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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-21433
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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 02138
CAMBRIDGE, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 497-7090
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value Nasdaq National Market System
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 5, 1998 (based on the closing price as quoted by the
Nasdaq National Market as of such date) was approximately $353 million.
As of March 5, 1999, 8,787,470 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Company's Annual Meeting of
Stockholders for the year ended December 31, 1998 are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
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 electronic
commerce and the Internet, computing, software, networking, and
telecommunications, and projects how technology trends will impact businesses,
consumers, and society. Forrester's clients, which include senior management,
business strategists, and marketing and information technology ("IT")
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.
Forrester offers its clients annual memberships to core research that is
organized into three coverage areas: Internet Commerce, Corporate Technology,
and Technographics(R) Data & Analysis ("Coverage Areas"). Each Coverage Area
includes research lenses ("Lenses") that each contain focused selections of core
research relevant to specific business issues and technology topics. These
issues and topics include the impact that the application of technology may have
on financial results, investment priorities, organizational effectiveness, and
staffing requirements. Forrester also provides advisory services to a limited
number of clients to help them explore in greater detail the issues and topics
covered by the core research.
Forrester targets its products and services to both large enterprises and
technology vendors. As of December 31, 1998, Forrester's research was delivered
to 1,271 client companies. No single client company accounted for over 3% of the
Company's revenues during the year ended December 31, 1998. Approximately 75% of
Forrester's client companies with memberships expiring during the year ended
December 31, 1998 renewed one or more memberships for the Company's products and
services.
The Company was incorporated in Massachusetts on July 7, 1983 and
reincorporated in Delaware on February 21, 1996. In addition to its headquarters
in Cambridge, Massachusetts, the Company opened a European Research Center in
Amsterdam, Netherlands, in April 1998.
INDUSTRY BACKGROUND
Businesses increasingly depend on technology for competitive advantage and
success. Technology is being used as a strategic tool to develop innovative
products, services, and distribution channels, as well as to create more
efficient internal business processes. Decisions about how to deploy networks,
software, and other systems are increasingly participatory, with
line-of-business managers, marketing executives, and corporate leaders joining
IT professionals in the technology review and decision-making process. Together,
these individuals must develop a coherent strategy that leverages innovative
systems to reach new markets, gain competitive advantage, and develop high
customer service and loyalty levels. Developing such a strategy is difficult,
however, as the rate of technology change accelerates. Increased complexity and
the proliferation of vendors and solutions have increased the challenges in
anticipating and understanding emerging technologies.
The strategic use of technology, the widening scope of decision-making, the
speed of change, and the complexity of decisions make it difficult for
organizations to efficiently generate research and analysis on their own. Costly
incremental resources -- time and expertise -- are required for successful
analysis and implementation of technology. Poor decisions can be costly and
detrimental to an organization's competitive position. Consequently, demand is
growing for external sources of expertise that provide independent, vendor-
neutral business advice on how to benefit from technology change. Research firms
that provide tactical product assessment or customized consulting are often too
narrow in their perspectives to satisfy this demand. Business leaders as well as
technology users require comprehensive research that can anticipate, assess, and
interpret major trends. Forrester believes there is a growing need for thematic,
prescriptive analysis of technology that appeals to senior management, business
strategists, and marketing and IT professionals, and
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helps organizations improve their strategic planning processes, leverage
technology change, and gain competitive advantage.
THE FORRESTER SOLUTION
Forrester addresses the growing demand for thematic, prescriptive analysis
of technology by providing business-focused research to senior management,
business strategists, and marketing and IT professionals. The Company's research
methodology analyzes complex technology issues and delivers prescriptive
analysis and advice in each of the Coverage Areas and Lenses. This research
helps large enterprises make informed decisions that positively affect
competitive strategy and business performance, reduce risk, and manage cost.
Although Forrester's research is user-focused, IT vendors also use Forrester's
research for marketing, product positioning, and market planning.
Forrester differentiates its products and services from those offered by
other research firms by:
PROVIDING SOPHISTICATED ELECTRONIC DELIVERY. Forrester's
eResearch(TM) helps clients succeed in today's world of real-time
information and communication by leveraging the Internet's most
sophisticated capabilities. Offering advanced personalization features,
downloadable data and graphics, and intuitive navigation, eResearch
provides clients with the access and flexibility that are necessary to make
the most of the Company's ideas and analysis.
ADDRESSING NEEDS OF BUSINESS EXECUTIVES. Forrester's core research
and advisory services blend analysis of technology with related business
issues to enable senior management to better use technology for competitive
advantage. Unlike narrowly-focused, tactically-based research that assesses
products and components, Forrester's research provides a strategic view of
the impact of technology on long-term business plans.
DELIVERING VALUABLE, STAND-ALONE WRITTEN RESEARCH. Forrester's
research distills the abundance of information, activities, and
developments in the technology industry into a concise, easy-to-read guide
for decision-making. In contrast to research that requires consulting
support, Forrester's research is designed to provide valuable, prescriptive
analysis that stands on its own without requiring ongoing analyst
interaction.
TAKING A STAND ON DIFFICULT TECHNOLOGY ISSUES. Forrester's research
and analysts challenge conventional viewpoints; the Company does not expect
clients to agree with every prediction or conclusion presented. However,
the Company does believe that strong opinions and recommendations will
enable clients to more thoroughly consider the use of technology to gain
competitive advantage. Forrester, unlike many other research firms,
provides concrete, actionable business advice.
PROVIDING A BROAD VIEW OF TECHNOLOGY CHANGE. Forrester's research
approach provides an integrated, cross-disciplinary view of technologies
and their impact throughout organizations and industries. The Company's
research methodology ensures that a coherent, thematic analysis is
consistently delivered to clients. Forrester's broad perspective can be
contrasted with narrowly-defined, specifically tailored technology
assessments.
FOCUSING ON EMERGING TECHNOLOGIES IN CONSUMER AND BUSINESS
MARKETS. Forrester's research methodology is designed to identify
fundamental shifts in technology before these changes appear on the
horizons of most users, vendors, and other research firms. Forrester's
interview-based research approach combines input from early adopters of new
technologies, vendors, and consumers to gauge the likelihood of a
technology's success and its potential impact on various markets.
STRATEGY
Forrester seeks to capitalize on the growing demand for technology
research, analysis, and advice. To achieve this goal, Forrester has adopted the
following strategies:
OPTIMIZE NEW TECHNOLOGY. The Company recently re-architected its core
research deliverables to capitalize on advanced new electronic and Internet
technologies. Forrester's interactive, electronic
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research, specifically designed for electronic delivery, leverages the full
capabilities of the Internet and offers advanced personalization features,
downloadable data and graphics, and intuitive navigation. The Company
believes that this initiative, known as eResearch, distinguishes Forrester
as an innovator in providing electronic research that enables organizations
to use technology strategically to gain and sustain competitive advantage.
LEVERAGE CORE RESEARCH. By focusing on sales of its stand-alone core
research, the Company can deliver value to its clients and can increase its
revenues without having to provide ongoing and direct analyst support. The
Company intends to continue to introduce new research Lenses and to provide
advisory services that build upon the analysis and recommendations set
forth in the research to enhance sales of that research.
EXPAND CLIENT BASE AND PENETRATE EXISTING ACCOUNTS. The Company
believes that its current offerings of products and services, and
anticipated new products and services, can continue to be successfully
marketed and sold to new client companies, as well as to new organizations
within existing client companies. Forrester currently targets senior
management, business strategists, and marketing and IT professionals within
Global 2,500 companies. The Company seeks to expand its international
audience by targeting select geographic markets. The Company also aims to
increase the number of Lenses that each client purchases through increased
marketing of new and current products and services.
IDENTIFY AND DEFINE NEW TECHNOLOGY MARKETS. Forrester seeks to
position itself ahead of other research firms by delivering strategic
research and analysis on new and emerging technologies. Forrester believes
its methodology and culture allow it to focus on areas of technology change
and enable it to expand its product and service offerings to address new
technology issues.
ATTRACT AND RETAIN HIGH-QUALITY RESEARCH PROFESSIONALS. The knowledge
and experience of Forrester's analysts are critical elements of the
Company's ability to provide high-quality products and services. The
Company seeks to attract, develop, and retain outstanding research
professionals by providing a creative corporate environment and culture, a
competitive compensation structure, training and mentoring programs for
individual development, and recognition and rewards for excellent
individual and team performance.
EXPAND AND LEVERAGE SALES FORCE. The Company is expanding its current
direct sales force and is seeking to increase the average sales volume per
sales representative. The Company believes that this increase can be
achieved as the average tenure of the Company's sales representatives
lengthens and marketing initiatives shorten the sales cycle. Initiatives
include the improvement of existing and the development of new methods for
obtaining highly qualified sales leads, targeted use of third-party
telemarketing firms, and hosting of regional marketing events around the
world.
PRODUCTS AND SERVICES
Forrester's principal products are annually renewable memberships to core
research in three main Coverage Areas: Internet Commerce, Corporate Technology,
and Technographics Data & Analysis. Internet Commerce addresses the challenges
of leveraging the Internet for sales, trade, marketing, and content delivery;
Corporate Technology analyzes the strategic and organizational issues related to
developing and managing corporate technology infrastructures, products, and
applications; Technographics Data & Analysis delivers quantitative research
addressing how today's technologies impact consumer attitudes and behavior.
Additionally, Forrester provides advisory services through the Partner's Program
which provides clients with a proactive relationship with the Company's analysts
to develop strategies for meeting specific corporate goals. The Company also
hosts the Forrester Forum Series, conferences devoted to leading technology
issues. The Forrester Forum, the Company's major event, is a two-day conference
held annually in Boston, Massachusetts. In addition, the Company intends to host
two Forum events in Amsterdam, the Netherlands and four other Forum events in
the United States during 1999. The Company works with each client to design a
portfolio ("Forrester Portfolio") of relevant research, advisory services, and
Forum seats to address each client's specific business objectives.
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COVERAGE AREAS AND LENSES
The Company's Coverage Areas and Lenses provide ongoing research and
analysis on the developments, information, and activities in the technology
industry. The Company employs a consistent research methodology to analyze
technology issues, address related business issues, and offer recommendations
and action plans. While each Lens addresses a specific technology area,
collectively they present complementary, consistent research themes and provide
comprehensive coverage of relevant technology issues faced by the Company's
clients. Businesses are able to supplement and extend internal resources with
current, thorough, and focused analysis and recommendations. In addition,
technology vendors are able to augment and test competitive, new product,
marketing, and sales plans against Forrester's independent analysis and advice.
The following table summarizes the Coverage Areas and Lenses:
CORPORATE TECHNOLOGY SAMPLE TOPICS
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LEVEL ONE LENS
CORPORATE TECHNOLOGY -- analyzes internal computing CIO "must read" research Outsourcing strategies
and communication architectures, technology that IT architecture & planning Corporate telecom
connects companies to business partners and strategies Intranets, groupware, & corporate
customers, and the impact of emerging technologies e-mail
on software, development, telecommunications,
packaged applications, networks, data management,
and supply chain technologies
LEVEL TWO LENSES
APPLICATIONS, DEVELOPMENT, & DATA -- analyzes data Application development & tools Application
management, application development, and software integration Data management & analysis
architecture in the era of intranets, extranets, Intranets, groupware, & corporate e-mail
and the Internet to guide clients to more informed Software components & middleware
software decisions
COMPUTING, NETWORKS, & COMMUNICATIONS -- analyzes IT architecture & planning Systems & network
the future of public carrier networks, IP management Corporate hardware & operating
standardization, extensions of IT infrastructure to systems Corporate LAN/Intranet infrastructure
business partners, the evolution of computing Corporate WAN/Internet infrastructure
platforms, and guides IT executives in how to
architect and manage their corporation's computing
and communications infrastructure
IT LEADERSHIP -- analyzes how senior executives can CIO "must read" research IT architecture &
maximize the business benefits of technology and planning IT's corporate role IT organization IT
guides them in making effective decisions about spending Outsourcing strategies
strategic direction, investment priorities,
resources management, and outsourcing
LEVEL THREE LENSES
SUPPLY CHAIN TECHNOLOGY -- analyzes supply chain Business-to-business market models Supply chain
architectures and applications, as well as how to systems Partner/intermediary technologies
adopt business practices, organizational Application integration
structures, and a collaborative culture that
support the supply chain business model to help
companies address the challenges of supply chain
implementation
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CORPORATE TECHNOLOGY SAMPLE TOPICS
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FUTURE OF PUBLIC NETWORKS -- analyzes the Public network infrastructure
Internet's impact on telecom, the effects of Public network services
deregulation, wireless networking, mergers and Carrier strategies
acquisitions, and public networking on carriers and Consumer network services
their service to provide carriers, ISPs, network Web site hosting
equipment makers, and software makers
TECHNOLOGY SERVICES & OUTSOURCING -- analyzes Outsourcing strategies
global sourcing strategies in the era of Internet Traditional systems & applications outsourcing
commerce and helps clients to determine and manage Web site development outsourcing
the appropriate combination of internal Business practice outsourcing
capabilities, outsourcers, and integrators to gain Web site hosting
competitive advantage and cut costs
EUROPEAN CORPORATE TECHNOLOGIES -- analyzes the European IT management
future of IT in Europe for global and European IT infrastructure
European-based corporations to enable clients to IT organization
choose technology strategies, infrastructures, IT's corporate role
vendors, and partners that are appropriate for Corporate telecom strategies
European operations
IT ORGANIZATIONS & BUDGETS -- analyzes IT budget IT organization
projections and organizations to enable clients to IT spending
align IT organizations more tightly with other IT staffing
business units and to accurately budget, project, European IT management
and staff for IT initiatives
INTERNET COMMERCE SAMPLE TOPICS
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LEVEL ONE LENS
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INTERNET COMMERCE -- analyzes the selection and On-line retail market & business models
management of the consumer and corporate On-linefinance market & business models
technologies that enable Internet commerce, how to Advertising on-line
implement the changes in organization, training, Commerce integration
and internal collaboration that Internet commerce Site design, search, & analysis tools
requires and how to provide strategies for
companies that are leveraging the Internet to
enhance their business-to-business and/or
business-to-consumer sales
LEVEL TWO LENSES
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ON-LINE FINANCIAL SERVICES -- analyzes retail On-line finance market & business models
financial services, focusing on interactive and On-line retail market & business models
consumer technologies, strategies for effective Customer service
marketing and customer service, and technology's Personalization
impact on how consumers spend, save, and invest
NEW MEDIA -- analyzes the development of both Advertising on-line
on-line media and entertainment and non-Internet Portals
media properties to help businesses build on-line Personalization
business models, plan strategies for marketing and Interactive TV
advertising, and to understand the growth and New media market & business models
behavior of the global Internet audience
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INTERNET COMMERCE SAMPLE TOPICS
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ON-LINE RETAIL -- analyzes the technologies, On-line retail market & business models
marketing and promotion strategies, and on-line Customer service
merchandising that support business-to-consumer Sell-side commerce applications
eCommerce to help consumer marketing executives Commerce integration
understand how to sell goods and services over the
Internet
BUSINESS TRADE ON-LINE -- analyzes the impact of Partner/intermediary market & business models
electronic markets on how businesses trade goods Customer service
and services to help clients develop Customer management applications
business-to-business strategies to help increase Business-to-business market & business models
profits, lower costs, and drive greater market
share
LEVEL THREE LENSES
BRANDING & ADVERTISING ON-LINE -- analyzes the Advertising on-line
integration of on-line advertising into businesses Portals
marketing strategies and helps companies develop Personalization
and implement effective on-line advertising, Interactive TV
promotion, and marketing strategies to drive site
traffic and bolster brand awareness
SITE DESIGN & MANAGEMENT -- analyzes server Site design, search, & analysis tools
software developments that deliver fast site Content creation & management
navigation and multi-media content as well as Web site development outsourcing
topics related to personalization, dynamic content, Personalization
Java, and dynamic HTML
FUTURE OF TV & ENTERTAINMENT -- analyzes the impact Entertainment market & business models
of technology on consumers' leisure activities and New media market & business models
the TV, music, and entertainment industries Interactive TV
Entertainment technologies & digital TV
CONSUMER TECHNOLOGY -- enables companies to Consumer hardware & operating systems
understand evolving consumer requirements for Consumer network services
communication, information, and entertainment and Entertainment technologies & digital TV
to create products and services that fit consumer Interactive TV
needs
EUROPEAN INTERNET COMMERCE -- analyzes the size, European Internet commerce market & business models
pace, and distribution of Internet growth in Europe Personalization
and its impact on European businesses and consumers Commerce integration
COMMERCE TECHNOLOGY -- analyzes the vendors and Sell-side commerce applications
technologies needed to effectively buy and sell Buy-side commerce applications
products and to serve customers more effectively Commerce integration
on-line Buy-side systems
Partner/intermediary technologies
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TECHNOGRAPHICS DATA & ANALYSIS SAMPLE TOPICS
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LEVEL ONE LENS
TECHNOGRAPHICS DATA & ANALYSIS -- provides a Digital TV & related devices
combination of continuous quantitative survey data, On-line brokerage
consumer segmentation, and technology insight to On-line v. traditional retail
help clients develop effective marketing, media,
and product strategies for today's competitive
marketplace
LEVEL TWO LENSES
TECHNOGRAPHICS: PERSONAL FINANCE -- analyzes the On-line brokerage
implications of consumer demand for on-line On-line banking
financial services and helps clients to target the Personal financial services
most receptive consumer segments for new financial
products and services, to understand how on-line
financial services change consumers' relationships
with providers, and to stay ahead of industry
trends
TECHNOGRAPHICS: RETAIL AND MEDIA -- analyzes the Travel industry on-line
role of the Internet in all stages of the buying On-line retail models
process: the way consumers gather information, make
decisions, transact, and maintain a post-sale
relationship
TECHNOGRAPHICS: CONSUMER TECHNOLOGY -- analyzes Near PCs
consumer demand for technology products and Networks and infrastructure
connectivity, the services that link consumer Digital TV& related devices
devices such as TVs, PCs, and telephones to
networks and other devices
LEVEL THREE LENS
TECHNOGRAPHICS: BENCHMARK RESEARCH -- provides Technographics annual benchmark survey
clients with the basic quantitative survey data Young adults survey
drawn from the Company's annual survey of 100,000 Media '99
North American households
Each client that purchases research in the Corporate Technology and
Internet Commerce Coverage Areas receives a combination of the following:
Forrester Reports that deliver concise, forward-looking, analysis of a
significant technology topic, and Forrester Briefs that offer succinct, timely,
examinations of current industry developments, written as events demand. Level
One Lens clients receive approximately 100 reports and 150 briefs; Level Two
Lens clients receive approximately 50 reports and 75 briefs; Level Three Lens
clients receive approximately 20 reports and 40 briefs.
Each client that purchases research in the Technographics Data & Analysis
Coverage Area receives report sets ("Report Sets") that contain a combination of
the following: Forrester Reports, quantitative survey data, Microsoft PowerPoint
presentations of the quantitative data, and Forrester Briefs offering timely
examinations of the survey data. Level One Lens clients receive approximately 14
Reports Sets; Level Two Lens clients receive approximately four Report Sets, and
Level Three Lens clients receive one Report Set.
ADVISORY SERVICES AND EVENTS
Forrester provides advisory services to a limited number of clients through
its Partners Program. This program leverages Forrester's research expertise to
address clients' long-term planning issues and align Forrester's core research
and insight with specific business goals. As of December 31, 1998, 121 client
companies were members of the Partners Program and 390 client companies were
members of the Strategy
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Review Program. In addition to research Lenses, clients purchasing a membership
to the Partners Program receive a series of one-day meetings and conference
calls with Forrester analysts that address long-range planning, technology
decision-making, and strategic management best practices.
The Company also hosts the Forrester Forum in Boston each year. The Forum
brings together more than 500 senior executives for a two-day conference to
network with their peers and hear major figures from the technology industry and
leaders from other business sectors discuss the impact of technology change on
business. In addition, the Company intends to host two Forum events in
Amsterdam, the Netherlands and four other Forum events in the United States
during 1999.
PRICING AND CONTRACT SIZE
The prices for Forrester's core research are a function of the number of
Lenses purchased and the number of research recipients within the client
organization. The average contract for annual memberships sold to Forrester
clients for core research, excluding annual memberships for core research in
connection with Forrester's Partners Program and Strategy Review Program, for
the year ended December 31, 1998 was approximately $29,500 and for the year
ended December 31, 1997 was approximately $22,300. The prices for Forrester's
Partners Program are also a function of the number of Lenses purchased, the
number of research recipients within the client organization, and the amount and
type of advisory services. All Partners Program memberships sold include core
research. The average contract for annual memberships sold to Forrester clients
for the Partners Program for the year ended December 31, 1998 was approximately
$124,200 and for the year ended December 31, 1997 was approximately $107,200.
The average contract for annual memberships sold to Forrester clients for the
Strategy Review Program for the year ended December 31, 1998 was approximately
$53,900 and for the year ended December 31, 1997 was approximately $42,800.
Forrester 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 total revenues
recognizable from all core research and advisory service contracts in force at a
given time, without regard to how much revenue has already been recognized.
Agreement value grew to $69.1 million at December 31, 1998 from $46.6 million at
December 31, 1997.
RESEARCH AND ANALYSIS
Forrester employs a structured and consistent methodology across the
Company's research Lenses. Forrester's methodology enables the Company to
identify and analyze emerging technology trends, markets, and audiences, and
ensures consistent research quality and recommendations across all Lenses. The
Company's research is thematic in approach: Forrester Reports are composed
around major technology trends, not isolated technology review and assessment.
Research themes apply throughout different research Reports, within Lenses, and
across Coverage Areas.
Forrester's research process subjects initial ideas to research, analysis,
and rigorous validation, and produces conclusions, predictions, and
recommendations. In the Corporate Technology and Internet Commerce Coverage
Areas, Forrester employs several different primary research methods:
confidential interviews with early adopters of new technology, technology
vendors, consumers, and users and vendors in related technology areas; regular
briefings with vendors to review current positions and future directions; and
input from clients and third parties gathered during advisory sessions. In the
Technographics Data & Analysis Coverage Area, Forrester combines the Company's
qualitative research methodology with traditional survey research methodologies
such as correlations, frequencies, cross-tabulations, and multi-variant
statistics to produce Reports, quantitative survey data, and Forrester Briefs.
The Company retains a third-party data vendor for data collection and
tabulation.
Reports begin with discussion sessions with analysts. Analysts test ideas
throughout the Report process at informal and weekly research meetings. At the
final stage of the research process, senior analysts meet to test the
conclusions of each Report. Also, each Report is reviewed by an independent
analyst as an additional quality check and to ensure clarity and readability by
all clients -- especially those lacking strong technology backgrounds. All
research is reviewed and graded by Forrester's senior research management.
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The knowledge and experience of Forrester's analysts are critical elements
of the Company's ability to provide high-quality research and analysis.
Forrester analysts have varied backgrounds mirroring all facets of the industry
- -- vendor and user marketing and development, entrepreneurs, financial services,
and journalism. The Forrester culture and compensation system foster a
dedication to high-quality research.
All members of Forrester's research staff participate in the Company's
incentive compensation bonus plan. Each employee's performance against
individual and team goals determines an eligible bonus that is funded by the
Company's overall performance against key business objectives. Individual and
team goals include on-time delivery of high-quality research, and advisory
services support to clients. Analysts, research directors, and research
management are eligible to receive equity awards under the Company's incentive
stock plans.
SALES AND MARKETING
Forrester has made a substantial investment in its direct sales force to
better serve clients and address additional markets. The Company's direct sales
force, comprised of 92 sales representatives as of December 31, 1998, consists
of account managers who are responsible for maintaining and leveraging the
current client base by renewing and selling additional products and services to
existing clients, account executives who develop new business in assigned
territories, and regional sales directors who focus on high-level client contact
and service.
Forrester sells its products and services through its headquarters in
Cambridge, Massachusetts and its European headquarters in Amsterdam, the
Netherlands. Forrester also uses seven local independent sales representatives
to market and sell its products and services internationally. These independent
third-party representatives cover the following territories: Australia, Brazil,
France, Italy, Spain, South Africa, and Korea.
The Company has developed and will continue to implement products and
programs to support its sales representatives in their effort to differentiate
Forrester and define the value derived from the Company's research and analysis.
These products and programs include extensive worldwide press relations, direct
mail campaigns, telemarketing, and a worldwide events program. In addition, the
Company uses its Web site as a strategic tool to increase the quality and speed
of lead development for sales. All Forrester direct sales representatives
participate in the Company's annual commission plan. Commissions are paid
monthly based upon attainment of net bookings against established quotas.
As of December 31, 1998, Forrester's research was delivered to 1,271 client
companies. No single client company accounted for over 3% of the Company's
revenues for the year ended December 31, 1998.
COMPETITION
Forrester believes that the principal competitive factors in its industry
include quality of research and analysis, timely delivery of information, the
ability to offer products that meet the changing needs of organizations for
research and analysis, independence from vendors, customer service, and price.
The Company believes it competes favorably with respect to each of these
factors. Additionally, the Company believes that its business-focused review of
emerging technologies and high-level, easy-to-read research format distinguish
it from its competitors.
The Company competes in the market for technology research products and
services with other independent providers of similar services. Forrester's
principal direct competitor in IT research is Gartner Group, Inc., which has a
substantially longer operating history, is significantly larger, and has
considerably greater financial resources and market share than the Company.
Numerous other companies, including META Group, Inc., provide IT research and
analysis. In addition, the Company's indirect competitors include the internal
planning and marketing staffs of the Company's current and prospective clients,
as well as other information providers such as electronic and print publishing
companies, survey-based general market research firms, and general business
consulting firms. The Company's indirect competitors could choose to compete
directly against the Company in the future. In addition, there are relatively
few barriers to entry into the Company's market and new competitors could
readily seek to compete against the Company in one or
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more market segments addressed by the Company's research. Increased competition
could adversely affect the Company's operating results through pricing pressure
and loss of market share. There can be no assurance that the Company will be
able to continue to compete successfully against existing or new competitors.
EMPLOYEES
As of December 31, 1998, Forrester employed a total of 311 persons,
including 98 research staff, 138 sales and marketing personnel, and 75
operations personnel.
EXECUTIVE OFFICERS
Listed below are the executive officers of the Company:
NAME AGE POSITION
---- --- --------
George F. Colony....................... 45 Chairman of the Board, President, and Chief Executive
Officer
Richard C. Belanger.................... 33 Chief Technology Officer
William M. Bluestein, Ph.D............. 41 Vice President, Corporate Strategy and Development
John W. Boynton........................ 33 Vice President, Business Development
Emily Nagle Green...................... 41 Managing Director, Forrester Research B.V.
Mary A. Modahl......................... 36 Vice President, Research
Timothy M. Riley....................... 47 Vice President, Strategic Growth
Jon D. Schwartz........................ 39 Vice President, North American Sales
Susan M. Whirty, Esq................... 41 Chief Financial Officer, Vice President of Operations,
and General Counsel
Stuart D. Woodring..................... 38 Vice President, Research
George F. Colony, founder of the Company, has served as President and Chief
Executive Officer since its inception in July 1983.
Richard C. Belanger became the Company's Chief Technology Officer in May
1998. Prior to joining the Company, from 1996 to 1998, Mr. Belanger served as
Vice President of Interactive Media and Vice President of Technology for
Mainspring Communications, an Internet strategy research consulting firm. He was
Vice President of Technology at Information Access Company, an on-line
information provider, from 1995 to 1996, and Vice President of Information
Services at Information Access Center, formerly Ziff-Davis Technical Information
Company, from 1992 to 1995.
William M. Bluestein, Ph.D., currently serves as Vice President, Corporate
Strategy and Development. He was previously the Company's Group Director, New
Media Research from 1995 to 1997, Director and Senior Analyst with the Company's
People & Technology Strategies from 1994 to 1995, and Director and Senior
Analyst with the Company's Computing Strategies from 1990 to 1993.
John W. Boynton currently serves as Vice President, Business Development.
He was Director, Business Development in 1997. Prior to joining the Company, Mr.
Boynton was a Senior Associate with Mercer Management Consulting, a global
strategy consulting firm from 1995 to 1997, and Co-founder and President of
CompTek International, Inc., a networking and telecommunications products and
services distributor based in the former Soviet Union, from 1990 to 1995.
Emily Nagle Green became the Company's Managing Director, Forrester
Research B.V. in January 1998. She was previously Director, People & Technology
Strategies, from 1996 to 1998. Prior to joining the Company, Ms. Green was Vice
President of Marketing and Sales at Point of View, Inc., a video technology
training firm, from 1994 to 1995, and Vice President of Strategic Marketing for
ADC Fibermux, a computer networking hardware manufacturer, from 1991 to 1994.
Mary A. Modahl currently serves as Vice President, Research. She was
previously Vice President, New Media Research from 1997 to 1998, Group Director,
New Media Research, from 1995 to 1997, Director and
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Senior Analyst with the Company's People & Technology Strategies from 1994 to
1995, and Senior Analyst with the Company's Computing Strategies from 1993 to
1994.
Timothy M. Riley became the Company's Vice President, Strategic Growth in
1997. Prior to joining the Company, Mr. Riley served as the Vice President of
Human Resources at Renaissance Solutions, a strategy and knowledge management
consulting firm, from 1993 to 1997. Mr. Riley served as Director of Human
Resources at Bolt Beranek and Newman, a technology research and development
company, from 1987 to 1993.
Jon D. Schwartz currently serves as the Company's Vice President, North
American Sales. He was previously Director, Worldwide Sales from 1995 to 1997,
and Director of the Company's North American Sales from 1993 to 1995.
Susan M. Whirty, Esq. is currently Chief Financial Officer, Vice President
of Operations, and General Counsel. Ms. Whirty has served as the Company's Chief
Financial Officer since May 1998. She was previously Vice President, Operations
and General Counsel from 1997 to 1998, and Director, Operations and General
Counsel from 1993 to 1997.
Stuart D. Woodring currently serves as Vice President, Research. He was
previously Vice President, Information Technology Research from 1997 to 1998,
Group Director, Information Technology Research from 1995 to 1997, Director of
the Company's Information Technology Research services from 1994 to 1995 and
Director with the Company's Software Strategies from 1990 to 1994.
ITEM 2. PROPERTIES
The Company's headquarters are located in approximately 55,000 square feet
of office space in Cambridge, Massachusetts. This facility accommodates
research, marketing, sales, IT, and operations personnel. The initial lease term
of this facility expires in January 2001. The Company has the option to extend
this lease for up to two additional terms of five years each.
The Company's European headquarters are located in approximately 1,385
square meters of office space in Amsterdam, the Netherlands. This facility
accommodates research, marketing, sales, IT, and operations personnel. The
initial lease term of this facility expires in February 2003.
The Company believes that its existing facilities are adequate for its
current needs and that additional facilities are available for lease to meet
future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been traded on the Nasdaq National Market
under the symbol "FORR" since its initial public offering at $16.00 per share on
November 26, 1996. On March 5, 1999, the closing price of the Company's common
stock was $40.13 per share.
As of March 5, 1999 there were approximately 34 stockholders of record of
the Company's common stock.
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The following table represents the ranges of high and low sale prices of
the Company's common stock for the fiscal years ended December 31, 1997 and
1998:
1998 1997
-------------------- --------------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter................ $35.88 $18.50 $29.13 $18.00
Second Quarter............... 43.75 28.75 32.88 15.50
Third Quarter................ 42.63 29.50 32.25 26.38
Fourth Quarter............... 44.00 23.75 27.75 22.75
The Company did not declare or pay any dividends during the fiscal years
ended December 31, 1997 and 1998. The Company anticipates that future earnings,
if any, will be retained for the development of its business, and the Company
does not anticipate paying any cash dividends on its common stock in the
foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below is derived from the
consolidated financial statements of the Company and should be read in
connection with those statements which are included herein.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues:
Core research............................. $ 6,363 $ 10,150 $ 18,206 $ 30,431 $ 46,842
Advisory services and other............... 3,336 4,439 6,757 9,990 14,725
---------- ---------- ---------- ---------- ----------
Total revenues..................... 9,699 14,589 24,963 40,421 61,567
---------- ---------- ---------- ---------- ----------
Operating expenses:
Cost of services and fulfillment.......... 3,424 5,486 8,762 13,698 22,038
Selling and marketing..................... 3,593 5,643 8,992 14,248 20,896
General and administrative................ 1,045 1,389 2,509 4,500 6,688
Depreciation and amortization............. 150 287 618 1,209 2,763
---------- ---------- ---------- ---------- ----------
Total operating expenses........... 8,212 12,805 20,881 33,655 52,385
---------- ---------- ---------- ---------- ----------
Income from operations.................. 1,487 1,784 4,082 6,766 9,182
Interest income............................. 125 339 634 2,515 2,957
---------- ---------- ---------- ---------- ----------
Income before income tax provision.......... 1,612 2,123 4,716 9,281 12,139
Income tax provision........................ 73 96 712 3,683 4,592
---------- ---------- ---------- ---------- ----------
Net income.............................. 1,539 2,027 4,004 $ 5,598 $ 7,547
========== ==========
Pro forma income tax adjustment............. 583 739 1,198
---------- ---------- ----------
Pro forma net income........................ $ 956 $ 1,288 $ 2,806
========== ========== ==========
Basic net income per common share........... $ 0.26 $ 0.34 $ 0.65 $ 0.67 $ 0.89
========== ========== ========== ========== ==========
Diluted net income per common share......... $ 0.26 $ 0.34 $ 0.62 $ 0.63 $ 0.81
========== ========== ========== ========== ==========
Basic pro forma net income per common
share..................................... $ 0.16 $ 0.21 $ 0.45
========== ========== ==========
Diluted pro forma net income per common
share..................................... $ 0.16 $ 0.21 $ 0.44
========== ========== ==========
Basic weighted average common shares
outstanding............................... 6,000,000 6,000,000 6,191,667 8,339,381 8,520,475
Diluted weighted average common shares
outstanding............................... 6,000,000 6,000,000 6,425,718 8,851,251 9,371,853
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities................................ $ 4,764 $ 7,518 $ 44,640 $ 54,914 $ 66,483
Working capital............................. $ 528 $ 991 $ 31,291 $ 36,016 $ 45,720
Total assets................................ $ 8,784 $ 15,426 $ 56,782 $ 73,536 $ 100,518
Stockholders' equity........................ $ 1,120 $ 2,047 $ 33,762 $ 40,505 $ 53,533
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Words such
as "expects," "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. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events, or otherwise. For further information, please refer to "Certain
Factors That May Affect Future Results" below.
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 and Quantitative Research 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 revenues are recognized pro rata on a monthly basis
over the term of the contract. Quantitative Research 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. 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
revenue 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, and
technology 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 total
revenues recognizable from all core research and advisory service contracts in
force at a given time, without regard to how much revenue has already been
recognized. Agreement value increased 48% to $69.1 million at December 31, 1998
from $46.6 million at December 31, 1997. No single client company accounted for
more than 3% of agreement value at December 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 75% of Forrester's client companies with memberships
expiring during the year ended December 31, 1998 renewed one or more memberships
for the Company's products and services. The renewal rate was 80% for 1997. This
renewal rate is not necessarily indicative of the rate of future retention of
the Company's revenue base.
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RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
total revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
Core research............................................... 73% 75% 76%
Advisory services and other................................. 27 25 24
--- --- ---
Total revenues.............................................. 100 100 100
Cost of services and fulfillment............................ 35 34 36
Selling and marketing....................................... 36 35 34
General and administrative.................................. 10 11 11
Depreciation and amortization............................... 3 3 4
--- --- ---
Income from operations...................................... 16 17 15
Interest income............................................. 3 6 5
--- --- ---
Income before income tax provision.......................... 19 23 20
Provision for income taxes.................................. 3 9 8
--- --- ---
Net income.................................................. 16% 14% 12%
=== ===
Pro forma income tax adjustment............................. 5
---
Pro forma net income........................................ 11%
===
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
REVENUES. Total revenues increased 52% to $61.6 million in the year ended
December 31, 1998 from $40.4 million in the year ended December 31, 1997.
Revenues from core research increased 54% to $46.8 million in the year ended
December 31, 1998 from $30.4 million in the year ended December 31, 1997.
Increases in total revenues and revenues from core research were primarily
attributable to an increase in the number of clients to 1,271 at December 31,
1998 from 1,029 at December 31, 1997, sales of additional Research Services to
existing clients, and the introduction of five new Research Services and one new
Quantitative Research Service since January 1, 1997.
Advisory services and other revenues increased 47% to $14.7 million in the
year ended December 31, 1998 from $10.0 million in the year ended December 31,
1997. This increase was primarily attributable to demand for the Partners and
Strategy Review Programs and the addition of three new Forums in 1998.
Revenues attributable to customers outside the United States increased 44%
to $12.6 million in the year ended December 31, 1998 from $8.8 million in the
year ended December 31, 1997, and decreased as a percentage of total revenues to
21% for the year ended December 31, 1998 from 22% for the year ended December
31, 1997. The increase in international revenues was primarily due to the
Company's opening of an office in Amsterdam, Netherlands in April 1998, and the
addition of direct international sales personnel. The Company invoices its
international clients in U.S. dollars.
Agreement value grew to $69.1 million at December 31, 1998 from $46.6
million at December 31, 1997. No single client company accounted for more than
3% of agreement value at December 31, 1998, or 3% of revenues for the year ended
December 31, 1998.
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment
increased as a percentage of total revenues to 36% in the year ended December
31, 1998 from 34% in the year ended December 31, 1997. These expenses increased
61% to $22.0 million in the year ended December 31, 1998 from $13.7 million in
the year ended December 31, 1997. The increase in expense and expense as a
percentage of total revenues was principally due to increased analyst staffing
for Research Services and related compensation expense and the addition of three
new Forum events held in 1998.
SELLING AND MARKETING. Selling and marketing expenses decreased as a
percentage of total revenues to 34% in the year ended December 31, 1998 from 35%
in the year ended December 31, 1997. These expenses
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increased 47% to $20.9 million in the year ended December 31, 1998 from $14.2
million in the year ended December 31, 1997. The decrease as a percentage of
total revenues resulted principally from the larger revenue base in 1998. The
increase in expenses was principally due to the addition of direct salespersons
and increased sales commission expense associated with increased revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses remained
constant as a percentage of total revenues at 11% in the years ended December
31, 1998 and December 31, 1997. These expenses increased 49% to $6.7 million in
the year ended December 31, 1998 from $4.5 million in the year ended December
31, 1997. The increase in expenses was principally due to staffing increases and
costs associated with the Amsterdam office.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 129% to $2.8 million in the year ended December 31, 1998 from $1.2
million in the year ended December 31, 1997. The increase in this expense was
principally due to investments in the Company's IT infrastructure, and costs
associated with the opening of the Amsterdam office.
INTEREST INCOME. Interest income increased to $3.0 million in the year
ended December 31, 1998 from $2.5 million in the year ended December 31, 1997.
This increase resulted from the Company's higher cash and marketable securities
balances resulting from positive cash flows from operations.
PROVISION FOR INCOME TAXES. During the year ended December 31, 1998, the
Company recorded a tax provision of $4.6 million reflecting an effective tax
rate of 37.8%. During the year ended December 31, 1997, the Company recorded a
tax provision of $3.7 million reflecting an effective tax rate of 39.7%. The
decrease in effective tax rate resulted from a reduction in the Company's
effective state tax rate, investments in tax-exempt instruments, and the
formation of a foreign sales corporation.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
REVENUES. Total revenues increased 62% to $40.4 million in the year ended
December 31, 1997 from $25.0 million in the year ended December 31, 1996.
Revenues from core research increased 67% to $30.4 million in the year ended
December 31, 1997 from $18.2 million in the year ended December 31, 1996.
Increases in total revenues and revenues from core research were primarily
attributable to an increase in the number of clients to 1,029 at December 31,
1997 from 885 at December 31, 1996 and the introduction of six new Strategy
Research Services since January 1, 1996. Revenues from the Company's
Quantitative Research Service were not material in 1997.
Advisory services and other revenues increased 48% to $10.0 million in the
year ended December 31, 1997 from $6.8 million in the year ended December 31,
1996. This increase was primarily attributable to demand for the Partners and
Strategy Review Programs and the addition of two new Forums in 1997.
Revenues attributable to customers outside the United States increased 66%
to $8.8 million in the year ended December 31, 1997 from $5.3 million in the
year ended December 31, 1996, and also increased as a percentage of total
revenues to 22% for the year ended December 31, 1997 from 21% for the year ended
December 31, 1996. These increases were due primarily to the addition of direct
international sales personnel. The Company invoices its international clients in
U.S. dollars.
Agreement value grew to $46.6 million at December 31, 1997 from $30.0
million at December 31, 1996. No single client company accounted for more than
2% of agreement value at December 31, 1997 or 3% of revenues for the year ended
December 31, 1997.
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment
decreased as a percentage of total revenues to 34% in the year ended December
31, 1997 from 35% in the year ended December 31, 1996. These expenses increased
56% to $13.7 million in the year ended December 31, 1997 from $8.8 million in
the year ended December 31, 1996. The expense increase in this period was
principally due to increased analyst staffing for Strategy Research Services and
related compensation expense. The decrease as a percentage of total revenues was
principally due to the Company's increased leverage of its core research
services.
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SELLING AND MARKETING. Selling and marketing expenses decreased as a
percentage of total revenues to 35% in the year ended December 31, 1997 from 36%
in the year ended December 31, 1996. These expenses increased 58% to $14.2
million in the year ended December 31, 1997 from $9.0 million in the year ended
December 31, 1996. 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 11% in the year ended December 31, 1997
from 10% in the year ended December 31, 1996. These expenses increased 79% to
$4.5 million in the year ended December 31, 1997 from $2.5 million in the year
ended December 31, 1996. The increases in expense and expense as a percentage of
total revenues were principally due to staffing increases in operations and IT,
the addition of a human resources department, and investment in the Company's
infrastructure, including new financial systems.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 95% to $1.2 million in the year ended December 31, 1997 from $618,000
in the year ended December 31, 1996. The increase in this expense was
principally due to purchases of computer equipment, software, office
furnishings, and leasehold improvements to support business growth.
INTEREST INCOME. Interest income increased to $2.5 million in the year
ended December 31, 1997 from $634,000 in the year ended December 31, 1996. This
increase resulted from the Company's higher cash and marketable securities
balances resulting from positive cash flows from operations and net proceeds
from the Company's initial public offering.
PROVISION FOR INCOME TAXES. During the year ended December 31, 1997, the
Company recorded a tax provision of $3.7 million reflecting an effective tax
rate of 39.7%. During the year ended December 31, 1996, the Company recorded a
pro forma tax provision of $1.9 million 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. The Company generated $12.3 million in cash from operating
activities during 1998 compared with $11.9 million of cash from operating
activities during 1997. In 1998, the positive cash flow effect from an increase
in income and depreciation was offset primarily by an increase in accounts
receivable.
In 1998, the Company used $14.8 million of cash in investing activities,
consisting of $6.1 million for the purchase of property and equipment, and $8.7
million for net purchases of marketable securities. The Company regularly
invests excess funds in short- and intermediate-term interest-bearing
obligations of investment grade.
In 1998, the Company generated a net $5.2 million in cash from financing
activities. This includes proceeds of $2.5 million from stock option exercises,
$657,000 of proceeds from the Employee Stock Purchase Plan, and $2.0 million
from the tax benefit of stock transactions with employees. In December 1996, the
Company received $33.2 million from the sale of 2,300,000 shares of common stock
in its initial public offering.
As of December 31, 1998, the Company had cash and cash equivalents of $10.4
million and $56.1 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 currently plans to introduce new products and services, and
to continue to invest in its infrastructure 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.
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YEAR 2000 DISCLOSURE
THE COMPANY'S STATE OF READINESS. The Company is implementing a
broad-based remediation effort to address the year 2000 problem. This effort
consists of the following three stages: (i) survey and assess the Company's
operations for year 2000 compliance; (ii) execute the necessary software and
hardware remedial changes; and (iii) test the remediation efforts to ensure year
2000 compliance. There can be no assurance that the Company's survey will
identify all year 2000 problems in these areas or that the necessary corrective
actions will be completed in a timely manner.
The first stage of the effort, a survey and assessment of the Company's
operations for year 2000 compliance, has been completed. The Company identified
three areas of operations where the year 2000 problem could arise:
External product delivery systems. This includes the Company's three
main platforms for electronic product delivery: Forrester's web site, FTP
site, and Lotus Notes system.
Internal information technology systems. This includes the Company's
MIS functions, customer service applications, and production systems.
Third-party vendors and service providers. This includes a review of
the Company's third-party vendor and service providers to establish their
readiness for the year 2000 problem and assess any risks to the Company.
Material third-party vendor and service providers include: printers,
mailing houses, and CD-ROM duplicators.
This survey included a review of the year 2000 compliance of the Company's
Amsterdam office. The Company's external product delivery systems, internal
information technology systems, and a number of third-party vendors and service
providers are also utilized by the Amsterdam office. The Company continues to
monitor and review non-IT facilities and third-party vendors that are used
exclusively by the European Research Center.
The Company is currently implementing the second stage, executing the
software and hardware changes necessary to remediate potential year 2000
problems identified in the survey. The year 2000 compliance of the Company's
external product delivery systems and internal information technology systems
ultimately depends upon the delivery of year 2000 compliant systems from the
Company's vendors. The Company is working closely with these vendors to ensure
the timely delivery of year 2000 compliant systems. The Company's Lotus Notes
system is fully year 2000 compliant, and the Company has updated its web site
and FTP site to bring these external delivery systems into year 2000 compliance.
The Company's MIS systems are fully compliant and vendor supplied upgrades for
the Company's customer service applications and production systems have been
delivered and will be installed during the second quarter of 1999. The Company's
survey of non-IT facilities technology, which included a review of the elevator,
HVAC, security, and energy management systems, indicated that these systems are
currently year 2000 compliant due to the absence of date-sensitive
microcontrollers.
During this second stage the Company is also assessing its vulnerability to
year 2000 problems of third-party vendors and service providers. The Company
relies on third-party suppliers primarily to deliver printing services, mailing
services, Internet and web-hosting services, and CD-ROM duplication. The Company
intends to continuously identify and prioritize critical service providers and
vendors and communicate with them about their plans and progress in addressing
the year 2000 problem.
The final stage of the Company's year 2000 efforts, the internal testing of
all systems, is also currently underway. In the fourth quarter of 1998 the
Company completed a successful test of its internal IT systems and intends to
continue to test these systems during 1999. The Company anticipates that all
testing for year 2000 compliance will be complete by mid-1999.
THE COMPANY'S YEAR 2000 RISK. Based on the efforts described above, the
Company currently believes that its systems will be year 2000 compliant by
mid-1999. However, there can be no assurance that all year 2000 problems will be
successfully identified, or that the necessary corrective actions will be
completed in a timely manner. In addition, the survey has indicated that the
Company's compliance will require the delivery
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of upgrades by various vendors, and any failure to deliver these upgrades in a
timely manner will adversely affect the Company's readiness for the year 2000
problem. The Company relies on the Internet for its external distribution
systems, and any failure of the Internet due to year 2000 issues could adversely
affect the Company.
THE COMPANY'S CONTINGENCY PLANS. The Company is designing a contingency
plan for year 2000 problems. This contingency plan will be in place by mid-1999
and will be designed to mitigate the effects of third parties' failures to
remediate their year 2000 issues and for unexpected failures in its own systems.
Pursuant to the contingency plan, the Company has made arrangements for some
alternate suppliers, such as Internet service providers, and will continue to
identify potential alternate suppliers. If it becomes necessary for the Company
to take these corrective actions, it is uncertain whether this would result in
significant interruptions in service or delays in business operations or whether
it would have a material adverse effect on the Company's results of operations,
financial position, or cash flow.
COSTS OF YEAR 2000 REMEDIATION. As of December 31, 1998, the Company has
not incurred material costs related to the year 2000 problem. In the future, the
Company may incur small incremental costs in connection with the upgrades of its
external delivery systems and internal information technology systems. The
Company has not deferred other information technology projects due to year 2000
expenses and does not expect to defer such projects in the future.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.
NEED TO ATTRACT AND RETAIN PROFESSIONAL STAFF. The Company's future
success will depend in large measure upon the continued contributions of its
senior management team, research analysts, and experienced sales personnel.
Accordingly, future operating results will be largely dependent upon the
Company's ability to retain the services of these individuals and to attract
additional qualified personnel from a limited pool of qualified candidates. The
Company experiences intense competition in hiring and retaining professional
personnel from, among others, producers of information technology products,
other research firms, management consulting firms, print and electronic
publishing companies, and financial services companies. Many of these firms have
substantially greater financial resources than the Company to attract and
compensate qualified personnel. The loss of the services of key management and
professional personnel or the inability to attract such personnel could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
MANAGEMENT OF GROWTH. The Company's growth has placed significant demands
on its management and other resources. The Company's revenues increased
approximately 52% to $61.6 million in 1998 from $40.4 million in 1997. The
Company's staff increased from 240 full-time employees on December 31, 1998 to
311 full-time employees on December 31, 1998. The Company's ability to manage
growth, if any, effectively will require it to continue to develop and improve
its operational, financial, and other internal systems, as well as its business
development capabilities, and to train, motivate, and manage its employees. In
addition, the Company may acquire complementary businesses, products, or
technologies, although it currently has no commitments or agreements to do so.
The Company's management has limited experience integrating acquisitions. If the
Company is unable to manage its growth effectively, such inability could have a
material adverse effect on the quality of the Company's products and services,
its ability to retain key personnel and its business, financial condition, and
results of operations.
VARIABILITY OF QUARTERLY OPERATING RESULTS; POSSIBLE VOLATILITY OF STOCK
PRICE. The Company's revenues and earnings may fluctuate from quarter to
quarter based on a variety of factors including the timing and size of new and
renewal memberships from clients, the timing of revenue-generating events
sponsored by the Company, the utilization of its advisory services, the
introduction and marketing of new products and services by the Company and its
competitors, the hiring and training of new analysts and sales personnel,
changes in demand for the Company's research, and general economic conditions.
As a result, the Company's
18
20
operating results in future quarters may be below the expectations of securities
analysts and investors which could have a material adverse effect on the market
price for the Company's common stock. Factors such as announcements of new
services or offices or strategic alliances by the Company or its competitors, as
well as market conditions in the information technology services industry, may
have a significant impact on the market price of the common stock. The market
price for the Company's common stock may also be affected by movements in prices
of stocks in general.
DEPENDENCE ON RENEWALS OF MEMBERSHIP-BASED RESEARCH SERVICES. The
Company's success depends in part upon renewals of memberships for its core
research products. Approximately 75% and 76% of the Company's revenues in 1997
and 1998, respectively, were derived from the Company's membership-based core
research products. A significant decline in renewal rates for the Company's core
research products could have a material adverse effect on the Company's
business, financial condition, and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend in
large part upon the continued services of a number of key employees. The loss of
key personnel, in particular George F. Colony, the Company's founder and
Chairman of the Board of Directors, President, and Chief Executive Officer,
could have a material adverse effect on the Company's business, financial
condition, and results of operations. In October 1996, the Company entered into
a registration rights and non-competition agreement with Mr. Colony, which
provides that if Mr. Colony's employment with the Company is terminated he will
not compete with the Company for the one-year period following his termination.
RISKS ASSOCIATED WITH ANTICIPATING MARKET TRENDS. The Company's success
depends in part upon its ability to anticipate rapidly changing technologies and
market trends and to adapt its core research to meet the changing information
needs of the Company's clients. The technology sectors that the Company analyzes
undergo frequent and often dramatic changes, including the introduction of new
products and obsolescence of others, shifting strategies and market positions of
major industry participants, paradigm shifts with respect to system
architectures, and changing objectives and expectations of users of technology.
The environment of rapid and continuous change presents significant challenges
to the Company's ability to provide its clients with current and timely
analysis, strategies, and advice on issues of importance to them. Meeting these
challenges requires the commitment of substantial resources, and any failure to
continue to provide insightful and timely analysis of developments,
technologies, and trends in a manner that meets market needs could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
NEW PRODUCTS AND SERVICES. The Company's future success will depend in
part on its ability to offer new products and services that successfully gain
market acceptance by addressing specific industry and business organization
sectors, changes in client requirements, and changes in the technology industry.
The process of internally researching, developing, launching, and gaining client
acceptance of a new product or service, or assimilating and marketing an
acquired product or service, is inherently risky and costly. There can be no
assurance that the Company's efforts to introduce new, or assimilate acquired,
products or services will be successful.
COMPETITION. The Company competes in the market for research products and
services with other independent providers of similar services. Several of the
Company's competitors have substantially greater financial,
information-gathering, and marketing resources than the Company. In addition,
the Company's indirect competitors include the internal planning and marketing
staffs of the Company's current and prospective clients, as well as other
information providers such as electronic and print publishing companies,
survey-based general market research firms, and general business consulting
firms. The Company's indirect competitors may choose to compete directly against
the Company in the future. In addition, there are relatively few barriers to
entry into the Company's market and new competitors could readily seek to
compete against the Company in one or more market segments addressed by the
Company's products and services. Increased competition could adversely affect
the Company's operating results through pricing pressure and loss of market
share. There can be no assurance that the Company will be able to continue to
compete successfully against existing or new competitors.
19
21
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.
INTEREST RATE SENSITIVITY. The Company maintains an investment portfolio
consisting mainly of corporate obligations, federal agency obligations, state
and municipal bonds, and U.S. Treasury notes with a weighted average maturity of
less than one year. These held-to-maturity securities are subject to interest
rate risk and will fall in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10 percent from
levels at December 31, 1998, the fair market value of the portfolio would
decline by an immaterial amount. The Company has the ability to hold its fixed
income investments until maturity, and therefore the Company would not expect
its operating results or cash flows to be affected to any significant degree by
the effect of a sudden change in market interest rates on its securities
portfolio. The following table provides information about the Company's
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 (in thousands,
except interest rates) are:
FAIR VALUE AT FY 2001 AND
DECEMBER 31, 1998 FY 1999 FY 2000 THEREAFTER
----------------- ------- ------- -----------
Cash equivalents.............................. $ 9,624 $ 9,624 $ -- $ --
Weighted average interest rate................ 4.04% 4.04% --% --%
Investments................................... $56,028 $32,846 $23,004 $177
Weighted average interest rate................ 5.57% 5.66% 5.44% 6.39%
Total portfolio............................... $65,652 $42,470 $23,004 $177
Weighted average interest rate................ 5.35% 5.29% 5.44% 6.39%
FOREIGN CURRENCY EXCHANGE. As a global concern, the Company faces exposure
to adverse movements in foreign currency exchange rates. These exposures may
change over time as business practices evolve and could have a material adverse
impact on the Company's financial results. Historically, the Company's primary
exposures have been related to non-dollar-denominated operating expenses in
Europe, Canada, and Asia where the Company sells primarily in U.S. dollars. The
introduction of the Euro as a common currency for members of the European
Monetary Union has taken place in the Company's fiscal year 1999. The Company
has not determined what impact, if any, the Euro will have on foreign exchange
exposure. The Company is prepared to hedge against fluctuations in the Euro if
this exposure becomes material. As of December 31, 1998, the assets and
liabilities related to non-dollar-denominated currencies was approximately $1.5
million.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in the following Index to Financial
Statements are filed as a part of this 1998 Annual Report on Form 10-K under
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
FORRESTER RESEARCH, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Income........................... F-3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income...................................... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
20
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding Executive Officers of the registrant is
included in Item 1 in Part I of this 1998 Annual Report on Form 10-K. The
information set forth under the sections captioned "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Company's Proxy Statement (the "1999 Proxy Statement") for the Company's Annual
Meeting of Stockholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" of the
1999 Proxy Statement, except for the Report of the Compensation Committee and
the Performance Graph, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item may be found under the section
captioned "Security Ownership of Certain Beneficial Owners and Management" in
the 1999 Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item may be found under the section
captioned "Certain Relationships and Related Transactions" and "Compensation
Committee Interlocks and Insider Participation" in the 1999 Proxy Statement, and
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. The financial statements filed as part of
this report are listed at Page F-1 and indexed on Page 20.
2. Financial Statements Schedules. None.
3. Exhibits. A complete listing of exhibits required is given in the
Exhibit Index that precedes the exhibits filed with this report on page E-1
hereof.
(b) Report on Form 8-K. None.
(c) See Item 14(a)(3) of this report.
(d) See Item 14(a)(2) of this report.
21
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:
Pursuant to the requirement of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
/s/ GEORGE F. COLONY Chief Executive Officer, March 27, 1999
- --------------------------------- President, and Director of the
George F. Colony Company (principal executive
officer)
/s/ SUSAN M. WHIRTY Chief Financial Officer March 27, 1999
- --------------------------------- (principal financial and
Susan M. Whirty accounting officer)
/s/ ROBERT M. GALFORD Member of the Board of Directors March 27, 1999
- ---------------------------------
Robert M. Galford
/s/ HENK W. BROEDERS Member of the Board of Directors March 27, 1999
- ---------------------------------
Henk W. Broeders
/s/ GEORGE R. HORNIG Member of the Board of Directors March 27, 1999
- ---------------------------------
George R. Hornig
/s/ MICHAEL H. WELLES Member of the Board of Directors March 27, 1999
- ---------------------------------
Michael H. Welles
22
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Forrester Research, Inc.:
We have audited the accompanying consolidated balance sheets of Forrester
Research, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1998, and the related consolidated statements of income, stockholders'
equity and comprehensive income, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Forrester Research, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 27, 1999
F-1
25
FORRESTER RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
1997 1998
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,742,094 $ 10,413,986
Marketable securities..................................... 47,171,975 56,069,332
Accounts receivable, net of allowance for doubtful
accounts of approximately $325,000 and $400,000 in 1997
and 1998, respectively................................. 11,192,887 21,158,040
Deferred commissions...................................... 1,368,106 2,124,292
Prepaid income taxes...................................... 520,018 334,370
Prepaid expenses and other current assets................. 1,052,326 2,604,834
----------- ------------
Total current assets.............................. 69,047,406 92,704,854
----------- ------------
Property and equipment, at cost:
Computers and equipment................................... 3,143,059 5,677,083
Computer software......................................... 1,003,558 2,765,754
Furniture and fixtures.................................... 778,084 1,249,185
Vehicle................................................... 30,098 30,098
Leasehold improvements.................................... 1,596,457 2,916,373
----------- ------------
Total property and equipment...................... 6,551,256 12,638,493
Less--accumulated depreciation and amortization........... 2,062,383 4,825,637
----------- ------------
Property and equipment, net....................... 4,488,873 7,812,856
----------- ------------
Total assets...................................... $73,536,279 $100,517,710
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,273,046 $ 1,433,486
Customer deposits......................................... 278,726 264,478
Accrued expenses.......................................... 3,660,726 5,050,991
Accrued income taxes...................................... 622,997 932,795
Deferred revenue.......................................... 27,074,379 38,894,149
Deferred income taxes..................................... 121,330 408,811
----------- ------------
Total current liabilities......................... 33,031,204 46,984,710
----------- ------------
Commitments (Note 4)
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--8,391,829 shares and 8,654,175
shares in 1997 and 1998, respectively................. 83,918 86,541
Additional paid-in capital................................ 34,353,268 39,574,939
Retained earnings......................................... 6,007,642 13,554,906
Accumulated other comprehensive income.................... 60,247 316,614
----------- ------------
Total stockholders' equity........................ 40,505,075 53,533,000
----------- ------------
Total liabilities and stockholders' equity........ $73,536,279 $100,517,710
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
26
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
----------- ----------- -----------
Revenues:
Core research......................................... $18,205,851 $30,430,972 $46,842,023
Advisory services and other........................... 6,757,270 9,989,965 14,725,111
----------- ----------- -----------
Total revenues................................ 24,963,121 40,420,937 61,567,134
----------- ----------- -----------
Operating Expenses:
Cost of services and fulfillment...................... 8,761,718 13,698,175 22,037,828
Selling and marketing................................. 8,991,794 14,248,287 20,895,597
General and administrative............................ 2,508,845 4,500,102 6,688,368
Depreciation and amortization......................... 618,290 1,208,606 2,763,254
----------- ----------- -----------
Total operating expenses...................... 20,880,647 33,655,170 52,385,047
----------- ----------- -----------
Income from operations........................ 4,082,474 6,765,767 9,182,087
Interest income....................................... 633,798 2,514,889 2,956,878
----------- ----------- -----------
Income before income tax provision............ 4,716,272 9,280,656 12,138,965
Income tax provision (Note 3)........................... 712,000 3,682,616 4,591,701
----------- ----------- -----------
Net income.................................... 4,004,272 $ 5,598,040 $ 7,547,264
=========== ===========
Pro forma income tax adjustment (Note 3)................ 1,198,000
-----------
Pro forma net income.................................... $ 2,806,272
===========
Basic net income per common share....................... $ 0.65 $ 0.67 $ 0.89
=========== =========== ===========
Diluted net income per common share..................... $ 0.62 $ 0.63 $ 0.81
=========== =========== ===========
Basic pro forma net income per common share............. $ 0.45
===========
Diluted pro forma net income per common share........... $ 0.44
===========
Basic weighted average common shares outstanding........ 6,191,667 8,339,381 8,520,475
=========== =========== ===========
Diluted weighted average common shares outstanding...... 6,425,718 8,851,251 9,371,853
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
27
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
COMMON STOCK ACCUMULATED
--------------------- ADDITIONAL OTHER TOTAL
NUMBER $.01 PAR PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' COMPREHENSIVE
OF SHARES VALUE CAPITAL INCOME EARNINGS EQUITY INCOME
--------- -------- ---------- ------------- -------- ------------- -------------
Balance, December 31,
1995...................... 6,000,000 $60,000 $ -- $ 21,696 $ 1,965,527 $ 2,047,223
Issuance of common stock
in initial public
offering, net of
issuance costs of
$3,565,947.............. 2,300,000 23,000 33,211,053 -- -- 33,234,053
Distributions (Note 3).... -- -- -- -- (5,560,197) (5,560,197)
Net income................ -- -- -- -- 4,004,272 4,004,272 $4,004,272
Unrealized gain on
marketable securities,
net of tax provision.... -- -- -- 36,404 -- 36,404 36,404
--------- ------- ----------- -------- ----------- ----------- ----------
Total comprehensive
income............ 4,040,676
==========
Balance, December 31,
1996...................... 8,300,000 83,000 33,211,053 58,100 409,602 33,761,755
Issuance of common stock
under stock option
plan.................... 70,246 702 446,851 -- -- 447,553
Issuance of common stock
under employee stock
purchase plan........... 21,583 216 293,306 -- -- 293,522
Tax benefit on exercise of
stock
options................. -- -- 402,058 -- -- 402,058
Net income................ -- -- -- -- 5,598,040 5,598,040 5,598,040
Unrealized gain on
marketable securities,
net of tax provision.... -- -- -- 2,147 -- 2,147 2,147
--------- ------- ----------- -------- ----------- ----------- ----------
Total comprehensive
income............ 5,600,187
==========
Balance, December 31,
1997...................... 8,391,829 83,918 34,353,268 60,247 6,007,642 40,505,075
Issuance of common stock
under stock option
plans................... 228,648 2,286 2,532,998 -- -- 2,535,284
Issuance of common stock
under employee stock
purchase plan........... 33,698 337 657,403 -- -- 657,740
Tax benefit on exercise of
stock
options................. -- -- 2,031,270 -- -- 2,031,270
Net income................ -- -- -- -- 7,547,264 7,547,264 7,547,264
Unrealized gain on
marketable securities,
net of tax provision.... -- -- -- 88,749 -- 88,749 88,749
Cumulative translation
adjustment.............. -- -- -- 167,618 -- 167,618 167,618
--------- ------- ----------- -------- ----------- ----------- ----------
Total comprehensive
income............ $7,803,631
==========
Balance, December 31,
1998...................... 8,654,175 $86,541 $39,574,939 $316,614 $13,554,906 $53,533,000
========= ======= =========== ======== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
28
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
----------- ------------- -------------
Cash flows from operating activities:
Net income........................................ $ 4,004,272 $ 5,598,040 $ 7,547,264
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization.................. 618,290 1,208,606 2,763,254
Deferred income taxes.......................... 436,714 (315,384) 287,481
Accretion of discount on marketable
securities................................... (193,152) (473,845) (54,810)
Cumulative translation adjustment.............. -- -- 157,740
Changes in assets and liabilities --
Accounts receivable.......................... (2,217,514) (3,092,392) (9,965,153)
Deferred commissions......................... (449,301) (26,838) (756,186)
Prepaid income taxes......................... -- (520,018) 185,648
Prepaid expenses and other current assets.... (153,064) (822,721) (1,552,508)
Accounts payable............................. 822,787 72,915 160,440
Customer deposits............................ 41,964 139,433 (14,248)
Accrued expenses............................. 1,656,296 459,615 1,390,265
Accrued income taxes......................... 227,037 395,960 309,798
Deferred revenue............................. 6,457,279 9,257,999 11,819,770
----------- ------------- -------------
Net cash provided by operating
activities.............................. 11,251,608 11,881,370 12,278,755
----------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment, net.......... (2,033,157) (3,226,337) (6,087,237)
Purchases of marketable securities................ (8,469,888) (365,870,837) (313,236,282)
Proceeds from sales and maturities of marketable
securities..................................... 4,962,208 329,432,571 304,482,484
----------- ------------- -------------
Net cash used in investing activities..... (5,540,837) (39,664,603) (14,841,035)
----------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock under stock
option plan and employee stock purchase plan,
including tax benefit on exercise of stock
options........................................ -- 1,143,133 5,224,294
Net proceeds from initial public stock offering... 33,234,053 -- --
Distributions to stockholder...................... (5,560,197) -- --
----------- ------------- -------------
Net cash provided by financing
activities.............................. 27,673,856 1,143,133 5,224,294
----------- ------------- -------------
Effect of exchange rate changes on cash and cash
equivalents....................................... -- -- 9,878
----------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents....................................... 33,384,627 (26,640,100) 2,671,892
Cash and cash equivalents, beginning of year........ 997,567 34,382,194 7,742,094
----------- ------------- -------------
Cash and cash equivalents, end of year.............. $34,382,194 $ 7,742,094 $ 10,413,986
=========== ============= =============
Supplemental disclosure of cash flow information:
Cash paid for income taxes........................ $ 87,053 $ 3,720,000 $ 1,117,000
=========== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
29
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Forrester Research, Inc. (the Company) creates, publishes and sells
technology research reports and provides advisory services and technology
conferences. The Company is incorporated under the laws of the State of Delaware
and grants credit to its customers with locations throughout the world.
The preparation of the accompanying consolidated financial statements
requires the use of certain estimates by management in determining the Company's
assets, liabilities, revenues and expenses. Actual results could differ from
these estimates.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described below and elsewhere in
the accompanying financial statements and notes.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
Revenue Recognition
The Company invoices its core research, advisory and other services when an
order is received. The gross amount is recorded as accounts receivable and
deferred revenue when the client is obligated to pay the invoice. Core research,
which represents the monthly distribution of research reports, is recorded as
revenue ratably over the term of the agreement as the research is delivered.
Advisory and other services are recognized during the period in which the
services are performed.
Deferred Commissions
Commissions incurred in acquiring new or renewal contracts are deferred and
charged to operations as the related revenue is recognized. The Company
evaluates the recoverability of deferred commissions at each balance sheet date
based on the status of the related contract.
Net Income and Pro Forma Net Income Per Common Share
Basic net income per common share and basic pro forma net income per common
share are computed by dividing net income or pro forma net income by the basic
weighted average number of common shares outstanding during the period. Diluted
net income per common share and diluted pro forma net income per common share
are computed by dividing net income or pro forma net income by the diluted
weighted average number of common and common equivalent 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 upon the exercise of
outstanding stock options.
Basic and diluted weighted average common shares are as follows:
1996 1997 1998
--------- --------- ---------
Basic weighted average common shares outstanding...... 6,191,667 8,339,381 8,520,475
Weighted average common equivalent shares............. 234,051 511,870 851,378
--------- --------- ---------
Diluted weighted average common shares outstanding.... 6,425,718 8,851,251 9,371,853
========= ========= =========
As of December 31, 1997 and 1998, 111,086 and 439,890 options,
respectively, were outstanding but not included in the diluted weighted average
common share calculation as the effect would have been anti-dilutive. As of
December 31, 1996, there were no anti-dilutive options.
F-6
30
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation
The Company provides for depreciation, computed using the straight-line
method, by charges to income in amounts that allocate the costs of these assets
over their estimated useful lives as follows:
ESTIMATED
USEFUL LIFE
-------------
Computers and equipment..................................... 3 to 5 Years
Computer software........................................... 3 Years
Furniture and fixtures...................................... 7 Years
Vehicles.................................................... 5 Years
Leasehold improvements...................................... Life of lease
Product Development
All costs associated with the development of new products and services are
expensed as incurred.
Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, requires disclosure of
any significant off-balance-sheet and credit risk concentrations. The Company
has no significant off-balance sheet concentration of credit risk such as
foreign exchange contracts, option contracts, or other foreign hedging
arrangements. Financial instruments that potentially subject the Company to
concentrations of credit risk are principally cash equivalents, marketable
securities and accounts receivable. The Company places its investments in highly
rated institutions. No single customer accounted for greater than 10% of
revenues or accounts receivable in any of the periods presented.
Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure about the fair value of financial instruments. Financial
instruments consist of cash equivalents, marketable securities, accounts
receivable and accounts payable. The estimated fair value of these financial
instruments approximates their carrying value. The fair market value of
marketable securities is based on market quotes. The Company's cash equivalents
and marketable securities are generally investment grade corporate bonds and
obligations of the federal government or municipal issuers.
Foreign Currency
The functional currency of the Company's wholly owned subsidiary in the
Netherlands is the local currency. The financial statements of the subsidiary
are translated to United States dollars using period-end exchange rates for
assets and liabilities and average exchange rates during the corresponding
period for revenues and expenses. Translation gains and losses as a result of
this translation are accumulated as a component of accumulated other
comprehensive income. Net gains and losses resulting from foreign exchange
transactions are included in the consolidated statements of operations and were
not significant during the periods presented.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of
comprehensive income and the components of comprehensive income. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. Comprehensive income is disclosed in the accompanying statement of
stockholders' equity and comprehensive
F-7
31
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income. The components of accumulated other comprehensive income as of December
31, 1996, 1997, and 1998 are as follows:
1996 1997 1998
------- ------- --------
Unrealized gain on marketable securities, net of
taxes............................................... $58,100 $60,247 $148,996
Cumulative translation adjustment..................... -- -- 167,618
------- ------- --------
Total accumulated other comprehensive income.......... $58,100 $60,247 $316,614
======= ======= ========
New Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 is
effective for all fiscal years beginning after December 15, 1998 and requires
certain computer software costs associated with internal-use software to be
expensed as incurred until certain capitalization criteria are met. The Company
will adopt SOP No. 98-1 prospectively beginning January 1, 1999. Adoption of
this statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities which requires that all nongovernmental entities expense the
costs of start-up activities, including organizational costs, as those costs are
incurred. The Company has historically recorded all such costs as expenses, in
the period incurred.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 is effective for all periods beginning after June 15, 1999 and establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
Adoption of SFAS No. 133 is not expected to have a material impact on the
Company's consolidated financial position or results from operations.
(2) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all short-term, highly liquid investments with
maturities of 90 days or less from the original date of purchase to be cash
equivalents.
The Company accounts for investments in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Under SFAS No.
115, securities that the Company has the positive intent and ability to hold to
maturity are reported at amortized cost and are classified as held-to-maturity.
There were no held-to-maturity securities at December 31, 1997 and 1998.
Securities purchased in order to be held for indefinite periods of time and not
intended at the time of purchase to be held until maturity are classified as
available-for-sale securities. At December 31, 1997 and 1998, these securities
consisted of investments in federal and state government obligations and
corporate obligations, which were recorded at fair market value, with any
unrealized gains and losses reported as a separate component of other
accumulated comprehensive income. There were no trading securities at December
31, 1997 and 1998.
F-8
32
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997 and 1998, marketable securities consisted of the
following:
1997 1998
----------- -----------
U.S. Treasury notes........................................ $10,025,860 $ 3,560,004
Federal agency obligations................................. 21,772,795 15,125,624
State and municipal bonds.................................. 13,131,114 12,335,825
Corporate obligations...................................... 2,242,206 25,047,879
----------- -----------
$47,171,975 $56,069,332
=========== ===========
The following table summarizes the maturity periods of marketable
securities as of December 31, 1998:
LESS THAN 1 TO 5 5 TO 10
1 YEAR YEARS YEARS TOTAL
----------- ----------- -------- -----------
U.S. Treasury notes....................... $ 2,550,164 $ 1,009,840 $ -- $ 3,560,004
Federal agency obligations................ 8,924,325 6,125,100 76,199 15,125,624
State and municipal bonds................. 9,451,342 2,884,483 -- 12,335,825
Corporate obligations..................... 11,962,138 13,085,741 -- 25,047,879
----------- ----------- -------- -----------
$32,887,969 $23,105,164 $ 76,199 $56,069,332
=========== =========== ======== ===========
Gross realized gains and losses on sales of marketable securities for the
years ended December 31, 1997 and 1998, which were calculated based on specific
identification, were not material.
(3) INCOME TAXES
The Company accounts for income taxes, including pro forma computations, in
accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109
prescribes an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities.
The Company was an S corporation under Section 1362 of the Internal Revenue
Code of 1986, as amended (the Code), until prior to the closing of its public
offering in December 1996. As an S corporation, the taxable income of the
Company was passed through to the sole stockholder and was reported on his
individual federal and state income tax returns. Payments to the stockholder to
cover the tax liabilities as a result of the Company's taxable income were
recorded as distributions in the accompanying statements of
stockholders' equity. In December 1996, a distribution was recorded to
distribute the cumulative S corporation earnings taxed or taxable to the
original stockholder net of the amounts previously distributed. This
distribution totaled approximately $5,231,000.
As discussed above, the Company terminated its S corporation election prior
to the closing of its initial public offering of common stock and became subject
to federal and state income taxes at prevailing corporate rates. Accordingly,
the accompanying statement of income for the year ended December 31, 1996
includes a pro forma income tax adjustment for the income taxes that would have
been recorded if the Company had been a C corporation for that period.
F-9
33
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the historical and pro forma income tax provisions are
approximately as follows:
1996 1997 1998
---------- ---------- ----------
Current --
Federal...................................... $ 67,000 $3,045,000 $3,800,000
State........................................ 208,000 953,000 504,000
---------- ---------- ----------
275,000 3,998,000 4,304,000
---------- ---------- ----------
Deferred --
Federal...................................... 354,000 (244,000) 255,000
State........................................ 83,000 (71,000) 33,000
---------- ---------- ----------
437,000 (315,000) 288,000
---------- ---------- ----------
Actual provision for income taxes....... 712,000 $3,683,000 $4,592,000
========== ==========
Pro forma income tax provision................. 1,910,000
----------
Pro forma income tax adjustment................ $1,198,000
==========
The Company's income tax provision for the year ended December 31, 1996
consisted primarily of corporate-level state income taxes that were levied
against the Company as an S corporation and the cumulative effect of temporary
differences between the financial reporting and tax basis of certain assets and
liabilities on the date of the S corporation termination as discussed in the
following paragraph. The pro forma tax provision does not materially differ from
the Company's combined federal and state statutory rate of 40%.
Upon termination of the S corporation election, deferred income taxes were
recorded for the tax effect of cumulative temporary differences between the
financial reporting and tax basis of certain assets and liabilities, primarily
deferred commissions, accrued expenses and cumulative tax depreciation in excess
of financial reporting allowances. These temporary differences resulted in a net
deferred income tax liability of approximately $510,000. The Company recorded
this tax liability as a one-time increase in the actual tax provision during
1996.
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
1997 1998
---- ----
Income tax provision at federal statutory rate.............. 34.0% 34.0%
Increase (decrease) in tax resulting from --
State tax provision, net of federal benefit............... 4.5 4.4
Non-deductible expenses................................... 0.6 0.8
Tax-exempt interest income................................ (1.1) (0.8)
Benefit of foreign sales corporation...................... -- (0.8)
Other, net................................................ 1.7 0.2
---- ----
Effective income tax rate................................. 39.7% 37.8%
==== ====
Deferred income taxes as of December 31, 1997 and 1998 related to the
following temporary differences:
1997 1998
--------- ---------
Nondeductible reserves and accruals.................. $ 397,000 $ 360,000
Depreciation and amortization........................ 33,000 38,000
Deferred commissions................................. (551,000) (807,000)
--------- ---------
$(121,000) $(409,000)
========= =========
The Company and George F. Colony, who was the sole stockholder of the
Company prior to its initial public offering, have entered into an
indemnification agreement relating to their respective income tax
F-10
34
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities. Mr. Colony will continue to be liable for personal income taxes on
the Company's income for all periods prior to the time the Company ceased to be
an S corporation, while the Company will be liable for all income taxes
subsequent to the time it ceased to be an S corporation. The agreement generally
provides that the Company will indemnify Mr. Colony for any increase in his
taxes (including interest and penalties) resulting from adjustments initiated by
taxing authorities and from payments to him under the agreement, and Mr. Colony
will pay to the Company an amount equal to any decrease in his tax liability
resulting from adjustments initiated by taxing authorities. The agreement also
provides that, if the Company is determined to have been a C corporation for tax
purposes at any time it reported its income as an S corporation, Mr. Colony will
make a capital contribution to the Company in an amount necessary to hold the
Company harmless from any taxes and interest arising from such determination up
to the amount of distributions made by the Company to Mr. Colony prior to the
termination of the Company's S corporation election less any taxes and interest
attributable to such distributions.
(4) COMMITMENTS
The Company leases its office space under operating leases. At December 31,
1998, approximate future minimum rentals due are as follows:
1999........................................................ $1,523,000
2000........................................................ 1,528,000
2001........................................................ 825,000
2002........................................................ 412,000
2003........................................................ 54,000
----------
Total minimum lease payments........................... $4,342,000
==========
Rent expense was approximately $664,000, $983,000 and $1,463,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
(5) 401(k) PLAN
The Company has a 401(k) savings plan covering substantially all eligible
employees. The plan is a qualified defined contribution plan in accordance with
Section 401(k) of the Code. Effective January 1, 1998, the Company elected to
match 50% of employee contributions, up to 3% of each employee's annual salary.
Company matching contributions will vest ratably over a period of four years.
The Company's matching contributions totaled $424,000 for the year ended
December 31, 1998.
(6) STOCKHOLDERS' EQUITY
(a) Initial Public Offering
In December 1996, the Company sold, through an underwritten public
offering, 2,300,000 shares of its common stock at $16.00 per share. The proceeds
to the Company from the Company's initial public offering, net of underwriting
discounts and expenses, were $33,234,053.
(b) Preferred Stock
The Company has authorized 500,000 shares of $.01 par value preferred
stock. The Board of Directors has full authority to issue this stock and to fix
the voting powers, preferences, rights, qualifications, limitations or
restrictions thereof, including dividend rights, conversion rights, redemption
privileges and liquidation preferences and the number of shares constituting any
series or designation of such series.
F-11
35
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) STOCK OPTION PLANS
In February 1996, the Company adopted the Forrester Research, Inc. 1996
Equity Incentive Plan, which was amended in September 1996 (the Plan). The Plan
provides for the issuance of incentive stock options (ISOs) and nonqualified
stock options (NSOs) to purchase up to 2,750,000 shares of common stock. Under
the terms of the Plan, ISOs may not be granted at less than fair market value on
the date of grant (and in no event less than par value). ISO grants to holders
of 10% of the combined voting power of all classes of Company stock must be
granted at an exercise price not less than 110% of the fair market value at the
date of grant. Options generally vest ratably over three years and expire after
10 years. Options granted under the Plan immediately vest upon certain events,
as defined.
In September 1996, the Company adopted the 1996 Stock Option Plan for
Non-Employee Directors (the Directors' Plan), which provides for the issuance of
options to purchase up to 150,000 shares of common stock. Under the Directors'
Plan, each non-employee director shall be awarded options to purchase 6,000
shares of common stock, at an exercise price equal to the fair market value of
the common stock upon his or her election as a director. These options vest in
three equal annual installments commencing on the date of grant. In addition,
each non-employee director will also receive an option to purchase 4,000 shares
of common stock, at an exercise price equal to the fair market value of the
common stock, each year immediately following the Company's annual stockholders'
meeting. These options will vest in three equal installments on the first,
second and third anniversaries of the date of grant. The Compensation Committee
(the Committee) of the Board of Directors also has the authority under the
Directors' Plan to grant options to non-employee directors in such amounts and
on such terms as set forth in the Directors' Plan as it shall determine at the
time of grant.
Stock option activity from the inception of the Plan and of the Directors'
Plan to December 31, 1998 was as follows:
WEIGHTED
AVERAGE
EXERCISE EXERCISE
NUMBER PRICE PRICE
OF SHARES PER SHARE PER SHARE
--------- --------- ---------
Granted..................................... 814,046 $ 5.50- 13.00 $ 8.16
Canceled.................................... (30,673) $ 5.50 $ 5.50
--------- ------------- ------
Outstanding at December 31, 1996............ 783,373 $ 5.50- 13.00 $ 8.28
Granted..................................... 334,395 $17.56- 29.19 $22.52
Exercised................................... (70,246) $ 5.50- 13.00 $ 6.37
Canceled.................................... (28,387) $ 5.50- 22.00 $14.18
--------- ------------- ------
Outstanding at December 31, 1997............ 1,019,135 $ 5.50- 29.19 $13.00
Granted..................................... 1,481,500 $19.13- 39.75 $25.48
Exercised................................... (228,648) $ 5.50- 29.19 $11.08
Canceled.................................... (223,519) $ 5.50- 39.69 $18.08
--------- ------------- ------
Outstanding at December 31, 1998............ 2,048,468 $ 5.50- 39.75 $21.70
========= ============= ======
Exercisable at December 31, 1998............ 427,721 $ 5.50- 29.19 $12.71
========= ============= ======
Exercisable at December 31, 1997............ 363,174 $ 5.50- 22.00 $10.56
========= ============= ======
Exercisable at December 31, 1996............ 157,376 $ 5.50 $ 5.50
========= ============= ======
F-12
36
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
WEIGHTED
AVERAGE WEIGHTED
NUMBER NUMBER REMAINING AVERAGE
OUTSTANDING AT EXERCISABLE CONTRACTUAL EXERCISE
DECEMBER 31, AT DECEMBER 31, LIFE PRICE
1998 1998 (YEARS) PER SHARE
-------------- --------------- ----------- ---------
Range of exercise prices
$ 5.50......................... 221,791 148,982 7.14 $ 5.50
11.00-13.00.......................... 265,643 148,896 7.70 $12.03
17.56-21.50.......................... 937,126 73,041 8.91 $19.22
22.00-26.69.......................... 59,850 30,432 8.55 $23.12
27.00-32.63.......................... 123,058 26,370 8.98 $29.44
33.06-39.75.......................... 441,000 -- 9.48 $38.57
--------- ------- ------
2,048,468 427,721 8.68 $21.70
========= ======= ======
The weighted average remaining contractual life of options outstanding at
December 31, 1996, 1997 and 1998 was 9.4, 8.6 and 8.7 years, respectively. As of
December 31, 1996, 1997 and 1998, options available for future grant under the
Plan and the Directors Plan were 2,116,627, 1,810,619 and 552,638, respectively.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
measurement of the fair value of stock options or warrants to be included in the
statement of income or disclosed in the notes to financial statements. The
Company has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
elect the disclosure-only alternative under SFAS No. 123. The Company has
computed the value of options granted in 1996, 1997 and 1998 using the
Black-Scholes option pricing model prescribed by SFAS No. 123, using the
following assumptions:
1996 1997 1998
--------- --------- -------
Risk-free interest rate................. 6.21% 6.32% 5.28%
Expected dividend yield................. -- -- --
Expected lives.......................... 7.5 years 7.5 years 5 years
Expected volatility..................... 0%-64% 59% 40%
The weighted average grant date fair value of options granted under the
Plan and the Directors' Plan during the years ended December 31, 1996, 1997 and
1998 were $3.40, $15.16 and $25.48, respectively.
Had compensation cost for the Company's stock option plan been determined
consistent with SFAS No. 123, net income would have been approximately as
follows:
1996 1997 1998
---------- ---------- ----------
As reported --
Net income.......................... $2,806,000 $5,598,000 $7,547,264
========== ========== ==========
Basic net income per common share... $ 0.45 $ 0.67 $ 0.89
========== ========== ==========
Diluted net income per common
share............................ $ 0.44 $ 0.63 $ 0.81
========== ========== ==========
Pro forma --
Net income.......................... $2,429,000 $3,833,000 $4,569,000
========== ========== ==========
Basic net income per common share... $ 0.39 $ 0.46 $ 0.54
========== ========== ==========
Diluted net income per common
share............................ $ 0.38 $ 0.43 $ 0.49
========== ========== ==========
F-13
37
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1998, the Company's founder and principal shareholder granted
certain key employees options to purchase one million shares of his common
stock. The options have an exercise price of $19.13 and vest as follows:
one-thirty-sixth of the total number of options granted monthly through January
28, 1999; and one-third of the total number of options granted on and after each
of January 28, 2000 and January 28, 2001. At December 31, 1998, 149,628 options
have been exercised and 850,372 options remained outstanding.
(8) EMPLOYEE STOCK PURCHASE PLAN
In September 1996, the Company adopted the 1996 Employee Stock Purchase
Plan (the Stock Purchase Plan), which provides for the issuance of up to 200,000
shares of common stock. The Stock Purchase Plan is administered by the
Committee. With certain limited exceptions, all employees of the Company who
have completed six months or more of continuous service in the employ of the
Company and whose customary employment is more than 30 hours per week, including
officers and directors who are employees, are eligible to participate in the
Stock Purchase Plan. Purchase periods under the Stock Purchase Plan are
generally six months in length and commence on each successive July 1 and
January 1. During each purchase period under the Stock Purchase Plan, the
maximum number of shares of common stock that may be purchased by an employee is
limited to the number of shares equal to $12,500 divided by the fair market
value of a share of common stock on the first day of the purchase period. An
employee may elect to have up to a maximum of 10% deducted from his or her
regular salary for the purpose of purchasing shares under the Stock Purchase
Plan. The price at which the employee's shares are purchased is the lower of (a)
85% of the closing price of the common stock on the day that the purchase period
commences, or (b) 85% of the closing price of the common stock on the day that
the purchase period terminates. Employees purchased 21,583 shares of stock at
$13.60 for the first purchase period under the Stock Purchase Plan, which ended
June 30, 1997. Employees purchased 14,885 shares at $19.34 for the purchase
period that ended December 31, 1997 and 18,813 shares at $19.66 for the purchase
period that ended June 30, 1998. Subsequent to year-end, employees purchased
12,515 shares at $34.53 for the purchase period that ended December 31, 1998.
(9) SEGMENT AND ENTERPRISE WIDE REPORTING
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes selected standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating segments
are defined as components of an enterprise about which separate discrete
financial information is evaluated regularly by the chief operating decision
maker, or decision making group, in deciding how to allocate resources and
assess performance. The Company's chief decision making group, as defined under
SFAS No. 131, is the Executive Team, consisting of Mr. Colony and the executive
officers. To date, the Company has viewed its operations and managed its
business as principally one segment, research services. As a result, the
financial information disclosed herein, materially represents all of the
financial information related to the Company's principal operating segment.
Substantially all of the Company's assets are located in the United States.
F-14
38
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues by geographic destination and as a percentage of total revenues
are as follows:
1996 1997 1998
----------- ----------- -----------
United States................................ $19,694,363 $31,652,524 $48,922,414
Europe....................................... 2,751,858 4,892,523 7,374,138
Other........................................ 2,516,900 3,875,890 5,270,582
----------- ----------- -----------
$24,963,121 $40,420,937 $61,567,134
=========== =========== ===========
United States................................ 79% 78% 79%
Europe....................................... 11 12 12
Other........................................ 10 10 9
----------- ----------- -----------
100% 100% 100%
=========== =========== ===========
(10) CERTAIN BALANCE SHEET ACCOUNTS
Accrued Expenses
Accrued expenses consist of the following:
1997 1998
---------- ----------
Payroll and related......................................... $1,702,050 $2,950,984
Other....................................................... 1,958,676 2,100,007
---------- ----------
$3,660,726 $5,050,991
========== ==========
Allowance for Doubtful Accounts
A summary of the allowance for doubtful accounts at December 31, 1996,
1997, and 1998 is as follows:
1996 1997 1998
-------- -------- --------
Balance, beginning of period......................... $119,920 $200,000 $325,000
Provision for doubtful accounts...................... 312,317 398,637 375,483
Write-offs........................................... (232,237) (273,637) (300,483)
-------- -------- --------
Balance, end of period............................... $200,000 $325,000 $400,000
======== ======== ========
(11) SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the
years ended December 31, 1996, 1997 and 1998 (in thousands, except per share
data):
QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- -------- --------- --------
Revenues...................................... $4,746 $5,316 $6,312 $8,589
Income from operations........................ $ 459 $ 566 $1,129 $1,928
Pro forma net income.......................... $ 339 $ 409 $ 716 $1,314
Basic pro forma net income per common share... $ 0.06 $ 0.07 $ 0.12 $ 0.19
Diluted pro forma net income per common
share....................................... $ 0.06 $ 0.07 $ 0.11 $ 0.19
F-15
39
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
--------- -------- --------- --------
Revenues..................................... $8,171 $9,126 $10,117 $13,007
Income from operations....................... $1,073 $1,461 $ 1,656 $ 2,576
Net income................................... $1,019 $1,215 $ 1,332 $ 2,032
Basic net income per common share............ $ 0.12 $ 0.15 $ 0.16 $ 0.24
Diluted net income per common share.......... $ 0.12 $ 0.14 $ 0.15 $ 0.23
QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998
--------- -------- --------- --------
Revenues.................................... $13,131 $15,043 $15,070 $18,322
Income from operations...................... $ 1,448 $ 1,893 $ 2,257 $ 3,583
Net income.................................. $ 1,342 $ 1,617 $ 1,874 $ 2,714
Basic net income per common share........... $ 0.16 $ 0.19 $ 0.22 $ 0.32
Diluted net income per common share......... $ 0.15 $ 0.17 $ 0.20 $ 0.29
F-16
40
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1* Restated Certificate of Incorporation of the Company.
3.2* Bylaws of the Company, as amended.
4* Specimen Certificate for shares of Common Stock, $.01 par
value, of the Company.
10.1+* Registration Rights and Non-Competition Agreement.
10.2+* Tax Indemnification Agreement dated November 25, 1996.
10.3+* 1996 Amended and Restated Equity Incentive Plan as amended.
10.4+* 1996 Employee Stock Purchase Plan.
10.5+* 1996 Director Option Plan for Non-Employee Directors.
10.6* Lease dated May 1, 1995 between Advent Realty Limited
Partnership II and the Company for the premises located at
1033 Massachusetts Avenue, Cambridge, Massachusetts (the
"Cambridge Lease").
10.7* First Amendment to the Cambridge Lease, dated August 28,
1995.
10.8* Second Amendment to the Cambridge Lease, dated May 21, 1996.
10.9** Third Amendment to the Cambridge Lease, dated May 5, 1997.
10.10 Fourth Amendment to the Cambridge Lease, Dated January 1,
1998. (transmitted herewith).
21 Subsidiaries of the Registrant (transmitted herewith).
23 Consent of Arthur Andersen LLP (transmitted herewith).
27 Financial Data Schedule.
- ---------------
+ Denotes management contract or compensation arrangements.
* Filed as an Exhibit to the Company's Registration Statement on Form S-1 filed
on September 26, 1997 (File No. 333-12761) and incorporated by reference
herein.
** Filed as an exhibit to the Company's Annual Report on Form 10-K for
year-ended December 31, 1997.