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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-27577
HARRIS INTERACTIVE INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 16-1538028
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
135 CORPORATE WOODS, ROCHESTER, NY 14623
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (716) 272-8400
Securities registered pursuant to Section (b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark if the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of September 15, 2000, the aggregate market value of voting stock held by
non-affiliates of the registrant was $56,637,288.
As of September 15, 2000, 34,196,558 shares of the registrant's common
stock, par value $.001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement (to by filed
pursuant to Regulation 14A) for the 2000 Annual Meeting of Shareholders (the
"Proxy Statement") are incorporated by reference into Part III hereof.
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PART I
ITEM 1. BUSINESS
THE DISCUSSION IN THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS FORM 10-K THAT
ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING
EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON THE
INFORMATION AVAILABLE TO THE HARRIS INTERACTIVE INC. ON THE DATE HEREOF, AND
HARRIS INTERACTIVE ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING
STATEMENT. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED
HEREIN. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED IN RISK FACTORS OF THIS DOCUMENT. THE RISK
FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS HARRIS INTERACTIVE FILES FROM
TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, SUCH AS OUR PROSPECTUS
DATED DECEMBER 6, 1999 AND FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
DECEMBER 7, 1999, SHOULD ALSO BE REVIEWED.
OVERVIEW
Harris Interactive Inc., a Delaware corporation, and its subsidiaries
(together with its subsidiaries "Harris Interactive", "we", "our", "us", or the
"Company") is a leading market research and polling firm, using Internet-based
and traditional methodologies to provide information about the views,
experiences and attitudes of people worldwide to a broad range of companies,
non-profit organizations and governmental agencies. Known for our HARRIS POLL,
we have over 40 years experience in providing our clients with market research
and polling services. Our Internet-based and traditional market research and
polling services include:
- research studies conducted on specific issues for specific customers -
CUSTOM RESEARCH,
- research studies on issues of general interest developed and sold to
numerous clients - MULTI-CLIENT RESEARCH,
- research conducted for other research firms - SERVICE BUREAU RESEARCH, and
- outsourced customer relationship services - CUSTOMER RELATIONSHIP
SERVICES.
In September 1997, we began developing our Internet panel and our
proprietary technology infrastructure to provide our clients with online market
research and polling products and services. As of June 30, 2000, our Internet
panel consisted of more than 6.5 million individuals who have voluntarily agreed
to participate in our various online market research and polling studies. Our
Internet panel has developed and expanded in large part through our strategic
relationship with Excite@Home, a leading Internet portal. We believe our
Internet panel is larger than those of any of our competitors. Consequently, we
believe we are the leading Internet-based market research and polling firm in
the world. Our extensive Internet panel and proprietary technology
infrastructure enable us to offer Internet-based market research and polling
products and services which meet our clients' needs for fast, comprehensive and
accurate information.
Historically, we have provided our market research services exclusively
through traditional methodologies, including direct mail, telephone surveys,
mall intercepts, focus groups and in-person interviews. We believe, however,
that the Internet is changing our industry. Accordingly, we have made, and will
continue to make, significant expenditures in the development of our technology
platform, our Internet panel and management and staff to lead the transformation
of the market research and polling industry to an Internet-based platform.
The HARRIS POLL is a registered trademark of Harris Interactive. This 10-K
also includes other trademarks, trade names and service marks of Harris
Interactive and of other parties.
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OUR MARKET OPPORTUNITY
GENERAL OVERVIEW
Companies are operating in an increasingly complex business environment,
characterized by heightened competition, consolidation, globalization of product
markets, shortened product life cycles and rapidly changing consumer
preferences. This business environment has escalated the need for accurate and
timely information about the preferences, needs, purchase behavior and brand
recognition of existing and potential clients. Companies also need continuous
tracking capabilities so that they can ascertain product performance and
competitive position, monitor consumer satisfaction, measure advertising
effectiveness and determine price sensitivity.
Historically, information-gathering and tracking functions in market
research have been performed using traditional market research methodologies.
The ability of traditional market research methodologies to deliver accurate and
objective data rapidly is limited by high data acquisition costs, small sample
sizes and the extensive time required to perform the research. As a result,
broad-based research projects, which require a large number of survey
participants, are prohibitively costly except for companies and organizations
with significant resources. The growth and rapid adoption of the Internet is
changing the market research and polling industry, making it possible for the
first time to survey a very broad, diverse population at low cost and at speeds
that are unattainable through any other method.
THE INTERNET AND ITS IMPACT ON THE MARKET RESEARCH AND POLLING INDUSTRY
The Internet has emerged as a mass communications and commerce medium
enabling millions of people worldwide to gather and share information and
conduct business electronically. The use of the Internet as a market research
and polling tool is still in its early stages.
Companies first began testing the use of the Internet to conduct market
research and polling in 1995, at a time when less than 10 million persons in the
United States had access to the Internet and the population on the Internet was
not representative of the general population. We believe that, as Internet usage
has increased, the demographic composition of those using the Internet has
shifted to better reflect the characteristics of the overall population. As a
result, with standard market research weighting procedures, the Internet is now
a viable medium to conduct market research.
We believe that Internet-based market research and polling offers
significant advantages over traditional methodologies. These advantages include:
- VERSATILITY--Internet-based market research combines the interactivity of
telephone sampling with the visual capabilities of mail surveys. Pictures,
graphics, advertising copy and other visual materials can be viewed over
the Internet, a feature not available with telephone sampling. With
Internet-based methodology, questions and their sequence in surveys can be
modified as panelists respond. Mail panel surveys, in contrast, are
limited to the order and content in the printed text of the survey.
- SPEED--Responses from the online panelists are generally received within
several days, while mail panelists' responses are generally received over
several weeks. Further, when compared to a telephone survey, the speed
advantage of the Internet model becomes greater as sample sizes increase.
- COST-EFFICIENCY--Internet-based market research and polling offers
significant cost benefits when compared to traditional market research
methodologies. Under traditional methodologies, the sample size of a
survey is limited due to the high data collection costs per response.
However, utilizing Internet-based market research methods, larger and more
robust sample sizes can be
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used for effectively the same cost, or the same sample size can be used to
reduce the overall cost of a study.
- PRODUCTIVITY--The Internet is user-friendly to online panelists because
surveys can be completed at the convenience of the participant and can be
conducted 24 hours per day, seven days per week. In addition, because
online panelists can read questions faster than they can listen, more
questions can be asked to panelists in the same amount of time on the
Internet than with traditional telephone survey methods. In our
experience, a mail survey typically takes approximately six weeks from
design to completion. In contrast, Internet surveys can generally be
completed in two to seven days.
THE HARRIS INTERACTIVE ADVANTAGE
We offer a broad suite of Internet-based market research and polling
products and services to meet our clients' needs for rapid, comprehensive and
accurate information about the opinions, experiences and attitudes of people
worldwide. We possess several key competitive advantages that we believe will
enable us to maintain and expand our leading market position in Internet-based
research. Our key competitive advantages include:
LARGEST INTERNET PANEL. We have developed what we believe to be the largest
Internet panel in the world. As of June 30, 2000, our Internet panel consisted
of more than 6.5 million online panelists, who are individuals that have
voluntarily agreed to participate in our various online research studies. Our
large and diverse Internet panel enables us to:
- conduct a broad range of customer specific or multi-client research
studies across a wide set of industries;
- utilize survey sizes that range from a large representative sample of the
overall population to targeted subsets;
- market new research products and services through co-branded alliances
that we historically could not develop;
- market our online panel to other research firms through the Harris
Interactive Service Bureau, enabling us to penetrate new markets in which
we do not have relationships or specific expertise.
The database is net of approximately 3.5 million people who, since we began
building the database in 1997, have asked to be removed (unsubscribes) or no
longer have valid e-mail addresses (bouncebacks). Of the 6.5 million remaining,
the database consists of almost 6.4 million for whom we have at least three of
the following demographics: age, gender, zip code, state, education, race,
marital status, or country.
Regarding participation rates, Nielsen/Netratings produces monthly activity
reports for many Internet sites, including among others the Company's site.
Nielsen/Netrating's reported audience measurement estimate of unique visitors to
the Harris Interactive survey web-site was 2,542,000 for June, 2000, the only
month in our last fiscal year for which Nielsen/Netratings reported combined
home and work measurements.
PROPRIETARY TECHNOLOGY INFRASTRUCTURE. A significant amount of computer
software and hardware is required to conduct Internet-based market research and
polling. Since the beginning of fiscal 1998 through year end fiscal 2000, we
have expended approximately $21.6 million to develop and maintain our technology
infrastructure, data analysis techniques, and internal systems and procedures to
capitalize on the Internet opportunity within our industry.
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Key elements of our technology infrastructure include:
- A high speed customized e-mail system, which enables us to rapidly format,
target and deliver over 290,000 e-mails per hour, inviting panelists in
our database to participate in our online surveys.
- A sophisticated survey engine, which can be programmed to conduct 145,000
interactive, five-minute surveys per hour in any language supported by
Microsoft Word.
- An advanced survey dispatcher system, which monitors, controls and
allocates all respondent contact and survey results across our servers. In
addition, our proprietary dispatcher system gathers real-time statistics
on survey starts, suspensions and completions to ensure high quality data
collection.
- Customizable multi-language registration and polling system, which allows
new and existing panel members to add, delete or update registration
information online. In addition, this system, for which a patent
application has been filed, recognizes each panelist's language
preferences and delivers the survey in that language.
We have developed flexible, automated reporting tools which will allow
online access to survey information at any time and speed the process of data
delivery to clients. We have designed our technology infrastructure to be
scalable, which means that it can accommodate the expansion of our business
without significant modifications to our existing system design.
STRONG BRAND NAME AND LONG-STANDING CLIENT RELATIONSHIPS. We believe the
HARRIS POLL is one of the best known polls operating in the United States today.
For over 40 years, the HARRIS POLL has been recognized as providing trusted
market research products and services to a broad range of companies, non-profit
organizations and governmental agencies. We use a variety of marketing
strategies to heighten awareness of and enhance brand recognition of the HARRIS
POLL, Harris Interactive and our Internet-based products and services.
STRATEGIC RELATIONSHIP WITH EXCITE@HOME. We entered into an agreement with
Excite@Home that will enable us to expand and replenish our Internet panel. Our
relationship with MatchLogic, Inc., a subsidiary of Excite@Home, began in 1997
and we have obtained more than 90% of the more than 6.5 million names in our
Internet panel from that relationship. Effective October 1999, we entered into
an agreement with Excite@Home which continues until September 30, 2002. Under
this agreement, we have exclusive ownership of the names of individuals who have
voluntarily participated in a survey and who have affirmatively expressed a
desire to participate in our future surveys. We own these names exclusively for
purposes of conducting research studies. Excite@Home has exclusive ownership of
the names for all other purposes. The agreement provides that Excite@Home will
deliver a guaranteed number of names each calendar quarter in consideration for
a monthly fee paid by us. The agreement provides us with a rapid and
cost-efficient means of building and replenishing our Internet panel. Our
agreement with Excite@Home will automatically renew for successive one-year
terms after September 30, 2002, subject to either party's right to terminate
upon 120 days prior notice. We have also entered into agreements with
Excite@Home for the provision of research services, including custom research
and multi-client research products, and for the use and distribution of our
ECOMMERCEPULSE multi-client research product.
OUR PRODUCTS AND SERVICES
We are a full-service provider of market research and polling services,
utilizing both Internet-based and traditional survey methodologies. In
June 2000,we realigned our operations to focus on specific vertical markets.
These vertical markets include, but are not limited to, e-commerce, consumer
packaged goods, automotive, financial services, health care, technology and
education. By aligning all of our support functions (e.g. sales, marketing,
research staff) on specific vertical markets, we expect to
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better leverage the various multi-client and custom services that we offer, as
well as, better serve our clients.
Our business model comprises four main sources of revenues:
- custom research;
- multi-client research;
- service bureau research; and
- customer relationship services.
Our custom research products and services and our customer relationship
services are provided using both traditional and Internet-based methodologies.
We are transitioning our custom research and polling products and services to
Internet-based research. Our remaining products have been developed exclusively
using the Internet-based model. During fiscal 2000, 59% of our total revenues
were derived from custom research utilizing traditional research methods, and
41% of our total revenues were derived from our Internet-based products and
services. For Fiscal 1999, 90% of our total revenues were derived from custom
research utilizing traditional research methods, and 10% of our revenues were
derived from our Internet-based products and services. Through fiscal 1998, all
of our revenues were derived from custom research products using traditional
market research and polling methodologies. We are dedicating a significant
amount of our financial and management resources to developing and marketing
additional products and services which utilize our Internet-based methodologies.
The following table summarizes our products and services.
PRODUCT TYPE DESCRIPTION METHODOLOGY
- ------------ ----------------------------- -----------------------------
Custom Research Market research and polling Traditional and
conducted on an issue Internet-based
specifically by a client
Multi-Client Research Studies developed for and Internet-based
sold to a large number of
clients who have a similar
interest in a particular
subject area
Harris Interactive Service Market research and polling Internet-based
Bureau conducted for other market
research organizations
Customer Relationship Outsourced customer service Traditional and
Services operations for corporations Internet-based
and organizations
CUSTOM RESEARCH
For more than 40 years, we have provided custom business and consumer
research to a broad range of companies, non-profit organizations and
governmental agencies. This wealth of experience has provided us with the
foundation to conduct custom research using the Internet to perform efficient,
cost-effective data collection. As a result of our long history in providing
custom research, we have particular expertise in the following markets:
- office equipment and technology;
- pharmaceuticals;
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- healthcare;
- education and public policy; and
- transportation.
We conduct custom research to produce a variety of client-specific surveys
and polls, including customer satisfaction surveys, market share studies, new
product introduction studies and brand recognition studies. A custom research
project comprises three distinct phases:
- DESIGN--meetings with our client to discuss the objectives and reasons for
the study; determine the research procedure such as a mail, telephone or
Internet survey, focus group meetings or personal interviews; identify the
population to be surveyed; and design the survey questionnaire or focus
group protocol.
- DATA COLLECTION--interviews conducted through the use of computer-aided
Internet or telephone interviewing software, by mail or in person, or
holding focus group meetings; and follow-up procedures to assure that
surveys are returned and interviews are completed.
- ANALYSIS AND REPORTING--review of collected data for sufficiency and
completeness; segmentation of data for analysis by desired demographic,
business or industry characteristics; and preparation and delivery of the
report.
We use our proprietary sample design techniques and our questionnaire
development process to collect complete and accurate information responsive to
the specific inquiries of our clients. We have developed in-depth data
collection techniques that enhance the integrity and reliability of our sample
database. We also take affirmative steps to assure that our responses are
derived from the appropriate decision makers in each particular survey so as to
assure the accuracy of our results. As a result, we are able to deliver
samplings that represent the desired demographics of our clients based on our
significant expertise in assembling appropriate samples and in developing
effective survey content.
MULTI-CLIENT RESEARCH
Multi-client research products are studies that are conducted and sold on
one time or subscription basis to a large number of individuals or companies
that have an interest in a particular market segment or research application. To
develop our multi-client products, we utilize a rigorous, proprietary, Strategic
Marketing Implementation Process (SMIP). The SMIP ensures our products are
consistent with the Company's strategic direction, are meaningful in the
targeted marketplace, and are of superior value. Our multi-client products are
developed on an independent or co-branded basis and are marketed by us.
Co-branding involves the development and marketing of a study with another party
having a unique experience base in a particular subject or market. Agreements
for co-branded studies are negotiated on a case-by-case basis, with revenues
generally applied to specified categories of expenses and any profits shared
equally. These products enable our clients to conduct research and collect
useful data in their areas of expertise that they could not conduct without our
Internet panel and technology infrastructure. By combining their expertise, the
vast database of Internet respondents, and our Internet-based market research
capabilities, we are able to develop and market a product that benefits both
parties.
HARRIS INTERACTIVE SERVICE BUREAU
Our Harris Interactive Service Bureau (HISB) conducts Internet-based market
research for other market research firms and other organizations that either do
not have the necessary resources to develop Internet-based market research
capabilities or that have otherwise chosen not to develop such a capability
themselves. Harris Interactive Service Bureau provides us with a
revenue-generating source utilizing our data collection capabilities, our
proprietary Internet panel and our scalable technology
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infrastructure. It enables us to penetrate markets or industries in which we do
not have relationships or specific expertise. We believe that Harris Interactive
Service Bureau reduces the likelihood that those market research firms and other
organizations, which are our clients, will invest significant financial and
management resources in developing their own Internet-based market research
capabilities.
Harris Interactive Service Bureau clients can access our data collection
facilities on a long-term, continuous basis or on a project-by-project basis.
During fiscal 2000, the number of market research firms that use HISB increased
to 37, up from 5 at the end of fiscal 1999.
CUSTOMER RELATIONSHIP SERVICES
By combining our traditional telephone research capabilities, our experience
in customer contact services, and our sophisticated technology infrastructure,
we provide high quality customer relationship services to clients. Our services
include maintaining customer contact on behalf of our clients for the collection
of customer-specific data and providing "help desk" services. We have an
agreement to use LivePerson, an interactive communications software program,
that allows us to provide assistance to the customers of our clients using both
the telephone and the Internet. The LivePerson software enables us to transition
the utilization of our market research telephone interviewing facilities and
personnel to Internet-based customer relationship services.
OUR CLIENTS
For over 40 years, we have provided high quality market research products
and services to a broad range of companies, non-profit organizations and
governmental agencies. We ended fiscal 2000 with 363 Internet-based research
clients, an increase of over 672% for the year.
For the year ended June 30, 2000, revenues from the Company's largest
customer comprised 18% of total revenues. For the year ended June 30, 1999,
revenues from the Company's two largest customers comprised 15% and 14% of
revenues, respectively. For the year ended June 30, 1998, revenues from the two
largest customers comprised 19% and 15% of revenues.
OUR SALES AND MARKETING PROGRAMS
We have designed and implemented a broad range of sales and marketing
programs, intended to:
- raise the brand awareness of Harris Interactive;
- generate sales leads to add new clients who purchase our products and
services;
- recruit new members to expand our Internet panel; and
- support our global network.
Our marketing activities are strategically planned to be fully integrated.
Major marketing efforts include public relations, trade show participation, both
offline advertising and online promotion, as well as direct marketing.
- PUBLIC RELATIONS. We have retained Burson-Marsteller, a large global
public relations firm and subsidiary of Young & Rubicam Inc.
Burson-Marsteller helps us develop and deploy critical communication in
the areas of public affairs and government relations, issues management,
and media relations in the United States and globally.
- TRADE SHOWS. We have participated and will continue to participate in a
large number of industry tradeshows where we share our expertise with
attendees to further our position as a global leader in Internet-based
research.
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- OFFLINE ADVERTISING. We use print advertising to promote our brand name
and our associated products and services. One of our significant offline
promotional activities is our continuous release of the HARRIS POLL
results to the public. These results are reported by various national
newswire services.
- ONLINE PROMOTION. We have agreements with Excite@Home and more than 20
other Internet sites, which allow us to place the HARRIS POLL icon on
these online portals or websites. The HARRIS POLL icon provides a direct
link to the panel registration area of our website. Other online
promotions are undertaken from time to time to recruit special segments to
our panel such as senior citizens, minorities, and Information Technology
("IT") users.
OUR COMPETITION
The traditional market research and polling industry is highly competitive.
The Internet-based market research and polling industry is new and rapidly
evolving. We expect competition to intensify as existing market research firms
recognize the significance of the Internet to their business and as other
companies already engaged in Internet-based services recognize the potential
market.
In our traditional market research and polling business, we compete on the
basis of:
- our proprietary sample designs techniques;
- our questionnaire development;
- our in-depth data collection; and
- our ability to deliver samplings that represent the desired demographics
of our clients.
We believe that the primary competitive factors in the Internet-based market
research and polling industry are:
- a large and diverse proprietary Internet panel, with geographic scope and
demographic depth;
- a scalable proprietary Internet technology platform to provide a variety
of services and operational support;
- quality, depth and breadth of products and services offered;
- brand recognition and strong reputation; and
- cost.
In the delivery of both our traditional and Internet-based market research
products and services, we compete with numerous market research firms, as well
as corporations and individuals that perform market research studies on an
isolated basis, many of whom have market shares larger than our own.
We will likely also face competition in the future from other traditional
market research firms who move into Internet-based technologies or other
companies with access to large databases of individuals with whom they can
communicate on the Internet. These companies may, either alone or in alliances
with other firms, attempt to penetrate this market.
Many of our current and potential competitors have longer operating
histories or significantly greater financial and marketing resources. These
competitors may be able to undertake more extensive marketing campaigns for
their services, adopt more aggressive pricing policies and make more attractive
offers to potential employees, partners and potential customers. Further, our
competitors and potential competitors may develop technologies that are superior
to ours or that achieve greater market acceptance than our own.
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OUR INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success is dependent upon proprietary software technology, research
methods, data analysis techniques, and internal systems and procedures that we
have developed to address client and Internet-based market research needs. Our
intellectual property is essential to our success and we rely on a combination
of patent, copyright, trademark and trade secret laws and confidentiality and
license agreements with our employees, clients, independent contractors and
other third parties to further protect our proprietary rights, software and
procedures. We currently have two patents pending. One pending patent covers a
multi-location and multi-language registration and polling system being placed
on a variety of websites. Our other pending patent covers our CONCEPTLOC
encryption system. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are made
available.
Under the terms of our acquisition of Louis Harris and Associates, we
purchased the HARRIS name including HARRIS POLL, for global use except for use
in Europe and the European portion of the former Soviet Union (the "Territory").
The prior owner of Louis Harris and Associates sold the HARRIS name for use in
the Territory, and those rights are now owned by Taylor Nelson Sofres plc.
("TNS"). In February 2000, we entered into a trade mark license agreement with
TNS, which provides us with a non-transferable license to use the names HARRIS
ONLINE, HARRIS POLL ONLINE, HARRIS INTERACTIVE, and HARRIS POLL INTERACTIVE
within the Territory. Our use of these trademarks is permitted only in
connection with market research services involving use of the Internet, we may
not otherwise use the HARRIS name in the Territory. The agreement prohibits TNS
from using HARRIS ONLINE, HARRIS POLL ONLINE, HARRIS INTERACTIVE and HARRIS POLL
INTERACTIVE, or confusingly similar marks within the Territory, and provides
that TNS will not contest our use of "HPOL", within the Territory. TNS retains
the right to use the HARRIS name within the Territory unless such use indicates
a connection with the Internet and is confusingly similar to the marks licensed
to us. TNS also retains the right to terminate the license in the event of
(i) our insolvency or our breach of the agreement, (ii) the termination of
separate agreements between us and TNS relating to our providing TNS with access
to our panelist database, and/or (iii) a change of control or sale of
substantially all of our business or assets of Harris Interactive in favor of a
competitor of TNS; provided however, in the latter two cases we may purchase
perpetual rights to the license.
We have licensed in the past, and expect to license in the future, certain
of our proprietary rights, such as trademarks or copyrighted material, to third
parties. While we attempt to ensure that the quality of our brand is maintained
by these licenses, licensees may take actions that might harm the value of our
proprietary rights or reputation. The steps taken by us to protect our
proprietary rights may not be adequate and third parties may infringe or
misappropriate our copyrights, trademarks and similar proprietary rights. In
addition, other parties may assert claims of infringement of intellectual
property or other proprietary rights against us.
In addition, there can be no assurance that third parties will not
independently develop functionally equivalent or superior systems, software or
procedures. We believe that our systems, software and procedures and other
proprietary rights do not infringe on the proprietary rights of third parties.
There can be no assurance, however, that third parties will not assert
infringement claims against us in the future or that any such claim will not
require us to enter into materially adverse license agreements or result in
protracted and costly litigation, regardless of the merits of such claims.
EMPLOYEES
As of June 30, 2000, we employed a total of 1,072 persons on a full-time
basis. We also employed 190 part-time individuals. None of our employees is
represented by a collective bargaining agreement. We have not experienced any
work stoppages. We consider our relationship with our employees to be good.
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EXECUTIVE OFFICERS
The following persons are our executive officers who are not also directors.
These individuals have been elected by and are serving at the discretion of our
board of directors:
NAME AGE POSITION
- ---- -------- --------
Dennis Bhame...... 52 Executive Vice President, Human Resources
Arthur E. Coles... 57 Group President, Health Care and Public Policy
Jeffrey Glauber... 37 Executive Vice President, Corporate Marketing
Ronald Knight..... 61 Group President, Business & Consumer Services; Consulting &
Brand Management
Kathy C. Lee...... 45 Executive Vice President, Sales
Bruce A. Newman... 46 Chief Financial Officer, Secretary and Treasurer
Gregory T. 38 Group President, Emerging Markets
Novak.............
The following is a brief account of the business experience of each of the
above executive officers:
DENNIS K. BHAME has served as the Executive Vice President of Human
Resources since April 2000. Prior to joining our company, Mr. Bhame spent
16 years at Bausch & Lomb, most recently as Vice President, Global Human
Resources, Eyeware Division. He worked as a human resource professional at
Burroughs Corporation and Moore Business Forms prior to joining Bausch & Lomb.
Mr. Bhame holds a B.S. in Business Management from New Hampshire College.
ARTHUR E. COLES has served as our Group President, Health Care and Public
Policy, since July 2000. From June 1999 to June 2000, Mr. Coles was our
Executive Vice President of Marketing and Business Development. Mr. Coles was
President and Chief Executive Officer of our largest subsidiary from June 1997
to June 1999. Prior to joining our company, Mr. Coles worked for Eastman Kodak
Company, where he served as Vice President of Strategic Planning for the Digital
Imaging Division. Prior to this, he spent over 30 years at Xerox Corporation in
a variety of general management, marketing, and operational roles. Mr. Coles
received an M.B.A. from the Rochester Institute of Technology and a B.S. in
Mathematics from the State University of New York at Albany.
JEFFREY M. GLAUBER has served as our Executive Vice President of Corporate
Marketing since May 2000. Prior to joining our company, Mr. Glauber worked for
Reckitt Benckiser, from August 1996 through February 2000, in both the US and
the Netherlands. Most recently he was based in Amsterdam, serving as the
International Category Marketing Director for their worldwide automatic
dishwashing detergent business. Prior to this he was based in Greenwich,
Connecticut managing the company's US automatic dishwashing products. Before
joining Benckiser, Mr. Glauber worked as a Brand Manager for Kraft Foods in
their Desserts & Snacks Division from August 1991 through August 1996.
Mr. Glauber received an M.B.A. from Harvard University and a B.A. in Government
from Hamilton College.
RONALD B. KNIGHT has served as Group President, Business and Consumer
Services; Consulting & Brand Management since July 2000. Prior to joining our
company, Mr. Knight was the Chief Operating Officer for The Sutherland Group
from September 1998 through July 2000. He is the former Vice President and Chief
of Staff of Business Operations for Xerox Corporation's Production Systems Group
(PSG) where he worked for 30 years. He served as a Lieutenant in the U.S. Navy
and worked as a financial analyst for General Motors prior to joining Xerox
Corporation. Mr. Knight holds a B.S. in Business Administration from the
University of Rochester, and an M.B.A. from the University of Rhode Island.
KATHY C. LEE has served as our Executive Vice President of Sales since
July 1999. Prior to joining our company, she spent 22 years with IBM, holding a
variety of sales and sales management
11
positions. Ms. Lee received her B.S. in Business Administration and Political
Science from Albion College.
BRUCE A. NEWMAN has served as our Chief Financial Officer, Secretary and
Treasurer since January 1986. From July 1980 to January 1986, Mr. Newman served
as Treasury Manager of The Case-Hoyt Corporation, a national printer. From
July 1975 to August 1978, Mr. Newman worked for Price Waterhouse. Mr. Newman
received a B.A. in Accounting from the State University of New York at Albany
and is a Certified Public Accountant.
GREGORY T. NOVAK has served as Group President, Emerging Markets, since July
2000. From June 1999 and June 2000, Mr. Novak was the President of our Internet
Division. Prior to joining our company, Mr. Novak was Vice President/General
Manager of Lightnin America's, a unit of GSX. Mr. Novak received an M.S. in
Management from Purdue University's Krannert Business School and a B.S. in
Mechanical Engineering from the University of Pittsburgh. Mr. Novak is also a
graduate of General Electric's Nuclear Power Engineering Program and Corporate
Analyst's Training and Development Program.
ITEM 2. PROPERTIES
Our principal office is located in Rochester, New York, under a lease that
expires in June 2003. In addition, we lease data collection centers, which
include telephone interviewing and customer relationship services, in Rochester,
New York, Vestal, New York and Boardman Ohio, and we lease service offices to
house our project staff, administrative staff and processing staff, in New York,
New York, San Francisco, California, Chicago, Illinois, Charlotte, North
Carolina and Arlington, Virginia. In July 2000, we announced the closing of the
Vestal, New York facility as part of our strategic realignment, effective
September 2000.
We lease all of our facilities and believe our current facilities are
adequate to meet our needs for the foreseeable future. We believe additional or
alternative facilities can be leased to meet our future needs on commercially
reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are at times subject to pending and
threatened legal actions and proceedings. After reviewing pending and threatened
actions and proceedings with counsel, management believes that the outcome of
such actions or proceedings is not expected to have a material adverse effect on
our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock has been quoted on the Nasdaq National Market system under
the symbol "HPOL" since our initial public offering on December 6, 1999. Before
then, there was no public market for our common stock. The following quotations
are furnished by Nasdaq for the periods indicated. These quotations reflect
inter-dealer quotations that do not include retail markups, markdowns or
commissions and may not represent actual transactions. The following table
shows, for the periods indicated, the high and low prices per share of our
common stock.
PRICE RANGE
OF COMMON
STOCK
----------------------
HIGH LOW
-------- --------
Year ending June 30, 2000:
Second Quarter (from December 6, 1999)...................... 24 13
Third Quarter............................................... 21 6
Fourth Quarter.............................................. 7 7/8 3
HOLDERS
At September 15, 2000, the Company's common stock was held by approximately
4,370 shareholders of record or through nominee or street name accounts with
brokers.
DIVIDENDS
We have never declared nor paid any cash dividends on our common stock. We
currently anticipate that we will retain any future earnings for the development
and operations of our business. Accordingly, we do not anticipate paying any
cash dividends on our capital stock in the foreseeable future.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 6, 1999, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1 (No. 333-87311).
Pursuant to this Registration Statement, the Company completed an initial public
offering of 6,670,000 shares of its common stock (including 870,000 shares sold
pursuant to the exercise of the Underwriters' over-allotment option) at an
initial public offering price of $14.00 per share or an aggregate offering of
$93.4 million (the "Offering"). The Offering was managed by Lehman Brothers,
U.S. Bancorp Piper Jaffray, Volpe Brown Whelan & Company, E*Offering Corp. and
Fidelity Capital Markets. Proceeds to the Company from the Offering, after
deduction of the Underwriters' discount and commission, totaled approximately
$85.5 million, net of offering costs of approximately $1.4 million.
In September and October of 1999, the Company sold 200,000 shares of
Class B preferred stock for an aggregate purchase price of $20,000,000 to
Young & Rubicam Inc., Excite, Inc., Sequel Limited Partnership II, Sequel
Entrepreneur's Fund II L.P. and Riedman Corporation. Upon the closing of our
public offering in December of 1999, the shares of Class B preferred stock
automatically converted into 2,591,167 shares of common stock. The shares of
Class B preferred stock were issued in reliance upon Section 4(2) of the
Securities Act of 1933.
The Company issued and sold an aggregate of 1,701,000 shares of its common
stock to employees during the fourth quarter of fiscal 2000, upon the exercise
of options granted under the Company's
13
1997 stock option plan, prior to the Offering, at prices ranging from $.18 to
$3.70 per share, for an aggregate cash consideration of $508,848. As to each
employee of the Company who was issued the common stock described in this
paragraph, the Company relied on Rule 701 of the Securities Act of 1933. Each
person was granted an option to purchase shares of the Company's common stock
pursuant to a written contract between such person and the Company, and the
Company was eligible to use Rule 701 at the time the options herein reported as
exercised were originally granted in accordance with Rule 701(b).
In addition, the Company issued an aggregate of 85,193 shares of its common
stock upon the exercise of warrants granted by the Company, at a price of $1.50.
Each warrant had a net exercise provision under which the holder could, in lieu
of payment of the exercise price in cash, surrender the warrant and receive a
net amount of shares, based on the fair market value of our stock at the time of
the exercise of the warrant, after deducting the aggregate exercise price. All
such transactions were conducted using the net exercise provision during the
fourth quarter of fiscal 2000. The Company relied upon Section 4(2) of the
Securities Act of 1933 in connection with the issuance of those shares.
During the period December 6, 1999 through June 30, 2000, the Company used a
portion of the proceeds from its public offering as follows: (i) approximately
$21.5 million of net cash used for working capital and general corporate
purposes, including capital expenditures (ii) approximately $3.6 million of net
cash used for the expansion of our Internet panel and (iii) $0.5 million of net
cash used in connection with the repayment of short-term borrowings.
Upon completion of the Offering, the Company's preferred stock was converted
into 14,381,445 shares of common stock. Upon conversion of the preferred stock,
all rights to accrued and unpaid dividends were terminated.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes to those statements and other financial information appearing elsewhere in
this Form 10-K. The consolidated financial data for the years ended June 30,
14
1996 and 1997 reflect the results of operations and balance sheet data of Gordon
S. Black Corporation, our predecessor corporation.
YEAR ENDED JUNE 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues from services........................ $ 51,289 $ 28,965 $26,290 $23,327 $14,625
Cost of services.............................. 28,600 19,086 16,618 15,629 10,209
-------- -------- ------- ------- -------
Gross profit.................................. 22,689 9,879 9,672 7,698 4,416
Operating expenses:
Internet database development expenses...... 5,647 4,505 2,753 -- --
Sales and marketing expenses................ 8,665 1,316 957 513 336
General and administrative expenses......... 32,209 13,085 8,855 5,878 3,445
-------- -------- ------- ------- -------
Operating (loss) income....................... (23,832) (9,027) (2,893) 1,307 635
Interest and other income, net................ 2,940 180 (160) (89) 13
(Loss) income before income tax............... (20,892) (8,847) (3,053) 1,218 648
Income tax expense (benefit).................. 50 -- (1,114) 490 260
-------- -------- ------- ------- -------
Net (loss) income............................. (20,942) (8,847) (1,939) 728 388
Accrued dividends on preferred stock.......... (738) (1,176) -- -- --
-------- -------- ------- ------- -------
Net loss available to holders of common
stock....................................... $(21,680) $(10,023) $(1,939) $ 728 $ 388
======== ======== ======= ======= =======
(Loss) income per share -- basic and
diluted..................................... $ (0.93) $ (1.01) $ (0.16) $ 0.06 $ 0.03
======== ======== ======= ======= =======
Weighted average shares outstanding --
basic....................................... 23,318 9,955 11,903 11,742 11,635
Weighted average shares outstanding --
diluted..................................... 23,318 9,955 11,903 12,372 11,955
Pro forma basic and diluted net loss per share
(unaudited)................................. $ (0.73) $ (0.41)
======== ========
Pro forma basic and diluted weighted average
shares
outstanding, (unaudited)...................... 28,854 21,746
SELECTED OPERATING DATA:
Sales Growth.................................. 77% 10% 13% 60% 34%
Capital Expenditures.......................... 12,092 4,372 977 672 189
BALANCE SHEET DATA (AT END OF PERIOD):
Cash, cash equivalents and marketable
securities.................................. 72,892 108 4 349 1,073
Working capital (deficit)..................... 78,698 552 (2,196) (31) (246)
Total assets.................................. 104,452 14,785 9,798 9,721 6,628
Long-term debt, excluding current
installment................................. -- -- 400 700 1,100
Mandatory redeemable preferred stock.......... -- 15,876 -- -- --
Total stockholders' equity (deficit).......... 94,350 (8,496) 947 2,392 1,663
The pro forma net loss per share has been computed by dividing net loss by
the pro forma weighted average number of shares outstanding. Pro forma weighted
average shares assume the conversion of all preferred stock (which were
automatically converted to common stock in conjunction with the Company's
initial public offering) as if the conversion occurred at the beginning of the
period or at the date of issuance, if later.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION RESULTS OF
OPERATIONS
OVERVIEW
We provide market research and polling products and services to a broad
range of companies, non-profit organizations and governmental agencies. Since
1956, we have provided these services utilizing traditional market research and
polling methodologies, such as direct mail, telephone-based surveys, mall
intercepts, focus groups and in-person interviews. In September 1997, we began
developing our Internet panel and building the technology infrastructure to
provide online market research and polling services. In November 1997, we
introduced our first Internet-based market research and polling products and
services.
We generally perform traditional and Internet-based custom research services
on a fixed fee basis in response to client-generated requests. We sell our
multi-client research products on a periodic subscription basis, typically
quarterly or annually. Harris Interactive Service Bureau performs research for
other market research firms on a project-by-project basis in response to
requests from those firms.
15
We provide customer relationship services on an outsourced basis to our clients
on a project-by-project basis.
Through fiscal 1998, all of our revenues were derived from custom research
projects using traditional market research and polling methodologies. In fiscal
1999, revenues from those sources represented $26,055 or 90% of our total
revenues, while revenues from Internet-based products represented $2,910 or 10%
of total revenues. During fiscal 2000, revenues from traditional market research
and polling methodologies represented $30,301 or 59% of total revenues, while
revenues from Internet-based products represented $20,988 or 41% of total
revenues. We consider all of the revenues from a project to be Internet-based
whenever 50% or more of the surveys used in the completed project were completed
by online panelists over the Internet. We anticipate that, as our online
business grows, revenues derived from Internet-based custom research,
multi-client products and Harris Interactive Service Bureau research will
represent the dominant portion of our total revenues.
The number of our Internet clients has grown from 47 at June 30, 1999 to 363
at June 30, 2000, 102 of which were added in the fourth quarter of fiscal 2000.
Additionally, our Internet database of online panelists has expanded
significantly during fiscal 2000, with approximately 3.5 million online
panelists at June 30, 1999 and 6.5 million at June 30, 2000.
Revenues under fixed fee arrangements are recognized on a percentage of
completion method based on the ratio of costs incurred to total estimated costs.
These revenues include amounts billed to our clients to cover subcontractor
costs and other direct expenses. Provision for estimated contract losses, if
any, is made in the period such losses are determined. Subscription revenues are
recognized upon delivery of the research product.
Gross margin represents revenues less variable project costs and associated
direct labor. Variable project costs related to market research utilizing
traditional methodologies include interviewer payroll, subcontractor charges,
panelist incentives, telecommunication charges and mailing costs. In contrast,
variable costs related to Internet-based market research are nominal. Direct
labor costs consist primarily of survey design, analysis, and reporting costs
and are comparable for both traditional and Internet-based methodologies. We
anticipate that our gross margins will increase as the percentage of revenues we
generate from Internet-based products and services increases.
Operating expenses consist primarily of database development costs, sales
and marketing, and general and administrative expenses. Database development
expenses are the expenses we incur in connection with the ongoing development of
our Internet panel, primarily through our strategic alliance with Excite@Home.
Those costs are expensed as incurred. Sales and marketing expenses consist
primarily of personnel and marketing program expenses, public relations
advertising and promotion costs, commissions and telemarketing costs and other
related expenses. General and administrative expenses consist of salaries,
payroll taxes, benefits and related costs for both technology infrastructure
development and general corporate functions, occupancy costs and depreciation.
Interest and other income are primarily comprised of income from investments
in each period.
We are required to and have in the past recognized compensation expense when
we grant options or sell shares to employees or certain other persons at a price
less than the fair market value of the shares at the date of grant or sale. In
the case of option grants, the difference between the fair market value of the
common stock and the exercise price on the grant date of the option is amortized
as compensation expense over the vesting period for the option. In the case of a
sale of common stock, the compensation expense is recognized on the date of
sale. During fiscal 2000, we recognized compensation expense of approximately
$1.0 million in connection with such transactions. During fiscal 1999, we
recognized approximately $.02 million in compensation expense. There was no
compensation expense recognized during fiscal 1998.
16
Our net losses were $20.9 million, $8.8 million, and $1.9 million in fiscal
2000, fiscal 1999, and fiscal 1998 respectively. The increase in net losses over
the prior fiscal year is due primarily to the continued expansion of our
business resulting in the addition of new personnel, increased marketing and
sales expenses, and higher costs associated with ongoing development of new
products, services, and the technology infrastructure and Internet database
necessary for our transition from traditional to Internet-based market research.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated our results of
operations expressed as a percentage of revenues:
YEAR ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues from services...................................... 100% 100% 100%
Cost of services............................................ 56 66 63
Gross profit................................................ 44 34 37
Internet database development expenses...................... 11 16 11
Sales and marketing expenses................................ 17 4 14
General and administrative expenses......................... 63 45 23
Operating loss.............................................. (47) (31) (11)
Interest and other income, net.............................. (6) 1 (1)
Net loss.................................................... (41) (30) (7)
FISCAL 2000 AS COMPARED TO FISCAL 1999
REVENUES FROM SERVICES. Total revenues increased 77% from $29.0 million in
fiscal 1999 to $51.3 million in fiscal 2000. This increase was primarily due to
increased usage of our Internet-based market research products and services,
which contributed $21.0 million to total revenues in fiscal 2000, a 624%
increase over the prior year. Internet revenues constituted 41% of total
revenues in fiscal 2000 as compared to 10% of total revenues in fiscal 1999.
GROSS MARGIN. Gross margin increased to 44% in fiscal 2000 from 34% in
fiscal 1999, primarily due to the significant expansion of Internet-related
business relative to overall revenue growth.
DATABASE DEVELOPMENT EXPENSES. Database development expenses increased 24%
to $5.6 million in fiscal 2000 from $4.5 million in fiscal 1999. The increase
over fiscal 1999 is due to the continued expansion of the Company's online panel
at a rate consistent with strategic objectives.
SALES AND MARKETING. Sales and marketing expenses increased 569% to
$8.7 million in fiscal 2000 compared to $1.3 million in the prior year. The
increase is primarily attributable to additional sales and marketing personnel
as well as marketing efforts in support of our multi-client research products
and Harris Interactive Service Bureau expansion.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
146% to $32.2 million in fiscal 2000 from $13.1 million in fiscal 1999. This
increase was primarily attributable to increased staffing and occupancy expenses
associated with new hires, higher costs associated with our continuing
development of new products, services and technologies for the Internet, and
compensation expense related to stock option grants.
INTEREST AND OTHER INCOME, NET. Net interest and other income totaled
$2.9 million in fiscal 2000 as compared to $0.2 million in fiscal 1999. The
increase was primarily due to increased cash and
17
marketable security balances during fiscal 2000 resulting from a private
placement of Class B Preferred Stock in October 1999 and completion of our
initial public offering in December 1999.
FISCAL 1999 AS COMPARED TO FISCAL 1998
REVENUES FROM SERVICES. Total revenues increased 10% to $29.0 million in
fiscal 1999 from $26.3 million in fiscal 1998. This increase in total revenues
was due to the initial market penetration of our Internet-based market research
products which contributed $2.9 million, or 10% of total revenues, in fiscal
1999. Revenues from our market research and polling products and services
utilizing traditional methodologies were relatively unchanged as we focused our
marketing efforts on Internet-based market research products and services.
GROSS MARGIN. Gross margin decreased to 34% for fiscal 1999 from 37% in
fiscal 1998, due primarily to a change in project mix and the substantial direct
expenses incurred in connection with the development of multi-client products,
from which only nominal revenues were recognized in fiscal 1999. The decrease in
gross margins was partially offset by increased margins on our Internet-based
products and services.
DATABASE DEVELOPMENT EXPENSES. Database development expenses increased 64%
to $4.5 million in fiscal 1999 compared to $2.8 million in fiscal 1998. The
increase in fiscal 1999 reflects database development expenses for a full fiscal
year consisting of expenses associated with payments to Excite@Home for the
acquisition of additional names of panelists for our Internet panel.
SALES AND MARKETING. Sales and marketing costs were $1.3 million for fiscal
1999 compared to $1.0 million for fiscal 1998. The increase is primarily related
to additional sales and marketing personnel as well as higher costs associated
with the development of new products, services and technologies for the
Internet.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
48% from $8.9 million in fiscal 1998 to $13.1 million in fiscal 1999. The
increase was primarily due to increased staffing expenses associated with new
hires, higher costs associated with our continuing development of new products,
services and technologies for the Internet, and compensation expense related to
stock option grants.
INTEREST AND OTHER INCOME, NET. Net interest and other income was
$0.2 million of income for fiscal 1999 as compared to $0.2 million of expense
for fiscal 1998. The increase in income was primarily attributable to the
pay-down of long-term debt and the short-term investment of the proceeds of
redeemable preferred stock issued in July 1998 to finance our database
development expenses.
18
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited consolidated quarterly statement of
operations data for the years ended June 30, 1999 and 2000. In management's
opinion, this information has been prepared on the same basis as the audited
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments necessary for the fair presentation of the
unaudited information in the periods presented. This information should be read
in conjunction with the consolidated financial statements and related notes
included under Item 8 of this report and in conjunction with other financial
information included elsewhere in this Form 10-K. The results of operations for
any quarter are not necessarily indicative of results that may be expected for
any future periods.
THREE MONTHS ENDED
----------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1999 1999 1999 1999
------------- ------------ --------- -------- ------------- ------------
Revenues from services........... $ 6,530 $ 6,935 $ 6,462 $ 9,038 $ 9,364 $12,473
Cost of services................. 4,133 4,637 4,291 6,025 6,307 6,950
------- ------- ------- ------- ------- -------
Gross Profit..................... 2,397 2,298 2,171 3,013 3,057 5,523
Operating expenses:
Internet database development
expenses....................... 561 1,751 1,233 960 905 1,615
Sales and marketing expenses..... 160 311 388 457 793 2,067
General and administrative
expenses....................... 2,672 2,852 3,132 4,429 5,121 7,224
------- ------- ------- ------- ------- -------
Operating loss................... (996) (2,616) (2,582) (2,833) (3,762) (5,383)
Interest and other income
(expense), net................. 23 96 31 30 (71) 401
------- ------- ------- ------- ------- -------
Loss before income taxes......... (973) (2,520) (2,551) (2,803) (3,833) (4,982)
Income tax expense............... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Net loss......................... (973) (2,520) (2,551) (2,803) (3,833) (4,982)
Accrued dividends on preferred
stock.......................... (294) (294) (294) (294) (294) (444)
------- ------- ------- ------- ------- -------
Net loss available to holders of
common stock................... $(1,267) $(2,814) $(2,845) $(3,097) $(4,127) $(5,426)
======= ======= ======= ======= ======= =======
THREE MONTHS ENDED
--------------------
MARCH 31, JUNE 30,
2000 2000
--------- --------
Revenues from services........... $14,156 $15,296
Cost of services................. 7,503 7,840
------- -------
Gross Profit..................... 6,653 7,456
Operating expenses:
Internet database development
expenses....................... 1,600 1,527
Sales and marketing expenses..... 2,863 2,942
General and administrative
expenses....................... 9,046 10,818
------- -------
Operating loss................... (6,856) (7,831)
Interest and other income
(expense), net................. 1,340 1,270
------- -------
Loss before income taxes......... (5,516) (6,561)
Income tax expense............... -- 50
------- -------
Net loss......................... (5,516) (6,611)
Accrued dividends on preferred
stock.......................... -- --
------- -------
Net loss available to holders of
common stock................... $(5,516) $(6,611)
======= =======
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through bank financings and, more
recently, issuances of our common and preferred stock. In December 1999 we
completed the initial public offering of 6,670,000 shares of our common stock
(including 870,000 shares sold pursuant to the exercise of the Underwriters'
over-allotment option), which generated net proceeds of $85.5 million.
Consequently, cash and cash equivalents and marketable securities increased from
$0.1 million at June 30, 1999 to $72.9 million at June 30, 2000.
Net cash used in operating activities was $22.0 million for fiscal 2000,
$8.2 million for fiscal 1999 and $1.0 million for fiscal 1998. Net cash used in
operating activities in each of these periods was primarily the result of net
operating losses.
Net cash used in investing activities was $60.9 million for fiscal 2000,
$4.3 million for fiscal 1999 and $1.0 million for fiscal 1998. The increase in
fiscal 2000 over the prior years, was primarily
19
attributable to the purchase of investment securities with the proceeds from our
initial public offering of common stock, pending the use of these proceeds for
working capital, expansion of our Internet panel, and development of new
technologies, products, and services. Additionally, capital expenditures
associated with our Internet infrastructure development and facilities expansion
were $12.1 million in fiscal 2000. During fiscal 1999 and 1998, net cash used in
investing activities was primarily related to capital expenditures associated
with our Internet infrastructure development and facilities expansion.
Net cash provided by financing activities was $106.7 million for fiscal
2000, $12.6 million for fiscal 1999 and $1.7 million for fiscal 1998. In fiscal
2000, our financing activities primarily consisted of the issuance of common
stock in connection with the initial public offering completed in
December 1999, with net proceeds of $85.5 million, as well as a private
placement of our Class B preferred stock with net proceeds of $19.9 million.
In fiscal 1999, our financing activities consisted primarily of a private
placement of our Class A preferred stock with net proceeds of $14.1 million in
the first quarter, and the issuance of common stock to a long-term participant
in our Harris Interactive Service Bureau with net proceeds of $4.1 million in
the fourth quarter. These net proceeds were partially offset by the repurchase
of $3.0 million of common stock from two of our executive officers and several
other stockholders, the repayment of $1.9 million on our line of credit and
principal repayments of $0.7 million on our long-term debt. In fiscal 1998, our
financing activities consisted primarily of a $1.6 million increase in
short-term borrowings and the issuance of common stock upon exercise of stock
options in the amount of $0.5 million. These proceeds were partially offset by
$0.4 million in principal repayments on our long-term debt.
Our capital requirements depend on numerous factors, including market
acceptance of our products and services, the resources we allocate to the
continuing development of our Internet infrastructure and Internet panel,
marketing and selling of our services, our promotional activities and other
factors. While management anticipates continuing expenditures for property,
plant and equipment and working capital requirements throughout fiscal 2001,
these expenditures are expected to be lower than fiscal 2000.
YEAR 2000
On and after January 1, 2000, the Company has experienced no material
disruptions of its computer and microprocessor-based devices or operating
difficulties of mission critical applications. In addition, Harris Interactive
is not aware of any difficulties with its products or services nor has the
Company experienced any material problems related to applications or devices
provided by critical external third parties for use by the Company. We have no
reason to believe that Year 2000 failures will seriously affect us in the
future. However, given the possibility of latent Year 2000 defects, we cannot be
certain that we will not experience Year 2000 problems or be affected by
third-party Year 2000 failures. The Company will continue to monitor the
operations of its computers and micro-processor-based devices for any Year 2000
related problems.
RECENT ACCOUNTING PRONOUNCEMENTS
SAB 101
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. SAB 101 is effective for our fiscal year beginning July 1, 2000.
Implementation of SAB 101 is not expected to require us to change existing
revenue recognition policies and therefore is not expected to have a material
effect on our financial position or results of operations.
20
FIN 44
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or January 12,
2000. The impact of FIN 44 is not expected to have a material effect on the
consolidated financial statements.
RISK FACTORS
IF THE MARKETPLACE DOES NOT ACCEPT INTERNET-BASED MARKET RESEARCH AND POLLING,
OUR GROWTH WILL BE ADVERSELY AFFECTED.
The success of our business will depend on our ability to develop and market
Internet-based products and services that achieve broad market acceptance by our
current and potential clients. These clients must accept the Internet as an
attractive and sustainable substitute medium for traditional methodologies of
conducting market research to which they are accustomed, such as direct mail,
telephone-based surveys, mall intercepts, focus groups and in-person interviews.
Since the beginning of fiscal 1998, we have expended $34.5 million and
significant management resources in the development and growth of our
Internet-based market research and polling business. We have experienced
resistance from some of our clients regarding our Internet-based market research
and polling methodologies. These clients expressed concern that Internet users
do not yet accurately reflect the overall population, and any resulting
information will be inherently biased towards the views, experiences and
attitudes of an unrepresentative group. If our current and potential clients do
not accept our Internet-based methodologies as reliable and unbiased, our
revenues may not meet expectations or may decline, and our business would likely
suffer.
WE MUST CONTINUALLY ATTRACT AND RETAIN SKILLED TECHNICAL, MANAGERIAL, MARKETING,
SALES AND OTHER PERSONNEL OR WE WILL BE UNABLE TO EXECUTE OUR BUSINESS STRATEGY.
Our future success will depend, in part, on our ability to attract, retain
and motivate highly skilled technical, managerial, marketing, sales and client
support personnel. Competition for these personnel is intense, especially in the
Internet industry, and we may be unable to attract, integrate or retain
sufficiently qualified personnel or the number of qualified personnel our
business plan assumes. We have experienced in the past, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. Our past difficulties in
hiring and retaining highly skilled employees have resulted in additional costs
for recruitment, compensation and relocation or the provision of remote access
to our facilities. In addition, at certain times we have been required to
outsource software development for systems improvements, which has resulted in
delays in implementation and integration and increased costs. To the extent that
we are unable to hire and retain skilled employees in the future, our business
would likely suffer.
WE DERIVED 18% OF OUR TOTAL REVENUES FROM ONE CLIENT IN FISCAL 2000. IF WE WERE
TO LOSE, OR IF THERE WERE A MATERIAL REDUCTION IN BUSINESS FROM THIS CLIENT, OUR
BUSINESS WOULD LIKELY SUFFER.
Our contract with our largest client is terminable upon notice of 90 days or
less, and this client may reduce its use of our services or products at any
time. The loss of, or material reduction in business from, this client, without
replacement, would have a material adverse effect on our business, financial
condition and results of operations.
21
WE HAVE INCURRED LOSSES IN RECENT YEARS.
Since the beginning of fiscal 1998 through year end fiscal 2000, we have
expended approximately $34.5 million to develop and maintain our Internet
capabilities, comprising of approximately $12.9 million to develop our Internet
panel and approximately $21.6 million to develop and maintain our technology
infrastructure. As a result, we incurred net losses of $20.9 million in fiscal
2000, $8.8 million in fiscal 1999 and $1.9 million in fiscal 1998. We base
current and future expense levels on our operating plans and our estimates of
future revenues. If our revenues grow at a slower rate than we anticipate, or if
our spending levels exceed our expectations or cannot be adjusted to reflect
slower revenue growth, we may not be able to achieve profitability. Even if we
achieve profitability in the future, we may be unable to sustain or increase
profitability on a quarterly or annual basis.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO DECLINE.
Our operating results have in the past and may in the future fluctuate
significantly from quarter to quarter. Our operating results are difficult to
forecast because we have operated in the Internet-based market research and
polling industry for only approximately two years. In future periods, our
results of operations may be below the expectations of public market analysts
and investors. In this event, the price of our common stock would likely
decline.
Factors that are outside of our control, and that have caused our results to
fluctuate in the past or that may affect us in the future, include:
- demand for market research and polling products and services generally;
- seasonal fluctuations due to decreases in requests for market research
and polling services during the summer and year-end vacation and holiday
periods;
- development of products and services by our competitors;
- technical difficulties or system downtime affecting the Internet
generally; and
- fluctuations in general economic conditions or the budgets of our
clients.
Factors that are within our control, and that have caused our results to
fluctuate in the past or that may affect us in the future, include:
- our relative mix of Internet-based and traditional market research and
polling businesses;
- technical difficulties or downtime of individual components of our
computer system affecting our operations;
- our ability to increase the size and scope of our Internet panel that we
will use to develop and sell new products and services to generate
revenues; and
- development of our products and services.
The factors listed above may affect both our quarter-to-quarter operating
results as well as our long-term success. You should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance or any trend in our performance. Our limited Internet-
related operating history makes it difficult to assess the impact of any one of
the above factors on our future performance.
OUR AGREEMENTS WITH EXCITE@HOME HAVE PRODUCED MORE THAN 90% OF OUR ONLINE
PANELISTS. A LOSS OF THAT SOURCE WOULD INHIBIT OUR ABILITY TO EXPAND OUR ONLINE
PANEL.
We have obtained more than 90% of our online panelists through agreements
with Excite@Home. We entered into a new agreement with Excite@Home effective
October 1, 1999 which will continue
22
until September 30, 2002. This agreement will automatically renew for successive
one-year terms after September 30, 2002, subject to either party's right to
terminate upon 120 days prior notice. If this agreement were terminated by
either party, we would need to develop another reliable source with which to
build and replenish our Internet panel. If we were unable to develop an
alternative source of online panelists, our business, financial condition and
results of operations would likely suffer.
IF WE ARE UNABLE TO MAINTAIN ADEQUATE SIZE AND DEMOGRAPHIC COMPOSITION OF OUR
INTERNET PANEL, OR IF WE ARE REQUIRED TO SPEND SUBSTANTIAL FUNDS TO DO SO, OUR
BUSINESS WILL SUFFER.
Our success is highly dependent on our ability to obtain and retain online
panelists and to increase the number of online panelists we have available in
our Internet panel. Our ability to increase the number of online panelists or
increase revenues through the use of our Internet panel may be harmed if:
- a significant number of our current online panelists decide that they
are no longer willing to participate in our surveys;
- we lose our online panelists due to numerous requests for participation
and we are required to rely on a limited number of online panelists for
numerous surveys on a variety of subjects; or
- our online panelists become frustrated with the layout and design of our
questionnaires and, as a result, reduce their participation in our
surveys.
If the number of our survey respondents decreases or the demographic
composition of our Internet panel narrows, our ability to provide our clients
with accurate and statistically projectable information would likely suffer.
This risk is likely to increase as our business expands. For example, our
Internet panel is surveyed for our own studies as well as for studies conducted
by our Harris Interactive Service Bureau, which conducts research for other
market research firms. Our business cannot grow and will suffer if we have an
insufficient number of panelists to respond to our surveys, or if our panel
becomes unreliable because of its size or because it is not representative of
the general population.
Our online panelists are not obligated to participate in our surveys and
polls and there can be no assurance that they will do so. We occasionally offer
incentives to encourage participation in our surveys and to increase the size of
our Internet panel.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The markets for our products and services are highly competitive. We compete
for clients with market research firms offering Internet-based and traditional
market research and polling services. We expect to face competition in the
future from other traditional market research firms who develop Internet-related
products and services or other companies with access to large databases of
individuals with whom they can communicate on the Internet. These companies may,
either alone or in alliances with other firms, penetrate the Internet-based
market research and polling market.
We do not believe that there are currently any dominant competitors in the
Internet-based market research and polling market. However, many of our current
and potential competitors have longer operating histories and significantly
greater financial and marketing resources. These competitors may be able to
undertake more extensive marketing campaigns for their services, adopt more
aggressive pricing policies and make more attractive offers to potential
employees, strategic partners and customers. Further, our competitors and
potential competitors may develop technologies that are superior to ours, or
that achieve greater market acceptance than our own. The above factors, either
alone or in combination, would likely result in a loss of market share and
reduced levels of revenue and profitability.
23
POTENTIAL ACQUISITIONS OF OR INVESTMENTS IN OTHER COMPANIES MAY NOT BE AVAILABLE
AND MAY HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
As part of our continued strategy to expand our Internet panel, our
technology infrastructure and our products and services, we may acquire or make
investments in complementary businesses, services, products or technologies if
appropriate opportunities arise. However, we may be unable to identify suitable
acquisition or investment candidates at reasonable prices or on reasonable
terms. The material risks involved with acquisitions are:
- the difficulties in the integration and assimilation of the operations,
technologies, products and personnel of the acquired business;
- the diversion of management's attention from other business concerns;
- the availability of favorable acquisition financing; and
- the potential loss of key employees of any acquired business.
Acquisitions may require the use of significant amounts of cash, resulting
in the inability to use those funds for other business purposes. Acquisitions
utilizing our capital stock could result in potentially dilutive issuances of
our capital stock, which could adversely impact the market price of our common
stock. Amortization of goodwill and other intangible assets would reduce our
earnings, which in turn could negatively impact the price of our common stock.
These difficulties could disrupt our ongoing business, distract our management
and employees and increase our expenses.
THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL COULD DISRUPT OUR
OPERATIONS AND RESULT IN LOSS OF REVENUES.
Our future success depends to a significant extent on the continued services
of our key technical and senior management personnel. The loss of the services
of any of these persons could seriously harm our business. Although some of our
key employees have signed non-competitive agreements, none of our officers or
key employees is bound by an employment agreement, and our relationships with
our officers and key employees are at will. We do not have "key person" life
insurance policies covering any of our employees other than Gordon S. Black.
WE ARE GROWING RAPIDLY AND IF WE ARE NOT ABLE TO EFFECTIVELY MANAGE AND SUPPORT
OUR GROWTH OUR BUSINESS STRATEGY MIGHT NOT SUCCEED.
We have grown rapidly and will need to continue to grow in all areas of our
operations to execute our business strategy. Managing and sustaining our growth
will place significant demands on management as well as on our administrative,
operational, technical and financial systems and controls. If we are unable to
manage our growth effectively, we would have to divert resources away from the
continued growth of our business and the implementation of our business
strategy.
IF WE DO NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE AND THE INTENSE
COMPETITION OF THE MARKET RESEARCH AND POLLING INDUSTRY, WE WILL NOT BE ABLE TO
SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN.
The market research and polling industry is characterized by intense
competition, frequent new products and service introductions and evolving
methodologies. The recent growth of the Internet exacerbates these market
characteristics. To succeed, we will need to develop and integrate effectively
the various software programs, technologies and methodologies required to
enhance and improve our market research product and service offerings and manage
our business. Any enhancements or new services or products must meet the
requirements of our current and potential clients and achieve significant market
acceptance. Our success also will depend on our ability to adapt to rapidly
changing technologies by continually improving the performance features and
reliability of our products and
24
services. We may experience difficulties that could delay or prevent the
successful development, introduction or marketing of new products and services.
We could also incur substantial costs if we need to modify our services or
infrastructure to adapt to these changes.
ANY FAILURE IN THE PERFORMANCE OF OUR INTERNET-BASED TECHNOLOGY INFRASTRUCTURE
COULD HARM OUR BUSINESS AND OUR REPUTATION.
Any system failure, including network, software or hardware failure, that
causes an interruption in our ability to communicate with our Internet panel or
in our ability to collect research data could result in reduced revenue, and
could impair our reputation.
Our systems and operations are vulnerable to damage or interruption from
fire, earthquake, power loss, telecommunications failure, break-ins and similar
events. We depend on Verio Collocation, an off-site data security facility, to
maintain approximately one-third of our servers at its facility in Rochester,
New York, and to protect our systems and operations from the events described
above.
We have experienced technical difficulties with downtime of individual
components of our computer system in the past and believe that technical
difficulties and downtime will continue to occur from time to time in the
future. To date, technical difficulties and downtime have had minimal impact on
our operations and have usually been rectified within several hours to
48 hours. Their impact may be more severe in the future. We have no formal
disaster recovery plan and our business interruption insurance may not
adequately compensate us for any losses that may occur due to any failures in
our system and any resulting interruptions in our communications with our
Internet panel or in our data collection efforts. In addition, our servers and
software must be able to accommodate a high volume of traffic. Any increase in
demands on our servers beyond that which we currently anticipate will require us
to expand and adapt our network infrastructure. If we were unable to add
additional software and hardware to accommodate increased demand, unanticipated
system disruptions and slower data collection would likely result.
Moreover, our Internet panel members communicate with us using various
Internet service providers. These providers have experienced significant outages
in the past, and could experience outages, delays and other difficulties due to
system failures unrelated to our systems. While the impact of these outages in
the past has been minimal, any future system delays or failures of service
providers to our Internet panel could adversely affect our access to our online
panelists, which could have a material adverse effect on our business, financial
condition and results of operations.
FAILURE OR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT
OUR BUSINESS.
Our success and ability to compete substantially depend on our internally
developed technologies and trademarks, which we protect through a combination of
patent, copyright, trade secret and trademark laws. We have trademark
registrations for a number of our trademarks, including the HARRIS POLL. If we
were prevented from using the HARRIS POLL, our brand recognition and business
would likely suffer. We would have to make substantial financial commitments to
promote and rebuild our brand identity and loyalty with our clients and members
of our Internet panel and reimplement our website.
We have currently pending trademark applications for CONCEPTLOC, HARRIS
INTERACTIVE and HPOL. We also have patent applications currently pending for a
multi-location and multi-language registration and polling system and for our
CONCEPTLOC encryption system. In addition, we may apply for additional
trademarks or patents in the future. Our patent or trademark applications may
not be approved, or if approved, our patents or trademarks may be successfully
challenged by others or invalidated. If our trademark applications are not
approved because third parties own these trademarks, our use of these trademarks
would be restricted unless we enter into arrangements with the third-party
owners, which might not be possible on commercially reasonable terms or at all.
25
We generally enter into confidentiality or license agreements with parties
with whom we do business, and generally control access to and distribution of
our technologies, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights from unauthorized use or disclosure,
parties may attempt to disclose, obtain or use our technologies. The steps we
have taken may not prevent misappropriation of our technologies, particularly in
foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.
We also rely on off-the-shelf technologies that we license from third
parties. "Off-the-shelf" technology refers to generally commercially available
software that is not customized for a particular user. These third party
licenses may not continue to be available to us on commercially reasonable terms
or at all. The inability to use licensed technology important to our business
could require us to obtain substitute technology of lower quality or performance
standards or at a greater cost. In the future, we may seek to license additional
technology to enhance our current technology infrastructure. We cannot be
certain that any such licenses will be available on commercially reasonable
terms or at all. The loss of any of these technology licenses could result in
delays in providing our products and services until equivalent technology, if
available, is identified, licensed and integrated.
POSSIBLE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS BY THIRD PARTIES COULD BE
COSTLY.
We cannot guarantee that infringement or other claims will not be asserted
or prosecuted against us in the future, whether resulting from our internally
developed intellectual property or licenses or content from third parties. Any
future assertions or prosecutions could be time-consuming, result in costly
litigation and diversion of technical and management personnel or require us to
pay money damages, introduce new trademarks, develop non-infringing technology,
or enter into royalty or licensing agreements. Any of those events could
substantially increase our operating expenses and potentially reduce our
expected revenues. These royalty or license agreements, if required, may not be
available on acceptable terms, or at all. Our ability to execute our business
strategy will suffer if a successful claim of infringement is brought against us
and we are unable to introduce new trademarks, develop non-infringing technology
or license the infringed or similar technology on a timely basis. Moreover, our
general liability insurance may not cover, or may not be adequate to cover all
costs incurred in, defense of potential trademark infringement claims, or to
indemnify us for all liability that may be imposed.
ANY DIFFICULTY IN ACCESSING ADDITIONAL CAPITAL MAY PREVENT US FROM ACHIEVING OUR
BUSINESS OBJECTIVES.
We may need to raise additional funds in the future to fund the expansion of
our Internet panel and the marketing of our products and services, or to acquire
complementary businesses, technologies or services. Any required additional
financing may be unavailable on terms favorable to us, or at all. If we raise
additional funds by issuing equity securities, current stockholders will
experience dilution, which may be significant, to their ownership interest, and
such securities may have rights senior to those of the holders of our common
stock. If additional financing is not available when required or is not
available on acceptable terms, we may be unable to fund the development and
expansion of our business, promote our brand name successfully, take advantage
of business opportunities or respond to competitive pressures, any of which
could have a material adverse effect on our business, financial condition and
results of operations.
OUR BUSINESS IS LARGELY DEPENDENT ON THE DEVELOPMENT AND GROWTH OF THE INTERNET,
WHICH MAY NOT GROW, OR IF IT DOES GROW, MAY BE UNABLE TO SUPPORT THE DEMANDS
PLACED ON IT BY THIS GROWTH.
If Internet usage in general does not grow, we may be unable to attract
additional online panelists to our Internet panel or clients for our
Internet-based market research and polling products and services. If Internet
usage does continue to grow, the Internet infrastructure may be unable to
support the demands placed on it by this growth and its performance and
reliability may decline. Varying
26
factors could inhibit future growth or the ability of the Internet
infrastructure to adequately support the growth in Internet usage, including:
- inadequate network infrastructure;
- security concerns;
- inconsistent quality of service; and
- unavailability of cost effective, high speed service.
Our Internet panel depends on Internet service providers, online service
providers and other website operators for access to the Internet and our
websites. Many websites have experienced interruptions in their service as a
result of outages and other delays occurring throughout the Internet network
infrastructure.
The International Data Corporation projects that the number of Internet
users worldwide will grow from 142 million at the end of 1998 to more than
500 million by the year 2003, and in the United States will grow from
63 million at the end of 1998 to 177 million by the year 2003. If Internet usage
declines or grows at a significantly slower rate than projected, our ability to
maintain our Internet panel, add further members to our Internet panel and
gather research data and information quickly will decrease, which would likely
harm our business.
CHANGES IN GOVERNMENT REGULATION OR INDUSTRY PRACTICES COULD LIMIT OUR INTERNET
ACTIVITIES OR RESULT IN ADDITIONAL COSTS OF DOING BUSINESS ON THE INTERNET.
The Internet Tax Freedom Act prohibits states or political subdivisions from
imposing taxes on Internet access, unless imposed and enforced prior to
October 1, 1998, and multiple or discriminatory taxes on electronic commerce
during the period beginning October 1, 1998 and ending October 21, 2001. The
Internet Tax Freedom Act also created the Advisory Commission on Electronic
Commerce to examine tax laws that impact electronic commerce. Any new laws
pertaining to the imposition of taxes on Internet access and electronic commerce
could adversely affect our business. In February 1999, the Federal
Communications Commission issued a declaratory ruling interpreting the
Telecommunications Act of 1996 to allow local exchange carriers to receive
reciprocal compensation for traffic delivered to information service providers,
particularly Internet service providers, on the basis that traffic bound for
Internet service providers is largely interstate. As a result of this ruling,
the costs of transmitting data over the Internet may increase and our business
could suffer.
There are currently few laws or regulations that specifically regulate
communications on the Internet. However, we expect more stringent laws and
regulations to be enacted due to the increasing popularity and use of the
Internet. Any new legislation or regulations or the application of existing laws
and regulations to the Internet could limit our effectiveness in conducting
Internet-based market research and polling, and increase our operating expenses.
In addition, the application of existing laws to the Internet could expose us to
substantial liability for which we might not be indemnified by content providers
or other third parties. Existing laws and regulations currently address, and new
laws and regulations and industry self-regulatory initiatives are likely to
address, a variety of issues, including the following:
- e-mail distribution,
- user privacy and expression;
- the rights and safety of children;
- intellectual property;
- information security;
27
- anti-competitive practices;
- the convergence of traditional channels with Internet commerce;
- taxation and pricing; and
- the characteristics and quality of products and services.
Those laws that do reference the Internet have limited interpretation by the
courts and their applicability and scope are not well defined. Any new laws or
regulations relating to the Internet could adversely affect our business.
Industry standards related to the Internet are still evolving. Moreover,
some private entities have proposed their own standards for communications with,
and use of information related to, individuals who use the Internet. Internet
service providers also have the ability to disrupt our communications with our
panel. Although we believe that we employ responsible practices related to the
recruitment of members of our database, communications with our panelists and
use of information provided by our respondents, some service providers and/or
self appointed industry regulators may not agree. As a result, our
communications with our panelists may be disrupted from time to time.
INTERNET SECURITY CONCERNS COULD HINDER INTERNET COMMUNICATIONS AND OUR ABILITY
TO OBTAIN SUFFICIENT AND RELIABLE RESPONSES FROM OUR ONLINE PANELISTS.
The need to transmit confidential information securely over the Internet has
been a significant barrier to communications over the Internet. Internet
security concerns could cause some online panelists to reduce their
participation levels, provide inaccurate responses or terminate their membership
in our Internet panel. This could harm our credibility with our current clients.
If our clients become dissatisfied, they may stop using our products and
services. In addition, dissatisfied and lost clients could damage our
reputation. A loss of online panelists or a loss of clients would hurt our
efforts to generate increased revenues.
WE ARE SUSCEPTIBLE TO BREACHES OF DATABASE SECURITY.
A party who is able to circumvent our security measures could misappropriate
the personal information of our online panelists. As a result, we may be
required to expend capital and other resources to protect against the threat of
such security breaches or to alleviate problems caused by such breaches, which
could have a material adverse effect on our business, financial condition and
results of operations.
POTENTIAL LIABILITY FOR THE USE OF THE PERSONAL INFORMATION OF OUR INTERNET
PANEL COULD BE COSTLY.
We could be subject to liability claims by our online panelists for misuses
of personal information, such as for unauthorized marketing purposes. These
claims could result in costly litigation. In addition, the Federal Trade
Commission and state agencies have been investigating various Internet companies
regarding their use of personal information. We could incur additional costs and
expenses if new regulations regarding the use of personal information are
introduced or if our privacy practices are investigated.
IF WE ARE UNABLE TO ACHIEVE THE ANTICIPATED GLOBAL GROWTH OF OUR INTERNET PANEL,
OR IF WE ARE UNABLE TO OVERCOME OTHER RISKS OF GLOBAL OPERATIONS, WE WILL BE
UNABLE TO CONDUCT BUSINESS ON A GLOBAL LEVEL.
Key components of our strategy are extension of our Internet-based market
research and polling products and services to clients globally, expansion of our
Internet panel to include global online
28
panelists and development of strategic alliances globally. The following risks
are inherent in doing business on a global level:
- export controls relating to encryption technology;
- more restrictive privacy laws;
- unexpected changes in regulatory requirements;
- lower penetration of Internet use globally, which may effect our ability
to obtain non-U.S. panel members;
- currency exchange fluctuations;
- problems in collecting accounts receivable and longer collection
periods;
- potentially adverse tax consequences;
- political instability; and
- Internet access restrictions.
We have little or no control over these risks. We have encountered more
restrictive privacy laws in connection with our business operations in Europe,
which have inhibited our ability to develop our European Internet panel. We have
also experienced currency exchange fluctuations, the impact of which has not
been material. As we increase our global operations, we may experience in the
future some or all of these risks, which may have a material adverse effect on
our business, financial condition and results of operations.
WE MAY BE SUBJECT TO LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER THE
INTERNET.
We may be subject to claims relating to content that is published on or
downloaded from our websites. We also could be subject to liability for content
that is accessible from our website through links to other websites.
Although we carry general liability insurance, our insurance may not cover
potential claims of this type, such as defamation or trademark infringement, or
may not be adequate to cover all costs incurred in defense of potential claims
or to indemnify us for all liability that may be imposed. In addition, any
claims of this type, with or without merit, would result in the diversion of our
financial resources and management personnel.
THE PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE AND SUBJECT TO WIDE
FLUCTUATIONS.
The market prices of the securities of Internet-related companies have been
especially volatile and these securities may be overvalued. The market price of
our common stock is likely to be subject to wide fluctuations. If financial
operating results do not improve or improve at a slower rate than we anticipate,
or if operating or capital expenditures exceed our expectations and cannot be
adjusted accordingly, or if some other event adversely affects us, the market
price of our common stock would decline. In addition, if the market for
Internet-related stocks or the stock market in general experiences a loss in
investor confidence or otherwise falls, the market price of our common stock
could fall for reasons unrelated to our business, financial condition and
results of operations. Investors might be unable to resell their shares of our
common stock at or above the purchase price. In the past, companies that have
experienced volatility in the market price of their stock have been the subject
of securities class action litigation. If we were to become the subject of
securities class action litigation, it could result in substantial costs and a
diversion of management's attention and resources.
29
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER COULD DELAY OR PREVENT AN ACQUISITION OF
THE COMPANY.
Our restated certificate of incorporation provides for the division of our
board of directors into three classes and provides our board of directors with
the power to issue shares of preferred stock without stockholder approval.
This preferred stock could have voting rights, including voting rights that
could be superior to that of our common stock, and the board of directors has
the power to determine these voting rights. In addition, Section 203 of the
Delaware General Corporation Law contains provisions which impose restrictions
on stockholder action to acquire our company. The effect of these provisions of
our certificate of incorporation and Delaware law provisions could discourage or
prevent third parties from seeking to obtain control of us, including
transactions in which the holders of common stock might receive a premium for
their shares over prevailing market prices.
OUR EXECUTIVE OFFICERS, DIRECTORS, MEMBERS OF THEIR FAMILIES AND ENTITIES
AFFILIATED WITH THEM HAVE SIGNIFICANT CONTROL OF OUR MANAGEMENT AND AFFAIRS.
Our executive officers, directors, members of their families and entities
affiliated with them, in the aggregate, beneficially own a majority of our
common stock. As a result, these stockholders are able to exercise control over
all matters requiring approval by our stockholders, including the election of
directors and approval of mergers, consolidations, sales of assets,
recapitalizations and amendments to our certificate of incorporation. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The carrying values of financial instruments including cash and cash
equivalents, marketable securities, accounts receivable, accounts payable and
notes payable, approximate fair value because of the short maturity of these
instruments.
We have historically had very low exposure to changes in foreign currency
exchange rates, therefore we have not used derivative financial instruments to
manage foreign currency fluctuation risk. As we continue to expand globally, the
risk of foreign currency exchange rate fluctuation may increase. Therefore, in
the future, we may consider utilizing derivative instruments to mitigate such
risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
consolidated financial statements listed in Item 14(a) of Part IV of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors is incorporated by reference from the
section entitled "Election of Directors" in our definitive proxy statement for
our annual stockholders' meeting to be held on November 1, 2000. Information
regarding executive officers who are not directors is set forth in Item 1 of
Part I of this report under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from our
definitive proxy statement for our annual stockholders' meeting to be held on
November 1, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from our
definitive proxy statement for our annual stockholders' meeting to be held on
November 1, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from our
definitive proxy statement for our annual stockholders' meeting to be held on
November 1, 2000.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT.
(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets at June 30, 2000 and 1999....... F-2
Consolidated Statements of Operations for the years ended
June 30, 2000, 1999 and 1998.............................. F-3
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2000, 1999 and 1998.................. F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999 and 1998.............................. F-5
Notes to Consolidated Financial Statements.................. F-6
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts S-1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(B) REPORTS ON FORM 8-K
None
(C) LIST OF EXHIBITS
EXHIBIT NUMBER EXHIBIT TITLE
- -------------- -------------
3.1 Amended and Restated Certificate of Incorporation of the
Company (filed herewith).
3.2 Bylaws of the Company (filed as Exhibit 3.5 to the Company's
Registration Statement on Form S-1/A filed October 26, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.1 1999 Long Term Incentive Plan and form of agreements thereto
of the Company (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 filed September 17, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.2 1999 Employee Stock Purchase Plan and form of agreements
thereto of the Company (filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-1 filed September
17, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.3+ Unique Name Agreement between At Home Corporation and the
Company (filed as Exhibit 10.3 to the Company's Registration
Statement on Form S-1/A filed November 10, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.4+ Strategic Alliance Agreement between Market Facts, Inc. and
the Company (filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-1/A filed November 10, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
32
EXHIBIT NUMBER EXHIBIT TITLE
- -------------- -------------
10.5.1 Confidentiality and Non-Competition Agreement dated
September 1, 1999 between the Company and Gordon S. Black
(filed as Exhibit 10.5.1 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.5.2 Confidentiality and Non-Competition Agreement dated
September 1, 1999 between the Company and David H. Clemm
(filed as Exhibit 10.5.2 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.5.3 Confidentiality and Non-Competition Agreement dated
September 1, 1999 between the Company and Leonard R. Bayer
(filed as Exhibit 10.5.3 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.6.1 Leases for 135 & 60 Corporate Woods, Rochester, New York
dated April 12, 1991 between Gordon S. Black Corporation and
Corporate Woods Associates, together with all amendments
thereto (filed as Exhibit 10.6.1 to the Company's
Registration Statement on Form S-1 filed September 17, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.6.2 Lease for 70 Carlson Road, Rochester, New York dated July 1,
1998 between Gordon S. Black Corporation and Carlson Park
Associates, together with all amendments thereto (filed as
Exhibit 10.6.2 to the Company's Registration Statement on
Form S-1 filed September 17, 1999 (Registration No.
333-87311) and incorporated herein by reference).
10.6.3 Lease for 111 Fifth Avenue, New York, New York dated June 9,
1994 between Louis Harris and Associates, Inc. and B.J.W.
Associates (filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1/A filed October 26, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.6.4 Sublease for 5th Floor, 500 Fifth Avenue, New York, New York
dated March 31, 2000 between the Company and New York Life
Insurance Company (filed herewith).
10.7 Registration Agreement dated July 7, 1998 among the Company,
Brinson Venture Capital Fund III, L.P., Brinson MAP Venture
Capital Fund III Trust and the Virginia Retirement System
(filed as Exhibit 10.8 to the Company's Registration
Statement on Form S-1 filed September 17, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.8 Revolving Credit Facility between Gordon S. Black
Corporation and Manufacturers and Traders Trust Company
dated August 18, 1999 (filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.9 Investment Agreement between Market Facts, Inc. and the
Company dated April, 1999 (filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.10 Amended and Restated Investment Agreement between Riedman
Corporation and the Company dated October 15, 1991 (filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1/A filed October 26, 1999 (Registration No.
333-87311) and incorporated herein by reference).
33
EXHIBIT NUMBER EXHIBIT TITLE
- -------------- -------------
10.11 Investment Agreement among SEQUEL Limited Partnership II and
Sequel Entrepreneur's Fund II, L.P. and the Company dated as
of October 15, 1995 (filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-1/A filed October 26, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.12 Investment Agreement between Young & Rubicam Inc. and the
Company dated as of October 15, 1999 (filed as Exhibit 10.14
to the Company's Registration Statement on Form S-1/A filed
October 26, 1999 (Registration No. 333-87311) and
incorporated herein by reference).
10.13 Investment Agreement between Excite, Inc. and the Company
dated as of October 15, 1999 (filed as Exhibit 10.15 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.14 Amendment No. 1 to the Registration Agreement between the
Company and Brinson Map Venture Capital Fund III, Brinson
MAP Venture Capital Fund III Trust, BVCF III, L.P., and
Virginia Retirement System dated as of October 15, 1999
(filed as Exhibit 10.16 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.15 Registration Agreement between the Company and Riedman
Corporation dated as of October 15, 1999 (filed as Exhibit
10.17 to the Company's Registration Statement on Form S-1/A
filed October 26, 1999 (Registration No. 333-87311) and
incorporated herein by reference).
10.16 Registration Agreement among the Company and Sequel Limited
Partnership II and Sequel Entrepreneur's Fund II, L.P. dated
as of October 15, 1999 (filed as Exhibit 10.18 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.17 Registration Agreement between the Registrant and Young &
Rubicam Inc. dated as of October 15, 1999 (filed as Exhibit
10.19 to the Company's Registration Statement on Form 5-1/A
filed October 26, 1999 (Registration No. 333-87311 and
incorporated herein by reference).
10.18 Registration Agreement between the Registrant and Excite,
Inc. dated as of October 15, 1999 (filed as Exhibit 10.20 to
the Company's Registration Statement on Form S-1/A filed
October 26, 1999 (Registration No. 333-87311) and
incorporated herein by reference).
10.19 Stockholder's Agreement by and among the Company, Brinson
MAP Venture Capital Fund III, BVCF III, L.P., Virginia
Retirement System, Gordon S. Black, Leonard R. Bayer, David
M. Clemm, Excite, Inc., Young & Rubicam Inc., Riedman
Corporation, Sequel Limited Partnership II and Sequel
Entrepreneur's Fund II, L.P. dated as of October 15, 1999
(filed as Exhibit 10.21 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.20 Research Agreement between the Company and Young & Rubicam
Inc. dated October 22, 1999 (filed as Exhibit 10.22 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
34
EXHIBIT NUMBER EXHIBIT TITLE
- -------------- -------------
10.21 First Amendment to Unique Name Agreement between At Home
Corporation and the Company dated October 14, 1999 (filed as
Exhibit 10.23 to the Company's Registration Statement on
Form S-1/A filed October 26, 1999 (Registration No.
333-87311) and incorporated herein by reference).
10.22 Letter Agreement between the Company and Sanford M. Schwartz
dated October 27, 1999 (filed as Exhibit 10.24 to the
Company's Registration Statement on Form S-1/A filed
November 10, 1999 (Registration No. 333-87311) and
incorporated herein by reference).
11. Statement Re: Computation of Per Share Earnings (filed
herewith).
12. Statement Re: Computation of Ratios (filed herewith).
21. List of Subsidiaries (filed herewith).
23.1 Consent of Independent Accountants (filed herewith).
23.2 Report of Independent Accountants (filed herewith).
24. Power of Attorney (included on page 36 of this Report).
27. Financial Data Schedule (filed herewith).
- ------------------------
+ Confidential treatment was granted pursuant to Rule 406 of the Securities Act
as to portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
35
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 on the 27th day of
September, 2000.
HARRIS INTERACTIVE INC.
By: /s/ BRUCE A. NEWMAN
-----------------------------------------
Bruce A. Newman
Title: CHIEF FINANCIAL OFFICER, SECRETARY,
AND TREASURER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Bruce A. Newman and
Gordon S. Black, and each of them, as his true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him, and in his name, place
and stead, in any and all capacities, to sign any amendments to this Report on
Form 10-K, and to file the same, with Exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME CAPACITY DATE
---- -------- ----
/s/ GORDON S. BLACK Chairman and Chief September 27, 2000
------------------------------------------- Executive Officer
Gordon S. Black (Principal Executive
Officer)
/s/ BRUCE A. NEWMAN Chief Financial Officer, September 27, 2000
------------------------------------------- Secretary, and Treasurer
Bruce A. Newman (Principal Financial and
Accounting Officer)
/s/ DAVID H. CLEMM President, Chief Operating September 27, 2000
------------------------------------------- Officer, and Director
David H. Clemm
/s/ LEONARD R. BAYER Director September 27, 2000
-------------------------------------------
Leonard R. Bayer
36
NAME CAPACITY DATE
---- -------- ----
/s/ THOMAS D. BERMAN Director September 27, 2000
-------------------------------------------
Thomas D. Berman
/s/ G. THOMAS CLARK Director September 27, 2000
-------------------------------------------
G. Thomas Clark
/s/ JAMES R. RIEDMAN Director September 27, 2000
-------------------------------------------
James R. Riedman
/s/ BENJAMIN D. ADDOMS Director September 27, 2000
-------------------------------------------
Benjamin D. Addoms
/s/ SANFORD M. SCHWARTZ Director September 27, 2000
-------------------------------------------
Sanford M. Schwartz
37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Harris Interactive Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Harris
Interactive Inc. (the "Company") and its subsidiaries at June 30, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 2000 in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/S/ PRICEWATERHOUSECOOPERS LLP
Rochester, New York
August 3, 2000
F-1
HARRIS INTERACTIVE INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30,
-------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 23,932 $ 108
Marketable securities..................................... 48,960 --
Accounts receivable....................................... 10,056 5,989
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 3,780 1,706
Other current assets...................................... 2,072 154
-------- -------
Total current assets................................ 88,800 7,957
Property, plant and equipment, net.......................... 13,640 5,029
Goodwill, less accumulated amortization of $456 and $353 at
June 30, 2000 and 1999, respectively...................... 1,094 1,197
Other assets................................................ 918 602
-------- -------
Total assets........................................ $104,452 $14,785
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,243 $ 1,843
Accrued expenses.......................................... 2,958 1,800
Short-term borrowings..................................... -- 291
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 2,901 3,470
-------- -------
Total current liabilities........................... 10,102 7,404
Mandatory redeemable preferred stock........................ -- 15,876
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding
Common stock, $.001 par value at June 30, 2000 and $.01
par value at June 30, 1999
Authorized--100,000,000 shares at June 30, 2000 and
28,000,000 shares at June 30, 1999
Issued and outstanding--34,111,434 shares at June 30, 2000
and 10,870,692 shares at June 30, 1999.................. 34 109
Additional paid-in capital................................ 129,113 4,813
Unamortized deferred compensation......................... (2,075) (650)
Accumulated other comprehensive loss...................... (133) --
Accumulated deficit....................................... (32,589) (12,767)
-------- -------
Total stockholders' equity (deficit)................ 94,350 (8,495)
-------- -------
Total liabilities and stockholders' equity.......... $104,452 $14,785
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FOR THE YEARS ENDED JUNE 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues from services................................ $ 51,289 $ 28,965 $ 26,290
Cost of services...................................... 28,600 19,086 16,618
----------- ----------- -----------
Gross profit.................................. 22,689 9,879 9,672
Operating expenses:
Internet database development expenses.............. 5,647 4,505 2,753
Sales and marketing expenses........................ 8,665 1,316 957
General and administrative expenses................. 32,209 13,085 8,855
----------- ----------- -----------
Operating loss................................ (23,832) (9,027) (2,893)
Interest and other income (loss), net................. 2,940 180 (160)
----------- ----------- -----------
Loss before income taxes...................... (20,892) (8,847) (3,053)
Income tax expense (benefit).......................... 50 -- (1,114)
----------- ----------- -----------
Net loss...................................... (20,942) (8,847) (1,939)
Accrued dividends on preferred stock.................. (738) (1,176) --
----------- ----------- -----------
Net loss available to holders of common stock......... $ (21,680) $ (10,023) $ (1,939)
=========== =========== ===========
Basic and diluted net loss per share.................. $ (.93) $ (1.01) $ (.16)
=========== =========== ===========
Weighted average shares outstanding--basic and
diluted............................................. 23,317,847 9,955,261 11,903,256
=========== =========== ===========
Pro forma basic and diluted net loss per share
(unaudited)......................................... $ (.73) $ (.41)
=========== ===========
Pro forma weighted average shares outstanding--basic
and diluted (unaudited)............................. 28,854,370 21,745,539
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ACCUMULATED RETAINED TOTAL
OUTSTANDING ADDITIONAL UNAMORTIZED OTHER EARNINGS STOCKHOLDERS'
------------------- PAID-IN DEFERRED COMPREHENSIVE (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION LOSS DEFICIT) (DEFICIT)
-------- -------- ---------- ------------- -------------- ------------ -------------
BALANCE AT JUNE 30, 1997....... 11,763 $118 $ 2 $ 2,273 $ 2,393
Issuance of common stock....... 314 3 87 90
Purchase and retirement of
common stock................. (14) (7) (7)
Compensation expense on stock
options issued............... 410 410
Net loss and comprehensive
loss......................... (1,939) (1,939)
------ ---- -------- ------- ----- -------- --------
BALANCE AT JUNE 30, 1998....... 12,063 121 492 334 947
Purchase and retirement of
common stock................. (2,382) (24) (492) (2,484) (3,000)
Issuance costs incurred on
preferred stock.............. (594) (594)
Issuance of common stock....... 1,190 12 4,147 4,159
Deferred compensation on stock
options issued............... 666 $ (666)
Amortization of deferred
compensation................. 16 16
Accrued dividends on preferred
stock........................ (1,176) (1,176)
Net loss and comprehensive
loss......................... (8,847) (8,847)
------ ---- -------- ------- ----- -------- --------
BALANCE AT JUNE 30, 1999....... 10,871 109 4,813 (650) (12,767) (8,495)
Comprehensive loss:
Net loss..................... (20,942) (20,942)
Unrealized losses on
marketable securities...... $(127) (127)
Foreign currency
translation................ (6) (6)
--------
Total comprehensive loss....... (21,075)
--------
Exercise of options and
warrants..................... 2,010 2 696 698
Issuance of common stock under
Employee
Stock Purchase Plan.......... 28 118 118
Deferred compensation on stock
options issued............... 2,431 (2,431)
Amortization of deferred
compensation................. 1,006 1,006
Conversion to $.001 par value
stock........................ (98) 98
Issuance costs incurred on
preferred stock.............. (56) (56)
Issuance of common stock....... 151 811 811
Accrued dividends on preferred
stock........................ (738) (738)
Conversion of Class A Preferred
Stock........................ 11,790 12 14,688 1,688 16,388
Conversion of Class B Preferred
Stock........................ 2,591 2 19,998 226 20,226
Initial public offering, net of
costs........................ 6,670 7 85,460 85,467
------ ---- -------- ------- ----- -------- --------
BALANCE AT JUNE 30, 2000....... 34,111 $ 34 $129,113 $(2,075) $(133) $(32,589) $ 94,350
====== ==== ======== ======= ===== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(20,942) $(8,847) $(1,939)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization........................... 3,584 1,261 783
Amortization of deferred compensation................... 1,006 16
Amortization of premium and discount on marketable
securities............................................ (269)
(Increase) decrease in--
Accounts receivable................................... (4,067) (2,071) 306
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... (2,074) (457) 681
Other current assets.................................. (1,918) 727 (1,177)
Other assets.......................................... (316) (13) (12)
Increase (decrease) in --
Accounts payable.................................... 2,400 1,666 (305)
Accrued expenses.................................... 1,158 (848) 855
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... (569) 363 (227)
-------- ------- -------
Net cash used in operating activities............. (22,007) (8,203) (1,035)
-------- ------- -------
Cash flows from investing activities:
Purchase of marketable securities......................... (73,860)
Proceeds from maturities of marketable securities......... 25,042
Repayment (borrowings) of loan to officer................. 42 (25)
Capital expenditures...................................... (12,092) (4,372) (977)
-------- ------- -------
Net cash used in investing activities............. (60,910) (4,330) (1,002)
-------- ------- -------
Cash flows from financing activities:
Principal payments under long-term debt................... (700) (400)
(Decrease) increase in short-term borrowings.............. (291) (1,927) 1,599
Net proceeds from initial public offering of common
stock................................................... 85,467
Net proceeds from issuance of preferred stock............. 19,944 14,105
Repurchase of common stock................................ (3,000) (7)
Issuance of common stock and stock options................ 1,627 4,159 500
-------- ------- -------
Net cash provided by financing activities......... 106,747 12,637 1,692
-------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (6)
Net increase (decrease) in cash and cash equivalents........ 23,824 104 (345)
Cash and cash equivalents at beginning of year.............. 108 4 349
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 23,932 $ 108 $ 4
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BUSINESS
Harris Interactive Inc. (the "Company") is a leading global market research
firm, using Internet-based and traditional methodologies to provide clients with
information about the views, behaviors and attitudes of people worldwide. Known
for the HARRIS POLL-TM-, the Company has over 40 years experience in providing
clients with market research and polling services including custom, multi-client
and service bureau research, in addition to customer relationship management
services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the assets,
liabilities and results of operations of its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents include marketable securities with original maturities of
three months or less.
MARKETABLE SECURITIES
Harris Interactive Inc. accounts for its investments in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." All investments have been
classified as available-for-sale securities as of June 30, 2000.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses reported in other comprehensive income (loss). Realized gains
and losses on available-for-sale securities are included in interest and other
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
PROPERTY, PLANT AND EQUIPMENT
Plant, property and equipment, including improvements that significantly add
to productive capacity or extend useful life, are recorded at cost, while
maintenance and repairs are expensed as incurred. Depreciation is calculated on
the straight-line or accelerated methods over the estimated useful lives of the
assets, which are generally 3 to 7 years. Leasehold improvements are amortized
on the straight-line method over the estimated useful life of the assets or
lease term, whichever is shorter.
GOODWILL
Goodwill, which represents the excess of the purchase price over fair value
of Louis Harris and Associates Inc.'s net assets acquired, is amortized on a
straight-line basis over 15 years. Amortization expense amounted to $103 in each
of the fiscal years ended 2000, 1999 and 1998, respectively.
The Company regularly assesses all of its long-lived assets for impairment
when events or circumstances indicate their carrying amounts may not be
recoverable. This is accomplished by comparing the expected discounted future
cash flows of the assets with the respective carrying amounts
F-6
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
as of the date of the assessment. Should aggregate future cash flows be less
than the carrying value, a write-down would be required, measured as the
difference between the carrying value and the fair value of the asset. Fair
value is estimated either through independent valuation or as the present value
of expected discounted future cash flows. If the expected undiscounted future
cash flows exceed the respective carrying amount as of the date of assessment,
no impairment is recognized. There were no impairment charges related to
long-lived assets recorded during fiscal 2000, 1999, or 1998.
REVENUE RECOGNITION
The Company recognizes revenue from services principally on the percentage
of completion method in the ratio that costs incurred bear to estimated cost at
completion. Subscription revenues are recognized upon delivery of the research
project. Revenues include amounts billed to customers to cover subcontractor
costs and other direct expenses. Provision for estimated contract losses, if
any, is made in the period such losses are determined.
INTERNET DATABASE DEVELOPMENT EXPENSES
The Company is in the process of developing a database of e-mail addresses
principally through a strategic alliance formed with a marketing services firm.
The Company is using these addresses to conduct marketing research, polling and
surveys on behalf of its customers. The costs to acquire these addresses and
other external database development costs approximated $5,647, $4,505, and
$2,753 in fiscal 2000, 1999, and 1998, respectively. Such costs have been
classified as Internet database development expenses in the consolidated
statements of operations and are expensed as incurred.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist principally of accounts receivable as well as costs and
estimated earnings in excess of billings on uncompleted contracts. Credit losses
are provided for in the financial statements and have been within management's
expectations.
INCOME TAXES
The Company accounts for income taxes using the asset and liability approach
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax basis of such assets and liabilities.
This method utilizes enacted statutory tax rates in effect for the year in
which the temporary differences are expected to reverse and gives immediate
effect to changes in income tax rates upon enactment. Deferred tax assets are
recognized, net of any valuation allowance, for deductible temporary differences
and net operating loss and tax credit carryforwards.
F-7
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
SAB 101
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. SAB 101 is effective for our fiscal year beginning July 1, 2000.
Implementation of SAB 101 is not expected to require us to change existing
revenue recognition policies and therefore is not expected to have a material
effect on our financial position or results of operations.
FIN 44
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or January 12,
2000.
The impact of FIN 44 is not expected to have a material effect on the
consolidated financial statements.
RECLASSIFICATIONS
It is the Company's policy to reclassify amounts in prior years' financial
statements to conform with the current year's presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable and preferred stock are valued at their carrying
or redemption amounts, which are reasonable estimates of their fair value. The
carrying value of the note payable and short-term borrowings approximates fair
value, as the interest rate on this debt approximates market rates at June 30,
2000 and 1999. The fair value of all other instruments approximates cost.
F-8
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. MARKETABLE SECURITIES
At June 30, 2000, marketable securities consisted of the following:
COST FAIR VALUE
-------- ----------
Type of issue:
Available-for-sale securities--
Certificates of deposit.............................. $ 1,499 $ 1,496
Commercial paper..................................... 8,013 7,989
Corporate bonds...................................... 32,727 32,628
Government securities................................ 4,847 4,847
Market auction....................................... 2,000 2,000
------- -------
Total available-for-sale securities.............. $49,086 $48,960
======= =======
Gross unrealized losses on available-for-sale securities were $126 at
June 30, 2000.
The cost and fair value of available-for-sale securities at June 30, 2000,
by contractual maturity, are shown below:
COST FAIR VALUE
-------- ----------
Maturity date:
Due in one year or less................................ $29,100 $29,028
Due after one year through three years................. 19,986 19,932
------- -------
Total available-for-sale securities.............. $49,086 $48,960
======= =======
There were no material gains or losses from sales of available-for-sale
securities during the year ended June 30, 2000.
F-9
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. CONTRACTS IN PROGRESS
Accumulated costs and estimated earnings and billings on contracts in
progress at June 30 follows:
2000 1999
-------- --------
Accumulated costs and estimated earnings................. $ 14,714 $ 6,408
Billings................................................. (13,835) (8,172)
-------- -------
$ 879 $(1,764)
======== =======
Contracts in progress are included in the accompanying balance sheets under
the following captions:
2000 1999
-------- --------
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... $ 3,780 $ 1,706
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... (2,901) (3,470)
------- -------
$ 879 $(1,764)
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
JUNE 30,
-------------------
2000 1999
-------- --------
Furniture and fixtures..................................... $ 4,062 $1,393
Equipment.................................................. 14,555 6,436
Leasehold improvements..................................... 2,869 1,588
------- ------
21,486 9,417
Accumulated depreciation................................... (7,846) (4,388)
------- ------
$13,640 $5,029
======= ======
Depreciation expense amounted to $3,481, $1,158 and $680 in fiscal years
2000, 1999 and 1998, respectively.
F-10
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
The Company has several noncancelable operating leases for office space and
office equipment. Future minimum lease payments under noncancelable operating
leases as of June 30, 2000 are as follows:
YEARS ENDING JUNE 30:
- ---------------------
2001........................................................ $4,220
2002........................................................ 3,953
2003........................................................ 3,728
2004........................................................ 1,661
2005........................................................ 580
2006 and beyond............................................. 500
Total rental expense for operating leases in 2000, 1999 and 1998 was $2,749,
$1,612 and $1,335, respectively.
6. BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in a single domestic market engaged principally in
marketing research, consulting and polling.
For the year ended June 30, 2000, revenues from the Company's largest
customer amounted to 18% of revenues. For the year ended June 30, 1999, revenues
from the two largest customers comprised 15% and 14% of revenues. For the year
ended June 30, 1998, revenues from the Company's two largest customers comprised
19% and 15% of revenues.
7. ACCRUED EXPENSES
Accrued expenses consisted of the following at June 30:
2000 1999
-------- --------
Payroll and withholding expenses............................ $ 989 $ 474
Bonuses..................................................... 1,513 839
Other....................................................... 456 487
------ ------
$2,958 $1,800
====== ======
8. LINE OF CREDIT
The Company maintains a line of credit with a commercial bank providing
borrowings up to $5,000 in fiscal 2000 (at prime) and $1,500 in fiscal 1999 (at
prime plus 1%). The prime rate in effect at June 30, 2000 was 9.5%. Borrowings
under this arrangement are due upon demand. The Company had borrowings of $291
at June 30, 1999. There were no borrowings under this agreement at June 30,
2000. The line of credit is collateralized by the assets of the Company.
F-11
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. INCOME TAXES
Income tax expense (benefit) consists of:
CURRENT DEFERRED TOTAL
-------- -------- --------
2000:
Federal.......................................... $ 256 $(256) $ --
State............................................ 50 -- 50
----- ----- -------
$ 306 $(256) $ 50
===== ===== =======
1999:
Federal.......................................... $ -- $ -- $ --
State............................................ -- -- --
----- ----- -------
$ $ $
===== ===== =======
1998:
Federal.......................................... $(728) $(171) $ (899)
State............................................ (1) (214) (215)
----- ----- -------
$(729) $(385) $(1,114)
===== ===== =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The valuation allowance
increased by $11,488 and $3,516 during 2000 and 1999, respectively, primarily
related to federal and state net operating loss carryforwards and Internet
database development expenses.
The Company continually reviews the adequacy of the valuation allowance and
recognizes these benefits only as reassessment indicates that it is more likely
than not that the benefits will be realized. The components of deferred income
tax assets at June 30 are presented below:
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforwards......................... $12,050 $3,659
Internet database development expenses................... 2,906
Financial statement versus tax depreciation.............. 87 62
Tax credit carryforwards................................. 97 93
Compensation expense accounted for differently between
financial reporting and tax purposes................... 555 153
Book expenses currently not deductible for tax
purposes............................................... 45 29
------- ------
Gross deferred tax assets............................ 15,740 3,996
Valuation allowance...................................... (15,004) (3,516)
------- ------
Net deferred tax assets.............................. $ 736 $ 480
======= ======
F-12
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
The New York State and Federal net operating loss carryforwards ("NOLs") of
approximately $32,412 and $30,742, respectively, begin to expire in 2019.
The differences between income taxes (benefit) at the U.S. statutory rate
and the effective rate are summarized as follows:
2000 1999 1998
-------- -------- --------
Benefit at Federal statutory rate................ $ (7,104) $(3,008) $(1,038)
State income tax benefit, net of Federal income
tax benefit.................................... (1,388) (435) (141)
Stock option deductions.......................... (2,832)
Other............................................ (114) (73) 65
Valuation allowance.............................. 11,488 3,516
-------- ------- -------
$ 50 $ -- $(1,114)
======== ======= =======
10. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On December 6, 1999, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1. Pursuant to this
Registration Statement, the Company completed an initial public offering of
6,670,000 shares of its common stock (including 870,000 shares sold pursuant to
the exercise of the Underwriters' over-allotment option) at an initial public
offering price of $14.00 per share (the "Offering"). The Offering was managed by
Lehman Brothers, U.S. Bancorp Piper Jaffray, Volpe Brown Whelan & Company,
E*Offering Corp. and Fidelity Capital Markets. Proceeds to the Company, after
deduction of the Underwriters' discount and commission, totaled approximately
$85,467, net of offering costs of approximately $1,367.
PREFERRED STOCK
In July 1998, the Company authorized and issued 147,000 shares of Class A
Preferred Stock having a par value of $.01 per share and received proceeds in
the amount of $14,700. The redemption value of Class A Preferred Stock is equal
to $100 per share plus accrued and unpaid dividends. The total redemption value
of Class A Preferred Stock at June 30, 1999 in the amount of $15,876 is
classified on the Company's balance sheet as mandatory redeemable preferred
stock and includes $1,176 of accrued and unpaid dividends. The costs associated
with issuing these securities in the amount of $594 were charged to retained
deficit due to the fact that the Class A Preferred Stock is required to be
carried at redemption value.
In September 1999, the Company authorized 200,000 shares of Class B
Preferred Stock having a par value of $.01 per share. The Company received
proceeds of approximately $1,000 from the issuance of 10,000 shares of Class B
Preferred Stock on September 30, 1999. In October 1999, the Company
F-13
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
10. STOCKHOLDERS' EQUITY (CONTINUED)
received proceeds of approximately $19,000 from the issuance of 190,000 shares
of Class B Preferred Stock.
In December 1999, the Company authorized 5,000,000 shares of preferred stock
having a par value of $.01 per share. No shares were outstanding at June 30,
2000.
Upon completion of the initial public offering, the Company's preferred
stock was converted into 14,381,445 shares of common stock, and all outstanding
shares of preferred stock were cancelled and retired. Upon conversion of the
preferred stock, all rights to accrued and unpaid dividends were terminated.
COMMON STOCK
In fiscal 2000, the Company amended the Certificate of Incorporation to
increase the number of authorized common stock to 100,000,000 shares. At
June 30, 2000 and 1999, the Company had outstanding Warrants to purchase 104,916
and 260,960 shares, respectively, of common stock at $1.50 per share. The
Warrants expire in July 2003.
STOCK SPLIT
On September 7, 1999, the Company declared a 28-for-1 stock split. All
references in the consolidated financial statements referring to share prices,
conversion rates, per share amounts, stock option plans and common stock issued
and outstanding have been adjusted retroactively for the 28-for-1 stock split.
EMPLOYEE STOCK PURCHASE PLAN
The Company registered 500,000 shares of common stock in March 2000 for
issuance under the 1999 Employee Stock Purchase Plan ("ESPP"). The ESPP provides
employees with an opportunity to purchase the Company's common stock through
payroll deductions. Under the ESPP, the Company's employees may purchase,
subject to certain restrictions, shares of common stock at the lesser of
85 percent of the fair value at either the beginning or the end of each offering
period. During fiscal year 2000, employees purchased 28,672 shares of common
stock. There were no purchases under this plan in fiscal year 1999.
11. NET LOSS PER SHARE
Basic and diluted net loss per share are computed based on the weighted
average number of common shares outstanding during the period. In arriving at
the net loss available to holders of common stock, preferred stock dividends of
$738 and $1,176 were added in fiscal 2000 and 1999. Upon conversion of the
preferred stock in conjunction with the initial public offering, all rights to
accrued and unpaid dividends were terminated. All potentially dilutive
securities (see Notes 10 and 12) were excluded from the calculation of diluted
net loss per share, as the effect would be anti-dilutive.
F-14
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. NET LOSS PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted net loss
per share:
2000 1999 1998
----------- ---------- -----------
Numerator:
Net loss............................................. $ (20,942) $ (8,847) $ (1,939)
Accrued dividends on preferred stock................. (738) (1,176) --
----------- ---------- -----------
Net loss available to holders of common stock.......... $ (21,680) $ (10,023) $ (1,939)
=========== ========== ===========
Denominator for basic and diluted loss per share --
weighted average shares.............................. 23,317,847 9,955,261 11,903,256
=========== ========== ===========
Basic and diluted net loss per share................... $ (.93) $ (1.01) $ (.16)
=========== ========== ===========
(UNAUDITED)
The pro forma net loss per share has been computed by dividing net loss by
the pro forma weighted average number of shares outstanding. Pro forma weighted
average shares assume the conversion of all preferred stock (which was
ultimately converted to common stock in conjunction with the initial public
offering) as if the conversation occurred at the beginning of the period or at
date of issuance, if later.
12. EMPLOYEE STOCK OPTION PLAN
The Company has a nonqualified and incentive stock option plan that enables
key employees and directors of the Company to purchase shares of common stock of
the Company. The Company grants options to key employees to purchase its common
stock, generally at fair value as of the date of grant. Options generally vest
over a period up to 4 years and expire after 10 years from the date of grant.
The Company registered 1,250,000 shares of common stock in March 2000 for
issuance under the 1999 long-term incentive plan. There were 216,000 shares
available for future grant at June 30, 2000.
During fiscal 2000 and 1999, 617,000 and 266,000 options, respectively, were
granted to employees at an amount which was less than the fair value of the
common stock as of the grant date. Accordingly, the Company recorded $2,431 and
$666 in unamortized deferred compensation in fiscal 2000 and 1999 for such
options which vest over 3 to 4 years. Compensation expense will be amortized
over the vesting period and unamortized deferred compensation has been recorded
as a reduction in stockholders' equity. During fiscal 2000 and 1999,
compensation expense recognized in the consolidated statements of operations
amounted to $1,006 and $16, respectively.
During fiscal 1998, the life was extended on 1,050,000 options. As a result,
a new measurement date occurred. Accordingly, the Company recorded approximately
$301 in compensation expense for such options which were fully vested. Also
during fiscal 1998, 980,000 options were granted to employees at an amount which
was less than the fair value of the common stock as of the grant date.
Accordingly, the Company recorded approximately $109 in compensation expense for
such options which vested immediately upon grant.
F-15
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
Stock option activity is as follows:
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE
--------- ----------------
Outstanding at June 30, 1997....................... 2,105,600 $ .26
Granted.......................................... 2,240,000 .42
Canceled......................................... 770,000 .35
Exercised........................................ 196,000 .18
---------
Outstanding at June 30, 1998....................... 3,379,600 .35
Granted.......................................... 560,000 1.26
Canceled......................................... 65,352 .47
Exercised........................................ 97,048 .37
---------
Outstanding at June 30, 1999....................... 3,777,200 .48
Granted.......................................... 2,288,600 5.88
Canceled......................................... 126,200 2.93
Exercised........................................ 1,880,200 .34
---------
Outstanding at June 30, 2000....................... 4,059,400 3.52
=========
Under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has elected to continue to account for its stock
option plan in accordance with the provisions of APB Opinion No. 25. Had
compensation cost for the Company's stock option plan been determined consistent
with the provisions of SFAS No. 123, the Company's net loss and net loss per
share would have been the pro forma amounts indicated below:
BASIC NET LOSS DILUTED NET LOSS
NET LOSS PER SHARE PER SHARE
AVAILABLE TO HOLDERS AVAILABLE TO HOLDERS AVAILABLE TO HOLDERS
OF COMMON STOCK OF COMMON STOCK OF COMMON STOCK
--------------------- --------------------- ---------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
--------- --------- --------- --------- --------- ---------
2000..................................... $(21,680) $(22,224) $(.93) $(.95) $(.93) $(.95)
1999..................................... (10,023) (10,100) (1.01) (1.01) (1.01) (1.01)
1998..................................... (1,939) (2,043) (.16) (.17) (.16) (.17)
For purposes of this disclosure, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants outstanding in 2000,
1999 and 1998.
2000 1999 1998
-------- -------- --------
Risk-free interest rate................................... 6.28% 4.70% 5.68%
Weighted average expected life (years).................... 3 3 3
F-16
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
For option grants made subsequent to the initial public offering, a
volatility factor of 137% was used.
The weighted average grant date fair value of options granted in 2000, 1999
and 1998 is summarized below:
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
------------------- ------------------- -------------------
FAIR EXERCISE FAIR EXERCISE FAIR EXERCISE
VALUE PRICE VALUE PRICE VALUE PRICE
-------- -------- -------- -------- -------- --------
Options whose exercise price equaled the grant date
fair value.......................................... $3.33 $6.16 $ .15 $1.26 $.06 $.47
Options whose exercise price was less than the grant
date fair value..................................... $4.36 $4.65 $2.63 $1.26 $.28 $.24
The following represents additional information about stock options
outstanding at June 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE PRICES NUMBER CONTRACUTAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
PER SHARE OUTSTANDING (YEARS) (PER SHARE) EXERCISABLE (PER SHARE)
- --------------------- ----------- ---------------- -------------- ----------- --------------
$.18--$.47........... 1,456,000 7 $ .45 1,456,000 $.45
1.26--3.70.......... 1,569,400 9 2.77 486,575 2.34
3.75--7.06.......... 477,000 9 6.09 230,833 7.06
11.00--14.00........ 557,000 10 11.47 -- --
13. 1997 STOCK PROGRAM
The 1997 Stock Program replaces a similar program enacted in 1993. Under
this Program, the Company purchases outstanding shares of common stock and may:
1) grant to certain employees the right to purchase shares; and/or 2) designate
that a portion of the compensation payable under the Company's bonus plans be
paid in common stock. All purchases and sales are made at fair value and occur
within six months following the end of the Company's year end. The plan has a
repurchase requirement whereby the Company must attempt to repurchase certain
amounts of its common stock.
Transactions under the 1997 Stock Program are as follows:
2000 1999 1998
-------------------- -------------------- --------------------
NUMBER NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT
--------- -------- --------- -------- --------- --------
Shares purchased or
retired................... 57,540 $72,459 14,364 $ 6,679
Shares issued............... 75,880 $281,027 57,540 72,459 118,664 55,178
F-17
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
14. 401(K) PLAN
The Company established a 401(k) Plan (the "Plan") effective January 1,
1995. Eligibility to participate in the Plan, including employer matching
contributions, if any, is limited to those employees who are at least 21 years
of age and have completed one year of employment with at least 1,000 hours of
service. However, employees are eligible to contribute to the Plan upon
completion of one quarter of service.
Participants may contribute 1% to 18% of compensation. Employer matching
contributions are discretionary, and include matching contributions and profit
sharing contributions. Matching contribution expense incurred by the Company
during 2000, 1999 and 1998 was $137, $94 and $81, respectively.
15. SUPPLEMENTAL CASH FLOW INFORMATION
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) during the year for:
2000 1999 1998
-------- -------- --------
Interest.................................................... $160 $ 35 $171
---- ----- ----
Taxes....................................................... $253 $(748) $256
---- ----- ----
NON-CASH FINANCING ACTIVITY
Upon completion of the initial public offering during fiscal 2000, all
outstanding shares of preferred stock were converted into 14,381,445 shares of
common stock, and all outstanding shares of preferred stock were cancelled and
retired.
F-18
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE AT ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO AMOUNTS AT END
OF PERIOD EARNINGS WRITTEN OFF OF PERIOD
---------- ---------- ----------- ---------
Year ended June 30, 1998
Deducted in the consolidated balance sheet:
Trade accounts receivable, allowance for
doubtful accounts............................ $ 0 $ 0 $ 0 $ 0
======= ======= ======= =======
Deferred tax valuation allowance............... 0 0 0 0
======= ======= ======= =======
Year ended June 30, 1999
Deducted in the consolidated balance sheet:
Trade accounts receivable, allowance for
doubtful accounts............................ 0 0 0 0
======= ======= ======= =======
Deferred tax valuation allowance............... 0 3,516 0 3,516
======= ======= ======= =======
Year ended June 30, 2000
Deducted in the consolidated balance sheet:
Trade accounts receivable, allowance for
doubtful accounts............................ 0 74 0 74
======= ======= ======= =======
Deferred tax valuation allowance............... 3,516 11,488 0 15,004
======= ======= ======= =======
S-1
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE PAGE
- -------------- ------------- --------
3.1 Amended and Restated Certificate of Incorporation of the
Company (filed herewith).
3.2 Bylaws of the Company (filed as Exhibit 3.5 to the Company's
Registration Statement on Form S-1/A filed October 26, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.1 1999 Long Term Incentive Plan and form of agreements thereto
of the Company (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 filed September 17, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.2 1999 Employee Stock Purchase Plan and form of agreements
thereto of the Company (filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-1 filed September
17, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.3+ Unique Name Agreement between At Home Corporation and the
Company (filed as Exhibit 10.3 to the Company's Registration
Statement on Form S-1/A filed November 10, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.4+ Strategic Alliance Agreement between Market Facts, Inc. and
the Company (filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-1/A filed November 10, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.5.1 Confidentiality and Non-Competition Agreement dated
September 1, 1999 between the Company and Gordon S. Black
(filed as Exhibit 10.5.1 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.5.2 Confidentiality and Non-Competition Agreement dated
September 1, 1999 between the Company and David H. Clemm
(filed as Exhibit 10.5.2 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.5.3 Confidentiality and Non-Competition Agreement dated
September 1, 1999 between the Company and Leonard R. Bayer
(filed as Exhibit 10.5.3 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.6.1 Leases for 135 & 60 Corporate Woods, Rochester, New York
dated April 12, 1991 between Gordon S. Black Corporation and
Corporate Woods Associates, together with all amendments
thereto (filed as Exhibit 10.6.1 to the Company's
Registration Statement on Form S-1 filed September 17, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.6.2 Lease for 70 Carlson Road, Rochester, New York dated July 1,
1998 between Gordon S. Black Corporation and Carlson Park
Associates, together with all amendments thereto (filed as
Exhibit 10.6.2 to the Company's Registration Statement on
Form S-1 filed September 17, 1999 (Registration No.
333-87311) and incorporated herein by reference).
EXHIBIT NUMBER EXHIBIT TITLE PAGE
- -------------- ------------- --------
10.6.3 Lease for 111 Fifth Avenue, New York, New York dated June 9,
1994 between Louis Harris and Associates, Inc. and B.J.W.
Associates (filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1/A filed October 26, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.6.4 Sublease for 5th Floor, 500 Fifth Avenue, New York, New York
dated March 31, 2000 between the Company and New York Life
Insurance Company (filed herewith).
10.7 Registration Agreement dated July 7, 1998 among the Company,
Brinson Venture Capital Fund III, L.P., Brinson MAP Venture
Capital Fund III Trust and the Virginia Retirement System
(filed as Exhibit 10.8 to the Company's Registration
Statement on Form S-1 filed September 17, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.8 Revolving Credit Facility between Gordon S. Black
Corporation and Manufacturers and Traders Trust Company
dated August 18, 1999 (filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.9 Investment Agreement between Market Facts, Inc. and the
Company dated April, 1999 (filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.10 Amended and Restated Investment Agreement between Riedman
Corporation and the Company dated October 15, 1991 (filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1/A filed October 26, 1999 (Registration No.
333-87311) and incorporated herein by reference).
10.11 Investment Agreement among SEQUEL Limited Partnership II and
Sequel Entrepreneur's Fund II, L.P. and the Company dated as
of October 15, 1995 (filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-1/A filed October 26, 1999
(Registration No. 333-87311) and incorporated herein by
reference).
10.12 Investment Agreement between Young & Rubicam Inc. and the
Company dated as of October 15, 1999 (filed as Exhibit 10.14
to the Company's Registration Statement on Form S-1/A filed
October 26, 1999 (Registration No. 333-87311) and
incorporated herein by reference).
10.13 Investment Agreement between Excite, Inc. and the Company
dated as of October 15, 1999 (filed as Exhibit 10.15 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.14 Amendment No. 1 to the Registration Agreement between the
Company and Brinson Map Venture Capital Fund III, Brinson
MAP Venture Capital Fund III Trust, BVCF III, L.P., and
Virginia Retirement System dated as of October 15, 1999
(filed as Exhibit 10.16 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.15 Registration Agreement between the Company and Riedman
Corporation dated as of October 15, 1999 (filed as Exhibit
10.17 to the Company's Registration Statement on Form S-1/A
filed October 26, 1999 (Registration No. 333-87311) and
incorporated herein by reference).
EXHIBIT NUMBER EXHIBIT TITLE PAGE
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10.16 Registration Agreement among the Company and Sequel Limited
Partnership II and Sequel Entrepreneur's Fund II, L.P. dated
as of October 15, 1999 (filed as Exhibit 10.18 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.17 Registration Agreement between the Registrant and Young &
Rubicam Inc. dated as of October 15, 1999 (filed as Exhibit
10.19 to the Company's Registration Statement on Form 5-1/A
filed October 26, 1999 (Registration No. 333-87311 and
incorporated herein by reference).
10.18 Registration Agreement between the Registrant and Excite,
Inc. dated as of October 15, 1999 (filed as Exhibit 10.20 to
the Company's Registration Statement on Form S-1/A filed
October 26, 1999 (Registration No. 333-87311) and
incorporated herein by reference).
10.19 Stockholder's Agreement by and among the Company, Brinson
MAP Venture Capital Fund III, BVCF III, L.P., Virginia
Retirement System, Gordon S. Black, Leonard R. Bayer, David
M. Clemm, Excite, Inc., Young & Rubicam Inc., Riedman
Corporation, Sequel Limited Partnership II and Sequel
Entrepreneur's Fund II, L.P. dated as of October 15, 1999
(filed as Exhibit 10.21 to the Company's Registration
Statement on Form S-1/A filed October 26, 1999 (Registration
No. 333-87311) and incorporated herein by reference).
10.20 Research Agreement between the Company and Young & Rubicam
Inc. dated October 22, 1999 (filed as Exhibit 10.22 to the
Company's Registration Statement on Form S-1/A filed October
26, 1999 (Registration No. 333-87311) and incorporated
herein by reference).
10.21 First Amendment to Unique Name Agreement between At Home
Corporation and the Company dated October 14, 1999 (filed as
Exhibit 10.23 to the Company's Registration Statement on
Form S-1/A filed October 26, 1999 (Registration No.
333-87311) and incorporated herein by reference).
10.22 Letter Agreement between the Company and Sanford M. Schwartz
dated October 27, 1999 (filed as Exhibit 10.24 to the
Company's Registration Statement on Form S-1/A filed
November 10, 1999 (Registration No. 333-87311) and
incorporated herein by reference).
11. Statement Re: Computation of Per Share Earnings (filed
herewith).
12. Statement Re: Computation of Ratios (filed herewith).
21. List of Subsidiaries (filed herewith).
23.1 Consent of Independent Accountants (filed herewith).
23.2 Report of Independent Accountants (filed herewith).
24. Power of Attorney (included on page 36 of this Report).
27. Financial Data Schedule (filed herewith).
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+ Confidential treatment was granted pursuant to Rule 406 of the Securities Act
as to portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.