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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, 2001
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. /X/
As of August 28, 2001, the aggregate market value of voting stock held by
non-affiliates of the registrant was $30,606,848.
As of August 28, 2001, 34,419,803 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 be filed
pursuant to Regulation 14A) for the 2001 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 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 the Risk Factors section of the 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, polling and consulting firm that uses
Internet-based and traditional methodologies to provide our world-wide customers
with critical market knowledge in many industries. Known for our HARRIS
POLL(TM), we have over 45 years experience in providing our clients with
information about the views, experiences and attitudes of people worldwide. The
Company operates as one business segment. 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
management 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, 2001, our Internet
panel consisted of several million individuals who have voluntarily agreed
to participate in our various online market research and polling studies. 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.
Prior to 1999, we 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 used for effectively the same cost, or the
same sample size can be used to reduce the overall cost of a study.
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- 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, 2001, our Internet panel consisted
of several 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.
As our Internet business has matured and our panel size reached a critical
mass, we have shifted the focus of our attention from increasing the absolute
size of our panel to quality and segmentation of participants. Our change of
emphasis enables us to target our investments more specifically toward increases
in panel productivity at a reduced cost. As part of these changes, we terminated
our agreement to buy names in bulk from Excite@Home in April, 2001. We continue
to obtain and buy names from a variety of sources to meet specific needs, and
are planning additional investment in expanding our international databases. We
also are transforming our entire panel to double opt-in status, enabling us to
be removed from the Mail Abuse Prevention System ("MAPS") black hole list. Along
with productivity related activities, we also have created a number of specialty
subpanels, enabling us to better meet clients' specialized needs.
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 2001, we
have expended approximately $36.4 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.
Key elements of our technology infrastructure include:
- A high speed customized e-mail system, which enables us to rapidly format,
target and deliver over 1,000,000 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 200,000
interactive, five-minute surveys per hour in any language supported by
Microsoft Word.
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- 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 is presently pending, 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.
Based on our extensive research about Internet research, we have determined
that some anomalies occur between the responses from on-line respondents versus
the responses from off-line respondents that cannot be reconciled through normal
demographic weighting. As such, we have developed proprietary propensity
weighting schemes to correct for those anomalies.
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 45 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.
Custom Research Division of Yankelovich Partners, Inc. Complimenting the
strong brand name HARRIS POLL, in February 2001, the Company acquired the custom
research division of Yankelovich Partners, Inc.("Yankelovich") headquartered in
Norwalk, Connecticut. Yankelovich offers a full range of research and consulting
services including: product forecasting for the pharmaceutical and other
industries, public opinion polling, brand equity studies, and corporate
reputation measurement. Yankelovich has a long history of conducting
high-quality market research for blue chip clients. We believe their
consultative expertise and access to new markets such as retail,
telecommunications and media is a key competitive advantage.
Our Products and Services
We are a full-service provider of market research and polling services,
utilizing both Internet-based and traditional survey methodologies. Our services
are focused upon serving numerous vertical markets, which 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 can
effectively and efficiently deliver the various multi-client and custom services
that we offer, while providing industry expertise and consultative support.
Our business model comprises four main sources of revenues:
- - custom research;
- - multi-client research;
- - service bureau research; and
- - customer relationship management services;
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Our custom research products and services and customer relationship
management 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 2001, 54% of our total
revenues were derived from Internet-based products, up from 41% in fiscal 2000
and 10% in fiscal 1999. 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 identified
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
Management Services operations for corporations Internet-based
and organizations
Custom Research
For more than 45 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;
- 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.
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- 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 a
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 infrastructure. It
enables us to penetrate markets or industries in which we do not have
relationships or specific expertise. We believe that the 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 2001, the number of market research firms that use HISB increased
to 74, up from 37 in fiscal 2000 and 5 at the end of fiscal 1999.
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Customer Relationship Management 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 customer
relationship management practice ("CRM"), assists clients in improving campaign
performance using real-time data mining, marketing research, and
state-of-the-art CRM technology. Our ISO 9002 certified contact centers offer
24/7, 365 days-per-year services that facilitate CRM campaign management
processes. Customized program management and resource optimization help
businesses achieve personalization with customers so they can proactively
develop account management strategies and recommendations for next-logical
product development solutions and marketing actions.
Our Clients
For over 45 years, we have provided high quality market research products
and services to a broad range of companies, non-profit organizations and
governmental agencies.
For the year ended June 30, 2001, revenues from the Company's largest
customer comprised 12% of total revenues. No other single customer comprised 10%
of total revenue. For the year ended June 30, 2000, revenues from the Company's
largest customer comprised 18%. For the year ended June 30, 1999, revenues from
the two largest customers comprised 15% and 14% 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 rely on our ability to produce and issue press
releases for both our Company and clients who desire to make joint
releases concerning studies that we have conducted. Our public relations
strategy is designed to deploy critical communications 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.
- 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. Additionally, the Harris Interactive name regularly
appears in Time Magazine and on CNN as the research provider for Time/CNN
surveys.
- Online Promotion. We have agreements with numerous 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.
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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 continues to rapidly
evolve. 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 both traditional and Internet-based market research and polling business,
we compete on the basis of our superior analytical and consultative skills to
assist clients in identifying appropriate research issues to examine. This is
accomplished through:
- 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 additional competitive factors in the Internet-based market
research and polling industry are:
- an ability to project results to the required universe;
- 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. Additionally, in June 2001, a patent application was filed
for a system and method for conducting product configuration research over a
computer-based network. 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 with
reference to the license 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 names.
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, 2001, we employed a total of 560 persons on a full-time
basis in addition to 190 full-time and 150 part-time individuals involved in our
telephone data collection activities.
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None of our employees are represented by a collective bargaining agreement. We
have not experienced any work stoppages. We consider our relationship with our
employees to be good.
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 pleasure of our
board of directors:
Name Age Position
- ---- --- --------
Dennis Bhame...... 53 Executive Vice President, Human Resources
Arthur E. Coles... 58 Group President, Health Care and Public Policy
Peter J. Milla.... 42 Senior Vice President, Chief Information Officer
Ronald Knight..... 62 Group President, Business & Consumer Services;
Consulting & Brand Management
Bruce A. Newman... 47 Chief Financial Officer, Secretary and Treasurer
Gregory T. Novak.. 39 Group President, Emerging Markets
Harold E. Quinley. 58 Group President, Media & Public Relations
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.
PETER J. MILLA has served as our Senior Vice President, Chief Information
Officer since September 1999. From 1985 until 1999, Mr. Milla was the Senior
Vice President and Chief Information Officer at Response Analysis Corporation
and following its acquisition, at Roper Starch Worldwide, where he was
responsible for all information technology and data processing activities. From
1983 until 1985, Mr. Milla was on the staff of the National Opinion Research
Center (NORC) at the University of Chicago and was responsible for managing the
data processing activities on research projects for academic institutions and
government agencies. Mr. Milla is currently a member of the Board of Directors
of the Council of American Survey Research Organizations (CASRO). He also serves
as chair of CASRO's Technology Committee. Mr. Milla holds a B.A. and M.A. from
Queens College of the City University of New York.
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.
10
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 1979, Mr. Newman worked for PricewaterhouseCoopers LLP. Mr.
Newman received a B.S. 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, Strategic Marketing
Solutions, since July 2000. From June 1999 through June 2000, Mr. Novak was the
President of our Internet Division. From August 1996 to June 1999, 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.
HAROLD E. QUINLEY has served as Group President, Media & Public Relations,
since February 2001. From 1984 until 2001, Dr. Quinley held various positions
with Yankelovich Partners, Inc., including Partner, Senior Partner, and most
recently, Executive Vice President. Prior to joining Yankelovich Partners, Inc.,
Dr. Quinley held various teaching positions at Stanford University, Brown
University, San Francisco State University, Manhattanville College and The
Graduate School at the New School for Social Research. Dr. Quinley was also the
recipient of two Post-Doctoral Grants: Social Science Research Council
(1969-1970) and National Endowment for the Humanities (1973-1974). Dr. Quinley
received a B.A. from Lawrence University and a Ph.D. from Stanford University.
Item 2. Properties
Our principal office is located in Rochester, New York, under a lease that
expires in June 2005. In addition, we lease data collection centers, which
include telephone interviewing and customer relationship management services, in
Rochester, 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, Chicago, Illinois, Charlotte, North Carolina, Arlington, Virginia,
Norwalk, Connecticut, Claremont, California and Washington DC. In August 2001,
we closed the Charlotte, North Carolina and Washington DC offices.
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 2001.
11
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 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 bid prices per share of our common stock.
Price Range
of Common
Stock
----------------------
High Low
-------- --------
Year ending June 30, 2001:
Fourth Quarter......................................... 3.8000 2.0500
Third Quarter ......................................... 6.0625 2.6250
Second Quarter......................................... 4.8750 2.5000
First Quarter.......................................... 5.3750 3.1250
Year ending June 30, 2000:
Fourth Quarter......................................... 7.8750 3.0000
Third Quarter.......................................... 21.0000 6.0000
Second Quarter (from December 6, 1999)................. 24.0000 13.0000
Holders
At August 28, 2001, the Company's common stock was held by approximately
4,710 shareholders, reflecting shareholders of record or persons holding stock
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. Proceeds to the Company from
the offering totaled approximately $85.5 million, net of offering costs of
approximately $1.4 million.
The Company issued and sold an aggregate of 101,466 shares of its common
stock to employees during the fourth quarter of fiscal 2001, upon the exercise
of options granted under the Company's 1997 stock option plan, at a price of
$1.26, for an aggregate cash consideration of $127,847. As to each employee of
the Company who was issued the common stock described in this paragraph, the
Company relied on Rule 701 under the Securities Act of 1933, as amended. 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).
12
On June 30, 2001, the Company issued an aggregate of 44,438 shares of its
common stock as the Company's matching contribution for the 401(k) Plan at a
price of $2.50, which did not constitute a sale under Section 2(3) of the
Securities Act of 1933, as amended.
During the period December 6, 1999 through June 30, 2001, the Company used a
portion of the proceeds from its public offering as follows: (i) approximately
$44.6 million of net cash used for working capital and general corporate
purposes, including capital expenditures (ii) approximately $11.0 million of net
cash used for the expansion of our Internet panel (iii) approximately $8.2
million of net cash used for the purchase of the custom research division of
Yankelovich and (iv) $0.5 million of net cash used in connection with the
repayment of short-term borrowings.
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 year ended June 30, 1997
reflects the results of operations and balance sheet data of Gordon S. Black
Corporation, our predecessor corporation.
Year ended June 30,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands, except per share data and sales growth)
Statement of Operations Data:
Revenues from services........................ $ 60,061 $ 51,289 $ 28,965 $ 26,290 $ 23,327
Cost of services.............................. 30,764 28,600 19,086 16,618 15,629
-------- -------- ------- ------- -------
Gross profit.................................. 29,297 22,689 9,879 9,672 7,698
Operating expenses:
Internet database development expenses...... 7,422 5,647 4,505 2,753 --
Sales and marketing expenses................ 8,475 8,665 1,316 957 513
General and administrative expenses......... 41,115 32,209 13,085 8,855 5,878
-------- -------- ------- ------- -------
Operating (loss) income....................... (27,715) (23,832) (9,027) (2,893) 1,307
Interest and other income (loss), net......... 3,695 2,940 180 (160) (89)
(Loss) income before income tax............... (24,020) (20,892) (8,847) (3,053) 1,218
Income tax expense (benefit).................. -- 50 -- (1,114) 490
-------- -------- ------- ------- -------
Net (loss) income............................. (24,020) (20,942) (8,847) (1,939) 728
Accrued dividends on preferred stock.......... -- (738) (1,176) -- --
-------- -------- ------- ------- -------
Net (loss) income available to holders of
common stock................................ $(24,020) $(21,680) $(10,023) $ (1,939) $ 728
======== ======== ======= ======= =======
(Loss) income per share -- basic and
diluted..................................... $ (0.70) $ (0.93) $ (1.01) $ (0.16) $ 0.06
======== ======== ======= ======= =======
Weighted average shares outstanding --
basic....................................... 34,239 23,318 9,955 11,903 11,742
Weighted average shares outstanding --
diluted..................................... 34,239 23,318 9,955 11,903 12,372
Selected Operating Data:
Sales Growth.................................. 17% 77% 10% 13% 60%
Capital Expenditures.......................... 7,648 12,092 4,372 977 672
Balance Sheet Data (at end of period):
Cash, cash equivalents and marketable
securities.................................. 42,491 72,892 108 4 349
Working capital (deficit)..................... 44,634 78,698 552 (2,196) (31)
Total assets.................................. 85,221 104,452 14,785 9,798 9,721
Long-term debt, excluding current
installment................................. -- -- -- 400 700
Mandatory redeemable preferred stock.......... -- -- 15,876 -- --
Total stockholders' equity (deficit).......... 71,174 94,350 (8,496) 947 2,392
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We provide market research, polling and consulting 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. We provide customer relationship management 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 $26.1 million, or 90% of our total
revenues, while revenues from Internet-based products represented $2.9 million,
or 10% of total revenues. During fiscal 2000, revenues from traditional market
research and polling methodologies represented $30.3 million, or 59% of total
revenues, while revenues from Internet-based products represented $21.0 million,
or 41% of total revenues. During fiscal 2001, revenues from traditional market
research and polling methodologies represented $27.5 million, or 46% of total
revenues, while revenues from Internet-based products represented $32.6 million,
or 54% 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
revenues derived from Internet-based custom research, multi-client products and
Harris Interactive Service Bureau research will continue to represent the
dominant portion of our total revenues.
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. 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.
14
Interest and other income is 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 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
2001, fiscal 2000 and fiscal 1999, we recognized compensation expense in
connection with such transactions of approximately $.4 million, $1.0 million and
$.02 million, respectively.
Our net losses were $24.0 million, $20.9 million, and $8.8 million in fiscal
2001, fiscal 2000, and fiscal 1999, respectively, resulting primarily from the
continued expansion of our business including 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. We believe that as Internet-based revenue
continues to grow sharply, becoming an even larger component of total revenue,
gross margin will continue to increase and losses will decline.
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,
----------------------------
2001 2000 1999
-------- -------- ------
Revenues from services............................ 100% 100% 100%
Cost of services.................................. 51 56 66
Gross margin...................................... 49 44 34
Internet database development expenses............ 12 11 16
Sales and marketing expenses...................... 14 17 4
General and administrative expenses............... 69 63 45
Operating loss.................................... (46) (47) (31)
Interest and other income, net.................... (6) (6) 1
Net loss.......................................... (40) (41) (30)
Fiscal 2001 as Compared to Fiscal 2000
Revenues from Services. Total revenue increased 17% from $51.3 million in
fiscal 2000 to $60.1 million in fiscal 2001. This increase was due primarily to
the incremental revenue generated from the Yankelovich custom research group
acquired effective February 1, 2001, supplemented by increased usage of our
Internet-based market research products and services, which contributed $32.6
million to total revenue in fiscal 2001, a 55% increase over the prior year.
Additionally, total revenues were negatively impacted by the current economic
slowdown.
Internet revenue constituted 54% of total revenues in fiscal 2001 as
compared to 41% of total revenues in fiscal 2000. This increase was dampened by
the impact of the revenue mix acquired from Yankelovich which, prior to its
acquisition by us, conducted virtually all of its research using traditional
methodologies. However, as a percent of total revenue, Internet revenue for
Yankelovich totaled 25% during the fourth quarter of fiscal 2001, its first full
quarter since being acquired.
Gross Margin. Gross margin increased to 49% in fiscal 2001 from 44% in
fiscal 2000, primarily due to the continuing expansion of Internet-related
business relative to overall revenue growth.
15
Database Development Expenses. Database development expenses increased 32%
to $7.4 million in fiscal 2001 from $5.6 million in fiscal 2000. The increase
over fiscal 2000 is primarily due to The Planet Project Global Poll initiative,
a four day, worldwide poll conducted in November, across all continents in eight
languages. This survey was the largest of its type ever conducted and greatly
increased our knowledge and expertise related to global research and added
modestly to the number of cooperative online respondents worldwide.
Sales and Marketing. Sales and marketing expenses decreased slightly to $8.5
million, or 14% of revenue in fiscal 2001 compared to $8.7 million, or 17% of
revenue, in the prior year. The decrease is primarily attributable to a
reduction in marketing expenses, with a focus on specific products, as well as
the Company-wide initiative to reduce overall spending.
General and Administrative. General and administrative expenses increased
to $41.1 million, or 69% of revenue in fiscal 2001 from $32.2 million, or 63% of
revenue in fiscal 2000. 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.
Interest and Other Income, Net. Net interest and other income totaled
$3.7 million in fiscal 2001 as compared to $2.9 million in fiscal 2000. The
increase was primarily due to a higher average marketable securities balance
during fiscal 2001 as compared to the prior year.
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 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.
16
Quarterly Results of Operations
The following table presents unaudited consolidated quarterly statement of
operations data for the years ended June 30, 2000 and 2001. 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, March 31, June 30,
1999 1999 2000 2000 2000 2000 2001 2001
-------- -------- -------- -------- -------- -------- -------- --------
Revenues from services ............. $ 9,364 $ 12,473 $ 14,156 $ 15,296 $ 12,053 $ 14,532 $ 15,826 $ 17,650
Cost of services ................... 6,307 6,950 7,503 7,840 6,301 6,939 8,444 9,080
-------- -------- -------- -------- -------- -------- -------- --------
Gross Profit ....................... 3,057 5,523 6,653 7,456 5,752 7,593 7,382 8,570
Operating expenses:
Internet database development
expenses ......................... 905 1,615 1,600 1,527 2,517 2,617 1,633 655
Sales and marketing expenses ....... 793 2,067 2,863 2,942 1,913 2,071 2,443 2,048
General and administrative
expenses ......................... 5,121 7,224 9,046 10,818 10,086 9,748 10,045 11,236
-------- -------- -------- -------- -------- -------- -------- --------
Operating loss ..................... (3,762) (5,383) (6,856) (7,831) (8,764) (6,843) (6,739) (5,369)
Interest and other (expense)
income, net ...................... (71) 401 1,340 1,270 1,138 1,048 818 862
-------- -------- -------- -------- -------- -------- -------- --------
Loss before income taxes ........... (3,833) (4,982) (5,516) (6,561) (7,626) (5,795) (5,921) (4,507)
Income tax expense ................. -- -- -- 50 -- 171 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net loss ........................... (3,833) (4,982) (5,516) (6,611) (7,626) (5,966) (5,921) (4,507)
Accrued dividends on preferred
stock ............................ (294) (444) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net loss attributable to holders of
common stock ..................... $ (4,127) $ (5,426) $ (5,516) $ (6,611) $ (7,626) $ (5,966) $ (5,921) $ (4,507)
======== ======== ======== ======== ======== ======== ======== ========
Basic and diluted net loss per share $ (0.38) $ (0.33) $ (0.17) $ (0.19) $ (0.22) $ (0.17) $ (0.17) $ (0.13)
======== ======== ======== ======== ======== ======== ======== ========
Liquidity and Capital Resources
We have financed our operations primarily through bank financing 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. At June 30,
2001, cash and cash equivalents and marketable securities were $42.5 million.
Net cash used in operating activities was $15.5 million for fiscal 2001,
$22.0 million for fiscal 2000 and $8.2 million for fiscal 1999. Net cash used in
operating activities in each of these periods was primarily the result of net
losses.
17
Net cash provided by investing activities was $2.1 million for fiscal 2001.
Net proceeds from sales and maturities of marketable securities of $17.9 million
were partially offset by the $8.2 million cash outflow to purchase the custom
research division of Yankelovich Partners, Inc. in February 2001. Capital
expenditures of $7.6 million primarily supported the development of our Internet
infrastructure.
During fiscal 2000 and fiscal 1999, net cash used in investing activities
was $60.9 million and $4.3 million, respectively. Net cash used in investing
activities during fiscal 2000 was 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. During fiscal 1999, 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 $.1 million in fiscal 2001,
resulting from issuances of common stock and stock options, offset by the
repurchase of common stock. During fiscal 2000 and fiscal 1999 net cash provided
by financing activities was $106.7 million and $12.6 million, respectively. 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.
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 2002,
these expenditures are expected to be lower than fiscal 2001.
Recent Developments
On August 5, 2001, the Company entered into an Agreement and Plan of
Merger with Total Research Corporation, located in Princeton, New Jersey.
Pursuant to the agreement, Harris Interactive will exchange 1.222 shares of
Harris Interactive common stock, par value $.001 per share, for each outstanding
share of Total Research common stock, par value $.001 per share.
The merger is intended to be a tax free exchange. Consummation of the
merger is subject to satisfaction or waiver by the parties of certain closing
conditions, including the receipt of regulatory approvals, approvals by the
stockholders of Harris Interactive and Total Research, respectively, and other
customary closing conditions. The transaction is anticipated to close during the
fourth quarter of the calendar year 2001.
On August 6, 2001, the Company also entered into an agreement to acquire
Market Research Solutions Limited, a privately owned UK company, headquartered
in Oxford, England, in consideration of a combination of cash and shares of
Harris Interactive common stock.
18
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 became effective for our fiscal year beginning July 1,
2000. Implementation of SAB 101 did not require us to change existing revenue
recognition policies and therefore did not 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 became 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 did not have a material effect on our
financial position or results of operations.
SFAS 141 and SFAS 142
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141 ("SFAS 141"), "Business Combinations" and
Statement of Financial Accounting Standard No. 142 ("SFAS 142"), Goodwill and
Other Intangible Assets." SFAS 141 requires that all business combinations be
accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill. SFAS 142 requires that ratable amortization of goodwill be replaced
with periodic tests of the goodwill impairment and that intangible assets other
than goodwill and other indefinite lived intangible assets, be amortized over
their useful lives. SFAS 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for by
the purchase method for which the date of acquisition is after June 30, 2001.
The provisions of SFAS 142 will be effective for fiscal years beginning after
December 15, 2001. The impact of SFAS 141 and SFAS 142 on the Company's
financial statements has not yet been determined.
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 $56.7 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.
19
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 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 12% of our total revenues from one client in fiscal 2001. 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.
We have incurred losses in recent years.
Since the beginning of fiscal 1998 through year end fiscal 2001, we have
expended approximately $56.7 million to develop and maintain our Internet
capabilities, comprising of approximately $20.3 million to develop our Internet
panel and approximately $36.4 million to develop and maintain our technology
infrastructure. As a result, we incurred net losses of $24.0 million in fiscal
2001, $20.9 million in fiscal 2000 and $8.8 million in fiscal 1999. 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. 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.
20
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 maintain a critical mass and scope of our Internet panel
commensurate with our use of the panel 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.
We have ended our agreements with Excite@Home.
In June 2001 the Company ended its strategic alliance and multi-year, panel
recruitment agreement with Excite@Home. This arrangement had been the single,
largest source of new names for the Harris Interactive online panel, having
obtained more than 90% of the names in the Internet panel from that
relationship. However, prices for double opt-in names have dropped precipitously
over the past 18 months, thus allowing the Company to explore other less costly
options to expand and replenish the panel. Our success will depend on our
ability to develop other reliable sources with which to build and replenish our
Internet panel. If we are unable to develop alternative sources 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 an
adequate number of panelists in our Internet panel. Our ability to maintain an
adequate online panel 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.
21
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.
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 and/or customers 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 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.
22
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 continued 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 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.
23
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 re-implement our website.
We have currently pending trademark applications for CONCEPTLOC, STOCKMETER,
JOURNAL OF INTERNET RESEARCH, 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
June 2001, the Company filed a third patent application for a system and method
for conducting product configuration research over a computer-based network. 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.
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.
24
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 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.
Nielsen//NetRatings reported that the total number of users that had access
to the Web during the month of July 2001 (but did not necessarily log on), was
approximately 165 million or 58% of the census population, an increase of 6%
from one year ago and an increase of 19% from two years ago. 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. The Internet Tax Freedom Act also
created the Advisory Commission on Electronic Commerce to examine tax laws that
impact electronic commerce.
25
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;
- 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.
26
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 or 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 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.
27
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.
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.
28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The carrying values of financial instruments including cash and cash
equivalents, marketable securities, accounts receivable and accounts 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.
29
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 or before December 31, 2001 (the
"2001 Proxy Statement"). 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 the
2001 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from the
2001 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from the
2001 Proxy Statement.
30
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, 2001 and 2000....... F-2
Consolidated Statements of Operations for the years ended
June 30, 2001, 2000 and 1999.............................. F-3
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2001, 2000 and 1999.................. F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 2001, 2000 and 1999.............................. 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 as Exhibit 3.1 to Form 10-K filed
September 27, 2000 and incorporated herein by
reference).
3.2 Bylaws of the Company (filed herewith).
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).
10.5.1 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).
31
Exhibit Number Exhibit Title
- -------------- -------------
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, 155 & 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 and incorporated herein by
reference); amendments dated February 11, 2000, March
14, 2000 and October 1, 2000 (filed herewith).
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 as Exhibit 10.6.4 to
Form 10-K filed September 27, 2000 and incorporated
herein by reference).
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).
32
Exhibit Number Exhibit Title
- -------------- -------------
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).
10.14 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).
10.21 Consulting Agreement between the Company and James R.
Riedman dated April 25, 2001 (filed herewith)
21. List of Subsidiaries (filed herewith).
23.1 Consent of Independent Accountants (filed herewith).
23.2 Report of Independent Accountants on Financial Statement
Schedule (filed herewith).
24. Power of Attorney (included on page 36 of this Report).
33
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 31st day of
August, 2001.
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 August 31, 2001
- ----------------------------- Executive Officer
Gordon S. Black (Principal Executive
Officer)
/s/ BRUCE A. NEWMAN Chief Financial Officer, August 31, 2001
- ----------------------------- Secretary, and Treasurer
Bruce A. Newman (Principal Financial and
Accounting Officer)
/s/ DAVID H. CLEMM President, Chief Operating August 31, 2001
- ----------------------------- Officer, and Director
David H. Clemm
34
Name Capacity Date
---- -------- ----
/s/ LEONARD R. BAYER Director August 31, 2001
- -----------------------------
Leonard R. Bayer
/s/ THOMAS D. BERMAN Director August 31, 2001
- -----------------------------
Thomas D. Berman
/s/ G. THOMAS CLARK Director August 31, 2001
- -----------------------------
G. Thomas Clark
/s/ JAMES R. RIEDMAN Director August 31, 2001
- -----------------------------
James R. Riedman
/s/ BENJAMIN D. ADDOMS Director August 31, 2001
- -----------------------------
Benjamin D. Addoms
35
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, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 2001 in conformity with accounting principles
generally accepted in the United States of America. 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 of America, 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 our opinion.
/S/ PricewaterhouseCoopers LLP
Rochester, New York
July 27, 2001
F-1
Harris Interactive Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
June 30,
-------------------
2001 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents............................... $ 10,585 $ 23,932
Marketable securities................................... 31,906 48,960
Accounts receivable, less allowances of $383 and $74,
respectively.......................................... 12,722 10,056
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 1,888 3,780
Other current assets.................................... 1,580 2,072
-------- --------
Total current assets.............................. 58,681 88,800
Property, plant and equipment, net........................ 14,983 13,640
Goodwill and other intangibles, less accumulated
amortization of $786 and $456, respectively........... 8,971 1,094
Other assets.............................................. 2,586 918
-------- --------
Total assets...................................... $ 85,221 $104,452
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................................ $ 4,805 $ 4,243
Accrued expenses........................................ 2,863 2,958
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 6,379 2,901
-------- --------
Total current liabilities......................... 14,047 10,102
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding
Common stock, $.001 par value, 100,000,000 shares authorized;
34,614,503 shares issued at June 30, 2001 and 34,111,434
shares issued at June 30, 2000........................ 34 34
Additional paid-in capital.............................. 128,793 129,113
Unamortized deferred compensation....................... (436) (2,075)
Accumulated other comprehensive income (loss)........... 184 (133)
Accumulated deficit..................................... (56,609) (32,589)
Less: Treasury stock at cost, 232,700 shares at
June 30, 2001 and 0 shares at June 30, 2000........... (792)
-------- --------
Total stockholders' equity........................ 71,174 94,350
-------- --------
Total liabilities and stockholders' equity........ $ 85,221 $104,452
======== ========
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,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenues from services................................ $ 60,061 $ 51,289 $ 28,965
Cost of services...................................... 30,764 28,600 19,086
----------- ----------- -----------
Gross profit.................................. 29,297 22,689 9,879
Operating expenses:
Internet database development expenses.............. 7,422 5,647 4,505
Sales and marketing expenses........................ 8,475 8,665 1,316
General and administrative expenses................. 41,115 32,209 13,085
----------- ----------- -----------
Operating loss................................ (27,715) (23,832) (9,027)
Interest and other income, net........................ 3,695 2,940 180
----------- ----------- -----------
Loss before income taxes...................... (24,020) (20,892) (8,847)
Income tax expense.................................... -- 50 --
----------- ----------- -----------
Net loss...................................... (24,020) (20,942) (8,847)
Accrued dividends on preferred stock.................. -- (738) (1,176)
----------- ----------- -----------
Net loss attributable to holders of common stock...... $ (24,020) $ (21,680) $ (10,023)
=========== =========== ===========
Basic and diluted net loss per share.................. $ (.70) $ (.93) $ (1.01)
=========== =========== ===========
Weighted average shares outstanding--basic and
diluted............................................. 34,239,393 23,317,847 9,955,261
=========== =========== ===========
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 Treasury Equity
Shares Amount Capital Compensation Income (Loss) Deficit) Stock (Deficit)
------ ------ -------- ------------ ------------- -------- ------ -------
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
Comprehensive loss:
Net loss..................... (24,020) (24,020)
Unrealized gains on
marketable securities...... 357 357
Foreign currency
translation................ (40) (40)
-------
Total comprehensive loss....... (23,703)
-------
Exercise of options and
warrants..................... 291 318 318
Issuance of common stock under
Employee
Stock Purchase Plan.......... 145 385 385
Deferred compensation related
to cancelled stock options... (1,218) 1,218 --
Amortization of deferred
compensation................. 421 421
Repurchase of common stock $ (792) (792)
Issuance of common stock....... 67 195 195
------ ---- -------- ------- ------ -------- ------ -------
Balance At June 30, 2001....... 34,614 $ 34 $128,793 $ (436) $ 184 $(56,609) $ (792) $71,174
====== ==== ======== ======= ====== ======== ====== =======
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,
------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(24,020) $(20,942) $(8,847)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization........................... 6,441 3,584 1,261
Amortization of deferred compensation................... 421 1,006 16
Amortization of premium and discount on marketable
securities............................................ (493) (269)
Loss on disposal of assets 152
(Increase) decrease in--
Accounts receivable................................... (2,666) (4,067) (2,071)
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... 1,892 (2,074) (457)
Other current assets.................................. 492 (1,918) 727
Other assets.......................................... (1,668) (316) (13)
Increase (decrease) in --
Accounts payable.................................... 562 2,400 1,666
Accrued expenses.................................... (95) 1,158 (848)
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... 3,478 (569) 363
-------- ------- -------
Net cash used in operating activities............. (15,504) (22,007) (8,203)
-------- ------- -------
Cash flows from investing activities:
Purchase of custom research division of Yankelovich
Partners, Inc. ( 8,207)
Purchase of marketable securities......................... (41,838) (73,860)
Proceeds from sales and maturities of marketable
securities.............................................. 59,742 25,042
Repayment of loan to officer.............................. 42
Capital expenditures...................................... ( 7,606) (12,092) (4,372)
-------- ------- -------
Net cash provided by (used in)investing activities 2,091 (60,910) (4,330)
-------- ------- -------
Cash flows from financing activities:
Principal payments under long-term debt................... (700)
Decrease in short-term borrowings......................... (291) (1,927)
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................................ (792) (3,000)
Issuance of common stock and stock options................ 898 1,627 4,159
-------- ------- -------
Net cash provided by financing activities......... 106 106,747 12,637
-------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (40) (6)
Net (decrease) increase in cash and cash equivalents........ (13,347) 23,824 104
Cash and cash equivalents at beginning of year.............. 23,932 108 4
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 10,585 $ 23,932 $ 108
======== ======== =======
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, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
1. Business
Harris Interactive Inc. (the "Company") is a leading global market research,
polling and consulting 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 POLLTM, the Company has over 45 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 and cash equivalents include highly liquid 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, 2001.
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. In
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," the Company assesses all
long-lived assets, including property, plant and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
Goodwill and Other Intangibles
Goodwill and other intangibles are amortized on a straight-line basis over
15 years. Amortization expense amounted to $330 in fiscal 2001 and $103 in each
of the fiscal years ended 2000 and 1999.
F-6
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies (Continued)
In accordance with SFAS No. 121, the Company assesses intangible assets for
impairment whenever events or circumstances indicate their carrying amounts may
not be recoverable. This is accomplished by comparing the expected undiscounted
future cash flows of the assets with the respective carrying amounts 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 goodwill
or other intangible assets recorded during fiscal 2001, 2000, or 1999.
Computer Software Developed or Obtained for Internal Use
During the year ended June 30, 2000, the Company adopted the provisions of
Statement of Position 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for internal
use and new cost recognition principles and identifies the characteristics of
internal use software. The adoption of SOP 98-1 did not have a material impact
on the Company's results of operations, financial position or cash flows.
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 will continue to develop the database of e-mail addresses and
use 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 $7,422, $5,647, and $4,505 in fiscal
2001, 2000, and 1999, 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.
F-7
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies (Continued)
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.
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 became effective for the Company's fiscal year beginning
July 1, 2000. Implementation of SAB 101 did not require the Company to change
existing revenue recognition policies and therefore did not have a material
effect on the Company's 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 became 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 did not have a material effect on the Company's
financial position or results of operations.
SFAS 141 and 142
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141 ("SFAS 141"), "Business Combinations" and
Statement of Financial Accounting Standard No. 142 ("SFAS 142"), Goodwill and
Other Intangible Assets." SFAS 141 requires that all business combinations be
accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill.
F-8
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies (Continued)
SFAS 142 requires that ratable amortization of goodwill be replaced with
periodic tests of the goodwill impairment and that intangible assets other than
goodwill and other indefinite lived intangible assets, be amortized over their
useful lives. SFAS 141 is effective for all business combinations initiated
after June 30, 2001 and for all business combinations accounted for by the
purchase method for which the date of acquisition is after June 30, 2001. The
provisions of SFAS 142 will be effective for fiscal years beginning after
December 15, 2001. The impact of SFAS 141 and SFAS 142 on the Company's
financial statements has not yet been determined.
In addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. SFAS 142 also requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption.
The Company is currently assessing the impact of this new statement on the
Company's combined financial position and results of operations and have not yet
determined the impact of adoption.
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 accounting
principles generally accepted in the United States of America, 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 and accounts receivable are valued at their carrying or redemption
amounts, which are reasonable estimates of their fair value. The fair value of
all other instruments approximates cost.
3. Acquisition of Yankelovich Custom Research Division
In February 2001, the Company acquired the custom research division of
Yankelovich Partners, Inc. ("Yankelovich") headquartered in Norwalk,
Connecticut, for approximately $8,207, including acquisition costs. Yankelovich
custom research group offers a full range of research and consulting services
including: product forecasting for the pharmaceutical and other industries,
public opinion polling, brand equity studies, and corporate reputation
measurement. In addition to Norwalk, Yankelovich has offices in Claremont, CA
and Washington, DC. which was closed in August 2001. The acquisition was
accounted for as a purchase, and accordingly, the operating results of
Yankelovich custom research division have been included in the Company's
consolidated financial statements from the date of acquisition. Goodwill and
other intangibles of approximately $8,100 are being amortized on a straight-line
basis over 15 years.
F-9
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
4. Marketable Securities
At June 30, 2001 and 2000, marketable securities consisted of the following:
2001 2000
------------------- --------------------
Cost Fair Value Cost Fair Value
-------- ----------- ------- ----------
Type of issue:
Available-for-sale securities--
Certificates of deposit............... $ -- $ -- $ 1,499 $ 1,496
Commercial paper...................... 5,000 5,000 8,013 7,989
Corporate bonds....................... 16,507 16,627 32,727 32,628
Government securities................. 10,169 10,279 4,847 4,847
Market auction........................ -- -- 2,000 2,000
------- ------- ------- --------
Total available-for-sale securities.. $31,676 $31,906 $49,086 $48,960
======= ======= ======= ========
Gross unrealized gains and losses on available-for-sale securities at June
30, 2001 were $232 and $2, respectively. Gross unrealized gains and losses on
available-for-sale securities at June 30, 2000 were $6 and $132, respectively.
The cost and fair value of available-for-sale securities at June 30, 2001 and
2000, by contractual maturity, are shown below:
2001 2000
------------------ -------------------
Cost Fair Value Cost Fair Value
------ ---------- ------- ----------
Maturity date:
Due in one year or less................. $22,676 $22,768 $29,100 $29,028
Due after one year through three years.. 9,000 9,138 19,986 19,932
------- ------- ------- ---------
Total available-for-sale securities $31,676 $31,906 $49,086 $48,960
======= ======= ======= =========
There were no material gains or losses from sales of available-for-sale
securities during the years ended June 30, 2001 and 2000.
5. Contracts In Progress
Accumulated costs and estimated earnings and billings on contracts in
progress at June 30 was as follows:
2001 2000
-------- ---------
Accumulated costs and estimated earnings................. $ 17,399 $ 14,714
Billings................................................. (21,890) (13,835)
-------- -------
$ (4,491) $ 879
======== ========
Contracts in progress are included in the accompanying balance sheets under
the following captions:
F-10
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
5. Contracts In Progress (Continued)
2001 2000
-------- --------
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... $ 1,888 $ 3,780
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... (6,379) (2,901)
------- -------
$(4,491) $ 879
======= =======
6. Property, Plant and Equipment
Property, plant and equipment consists of the following:
June 30,
-------------------
2001 2000
-------- --------
Furniture and fixtures..................................... $ 5,178 $ 4,062
Equipment.................................................. 19,792 14,555
Leasehold improvements..................................... 3,802 2,869
------- ------
28,772 21,486
Accumulated depreciation................................... (13,789) (7,846)
------- ------
$14,983 $13,640
======= ======
Depreciation expense amounted to $6,111, $3,481 and $1,158 in fiscal years
2001, 2000 and 1999, respectively.
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, 2001 are as follows:
Years Ending June 30:
---------------------
2002........................................................ $4,560
2003........................................................ 4,325
2004........................................................ 3,974
2005........................................................ 2,824
2006........................................................ 415
2007 and beyond............................................. 792
Total rental expense for operating leases in 2001, 2000 and 1999 was $5,121,
$2,749 and $1,612, respectively.
F-11
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
7. Business Segment and Geographical Information
The Company operates as one business segment, primarily in a single domestic
market, engaged principally in marketing research, consulting and polling.
For the year ended June 30, 2001, revenues from the Company's largest
customer amounted to 12% of revenues. For the year ended June 30, 2000, revenues
from the largest customer comprised 18% of revenues. For the year ended June 30,
1999, revenues from the Company's two largest customers comprised 15% and 14% of
revenues.
8. Accrued Expenses
Accrued expenses consisted of the following at June 30:
2001 2000
-------- -------
Payroll and withholding expenses............................ $ 791 $ 989
Bonuses..................................................... 373 1,513
Accrued Software............................................ 709 --
Other....................................................... 990 456
------ ------
$2,863 $2,958
====== ======
9. Line of Credit
The Company maintains a line of credit with a commercial bank providing
borrowings up to $5,000 in fiscal 2001 and fiscal 2000 at prime. The prime rate
in effect at June 30, 2001 was 6.75%. Borrowings under this arrangement are due
upon demand. There were no borrowings under this agreement at June 30, 2001 and
June 30, 2000. The line of credit is collateralized by the assets of the
Company.
10. Income Taxes
Income tax expense (benefit) consists of:
Current Deferred Total
-------- -------- -------
2001:
Federal........................................ $ -- $ -- $ --
State.......................................... -- -- --
----- ----- ------
$ -- $ -- $ --
===== ===== ======
F-12
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
10. Income Taxes (Continued)
2000:
Federal....................................... $ 256 $(256) $ --
State......................................... 50 -- 50
----- ----- -------
$ 306 $(256) $ 50
===== ===== =======
1999:
Federal....................................... $ -- $ -- $ --
State......................................... -- -- --
----- ----- -------
$ -- $ -- $ --
===== ===== =======
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 $9,588 and $11,488 during 2001 and 2000, 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:
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards........................ $21,011 $12,050
Internet database development expenses.................. 3,227 2,906
Financial statement versus tax depreciation............. 86 87
Tax credit carryforwards................................ 107 97
Compensation expense accounted for differently between
financial reporting and tax purposes.................. 723 555
Book expenses currently not deductible for tax
purposes.............................................. 174 45
------- -------
Gross deferred tax assets........................... 25,328 15,740
Valuation allowance..................................... (24,592) (15,004)
------- -------
Net deferred tax assets............................. $ 736 $ 736
======= =======
The New York State and Federal net operating loss carryforwards ("NOLs") of
approximately $55,691 and $53,720, respectively, begin to expire in 2019. A
change in ownership could create a limitation on the amount of annual income
that can be offset by NOLs and credits.
F-13
Harris Interactive Inc..
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
10. Income Taxes (Continued)
The differences between income taxes (benefit) at the U.S. statutory rate
and the effective rate are summarized as follows:
2001 2000 1999
-------- ------- -------
Benefit at Federal statutory rate................ $ (8,167) $(7,104) $(3,008)
State income tax benefit, net of Federal income
tax............................................ (1,162) (1,388) (435)
Stock option deductions.......................... (211) (2,832)
Other............................................ ( 48) (114) (73)
Valuation allowance.............................. 9,588 11,488 3,516
-------- ------- -------
$ -- $ 50 $ --
======== ======= =======
11. 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 costs associated with
issuing these securities in the amount of $594 were charged to accumulated
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.
F-14
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
11. Stockholders' Equity (Continued)
In October 1999, the Company 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 issued or outstanding at
June 30, 2001 or 2000.
Upon completion of the initial public offering, the Company's Class A and
Class B 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, 2001 and 2000, the Company had outstanding Warrants to purchase 67,659 and
104,916 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 years 2001 and 2000, employees purchased 145,143 and
28,672 shares of common stock, respectively. There were no purchases under this
plan in fiscal year 1999.
Treasury Stock
In December 2000, the Board of Directors approved a share repurchase
program authorizing the Company to purchase up to $5,000 of its common stock at
market prices. The amount and timing of any purchase will depend upon a number
of factors, including the price and availability of the Company's shares and
general market conditions. The Company's purchases of common stock are recorded
as "Treasury Stock" and result in a reduction of "Stockholders' Equity". As of
June 30, 2001, the Company repurchased 232,700 shares of common stock, at a cost
of $792 under such program.
F-15
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
12. 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 attributable 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 11 and 13) were excluded from the calculation of diluted
net loss per share, as the effect would be anti-dilutive.
The following table sets forth the computation of basic and diluted net loss per
share:
2001 2000 1999
----------- ---------- -----------
Numerator:
Net loss.......................................... $ (24,020) $ (20,942) $ (8,847)
Accrued dividends on preferred stock.............. -- (738) (1,176)
----------- ---------- -----------
Net loss attributable to holders of common stock.... $ (24,020) $ (21,680) $ (10,023)
=========== ========== ===========
Denominator for basic and diluted loss per share --
weighted average shares........................... 34,239,393 23,317,847 9,955,261
=========== ========== ===========
Basic and diluted net loss per share................ $ (.70) $ (0.93) $ (1.01)
=========== ========== ===========
13. 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 2,750,000 shares of common stock for issuance under
the 1999 long-term incentive plan. There were 1,433,250 shares available for
future grant at June 30, 2001.
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.
F-16
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
13. Employee Stock Option Plan (Continued)
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 is being amortized over the vesting period and
unamortized deferred compensation has been recorded as a reduction in
stockholders' equity. No such options were granted in fiscal 2001. During fiscal
2001, 2000 and 1999, compensation expense recognized in the consolidated
statements of operations amounted to $421, $1,006 and $16, respectively.
Stock option activity is as follows:
Number of Weighted Average
Shares Price Per Share
--------- ----------------
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
Granted........................................ 653,250 4.25
Canceled....................................... 600,130 6.21
Exercised...................................... 254,036 1.25
---------
Outstanding at June 30, 2001..................... 3,858,484 3.38
=========
Options exercisable as of June 30, 2001, 2000 and 1999 amounted to
2,456,572, 2,173,408 and 2,140,712, respectively.
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
--------- --------- --------- --------- --------- ---------
2001................................ $(24,020) $(25,282) $(.70) $(.74) $(.70) $(.74)
2000................................ (21,680) (22,224) (.93) (.95) (.93) (.95)
1999................................ (10,023) (10,100) (1.01) (1.01) (1.01) (1.01)
F-17
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
13. Employee Stock Option Plan (Continued)
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 2001,
2000 and 1999.
2001 2000 1999
-------- -------- --------
Risk-free interest rate......................... 4.31% 6.28% 4.70%
Weighted average expected life (years).......... 3 3 3
For option grants made subsequent to the initial public offering, a
volatility factor of 110% was used for fiscal 2001 and a volatility factor of
137% was used for fiscal 2000.
The weighted average grant date fair value of options granted in 2001, 2000
and 1999 is summarized below:
2001 2000 1999
------------------- ------------------- -------------------
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.......................................... $3.95 $5.80 $3.33 $6.16 $ .15 $1.26
Options whose exercise price was less than the grant
date fair value..................................... $6.57 $4.92 $4.36 $4.65 $2.63 $1.26
The following represents additional information about stock options
outstanding at June 30, 2001:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Prices Number Contractual Life Exercise Price Number Exercisable Price
Per Share Outstanding (Years) (Per Share) Exercisable (Per Share)
- --------------------- ----------- ---------------- -------------- ----------- --------------
$ .18--$ .47........ 1,372,000 6 $ .45 1,372,000 $ .45
1.26-- 3.70........ 1,186,734 8 2.95 690,467 2.69
3.75-- 7.06........ 847,750 9 4.53 125,771 5.23
11.00--14.00........ 452,000 9 11.22 268,334 11.28
14. 1997 Stock Program
The 1997 Stock Program replaced a similar program enacted in 1993. Under
this Program, the Company purchased outstanding shares of common stock and: 1)
granted 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 were made at fair value and occur
within six months following the end of the Company's year end.
F-18
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
14. 1997 Stock Program (Continued)
Transactions under the 1997 Stock Program are as follows:
2000 1999
-------------------- --------------------
Number Number
of Shares Amount of Shares Amount
--------- -------- --------- --------
Shares purchased or
retired................... -- -- 57,540 $72
Shares issued............... 75,880 $281 57,540 72
There were no transactions under the 1997 Stock Program for the year ended
June 30, 2001.
15. 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 2001, 2000 and 1999 was $344, $137 and $94, respectively.
16. Supplemental Cash Flow Information
Supplemental Disclosure of Cash Flow Information
Cash paid (received) during the year for:
2001 2000 1999
-------- -------- --------
Interest...................................... $ 26 $ 160 $ 35
---- ----- ----
Taxes......................................... $ -- $ 50 $(748)
---- ----- ----
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-19
Harris Interactive Inc.
Notes to Consolidated Financial Statements (Continued)
Years Ended June 30, 2001, 2000 and 1999
(In thousands, except share and per share amounts)
17. Subsequent Events
On August 5, 2001, the Company entered into an Agreement and Plan of
Merger with Total Research Corporation, located in Princeton, New Jersey.
Pursuant to the agreement, Harris Interactive will exchange 1.222 shares of
Harris Interactive common stock, par value $.001 per share, for each outstanding
share of Total Research common stock, par value $.001 per share.
The merger is intended to be a tax free exchange. Consummation of the
merger is subject to satisfaction or waiver by the parties of certain closing
conditions, including the receipt of regulatory approvals, approvals by the
stockholders of Harris Interactive and Total Research, respectively, and other
customary closing conditions. The transaction is anticipated to close during the
fourth quarter of the calendar year 2001.
On August 6, 2001, the Company also entered into an agreement to acquire
Market Research Solutions Limited, a privately owned UK company, headquartered
in Oxford, England, in consideration of a combination of cash and shares of
Harris Interactive common stock.
F-20
Schedule II
Valuation and Qualifying Accounts
(In thousands)
Balance at Additions Deductions Balance
beginning charged to amounts at end
of period earnings written off of period
---------- ---------- ----------- ---------
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
======= ======= ======= =======
Year ended June 30, 2001
Deducted in the consolidated balance sheet:
Trade accounts receivable, allowance for
doubtful accounts............................ 74 309 0 383
======= ======= ======= =======
Deferred tax valuation allowance............... 15,004 9,588 0 24,592
======= ======= ======= =======
S-1
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE PAGE
- -------------- ------------- --------
3.1 Amended and Restated Certificate of Incorporation of the
Company (filed as Exhibit 3.1 to Form 10-K filed
September 27, 2000 and incorporated herein by
reference).
3.2 Bylaws of the Company (filed herewith).
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).
10.5.1 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, 155 & 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 and
incorporated herein by reference); amendments dated February
11, 2000, March 14, 2000 and October 1, 2000 (filed herewith).
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 as Exhibit 10.6.4 to
Form 10-K filed September 27, 2000 and incorporated
herein by reference).
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).
10.14 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).
10.21 Consulting Agreement between the Company and James R. Riedman
dated April 25, 2001 (filed herewith)
21. List of Subsidiaries (filed herewith).
23.1 Consent of Independent Accountants
(filed herewith).
23.2 Report of Independent Accountants on Financial Statement
Schedule (filed herewith).
24. Power of Attorney (included on page 34 of this Report).