- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K
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 our current plans and expectations and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward- looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. PART I ITEM 1. BUSINESS GENERAL Forrester Research, Inc. is a leading independent emerging-technology research firm that conducts research and analysis on the impact of emerging technologies on business, consumers, and society. We provide our clients with an integrated perspective on emerging technology and business, which we call the WholeView(TM). This approach provides our clients with the strategies, data, and product evaluations they need to win customers, identify new markets, and scale their operations to gain competitive operational advantages. Our products and services are targeted to benefit the senior management, business strategists, and marketing and technology professionals at $1 billion-plus companies who use our prescriptive and executable research to understand and capitalize on changing business models and emerging technologies. We offer our clients annual memberships to our WholeView Research that provide barrier-free access to our core research on a wide variety of business issues and technology topics. These issues and topics include the impact that the application of technologies may have on business models, operational strategy, financial results, investment priorities, organizational effectiveness, and staffing requirements. We also provide Strategic Services that allow our clients to interact with analysts to explore in greater detail the issues and topics covered by our research on a client-specific basis. In addition, we host Forum and Summit Events, conferences devoted to critical business and technology issues, which bring together our clients and major technology and business leaders to discuss the impact of technology change on business. Our WholeView Research platform, Strategic Services, and Forum and Summit Events combine to provide our clients with comprehensive, integrated access to our research, analysts, online tools, presentations, advice, and speeches. We were incorporated in Massachusetts on July 7, 1983 and reincorporated in Delaware on February 21, 1996. Our Internet address is www.forrester.com and the Internet address for the investor information section of our Web site is www.forrester.com/ER/Investor. We make available free of charge, on or through the investor information section of our Web site, annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. INDUSTRY BACKGROUND Emerging technologies continue to play a central role in companies' efforts to remain both competitive and cost-efficient in an increasingly complex business arena. In 2002, a challenging business environment forced $1 billion-plus companies to reassess strategies, budgets, staffing, and business models. These complex decisions require participation from corporate leaders, business managers, marketing executives, and technology professionals. Together, these individuals must work to reduce and even eliminate the traditional separations between marketing, business strategy, and technology to reach new markets, gain competitive advantage, and develop high customer service and loyalty levels. Developing comprehensive and coordinated business strategies is difficult because as the economy and technology change, consumers and businesses adopt new methods of buying and selling, and markets grow increasingly dynamic. 2
Consequently, companies rely on external sources of expertise that provide independent business advice spanning a variety of areas including technology, business strategy, and consumer behavior. In addition, companies demand instant access to the issues and challenges confronting them in this dynamic environment. We believe that there is a need for objective research that is thematic, prescriptive, executable, and that provides a comprehensive perspective on the integrated use of technology in business. FORRESTER'S SOLUTION We believe that our business and emerging-technology expertise enables us to offer our clients the best available research on changing business models and technologies, technology investments, and customer trends. Our solution provides our clients with: THE WHOLEVIEW. We provide our clients with a comprehensive and integrated perspective on emerging technologies and business, which we call the WholeView, the primary component of which is WholeView Research. WholeView Research provides our clients with comprehensive access to our core research offerings. Our WholeView Research combines with our delivery mechanisms, specialized services, and expertise to offer clients access to the analysts, data, and research they need to: - Assess potential new markets, competitors, products, and services. - Anticipate technology-driven business model shifts. - Understand how technology can improve business processes. - Educate, inform, and align strategic decision-makers in their organizations. - Capitalize on emerging technologies. PERSONAL VIEW. Clients access our WholeView Research through our client Web interface that we call the Personal View. The Personal View is an easy-to-use gateway to our research that helps clients organize and access reports, data, and product evaluations and accelerates the deployment of our ideas and analysis. We distill the abundance of information, developments, and data into concise, connected, and easy-to-read formats to facilitate rapid decision-making. A UNIFIED SET OF SERVICES TO BUILD BUSINESS AND TECHNOLOGY STRATEGIES. Clients may combine our WholeView Research with Strategic Services and Forum and Summit Events to enhance their understanding and the value of the core research offerings. EXPERTISE ON EMERGING TECHNOLOGIES. We started our business in 1983 and have a long history of, and extensive experience in, identifying emerging-technology trends and providing research and executable advice on the impact of technology on business. Our research analysts have many years of industry experience, are frequent speakers at business and technology conferences and symposiums, and are often quoted in the press and other publications. They enjoy direct access to the leaders and decision-makers within large enterprises and technology vendors. We provide our research analysts with rigorous training to ensure that they have the skills to challenge conventional viewpoints and provide prescriptive, executable insight and research to our clients. FORRESTER'S STRATEGY We seek to maintain and enhance our position as a leading technology research firm and to capitalize on demand for our research by: IDENTIFYING AND DEFINING NEW BUSINESS MODELS, TECHNOLOGIES, AND MARKETS. We seek to position ourselves ahead of other research firms by delivering strategic research and analysis on the impact of technology on business models and technology infrastructure. We believe that our research methodology and our creative culture allow us to identify and analyze rapid shifts in the use of technology before these changes appear on the horizons of most users, vendors, and other research firms. Our early identification of these shifts enables us to offer research and introduce new products and services that help our clients capitalize on emerging business models and technologies. 3
LEVERAGING THE WHOLEVIEW. Our business model, technology platform, and research methodologies allow us to sell existing products and to rapidly introduce new products and services without incurring significant incremental costs. We intend to continue to use our business model, technology platform, and research methodologies to both increase sales of our existing research and introduce innovative new products. USING TARGETED, GLOBAL SALES CHANNELS. We sell our products and services via our headquarters in Cambridge, Massachusetts, our research centers in Amsterdam, Frankfurt, London, and San Francisco, and our sales offices in Sydney and Tokyo. We continually seek to increase average sales volume per sales representative, lengthen the average tenure of our sales representatives and sales management, and shorten our sales cycle through marketing initiatives. GROWING OUR CLIENT BASE WORLDWIDE AND INCREASING SALES TO EXISTING CLIENTS. We believe that our products and services can be successfully marketed and sold to new client companies worldwide and to new organizations within our existing client companies. We believe that within our client base of 1,125 client companies as of December 31, 2002, there is opportunity to sell additional products and services. In addition, we intend to expand our international presence as the growing impact of technology on business innovation creates demand for external sources of objective research. In February 2003, we completed our acquisition of Giga Information Group, Inc., a global technology advisory firm. We believe that this acquisition will further extend our research coverage by allowing us to offer products directed specifically at technology practitioners and may bring approximately 900 new clients to Forrester. DEVELOPING AND RETAINING OUTSTANDING RESEARCH PROFESSIONALS. The knowledge and experience of our analysts are critical elements of our ability to provide high-quality products and services. We employ outstanding research professionals from varied backgrounds and a wide range of industries. We believe that our culture, which emphasizes excellence, cooperation, and creativity and fosters a dedication to quality research, helps us to develop and retain high-caliber research professionals. We provide a competitive compensation structure and recognition and rewards for excellent individual and team performance. OPTIMIZING THE USE OF NEW TECHNOLOGY. Our technology platform allows us to conduct, design, sell, and deliver our research via the Internet. Through this platform we can: - Create research tools that allow us to perform, and clients to use, research on the Internet. - Conduct direct marketing campaigns. - Improve fulfillment of sales leads. - Accelerate the production of our research. We intend to continue to use emerging technologies to improve the reach and quality of our research. PRODUCTS AND SERVICES We offer annually renewable memberships to WholeView Research that provide our clients comprehensive access to our core research offerings of Technographics(R), TechStrategy(TM), and TechRankings(TM). We also offer Strategic Services and host Forum and Summit Events, which, when combined with our WholeView Research, provide unified guidance on customer trends, business strategy, and technology investments. WHOLEVIEW RESEARCH In January 2002, we introduced WholeView Research -- a unified offering that provides clients with comprehensive access to our core research offerings and is designed to inform our clients' strategic decision-making. WholeView Research consists of a library of cross-linked documents that interconnects our reports, data, product rankings, and research archives and allows clients to move barrier-free across our research. Our core research offerings consist of the following products: - TECHNOGRAPHICS. Technographics provides primary data and quantitative research that analyzes how technology is considered, bought, and used by consumers and businesses. Consumer Technographics 4
delivers both primary data and quantitative research, based on surveys of approximately 200,000 households in North America and Europe, which is analyzed and categorized into relevant market segments to help organizations capitalize on changing consumer behavior. Business Technographics is an ongoing quantitative research program that provides comprehensive, in-depth assessments of what motivates businesses to choose certain technologies and vendors over others. - TECHSTRATEGY. TechStrategy provides qualitative industry and technology research that analyzes the impact of technology change and informs strategic decision-making. - TECHRANKINGS. TechRankings consist of customizable, interactive research databases and Web tools that evaluate technologies on the basis of laboratory testing and measurement of characteristics weighted by us. TechRankings research synthesizes a rigorous combination of product evaluation results, market analysis, and user interviews to provide detailed, objective guidance to clients as they select and implement emerging technologies. The following table lists the specific research topic areas covered in our core research offerings: AUTOMOTIVE -- Marketing, Manufacturing, Distribution, Retail CONSUMER PACKAGED GOODS -- Marketing, Merchandising, Distribution, RFD Technology, Retail CONTENT MANAGEMENT -- Web Content, Enterprise Content, Digital Assets, Collaborative Content Management CUSTOMER RELATIONSHIP MANAGEMENT -- Sales, Marketing & Service, Consumer Marketing Platforms, Contact Center Infrastructure, Customer Service ENTERPRISE APPLICATIONS -- ERP, Enterprise Services Automation, B2B Sell-Side FINANCIAL SERVICES -- Banking, Insurance, Investment, Credit HEALTHCARE -- Health Plans, Pharmaceuticals, Healthcare Providers, Electronic Data Capture INFRASTRUCTURE -- Servers, Corporate Wireless, Storage, Business Intelligence, Commerce Platforms INTEGRATION & WEB SERVICES -- Middleware, EAI/B2B Integration Tools, Process Integration, Business Process Management IT SECURITY -- Technology Security Risk, IT Security Management, Business Continuity Planning IT SPENDING -- IT Budgeting, Technology Adoption & Purchase Plans, IT Organizations & Decision-Making MANUFACTURING & B2B -- Collaboration, Trade Forecasts, Energy, Chemicals MARKETING -- Branding, Promotion, Cross-Media Marketing, Marketing Measurement, Online Advertising, Loyalty Programs, Portal Deals MEDIA & ENTERTAINMENT -- Publishing, Television, Music, Content Syndication PORTALS & SITE TECHNOLOGY -- Measurement Tools, Process Portals, Search Engines, Self-Service, X Internet PRODUCT LIFE-CYCLE MANAGEMENT -- Product Development, Process and Discrete Marketing, Aftermarket, Demand Management RETAIL -- Marketing, eCommerce, Merchandising, Store Operations, Technology SERVICES & OUTSOURCING -- ASPs, Hosting, Outsourcing, Systems Integrators SUPPLY CHAIN -- Planning & Execution, Logistics, Product Design, eProcurement Applications TELECOM & NETWORKS -- Telecom & Mobile Services Carrier Strategy, Enterprise Network Management, Equipment, Services TRAVEL -- Marketing, Distribution, Airlines, Hotel & Business & Leisure Travel USER EXPERIENCE -- Interface Design, ROI of Design, Scenario Design, Speech Recognition, Usability Clients that purchase WholeView Research have access to a password protected Web site that contains a comprehensive, cross-linked library of our Technographics, TechStrategy, and TechRankings research, which 5
we call the Personal View. The Personal View helps clients organize and customize their research and provides access to: - Forrester reports that deliver a concise, forward-looking analysis of a significant topic. - Forrester briefs and Data Overviews that offer succinct, timely examinations of current industry developments written as events demand. - Customizable research databases and Web tools. - Product evaluations, benchmarks, and surveys. In addition, clients subscribing to WholeView Research have access to the Client Resource Center, a call center staffed by members of our research staff who are dedicated to providing additional information about our research, methodologies, coverage areas, and sources. The Client Resource Center is available on demand to help clients navigate our research, find relevant data and forecasts, collect analysis from a variety of related reports, and integrate our models into client initiatives. Clients subscribing to WholeView Research also may purchase the following services to supplement the core research offerings: - UNLIMITED ANALYST ACCESS. Unlimited Analyst Access licenses enable clients to contact any of our analysts for quick feedback on projects a client may have underway, to discuss ideas and models in the research, or to answer questions about unfolding industry events. Unlimited Analyst Access sessions are 30-minute phone calls, scheduled upon client request. - TECHNOGRAPHICS DATA & SERVICES. Our Technographics Data & Services leverage our core research findings to provide the detail that data marketers, product developers, and consumer experts need to gain an in-depth understanding of how consumers and businesses think about and use technology. We combine respondent data sets from our Technographics surveys into three offerings: Consumer Technographics North America, Consumer Technographics Europe, and Business Technographics North America. In addition to these three offerings, clients have unlimited, on-demand access to a Technographics data specialist to help them use the research effectively to meet their specific business needs. STRATEGIC SERVICES Our Strategic Services provide a number of ways for clients to interact directly with our research analysts and, depending on the service purchased, customize the research performed. Our Strategic Services include: - Custom Research - Custom Consumer Research - Consumer Technographics Omnibus Survey - Advisory Services - Structured Advisory Packages - Multi-Client Advisory Packages - Site Evaluation and Design Services - Technology Strategy Development Program We offer several unique programs within each of these categories. 6
CUSTOM RESEARCH Our Custom Research offerings include: - CUSTOM CONSUMER RESEARCH (FORMERLY TECHNOGRAPHICS CUSTOM DATA PROJECTS). Any of the surveys conducted by our Consumer Technographics North America team are available for custom analysis. Each year, hundreds of relevant questions in surveys conducted by our Consumer Technographics North America team are answered by more than 200,000 respondents. These responses are the foundation for a customizable array of services tailored to clients' data needs. These services may include Consumer Technographics Custom Segmentation, Consumer Technographics Customized Surveys, or Consumer Technographics North America Zip Code Analysis. Either with the help of a Technographics data specialist or by downloading the data sets directly from our Web site, clients have access to the precise data they need to drive their primary market research. - CONSUMER TECHNOGRAPHICS OMNIBUS SURVEY. The Consumer Technographics Omnibus Survey provides our clients with the opportunity to ask 5,000 of our Benchmark respondents proprietary questions. Forrester then appends the responses to the full Technographics Benchmark Survey, which includes topics ranging from mobile phone ownership to online financial and retail behaviors. In effect, participating clients receive custom data at a much lower cost than that of full-scale primary research. ADVISORY SERVICES Our Advisory Services offerings include: STRUCTURED ADVISORY PACKAGES Our Structured Advisory Packages include: - SOFTWARE SELECTION ADVISORY PROGRAM. Our Software Selection Advisory Program combines expert guidance from our analysts with TechRankings research to help clients select the best technology product with the lowest risk. The Software Selection Advisory Program enhances TechRankings research and online tools with four 1-hour conference calls led by a TechRankings analyst. - VENDOR SALES ADVISORY PROGRAM. Our Vendor Sales Advisory Program is a structured program that provides technology vendors and solution providers deep product positioning and competitive intelligence, which vendors and providers can use when selling and marketing their products to prospects and existing customers. Sales and marketing forces receive competitive product analyses and training presentations that provide robust insight on how to sell against other products. - RETAIL COMPETITIVE ASSESSMENT. Our Retail Competitive Assessment arms clients with profiles of their competitors' online and offline customers, including demographics, spending, and shopping attitudes. With this information, we believe clients can sharpen their marketing messages, optimize their merchandising assortments, improve their store formats, and tailor their service propositions to increase revenues and grow market share. MULTI-CLIENT ADVISORY PACKAGES Our Multi-Client Advisory Packages include: - FORRESTER OVAL PROGRAM. Our Forrester Oval Program currently consists of the CIO Group and provides member CIOs from $1 billion-plus companies with exclusive industry-specific benchmark data, access to a senior analyst for individual research-related questions, membership-directed research, best practices, and peer-to-peer networking. - ONLINE FINANCIAL SERVICES BENCHMARK. Our Online Financial Services Benchmark is a quarterly report that provides standard metrics for banks to assess their online success. Participants provide us with usage and activation data on the following metrics: online banking, bill payment, aggregation, 7
credit card services, and small business banking. Each participant receives a benchmark of their data against their peer group and across the entire industry. SITE EVALUATION & DESIGN SERVICES Our Site Evaluation & Design Services include: - WEB SITE REVIEW. Our Web Site Review provides a targeted, action-oriented assessment of a client's B2C or B2B Web site, extranet, or intranet. Feedback is based on comprehensive examination of the site by our analysts, as well as any additional information a client provides about its Web strategies. - WEB SITE REVIEW BOOT CAMP. The Web Site Review Boot Camp teaches clients how to review their sites with the objectivity and expertise of a Forrester analyst in a two-day intensive training session for Web design and strategy. - EFFECTIVE SITE DESIGN BOOT CAMP. The Effective Site Design Boot Camp is a workshop that takes clients through the steps of a scenario-based design process to help produce useful, user-friendly sites. This workshop provides a framework for making successful design-related decisions and reveals tactics for obtaining better results from designers for marketing, IT, and eBusiness decision-makers who hire, manage, or approve the work of online site designers and design firms. TECHNOLOGY STRATEGY DEVELOPMENT PROGRAM ("TSDP") Our Technology Strategy Development Program focuses on a client's distinct business needs to help create and refine technology strategies that drive business forward. Each program is custom-built under the direction of a dedicated senior research analyst with several years of industry experience who collaborates with the client to plan the optimum program format and deliverables for that client. Example programs include developing a business plan to take a technology to a new market and designing an IT organization to implement Internet-centric technologies. FORUM AND SUMMIT EVENTS We host Forum and Summit Events in various locations throughout the year. Forums and Summits bring together senior executives for one- or two-day conferences to network with their peers and to hear leaders from the technology industry and other business sectors discuss the impact of technology change on business. PRICING AND CONTRACT SIZE During 2002, the prices for contracts that included only core research were a function of the number of research recipients within the client organization. The average contract for annual memberships for core research only at December 31, 2002 was approximately $43,900, a decrease of 11% from $49,400 at December 31, 2001. In 2002, the prices for contracts that included core research and Strategic Services were also a function of the number of research recipients within the client organization and the amount and type of Strategic Services. The average contract for an annual membership for research which also included Strategic Services at December 31, 2002 was approximately $80,500, a decrease of 10% from $89,500 at December 31, 2001. We believe that the agreement value of contracts to purchase research and Strategic Services provides a significant measure of our business volume. We calculate agreement value as the total revenues recognizable from all research and advisory service contracts in force at a given time without regard to how much revenue has already been recognized. Agreement value decreased 33% to $78.1 million at December 31, 2002 from $116.2 million at December 31, 2001. RESEARCH ANALYSTS AND METHODOLOGY We employ a structured methodology in our research that enables us to identify and analyze technology trends, markets, and audiences and ensures consistent research quality and recommendations across all 8
coverage areas. Our research provides consistent research themes and comprehensive coverage of business and technology issues across our coverage areas. Our Technographics research combines our qualitative research methodology with traditional survey research methodologies such as correlations, frequencies, cross-tabulations, and multivariant statistics to produce research reports, quantitative survey data, and data briefs. We use third-party data vendors for data collection and tabulation. In our TechStrategy research, we use the following primary research inputs: - Confidential interviews with early adopters and mainstream users of new technologies. - In-depth interviewing with technology vendors and suppliers of related services. - Ongoing briefings with vendors to review current positions and future directions. Our TechRankings research combines in-depth product test results and user interviews with market and strategic analysis to score attributes of emerging technologies. We then apply this research and strategic analysis to determine the weighting of each attribute and create interactive scorecards, databases, and reports. All of our WholeView Research begins with discussion sessions with analysts to generate ideas for research. Analysts test ideas throughout the research report process at both informal and weekly research meetings. Our reports are consistent in format, and we require our analysts to write research reports in a structure that combines graphics with easy-to-read text to deliver concise, decisive, and objective research to our clients. At the final stage of the research process, senior analysts meet to test the conclusions of each research report. An analyst who has not been involved in the creation of a particular report reviews the report to ensure quality, clarity, and readability. All research is reviewed and graded by senior research management. SALES AND MARKETING We sell our products and services through our headquarters in Cambridge, Massachusetts, our research centers in Amsterdam, Frankfurt, London, and San Francisco, and our sales offices in Sydney and Tokyo. In 2002, we closed our sales offices in Austin and Chicago. We employed 105 sales representatives as of December 31, 2002, a decrease of 43% from 184 as of December 31, 2001. Our direct sales force consists of: - Sales directors who focus on high-level client contact and service. - Account managers who are responsible for maintaining and leveraging the current client base by renewing and selling additional products and services to existing clients. - Account executives who develop new business in assigned territories. - Telesales representatives who operate out of our headquarters in Cambridge. We also sell our research products directly online through our Web site and use local independent sales representatives to market and sell our products and services internationally in Australia, Brazil, Hong Kong, India, Korea, Latin America, South Africa, Spain, Taiwan, Turkey, and the United Arab Emirates. Our marketing efforts are designed to increase awareness of the Forrester brand and further our reputation as a leader in emerging technology research. We actively promote brand awareness via our Web site, Forum and Summit Events, extensive worldwide press relations, and direct mail campaigns. We also employ an integrated direct marketing strategy that uses Internet, mail, and telephone channels for identifying and attracting high-quality sales leads. We encourage our analysts to increase our visibility by having their research ideas selectively distributed through various Internet, print, and television outlets. As of December 31, 2002, our research was delivered to 1,125 client companies. No single client company accounted for more than 2% of our revenues for the year ended December 31, 2002. 9
COMPETITION We believe that the principal competitive factors in our industry include the following: - Quality of research and analysis. - The ability to offer products that meet the changing needs of organizations for research and analysis. - Independence from vendors and clients. - Timely delivery of information. - Customer service. - The ability to leverage new technologies. - Price. We believe that we compete favorably with respect to each of these factors. We feel that our early focus on emerging technologies is a significant competitive advantage. Additionally, we believe that our WholeView approach and easy-to-read research format distinguish us from our competitors. We compete in the market for research about emerging technologies. Our principal direct competitors include other independent providers of similar services, such as Gartner Group, as well as Internet and digital media measurement services. In addition, our indirect competitors include the internal planning and marketing staffs of our 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. Our indirect competitors could choose to compete directly against us in the future. In addition, there are relatively few barriers to entry into our market, and new competitors could readily seek to compete against us in one or more market segments addressed by our research. Increased competition could adversely affect our operating results through pricing pressure and loss of market share. There can be no assurance that we will be able to continue to compete successfully against existing or new competitors. EMPLOYEES As of December 31, 2002, we employed a total of 344 persons, including 124 research staff and 105 sales representatives. Our culture emphasizes certain key values -- including client service, quality, and creativity -- that we believe are critical to our future growth. We promote these values through rigorous training and frequent recognition for achievement. We encourage teamwork and promote individuals who foster these values. Each new employee that we hire undergoes a week-long training process. This training includes workshops and presentations by our executives, which focus on our corporate goals and provide individuals with the skills necessary to achieve our key values. All members of our research staff participate in our incentive compensation bonus plan. Their performance is measured against individual and team goals to determine an eligible bonus that is funded by our overall performance against key business objectives. Individual and team goals include on-time delivery of high-quality research and advisory services support to clients. In addition, analysts, research directors, and research management are eligible to receive equity awards under our incentive stock option plan. All of our direct sales representatives participate in our annual sales incentive compensation plan. Under this plan, we pay commissions monthly to sales personnel based upon attainment of net bookings against established quotas. In addition, all account managers, account executives, regional managers, and regional directors are eligible to participate in our incentive stock option plan based on performance. 10
RISKS AND UNCERTAINTIES We are subject to risks and uncertainties that could cause our actual future activities and results of operations to be materially different from those set forth in forward-looking statements made by us. These risks and uncertainties include: INTEGRATION OF GIGA. In February 2003, we acquired Giga Information Group, Inc., a global technology advisory firm. We may be unable to achieve the anticipated benefits from this acquisition. For example, we cannot be certain that Giga's customers will continue to do business with us or that the Giga employees who continue their employment with us will become well-integrated into our operations and culture. In addition, the integration of Giga can be disruptive to our operations and divert management time and attention. If we do not integrate the Giga acquisition effectively, we may fail to achieve the benefits we expected and our financial condition and results of operations may be adversely affected. FLUCTUATIONS IN OUR OPERATING RESULTS. Our revenues and earnings may fluctuate from quarter to quarter based on a variety of factors, many of which are beyond our control, and which may affect our stock price. The factors include, but are not limited to: - The timing and size of new and renewal memberships for our research from clients. - The timing of revenue-generating Forum and Summit Events sponsored by us. - The utilization of our Strategic Services by our clients. - The introduction and marketing of new products and services by us and our competitors. - The hiring and training of new analysts and sales personnel. - Changes in demand for our research. - General economic conditions. As a result, our operating results in future quarters may be below the expectations of securities analysts and investors, which could have an adverse effect on the market price for our common stock. Factors such as announcements of new products, services, offices, or strategic alliances by us or the technologies services industry may have a significant impact on the market price of our common stock. The market price for our common stock may also be affected by movements in prices of stocks in general. A DECLINE IN RENEWALS FOR OUR MEMBERSHIP-BASED RESEARCH SERVICES. Our success depends in large part upon renewals of memberships for our research products. Approximately 57%, 51%, and 74% of our client companies with memberships expiring during the years ended December 31, 2002, 2001, and 2000, respectively, renewed one or more memberships for our products and services. The decline in renewal rates for our research products since 2000 is reflective of the more difficult economic environment, and any future declines in renewal rates could have an adverse effect on our revenues. THE ABILITY TO ATTRACT AND RETAIN QUALIFIED PROFESSIONAL STAFF. Our future success will depend in large measure upon the continued contributions of our senior management team, research analysts, and experienced sales and marketing personnel. Thus, our future operating results will be largely dependent upon our ability to retain the services of these individuals and to attract additional professionals from a limited pool of qualified candidates. We experience competition in hiring and retaining professionals from developers of Internet and emerging-technology products, other research firms, management consulting firms, print and electronic publishing companies and financial services companies, many of which have substantially greater ability, either through cash or equity, to attract and compensate professionals. If we lose professionals or are unable to attract new talent, we will not be able to maintain our position in the market or grow our business. LOSS OF KEY MANAGEMENT. Our future success will depend in large part upon the continued services of a number of our key management employees. The loss of any one of them, in particular George F. Colony, our founder, Chairman of the Board, and Chief Executive Officer, could adversely affect our business. 11
FAILURE TO ANTICIPATE AND RESPOND TO MARKET TRENDS. Our success depends in part upon our ability to anticipate rapidly changing technologies and market trends and to adapt our research to meet the changing information needs of our clients. The technology and commerce sectors that we analyze undergo frequent and often dramatic changes. The environment of rapid and continuous change presents significant challenges to our ability to provide our clients with current and timely analysis, strategies and advice on issues of importance to them. Meeting these challenges requires the commitment of substantial resources. Any failure to continue to provide insightful and timely analysis of developments, technologies, and trends in a manner that meets market needs could have an adverse effect on our market position and results of operations. ABILITY TO DEVELOP AND OFFER NEW PRODUCTS AND SERVICES. Our future success will depend in part on our ability to offer new products and services. These new products and services must successfully gain market acceptance by addressing specific industry and business organization sectors, anticipating and identifying 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 risky and costly. We may not be able to introduce new, or assimilate acquired, products or services successfully. Our failure to do so would adversely affect our ability to maintain a competitive position in our market and continue to grow our business. COMPETITION. We compete in the market for research products and services with other independent providers of similar services. We may also face increased competition from Internet-based research firms. Some of our competitors have substantially greater financial, information-gathering, and marketing resources than we do. In addition, our indirect competitors include the internal planning and marketing staffs of our 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. Our indirect competitors may choose to compete directly against us in the future. In addition, there are relatively few barriers to entry into our market and new competitors could readily seek to compete against us in one or more market segments addressed by our products and services. Increased competition could adversely affect our operating results through pricing pressure and loss of market share. This list of uncertainties and risks is not exhaustive. Certain factors that could affect our actual future activities and results and cause actual results to differ materially from those contained in forward-looking statements made by us include, but are not limited to, those discussed above as well as those discussed in other reports filed by us with the Securities and Exchange Commission. 12
EXECUTIVE OFFICERS The following table sets forth information about our directors and executive officers as of March 31, 2003.
Warren Hadley became Forrester's chief financial officer and treasurer in February 2002. Mr. Hadley previously was our director of finance from 1999 to 2002 and served as our assistant treasurer from 2000 to 2001. Mr. Hadley was our corporate controller from 1996 to 1999. Prior to joining Forrester, Mr. Hadley served as an audit manager for MacDonald, Levine, Jenkins, an accounting firm, from 1993 to 1995. Brian E. Kardon became Forrester's vice president of strategy and marketing in January 2003. Prior to joining Forrester, Mr. Kardon was a co-founder and managing partner of Catalyst Consulting Collaborative, a strategic consulting firm, from 2002 to 2003 and president of First Act, Inc., a children's music development company, from 2000 to 2001. Mr. Kardon also served as the executive vice president of marketing and business at HomePortfolio, an online marketplace for home design, products, and services, from 1999 to 2000 and senior vice president and chief marketing officer of Cahners Business Information, a business publisher, from 1995 to 1999. From 1987 to 1995, Mr. Kardon served as director of the marketing strategy practice at Braxton Associates, the strategy consulting division of Deloitte & Touche. Dan Mahoney became Forrester's vice president of Giga Research in March 2003 in conjunction with Forrester's acquisition of Giga Information Group, Inc. Prior to that, he was senior vice president of research at Giga Information Group, Inc. from 1997 to 2003. Prior to joining Giga, Mr. Mahoney was the general manager of Intranet Partners, an Intranet consulting company, from 1996 to 1997; the general manager of Dataquest North America, a technology information provider, in 1996; and director of systems development for Household Credit Services, the credit card division of Household International, Inc. from 1993 to 1996. Timothy J. Moynihan, Esq. became Forrester's general counsel in February 2002. Mr. Moynihan previously served as Forrester's corporate counsel from 1998 to 2002. Mr. Moynihan also has served as secretary of Forrester since 2001, as assistant secretary from 2000 to 2001, and as a member of Forrester's legal department since 1996. Timothy M. Riley became Forrester's vice president, strategic growth in August 1997. Prior to joining Forrester, Mr. Riley served as the vice president of human resources at Renaissance Solutions, a strategy and knowledge management consulting firm, from 1993 to 1997. Mr. Riley served as director of human resources at Bolt Beranek and Newman, a technology research and development company, from 1987 to 1993. Henk W. Broeders became a director of Forrester in May 1998. Mr. Broeders has been the Chairman of the Executive Board of Cap Gemini N.V., a management consulting firm located in the Netherlands, since January 2001. Cap Gemini NV is the Dutch subsidiary of the global CGEY organization. From 1992 to 1998, Mr. Broeders was general manager of IQUIP Informatica B.V., a software company in the Netherlands. Robert M. Galford became a director of Forrester in November 1996. Mr. Galford has been a managing partner of the Center for Executive Development, an executive education provider in Boston, since April 2001. From 1999 to 2001 he was the executive vice president and chief people officer at Digitas, Inc., a technology and marketing services firm. From 1994 to 1999 he consulted to professional services firms and taught in the Executive Programs at the Kellogg School of Management at Northwestern University and Columbia University's Graduate School of Business. Before joining Columbia's Executive Programs, he taught at Boston University from 1993 to 1994. Prior to his work in executive education, Mr. Galford was vice president of the MAC Group, and its successor firm, Gemini Consulting, both of which are management consulting firms, from 1991 to 1994. George R. Hornig became a director of Forrester in November 1996. Mr. Hornig has been a managing director and chief operating officer of the Private Equity Division at Credit Suisse First Boston, an investment banking firm, since 1999. He was an executive vice president of Deutsche Bank Americas Holding Corporation, a diversified financial services holding company, and several of its affiliated entities, from 1993 to 1998. He is also a director of Unity Mutual Life Insurance Company, U.S. Timberlands Company, L.P., and Veridian Corporation. Michael H. Welles became a director of Forrester in November 1996. Mr. Welles is chief operating officer and founder of S2 Security Corporation, an IP-based facility security systems start-up. He previously served as vice president and general manager of the platforms business with NMS Communications, an OEM infrastructure supplier to the telecom industry, from 2000 to 2002. He previously served as vice president of 14
news operations and engineering for Individual.com, NewsEdge Corporation, and Individual, Inc., a group of news solutions companies, from 1997 to 2000, and before that as a general manager at Lotus Development Corporation, a software company, from 1991 to 1997. ITEM 2. PROPERTIES Our headquarters are located in approximately 146,000 square feet of office space in Cambridge, Massachusetts. This facility accommodates research, marketing, sales, technology, and operations personnel. The initial lease term of this facility expires in September 2006. We have the option to extend this lease for up to two additional terms of five years each. We also have leased office space for our research centers in Amsterdam, Frankfurt, London, and San Francisco, and for our sales office in Sydney and Tokyo. We believe that our existing facilities are adequate for our current needs and that additional facilities are available for lease to meet future needs. ITEM 3. LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the Nasdaq National Market under the symbol "FORR." On March 28, 2003, the closing price of our common stock was $14.71. As of March 24, 2003 there were approximately 55 stockholders of record of our common stock. The following table represents the ranges of high and low sale prices of our common stock for the fiscal years ended December 31, 2001, and December 31, 2002:
ITEM 6.SELECTED CONSOLIDATED FINANCIAL DATA The selected financial data presented below is derived from our consolidated financial statements and should be read in connection with those statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a leading independent emerging-technology research firm that conducts research and analysis on the impact of emerging technologies on business, consumers, and society. We provide our clients with an integrated perspective on technology and business, which we call the WholeView. This approach provides companies with the strategies, data, and product evaluations they need to win customers, identify new markets, and gain competitive operational advantages. Our products and services primarily are targeted to benefit the senior management, business strategists, and marketing and technology professionals at $1 billion-plus companies who use our prescriptive, executable research to understand and capitalize on business models and emerging technologies. We derive revenues from memberships to our core research and from our Strategic Services and Forum and Summit events. We offer contracts for our products and services that are typically renewable annually and payable in advance. Research revenues are recognized ratably over the term of the contract. Accordingly, a substantial portion of our billings is recorded as deferred revenue. Billings attributable to advisory services are initially recorded as deferred revenue and recognized as revenue when performed. Similarly, Forum and Summit billings are initially recorded as deferred revenue and are recognized upon completion of each event. Our operating expenses consist of cost of services and fulfillment, selling and marketing expenses, general and administrative expenses, and depreciation and amortization. Cost of services and fulfillment represents the costs associated with the production and delivery of our products and services, and it includes the costs of salaries, bonuses, and related benefits for research personnel and all associated editorial, travel, and support services. Selling and marketing expenses include salaries, employee benefits, travel expenses, promotional costs, sales commissions, and other costs incurred in marketing and selling our products and services. General and administrative expenses include the costs of the technology, operations, finance, and strategy groups and our other administrative functions. Overhead costs are allocated over these categories according to the number of employees in each group. We believe that the "agreement value" of contracts to purchase research and advisory services provides a significant measure of our business volume. We calculate agreement value as the total revenues recognizable from all research and advisory service contracts in force at a given time, without regard to how much revenue has already been recognized. Agreement value decreased 33% to $78.1 million at December 31, 2002 from $116.2 million at December 31, 2001. Agreement value decreased 38% to $116.2 million at December 31, 2001 from $187.8 million at December 31, 2000. No single client accounted for more than 3% of agreement value at December 31, 2002. Our historical experience is that a majority of client companies renew expiring contracts each year. Approximately 57%, 51%, and 74% of our client companies with memberships expiring during the years ended December 31, 2002, 2001, and 2000, respectively, renewed one or more memberships for our products and services. These renewal rates are not necessarily indicative of the rate of future retention of our revenue base. The declines in agreement value and renewal rates are reflective of the more difficult economic environment and will lead to a decrease in revenue for 2003. REORGANIZATIONS On July 24, 2002, we announced a reduction of our work force by approximately 21 positions in response to conditions and demands of the market. As a result, we recorded a reorganization charge of approximately $2.6 million during 2002. Approximately 31% of the terminated employees had been members of the sales force, while 41% had been in research and 28% had held administrative roles. The charge consisted primarily of severance and related benefits costs, office consolidation costs, such as contractual lease commitments for space that was vacated, the write-off of related leasehold improvements, and other payments for professional services incurred in connection with the reorganization. Additional depreciable assets that were written off consisted primarily of computer equipment, software and furniture and fixtures related to vacated locations in connection with the reorganization. 17
Total costs related to the July 24, 2002 reorganization are as follows:
The accrued costs related to the January 10, 2002 reorganization are expected to be paid in the following periods:
and other intangible assets and income taxes. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following policies as critical to our business operations and the understanding of our results of operations. This listing is not a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. For a discussion of our other accounting policies, see Note 1 in the Notes to Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K, beginning on page F-7. - REVENUE RECOGNITION. We generally invoice our core research, advisory, and other services when orders are received. The contract amount is recorded as accounts receivable and deferred revenue when the client is invoiced. Core research is generally recognized as revenue ratably over the term of the agreement. Advisory services are recognized as revenue during the period in which the services are performed. Revenue from events is recognized upon completion of the event. Furthermore, our revenue recognition determines the timing of commission expenses that are deferred and expensed to operations as the related revenue is recognized. We evaluate the recoverability of deferred commissions at each balance sheet date. As of December 31, 2002, deferred revenues and deferred commissions totaled $42.1 million and $3.5 million, respectively. - ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make contractually obligated payments that totaled approximately $827,000 as of December 31, 2002. Management specifically analyzes accounts receivable and historical bad debts, customer concentrations, current economic trends, and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. - NON-MARKETABLE INVESTMENTS. We hold minority interests in companies and equity investment funds that totaled approximately $10.0 million as of December 31, 2002. Our investments are in companies that are not publicly traded, and, therefore, no established market for these securities exists. We have a policy in place to review the fair value of our investments on a regular basis to evaluate the carrying value of the investments in these companies. We record an impairment charge when we believe that an investment has experienced a decline in value that is other than temporary. We recorded impairment charges that totaled approximately $3.2 million in 2001 and $4.1 in 2002. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future. - GOODWILL. We have goodwill related to our European operations that totaled approximately $14.0 million as of December 31, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized but instead be measured for impairment at least annually or whenever events indicate that there may be an impairment. In order to determine if an impairment exists, we obtain an independent appraisal which determines if the carrying amount of the reporting unit with goodwill exceeds the fair value. The estimates of the reporting unit's fair value are based on market conditions and operational performance. We have selected November 30th as the date of performing the annual goodwill impairment test. As of December 31, 2002, we believe that the carrying value of our goodwill and other intangible assets is not impaired. Future events could cause us to conclude that impairment indicators exist and that goodwill or other intangible assets associated with our acquired business are impaired. Any resulting impairment loss could have a material adverse 20
impact on our financial condition and results of operations for the period in which the loss is recognized. - INCOME TAXES. We have deferred tax assets related to temporary differences between the financial statement and tax base of assets and liabilities as well as operating loss carryforwards that totaled approximately $21.6 million as of December 31, 2002. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and the carryforwards expire. Although realization is not assured, based upon the level of historical taxable income of Forrester and projections for Forrester's future taxable income over the periods during which the deferred tax assets are deductible and the carryforwards expire, management believes it is more likely than not that Forrester will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced. RESULTS OF OPERATIONS The following table sets forth selected financial data as a percentage of total revenues for the periods indicated:
124 at December 31, 2002 from 196 at December 31, 2001 contributed to the decrease in advisory services performed. Revenues attributable to customers outside the United States decreased 41% to $27.6 million in 2002, from $46.8 million in 2001 but remained constant as a percentage of total revenues in 2002 compared with 2001 at 29%. The decrease in international revenues in dollars is primarily attributable to a decline in revenue from core research related to decreases in the number of client companies and lower average contract values. We invoice our international clients in US dollars, except for those in the United Kingdom, whom are billed in British pounds sterling, and those in continental Europe, whom are billed in the euro. The effect of changes in currency exchange rates have historically not had a significant impact on our results of operations. COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment increased as a percentage of total revenues to 35% in 2002, from 31% in 2001. These expenses decreased 31% to $34.0 million in 2002, from $49.1 million in 2001. The increase in expense as a percentage of revenues was primarily attributable to cost of services and fulfillment expenses, particularly compensation-related costs, rent and survey costs associated with our product offerings, decreasing at a slower rate than revenues. The decreases in these expenses in absolute dollars is primarily due to compensation-related costs and travel and entertainment expense savings associated with the reduction in staffing in our research organization to 124 at December 31, 2002 from 196 at December 31, 2001. The decrease in expenses is also due to a reduction in events expense as we hosted fewer events and had a higher mix of lower costing Summits in 2002 compared to 2001. SELLING AND MARKETING. Selling and marketing expenses decreased as a percentage of total revenues to 32% in 2002 from 37% in 2001. These expenses decreased 47% to $30.7 million in 2002, from $58.3 million in 2001. The decreases in expenses in absolute dollars and as a percentage of revenues were principally due to lower compensation-related costs and travel and entertainment expense savings as a result of the reduction in the number of direct sales personnel to 105 at December 31, 2002 from 184 at December 31, 2001. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased as a percentage of total revenues to 13% in 2002, from 11% in 2001. These expenses decreased 25% to $12.7 million in 2002, from $16.9 million in 2001. The increase in expense as a percentage of revenues was primarily attributable to general and administrative expenses, particularly compensation-related costs and rent, decreasing at a slower rate than revenues. The decrease in expenses in absolute dollars were principally due to the reduction in the staffing level of our general and administrative group to 66 at December 31, 2002 from 108 at December 31, 2001. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses decreased 24% to $8.4 million in 2002, from $11.1 million in 2001. The decrease in these expenses was principally due to low capital expenditures as well as the write-off of depreciable assets in connection with the workforce reorganizations in January 2002 and July 2002. The adoption of SFAS No. 142 also resulted in a reduction in annual amortization of $716,000 due to goodwill no longer being amortized. OTHER INCOME, NET. Other income decreased to $1.4 million in 2002, from $6.4 million in 2001. Other income in 2002 consisted of $6.1 million of interest income from marketable securities, offset by aggregate write-downs of approximately $4.1 million on certain non-marketable investments and $593,000 of other miscellaneous non-operating expenses. Other income in 2001 consisted of $9.1 million of interest income from marketable securities and a gain of approximately $1.7 million realized on the sale of our Internet AdWatch(TM) product, offset by aggregate write-downs of approximately $3.2 million on certain non-marketable investments and $1.1 million of other miscellaneous non-operating expenses. The decrease in interest income was principally due to a decline in market interest rates. INCOME TAX PROVISION. During 2002, we recorded a tax benefit of $311,000 reflecting an effective tax rate of (111.9%). During 2001, we recorded a tax provision of $8.9 million, reflecting, an effective tax rate of 33.0%. The decrease in our effective tax rate resulted primarily from a decrease in operating income coupled with our investments in tax-exempt marketable securities and our recording of a valuation allowance of $1.5 million associated with our operations in Germany. 22
YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 REVENUES. Total revenues increased 1% to $159.1 million in 2001, from $157.1 million in 2000. Revenues from core research increased 3% to $123.7 million in 2001, from $120.5 million in 2000. Increases in total revenues and revenues from core research were primarily attributable to sales of additional core research products to existing clients. No single client company accounted for more than 2% of revenues in 2001. Advisory services and other revenues decreased 3% to $35.4 million in 2001, from $36.7 million in 2000. This decrease was primarily attributable to the decrease in demand for advisory services in the second half of the year. Revenues attributable to customers outside the United States increased 14% to $46.8 million in 2001, from $41.1 million in 2000. Revenues attributable to customers outside the United States increased as a percentage of total revenues to 29% in 2001 from 26% in 2000. The increase in international revenues is primarily attributable to the expansion of our international operations, specifically our European headquarters in Amsterdam, Netherlands; our Research Centers in London, England and Frankfurt, Germany; and our sales office in Tokyo, Japan. We invoice our international clients in US dollars, except for those billed by our UK Research Centre, which invoices clients in British pounds sterling. The effect of changes in currency exchange rates historically have not had a significant impact on our results of operations. COST OF SERVICES AND FULFILLMENT. Cost of services and fulfillment increased as a percentage of total revenues to 31% in 2001, from 29% in 2000. These expenses increased 8% to $49.1 million in 2001, from $45.5 million in 2000. The increases in these expenses in absolute dollars and as a percentage of revenues were principally due to additional survey costs associated with our product offerings, and the opening of our Research Center in San Francisco, California. SELLING AND MARKETING. Selling and marketing expenses remained constant as a percentage of total revenues at 37% in 2001 and 2000. These expenses increased 1% to $58.3 million in 2001, from $58.0 million in 2000. The increase in expenses in absolute dollars was principally due to expansion of our international sales offices in Europe and the Asia-Pacific region, offset by cost savings as a result of the July 2001 reorganization. GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased as a percentage of total revenues to 10% in 2001, from 12% in 2000. These expenses decreased 10% to $16.9 million in 2001, from $18.6 million in 2000. The decrease in expenses in absolute dollars and as a percentage of revenues were principally due to decreased staffing in our technology, operations, finance, and strategy groups and related compensation, travel, and recruiting expenses. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased 40% to $11.1 million in 2001, from $7.9 million in 2000. The increase in these expenses in absolute dollars was principally due to previous purchases of computer equipment, software, and leasehold improvements to support business growth in past years. Further, amortization of goodwill related to our October 2000 acquisition of Forit, GmbH in Frankfurt, Germany, increased to approximately $1.0 million in 2001, from approximately $260,000 in 2000. OTHER INCOME, NET. Other income decreased to $6.4 million in 2001, from $6.9 million in 2000. Other income in 2001 consisted of $9.1 million of interest income from marketable securities and a gain of approximately $1.7 million realized on the sale of our Internet AdWatch(TM) product to Evaliant Media Resources, LLC in exchange for membership interests in Evaliant offset by aggregate write-downs of approximately $3.3 million on certain non-marketable investments and $1.1 million of other miscellaneous non-operating expenses. Other income in 2000 consisted primarily of $8.0 million of interest income from marketable securities offset by a non-marketable investment write-down of approximately $1.0 million, and approximately $175,000 of other miscellaneous non-operating expenses. We achieved the additional interest income in spite of generally lower yields due to higher cash and marketable securities balances resulting from positive cash flows from operations of $28.7 million and $16.4 million from proceeds of stock option exercises and our employee stock purchase plan during 2001. 23
INCOME TAX PROVISION. During 2001, we recorded a tax provision of $8.9 million, reflecting, an effective tax rate of 33.0%. During 2000, we recorded a tax provision of $12.4 million reflecting, an effective tax rate of 36.5%. The decrease in our effective tax rate resulted primarily from an increase in our investments in tax-exempt marketable securities. RESULTS OF QUARTERLY OPERATIONS The following tables set forth a summary of our unaudited quarterly operating results for each of our eight most recently ended fiscal quarters. We have derived this information from our unaudited interim consolidated financial statements, which, in the opinion of our management, have been prepared on a basis consistent with our financial statements contained elsewhere in this annual report and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation in accordance with generally accepted accounting principles in the United States when read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report. Historically, our total revenues, operating profit, and net income in the fourth quarter have reflected the significant positive contribution of revenues attributable to advisory services performed and Forum events held in the fourth quarter. As a result, we have historically experienced a decline in total revenues, operating profit, and net income from the quarter ended December 31 to the quarter ended March 31. Our quarterly operating results are not necessarily indicative of future results of operations.
In October 2001, we announced a program authorizing the repurchase of up to $50 million of our common stock. The shares repurchased will be used, among other things, in connection with our employee stock option and purchase plans and for potential acquisitions. As of December 31, 2002, we had repurchased 1,203,707 shares of common stock at an aggregate cost of $20.1 million. As of December 31, 2002, we had cash and cash equivalents of $11.5 million and marketable securities of $183.1 million. We do not have a line of credit and do not anticipate the need for one in the foreseeable future. We plan to continue to introduce new products and services and to invest in our infrastructure during the next 12 months. We believe that our current cash balance, marketable securities, and cash flows from operations will satisfy working capital, financing activities, and capital expenditure requirements for at least the next two years including cash requirements related to the purchase of Giga and our stock repurchase program. During the three months ended September 30, 2002, we entered into a structured stock repurchase agreement giving us the right to acquire shares of our common stock in exchange for an up-front net payment of $2.0 million. Upon expiration of the agreement in November 2002, we received 143,542 shares of our common stock. During the three months ended December 31, 2002, we entered into a similar agreement in exchange for an up-front net payment of $2.0 million. Pursuant to the agreement, if our stock price is above $14.84 on the expiration date, we will have the investment of $2.0 million returned with a premium. If our stock price is below $14.84 on the expiration date, we will receive 144,291 shares of our common stock. The $2.0 million up-front net payment is recorded in stockholders' equity as a reduction of additional paid-in capital in the accompanying consolidated balance as of December 31, 2002. Upon expiration of the agreement in February 2003, we received 144,291 shares of our common stock. In June 2000, we committed to invest $20.0 million in two private equity investment funds over a period of up to five years. We have adopted a cash bonus plan to pay bonuses, after the return of invested capital, measured by the proceeds of a portion of the share of net profits from these investments, if any, to certain key employees, subject to the terms and conditions of the plan. The payment of such bonuses would result in compensation expense with respect to the amounts so paid. As of December 31, 2002, we had contributed approximately $12.2 million to the funds. In February 2003, we contributed an additional $1.1 million to the funds. As of December 31, 2002, we had recorded total write-downs to the private equity investment funds of $3.3 million as a result of the permanent impairment of certain investments within the funds. The timing of the recognition of future gains or losses from the investment funds is beyond our control. As a result, it is not possible to predict when we will recognize such gains or losses, if we will award cash bonuses based on the net profit from such investments, or when we will incur compensation expense in connection with the payment of such bonuses. If the investment funds realize large gains or losses on their investments, we could experience significant variations in our quarterly results unrelated to our business operations. These variations could be due to significant gains or losses or to significant compensation expenses. While gains may offset compensation expenses in a particular quarter, there can be no assurance that related gains and compensation expenses will occur in the same quarter. As of December 31, 2002, we had contractual obligations as follows (in thousands) gross of estimated restructuring provisions*:
We hold minority interests in companies and equity investment funds having operations or technology in areas within our strategic focus. During 2001 and 2002, we recognized revenues of approximately $102,000 and $234,000 respectively, related to a core research with advisory services contract purchased by one of the private equity investment firms. The remaining revenues will be recognized in accordance with our revenue recognition policy through the termination date of the contract in March 2003. The prices for these transactions were determined as a function of our list price. We purchased data from companies in which we held a minority interest that totaled approximately $699,000 in 2000, $1,404,000 in 2001, and $1,113,000 in 2002. We believe that the services received were on arm's-length terms and at fair market value. RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement supersedes Emerging Issues Task Force (EITF) No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Under SFAS No. 146, a liability for a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity's commitment to an exit plan as required under EITF 94-3. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. We will apply the provisions of this standard to all restructuring activities initiated after January 1, 2003. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123. This statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We will continue to account for stock-based compensation in accordance with APB No. 25. As such, we do not expect the adoption of this standard to have a material impact on our consolidated financial position or results of operations. We adopted the disclosure only provision of SFAS No. 148 as of December 31, 2002. In November 2002, the EITF issued EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. Under EITF 00-21, revenues for contracts which contain multiple deliverables are allocated among the separate units based on their relative fair values. The provisions of EITF 00-21 are effective for contracts entered into in fiscal periods beginning after June 15, 2003. We are currently evaluating the impact, if any, of EITF 00-21 on our consolidated financial position and results of operations. In January 2003, the FASB issued Interpretation No. 46, Consolidation for Variable Interest Entities, an Interpretation of ARB No. 51 which requires all variable interest entities (VIEs) to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interest in the VIE. In addition, the interpretation expands the disclosure requirements for both variable interest entities that are consolidated as well as VIEs from which the entity is the holder of a significant amount of beneficial interests, but not the majority. FIN 46 is effective for all VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of this interpretation is not expected to be material to our consolidated financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments. 27
INTEREST RATE SENSITIVITY. We maintain an investment portfolio consisting mainly of federal and state government obligations and corporate obligations, with a weighted-average maturity of less than one year. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. We have the ability to hold our fixed income investments until maturity (except for any future acquisitions or mergers). Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates on our securities portfolio. The following table provides information about our investment portfolio. For investment securities, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Principal amounts by expected maturity in US dollars (dollars in thousands):
FORRESTER RESEARCH, INC. INDEX TO FINANCIAL STATEMENTS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information relating to security ownership of certain beneficial owners of our common stock and security ownership of our management may be found under the section captioned "Security Ownership of Certain Beneficial Owners and Management" in the 2002 Proxy Statement, and is incorporated herein by reference. The information relating to the compensation plans under which our equity securities are authorized for issuance may be found under the section captioned "Securities Authorized for Issuance under Equity Compensation Plans" in the 2002 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" in the 2002 Proxy Statement, and is incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES. Within 90 days before filing this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the SEC. George F. Colony, our Chairman of the Board and Chief Executive Officer, and Warren Hadley, our Treasurer and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Colony and Hadley concluded that, as of the date of their evaluation, our disclosure controls were effective. INTERNAL CONTROLS. Since the date of the evaluation described above, there have not been any significant changes in our internal controls or in other factors that could significantly affect those controls. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements. The financial statements filed as part of this report are listed at Page F-1 and indexed on Page 29. 2. Financial Statements Schedules. None. 3. Exhibits. A complete listing of exhibits required is given in the Exhibit Index that precedes the exhibits filed with this report on page E-1 hereof. (b) Report on Form 8-K. Forrester filed a Current Report on Form 8-K on April 5, 2002 disclosing under Item 4 its dismissal of Arthur Andersen LLP as its independent public accountant and its appointment of Deloitte & Touche LLP to serve as its independent public auditor for the fiscal year 2002. (c) See Item 15(a)(3) of this report. (d) See Item 15(a)(2) of this report. 30
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 and Chief Executive Officer Date: March 31, 2003 Pursuant to the requirement of the Securities Exchange 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.
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER I, George F. Colony, certify that: 1. I have reviewed this annual report on Form 10-K of Forrester Research, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ GEORGE F. COLONY -------------------------------------- George F. Colony Chairman of the Board and Chief Executive Officer (Principal executive officer) Date: March 31, 2003 32
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER I, Warren Hadley, certify that: 1. I have reviewed this annual report on Form 10-K of Forrester Research, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ WARREN HADLEY -------------------------------------- Warren Hadley Chief Financial Officer and Treasurer (Principal financial and accounting officer) Date: March 31, 2003 33
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Forrester Research, Inc.: We have audited the accompanying consolidated balance sheet of Forrester Research, Inc. and subsidiaries (the "Company") as of December 31, 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 2002 financial statements based on our audit. The financial statements as of December 31, 2001 and for each of the years in the two-year period then ended, before the inclusion of the disclosures discussed in Note 4 to the financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 29, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2002 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 4 to the consolidated financial statements, on January 1, 2002 the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." As discussed above, the consolidated financial statements of the Company, as of December 31, 2001, and for the two years in the period then ended, were audited by other auditors who have ceased operations. As described in Note 4, those financial statements have been revised to include the transitional disclosures required by SFAS No. 142. Our audit procedures with respect to the disclosures in Note 4 with respect to 2001 and 2000 included (i) comparing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill to the Company's underlying analysis obtained from management, and (ii) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 4 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts January 28, 2003 (February 24, 2003 with respect to Note 17) F-1
THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP NOR HAS ARTHUR ANDERSEN LLP PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THESE FINANCIAL STATEMENTS. THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND FOR THE YEAR ENDED DECEMBER 31, 1999 ARE NOT PRESENTED HEREIN. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Forrester Research, Inc.: We have audited the accompanying consolidated balance sheets of Forrester Research, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000, and 2001, and the related consolidated statements of income, stockholders' equity, and comprehensive income and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Forrester Research, Inc. and subsidiaries as of December 31, 2000, and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts January 29, 2002 F-2
FORRESTER RESEARCH, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FORRESTER RESEARCH, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
FORRESTER RESEARCH, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
FORRESTER RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS Forrester Research, Inc. ("Forrester") is a leading independent emerging-technology research firm that conducts research and analysis on the impact of emerging technologies on business, consumers, and society. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Forrester and its wholly owned subsidiaries. All intercompany balances have been eliminated in consolidation. FOREIGN CURRENCY The functional currencies of Forrester's wholly owned subsidiaries are their respective local currencies. The financial statements of the subsidiaries are translated to United States dollars using period-end exchange rates for assets and liabilities and average exchange rates during the corresponding period for revenues and expenses. Translation gains and losses as a result of this translation are accumulated as a component of accumulated other comprehensive (loss) income. Net gains and losses resulting from foreign exchange transactions are included in other income in the consolidated statements of income and were not significant during the periods presented. NET INCOME PER COMMON SHARE Basic net income per common share is computed by dividing net income by the basic weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the diluted weighted average number of common and common equivalent shares outstanding during the period. The weighted average number of common equivalent shares outstanding has been determined in accordance with the treasury-stock method. Common stock equivalents consist of common stock issuable upon the exercise of outstanding stock options. Basic and diluted weighted average common shares are as follows (in thousands):
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DEFERRED COMMISSIONS Commissions incurred in acquiring new or renewal contracts are deferred and expensed to operations as the related revenue is recognized. Forrester evaluates the recoverability of deferred commissions at each balance sheet date. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, requires the measurement of the fair value of stock options or warrants to be included in the statement of income or disclosed in the notes to financial statements. Forrester has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board (APB) Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123. There is no compensation expense related to option grants reflected in the accompanying consolidated financial statements. If compensation cost for Forrester's stock option plans had been determined consistent with SFAS No. 123, net income for the years ended December 31, 2000, 2001 and 2002 would have been approximately as follows (in thousands, except per share data):
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACCUMULATED OTHER COMPREHENSIVE INCOME The components of accumulated other comprehensive income as of December 31, 2001 and 2002 are as follows (in thousands):
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECENTLY ISSUED ACCOUNTING STANDARDS In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement supersedes Emerging Issues Task Force ("EITF") No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Under SFAS No. 146, a liability for a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity's commitment to an exit plan as required under EITF 94-3. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Forrester will apply the provisions of this standard to all restructuring activities initiated after January 1, 2003. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123. This statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Forrester will continue to account for stock-based compensation in accordance with APB No. 25. As such, Forrester does not expect the adoption of this standard to have a material impact on its consolidated financial position or results of operations. Forrester adopted the disclosure-only provision of SFAS No. 148 as of December 31, 2002. In November 2002, the EITF issued EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. Under EITF 00-21, revenues for contracts which contain multiple deliverables are allocated among the separate units based on their relative fair values. The provisions of EITF 00-21 are effective for contracts entered into in fiscal periods beginning after June 15, 2003. Forrester is currently evaluating the impact, if any, of EITF 00-21 on Forrester's consolidated financial position and results of operations. In January 2003, the FASB issued Interpretation No. 46, Consolidation for Variable Interest Entities, an Interpretation of ARB No. 51 which requires all variable interest entities (VIEs) to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interest in the VIE. In addition, the interpretation expands the disclosure requirements for both variable interest entities that are consolidated as well as VIEs from which the entity is the holder of a significant amount of beneficial interests, but not the majority. FIN 46 is effective for all VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of this interpretation is not expected to be material to our consolidated financial position or results of operations. (2) REORGANIZATIONS On July 24, 2002, Forrester announced a reduction of its work force by approximately 21 positions in response to conditions and demands of the market. As a result, Forrester recorded a reorganization charge of approximately $2.6 million during the year ended December 31, 2002. Approximately 31% of the terminated employees were members of the sales force, while 41% and 28% held research and administrative roles, respectively. The charge consisted primarily of severance and related benefits costs, office consolidation costs, such as contractual lease commitments for space that was vacated, the write-off of related leasehold improvements, and other payments for professional services incurred in connection with the reorganization. Additional depreciable assets that were written off consisted primarily of computer equipment, software and furniture and fixtures related to vacated locations in connection with the reorganization. F-10
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total costs related to the July 24, 2002 reorganization are as follows:
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total costs related to the January 10, 2002 reorganization are as follows:
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Had the provisions of SFAS No. 142 been applied for the year ended December 31, 2000 and 2001, Forrester's net income and net income per share would have been as follows:
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amortization expense related to identifiable intangible assets that will continue to be amortized in the future was approximately $328,000 during the year ended December 31, 2002. Estimated amortization expense related to identifiable intangible assets that will continue to be amortized is as follows:
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the maturity periods of marketable securities as of December 31, 2002:
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In September 2001, Forrester sold its Internet AdWatch(TM) product to Evaliant Media Resources LLC ("Evaliant"), a privately held international provider of online advertising data, in exchange for membership interest in Evaliant representing approximately a 8.3% ownership interest. Revenues related to the Internet AdWatch product were not material to Forrester's total revenues in any of the periods presented. This investment was being accounted for using the cost method and, accordingly, was being valued at cost unless an impairment in its value that is other than temporary occurs or the investment is liquidated. This transaction resulted in a net gain to Forrester of approximately $1.7 million during the quarter ended September 30, 2001, which was classified as other income in the consolidated statement of income. In March 2002, Forrester determined that its investment had been impaired. As a result, Forrester recorded a write-down of approximately $1,464,000, which was included in the consolidated statement of income during the year ended December 31, 2002, reducing the carrying value to approximately $250,000. Substantially all of Evaliant's assets were sold in June 2002 resulting in no gain or loss on the transaction. In March 2000, Forrester invested $1.0 million in the common stock of Doculabs, Inc. ("Doculabs"), an independent technology research firm. In March 2001, Forrester invested an additional $2.0 million, resulting in approximately a 10.4% ownership interest in Doculabs. This investment is being accounted for using the cost method and, accordingly, is being valued at cost unless an impairment in its value that is other than temporary occurs or the investment is liquidated. In December 2001, Forrester determined that its investment had been impaired. As a result, Forrester recorded a write-down of $1,474,000 to impairments of non-marketable investments in the consolidated statement of income during the year ended December 31, 2002. As of December 31, 2002, Forrester determined that no further impairment had occurred. During the years ended December 31, 2000, 2001 and 2002, Forrester expensed approximately $300,000, $1,030,000 and $931,000, respectively, to the cost of services and fulfillment related to services purchased from Doculabs. In July 2000, Forrester invested $1.6 million to purchase preferred shares of comScore Networks, Inc. ("comScore"), a provider of infrastructure services which utilizes proprietary technology to accumulate comprehensive information on consumer buying behavior, resulting in approximately a 1.2% ownership interest. This investment is being accounted for using the cost method and, accordingly, is valued at cost unless a permanent impairment in its value occurs or the investment is liquidated. In September 2001, Forrester determined that its investment in comScore had been permanently impaired due to an additional round of financing at a significantly lower valuation. As a result, Forrester recorded a write-down of $836,000 to impairments of non-marketable investments in the consolidated statement of income. In June 2002, Forrester determined that its investment in comScore had been permanently impaired due to an additional round of financing at a significantly lower valuation. As a result, Forrester recorded a further write-down of $271,000 to impairments of non-marketable investments in the consolidated statement of income during the year ended December 31, 2002. As of December 31, 2002, Forrester determined that no further permanent impairment had occurred. During the year ended December 31, 2001, Forrester expensed approximately $60,000 to the cost of services and fulfillment related to services purchased from comScore. In May 1999, Forrester invested $1.0 million in a holding company that is the majority shareholder of Greenfield Online, Inc. ("Greenfield"), an Internet-based marketing research firm. As a result of this investment, Forrester effectively owned approximately a 3.4% ownership interest in Greenfield. In March 2000 and June 2000, Forrester entered into additional Note and Warrant Agreements with Greenfield. Pursuant to these agreements, Forrester loaned Greenfield an aggregate of $216,000 bearing interest at 10% per annum. Forrester also received warrants to purchase additional equity in Greenfield. In August 2000, and concurrent with an additional round of financing in which Forrester did not participate, the notes, related accrued interest, and warrants were all converted into common stock such that Forrester's effective ownership interest in Greenfield was approximately 3.1%. F-17
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In December 2000, Forrester determined that its ownership interest in Greenfield had been impaired due to its decision not to participate in an additional round of financing at a significantly lower valuation. As a result, Forrester recorded a write-down of approximately $1.0 million during the fiscal quarter ended December 31, 2000, which was included in other income in the consolidated statement of income. As of December 31, 2002, Forrester determined that no further impairment had occurred. During the years ended December 31, 2000, 2001 and 2002, Forrester expensed approximately $399,000, $314,000 and $183,000, respectively, to the cost of services and fulfillment related to services purchased from Greenfield. In the aggregate, Forrester included impairment losses of $3,217,000 and $4,118,000 in the consolidated statements of income related to non-marketable investments and $619,000 and $484,000 (included in other income, net) related to fund management charges during the years ended December 31, 2001 and 2002, respectively. The aggregate carrying value of non-marketable investments included in other assets in the accompanying consolidated balance sheets as of December 31, 2001 and December 31, 2002 were $9,845,000 and $10,018,000, respectively. (8) INCOME TAXES Forrester accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax base of assets and liabilities as well as operating loss carryforwards. Forrester measures deferred taxes based on enacted tax rates assumed to be in effect when these differences reverse. Income before income tax provision for the years ended December 31, 2000, 2001 and 2002 consists of the following (in thousands):
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the income tax provision (benefit) for the years ended December 31, 2000, 2001 and 2002 are as follows (in thousands):
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2022. The use of these net operating loss carryforwards may be limited pursuant to Internal Revenue Code Section 382 as a result of future ownership changes. During the year ended December 31, 2002, Forrester recorded a valuation allowance of $1.5 million primarily related to net operating loss carryforwards in Germany. Forrester has not provided a valuation allowance for the remaining net deferred tax assets, primarily its federal net operating loss carryforwards, as management believes Forrester will have sufficient time to realize these assets during the twenty-year carryforward period. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and the carryforwards expire. Although realization is not assured, based upon the level of historical taxable income of Forrester and projections for Forrester's future taxable income over the periods during which the deferred tax assets are deductible and the carryforwards expire, management believes it is more likely than not that Forrester will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced. (9) COMMITMENTS Forrester leases its office space and certain office equipment under operating leases. At December 31, 2002, approximate future minimum rentals are as follows (in thousands):
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock option and purchase plans and for potential acquisitions. As of December 31, 2002, Forrester had repurchased 1,203,707 shares of common stock at an aggregate cost of $20.1 million. During the three months ended September 30, 2002, Forrester entered into a structured stock repurchase agreement giving it the right to acquire shares of Forrester common stock in exchange for an up-front net payment of $2.0 million. Upon expiration of the agreement in November 2002, Forrester received 143,542 shares of Forrester common stock. During the three months ended December 31, 2002, Forrester entered into a similar agreement in exchange for an up-front net payment of $2.0 million. Pursuant to the agreement, if Forrester's stock price is above $14.84 on the expiration date, Forrester will have the investment of $2.0 million returned with a premium. If Forrester's stock price is below $14.84 on the expiration date, Forrester will receive 144,291 shares of Forrester common stock. The $2.0 million up-front net payment is recorded in stockholders' equity as a reduction of additional paid-in capital in the accompanying consolidated balance as of December 31, 2002. (11) STOCK OPTION PLANS In February 1996, Forrester adopted the Forrester Research, Inc. 1996 Equity Incentive Plan, which has been subsequently amended (the "Plan"). The Plan provides for the issuance of incentive stock options ("ISOs") and non-qualified stock options ("NSOs") to purchase up to 13,500,000 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 Forrester stock must be granted at an exercise price not less than 110% of the fair market value at the date of grant. Options generally vest ratably over three to four years and expire after 10 years. Options granted under the Plan immediately vest upon certain events, as described in the Plan. In September 1996, Forrester adopted the 1996 Stock Option Plan for Non-Employee Directors (the "Directors' Plan"), which provides for the issuance of options to purchase up to 300,000 shares of common stock. The Directors' Plan was amended in 2002 to increase the number of shares of common stock available for issuance under the Directors' Plan by 300,000 shares. The Directors' Plan is administered by the Compensation Committee of the Board of Directors (the "Compensation Committee"). Under the Directors' Plan, each non-employee director shall be awarded options to purchase 6,000 shares of common stock, at an exercise price equal to the fair market value of the common stock upon his or her election as a director. These options vest in three equal annual installments commencing on the date of grant. In addition, each non-employee director will also receive an option to purchase 12,500 shares of common stock, at an exercise price equal to the fair market value of the common stock, each year immediately following Forrester's annual stockholders' meeting. These options vest in four equal installments on the first, second, third, and fourth anniversaries of the date of grant. The Compensation Committee 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. F-21
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock option activity under the Plan and under the Directors' Plan from December 31, 1999, to December 31, 2002, was as follows (in thousands, except per share data):
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 2002, options available for future grant under the Plan and the Directors' Plan were approximately 4,011,000. As described in Note 1, Forrester uses APB No. 25 to account for equity grants and awards to employees. Accordingly, there is no compensation expense related to option grants reflected in the accompanying consolidated financial statements. Forrester has adopted the disclosure-only provisions of SFAS No. 123, as amended by SFAS No. 148, and has presented such disclosure in Note 1. The "fair value" of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The key assumptions used to apply this pricing model and the related weighted average fair values are as follows:
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) that the purchase period commences, or b) 85% of the closing price of the common stock on the day that the purchase period terminates. Shares purchased by employees under the Stock Purchase Plan are as follows:
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (15) CERTAIN BALANCE SHEET ACCOUNTS ACCRUED EXPENSES: Accrued expenses as of December 31, 2001 and 2002 consist of the following (in thousands):
FORRESTER RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (17) SUBSEQUENT EVENT On January 20, 2003, Forrester entered into an Agreement and Plan of Merger with Giga Information Group, Inc. ("Giga") to acquire Giga, a global technology advisory firm. Pursuant to the agreement, Forrester commenced a tender offer for all of the outstanding shares of common stock of Giga at a price of $4.75 per share in cash. The tender offer expired at 12:00 midnight, New York City time on February 24, 2003. 10,336,913 shares of Giga common stock were tendered in the offer, representing approximately 93% of the outstanding common stock of Giga as of February 24, 2003. Forrester will acquire the remaining shares of outstanding common stock in a second-step merger in which all remaining Giga stockholders who did not tender their shares in the tender offer (and who do not exercise statutory appraisal rights) will receive the same $4.75 per share in cash paid in the tender offer. F-26
EXHIBIT INDEX
EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Giga Information Group, Inc., a Delaware corporation Whitcomb Investments, Inc., a Massachusetts corporation Forrester Research, B.V., a Dutch corporation. Forrester Research FSC, Inc., a Barbados corporation Fletcher Research Limited, a United Kingdom corporation Forrester Research KK, a Japanese corporation Forrester Research Australia Pty. Ltd., an Australian corporation Forrester Research Canada, Inc., a Canadian corporation Forrester Research GmbH & Co. KG, a German corporation Forrester Verwaltungs GmbH, a German corporation Forrester Beteiligungs GmbH, a German corporation Forrester Research GmbH, a Swiss corporation
EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 333-16905, 333-22749, 333-96393, 333-38626, 333-99749, and 333-99751 of Forrester Research, Inc. on Form S-8 of our report dated January 28, 2003 [(February 24, 2003 with respect to Note 17), which report expresses an unqualified opinion and includes explanatory paragraphs relative to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and the application of procedures relating to certain disclosures of financial statement amounts related to the 2001 and 2000 financial statements that were audited by other auditors who have ceased operations], relating to the consolidated financial statements of Forrester Research, Inc. as of and for the year ended December 31, 2002, appearing in this Annual Report on Form 10-K of Forrester Research, Inc. for the year ended December 31, 2002. /s/ Deloitte & Touche LLP Boston, Massachusetts March 28, 2003
EXHIBIT 23.2 Explanation Concerning Absence of Current Written Consent of Arthur Andersen LLP Section 11(a) of the Securities Act of 1933, as amended (the "Securities Act"), provides that if part of a registration statement at the time it becomes effective contains an untrue statement of a material fact, or omits a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proved that at the time of such acquisition such person knew of such untruth or omission) may assert a claim against, among others, an accountant who has consented to be named as having certified any part of the registration statement or as having prepared any report for use in connection with the registration statement. Forrester dismissed Arthur Andersen LLP ("Andersen") as its independent auditors, effective April 1, 2002. For additional information, see Forrester's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2002. After reasonable efforts, Forrester has been unable to obtain Andersen's written consent to the incorporation by reference into Forrester's registration statements (Form S-8 Nos. 333-16905, 333-22749, 333-96393, 333-38626, 333-99749, and 333-99751) (collectively, the "Registration Statements") of Andersen's audit report with respect to Forrester's consolidated financial statements as of December 31, 2001, and for the two years in the period then ended (the "Financial Statements"). Under these circumstances, Rule 437a under the Securities Act permits Forrester to file this Annual Report on Form 10-K, which is incorporated by reference into the Registration Statements, without consents from Andersen. As a result, with respect to transactions in Forrester securities pursuant to the Registration Statements that occur subsequent to the date this Annual Report on Form 10-K is filed with the Securities and Exchange Commission, Andersen will not have any liability under Section 11(a) of the Securities Act for any untrue statements of a material fact contained in the Financial Statements or any omissions of a material fact required to be stated therein. Accordingly, you would be unable to assert a claim against Andersen under Section 11(a) of the Securities Act. To the extent provided in Section 11(b)(3)(c) of the Securities Act, however, other persons who are liable under Section 11(a) of the Securities Act, including Forrester's officers and directors, may still rely on Andersen's original audit reports as being made by an expert for purposes of establishing a due diligence defense under Section 11(b) of the Securities Act.
EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Executive Officer of Forrester Research, Inc. (the "Company"), does hereby certify that to the undersigned's knowledge: 1) the Company's Annual Report on Form 10-K for the year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ George F. Colony ------------------------------- George F. Colony Chairman of the Board of Directors and Chief Executive Officer Dated: March 31, 2003
EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Financial Officer of Forrester Research, Inc. (the "Company"), does hereby certify that to the undersigned's knowledge: 1) the Company's Annual Report on Form 10-K for the year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Warren Hadley ------------------------------ Warren Hadley Chief Financial Officer and Treasurer Dated: March 31, 2003