<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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, 1997
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
------------------------
FORRESTER RESEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</TABLE>
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:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, $.01 par value Nasdaq National Market System
</TABLE>
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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 6, 1998 (based on the closing price as quoted by the
Nasdaq National Market as of such date) was approximately $65 million.
As of March 6, 1998, 8,441,374 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, 1997 are incorporated by reference
into Part III hereof.
================================================================================
<PAGE> 2
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 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") 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 the core research
produced by any of its 12 Strategy Research Services and one Quantitative
Research Service. Each Strategy Research and Quantitative Research Service
focuses on a particular area of technology and explores business issues relevant
to clients' decision-making. These issues 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 topics covered by the core research.
Forrester targets its products and services to both large enterprises and
technology vendors. As of December 31, 1997, Forrester's research was delivered
to 1,029 client companies. No single client company accounted for over 3% of the
Company's revenues during the year ended December 31, 1997. Approximately 80% of
Forrester's client companies with memberships expiring during the year ended
December 31, 1997 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.
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 IT professionals, and helps
organizations improve their strategic planning processes, leverage technology
change, and gain competitive advantage.
1
<PAGE> 3
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 IT professionals. The Company's research methodology
analyzes complex technology issues and delivers prescriptive analysis and advice
through each of its 12 Strategy Research Services and its Quantitative Research
Service. 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:
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
cross-service collaboration 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:
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. In
addition, Forrester's current and developing electronic delivery options
make it easier to disseminate research within an organization while
providing greater ease of use, including the ability to search, customize,
and sort information according to individual preferences. Finally, the
Company intends to continue to introduce new research services and to
provide advisory services that build upon the analysis and recommendations
set forth in the core research to enhance sales of that core 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
2
<PAGE> 4
client companies. Forrester currently targets senior management, business
strategists, and IT professionals within Fortune 1,000 companies. The
Company seeks to expand its international audience by targeting select
geographic markets. The Company also aims to increase the number of
Strategy Research and Quantitative Research Services 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 12
Strategy Research Services in three main research areas: Senior Management,
Information Technology, and New Media. Senior Management Research assists senior
executives in understanding the long-term implications of technology change for
organizational and business strategies; Information Technology Research services
analyze how technology change impacts IT's infrastructure, tactics, and mission;
and New Media Research services provide insight into how companies can leverage
emerging technology to deliver content and services to consumers. Each Strategy
Research Service delivers one Report and two Briefs each month, except the
Leadership Strategies service, which delivers Reports on a bimonthly basis and
Executive Takes on a biweekly basis. Additionally, Forrester provides advisory
services to select clients through the Partners Program and Strategy Review
Program. 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 hosts the Forrester Forum West in San Francisco, California, and the
Forrester Forum Europe in London, England. The Company intends to add three
additional Forums in 1998.
In October 1997 the Company expanded its principal products and services to
include annually renewable memberships to a Quantitative Research Service,
Consumers & Technographics(TM). This service combines quantitative data and
qualitative analysis of consumers and technology to segment consumers by
motivation, desire, and ability to invest in technology. Consumers &
Technographics intends to deliver approximately five Reports and databases each
year, biweekly Data Insights, and quarterly Prime Numbers. The service also
intends to provide advisory services to select clients. The Company retains a
third-party data vendor for data collection and tabulation.
STRATEGY RESEARCH AND QUANTITATIVE RESEARCH SERVICES
The Company's Strategy Research and Quantitative Research Services provide
ongoing research and analysis on the developments, information, and activities
in the technology industry. Each service is staffed by a team of research
analysts and associates with substantial experience in the technology area
covered by that service. The services employ a consistent research methodology
to analyze technology issues, address related
3
<PAGE> 5
business issues, and offer recommendations and action plans. While each service
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 of Forrester's Strategy
Research and Quantitative Research Services:
<TABLE>
<CAPTION>
SENIOR MANAGEMENT RESEARCH SAMPLE TOPICS
-------------------------- -------------
<S> <C>
LEADERSHIP STRATEGIES -- introduced in September 1995, ana- -- Strategic planning
lyzes how executives can maximize the business benefits of -- IT cost management
technology and guides them in making effective decisions -- Best practices/benchmarking
about strategic direction, investment priorities, and -- Strategic vendor selection
resource management -- High Performance IT
INFORMATION TECHNOLOGY RESEARCH SAMPLE TOPICS
- ------------------------------------------------------------ ------------------------------------------
COMPUTING STRATEGIES -- introduced in November 1983, ana- -- Systems and network management
lyzes the rollout and management of large-scale -- Directories
client/server systems, the impact of the Internet on -- Strategic outsourcing
computing architectures, and the changing IT organization -- Servers, PCs, workstations
-- Internet Computing
NETWORK STRATEGIES -- introduced in December 1986, analyzes -- ATM
high-performance network services and guides companies to -- Video
build advanced networks that support client/server -- EDI
applications, link mobile workers, and connect business -- Internetworking equipment
partners and customers -- Networking protocols and services
-- Internet/intranet
PACKAGED APPLICATION STRATEGIES -- introduced in April 1996, -- Cost of ownership analysis
analyzes the impact of emerging technologies on application -- eCommerce packages
strategy and helps clients acquire, manage, and leverage -- Portfolio assembly
packaged software applications -- Application data warehousing
-- Impact of Internet/intranet
-- Supply chain management
SOFTWARE STRATEGIES -- introduced in April 1990, analyzes -- Object-oriented technology
and defines strategies for the overall software architecture -- Internet Computing migration
needed to meet business objectives, including strategic use -- Internet/intranet software
of data, documents, and development -- Document management
-- Date warehousing
-- Transactive Content
TELECOM STRATEGIES -- introduced in June 1996, analyzes -- Wide area networking
telecommunications in the era of deregulation and the -- Wireless communications
Internet and helps clients use communications technologies -- Internet access
to gain competitive advantage and cut costs -- Deregulation
</TABLE>
4
<PAGE> 6
<TABLE>
<CAPTION>
NEW MEDIA RESEARCH SAMPLE TOPICS
------------------ -------------
<S> <C>
BUSINESS TRADE & TECHNOLOGY STRATEGIES -- introduced in July -- Intercompany commerce
1997, analyzes the impact of electronic markets on how busi- -- On-line purchasing
nesses trade goods and services -- Internet customer service
CONSUMERS & TECHNOGRAPHICS -- introduced in October 1997, -- Platforms and connections
provides quantitative consumer data about emerging technolo- -- Transforming media
gies and changing behaviors -- Delivering financial services
-- Commerce value chain
ENTERTAINMENT & TECHNOLOGY STRATEGIES -- introduced in April -- Internet games
1997, enables companies to understand the impact of technol- -- Networked toys
ogy on consumers' leisure activities -- Music on the Web
-- Digital production
INTERACTIVE TECHNOLOGY STRATEGIES -- introduced in March -- Internet site development
1996, analyzes how companies use new technologies to provide -- Web site management tools
a compelling consumer experience -- Personal broadcast networks
-- Multimedia content
MEDIA & TECHNOLOGY STRATEGIES -- introduced in September -- Internet advertising
1996, analyzes electronic media business models for -- On-line magazines
publishers, broadcasters, and information service providers -- Electronic yellow pages
and helps clients build technology-based media franchises -- Future of business information ser-
vices
MONEY & TECHNOLOGY STRATEGIES -- introduced in September -- eCommerce
1995, analyzes consumer financial services, focusing on -- Integrated financial services
technology's impact on how consumers spend, save, and invest -- Smart cards
-- On-line payments
-- On-line banking and investing
-- Web strategies for financial firms
PEOPLE & TECHNOLOGY STRATEGIES -- introduced in May 1994, -- Consumer demographics
analyzes how emerging technologies affect consumer -- On-line services and the Internet
lifestyles and behavior -- On-line business models
-- Mobile communications
</TABLE>
Each client that purchases a membership to a Strategy Research Service
receives the following materials:
FORRESTER REPORTS are created monthly by the services in Information
Technology and New Media Research, and bimonthly by the Leadership
Strategies service. These Reports deliver analysis on current technology
issues in a concise format.
FORRESTER BRIEFS AND TAKES offer timely analysis on industry events,
issues, technology, or other specific research topics. Information
Technology and New Media clients receive 24 Briefs per year, and Leadership
Strategies clients receive 26 Executive Takes per year.
JOURNAL ENTRIES are presented at the end of every Forrester Report and
offer Forrester's inside perspective on current events in the industry.
5
<PAGE> 7
Each client that purchases a membership to the Quantitative Research
Service receives the following materials:
FORRESTER REPORTS AND SURVEY DATA are created approximately five times
each year and deliver analysis of data from field surveys in a concise
format. Each Report is delivered with cross-tabs and a CD-ROM with
complete, original respondent survey data.
DATA INSIGHTS offer timely analysis of the most recent field research.
Forrester intends to deliver 22 Data Insights during 1998.
PRIME NUMBERS provides clients with updates on the key results from
the surveys. Forrester intends to deliver the Prime Numbers on a quarterly
basis.
In addition to printed reports, all core research deliverables are
available in the following electronic delivery formats:
FORRESTER INTERNET gives clients access to a full three-year archive
of Forrester's research via the World Wide Web.
FORRESTER INTRANET delivers the same research archive as Forrester
Internet, can be purchased with or without a search engine, and is
compatible with clients' Intranet environments.
FORRESTER RESEARCH FOR LOTUS NOTES USERS provides access to
Forrester's full, three-year, research archive via replication to
Forrester's Lotus Notes server.
ADVISORY SERVICES AND EVENTS
Forrester provides advisory services to a limited number of clients through
its Partners Program and Strategy Review Program and also in conjunction with
its Quantitative Research Service. These programs leverage 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, 1997,
117 client companies were members of the Partners Program and 247 client
companies were members of the Strategy Review Program. In addition to core
research, each client purchasing a membership to the Partners Program and
Strategy Review Program receives the following deliverables:
THE PARTNERS PROGRAM provides clients with a proactive relationship
with Forrester analysts to address long-range planning, technology
decision-making, and strategic management best practices. The base program
includes a series of one-day meetings and conference calls with Forrester
analysts.
THE STRATEGY REVIEW PROGRAM gives clients access to Forrester analysts
in a series of quarterly two-hour conference calls or meetings in order to
apply the research to business strategies.
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 also hosts the Forrester Forum West in San
Francisco, California, and the Forrester Forum Europe in London, England. The
Company intends to add three additional Forums in 1998.
PRICING AND CONTRACT SIZE
The prices for Forrester's core research are a function of the number of
services purchased, the number of research recipients within the client
organization, and the delivery format (i.e., print or electronic). 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 and Strategy Review Programs, for the year ended December 31, 1997 was
approximately $22,300 and for the year ended December 31, 1996 was approximately
$15,200. The prices for Forrester's Partners and Strategy Review Programs are
also a function of the number of services purchased, the number of research
recipients within the client organization, delivery format, and amount and type
of advisory services. All Partners Program and Strategy Review Program
memberships sold include core research. The average contract for annual
memberships sold to Forrester
6
<PAGE> 8
clients for the Partners Program for the year ended December 31, 1997 was
approximately $107,200 and for the year ended December 31, 1996 was
approximately $85,000. The average contract for annual memberships sold to
Forrester clients for the Strategy Review Program for the year ended December
31, 1997 was approximately $42,800 and for the year ended December 31, 1996 was
approximately $37,800.
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 annualized fees
payable under all core research and advisory services contracts in effect at a
given point in time, without regard to the remaining duration of the contracts.
Agreement value grew to $46.6 million at December 31, 1997 from $30.0 million at
December 31, 1996. At December 31, 1995 agreement value was $17.8 million.
RESEARCH AND ANALYSIS
Forrester employs a structured and consistent research methodology across
the Company's 13 research services. Each service is managed by a service
director who is responsible for implementing the Company's research methodology
and maintaining research quality in the service's particular technology coverage
area. 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 services. 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 services, and across research
services.
Forrester's research process subjects initial ideas to research, analysis,
and rigorous validation, and produces conclusions, predictions, and
recommendations. 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.
Reports begin with cross-service discussion sessions with analysts.
Cross-service testing of an idea continues 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 analyst outside the research service 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.
The Company's Quantitative Research Service, Consumers & Technographics,
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 and Survey Data, Data Insights, and
Prime Numbers. The Company retains a third-party data vendor for data collection
and tabulation.
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 average approximately 10 years of industry experience, with
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 across all research services.
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, core research
bookings, and advisory services support to clients. Senior analysts, research
directors, and research management are eligible to receive equity awards under
the Company's incentive stock plans.
7
<PAGE> 9
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 76 sales representatives as of December 31, 1997, consists
of business development managers who are responsible for maintaining and
leveraging the current client base by renewing and selling additional Strategy
Research and Quantitative Research Services to existing clients, corporate
account managers 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. It has recently established a presence in Amsterdam,
Netherlands and intends to sell its products and services through this facility
as well. 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 Netherlands.
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, 1997, Forrester's research was delivered to 1,029 client
companies, including 59 Fortune 100 companies and 178 Fortune 500 companies. No
single client company accounted for over 3% of the Company's revenues for the
year ended December 31, 1997.
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, and 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 more market segments
addressed by the Company's Strategy Research and Quantitative Research 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.
EMPLOYEES
As of December 31, 1997, Forrester employed a total of 240 persons,
including 77 research staff, 113 sales and marketing personnel, and 50
operations personnel.
8
<PAGE> 10
EXECUTIVE OFFICERS
Listed below are the executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George F. Colony.................. 44 Chairman of the Board, President, and Chief Executive
Officer
William M. Bluestein, Ph.D. ...... 40 Vice President, Corporate Strategy and Development
John W. Boynton................... 32 Vice President, Business Strategy
Mary A. Modahl.................... 35 Vice President, New Media Research
David H. Ramsdell................. 47 Vice President, Finance and Chief Financial Officer
Timothy M. Riley.................. 46 Vice President, Strategic Growth
Jon D. Schwartz................... 38 Vice President, Sales, Marketing, and Client Services
Paul J. Warren.................... 32 Vice President, Technology
Susan M. Whirty, Esq. ............ 40 Vice President, Operations, General Counsel, and
Secretary
Stuart D. Woodring................ 37 Vice President, Information Technology Research
</TABLE>
George F. Colony, founder of the Company, has served as Chairman of the
Board, President, and Chief Executive Officer since its inception in July 1983.
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 the Company's Vice President, Business
Strategy. He served as Director, Corporate 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 cofounder
and President of CompTek International, Inc., a networking and
telecommunications products and services distributor based in the former Soviet
Union, from 1990 to 1995.
Mary A. Modahl currently serves as Vice President, New Media Research. She
was previously Group Director, New Media Research, from 1995 to 1997, Director
and Senior Analyst with the Company's People & Technology Strategies from 1994
to 1995, Senior Analyst with the Company's Computing Strategies from 1993 to
1994, and Director with the Company's Network Strategies from 1990 to 1993.
David H. Ramsdell currently serves as the Company's Vice President, Finance
and Chief Financial Officer. He was previously the Company's Director, Finance
from 1996 to 1997. Mr. Ramsdell was Vice President, Finance at Virus Research
Institute, Inc., a developer of vaccine delivery systems, from August 1993
through September 1996. He also served as Chief Financial Officer at ISI
Systems, Inc., a data processing and software development company, from 1987 to
August 1993.
Timothy M. Riley became the Company's Vice President, Strategic Growth, in
1997. Prior to joining the Company, Mr. Riley served as Vice President of Human
Resources at Renaissance Solutions, a strategy and knowledge management
consulting firm, from 1993 to 1997, and was Director of Human Resources for
Bolt, Beranek and Newman, a technology development firm, from 1987 to 1993.
Jon D. Schwartz currently serves as the Company's Vice President, Sales,
Marketing, and Client Services. He was previously Director, Worldwide Sales from
1995 to 1997, Director of the Company's North American Sales from 1993 to 1995,
and Partners Manager from 1990 to 1993.
Paul J. Warren currently serves as the Company's Vice President,
Technology. He was previously the Company's Director, IT from 1995 to 1997.
Before joining the Company, Mr. Warren was Manufacturing Systems Manager for
Malden Mills, a textile manufacturer, from 1993 to 1995. He also served as a
Manufacturing Systems Analyst for Malden Mills from 1991 to 1993.
Susan M. Whirty, Esq. is currently the Company's Vice President, Operations
and General Counsel. Ms. Whirty was previously Director, Operations and General
Counsel from 1993 to 1997. She has served as
9
<PAGE> 11
the Company's General Counsel since March 1993 and has served as the Company's
Secretary since February 1996. Prior to joining the Company, Ms. Whirty was
Corporate Counsel at Cognos Corporation, a software development and application
company, from 1989 to 1993.
Stuart D. Woodring currently serves as Vice President, Information
Technology Research. He was previously 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 49,000 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, 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 6, 1998, the closing price of the Company's common
stock was $26.63 per share.
As of March 6, 1998 there were approximately 35 stockholders of record of
the Company's common stock.
The following table represents the ranges of high and low sale prices of
the Company's common stock since its initial public offering on November 26,
1996 through December 31, 1997:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter........................... $29.13 $18.00 -- --
Second Quarter.......................... $32.88 $15.50 -- --
Third Quarter........................... $32.25 $26.38 -- --
Fourth Quarter.......................... $27.75 $22.75 $27.25 $19.63
</TABLE>
In the year ended December 31, 1996, the Company paid a cash distribution
of $5,493,197 and accrued a cash distribution of $67,000 to the former sole
stockholder of the Company. The Company did not declare or pay any dividends
during 1997. The Company anticipates that future earnings, if any, will be
retained for the
10
<PAGE> 12
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues:
Core research........................ $4,691 $6,363 $10,150 $18,206 $30,431
Advisory services and other.......... 2,608 3,336 4,439 6,757 9,990
------ ------ ------- ------- -------
Total revenues............... 7,299 9,699 14,589 24,963 40,421
------ ------ ------- ------- -------
Operating expenses:
Cost of services and fulfillment..... 2,406 3,424 5,486 8,762 13,698
Selling and marketing................ 2,693 3,593 5,643 8,992 14,248
General and administrative........... 1,148 1,045 1,389 2,509 4,500
Depreciation and amortization........ 105 150 287 618 1,209
------ ------ ------- ------- -------
Total operating expenses..... 6,352 8,212 12,805 20,881 33,655
------ ------ ------- ------- -------
Income from operations............ 947 1,487 1,784 4,082 6,766
Interest income........................ 79 125 339 634 2,515
------ ------ ------- ------- -------
Income before income tax
provision....................... 1,026 1,612 2,123 4,716 9,281
Income tax provision................... 46 73 96 712 3,683
------ ------ ------- ------- -------
Net income........................ 980 1,539 2,027 4,004 5,598
Pro forma income tax adjustment........ 365 583 739 1,198 --
------ ------ ------- ------- -------
Pro forma net income.............. $ 615 $ 956 $ 1,288 $ 2,806 $ 5,598
====== ====== ======= ======= =======
Basic net income per common share...... $ 0.16 $ 0.26 $ 0.34 $ 0.65 $ 0.67
====== ====== ======= ======= =======
Diluted net income per common share.... $ 0.16 $ 0.26 $ 0.34 $ 0.62 $ 0.63
====== ====== ======= ======= =======
Basic pro forma net income per common
share................................ $ 0.10 $ 0.16 $ 0.21 $ 0.45 $ 0.67
====== ====== ======= ======= =======
Diluted pro forma net income per common
share................................ $ 0.10 $ 0.16 $ 0.21 $ 0.44 $ 0.63
====== ====== ======= ======= =======
Basic weighted average common shares
outstanding.......................... 6,000,000 6,000,000 6,000,000 6,191,667 8,339,381
Diluted weighted average common shares
outstanding.......................... 6,000,000 6,000,000 6,000,000 6,425,718 8,851,251
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities........................... $3,111 $4,764 $ 7,518 $44,640 $54,914
Working capital........................ $ 901 $ 528 $ 991 $31,291 $36,016
Total assets........................... $6,367 $8,784 $15,426 $56,782 $73,536
Stockholders' equity................... $1,331 $1,120 $ 2,047 $33,762 $40,505
</TABLE>
11
<PAGE> 13
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 Services and Quantitative
Research Service are renewable contracts, typically annual and payable in
advance. Accordingly, a substantial portion of the Company's billings are
initially recorded as deferred revenue. Strategy Research Services revenues are
recognized pro rata on a monthly basis over the term of the contract.
Quantitative Research Service revenue is recognized upon delivery of the
research. The Company's other revenues are derived from advisory services
rendered pursuant to Forrester's Partners Program and Strategy Review Program
and in conjunction with Quantitative Research and from Forrester Forums
("Forums"). The Company's advisory service clients purchase such services
together with core research memberships to Research Services, and the contracts
for such purchases are also generally payable in advance. Billings attributable
to advisory services are initially recorded as deferred revenues and recognized
as revenue when performed. Similarly, Forum billings are initially recorded as
deferred 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 IT
groups, and other administrative functions of the Company.
The Company believes that the "agreement value" of contracts to purchase
core research and advisory services provides a significant measure of the
Company's business volume. Forrester calculates agreement value as the
annualized fees payable under all core research and advisory service contracts
in effect at a given point in time, without regard to the remaining duration of
such contracts. Agreement value increased 55% 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. 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 80% of Forrester's client companies with
memberships expiring during the year ended December 31, 1997 renewed one or more
memberships for the Company's products and services. The renewal rate was 74%
for 1996. The increase in retention rate is primarily due to an increased focus
by the Company on renewing existing clients. This renewal rate is not
necessarily indicative of the rate of future retention of the Company's revenue
base.
12
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Core research............................................... 70% 73% 75%
Advisory services and other................................. 30 27 25
--- --- ---
Total revenues.............................................. 100 100 100
Cost of services and fulfillment............................ 37 35 34
Selling and marketing....................................... 39 36 35
General and administrative.................................. 9 10 11
Depreciation and amortization............................... 2 3 3
--- --- ---
Income from operations...................................... 13 16 17
Interest income............................................. 2 3 6
--- --- ---
Income before income tax provision.......................... 15 19 23
Provision for income taxes.................................. 1 3 9
--- --- ---
Net income.................................................. 14% 16% 14%
=== === ===
Pro forma income tax adjustment............................. 5 5 --
--- --- ---
Pro forma net income........................................ 9% 11% 14%
=== === ===
</TABLE>
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, sales of additional Strategy Research
Services to existing clients, 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. The increase was due primarily to the addition of direct
international sales personnel and the introduction of six new Strategy Research
Services since January 1, 1996. 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 during the 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.
13
<PAGE> 15
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 increase in expenses and expense as a percentage of
total revenues was 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. In 1997, interest income made up 27%
of pre-tax income. As a result, a portion of the Company's pre-tax income is
subject to interest rate and other investment risk.
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.
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
REVENUES. Total revenues increased 71% to $25.0 million in the year ended
December 31, 1996 from $14.6 million in the year ended December 31, 1995.
Revenues from core research increased 79% to $18.2 million in the year ended
December 31, 1996 from $10.1 million in the year ended December 31, 1995.
Increases in total revenues and revenues from core research were primarily
attributable to an increase in the number of clients, the introduction of four
new Strategy Research Services, and continued expansion and increased
productivity of the Company's sales force.
Advisory services and other revenues increased 52% to $6.8 million in the
year ended December 31, 1996 from $4.4 million in the year ended December 31,
1995. This increase was primarily attributable to demand for the Partners and
Strategy Review Programs.
Revenues attributable to customers outside the United States increased 106%
to $5.3 million in the year ended December 31, 1996 from $2.6 million in the
year ended December 31, 1995, and also increased as a percentage of total
revenues to 21% for the year ended December 31, 1996 from 18% for the year ended
December 31, 1995. The increase was due primarily to the addition of direct
international sales personnel.
Agreement value grew to $30.0 million at December 31, 1996 from $17.8
million at December 31, 1995. No single client company accounted for more than
2% of agreement value at December 31, 1996 or 3% of revenues for the year ended
December 31, 1996.
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment
decreased as a percentage of total revenues to 35% in the year ended December
31, 1996 from 37% in the year ended December 31, 1995. These expenses increased
60% to $8.8 million in the year ended December 31, 1996 from $5.5 million in the
year ended December 31, 1995. The expense increase in this period was
principally due to increased analyst staffing
14
<PAGE> 16
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.
SELLING AND MARKETING. Selling and marketing expenses decreased as a
percentage of total revenues to 36% in the year ended December 31, 1996 from 39%
in the year ended December 31, 1995. These expenses increased 59% to $9.0
million in the year ended December 31, 1996 from $5.6 million in the year ended
December 31, 1995. 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 10% in the year ended December 31, 1996
from 9% in the year ended December 31, 1995. These expenses increased 81% to
$2.5 million in the year ended December 31, 1996 from $1.4 million in the year
ended December 31, 1995. The increase in expenses was principally due to
staffing increases in operations and IT and higher costs associated with the
expansion of the Company's Cambridge headquarters.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 115% to $618,000 in the year ended December 31, 1996 from $287,000 in
the year ended December 31, 1995. The increase in this expense was principally
due to purchases of computer equipment, software, and office furnishings to
support business growth, and the expansion of the Company's Cambridge
headquarters.
INTEREST INCOME. Interest income increased to $634,000 in the year ended
December 31, 1996 from $340,000 in the year ended December 31, 1995 due to an
increase in the Company's cash balances resulting from positive cash flows from
operations and net proceeds from the Company's initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date through funds generated
from operations. The Company generated $11.9 million in cash from operating
activities during 1997 compared with $11.3 million of cash from operating
activities during 1996. Cash flows from operations in 1996 included tax payments
of $87,000 made by the Company as an S corporation. Cash flows from operations
in 1997 included tax payments of $3.7 million made by the Company as a C
corporation.
In 1997, the Company used $39.6 million of cash in investing activities,
consisting of $3.2 million for the purchase of property and equipment, and $36.4
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 1997, the Company generated a net $1.1 million in cash from financing
activities. This includes proceeds of $448,000 from stock option exercises,
$294,000 of proceeds from the Employee Stock Purchase Plan, and $402,000 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, 1997, the Company had cash and cash equivalents of $7.7
million and $47.2 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 Strategy Research Services,
open an office in Amsterdam, Netherlands, and 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.
Management is aware of and is currently assessing the need for its computer
systems, software applications, and product offerings to be year 2000 compliant.
The Company expects to incur internal staff costs as well as consulting and
other expenses related to systems enhancements for the year 2000. The total
costs to be incurred for all year 2000-related projects are not expected to have
a material impact on future results from operations.
15
<PAGE> 17
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 62% to $40.4 million in 1997 from $25.0 million in 1996. The
Company's staff increased from 134 full-time employees on January 1, 1997 to 240
full-time employees on December 31, 1997. 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 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 73% of the Company's revenues in 1997
and 1996, respectively, were derived from the Company's membership-based core
research products. A 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.
16
<PAGE> 18
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.
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 1997 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
Report of Independent Public Accountants on Schedule........ F-17
</TABLE>
17
<PAGE> 19
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 1997 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 "1998 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
1998 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 1998 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 1998 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 above on Page 17.
2. Financial Statements Schedules. The following additional financial
data should be read in conjunction with the consolidated financial statements in
this report. Schedules other than those listed below have been omitted because
they are inapplicable or not required.
<TABLE>
<CAPTION>
FORM 10-K
PAGE
---------
<S> <C>
Report of Independent Public Accountants on Schedule........ F-17
Valuation and Qualifying Accounts........................... F-18
</TABLE>
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.
18
<PAGE> 20
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: March 27, 1998
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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
<C> <S> <C>
/s/ GEORGE F. COLONY Chief Executive Officer, President, March 27, 1998
- ------------------------------------- and Director of the Company
George F. Colony (principal executive officer)
/s/ DAVID H. RAMSDELL Vice President, Finance and Chief March 27, 1998
- ------------------------------------- Financial Officer (principal
David H. Ramsdell financial and accounting officer)
/s/ ROBERT M. GALFORD Member of the Board of Directors March 27, 1998
- -------------------------------------
Robert M. Galford
Member of the Board of Directors March 27, 1998
- -------------------------------------
George R. Hornig
/s/ MICHAEL H. WELLES Member of the Board of Directors March 27, 1998
- -------------------------------------
Michael H. Welles
</TABLE>
19
<PAGE> 21
FORRESTER RESEARCH, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1997
TOGETHER WITH AUDITORS' REPORT
F-1
<PAGE> 22
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, 1996
and 1997 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 26, 1998, except with respect to the
matter discussed in Note 12, as to which
the date is January 28, 1998
F-2
<PAGE> 23
FORRESTER RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
ASSETS
1996 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $34,382,194 $ 7,742,094
Marketable securities..................................... 10,257,717 47,171,975
Accounts receivable, net of allowance for doubtful
accounts of approximately $200,000 and $325,000 in 1996
and 1997, respectively................................. 8,100,494 11,192,887
Deferred commissions...................................... 1,341,268 1,368,106
Prepaid income taxes...................................... -- 520,018
Prepaid expenses and other current assets................. 229,606 1,052,326
----------- -----------
Total current assets.............................. 54,311,279 69,047,406
----------- -----------
Property and equipment, at cost:
Computers and equipment................................... 1,752,473 3,143,059
Computer software......................................... 312,111 1,003,558
Furniture and fixtures.................................... 546,595 778,084
Vehicle................................................... 30,098 30,098
Leasehold improvements.................................... 683,642 1,596,457
----------- -----------
Total property and equipment...................... 3,324,919 6,551,256
Less -- accumulated depreciation and amortization......... 853,777 2,062,383
----------- -----------
Property and equipment, net....................... 2,471,142 4,488,873
----------- -----------
Total assets...................................... $56,782,421 $73,536,279
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,200,131 $ 1,273,046
Customer deposits......................................... 139,293 278,726
Accrued expenses.......................................... 3,201,111 3,660,726
Accrued income taxes...................................... 227,037 622,997
Deferred revenue.......................................... 17,816,380 27,074,379
Deferred income taxes..................................... 436,714 121,330
----------- -----------
Total current liabilities......................... 23,020,666 33,031,204
----------- -----------
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 -- 8,300,000 shares and
8,391,829 shares in 1996 and 1997, respectively....... 83,000 83,918
Additional paid-in capital................................ 33,211,053 34,353,268
Retained earnings......................................... 409,602 6,007,642
Unrealized gain on marketable securities.................. 58,100 60,247
----------- -----------
Total stockholders' equity........................ 33,761,755 40,505,075
----------- -----------
Total liabilities and stockholders' equity........ $56,782,421 $73,536,279
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 24
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Core research..................................... $10,149,514 $18,205,851 $30,430,972
Advisory services and other....................... 4,439,298 6,757,270 9,989,965
----------- ----------- -----------
Total revenues............................ 14,588,812 24,963,121 40,420,937
----------- ----------- -----------
Operating expenses:
Cost of services and fulfillment.................. 5,486,346 8,761,718 13,698,175
Selling and marketing............................. 5,643,196 8,991,794 14,248,287
General and administrative........................ 1,388,868 2,508,845 4,500,102
Depreciation and amortization..................... 286,705 618,290 1,208,606
----------- ----------- -----------
Total operating expenses.................. 12,805,115 20,880,647 33,655,170
----------- ----------- -----------
Income from operations.................... 1,783,697 4,082,474 6,765,767
Interest income................................... 339,569 633,798 2,514,889
----------- ----------- -----------
Income before income tax provision........ 2,123,266 4,716,272 9,280,656
Income tax provision (Note 3)..................... 96,000 712,000 3,682,616
----------- ----------- -----------
Net income................................ 2,027,266 4,004,272 5,598,040
Pro forma income tax adjustment (Note 3)............ 739,000 1,198,000 --
----------- ----------- -----------
Pro forma net income................................ $ 1,288,266 $ 2,806,272 $ 5,598,040
=========== =========== ===========
Basic net income per common share................... $ 0.34 $ 0.65 $ 0.67
=========== =========== ===========
Diluted net income per common share................. $ 0.34 $ 0.62 $ 0.63
=========== =========== ===========
Basic pro forma net income per common share......... $ 0.21 $ 0.45 $ 0.67
=========== =========== ===========
Diluted pro forma net income per common share....... $ 0.21 $ 0.44 $ 0.63
=========== =========== ===========
Basic weighted average common shares outstanding.... 6,000,000 6,191,667 8,339,381
=========== =========== ===========
Diluted weighted average common shares
outstanding....................................... 6,000,000 6,425,718 8,851,251
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 25
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
--------------------- ADDITIONAL GAIN ON TOTAL
NUMBER $.01 PAR PAID-IN RETAINED MARKETABLE STOCKHOLDERS'
OF SHARES VALUE CAPITAL EARNINGS SECURITIES EQUITY
---------- -------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994........ 6,000,000 $60,000 $ -- $ 1,059,603 $ -- $ 1,119,603
Distributions (Note 3).......... -- -- -- (1,121,342) -- (1,121,342)
Net income...................... -- -- -- 2,027,266 -- 2,027,266
Unrealized gain on
available-for-sale
securities................... -- -- -- -- 21,696 21,696
---------- ------- ----------- ----------- ------- -----------
Balance, December 31, 1995........ 6,000,000 60,000 -- 1,965,527 21,696 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
Unrealized gain on
available-for-sale
securities................... -- -- -- -- 36,404 36,404
---------- ------- ----------- ----------- ------- -----------
Balance, December 31, 1996........ 8,300,000 83,000 33,211,053 409,602 58,100 33,761,755
Issuance of common stock under
stock option plans........... 70,246 702 446,851 -- -- 447,553
Issuance of common stock under
employee stock purchase
plan......................... 21,583 216 293,306 -- -- 293,522
Net income...................... -- -- -- 5,598,040 -- 5,598,040
Tax benefit on exercise of stock
options...................... -- -- 402,058 -- -- 402,058
Unrealized gain on
available-for-sale
securities................... -- -- -- -- 2,147 2,147
---------- ------- ----------- ----------- ------- -----------
Balance, December 31, 1997........ 8,391,829.. $83,918 $34,353,268 $ 6,007,642 $60,247 $40,505,075
========== ======= =========== =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 26
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 2,027,266 $ 4,004,272 $ 5,598,040
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization..................... 286,705 618,290 1,208,606
Deferred income taxes............................. -- 436,714 (315,384)
Accretion of discount on marketable securities.... (60,377) (193,152) (473,845)
Changes in assets and liabilities --
Accounts receivable............................. (3,010,742) (2,217,514) (3,092,392)
Deferred commissions............................ (396,752) (449,301) (26,838)
Prepaid income taxes............................ -- -- (520,018)
Prepaid expenses and other current assets....... (15,582) (153,064) (822,721)
Accounts payable................................ 335,950 822,787 72,915
Customer deposits............................... 97,329 41,964 139,433
Accrued expenses................................ 1,019,763 1,656,296 459,615
Accrued income taxes............................ -- 227,037 395,960
Deferred revenue................................ 4,261,527 6,457,279 9,257,999
----------- ----------- ------------
Net cash provided by operating activities.... 4,545,087 11,251,608 11,881,370
----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment, net............. (751,850) (2,033,157) (3,226,337)
Purchases of marketable securities................... (9,171,880) (8,469,888) (365,870,837)
Proceeds from sales and maturities of marketable
securities........................................ 4,718,827 4,962,208 329,432,571
----------- ----------- ------------
Net cash used in investing activities........ (5,204,903) (5,540,837) (39,664,603)
----------- ----------- ------------
Cash flows from financing activities:
Distributions to stockholder......................... (1,121,342) (5,560,197) --
Proceeds from issuance of common stock under stock
option plans and employee stock purchase plan..... -- -- 741,075
Tax benefit on exercise of stock options............. -- -- 402,058
Net proceeds from initial public stock offering...... -- 33,234,053 --
----------- ----------- ------------
Net cash (used in) provided by financing
activities................................. (1,121,342) 27,673,856 1,143,133
----------- ----------- ------------
Net (decrease) increase in cash and cash equivalents... (1,781,158) 33,384,627 (26,640,100)
Cash and cash equivalents, beginning of year........... 2,778,725 997,567 34,382,194
----------- ----------- ------------
Cash and cash equivalents, end of year................. $ 997,567 $34,382,194 $ 7,742,094
=========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid for income taxes........................... $ 44,893 $ 87,053 $ 3,720,000
=========== =========== ============
Supplemental disclosure of noncash investing and
financing activities:
Unrealized gain on available-for-sale securities..... $ 21,696 $ 36,404 $ 2,147
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 27
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
required 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 legally obligated to pay the invoice. Core
research, which represents 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
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.
This statement established standards for computing and presenting earnings per
share and applies to all entities with publicly traded common stock or potential
common stock. This statement is effective for fiscal years ending after December
15, 1997. This statement has been adopted as of December 31, 1997. In February
1998, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 98. This bulletin revises the SEC's guidance for calculating
earnings per share with respect to the issuance of equity securities prior to an
initial public offering and is effective for fiscal years ending on or after
December 31, 1997. Accordingly, the prior years' weighted average common shares
outstanding and net income per common share have been retroactively restated to
reflect the adoption of SFAS No. 128 and SAB No. 98.
Basic net income per common share and basic pro forma net income per common
share were 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
were computed by dividing net income or pro forma net income by diluted weighted
average number of common shares outstanding during the period. The weighted
average number of common equivalent shares outstanding has been determined in
accordance with the treasury-stock method. Common stock equivalents consist of
common stock issuable on the exercise of outstanding options. The number of
F-7
<PAGE> 28
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock and common stock equivalents outstanding for all periods
presented has been adjusted for the reincorporation discussed in Note 6.
Basic and diluted weighted average common shares are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Basic weighted average common shares
outstanding..................................... 6,000,000 6,191,667 8,339,381
Weighted average common equivalent shares......... -- 234,051 511,870
--------- --------- ---------
Diluted weighted average common shares
outstanding..................................... 6,000,000 6,425,718 8,851,251
========= ========= =========
</TABLE>
As of December 31, 1997, 111,086 options were outstanding but not included
in the diluted weighted average common share calculation as the effect would
have been anti-dilutive.
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:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
------------
<S> <C>
Computers and equipment.................................. 3 to 5 Years
Computer software........................................ 3 Years
Furniture and fixtures................................... 7 Years
Vehicles................................................. 5 Years
Leasehold improvements................................... Life of lease
</TABLE>
Product Development
All costs associated with the development of new products and services are
expensed as incurred.
Concentration of Credit Risk
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. Financial instruments that potentially subject the Company to
concentrations of credit risk are principally cash and 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 and accounts
receivable. The estimated fair value of these financial instruments approximates
their carrying value and, except for accounts receivable, is based primarily on
market quotes. The Company's cash equivalents and marketable securities are
generally obligations of the federal government or municipal issuers.
New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and
F-8
<PAGE> 29
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other events and circumstances from non-owner sources. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable, companies would
be required to restate prior information upon adoption.
(2) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all short-term, highly liquid investments with
original maturities of 90 days or less 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.
At December 31, 1996, held-to-maturity securities consisted of investments in
U.S. Treasury bills, which were recorded at cost approximating their fair market
value. These investments are classified as current since they matured within one
year. 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, 1996 and 1997,
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
stockholders' equity. There were no trading securities as of December 31, 1996
and 1997.
At December 31, 1996 and 1997, marketable securities consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
U.S. Treasury bills....................................... $ 3,473,694 $ --
U.S. Treasury notes....................................... 2,510,155 10,025,860
Federal agency obligations................................ 854,214 21,772,795
State and municipal bonds................................. 3,419,654 13,131,114
Corporate obligations..................................... -- 2,242,206
----------- -----------
$10,257,717 $47,171,975
=========== ===========
</TABLE>
The following table summarizes the maturity periods of marketable
securities as of December 31, 1997:
<TABLE>
<CAPTION>
LESS THAN 1 TO 5 5 TO 10
1 YEAR YEARS YEARS TOTAL
----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury notes............. $ 7,515,305 $ 2,510,555 $ -- $10,025,860
Federal agency obligations...... 15,488,260 6,116,958 167,577 21,772,795
State and municipal bonds....... 5,574,659 7,556,455 -- 13,131,114
Corporate obligations........... 998,180 1,244,026 -- 2,242,206
----------- ----------- -------- -----------
$29,576,404 $17,427,994 $167,577 $47,171,975
=========== =========== ======== ===========
</TABLE>
Gross realized gains and losses on sales of marketable securities for the
years ended December 31, 1996 and 1997, which were calculated based on specific
identification, were not material.
F-9
<PAGE> 30
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 are
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 statements of income for the years ended December 31, 1995 and
1996 include a pro forma income tax adjustment for the income taxes that would
have been recorded if the Company had been a C corporation for those periods.
The components of the historical and pro forma income tax provision are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ---------- ----------
<S> <C> <C> <C>
Current --
Federal....................................... $ -- $ 67,000 $3,045,000
State......................................... 96,000 208,000 953,000
-------- ---------- ----------
96,000 275,000 3,998,000
-------- ---------- ----------
Deferred --
Federal....................................... -- 354,000 (244,000)
State......................................... -- 83,000 (71,000)
-------- ---------- ----------
-- 437,000 (315,000)
-------- ---------- ----------
Actual provision for income taxes........ 96,000 712,000 $3,683,000
==========
Pro forma income tax provision................ 835,000 1,910,000
-------- ----------
Pro forma income tax adjustment............... $739,000 $1,198,000
======== ==========
</TABLE>
The Company's income tax provision for the year ended December 31, 1995
consisted primarily of corporate-level state income taxes that were levied
against the Company as an S corporation. 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
provisions do 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
F-10
<PAGE> 31
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Income tax provision at federal statutory rate............ 34%
Increase in tax resulting from --
State tax provision, net of federal benefit............. 5%
Other................................................... 1%
--
Effective income tax rate............................... 40%
==
</TABLE>
Deferred income taxes as of December 31, 1996 and 1997 related to the
following temporary differences:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Nondeductible reserves and accruals...... $ 147,000 $ 397,000
Depreciation and amortization............ (47,000) 33,000
Deferred commissions..................... (537,000) (551,000)
--------- ---------
$(437,000) $(121,000)
========= =========
</TABLE>
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 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,
1997, approximate future minimum rentals due are as follows:
<TABLE>
<S> <C>
1998................................................. $1,463,000
1999................................................. 1,523,000
2000................................................. 1,528,000
2001................................................. 825,000
2002................................................. 412,000
2003................................................. 54,000
----------
Total minimum lease payments.................... $5,805,000
==========
</TABLE>
Rent expense was approximately $663,000, $664,000, and $983,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
F-11
<PAGE> 32
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 and is funded entirely through employee
contributions. 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.
(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) Reincorporation
In February 1996, in connection with the Company's reincorporation in
Delaware, the Company increased the number of authorized shares of common stock
to 7,000,000, and each outstanding share of common stock was exchanged for 6,000
shares of common stock in the reincorporated entity. The accompanying financial
statements and notes have been retroactively adjusted to reflect this
transaction. Immediately prior to the Company's initial public offering, the
Company's Certificate of Incorporation was amended to increase the number of
authorized shares of common stock to 25,000,000.
(c) Preferred Stock
Prior to its initial public offering, the Company amended its Certificate
of Incorporation to authorize 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.
(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
F-12
<PAGE> 33
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Director's
Plan to December 31, 1997 was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
NUMBER PRICE PRICE
OF SHARES PER SHARE PER SHARE
--------- --------------- ---------
<S> <C> <C> <C>
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
========= =============== ======
Exercisable at December 31, 1997.............. 363,174 $ 5.50 - $22.00 $10.56
========= =============== ======
Exercisable at December 31, 1996.............. 157,376 $ 5.50 $ 5.50
========= =============== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER WEIGHTED WEIGHTED
OUTSTANDING AVERAGE AVERAGE
AT REMAINING EXERCISE
DECEMBER 31, CONTRACTUAL PRICE
1997 LIFE PER SHARE
------------ ----------- ---------
<S> <C> <C> <C>
Range of exercise prices
$ 5.50................................ 364,947 8.17 $ 5.50
11.00 - 13.00................................ 330,793 8.66 11.96
17.56 - 22.94................................ 229,122 9.24 20.23
26.69 - 29.19................................ 94,273 9.62 28.06
--------- ------
1,019,135 $13.00
========= ======
</TABLE>
The weighted average remaining contractual life of options outstanding at
December 31, 1996 and 1997 was 9.4 and 8.6 years, respectively. Options
available for future grant under the Plan and the Directors' Plan as of December
31, 1996 and 1997 were 2,116,627 and 1,810,619, respectively.
F-13
<PAGE> 34
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and 1997 using the Black-Scholes
option pricing model prescribed by SFAS No. 123, using the following
assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Risk-free interest rate................................. 6.21% 6.32%
Expected dividend yield................................. -- --
Expected lives.......................................... 7.5 years 7.5 years
Expected volatility..................................... 0%-64% 59%
</TABLE>
The weighted average grant date fair value of options granted under the
Plan and the Directors' Plan during the years ended December 31, 1996 and 1997
were $3.40 and $15.16 per share, respectively.
Had compensation cost for the Company's stock option plans been determined
consistent with SFAS No. 123, net income would have been approximately as
follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
As reported --
Net income......................................... $2,806,000 $5,598,000
========== ==========
Basic net income per common share.................. $ 0.45 $ 0.67
========== ==========
Diluted net income per common share................ $ 0.44 $ 0.63
========== ==========
Pro forma --
Net income......................................... $2,429,000 $3,833,000
========== ==========
Basic net income per common share.................. $ 0.39 $ 0.46
========== ==========
Diluted net income per common share................ $ 0.38 $ 0.43
========== ==========
</TABLE>
(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 20 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 during the first purchase period under the Stock Purchase Plan, which
period ended June 30, 1997. Subsequent to year-end, employees purchased 14,885
shares at $19.34 for the purchase period which ended December 31, 1997.
F-14
<PAGE> 35
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) REVENUES BY GEOGRAPHIC DESTINATION
Revenues by geographic destination and as a percentage of total revenues
are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
United States................................ $12,025,529 $19,694,363 $31,652,524
Europe....................................... 1,066,314 2,751,858 4,892,523
Other........................................ 1,496,969 2,516,900 3,875,890
----------- ----------- -----------
$14,588,812 $24,963,121 $40,420,937
=========== =========== ===========
United States................................ 82% 79% 78%
Europe....................................... 8 11 12
Other........................................ 10 10 10
----------- ----------- -----------
100% 100% 100%
=========== =========== ===========
</TABLE>
(10) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Payroll and related................................. $1,446,752 $1,702,050
Other............................................... 1,754,359 2,581,673
---------- ----------
$3,201,111 $4,283,723
========== ==========
</TABLE>
(11) SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the
years ended December 31, 1995, 1996 and 1997 (in thousands, except per share
data):
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues.................................... $2,708 $2,873 $ 3,535 $ 5,473
Income from operations...................... $ 209 $ 162 $ 370 $ 1,043
Pro forma net income........................ $ 168 $ 157 $ 272 $ 691
Basic pro forma net income per common
share..................................... $ 0.03 $ 0.03 $ 0.05 $ 0.12
Diluted pro forma net income per common
share..................................... $ 0.03 $ 0.03 $ 0.05 $ 0.12
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
F-15
<PAGE> 36
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
(12) SUBSEQUENT EVENTS
On January 28, 1998 the Company granted 949,500 options under the Plan at
an exercise price of $19.13 per share.
F-16
<PAGE> 37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Stockholders of
Forrester Research, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Forrester Research, Inc. included in this Form 10-K,
and have issued our report thereon dated January 26, 1998, except with respect
to the matter discussed in Note 12, as to which the date is January 28, 1998.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)(2) is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 26, 1998, except with respect to the
matter discussed in Note 12, as to which the
date is January 28, 1998
F-17
<PAGE> 38
FORRESTER RESEARCH, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------------------------------------
BALANCE, CHARGED BALANCE,
BEGINNING TO COST OR DEDUCTIONS END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF PERIOD EXPENSE (WRITE-OFFS) PERIOD
------------------------------- --------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Fiscal 1995.................................... $ 88,459 $ 62,245 $ (30,784) $119,920
Fiscal 1996.................................... $119,920 $312,317 $(232,237) $200,000
Fiscal 1997.................................... $200,000 $398,637 $(273,637) $325,000
</TABLE>
F-18
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
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 6, 1997
(transmitted herewith).
21 Subsidiaries of the Registrant (transmitted herewith).
23 Consent of Arthur Andersen LLP (transmitted herewith).
</TABLE>
- ---------------
+ Denotes management contract or compensation arrangements.
* Filed as an Exhibit to the Company's Registration Statement on Form S-1 (File
No. 333-12761) and incorporated by reference herein.
<PAGE> 1
EXHIBIT 10.9
THIRD AMENDMENT TO LEASE
This Third Amendment to Lease is dated as of May 6, 1997 between ADVENT
REALTY LIMITED PARTNERSHIP II, a Delaware limited partnership with an address at
45 Milk Street, Boston, Massachusetts 02110 ("Landlord"), and FORRESTER
RESEARCH, INC., a Delaware corporation with an address at 1033 Massachusetts
Avenue, Cambridge, Massachusetts 02138 ("Tenant").
WHEREAS, Landlord and Tenant have entered into a Lease dated as of May 1,
1995, a First Amendment to Lease dated as of August 28, 1995 and a Second
Amendment to Lease dated as of May 21, 1996, all with respect to the Building
(as so amended, the "Lease");
WHEREAS, on November 1, 1996 Tenant exercised its option to lease the
entire fourth floor of the Building; and
WHEREAS, Landlord and Tenant desire to add to the Premises the fourth floor
of the Building in accordance with the Lease and on the terms contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and in consideration of the mutual
covenants herein contained, Landlord and Tenant hereby agree as follows. Terms
not defined herein shall have the same meaning as in the Lease.
1. MEASUREMENT OF THE PREMISES. Effective May 6, 1997, Section 1.1 of the
Lease shall be amended by deleting the defined term "RENTABLE FLOOR AREA OF THE
PREMISES" and substituting therefor the following:
<TABLE>
<S> <C>
"RENTABLE FLOOR AREA
OF THE PREMISES:...................................... 63,946 Square Feet
Second Floor:........................................... 13,223 Square Feet
Third Floor:............................................ 13,223 Square Feet
Fourth Floor:........................................... 12,500 Square Feet
Fifth Floor:............................................ 12,500 Square Feet
Sixth Floor:............................................ 12,500 Square Feet"
</TABLE>
<PAGE> 2
2. ANNUAL BASIC RENT. Effective May 6, 1997, Section 1.1 of the Lease
shall be amended by deleting the defined term "ANNUAL BASIC RENT" and
substituting therefor the following:
"ANNUAL BASIC RENT:
<TABLE>
<CAPTION>
TIME PERIOD ANNUAL RATE CALCULATION
----------- ----------- -----------
<S> <C> <C>
June 12, 1995 through August 31, 1995.................... $ 293,019.65 $17.05 X 13,223 rsf+
$ 9.10 X 7,425 rsf
September 1, 1995 through December 11, 1995.............. $ 327,909.65 $17.05 X 13,223 rsf+
$ 9.10 X 7,425 rsf+
$15.00 X 2,326 rsf
December 12, 1995 through May 20, 1996................... $ 386,938.40 $17.05 X 20,648 rsf+
$15.00 X 2,326 rsf
May 21, 1996 through June 2, 1996........................ $ 861,938.40 $17.05 X 20,648 rsf+
$15.00 X 2,326 rsf+
$19.00 X 25,000 rsf
June 3, 1996 through May 5, 1997......................... $ 914,018.40 $17.05 X 20,648 rsf+
$15.00 X 5,798 rsf+
$19.00 X 25,000 rsf
May 6, 1997 through June 11, 1997........................ $1,170,268.40 $17.05 X 20,648 rsf+
$15.00 X 5,798 rsf+
$20.50 X 12,500 rsf+
$19.00 X 25,000 rsf
June 12, 1997 through June 30, 1997...................... $1,181,005.36 $17.57 X 20,648 rsf+
$15.00 X 5,798 rsf+
$20.50 X 12,500 rsf+
$19.00 X 25,000 rsf
July 1, 1997 through June 11, 1999....................... $1,195,906.22 $17.57 X 26,446 rsf+
$20.50 X 12,500 rsf+
$19.00 X 25,000 rsf
June 12, 1999 through January 31, 2001................... $1,207,013.54 $17.99 X 26,446 rsf+
$20.50 X 12,500 rsf+
$19.00 X 25,000 rsf
February 1, 2001 through June 8, 2001.................... $ 731,250.00 $20.50 X 12,500 rsf+
$19.00 X 25,000 rsf
June 9, 2001 through May 5, 2002......................... $ 256,250.00 $20.50 X 12,500 rsf"
</TABLE>
3. PARKING. Effective May 6, 1997, Section 1.1 of the Lease shall be
amended by deleting the defined term "PARKING" and substituting therefor the
following:
"PARKING: Seventy-Three (73) spaces"
The parking plan attached hereto as Exhibit A shall effective such date be
substituted for the parking plan attached to the Second Amendment to Lease.
Except as expressly modified herein, all the terms and conditions of the
Lease shall remain in full force and effect and are hereby ratified and
confirmed.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in multiple counterparts under seal as of the date first above written.
Landlord:
ADVENT REALTY LIMITED PARTNERSHIP II
By: Advent Realty GP II Limited
Partnership, its
General Partner
By: Advent Realty, Inc., its General
Partner
By: /s/ ARTHUR I. SEGEL
-----------------------------------
Tenant:
FORRESTER RESEARCH, INC.
By: /s/ GEORGE F. COLONY
-----------------------------------
George F. Colony, President
<PAGE> 4
EXHIBIT A
GRAYSTONE CORPORATION
1033 MASSACHUSETTS AVENUE PARKING ALLOTMENT
<TABLE>
<CAPTION>
GARAGE PARKING OUTDOOR PARKING
- ---------------------------------------------- --------------------------------------------
SINGLE DOUBLE SINGLE DOUBLE
- -------------- ------------------------------ ------------ ------------------------------
<S> <C> <C> <C> <C> <C>
(13)
(59) Forrester (60) Forrester Forrester (14) Bentley (15) Bentley
DRIVEWAY
(12)
(61) Forrester (62) Forrester Forrester (16) Forrester (17) Forrester
(58) Forrester (11)
(63) Forrester (64) Forrester Forrester (18) Forrester (19) Forrester
(57) Forrester (10)
(65) Forrester (66) Forrester Forrester (20) Forrester (21) Forrester
(56) Forrester (9)
(67) Forrester (68) Forrester Forrester (22) Forrester (23) Forrester
(55) Forrester (8)
(69) Forrester (70) Forrester Forrester (24) Forrester (25) Forrester
(54) Dynasty (7)
(71) Forrester (72) Forrester Forrester (26) Forrester (27) Forrester
(53) Dynasty (73) Forrester (74) Forrester (6) DUMPSTER (28) Forrester (29) Forrester
(52) Forrester (75) Forrester (76) Forrester DUMPSTER (30) Forrester (31) Forrester
DOORWAY (77) Forrester (78) Forrester DOORWAY (32) Forrester (33) Forrester
(51) Forrester (5)
(79) Forrester (80) Forrester Forrester (34) Forrester (35) Forrester
(50) Forrester (4)
(81) Forrester (82) Forrester Forrester (36) Forrester (37) Forrester
(49) Forrester (3)
(83) Bentley (84) Bentley Forrester (38) Forrester (39) Forrester
(48) Forrester (2)
(85) Bentley (86) Bentley Forrester (40) Forrester (41) Forrester
(1)
Forrester (42) Forrester (43) Forrester
TRANSFORMER (44) Charrette (45) Charrette
(46) Charrette (47) Charrette
Robert Bentley, Inc. 2 out, 4 garage All Tandems 6
Charrette ProGraphics,
Inc. 4 out All Tandems 4
Dynasty Gallery Inc. 2 garage All Singles 2
Forrester Research, Inc. 40 out, 33 garage 21 Singles, 52 Tandems 73
----------------- ---
Tenant Total 46 out, 39 garage 85
Dumpster 2
Transformer 1
---
Total Number of
Spaces 88
</TABLE>
May 15, 1997
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Whitcomb Investments, Inc., a Massachusetts corporation.
Forrester Research B.V., a Dutch corporation.
Forrester Research FSC, Inc., a Barbados corporation.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated January 26, 1998, except with respect to the matter
discussed in Note 12, as to which the date is January 28, 1998, included in this
Form 10-K, into the Company's previously filed Registration Statement File No.
333-12761.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORRESTER
RESEARCH INC'S DECEMBER 31, 1997 CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN
FORM 10-K
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 7,742,094
<SECURITIES> 47,171,975
<RECEIVABLES> 11,517,887
<ALLOWANCES> 325,000
<INVENTORY> 0
<CURRENT-ASSETS> 69,047,406
<PP&E> 6,551,256
<DEPRECIATION> 2,062,383
<TOTAL-ASSETS> 73,536,279
<CURRENT-LIABILITIES> 33,031,204
<BONDS> 0
0
0
<COMMON> 83,918
<OTHER-SE> 40,421,157
<TOTAL-LIABILITY-AND-EQUITY> 73,536,279
<SALES> 0
<TOTAL-REVENUES> 40,420,937
<CGS> 0
<TOTAL-COSTS> 13,698,175
<OTHER-EXPENSES> 19,956,995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,280,656
<INCOME-TAX> 3,682,616
<INCOME-CONTINUING> 5,598,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,598,040
<EPS-PRIMARY> .67
<EPS-DILUTED> .63
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORRESTER
RESEARCH, INC'S DECEMBER 31, 1996 CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN
FORM 10-K.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 34,382,194
<SECURITIES> 10,257,717
<RECEIVABLES> 8,300,494
<ALLOWANCES> 200,000
<INVENTORY> 0
<CURRENT-ASSETS> 54,311,279
<PP&E> 3,324,919
<DEPRECIATION> 853,777
<TOTAL-ASSETS> 56,782,421
<CURRENT-LIABILITIES> 23,020,666
<BONDS> 0
0
0
<COMMON> 83,000
<OTHER-SE> 33,678,755
<TOTAL-LIABILITY-AND-EQUITY> 56,782,421
<SALES> 0
<TOTAL-REVENUES> 24,963,121
<CGS> 0
<TOTAL-COSTS> 8,761,718
<OTHER-EXPENSES> 12,118,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,716,272
<INCOME-TAX> 1,910,000
<INCOME-CONTINUING> 2,806,272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,806,272
<EPS-PRIMARY> .45
<EPS-DILUTED> .44
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORRESTER
RESEARCH, INC.'S DECEMBER 31, 1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN FORM 10-K.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 997,567
<SECURITIES> 6,520,481
<RECEIVABLES> 6,002,980
<ALLOWANCES> 120,000
<INVENTORY> 0
<CURRENT-ASSETS> 14,369,537
<PP&E> 1,549,651
<DEPRECIATION> 493,376
<TOTAL-ASSETS> 15,425,812
<CURRENT-LIABILITIES> 13,378,589
<BONDS> 0
0
0
<COMMON> 60,000
<OTHER-SE> 1,987,223
<TOTAL-LIABILITY-AND-EQUITY> 15,425,812
<SALES> 0
<TOTAL-REVENUES> 14,588,812
<CGS> 0
<TOTAL-COSTS> 5,486,346
<OTHER-EXPENSES> 7,318,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,123,266
<INCOME-TAX> 835,000
<INCOME-CONTINUING> 1,288,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,288,266
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
