1
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, 1998
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)
1033 Massachusetts Avenue
Cambridge, Massachusetts 02138
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 497-7090
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 12, 1998, 8,489,965 shares of the registrant's common stock were
outstanding.
2
FORRESTER RESEARCH, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Financial Statements
Consolidated Balance Sheets at March 31, 1998 and December 31,
1997 3
Consolidated Statements of Income for the Three Months Ended
March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION 12
ITEM 1. Legal Proceedings 12
ITEM 2. Changes in Securities 12
ITEM 3. Defaults Upon Senior Securities 12
ITEM 4. Submission of Matters to a Vote of Security-Holders 12
ITEM 5. Other Information 12
ITEM 6. Exhibits and Reports on Form 8-K 12
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORRESTER RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 3,203 $ 7,742
Marketable securities 53,904 47,172
Accounts receivable, net 12,578 11,193
Deferred commissions 1,621 1,368
Prepaid income taxes 546 520
Prepaid expenses and other current assets 1,405 1,052
------- -------
Total current assets 73,257 69,047
------- -------
Property and equipment, net 6,523 4,489
------- -------
Total assets $79,780 $73,536
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,744 $ 1,273
Customer deposits 124 279
Accrued expenses 3,064 3,661
Accrued income taxes 623 623
Deferred revenue 31,001 27,074
Deferred income taxes 186 121
------- -------
Total current liabilities 36,742 33,031
------- -------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value
Authorized--500,000 shares
Issued and outstanding--none -- --
Common stock, $.01 par value
Authorized--25,000,000 shares
Issued and outstanding--8,468,409 shares and 8,391,829
shares at March 31, 1998 and December 31, 1997, respectively 85 84
Additional paid-in capital 35,518 34,353
Retained earnings 7,350 6,008
Unrealized gain on marketable securities 85 60
------- -------
Total stockholders' equity 43,038 40,505
------- -------
Total liabilities and stockholders' equity $79,780 $73,536
======= =======
See accompanying notes.
3
4
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
1998 1997
REVENUES:
Core research $10,469 $6,178
Advisory services and other 2,662 1,993
------- ------
Total revenues 13,131 8,171
------- ------
OPERATING EXPENSES:
Cost of services and fulfillment 4,829 2,918
Selling and marketing 4,766 3,128
General and administrative 1,557 820
Depreciation and amortization 531 232
------- ------
Total operating expenses 11,683 7,098
------- ------
Income from operations 1,448 1,073
OTHER INCOME 715 644
------- ------
Income before income tax provision 2,163 1,717
INCOME TAX PROVISION 821 698
------- ------
Net income $ 1,342 $1,019
======= ======
BASIC NET INCOME PER COMMON SHARE $ 0.16 $ 0.12
======= ======
DILUTED NET INCOME PER COMMON SHARE $ 0.15 $ 0.12
======= ======
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,435 8,300
======= ======
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 9,074 8,703
======= ======
See accompanying notes.
4
5
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS ENDED
MARCH 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,342 $ 1,019
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 531 232
Deferred income taxes 64 (160)
Accretion of discount on marketable securities (12) (152)
Changes in assets & liabilities
Accounts receivable (1,385) (115)
Deferred commissions (253) 208
Prepaid expenses and other current assets (353) (355)
Prepaid income taxes (26) --
Accounts payable 471 (276)
Customer deposits (155) 124
Accrued expenses (597) (238)
Accrued income taxes -- 422
Deferred revenue 3,927 2,202
--------- --------
Net cash provided by operating activities 3,554 2,911
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,565) (439)
Purchase of marketable securities (108,221) (75,590)
Proceeds from sales and maturities of marketable securities 101,528 43,690
--------- --------
Net cash used in investing activities (9,258) (32,339)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Tax effect of stock options 200 --
Net proceeds of stock options exercised and employee stock
purchase plan 965 6
--------- --------
Net cash provided by financing activities 1,165 6
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,539) (29,422)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,742 34,382
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,203 4,960
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 583 $ 437
========= ========
See accompanying notes.
5
6
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 generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Accordingly,
certain information and footnote disclosure 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 of Forrester Research, Inc. (the "Company") as reported in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of financial position,
results of operations, and cash flows at the dates and for the periods presented
have been included. The consolidated balance sheet presented as of December 31,
1997 has been derived from the consolidated financial statements that have been
audited by the Company's independent public accountants. The results of
operations for the first quarter ended March 31, 1998 may not be indicative of
the results that may be expected for the year ended December 31, 1998, or any
other period.
Note 2 - Earnings Per Share
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
128, Earnings Per Share. This statement established standards for computing and
presenting earnings per share and applies to entities with publicly traded
common stock or potential common stock. This statement is effective for fiscal
years ending after December 15, 1997. In February 1998, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 98. This
bulletin revises the SEC's guidance for calculating earnings per share with
respect to equity security issuances before an initial public offering (IPO) and
is effective for fiscal years ending after December 15, 1997. Accordingly, the
prior years' weighted average common shares outstanding and per common share
have been retroactively restated to reflect the adoption of SFAS No. 128 and SAB
No. 98.
Basic net income per common share was computed by dividing net income by the
basic weighted average number of common shares outstanding during the period.
Diluted net income per common share 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. The calculations of basic and diluted weighted average shares
outstanding are as follows (in thousands):
Three Months Ended
March 31, 1998 March 31, 1997
Basic weighted average common shares outstanding 8,435 8,300
Weighted average common equivalent shares 639 403
----- -----
Diluted weighted average shares outstanding 9,074 8,703
===== =====
Note 3 - Comprehensive Income
Comprehensive income for the three month periods ended March 31, 1998 and 1997
was approximately $1,367,000 and $827,000, respectively. The difference between
comprehensive income and net income relates to unrealized gains and losses on
marketable securities.
6
7
Note 4 - New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires computer
software costs associated with internal use software to be expensed as incurred
until certain capitalization criteria are met. The Company will adopt SOP 98-1
prospectively beginning January 1, 1999. Adoption of this Statement will not
have a material impact on the Company's consolidated financial position or
results of operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires all costs associated with pre-opening,
pre-operating and organization activities to be expensed as incurred. The
Company will adopt SOP 98-5 beginning January 1, 1999. Adoption of this
Statement will not have a material impact on the Company's consolidated
financial position or results of operations.
7
8
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 the Company's current
plans and expectations and involve risks and uncertainties that could cause
actual future activities and results of operations to be materially different
from those set forth in the forward-looking statements. Important factors that
could cause actual results to differ materially from those indicated by
forward-looking statements include, among others, the need to attract and retain
professional staff, the ability of the Company to manage growth, variability of
quarterly operating results, possible volatility of stock price, dependence on
renewals of membership-based research services, dependence on key personnel,
risks associated with anticipating market trends, the ability to develop and
offer successful new products and services, and competition. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events, or otherwise.
Forrester Research, Inc. ("Forrester" or the "Company") is a leading
independent research firm offering products and services that help its clients
assess the effect of technology on their businesses. The Company provides
analysis and insight into a broad range of technology areas such as computing,
software, networking, the Internet, and telecommunications, and projects how
technology trends will impact businesses, consumers, and society. Forrester's
clients, which include senior management, business strategists, and information
technology ("IT") and marketing professionals within large enterprises, use
Forrester's prescriptive research to understand and benefit from current
developments in technology and as support for their development and
implementation decisions.
Memberships to Forrester's Strategy Research Services and Quantitative
Research Service are renewable contracts, typically annual and payable in
advance. Accordingly, a substantial portion of the Company's billings are
initially recorded as deferred revenue. Strategy Research Services revenues are
recognized pro rata on a monthly basis over the contract period. Quantitative
Research Service revenue is recognized upon delivery of the research. The
Company's other revenues are derived from advisory services rendered pursuant to
Forrester's Partners Program and Strategy Review Program and in conjunction with
Quantitative Research and from Forrester Forums ("Forums"). The Company's
advisory service clients purchase such services together with core research
memberships to Research Services, and the contracts for such purchases are also
generally payable in advance. Billings attributable to advisory services are
initially recorded as deferred revenues and recognized as revenue when
performed. Similarly, Forum billings are initially recorded as deferred revenues
and are recognized upon completion of each event.
The Company's 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
represent the costs associated with production and delivery of the Company's
products and services, and 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 the Company's products and services. General
and administrative expenses include the costs of the finance, operations,
technology, and strategy groups, and other administrative functions of the
Company.
The Company believes that the "agreement value" of contracts to purchase
core research and advisory services provides a significant measure of the
Company's business volume. Forrester calculates agreement value as the
annualized fees payable under all core research and advisory service contracts
in effect at a given point in time, without regard to the remaining duration of
such contracts. Agreement value increased 9% to $50.6 million at March 31, 1998
from $46.6 million at December 31, 1997. No single client company accounted for
more than 2% of agreement value at March 31, 1998. The Company's experience is
that a substantial portion of client companies renew expiring contracts for an
equal or higher level of total core research and advisory service fees each
year. Approximately 78% of Forrester's client companies with memberships
expiring during the twelve-month period ended March 31, 1998 renewed one
8
9
or more memberships for the Company's products and services. This renewal rate
is not necessarily indicative of the rate of future retention of the Company's
revenue base.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
total revenues for the periods indicated:
THREE MONTHS ENDED MARCH 31,
1998 1997
---- ----
Core research 80% 76%
Advisory services and other 20 24
--- ---
Total revenues 100 100
Cost of services and fulfillment 37 36
Selling and marketing 36 38
General and administrative 12 10
Depreciation and amortization 4 3
--- ---
Income from operations 11 13
Other income 5 8
--- ---
Income before income tax provision 16 21
Provision for income taxes 6 9
--- ---
Net income 10% 12%
=== ===
THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
REVENUES. Total revenues increased 61% to $13.1 million in the three months
ended March 31, 1998 from $8.2 million in the three months ended March 31, 1997.
Revenues from core research increased 69% to $10.5 million in the three months
ended March 31, 1998 from $6.2 million in the three months ended March 31, 1997.
Increases in total revenues and revenues from core research were primarily
attributable to an increase in the number of client companies to 1,065 at March
31, 1998 from 898 at March 31, 1997, the introduction of two new Strategy
Research Services and a Quantitative Research Service since March 31, 1997, and
sales of additional Strategy Research Services to existing clients. No single
client company accounted for more than 3% of revenues for the three months ended
March 31, 1998.
Advisory services and other revenues increased 34% to $2.7 million in the
three months ended March 31, 1998 from $2.0 million in the three months ended
March 31, 1997. This increase was primarily attributable to demand for the
Partners and Strategy Review Programs and increased attendance at the Forum
event held in March 1998.
Revenues attributable to customers outside the United States increased 48%
to $2.6 million in the three months ended March 31, 1998 from $1.7 million in
the three months ended March 31, 1997, and decreased as a percentage of total
revenues to 20% for the three months ended March 31, 1998 from 21% for the three
months ended March 31, 1997. The increase in revenues attributable to customers
outside the United States was due primarily to the addition of direct
international sales personnel. The decrease in these revenues as a percentage of
total revenue was due to an increased percentage of advisory services and other
revenue attributable to customers located in the United States. The Company
invoices its international clients in U.S. dollars.
9
10
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment
increased as a percentage of total revenues to 37% in the three months ended
March 31, 1998 from 36% in the three months ended March 31, 1997. These expenses
increased 65% to $4.8 million in the three months ended March 31, 1998 from $2.9
million in the three months ended March 31, 1997. The expense increase and
increase as a percentage of total revenues in this period was principally due to
increased analyst staffing for Strategy Research Services and related
compensation expense, additional expenses related to events, and the cost of
survey services related to the Quantitative Research Service.
SELLING AND MARKETING. Selling and marketing expenses decreased as a
percentage of total revenues to 36% in the three months ended March 31, 1998
from 38% in the three months ended March 31, 1997. These expenses increased 52%
to $4.8 million in the three months ended March 31, 1998 from $3.1 million in
the three months ended March 31, 1997. The increase in expenses was principally
due to the addition of direct salespersons and increased sales commission
expense associated with increased revenues. The decrease as a percentage of
total revenues was principally due to increased productivity of the Company's
direct sales force.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
as a percentage of total revenues to 12% in the three months ended March 31,
1998 from 10% in the three months ended March 31, 1997. These expenses increased
90% to $1.6 million in the three months ended March 31, 1998 from $820,000 in
the three months ended March 31, 1997. The increase in expenses and expense as a
percentage of total revenues was principally due to staffing increases in the
Company's operations, finance, technology, and strategy groups, and investment
in the Company's infrastructure, including new financial systems.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 129% to $531,000 in the three months ended March 31, 1998 from
$232,000 in the three months ended March 31, 1997. The increase in this expense
was principally due to purchases of computer equipment, software, office
furnishings, and leasehold improvements to support business growth.
OTHER INCOME. Other income, consisting primarily of interest income,
increased to $715,000 in the three months ended March 31, 1998 from $644,000 in
the three months ended March 31, 1997 due to an increase in the Company's cash
and marketable securities balances resulting from positive cash flows from
operations.
PROVISION FOR INCOME TAXES. During the three months ended March 31, 1998,
the Company recorded a tax provision of $821,000, reflecting an effective tax
rate of 38%. During the three months ended March 31, 1997, the Company recorded
a tax provision of $698,000, reflecting an effective tax rate of 40.5%. The
decrease in effective tax rate resulted from a reduction in the Company's
effective state tax rate and investments in tax-exempt instruments.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date through funds generated
from operations. Memberships for core research, which constituted approximately
80% of the Company's revenues for the three months ended March 31, 1998, are
annually renewable and are generally payable in advance. The Company generated
$3.6 million in cash from operating activities during the three-month period
ended March 31, 1998 compared with $2.9 million of cash from operating
activities during three-month period ended March 31, 1997.
During the three-month period ended March 31, 1998, the Company used $9.3
million of cash in investing activities. This includes $2.6 million for the
purchase of property and equipment and $6.7 million for net purchases of
marketable securities. The increase in purchases of property and equipment was
primarily due to computer equipment purchases to support additional headcount,
investment in technology
10
11
infrastructure, and leasehold improvements to support business growth. The
Company regularly invests excess funds in short- and intermediate-term
interest-bearing obligations of investment grade.
During the three-month period ended March 31, 1998, the Company generated
1.2 million in cash from financing activities. This includes proceeds of
$670,000 from stock option exercises, proceeds of $295,000 from the Employee
Stock Purchase Plan, and $200,000 from the tax benefit of stock transactions
with employees.
As of March 31, 1998, the Company had cash and cash equivalents of $3.2
million and $53.9 million in marketable securities. The Company does not have a
line of credit and does not anticipate the need for one in the foreseeable
future. The Company has recently opened an office in Amsterdam, Netherlands. The
Company currently plans to introduce new Strategy Research Services and events
and to continue to invest in its infrastructure and personnel over the next
three to 12 months. The Company believes that its 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.
Management is currently aware of and is currently assessing the need for
its computer systems, software applications, and product offerings to be year
2000 compliant. The Company expects to incur internal staff costs as well as
consulting and other expenses related to systems enhancements for the year 2000.
The total costs to be incurred for all year 2000-related projects are not
expected to have a material impact on future results from operations.
11
12
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 Company did not submit any matters during the first quarter of the fiscal
year covered by this report to a vote of the stockholders through solicitation
or otherwise.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
12
13
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, President, and
Chief Executive Officer
Date: May 15, 1998
By: /s/ SUSAN M. WHIRTY
-----------------------------
Susan M. Whirty
Chief Financial Officer, Vice President, Operations
(principal financial and accounting officer)
Date: May 15, 1998
13
5
U.S. DOLLARS
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
1
3,202,629
53,904,621
12,917,783
340,000
0
73,257,471
9,116,226
2,593,541
79,780,156
36,742,217
0
0
0
84,684
42,953,255
79,780,156
0
13,131,189
0
4,828,660
6,854,656
0
0
2,163,510
821,027
1,342,483
0
0
0
1,342,483
.16
.15
