risk was approximately $8.8 million.
20
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
The Annual Meeting of Stockholders ("Meeting") was held on May 14, 2002. At the
Meeting, George F. Colony and Michael H. Welles were re-elected as Class I
Directors of the Board of Directors. Below are the votes by which each Director
was elected:
Total Vote Total Vote Withheld
For Director From Director
- ------------------------------------------------------------
George F. Colony 20,194,400 2,002,345
- ------------------------------------------------------------
Michael H. Welles 22,019,745 177,000
- ------------------------------------------------------------
In addition, the stockholders voted to increase the number of shares of common
stock reserved for purchase under the 1996 Employee Stock Purchase Plan ("Stock
Purchase Plan") by 500,000 shares. Below are the votes by which the increase in
the number of shares reserved for purchase under the Stock Purchase Plan was
approved:
Total Vote For Increase Total Vote Against Increase Total Votes Abstained
- --------------------------------------------------------------------------------
20,869,336 613,019 714,390
Finally, the stockholders voted to increase the number of shares of common stock
reserved for issuance under the 1996 Stock Option Plan for Non-Employee
Directors ("Director Plan") by 300,000 shares. Below are the votes by which the
increase in the number of shares reserved for issuance under the Director Plan
was approved:
Total Vote For Increase Total Vote Against Increase Total Votes Abstained
- --------------------------------------------------------------------------------
15,778,474 5,698,921 719,350
ITEM 5. OTHER INFORMATION
Accompanying this Form 10-Q are the certificates of the Chief Executive Officer
and the Chief Financial Officer required by Section 1350, Chapter 63 of Title
18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, copies of which are furnished as an exhibit to this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on April 5, 2002 disclosing under
Item 4 its dismissal of Arthur Andersen LLP as its independent public
accountant and its appointment of Deloitte & Touche LLP to serve as its
independent public accountant for the fiscal year 2002. No other reports on
Form 8-K were filed by the Company during the three months ended June 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FORRESTER RESEARCH, INC.
By: /s/ George F. Colony
-----------------------------------
George F. Colony
Chairman of the Board of Directors
and Chief Executive Officer (principal
executive officer)
Date: August 13, 2002
By: /s/ Warren W. Hadley
-----------------------------------
Warren W. Hadley
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
Date: August 13, 2002
22