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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, 1996
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)
DELAWARE 04-2797789
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1033 MASSACHUSETTS AVENUE 02138
CAMBRIDGE, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 497-7090
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value Nasdaq National Market System
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 21, 1997 (based on the closing price as quoted by the
Nasdaq National Market as of such date) was approximately $44.1 million.
As of March 21, 1997, 8,301,052 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, 1996 are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
Forrester Research, Inc. ("Forrester" or the "Company") is a leading
independent research firm offering products and services that help its clients
assess the effect of technology on their businesses. The Company provides
analysis and insight into a broad range of technology areas such as 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 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 any of its 10 research
services ("Strategy Research Services"). Each Strategy 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, 1996, Forrester's research was delivered
to 885 client companies. No single client company accounted for over 3% of the
Company's revenues during the year ended December 31, 1996. Approximately 74% of
Forrester's client companies with memberships expiring during the year ended
December 31, 1996 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 perspective 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.
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
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research methodology analyzes complex technology issues and delivers
prescriptive analysis and advice through each of its 10 Strategy Research
Services. 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 IT 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 Strategy 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 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
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select geographic markets. The Company also aims to increase the number of
Strategy 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 10
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 on
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 monthly Reports and biweekly Briefs, 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 holds one major event each year, the Forrester Technology
Management Forum, a two-day conference devoted to leading technology issues.
STRATEGY RESEARCH SERVICES
The Company's Strategy 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 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.
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The following table summarizes the coverage areas of Forrester's Strategy
Research Services:
SENIOR MANAGEMENT RESEARCH SAMPLE TOPICS
- ----------------------------------------------------- -------------------------------------
LEADERSHIP STRATEGIES -- introduced in September -- Strategic planning
1995, analyzes how executives can maximize the -- IT cost management
business benefits of technology and guides them in -- Best practices/benchmarking
making effective decisions about strategic direction, -- Strategic vendor selection
investment priorities, and resource management -- High Performance IT
INFORMATION TECHNOLOGY RESEARCH SAMPLE TOPICS
- ----------------------------------------------------- -------------------------------------
COMPUTING STRATEGIES -- introduced in November 1983, -- Systems and network management
analyzes 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 -- Servers, PCs, workstations
organization -- Internet Computing
NETWORK STRATEGIES -- introduced in December 1986, -- ATM
analyzes high-performance network services and guides -- Video
companies to build advanced networks that support -- EDI
client/server applications, link mobile workers, and -- Internetworking equipment
connect business partners and customers -- Networking protocols and services
-- Internet/Intranet
PACKAGED APPLICATION STRATEGIES -- introduced in -- Cost of ownership analysis
April 1996, analyzes the impact of emerging -- Commerce packages
technologies on application strategy and helps -- Suite vs. best-of-breed
clients acquire, manage, and leverage packaged -- Application data warehousing
software applications -- Impact of Internet/Intranet
SOFTWARE STRATEGIES -- introduced in April 1990, -- Object-oriented technology
analyzes and defines strategies for the overall -- Internet/Intranet software
software architecture needed to meet business -- Document management
objectives, including strategic use of data, -- Data warehousing
documents, and development -- Internet commerce
TELECOM STRATEGIES -- introduced in June 1996, -- Wide area networking
analyzes telecommunications in the era of -- Wireless communications
deregulation and the Internet and helps clients use -- Internet access
communications technologies to gain competitive -- Deregulation
advantage and cut costs
NEW MEDIA RESEARCH SAMPLE TOPICS
- ----------------------------------------------------- -------------------------------------
INTERACTIVE TECHNOLOGY STRATEGIES -- introduced in -- Internet site development
March 1996, analyzes how companies use new -- Web site management tools
technologies to provide a compelling consumer -- Personal broadcast networks
experience -- Multimedia content
MEDIA & TECHNOLOGY STRATEGIES -- introduced in -- Internet advertising
September 1996, analyzes electronic media business -- On-line magazines
models for publishers, broadcasters, and information -- Electronic yellow pages
service providers and helps clients build -- Future of business information
technology-based media franchises services
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NEW MEDIA RESEARCH (CONTINUED) SAMPLE TOPICS
- ----------------------------------------------------- -------------------------------------
MONEY & TECHNOLOGY STRATEGIES -- introduced in -- Commerce
September 1995, analyzes consumer financial services, -- Integrated financial services
focusing on technology's impact on how consumers -- Smart cards
spend, save, and invest -- On-line payments
-- On-line banking and investing
-- Web strategies for financial firms
PEOPLE & TECHNOLOGY STRATEGIES -- introduced in May -- Consumer demographics
1994, analyzes how emerging technologies affect -- On-line services and the Internet
consumer lifestyles and behavior -- On-line business models
Each client that purchases a membership to a Strategy Research Service
receives the following written 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.
In addition to printed reports, Strategy Research Service core research
deliverables are available in the following electronic delivery formats:
FORRESTER INTERNET gives clients access to a full archive of
Forrester's research from 1993 to the present via the World Wide Web.
Extensive search capabilities and end user customization allow clients to
tailor document viewing to their particular needs.
FORRESTER INTRANET delivers the same research archive as Forrester
Internet, can be purchased with or without a search engine, and is
compatible with any client's Intranet environment.
FORRESTER RESEARCH FOR LOTUS NOTES USERS provides access to
Forrester's full research archive from 1994 to the present via replication
to Forrester's Lotus Notes server. Documents can be viewed and sorted by
Strategy Research Service, analyst, technology, product, company, people,
or date.
ADVISORY SERVICES AND EVENTS
Forrester provides advisory services to a limited number of clients through
its Partners Program and Strategy Review Program. 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, 1996, 79 client companies were members of the Partners Program and
223 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, respectively:
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.
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The Company also hosts the Forrester Forum 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.
PRICING
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., printed 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, 1995 was
approximately $10,200 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 clients for the Partners Program for the year
ended December 31, 1995 was approximately $65,700 and for the year ended
December 31, 1996 was approximately $85,000. The average contract price of
annual memberships sold to Forrester clients for the Strategy Review Program for
the year ended December 31, 1995 was approximately $33,300 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 at December 31, 1994 was $10.2 million and grew to $17.8 million
at December 31, 1995. At December 31, 1996, agreement value was $30.0 million.
RESEARCH AND ANALYSIS
Forrester employs a structured and consistent research methodology across
the Company's 10 Strategy 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 directors.
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.
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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 Partners and Strategy Review Program
clients. Senior analysts and research directors are eligible to receive equity
awards under the Company's stock plans.
SALES AND MARKETING
Forrester has made a substantial investment in its direct sales force to
better serve clients and address additional markets. The Company's direct sales
force, comprised of 43 sales representatives as of December 31, 1996, consists
of business development managers who are responsible for maintaining and
leveraging the current client base by renewing and selling additional Strategy
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. Forrester also uses five 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, Spain, and South Africa.
The Company has developed and will continue to implement products and
programs to support the 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 the sales force. All Forrester 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, 1996, Forrester's research was delivered to 885 client
companies, including 57 Fortune 100 companies and 159 Fortune 500 companies. No
single client company accounted for over 3% of the Company's revenues for the
year ended December 31, 1996.
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 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.
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EMPLOYEES
As of December 31, 1996, Forrester employed a total of 134 persons,
including 60 research staff, 50 sales and marketing personnel, and 24 operations
personnel.
EXECUTIVE OFFICERS
Listed below are the executive officers of the Company:
NAME AGE POSITION
- ------------------------------- --- ----------------------------------------------------------
George F. Colony............... 43 Chairman of the Board, President, and Chief Executive
Officer
William M. Bluestein, Ph.D. ... 39 Group Director, New Media Research
Paul D. Callahan............... 48 Group Director, Information Technology Research
Ruth Habbe..................... 42 Director, Marketing
John C. McCarthy............... 37 Group Director, Research
Mary A. Modahl................. 34 Group Director, New Media Research
David H. Ramsdell.............. 46 Director, Finance
Jon D. Schwartz................ 37 Director, Worldwide Sales
Paul J. Warren................. 31 Director, IT
Susan M. Whirty, Esq. ......... 39 Director, Operations, General Counsel, Secretary, and
Treasurer
Stuart D. Woodring............. 36 Group Director, Information Technology Research
George F. Colony, founder of the Company, has served as President and Chief
Executive Officer since its inception in July 1983.
William M. Bluestein, Ph.D., currently serves as Group Director, New Media
Research. He was previously 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.
Paul D. Callahan currently serves as Group Director, Information Technology
Research. He was previously with the Company's Network Strategies where he
served as Director from 1995 to 1996, Senior Analyst from 1993 to 1995, and
Analyst from 1992 to 1993. Prior to joining the Company, Mr. Callahan was a
manager with Digital's networks business from 1987 to 1992.
Ruth Habbe has served as the Company's Director, Marketing since 1994.
Prior to joining the Company, Ms. Habbe was Vice President, Marketing at Imagery
Software, Inc. from 1992 to 1994 and Document Imaging Segment Manager at Digital
from 1990 to 1992.
John C. McCarthy currently serves as Group Director, Research. He was
previously Director with the Company's Interactive Technology Strategies from
June 1996 to December 1996 and Director with the Company's Software Strategies
from January 1996 to June 1996. He also served as Director of the Company's New
Customer Connection Research from 1995 to 1996, Director of the Company's
Information Technology Research Services from 1993 to 1994, and Director with
the Company's Computing Strategies from 1994 to 1995 and 1990 to 1993.
Mary A. Modahl currently serves as Group Director, New Media Research. She
was previously 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 became the Company's Director, Finance in October 1996.
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.
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Jon D. Schwartz currently serves as the Company's Director, Worldwide
Sales. He was previously Director of the Company's North American Sales from
1993 to 1995 and Partners Manager from 1990 to 1993.
Paul J. Warren has served as the Company's Director, IT since 1995. 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. has served as the Company's Director, Operations and
General Counsel since March 1993 and has served as the Company's Secretary and
Treasurer 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 Group Director, Information
Technology Research. He was previously 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 30,000 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
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
The Company did not submit any matters during the fourth quarter of the
fiscal year covered by this report after becoming subject to the Securities
Exchange Act of 1934, to a vote of the stockholders through solicitation or
otherwise.
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. Since the Company's initial public offering through March 21,
1997 the high sale price for the Company's common stock was $29.13 per share,
and the low sale price was $18.00 per share, as reported on the Nasdaq National
Market. On March 21, 1997, the closing price of the Company's common stock was
$19.25 per share.
During the fiscal year for which this report is filed the Company did not
sell any securities which were not registered under the Securities Act of 1933,
as amended (the "Securities Act"). In February 1996, the Company issued
6,000,000 shares of its common stock to its former sole stockholder in
connection with its reincorporation merger in Delaware. Such transaction was not
a "sale" because it fit within the exemption pursuant to Rule 145(a)(2) under
the Securities Act.
As of March 21, 1997 there were approximately 32 stockholders of record of
the Company's common stock. The Company estimates that there are approximately
1,400 beneficial holders of its common stock.
In the year ended December 31, 1995, the Company paid a cash dividend of
$1,121,342 to the former sole stockholder of the Company, and in the year ended
December 31, 1996, the Company paid a cash dividend of
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$5,493,197 and accrued a cash dividend of $67,000 in each case to the former
sole stockholder of the Company. The Company anticipates that future earnings,
if any, will be retained for the development of its business, and the Company
does not anticipate paying any cash dividends on its common stock in the
foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below is derived from the
consolidated financial statements of the Company and its wholly owned
subsidiary, Whitcomb Investments, Inc., and should be read in connection with
those statements which are included herein.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues:
Core research........................... $ 2,626 $ 4,691 $ 6,363 $ 10,150 $ 18,206
Advisory services and other............. 2,139 2,608 3,336 4,439 6,757
--------- --------- --------- --------- ---------
Total revenues.................. 4,765 7,299 9,699 14,589 24,963
--------- --------- --------- --------- ---------
Operating expenses:
Cost of services and fulfillment........ 1,866 2,406 3,424 5,486 8,762
Selling and marketing................... 1,645 2,693 3,593 5,643 8,992
General and administrative.............. 599 1,148 1,045 1,389 2,509
Depreciation and amortization........... 69 105 150 287 618
--------- --------- --------- --------- ---------
Total operating expenses........ 4,179 6,352 8,212 12,805 20,881
--------- --------- --------- --------- ---------
Income from operations.......... 586 947 1,487 1,784 4,082
Interest income, net...................... 68 79 125 340 634
--------- --------- --------- --------- ---------
Income before income tax
provision..................... 654 1,026 1,612 2,124 4,716
Income tax provision...................... -- 46 73 97 712
--------- --------- --------- --------- ---------
Net income...................... 654 980 1,539 2,027 4,004
Pro forma income tax adjustment........... 262 365 583 739 1,198
--------- --------- --------- --------- ---------
Pro forma net income...................... 392 615 956 1,288 2,806
========= ========= ========= ========= =========
Pro forma net income per common share..... $ 0.06 $ 0.10 $ 0.15 $ 0.20 $ 0.43
========= ========= ========= ========= =========
Weighted average common shares
outstanding............................. 6,293,449 6,293,449 6,293,449 6,293,449 6,556,255
========= ========= ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities.............................. $ 2,354 $ 3,111 $ 4,764 $ 7,518 $ 44,640
Working capital........................... $ 409 $ 901 $ 528 $ 991 $ 31,291
Total assets.............................. $ 4,964 $ 6,367 $ 8,784 $ 15,426 $ 56,782
Stockholders' equity...................... $ 696 $ 1,331 $ 1,120 $ 2,047 $ 33,762
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-
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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 has experienced year-to-year revenue growth every year since its
inception in 1983, and the Company's total revenues increased to $25.0 million
in 1996 from $14.6 million in 1995. Forrester attributes its growth to the
Company's continuing reputation for quality research and services, accurate
analysis of technology industry developments, the introduction of new products
and services, and the expansion of the Company's sales and marketing
organization. In addition, the Company believes the speed of technology change
and the increasingly participatory nature of technology decisions have led to a
growing market need for independent research and analysis on the impact of
technology on large enterprises, consumers, and society.
Revenues from core research also increased to $18.2 million in 1996 from
$10.1 million in 1995 and increased as a percentage of total revenues to 73% in
1996 from 70% in 1995. Forrester attributes this growth to, in addition to the
factors cited above, an increase in total Strategy Research Services
offered -- from six in 1995 to a total of 10 Strategy Research Services as of
December 31, 1996.
Memberships to Forrester's Strategy Research Services are renewable
contracts, typically annual and payable in advance. Accordingly, a substantial
portion of the Company's billings are initially recorded as deferred revenue and
recognized pro rata on a monthly basis over the contract period. The Company's
other revenues are derived from advisory services rendered pursuant to
Forrester's Partners Program and Strategy Review Program and from the Forrester
Technology Management Forum (the "Forum"). The Company's advisory service
clients purchase such services in conjunction with the purchase of core research
memberships to Strategy Research Services, and the contracts for such purchases
are also generally payable in advance. Billings attributable to advisory
services are initially recorded as deferred revenues and recognized as revenue
when performed. Similarly, Forum billings are initially recorded as deferred
revenues and are recognized upon completion of the 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, and sales commissions, which are
deferred when paid and expensed as the related revenue is recognized. General
and administrative expenses include the costs of the finance, operations, and
corporate IT groups, and other administrative functions of the Company.
The Company has had income from operations in each of the last six years
from 1991 through 1996. Income from operations rose 129% to $4.1 million in 1996
from $1.8 million in 1995.
The Company was an S corporation under section 1362 of the Internal Revenue
Code of 1986, as amended, until prior to the closing of its initial public
offering. 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. The Company is now taxed as a C corporation and
accordingly is subject to federal and state income taxes at prevailing corporate
rates. The statements for each of the three years ended December 31, 1994, 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 Company has calculated these amounts based on an estimated
effective tax rate for the respective periods. Upon termination of the S
corporation election, the Company recorded a net deferred income tax liability,
reflecting the tax effect of cumulative differences between the financial
reporting and tax bases of certain assets and liabilities, of approximately
$510,000 as a one-time increase in the actual tax provision during 1996.
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 services contracts
in effect at a given point in time, without regard to the remaining duration of
such contracts. Agreement value increased 69% to $30.0 million at December 31,
1996 from $17.8 million at December 31, 1995. The Company's experience is
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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 74% and 71% of Forrester's client companies with memberships
expiring during 1996 and 1995, respectively, renewed one or more memberships for
the Company's products and services, although these renewal rates are not
necessarily indicative of the rate of future retention of the Company's revenue
base. The number of client companies increased to 885 at December 31, 1996 from
799 at December 31, 1995, and no single client company accounted for over 3% of
the Company's revenues in 1996 or over 4% of the Company's revenues in 1995.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
total revenues for the periods indicated:
YEAR ENDED DECEMBER
31,
----------------------
1994 1995 1996
---- ---- ----
Core research................................................... 66% 70% 73%
Advisory services and other..................................... 34 30 27
--- --- ---
Total revenues.................................................. 100 100 100
Cost of services and fulfillment................................ 35 37 35
Selling and marketing........................................... 37 39 36
General and administrative...................................... 10 9 10
Depreciation and amortization................................... 2 2 3
--- --- ---
Income from operations.......................................... 16 13 16
Interest income................................................. 1 2 3
--- --- ---
Income before state income tax provision........................ 17 15 19
Provision for income taxes...................................... 1 1 3
--- --- ---
Net income...................................................... 16% 14% 16%
=== === ===
Pro forma income tax adjustment................................. 6 5 5
--- --- ---
Pro forma net income............................................ 10% 9 % 11%
=== === ===
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. The Company invoices its international clients in
U.S. dollars.
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.
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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 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 form positive cash flows from
operations and net proceeds from the Company's initial public offering.
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUES. Total revenues increased 50% to $14.6 million in 1995 from $9.7
million in 1994. Revenues from core research increased 59% to $10.1 million in
1995 from $6.4 million in 1994. The increases in total revenues and revenues
from core research were primarily attributable to an increase in the number of
clients, the introduction of new Strategy Research Services, continued expansion
and increased productivity of the Company's sales force, and growing market
acceptance of the Company's products. The Company introduced two new Strategy
Research Services in 1995 and one new Strategy Research Service in 1994.
Advisory services and other revenues increased 33% to $4.4 million in 1995
from $3.3 million in 1994. The increase in advisory services and other revenues
was primarily attributable to demand for the Company's advisory services. The
decrease of these revenues as a percentage of total revenues to 30% in 1995 from
34% in 1994 reflects the results of the Company's strategy to expand sales of
its core research.
Revenues attributable to sales to customers outside the United States
increased 61% to $2.6 million in 1995 from $1.6 million in 1994. International
sales represented 18% and 16% of total revenue for 1995 and 1994, respectively.
The increase was due primarily to the Company's expansion of its direct
international sales force during 1995.
Agreement value grew 74% to $17.8 million at December 31, 1995 from $10.2
million at December 31, 1994.
COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment
increased as a percentage of total revenues to 37% in 1995 from 35% in 1994.
These costs increased 60% to $5.5 million in 1995 from $3.4 million in 1994. The
increase was principally due to investment in new Strategy Research Services and
resultant increased analyst staffing and related compensation expense.
SELLING AND MARKETING. Selling and marketing expenses increased as a
percentage of total revenues to 39% in 1995 from 37% in 1994. These expenses
increased 57% to $5.6 million in 1995 from $3.6 million in
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1994. The increase in expenses was principally due to the addition of direct
salespersons and marketing personnel and increased sales commissions resulting
from increased revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
as a percentage of total revenues to 9% in 1995 from 10% in 1994. These expenses
increased 33% to $1.4 million in 1995 from $1.0 million in 1994. The increase in
expenses was principally due to staffing increases in operations and IT, higher
costs associated with the Company's new Cambridge headquarters, and investment
in the Company's internal IT systems.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 91% to $287,000 in 1995 from $150,000 in 1994. The increase in this
expense was principally due to purchases of computer equipment, software, and
office furnishings to support business growth and the Company's move to its new
Cambridge headquarters and expansion thereof.
INTEREST INCOME. Interest income increased 171% to $340,000 in 1995 from
$125,000 in 1994. This increase resulted primarily from an increase in the
Company's cash balances resulting from positive cash flows from operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date through funds generated
from operations. Memberships for core research, which constituted approximately
73% of the Company's revenues for the year ended December 31, 1996, are annually
renewable and are generally payable in advance. These up-front payment terms
together with historical year-to-year revenue growth have allowed the Company to
generate positive cash flows each year since 1984, one year after its inception
in 1983. The Company generated $11.3 million in cash from operating activities
during 1996 compared with $4.5 million of cash from operating activities during
1995.
The Company's revenues, earnings, and cash flows 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 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.
In 1996, the Company used $5.5 million of cash in investing activities,
consisting of $2.0 million for the purchase of property and equipment and $3.5
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 1996, the Company generated a net $27.7 million in cash from financing
activities. This includes net proceeds of $33.2 million (net of underwriting
discount and offering expenses) to the Company from the sale of 2,300,000 shares
of common stock in its initial public offering at a price of $16.00 per share,
and less a $5.6 million distribution to its sole stockholder prior to the
offering, for undistributed S corporation earnings. The Company expects to use
the net proceeds of the initial offering for working capital and general
corporate purposes, including possible acquisitions. The Company currently has
no commitments or agreements with respect to any specific acquisition. Pending
such uses, the Company is investing the net proceeds primarily in short- and
intermediate-term interest-bearing obligations of investment grade.
As of December 31, 1996, the Company had cash and cash equivalents of $34.4
million and $10.3 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 has no material capital commitments and does not
foresee that capital expenditures will increase substantially during the next
two years. The Company believes that its current cash balance, marketable
securities, and cash flows from operations will satisfy working capital,
financing activities, and capital expenditure requirements for at least the next
two years.
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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 71% to $25.0 million in 1996 from $14.6 million in 1995. The
Company's staff increased from 61 full-time employees on January 1, 1995 to 134
full-time employees on December 31, 1996. 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 73% and 70% of the Company's revenues in 1996
and 1995, 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,
would 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.
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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 1996 Annual Report on Form 10-K under
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
FORRESTER RESEARCH, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.............................................. F-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
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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 1996 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 "1997 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
1997 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 1997 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 1997 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 16.
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.
FORM 10-K
PAGE
---------
Report of Independent Public Accountants......................... F-2
Report of Independent Public Accountants on Schedule............. F-15
Valuation and Qualifying Accounts................................ F-16
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.
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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 28, 1997
Pursuant to the requirement of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------------- -------------------------------------- --------------
/s/ GEORGE F. COLONY Chief Executive Officer, President, March 28, 1997
- ------------------------------------- and Director of the Company
George F. Colony (principal executive officer)
/s/ DAVID H. RAMSDELL Director, Finance (principal financial March 28, 1997
- ------------------------------------- and accounting officer)
David H. Ramsdell
/s/ ROBERT M. GALFORD Member of the Board of Directors March 28, 1997
- -------------------------------------
Robert M. Galford
/s/ GEORGE R. HORNIG Member of the Board of Directors March 22, 1997
- -------------------------------------
George R. Hornig
/s/ MICHAEL H. WELLES Member of the Board of Directors March 23, 1997
- -------------------------------------
Michael H. Welles
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20
FORRESTER RESEARCH, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1996
TOGETHER WITH AUDITORS' REPORT
F-1
21
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 subsidiary as of December 31, 1995
and 1996 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. 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
subsidiary as of December 31, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 22, 1997
F-2
22
FORRESTER RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
1995 1996
----------- -----------
Current Assets:
Cash and cash equivalents....................................... $ 997,567 $34,382,194
Marketable securities........................................... 6,520,481 10,257,717
Accounts receivable, net of allowance for doubtful accounts of
approximately $120,000 and $200,000 in 1995 and 1996,
respectively................................................. 5,882,980 8,100,494
Deferred commissions............................................ 891,967 1,341,268
Prepaid expenses and other current assets....................... 76,542 229,606
----------- -----------
Total current assets.................................... 14,369,537 54,311,279
----------- -----------
Property and Equipment, at cost:
Computers and equipment......................................... 965,435 1,752,473
Furniture and fixtures.......................................... 288,532 546,595
Computer software............................................... 206,324 312,111
Vehicles........................................................ 30,098 30,098
Leasehold improvements.......................................... 59,262 683,642
----------- -----------
Total property and equipment............................ 1,549,651 3,324,919
Less -- Accumulated depreciation and amortization............... 493,376 853,777
----------- -----------
Property and equipment, net............................. 1,056,275 2,471,142
----------- -----------
Total assets............................................ $15,425,812 $56,782,421
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................ $ 377,344 $ 1,200,131
Customer deposits............................................... 97,329 139,293
Accrued expenses................................................ 1,544,815 3,201,111
Accrued income taxes............................................ -- 227,037
Deferred revenue................................................ 11,359,101 17,816,380
Deferred income taxes........................................... -- 436,714
----------- -----------
Total current liabilities............................... 13,378,589 23,020,666
----------- -----------
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 -- 6,000,000 shares and 8,300,000
shares in 1995 and 1996, respectively........................ 60,000 83,000
Additional paid-in capital...................................... -- 33,211,053
Retained earnings............................................... 1,965,527 409,602
Unrealized gain on marketable securities........................ 21,696 58,100
----------- -----------
Total stockholders' equity.............................. 2,047,223 33,761,755
----------- -----------
Total liabilities and stockholders' equity.............. $15,425,812 $56,782,421
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
23
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996
---------- ----------- -----------
Revenues:
Core research...................................... $6,363,335 $10,149,514 $18,205,851
Advisory services and other........................ 3,335,467 4,439,298 6,757,270
---------- ----------- -----------
Total revenues............................. 9,698,802 14,588,812 24,963,121
---------- ----------- -----------
Operating expenses:
Cost of services and fulfillment................... 3,423,844 5,486,346 8,761,718
Selling and marketing.............................. 3,592,853 5,643,196 8,991,794
General and administrative......................... 1,045,340 1,388,868 2,508,845
Depreciation and amortization...................... 150,067 286,705 618,290
---------- ----------- -----------
Total operating expenses................... 8,212,104 12,805,115 20,880,647
Income from operations..................... 1,486,698 1,783,697 4,082,474
Interest income, net................................. 125,115 339,569 633,798
---------- ----------- -----------
Income before income tax provision......... 1,611,813 2,123,266 4,716,272
Income tax provision (Note 3)................... 73,000 96,000 712,000
---------- ----------- -----------
Net income................................. 1,538,813 2,027,266 4,004,272
Pro forma income tax adjustment (Note 3)............. 583,000 739,000 1,198,000
---------- ----------- -----------
Pro forma net income................................. $ 955,813 $ 1,288,266 $ 2,806,272
========== =========== ===========
Pro forma net income per common share................ $ 0.15 $ 0.20 $ 0.43
========== =========== ===========
Weighted average common shares outstanding........... 6,293,449 6,293,449 6,556,255
========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
24
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
COMMON STOCK
------------------- UNREALIZED
$.01 ADDITIONAL GAIN ON TOTAL
NUMBER PAR PAID-IN RETAINED MARKETABLE STOCKHOLDERS'
OF SHARES VALUE CAPITAL EARNINGS SECURITIES EQUITY
--------- ------- ----------- ----------- ---------- ------------
Balance, December 31, 1993...... 6,000,000 $60,000 $ -- $ 1,270,790 $ -- $ 1,330,790
Distributions (Note 3)........ -- -- -- (1,750,000) -- (1,750,000)
Net income.................... -- -- -- 1,538,813 -- 1,538,813
--------- ------- ----------- ---------- ------- -----------
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
========= ======= =========== ========== ======= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
25
FORRESTER RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996
----------- ----------- -----------
Cash flows from operating activities:
Net income............................................ $ 1,538,813 $ 2,027,266 $ 4,004,272
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization...................... 150,067 286,705 618,290
Deferred income taxes.............................. -- -- 436,714
Accretion of discount on marketable securities..... (24,935) (60,377) (193,152)
Changes in assets and liabilities --
Accounts receivable.............................. (455,965) (3,010,742) (2,217,514)
Deferred commissions............................. (158,244) (396,752) (449,301)
Prepaid expenses and other current assets........ 5,113 (15,582) (153,064)
Accounts payable................................. 28,748 335,950 822,787
Customer deposits................................ -- 97,329 41,964
Accrued expenses................................. 330,913 1,019,763 1,656,296
Accrued income taxes............................. -- -- 227,037
Deferred revenue................................. 2,268,001 4,261,527 6,457,279
----------- ----------- -----------
Net cash provided by operating activities..... 3,682,511 4,545,087 11,251,608
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment, net.............. (304,736) (751,850) (2,033,157)
Purchase of marketable securities..................... (1,960,420) (9,171,880) (8,469,888)
Proceeds from sales and maturities of marketable
securities......................................... -- 4,718,827 4,962,208
----------- ----------- -----------
Net cash used in investing activities......... (2,265,156) (5,204,903) (5,540,837)
----------- ----------- -----------
Cash flows from financing activities:
Distributions to stockholder.......................... (1,750,000) (1,121,342) (5,560,197)
Net proceeds of stock offering........................ -- -- 33,234,053
----------- ----------- -----------
Net cash (used in) provided by financing
activities.................................. (1,750,000) (1,121,342) 27,673,856
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents.... (332,645) (1,781,158) 33,384,627
Cash and cash equivalents, beginning of year............ 3,111,370 2,778,725 997,567
----------- ----------- -----------
Cash and cash equivalents, end of year.................. $ 2,778,725 $ 997,567 $34,382,194
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes............................ $ 18,961 $ 44,893 $ 87,053
=========== =========== ===========
Supplemental disclosure of noncash investing and
financing activities:
Unrealized gain on available-for-sale securities...... $ -- $ 21,696 $ 36,404
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
26
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 consolidated financial statements as of and for the year
ended December 31, 1996 include the accounts of the Company and its wholly owned
subsidiary, Whitcomb Investments, Inc., a Massachusetts corporation. 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
amortized 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.
Pro Forma Net Income Per Common Share
Pro forma net income per common share is computed by dividing pro forma net
income (reflecting the pro forma income tax adjustment discussed in Note 3) by
the weighted average number of shares of common stock and common stock
equivalents outstanding during the period, adjusted for the reincorporation
discussed in Note 6. Common stock equivalents consist of common stock issuable
on the exercise of outstanding options.
In accordance with Securities and Exchange Commission requirements, all
common stock and common stock equivalents issued during the 12 months preceding
an initial public offering have been included in the net income per share
computation as if they were outstanding for all periods using the treasury stock
method.
F-7
27
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation
The Company provides for depreciation, computed using the straight-line
method, by charges to income in amounts that allocate the costs of these assets
over their estimated useful lives as follows:
ESTIMATED
USEFUL LIFE
-------------
Computers and equipment....................... 3 to 5 Years
Furniture and fixtures........................ 7 Years
Computer software............................. 3 Years
Vehicles...................................... 5 Years
Leasehold improvements........................ Life of lease
Product Development
All costs associated with the development of new products and services are
expensed as incurred.
Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, requires disclosure of
any significant off-balance-sheet and credit risk concentrations. 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 in
any of the periods presented.
Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure about 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.
(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, 1995 and 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
mature 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, 1995
and 1996, these securities consisted of investments in federal and state
government obligations, which were recorded at fair market value, with any
unrealized gains and losses reported as a separate component of stockholders'
equity. These investments were classified as current at December 31, 1995 and
1996 as it is the Company's intent to hold these securities less than one year.
Securities that are
F-8
28
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bought and held principally for the purpose of selling in the near term are
classified as trading securities. There were no trading securities as of
December 31, 1995 and 1996.
At December 31, 1995 and 1996, marketable securities consisted of the
following:
1995 1996
---------- -----------
U.S. Treasury bills................................ $3,876,100 $ 3,473,694
U.S. Treasury notes................................ 613,456 2,510,155
Federal agency obligations......................... 309,255 854,214
State and municipal bonds.......................... 1,721,670 3,419,654
---------- -----------
$6,520,481 $10,257,717
========== ===========
The following table summarizes the maturity periods of marketable
securities as of December 31, 1996:
LESS THAN 1 TO 5 5 TO 10
1 YEAR YEARS YEARS TOTAL
---------- ---------- ---------- -----------
U.S. Treasury bills.............. $3,473,694 $ -- $ -- $ 3,473,694
U.S. Treasury notes.............. -- 2,006,875 503,280 2,510,155
Federal agency obligations....... -- 445,601 408,613 854,214
State and municipal bonds........ -- 1,887,497 1,532,157 3,419,654
---------- ---------- ---------- -----------
$3,473,694 $4,339,973 $2,444,050 $10,257,717
========== ========== ========== ===========
Gross realized gains and losses on sales of marketable securities for the
years ended December 31, 1995 and 1996, which were calculated based on specific
identification, were not material.
(3) INCOME TAXES
The Company accounts for income taxes, including pro forma computations, in
accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109
prescribes an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases 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. As an S corporation, the taxable income of the Company was passed
through 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 amounts
previously distributed. This distribution totaled approximately $5,231,000, of
which approximately $5,164,000 was paid in cash and $67,000 was accrued as of
December 31, 1996.
As discussed above, the Company terminated its S corporation election and
became subject to federal and state income taxes at prevailing corporate rates
prior to the closing of its initial public offering of common stock.
Accordingly, the accompanying statements of income for each of the three years
ended December 31, 1994, 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 the period presented.
F-9
29
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the historical and pro forma income tax provision are as
follows:
1994 1995 1996
-------- -------- ----------
Current --
Federal......................................... $ -- $ -- $ 67,000
State........................................... 73,000 96,000 208,000
-------- -------- ----------
73,000 96,000 275,000
-------- -------- ----------
Deferred --
Federal......................................... -- -- 354,000
State........................................... -- -- 83,000
-------- -------- ----------
-- -- 437,000
-------- -------- ----------
Actual provision for income taxes............ 73,000 96,000 712,000
Pro forma income tax provision.................... 656,000 835,000 1,910,000
-------- -------- ----------
Pro forma income tax adjustment................... $583,000 $739,000 $1,198,000
======== ======== ==========
The Company's income tax provision for the years ended December 31, 1994
and 1995 consisted of corporate-level state income taxes that were levied
against the Company as an S corporation. 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 bases of certain assets and liabilities, primarily
deferred commissions, accrued expenses and cumulative tax depreciation in excess
of financial reporting allowances. These temporary differences resulted in a net
deferred income tax liability of approximately $510,000. The Company recorded
this tax liability as a one-time increase in the actual tax provision during
1996.
Deferred income taxes as of December 31, 1996 related to the following
temporary differences:
Nondeductible reserves and accruals.............. $ 147,000
Depreciation and amortization.................... (47,000)
Deferred commissions............................. (537,000)
---------
$(437,000)
=========
The Company and George F. Colony, who was the sole stockholder of the
Company prior to its initial public offering, have entered into an
indemnification agreement relating to their respective income tax 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.
F-10
30
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) COMMITMENTS
The Company leases its office space under an operating lease. The Company
will also make lease payments on its previous facility through January 1997. The
excess of the payments on its old facility over anticipated sublease income has
been accrued as of December 31, 1995 and 1996.
At December 31, 1996, approximate future minimum rentals due are as
follows:
1997............................................. $1,011,000
1998............................................. 1,001,000
1999............................................. 1,007,000
2000............................................. 1,012,000
2001............................................. 262,000
----------
Total minimum lease payments................ $4,293,000
==========
Rent expense was approximately $369,000, $663,000 and $664,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
In connection with its facility leases, the Company has outstanding letters
of credit of approximately $73,000.
(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.
(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.
F-11
31
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) STOCK OPTION PLANS
In February 1996, the Company adopted the Forrester Research, Inc. 1996
Equity Incentive Plan, which was amended in September 1996 (the Plan). The Plan
provides for the issuance of incentive stock options (ISOs) and nonqualified
stock options (NSOs) to purchase up to 2,750,000 shares of common stock. Under
the terms of the Plan, ISOs may not be granted at less than fair market value on
the date of grant (and in no event less than par value). ISO grants to holders
of 10% of the combined voting power of all classes of Company stock must be
granted at an exercise price of not less than 110% of the fair market value at
the date of grant. The fair market value of $5.50 per share for the options
granted in February 1996 was based on an independent appraisal. Options vest
ratably over three years and expire after 10 years. Options granted under the
Plan immediately vest upon certain events, as defined.
Stock option activity since the Plan's inception to December 31, 1996 was
as follows:
WEIGHTED
AVERAGE
EXERCISE EXERCISE
NUMBER PRICE PRICE
OF SHARES PER SHARE PER SHARE
--------- ------------ ---------
Granted........................................... 790,046 $5.50-$13.00 $8.16
Canceled.......................................... (31,355) 5.50 5.50
------- ------------ -----
Outstanding at December 31, 1996.................. 758,691 $5.50-$13.00 $8.28
======= ============ =====
Exercisable at December 31, 1996.................. 149,376 $5.50 $5.50
======= ============ =====
The weighted average remaining contractual life of options outstanding at
December 31, 1996 is 9.4 years. As of December 31, 1996, options available for
future grant under the Plan were 1,991,309.
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, the Company's four non-employee directors each received, on the date that
the Company first filed a registration statement under the Securities Act of
1933 covering its common stock, an option to purchase 6,000 shares of the
Company's common stock at an exercise price of $13.00 per share. Such options
vest in three equal installments commencing on the date that the Company
completed its initial public offering of the common stock and on the first and
second anniversaries of such date. Each non-employee director elected thereafter
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, which will vest in three equal installments
commencing on the date of grant and on the first and second anniversaries of the
date of grant. 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, which will vest in three equal installments on the
first, second and third anniversaries of the date of grant. The Compensation
Committee (the Committee) of the Board of Directors also has the authority under
the Directors' Plan to grant options to non-employee directors in such amounts
and on such terms as set forth in the Directors' Plan as it shall determine at
the time of grant.
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 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 pro forma disclosures required under SFAS No. 123 for options
granted in
F-12
32
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The weighted average assumptions used for 1996 are:
Risk-free interest rate........................... 6.21%
Expected dividend yield........................... --
Expected lives.................................... 7.5 years
Expected volatility............................... 0%-64%
The total value of options granted during the year ended December 31, 1996
was computed as approximately $2,705,000. Of this amount, approximately $377,000
would be charged to operations for the year ended December 31, 1996, and the
remaining amount, approximately $2,328,000, would be amortized over the related
remaining vesting periods. There were no options or warrants issued prior to
1996. The pro forma effect of SFAS No. 123 for the year ended December 31, 1996
is approximately as follows:
AS REPORTED PRO FORMA
----------- ----------
Net income.......................................... $ 2,806,000 $2,429,000
========== ==========
Net income per share................................ $0.43 $0.37
========== ==========
(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. The first purchase period under the Stock Purchase Plan
commenced on the first day that the Company's common stock was publicly traded
on the Nasdaq National Market and will end on June 30, 1997. Each subsequent
purchase period under the Stock Purchase Plan will be six months in length and
will 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. Because the first purchase period under the stock purchase plan ends
on June 30, 1997, no shares were purchased under the Stock Purchase Plan during
1996.
F-13
33
FORRESTER RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) NET SALES BY GEOGRAPHIC DESTINATION
Net sales by geographic destination and as a percentage of total sales are
as follows:
1994 1995 1996
---------- ----------- -----------
United States................................ $8,103,708 $12,025,529 $19,694,363
Europe....................................... 629,208 1,066,314 2,751,858
Other........................................ 965,886 1,496,969 2,516,900
---------- ----------- -----------
$9,698,802 $14,588,812 $24,963,121
========== =========== ===========
United States................................ 84% 82% 79%
Europe....................................... 6 8 11
Other........................................ 10 10 10
---------- ----------- -----------
100% 100% 100%
========== =========== ===========
(10) ACCRUED EXPENSES
Accrued expenses consist of the following:
1995 1996
---------- ----------
Payroll and related................................. $ 802,673 $1,446,752
Other............................................... 742,142 1,754,359
---------- ----------
$1,544,815 $3,201,111
========== ==========
(11) SUMMARY SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the
years ended December 31, 1995 and 1996 (in thousands, except per share data):
QUARTER ENDED
-------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995
--------- -------- --------- --------
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
Pro forma net income per common share........ $ 0.03 $ 0.03 $ 0.04 $ 0.11
QUARTER ENDED
-------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- -------- --------- --------
Revenues..................................... $ 4,746 $5,316 $ 6,312 $8,589
Income from operations....................... $ 459 $ 566 $ 1,129 $1,928
Pro forma net income......................... $ 339 $ 409 $ 716 $1,314
Pro forma net income per common share........ $ 0.05 $ 0.07 $ 0.11 $ 0.18
F-14
34
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 22, 1997. 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 22, 1997
F-15
35
FORRESTER RESEARCH, INC.
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
------------------------------------------------------
BALANCE, CHARGED BALANCE,
BEGINNING TO COST OR DEDUCTIONS END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF PERIOD EXPENSE (WRITE-OFFS) PERIOD
- ----------------------------------------------- --------- ---------- ------------ --------
Fiscal 1993.................................... $ -- $ 158,624 $ (125,290) $ 33,334
Fiscal 1994.................................... 33,334 108,644 (53,519) 88,459
Fiscal 1995.................................... 88,459 62,245 (30,784) 119,920
Fiscal 1996.................................... 119,920 312,317 (232,237) 200,000
F-16
36
EXHIBIT
NO. DESCRIPTION
- ---- ---------------------------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Company.
3.2* Bylaws of the Company, as amended.
4* Specimen Certificate for shares of Common Stock, $.01 par value, of the Company.
10.1+* Registration Rights and Non-Competition Agreement.
10.2+* Tax Indemnification Agreement dated November 25, 1996.
10.3+ 1996 Amended and Restated Equity Incentive Plan as amended (transmitted herewith).
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.
11 Statement Regarding Computation of Pro Forma Per Share Earnings (transmitted
herewith).
20 Subsidiaries of the Registrant (transmitted herewith).
23 Consent of Arthur Andersen LLP (transmitted herewith).
+ Denotes management contract or compensation arrangements.
* Filed as an Exhibit to the Company's Registration Statement on Form S-1
filed on September 26, 1997 (File No. 333-12761) and incorporated by
reference herein.
E-1