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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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: (585) 272-8400
Securities registered pursuant to Section 12(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, 2002, the aggregate market value of voting and non-voting
common equity securities held by non-affiliates of the registrant was
$82,121,698.
As of August 28, 2002, 52,413,732 shares of the registrant's common stock,
par value $.001 per share, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set
forth herein, is incorporated by reference from the Registrant's definitive
proxy statement relating to the annual meeting of stockholders to be held in
November 2002, which definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Report relates.
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PART I
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
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 this Form 10-K. 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 the "Risk Factors" section of our definitive Joint Proxy
Statement/Prospectus dated September 25, 2001, should also be reviewed.
Item 1. Business
Harris Interactive is a Delaware corporation that was incorporated in 1997.
Harris Interactive Inc. and its subsidiaries (also herein referred to as "Harris
Interactive", "we", "our", "us", or the "Company" ) is a worldwide market
research and consulting firm best known for The Harris Poll(R), and for
pioneering the Internet method to conduct scientifically accurate market
research. Harris Interactive combines proprietary methodologies and technology
with expertise in predictive, custom and strategic research. The Company
conducts international research through wholly owned subsidiaries--London- based
Total Research Limited, doing business under the brand, HI Europe
(www.hieurope.com) and Tokyo-based Harris Interactive Japan K.K.
(www.hpol.co.jp)--as well as through its network of local market-and opinion-
research firms, and various U.S. offices.
The Company has its corporate headquarters in Rochester, New York. The
Company's fiscal year ends June 30th. Information about the Company's products
and services, shareholder information, press releases, and SEC filings can be
found on the Company's website at www.harrisinteractive.com. Information on our
website (or the websites of our subsidiaries) does not constitute part of this
Report on Form 10-K.
Merger with Total Research
On November 1, 2001 Harris Interactive acquired all of the issued and
outstanding shares of common stock, par value $.001 per share, of Total
Research Corporation, a Delaware corporation, located in Princeton, New
Jersey. The transaction was completed pursuant to the Agreement and Plan of
Merger, dated as of August 5, 2001, among the Company, Total Merger Sub Inc.,
a Delaware corporation and direct, wholly owned subsidiary of the Company, and
Total Research. Total Merger Sub was merged with and into Total Research (the
"Merger"), with Total Research continuing as the surviving corporation and as
a direct, wholly owned subsidiary of the Company.
Harris Interactive and Total Research are complementary market research and
polling businesses. We believe that the acquisition is creating increased
value for stockholders by providing opportunities for revenue growth and cost
savings. In addition, the Merger is expected to offer increased opportunities
to:
o convert Total Research traditional-based clients to the Internet,
o cross sell to one another's customers,
o sell customers a larger set of diverse products and services,
o leverage a larger, combined worldwide network for sales and execution,
and
o jointly pursue future acquisitions.
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Overview
The Company operates as one business segment, and services its clients
through six distinct operating groups:
o Strategic Marketing Solutions/Business and Consumer Research,
o Health Care, Youth & Public Policy Research,
o Customer Loyalty Management,
o HI Europe,
o Harris Interactive Japan, and
o Harris Interactive Service Bureau.
The groups conduct:
o custom research--internet-based and traditional studies conducted on
specific issues for specific customers,
o multi-client research--internet-based studies conducted on issues of
general interest and sold to numerous clients, and
o service bureau research--internet-based research conducted for other
research firms.
Five years ago, we embarked on our mission to develop our Internet panel and
the proprietary technology infrastructure to conduct online market research
which would meet our clients' needs for fast, comprehensive and accurate
information. Accordingly, we made, and will continue to make, significant
expenditures to drive the transformation of the market research and polling
industry to an Internet-based platform. We now believe that Harris Interactive
is the leading Internet-based market research and polling firm in the world,
based on the size of our Internet panel, and the amount of revenue we derive
from online research.
The Company operates telephone data collection centers in Rochester, New
York, London, England, and Tokyo, Japan. The Rochester call center currently has
240 CATI (Computer Assisted Telephone Interviewing) stations. The London call
center has 150 CATI stations and the Tokyo call center has 65 CATI stations. The
Company's phone centers conduct interviews utilizing computer programmed
questionnaires. The data are immediately uploaded to the Company's central
data-processing center, thereby enabling more efficient and effective analysis.
The Company maintains secure in-house data processing operations that
provide rapid data management and analysis. The Company supports many
platforms and file types both to exchange data and to provide clients with
extensive database design and management capabilities. The Company also
provides its clients with sample management services and survey data results
using a variety of software applications.
Harris Interactive and The Harris Poll are U.S. registered trademarks of
Harris Interactive Inc. This 10-K also includes other trademarks, trade names
and service marks of Harris Interactive and of other parties.
Our Market Opportunity
General Overview
Business is becoming more complex. Heightened competition, consolidation,
globalization of product markets, shortened product life and rapidly changing
consumer preferences mark today's business environment. This complexity has
escalated the value of accurate and timely information needed to make critical
decisions. Business covets data about the preferences, needs, purchase
behavior and brand awareness of existing and potential clients. Well managed
companies also need to continuously track product performance and competitive
position, monitor consumer satisfaction, measure advertising effectiveness and
determine price sensitivity.
Historically, market research has been performed using traditional data
collection methodologies: telephone, mail and in-person interviews. However,
these methodologies are limited by high data collection costs, small sample
sizes and the extensive time required to perform the research. Consequently,
executing large research projects has been prohibitively expensive except for
organizations with significant resources. The Internet has
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dramatically changed the market research and polling industry, making it
possible for the first time to survey a broad, diverse population at costs and
speeds that were previously unattainable.
The Internet and its Impact on the Market Research and Polling Industry
Since its initial concept in the early 1960's, the Internet has enabled
hundreds of millions of people worldwide to gather and share information and
conduct business electronically. However, the use of the Internet as a market
research and polling tool is still in its early stages, having only been
practiced for the last five-to-seven years.
Harris Interactive first began testing the Internet to conduct market
research and polling in 1997. At that time, there were approximately 40 million
people, or only about 16% of the population in the United States, who had
Internet access. They were not representative of the general population.
Harris Interactive had to perfect data weighting systems to correct for this.
As the demographic composition of Internet users has become closer to the
overall population and weighting procedures have become more accurate, the
Internet has become a viable means to conduct market research--with
significant advantages:
These advantages include:
o Flexibility--Internet-based market research is conducted on the
respondent's schedule--not the telephone researcher's schedule. Online
questionnaires may be completed at home, work or anyplace with Internet
access. Surveys can be created in multiple languages and administered
around the world seven days a week, twenty-four hours a day.
o Versatility--Motion and still pictures, graphics, advertising copy and
other visual materials can be viewed over the Internet, a feature not
available with telephone sampling. The images can be combined with sound
as well as protected from being stolen, printed, forwarded, copied or
saved. Internet-based methodology allows questions and their sequence in
surveys to be modified as panelists respond. Mail surveys, in contrast,
are limited to the order and content of the printed text of the survey.
o Speed--In our experience, an average mail survey takes approximately six
weeks from design to completion. In contrast, Internet surveys can
generally be completed in two to seven days. As voicemail, caller ID,
call screening answering machines and a general aversion to telemarketing
proliferate, call acceptance rates drop and telephone researchers must
call more people to get the same number of completed surveys. Therefore,
the speed advantage of the Internet model actually becomes greater as the
sample size increases.
o Value--Internet-based methodology offers significant cost benefits when
compared to traditional market research methodologies. Using traditional
methodologies, the survey sample size is limited due to the high data
collection costs per response. Internet-based market research methods can
provide larger and more robust sample sizes for the same cost, or the
same sample size can be gathered at a reduced cost.
o Productivity--Because online panelists can read questions faster than
they can listen, more questions can be asked in the same amount of time.
The Harris Interactive Advantage
Harris Interactive offers a broad suite of Internet-based market research
and polling products and services to meet our clients' needs. We possess
several key competitive advantages that we believe will enable us to maintain
and expand our lead position in Internet-based research. Our key competitive
advantages include:
o Largest Internet Panel. We believe that we have developed the largest
Internet panel for conducting market research in the world. As of June 30,
2002, our Internet panel consisted of several million individuals who
have voluntarily agreed to participate in our various online research
studies. Our large and diverse Internet panel enables us to:
o conduct a broad range of customer specific or multi-client research
studies across a wide set of industries,
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o utilize survey sizes that range from a large representative sample of
the overall population to targeted subsets,
o market new research products and services through co-branded alliances
that we historically could not develop, and
o market our online panel to other research firms through the Harris
Interactive Service Bureau, enabling us to penetrate new markets where
we do not have relationships or specific expertise.
o High Value Sub-panels. As our online panel has attained critical mass, we
have shifted our focus from increasing its absolute size to acquiring
high value sub-panels of participants. This change has enabled us to
achieve increases in panel productivity while reducing costs. As part of
these changes, in April 2001, we canceled our agreement to buy names in
bulk from Excite@Home. We continue to acquire names from a variety of
sources to meet specific needs, and are planning to invest significantly
over the next several years to expand our databases in the U.K., France,
Italy, Germany, Spain, Sweden, Norway, Denmark, Japan and other Asian
countries.
o 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 2002, we have expended approximately $46.4 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:
o A high speed customized email system, which enables us to rapidly
format, target and deliver over one million email invitations per hour;
o A sophisticated survey engine, which can support 240,000 custom, five-
minute surveys per hour;
o Software systems with the ability to collect data in foreign languages,
including languages that require "double-byte character set" support,
such as the Asian languages: Chinese, Japanese, Korean and Vietnamese;
in any language supported by Microsoft, including those using Cyrillic,
double-byte and left to right fonts;
o An advanced survey dispatcher system, which monitors, controls and
balances all respondent activity 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;
o A patented customizable multi-language registration and polling
system, which allows new and existing panel members to add, delete or
update their registration information online, and which recognizes each
panelist's language preferences and delivers the survey in that
language;
o Flexible, automated reporting tools which will allow online access to
survey information at any time and speed the process of data delivery
to clients;
o A scalable technology infrastructure which can accommodate the
expansion of our business cheaply and with no significant modifications
to the existing system design; and
o A proprietary propensity weighting system that corrects for anomalies
to the data that occur between the responses from online respondents
and offline respondents.
o A Strong Brand. We believe that 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 for providing trusted information 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.
o Loyal Clients. Our almost fanatical customer satisfaction measurement
system and the associated process improvements have allowed us to greatly
improve the quality of services that we deliver. Consequently, our client
satisfaction scores (over 9.0 out of 10) are in the top in the industry.
Strong client satisfaction levels have enabled us to:
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o increase customer loyalty,
o decrease our cost of sales,
o respond to changing customer needs, and
o improve our margins.
Our Products and Services
Our services are focused upon serving numerous vertical markets, which
include, but are not limited to, ecommerce, consumer packaged goods,
automotive, financial services, health care, technology and education. By
aligning all of our support functions (e.g. sales, marketing, research staff,
etc.) on specific vertical markets, we can effectively and efficiently deliver
our services, while providing industry expertise and consultative support.
Our three primary sources of revenues are:
o custom research
o multi-client research
o service bureau research
All multi-client and service bureau research is conducted via the Internet.
We deliver custom research by employing both traditional and Internet-based
methodologies. Currently, we are aggressively transitioning our custom
research and polling products and services to Internet-based research. During
fiscal 2002, 41% of our total revenues were derived from Internet-based
products, down from 54% in fiscal 2001. The decrease occurred due to the
dilutive effect of the traditional business that was acquired from Total
Research. During fiscal 2000, 41% of our total revenues were derived from
Internet-based products. We continue to dedicate a significant amount of our
financial and management resources to developing and marketing additional
products and services that use our Internet-based methodologies.
The following table summarizes our products and services.
Product Type Description Methodology
- ------------ ----------- -----------
Custom Research Market research and polling conducted on an issue Traditional and Internet-based
specifically identified by a client.
Multi-Client Research Studies developed for and sold to a large number of Internet-based
clients who have a similar interest in a particular
subject area.
Service Bureau Research Market research and polling conducted for other market Internet-based
research firms.
Custom Research
For more than 45 years, we have provided custom research to a broad range of
clients, ranging from business-to-business and business-to-consumer companies,
to non-profit organizations and governmental agencies. This experience has
served as our foundation to build the techniques used to conduct accurate
Internet-based custom research. Our long history has also provided us with
particular expertise in the following markets:
o healthcare,
o pharmaceuticals and medical devices,
o office equipment and technology,
o education and public policy,
o transportation, and
o public relations.
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We conduct many types of custom research including customer satisfaction
surveys, market share studies, new product introduction studies, brand
recognition studies, reputation studies, ad concept testing and more. A custom
research project has three distinct phases:
o design meetings--Initial meetings are conducted with the client to
clearly define the objectives and reasons for the study which ensures
that the data collected by the research will meet the customer's needs.
Based on the requirements, we then determine the proper 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.
o data collection--Field data collection is conducted through computer-
aided Internet or telephone interviewing, by mail or in person, or
holding focus group meetings or any combination of the above. Quality
procedures assure that surveys are returned and the correct number of
interviews are completed.
o weighting, analysis and reporting--We review the collected data for
sufficiency and completeness; weight the data accordingly, and then
analyze by desired demographic, business or industry characteristics. A
comprehensive report that typically includes recommendations is then
prepared and delivered to the client.
Our proprietary sample design and questionnaire development techniques
ensure that complete and accurate information is collected, and that this data
will satisfy the specific inquiries of our clients. We have developed in-depth
data collection techniques that enhance the integrity and reliability of our
sample database. Our survey methodology ensures that responses are derived
from the appropriate decision-makers in each category. As a result, we deliver
the data that our clients need.
Multi-Client Research
Multi-client research is sold on a one-time or subscription basis to a large
number of customers that have an interest in a particular market segment or
research application. Our multi-client products are developed on an
independent or co-branded basis and are marketed by us. We collaborate with
other parties that have unique experience in a particular subject or market to
produce co-branded multi-client products. 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 accordingly. Co-
branded products typically enable our clients to conduct research that they
could not conduct without our Internet panel and technology infrastructure. By
combining their expertise with our vast database and research capabilities, we
are able to develop and market products that benefit both parties.
Service Bureau Research
The Harris Interactive Service Bureau ("HISB") conducts Internet-based
market research for other market research firms and other clients that either
do not have the necessary resources to develop Internet-based market research
capabilities or that have otherwise chosen not to develop such capabilities
themselves. In addition to being a strong revenue source, HISB also enables us
to penetrate markets or industries where we do not have current relationships
or specific expertise. We also believe that HISB reduces the likelihood that
those clients will invest significant financial and management resources to
develop competitive 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 2002, 90 market research firms used HISB, up from 74 in fiscal
2001 and 37 at the end of fiscal 2000.
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Our Clients
In fiscal 2002, approximately 37.5% of the Company's revenues were derived
from Fortune 500 companies. The Company served approximately 737 clients,
derived from the following sectors:
% FY2002
Sector Revenue
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Health Care/Pharmaceutical 24
Customer Loyalty Management 15
Market Research (HISB) 8
Public Policy 7
Customer Relationship Management 6
Strategic Brands & Consulting 6
Advertising 5
Automotive & Transportation. 4
Ebusiness 4
Education 4
Consumer Packaged Goods 3
Technology 3
General Markets/Other 7
In fiscal 2002, no single client accounted for more than 10% of the
Company's consolidated revenues. For the year ended June 30, 2001, our largest
customer comprised 12% of total revenues and 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%.
Our Sales and Marketing Programs
During fiscal 2002 the Company has invested approximately $3.5 million to
implement a broad range of sales and marketing programs, intended to:
o raise awareness of the Harris Interactive brand,
o build specific product awareness,
o generate new sales leads,
o expand our Internet panel, and
o support our global network.
Marketing activities are integrated and may contain elements of public
relations, trade show participation, offline advertising and online promotion,
as well as direct marketing.
o Public Relations. We engage in comprehensive media relations and public
relations on a full time basis. We regularly create and distribute via
national and international news wires, media releases for both our
Company and our clients who desire to jointly release data from studies
that we have conducted. Last fiscal year, the Company created and
distributed over 140 media releases, including the weekly distribution of
The Harris Poll. Our public relations team also collaborated with our
clients for over 40 joint releases of information. Our public relations
team also responded to over 2,000 media inquiries from reporters and
editors who wanted to publish our data--coordinating interviews between
our researchers and the media. The Harris Interactive name regularly
appears in Business Week and Time Magazines, and on CNN as a research
provider for Time/CNN surveys. Brand Week and The Wall Street Journal
publish our Brand and Reputation research on a regular basis. Public
relations has been, and will remain, the main driver behind the rapid
increase in the overall awareness of the Harris Interactive brand.
o Trade Shows. To further our position as a global leader in Internet-based
research Harris Interactive has participated and will continue to
participate in a large number of industry tradeshows, seminars and
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expositions. Speakers from the Company are invited all over the world to
share their knowledge with many prestigious organizations, including the
Congress of the United States.
o Offline Advertising and Promotion. We use print advertising to promote
our brand name and our associated products and services. The weekly,
public release of The Harris Poll is one of our most effective offline
promotional activities. The Harris Poll has been in existence since 1963
and is one of the best known and longest running public opinion polls in
the United States.
o Online Promotion. The Company has entered into agreements with numerous
Internet portals, which allow us to place The Harris Poll or Harris
Interactive logo links to our panel registration website. The Company
also purchases banner advertising and co-registration opportunities to
recruit new members to The Harris Poll Online. Other online promotions
are undertaken from time to time to recruit special segments to our panel
such as senior citizens, teens, minorities, and Information Technology
("IT") users.
o Direct Marketing. Direct marketing strategies are becoming increasingly
important in generating leads for specific products and services of the
Company. Campaigns that incorporate dimensional mail in combination with
outbound telemarketing calls conducted by the inside sales force, have
yielded the greatest response. These campaigns are scheduled on a
rotating basis throughout the year to support all major lines of business
and to maximize the productivity of the inside sales force.
Our Competition
Traditional market research and polling is a mature industry with annual
growth rates in the single digits. Consolidation continues to create larger
and larger firms, some with billions of dollars in annual revenue. The
Internet-based market research and polling industry continues to grow and
evolve rapidly, with annual growth rates of more than forty percent. Many
organizations created exclusively to enter the Internet-based research race
have disappeared or are now greatly diminished. Meanwhile, other firms have
stepped in to take their place. We expect that competition will intensify as
existing market research firms recognize the potential impact of the Internet
to their business.
Although barriers to entry are high, we believe that many of the larger
firms have the potential to spend the millions of dollars necessary to develop
and deploy the infrastructure necessary to conduct accurate, Internet-based
market research.
However, we can compete well due to the knowledge of our people and our
ability to excel in:
o proprietary sample design techniques,
o questionnaire development,
o in-depth data collection, and
o the ability to accurately deliver data that represents the desired
demographics.
We also believe that we have additional competitive advantages in the
Internet-based market research and polling industry:
o our ability to project results to the required universe,
o our large Internet panel, diverse in geographic scope and demographic
depth,
o our scalable proprietary Internet technology platform,
o our quality, and the depth and breadth of our products and services,
o our brand recognition and strong reputation, and
o our value.
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.
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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.
Our Intellectual Property and Other Proprietary Rights
Our success in becoming the leader in Internet-based market research was
largely driven by our proprietary software technology, research methodology,
data weighting and analysis techniques, and the internal processes that we
developed to conduct online research. This intellectual property is essential
to our continued success, and to protect it, we rely on a combination of
patent, copyright, trademark and trade secret laws, plus confidentiality and
license agreements. In October 2001, we received a patent for a system to
conduct surveys over a network, including the Internet, to multiple
respondents in multiple countries in different languages. This system only
allows the respondent to participate once. It can also dynamically generate
surveys from a database as well as immediately show and compare the results of
the surveys. The patent will expire February 2, 2019. We also have two
additional patents pending:
o For ConceptLoc(TM)--a proprietary suite of online security products that
protect non-animated graphics interchange format and Joint Photographic
Expert Group images, prevent printing of protected images, disable screen
print capability, disable save, save as, drag and drop, and copy
capabilities and defeat third-party capture applications; and
o For a system to conduct "build your own" product configuration research
over a network.
Our success and ability to compete substantially depend on our internally
developed technologies and trademarks. We have trademark registrations for a
number of our trademarks, including Harris Interactive and The Harris Poll. If
we were prevented from using The Harris Poll name, 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.
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 The 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 and 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,
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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.
Financial Information About Geographic Areas
During fiscal 2002, approximately 21% of our consolidated revenues were
derived from our non-U.S. operations in the United Kingdom and Japan. During
fiscal 2001 and 2000, there we no revenues generated from non-U.S. operations.
Backlog
As of June 30, 2002, we had a revenue backlog of approximately $40 million,
as compared to a backlog of approximately $27 million at June 30, 2001. It is
estimated that substantially all of the backlog as of June 30, 2002 will be
recognized during the fiscal year ending June 30, 2003.
Employees
As of June 30, 2002, we employed a total of 745 persons on a full-time
basis, worldwide, 550 of which are employed in the U.S. In addition, we
employed 450 part-time and hourly individuals for data gathering and
processing activities.
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 of Harris Interactive
The following table sets forth the name, age and position of each of the
persons who were serving as executive officers of the Company as of
September 27, 2002. These individuals have been elected by and are serving at
the pleasure of our board of directors:
Name Age Position
- ---- --- --------
Gordon S. Black ................. 61 Chairman of the Board, Chief Executive Officer
Albert A. Angrisani ............. 53 President, Chief Operating Officer
Leonard R. Bayer ................ 52 Executive Vice President, Chief Technology
Officer
Dennis Bhame .................... 54 Executive Vice President, Human Resources
Arthur E. Coles ................. 59 Group President, Health Care, Education and
Public Policy
Peter J. Milla .................. 43 Executive Vice President, Chief Information
Officer
Ronald Knight ................... 63 Group President, Harris Interactive Service
Bureau and Chief of Staff
Bruce A. Newman ................. 48 Chief Financial Officer, Secretary and Treasurer
Gregory T. Novak ................ 40 Group President, Strategic Marketing Solutions
and Business & Consulting
Theresa A. Flanagan ............. 41 President, Customer Loyalty Management
Gareth Davies ................... 44 Managing Director, HI Europe
Minoru Aoo ...................... 58 Managing Director, Harris Interactive Japan
10
The following is a brief account of the business experience of each of the
above executive officers:
Gordon S. Black has served as Chairman of the Board and Chief Executive
Officer of Harris Interactive since he founded Gordon S. Black Corporation in
July 1975. From July 1968 to June 1978, Dr. Black was a member of the faculty
of the University of Rochester, where he was an Associate Professor with
tenure. Dr. Black received a Ph.D. in Political Science from Stanford
University and a B.A. degree in Political Science from Washington University.
Albert A. Angrisani has served as President and Chief Operating Officer, and
as a director of Harris Interactive since November 2001. Mr. Angrisani was
elected to serve as President and Chief Operating Officer and as a director of
Harris Interactive pursuant to the terms of the Agreement and Plan of Merger
dated August 5, 2001 between Harris Interactive Inc., Total Research
Corporation and Total Merger Sub Inc. From July 1998 to November 2001,
Mr. Angrisani served as President and Chief Executive Officer of Total
Research Corporation and as director of Total Research Corporation from
November 1994 to November 2001. Prior to July 1998, Mr. Angrisani acted as a
consultant to Total Research Corporation, and from January 1993 to April 1998,
Mr. Angrisani served as the President of the Princeton-Potomac Management
Company, a consulting and financial services firm. Mr. Angrisani earned an
A.P.C. from New York University, an M.B.A. from Fairleigh Dickenson University
and a B.A. from Washington & Lee University.
Leonard R. Bayer has served as Executive Vice President and Chief Technology
Officer, and as a director of Harris Interactive, since July 1978. From August
1976 to July 1978, Mr. Bayer worked for Practice Development Corporation where
he served as Vice President of Research and Development. From September 1975
to August 1976, Mr. Bayer was a member of the faculty of the University of
Rochester School of Medicine where he taught mathematical statistics. Mr. Bayer
received an M.A. degree in Statistics, a B.S. degree in Astrophysics and a
B.A. degree in Mathematics from the University of Rochester.
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, Education
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 the 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 Executive 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, Harris Interactive Service
Bureau and Chief of Staff since July 2001. He served as Group President,
Business and Consumer Services; Consulting & Brand Management from July 2000
until July 2001. Prior to joining the 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
11
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.
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 and Business and Consulting since July 2001. He served as Group
President, Strategic Marketing Solutions, from July 2000 to July 2001. 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.
Theresa A. Flanagan has served as President of the Customer Loyalty
Management division of Harris Interactive since November 2001. Ms. Flanagan
became President of the Customer Loyalty Management division of Total Research
Corporation in July 1996. She joined Total Research Corporation in 1983 and
served as Senior Vice President from June 1993 to July 1996.
Gareth Davies has served as Managing Director of HI Europe since November
2001. Mr. Davies became the Managing Director of Total Research Europe in June
1998. In 1989 he joined Business Marketing Services as a Financial Controller
and had been its Financial Director prior to its purchase by Total Research
Corporation in 1994.
Minoru Aoo has served as Managing Director of Harris Interactive Japan since
February 2000. He has also served as Managing Director of Adams Communications
and M&A Create Limited since August 1995. From March 1987 to July 1995, Mr. Aoo
worked for Dow Jones and Co. as a Managing Director in the International
Marketing Services Department. Mr. Aoo joined Nihon Keizai Shimbun after
receiving a Bachelor of Commercial Science from Keio University in Tokyo.
Item 2. Properties
The Company's headquarters and principal United States operating facility is
located at 135 Corporate Woods, Rochester, New York, 14623, under a lease that
expires in June 2005. In addition, we lease data collection centers, which
includes telephone interviewing and customer relationship management services,
in Rochester, New York, London, England, and Tokyo, Japan, and we lease
service offices to house our project staff, administrative staff and
processing staff, in New York, New York, Princeton, New Jersey, Arlington,
Virginia, Norwalk, Connecticut, Minneapolis, Minnesota, Claremont, California,
London, England and Tokyo, Japan.
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 business, financial condition 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 2002.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
Our common stock is traded on the Nasdaq National Market system under the
symbol "HPOL". The following 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, 2002:
Fourth Quarter ............................................. 3.9900 3.0700
Third Quarter .............................................. 4.1000 2.4500
Second Quarter ............................................. 3.1800 1.6500
First Quarter .............................................. 3.2100 1.6500
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
Holders
At August 28, 2002, the Company's common stock was held by approximately
5,200 stockholders, reflecting stockholders 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. Net proceeds to the
Company from the offering totaled approximately $85.5 million.
The Company issued and sold an aggregate of 26,434 shares of its common
stock to employees during the fourth quarter of fiscal 2002, upon the exercise
of options granted under the Company's 1997 stock option plan, at a price
ranging from $0.47 per share to $1.26 per share, for an aggregate cash
consideration of $17,327. 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).
In addition, the Company issued an aggregate of 13,337 shares of its common
stock upon the exercise of warrants granted by the Company, at a price of
$1.50 each. Each warrant had a net exercise provision under which the holder
could, in lieu of payment of the exercise price in cash, surrender the warrant
and receive a net amount of shares, based on the fair market value of our
stock at the time of the exercise of the warrant, after
13
deducting the aggregate exercise price. All such transactions were conducted
using the net exercise provision during the fourth quarter of fiscal 2002. The
Company relied upon Section 4(2) of the Securities Act of 1933 in connection
with the issuances of those shares.
On June 30, 2002, the Company issued an aggregate of 32,155 shares of its
common stock as the Company's matching contribution for the 401(k) Plan at a
price of $3.37, 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, 2002, the Company used a
portion of the proceeds from its public offering as follows: (i) approximately
$53.0 million of net cash used for working capital and general corporate
purposes, including capital expenditures (ii) approximately $11.4 million of
net cash used for the expansion of our Internet panel (iii) approximately
$12.0 million of net cash used for acquisitions and (iv) $2.8 million of net
cash used in connection with the repayment of short-term and long-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.
Year ended June 30,
-----------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands, except per share data and sales growth)
Statement of Operations Data:
Revenues from services.................................................... $100,048 $ 60,061 $ 51,289 $ 28,965 $26,290
Cost of services.......................................................... 53,470 30,764 28,600 19,086 16,618
-------- -------- -------- -------- -------
Gross profit.............................................................. 46,578 29,297 22,689 9,879 9,672
Operating expenses:
Internet database development expenses.................................... 448 7,422 5,647 4,505 2,753
Sales and marketing expenses.............................................. 9,720 8,475 8,665 1,316 957
General and administrative expenses....................................... 46,260 41,115 32,209 13,085 8,855
Restructuring and asset impairment charge................................. 6,222 -- -- -- --
-------- -------- -------- -------- -------
Operating loss............................................................ (16,072) (27,715) (23,832) (9,027) (2,893)
Interest and other income................................................. 1,412 3,721 3,100 206 95
Interest expense.......................................................... (95) (26) (160) (26) (255)
-------- -------- -------- -------- -------
Loss before income tax.................................................... (14,755) (24,020) (20,892) (8,847) (3,053)
Income tax expense (benefit).............................................. 38 -- 50 -- (1,114)
-------- -------- -------- -------- -------
Net loss.................................................................. (14,793) (24,020) (20,942) (8,847) (1,939)
Accrued dividends on preferred stock...................................... -- -- (738) (1,176) --
-------- -------- -------- -------- -------
Net loss available to holders of common stock............................. $(14,793) $(24,020) $(21,680) $(10,023) $(1,939)
======== ======== ======== ======== =======
Loss per share--basic and diluted......................................... $ (0.32) $ (0.70) $ (0.93) $ (1.01) $ (0.16)
======== ======== ======== ======== =======
Weighted average shares outstanding--basic................................ 46,136 34,239 23,318 9,955 11,903
Weighted average shares outstanding--diluted.............................. 46,136 34,239 23,318 9,955 11,903
Selected Operating Data:
Sales Growth.............................................................. 67% 17% 77% 10% 13%
Capital Expenditures...................................................... 2,841 7,606 12,092 4,372 977
Balance Sheet Data (at end of period):
Cash, cash equivalents and marketable securities.......................... 27,857 42,491 72,892 108 4
Working capital (deficit)................................................. 27,799 44,634 78,698 552 (2,196)
Total assets.............................................................. 135,518 85,221 104,452 14,785 9,798
Long-term debt, excluding current installment............................. 314 -- -- -- 400
Mandatory redeemable preferred stock...................................... -- -- -- 15,876 --
Total stockholders' equity (deficit)...................................... 103,300 71,174 94,350 (8,496) 947
14
Our results include the acquisitions of Total Research Corporation (November
2001), Market Research Solutions Limited (August 2001), M&A Create Limited
(August 2001) and the custom research division of Yankelovich Partners
(February 2001).
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
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.
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported therein. The most
significant of these involving difficult or complex judgements in 2002
include:
o Revenue recognition,
o Provision for uncollectible accounts,
o Valuation of goodwill and intangible assets and other long-lived assets,
o Realizability of deferred tax assets, and
o HI Points loyalty program.
In each situation, management is required to make estimates about the
effects of matters or future events that are inherently uncertain.
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. Provisions 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.
Revisions to estimated costs and differences between actual contract losses
and estimated contract losses would effect both the timing of revenue
allocated and the results of operations of the Company. 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.
The Company maintains provisions for uncollectible accounts for estimated
losses resulting from the inability of its customers to remit payments. If the
financial condition of customers were to deteriorate, thereby resulting in an
inability to make payments, additional allowances may be required.
The Company assesses the carrying value of its identifiable intangible
assets, long-lived assets and goodwill whenever events or changes in
circumstances indicate that the carrying amount of the underlying asset may
not be recoverable. Certain factors which may occur and indicate that an
impairment exists include, but are not limited to: significant under
performance relative to historical or projected future operating results;
significant changes in the manner of the Company's use of the underlying
assets; and significant adverse industry or market trends. In the event that
the carrying value of assets are determined to be unrecoverable, the Company
would record an adjustment to the respective carrying value. With respect to
goodwill, the Company will complete its impairment test on an annual basis.
15
The Company evaluates the valuation allowance and the realizability of its
deferred tax assets on an ongoing basis. In the determination of the valuation
allowance, the Company has considered future taxable income. Should the
Company determine that it is more likely than not that it will realize certain
of its deferred tax assets in the future, an adjustment would be required to
reduce the existing valuation allowance and increase income.
The Company has implemented a loyalty program whereby points are awarded to
survey respondents who register for the Company's online panel, complete
online surveys and refer others to join the online panel. The earned points,
which are non-transferable, may be redeemed for gifts from a specific product
folio. The Company estimated the redemption rate of the points based on
research from other loyalty and retention programs. An actual redemption rate
that differs from this estimated redemption rate may have a material impact on
the results of operations of the Company.
Business Combinations
On November 1, 2001 the Company acquired all of the issued and outstanding
shares of common stock, par value $.001 per share, of Total Research
Corporation ("Total Research"), a Delaware corporation, headquartered in
Princeton, New Jersey, pursuant to the Agreement and Plan of Merger, dated as
of August 5, 2001, among the Company, Total Merger Sub Inc., a Delaware
corporation and direct, wholly owned subsidiary of the Company, and Total
Research. Pursuant to the merger agreement, Total Merger Sub was merged with
and into Total Research (the "Merger"), with Total Research continuing as the
surviving corporation and as a direct, wholly owned subsidiary of the Company.
Harris Interactive and Total Research are engaged in complementary businesses
in the market research and polling industry. The acquisition is expected to
create opportunities for revenue growth, cost savings and other synergies
including the ability to convert Total Research traditional-based clients to the
Internet, sell to one another's customers, offer customers more comprehensive
and diverse products and services, use a combined worldwide network, and pursue
jointly future acquisitions. Consequently, the acquisition is intended to result
in increased value for stockholders. The preliminary results of our first seven
months of combined operations lead us to believe that our expectations were
correct.
Upon consummation of the Merger, each outstanding share of Total Research
common stock was converted into the right to receive 1.222 shares of Harris
Interactive common stock, par value $.001 per share. An aggregate of
approximately 16,610,000 shares of common stock, with an estimated fair value
of $41.3 million, was issued to the stockholders of Total Research
Corporation. The value was determined using the average fair market value of
the stock for the range of trading days beginning August 2, 2001 and ending
August 8, 2001. Additionally, pursuant to the merger agreement, all
outstanding options to purchase shares of Total Research common stock were,
upon consummation of the merger, fully vested and converted into an option to
purchase 1.222 shares of Harris Interactive common stock. As a result, the
former option holders of Total Research received from Harris Interactive
options to purchase approximately 2,899,000 shares of Harris Interactive
common stock, with an estimated fair value of $3.6 million. The acquisition
was accounted for as a purchase in accordance with FAS 141 and is included in
the Company's financial statements commencing on November 1, 2001.
The Company recorded approximately $50.3 million in goodwill and intangibles
related to the acquisition in accordance with the provisions of SFAS 141 (See
Note 18 of Notes to Consolidated Financial Statements included in "Item 8--
Financial Statements and Supplementary Data").
In September, 2001, the Company acquired all of the issued and outstanding
stock of M&A Create Limited, a privately owned company headquartered in Tokyo,
Japan, in consideration of a combination of cash and shares of Harris
Interactive common stock. Additionally, in August, 2001, the Company acquired
all of the issued and outstanding stock of 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.
Restructuring and Asset Impairment Charge
During the second quarter of fiscal 2002, the Company recorded a
restructuring and asset write-down charge of $6.2 million directly related to
the operational integration of Harris Interactive and Total Research.
Management developed a formal plan that included a 5% reduction in Harris
Interactive staff of the full-time workforce in Rochester, NY; New York,
NY; Norwalk, CT and a few other outlying locations. The affected employees
were mainly support staff with overlapping functions in the combined Company.
Other integration
16
actions included the closing of our telephone center located in Youngstown, OH
and offices in New York, NY and Chicago, IL which resulted in asset write-
downs and lease commitments at these locations. The plan was formally
communicated to the affected employees during the second fiscal quarter. As a
result of the restructuring, the Company realized approximately $1.1 million
in non-cash savings and $1.9 million in cash savings in fiscal 2002. The
Company estimates non-cash savings of approximately $2.1 million and cash
savings of approximately $5.6 million, in fiscal 2003. The following table
summarizes activity with respect to the restructuring and asset impairment
charge for the period ended June 30, 2002:
Asset Lease
Severance write-downs Commitments Total
--------- ----------- ----------- -------
(In thousands)
Net charge fiscal 2002 ........................................................ $ 1,169 $ 2,792 $2,261 $ 6,222
Asset write-downs during 2002 ................................................. 0 (2,792) 0 (2,792)
Cash payments during 2002 ..................................................... (1,098) 0 (160) (1,258)
------- ------- ------ -------
Remaining reserve at June 30, 2002 ............................................ $ 71 $ 0 $2,101 $ 2,172
======= ======= ====== =======
As of June 30, 2002, all actions have been completed, however cash payments
for severance and lease commitments will be made on a longer-term basis
according to the contractually scheduled payments of such commitments. Cash
payments on the leases will continue through 2005. Total number of employees
included in the charge was 82. All have been terminated as of June 30, 2002
with the balance of severance to be paid in fiscal 2003.
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,
-------------------
2002 2001 2000
---- ---- ----
Revenues from services.................................. 100% 100% 100
Cost of services........................................ 53 51 56
Gross margin............................................ 47 49 44
Internet database development expenses.................. 1 12 11
Sales and marketing expenses............................ 10 14 17
General and administrative expenses..................... 46 69 63
Restructuring charges and asset impairment.............. 6 -- --
Operating loss.......................................... (16) (46) (47)
Interest and other income, net.......................... (1) (6) (6)
Net loss before taxes................................... (15) (40) (41)
Income taxes............................................ (--) -- --
Net loss................................................ (15) (40) (41)
Fiscal 2002 as Compared to Fiscal 2001
Revenues from services. Revenues increased 67% from $60.1 million in fiscal
2001 to $100.0 million in fiscal 2002. The revenue growth was mainly due to
the acquisitions of Total Research in November of fiscal 2002, the Yankelovich
custom research group in February of fiscal 2001, Market Research Solutions
Limited and M&A Create Limited in August of fiscal 2002. In fiscal 2002, the
Company also increased Internet-based revenues to $40.6 million, from
$32.6 million in fiscal 2001. Acquiring new Internet-based revenue as well as
converting existing, traditional work to the Internet drove this 25% increase.
Gross margin. Gross margin decreased to 47% in fiscal 2002, from 49% in
fiscal 2001. The margins declined mainly because a large majority of the
acquired revenue was generated from traditional research.
Internet database development. Internet database development costs declined
$7.0 million, or 95%, to $0.4 million in fiscal 2002 from $7.4 million in
fiscal 2001. This decrease was due to a number of factors:
17
o the primary building of the U.S. database was completed last year,
o the price to acquire double opt-in names for database replenishment
dropped precipitously this year, and
o we terminated our panel recruitment agreement with Excite@Home.
In addition, the prior year expense included costs associated with The
Planet Project Global Poll conducted in November 2000.
Sales and marketing. Sales and marketing expenses were $9.7 million for
fiscal 2002, or 10% of revenue, compared with $8.5 million, or 14% of revenue
for fiscal 2001. The absolute dollar increase is primarily attributable to an
increase in salaries and related expenses resulting from the acquisition of
Total Research and an increase in sales commission expense. The improvement as
a percentage of revenue is attributable to the Company's continuing efforts to
reduce overall costs.
General and administrative. General and administrative expenses were
$46.3 million, or 46% of revenue in fiscal 2002, compared with $41.1 million,
or 69% of revenue in fiscal 2001. Similar to sales and marketing expenses,
general and administrative expenses have increased in absolute dollars due to
increased personnel and related costs, including rent and depreciation
expense, resulting from the acquisition of Total Research. The decrease as a
percentage of revenue is directly attributable to continuing cost reduction
efforts.
Interest and other income, net. Net interest and other income totaled
$1.3 million for fiscal 2002, compared with $3.7 million for fiscal 2001. The
decrease is primarily attributable to a lower average marketable securities
balance for fiscal 2002 as compared to the prior year.
Fiscal 2001 as Compared to Fiscal 2000
Revenues from services. Aggregate revenues 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
economic slowdown that year.
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.
Internet database development. Database development expenses increased 32%
to $7.4 million in fiscal 2001 from $5.6 million in fiscal 2000. The increase
over fiscal 2000 was 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, 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, and higher costs
associated with our development of new products, services and technologies for
the Internet.
18
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.
Liquidity and Capital Resources
In recent years we have financed our operations primarily through the
$85.5 million of net proceeds generated from our December 1999 initial public
offering. Consequently, cash and cash equivalents and marketable securities
were $72.9 million at June 30, 2000, $42.5 million at June 30, 2001, and
$27.9 million at June 30, 2002.
The Company maintains a line of credit with a commercial bank providing
borrowings up to $5.0 million in fiscal 2002 and fiscal 2001 at prime. The
prime rate in effect at June 30, 2002 was 4.75%. Borrowings under this
arrangement are due upon demand. There were no borrowings under this agreement
at June 30, 2002 and June 30, 2001. The line of credit is collateralized by
the assets of the Company.
As of June 30, 2002, the Company had short-term and long-term borrowings of
$0.8 million and $1.5 million, respectively, limited to operations in the
United Kingdom and Japan. Interest rates related to the borrowings range from
1.8% to 3.0% with maturity dates extending to 2006. There are no restrictive
covenants associated with these borrowings.
Net cash used in operating activities was $5.5 million for fiscal 2002,
$15.5 million for fiscal 2001 and $22.0 million for fiscal 2000. Net cash used
in operating activities in each of these periods was primarily the result of
net losses.
Net cash provided by investing activities was $8.0 million for fiscal 2002
and $2.1 million for fiscal 2001. During fiscal 2002, net proceeds from sales
and maturities of marketable securities of $14.6 million were partially offset
by the $3.8 million cash outflow for transaction related costs to acquire
Total Research in November 2001. During 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
YankelovichPartners, Inc. in February 2001. Fiscal 2002 and 2001 capital
expenditures of $2.8 million and $7.6 million, respectively, primarily
supported the development of our Internet infrastructure.
During fiscal 2000, net cash used in investing activities was $60.9 million.
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.
Net cash used in financing activities of $1.7 million in fiscal 2002 was
primarily related to the paydown of long-term debt and the repurchase of
common stock. Net cash provided by financing activities was $0.1 million in
fiscal 2001, resulting from issuances of common stock and stock options,
offset by the repurchase of common stock. During fiscal 2000 net cash provided
by financing activities was $106.7 million. 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.
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. Management anticipates continuing expenditures for property, plant
and equipment and working capital requirements throughout fiscal 2003 at
levels consistent with fiscal 2002.
Based on current plans and business conditions, we believe that our existing
cash, cash equivalents and short-term investments will be sufficient to
satisfy our anticipated cash requirements for at least the next twelve months.
We cannot be certain, however, that our underlying assumed levels of revenues
and expenses will be accurate. If our operating results were to fail to meet
our expectations or if accounts receivable or other assets were to require a
greater use of cash than is currently anticipated, we could be required to
seek additional funding
19
through public or private financing or other arrangements. In such event,
adequate funds may not be available when needed or may not be available on
favorable terms, which could have a negative effect on our business and
results of operations.
New Accounting Pronouncements
SFAS 144
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
to be held and used, to be disposed of other than by sale and to be disposed
of by sale. The Statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years, and will thus be adopted by the Company, as required, on
July 1, 2002. The adoption of SFAS No. 144 is not expected to have a material
impact on the Company's consolidated financial statements.
SFAS 146
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 146 ("SFAS 146"), "Accounting for the Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when it is incurred and measured initially at fair value. This new
guidance will impact the timing of recognition and the initial measurement of
the amount of liabilities the Company recognizes in connection with exit or
disposal activities initiated after December 31, 2002, the effective date of
SFAS No. 146. The adoption of SFAS No. 146 is not expected to have a material
impact on the Company's consolidated financial statements.
Risk Factors
If the marketplace does not continue to convert to internet-based market
research and polling, our growth will be adversely affected.
The continued success of our business will depend on our ability to continue
to develop and market Internet-based products and services that achieve broad
market acceptance. Clients must continue to accept the Internet as an
attractive replacement for traditional market research methodologies, such as
direct mail, telephone-based surveys, mall intercepts, focus groups and in-
person interviews.
Since the beginning of fiscal 1998, we have expended $67.1 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 have expressed concern that
Internet users do not yet accurately reflect their applicable population, and
any resulting information will be inherently biased toward 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, financial condition and results of operations would likely suffer.
We must continue to attract and retain highly-skilled employees.
Our future success will depend, in part, on our ability to continue to
attract, retain and motivate highly-skilled technical, managerial, marketing,
sales and client support personnel. Competition for these personnel exists,
and we may be unable to attract, integrate or retain the proper numbers of
sufficiently qualified personnel that our business plan assumes. We have
experienced in the past, and we may experience in the future, difficulty in
hiring and retaining 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
20
provision of remote access to our facilities. To the extent that we are unable
to hire and retain skilled employees in the future, our business, financial
condition and results of operations would likely suffer.
We have incurred losses in recent years.
Since the beginning of fiscal 1998 through year end fiscal 2002, we have
expended approximately $67.1 million to develop and maintain our Internet
capabilities, comprising of approximately $20.7 million to develop our
Internet panel and approximately $46.4 million to develop and maintain our
technology infrastructure. Consequently, we incurred net losses of
$14.8 million in fiscal 2002, $24.0 million in fiscal 2001 and $20.9 million
in fiscal 2000. We base current and future expense levels on our operating
plans and our estimates of future revenues. While we were profitable in the
fourth quarter of fiscal 2002, 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 maintain
profitability. Even if we are profitable in the future, we may be unable to
sustain or increase profitability on a quarterly or annual basis.
Variations in our operating results may cause our stock price to decline.
Our quarterly operating results have in the past, and may in the future,
fluctuate significantly. Our future results of operations may fall below the
expectations of public market analysts and investors. If this happens, 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:
o a general decline in the demand for market research and polling products
and services,
o seasonal decreases in demand for market research and polling services
during the summer and year-end vacation and holiday periods,
o development of parity or superior products and services by our
competitors,
o technical difficulties that cause general and long-term failure of the
Internet, and
o declines in general economic conditions or the budgets of our clients.
Factors that are within our control, and that have caused our results to
fluctuate in the past or that may affect us in the future, include:
o our relative mix of Internet-based and traditional market research and
polling businesses,
o technical difficulties that negatively affect our operations,
o our ability to maintain the proper critical mass and scope of our
Internet panel necessary to develop and sell new products and services
and generate expected revenues,
o our ability to recruit respondents into our sub-panels, such as our IT
Decision Makers, to conduct high-value research for our clients, and
o development of new, marketable 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.
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, financial condition and results of operations will suffer.
Our success is highly dependent on our ability to obtain and retain an
adequate number of panelists in our Internet panel and its sub-panels. Our
ability to maintain an adequate online panel or increase Internet revenues may
be harmed if:
21
o a significant number of our current online panelists decide that they are
no longer willing to participate in our surveys,
o we lose a large number of online panelists from over use, and then must
rely on a limited number of online panelists for ongoing research, and
o we are unable to attract an adequate number of replacement panelists and
subpanelists.
If the number of our survey respondents significantly 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 for other market research firms by our Harris Interactive
Service Bureau. 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 due to reduced size, or because it is not representative of
the general population.
Our online panelists are not obligated to participate in our surveys and
polls and there can be no assurance that they will continue to do so.
We believe our HI Points and HI Stakes programs currently appear to provide
adequate incentives to encourage participation in our surveys and to maintain
the size of our Internet panel. These programs may lose their effectiveness in
the future, resulting in the reduction in size of the panel.
We may not be able to compete successfully.
The markets for our products and services are highly competitive. Our
current competitors also offer Internet-based and traditional market research
and polling services. We expect to face future competition from other
organizations that develop Internet-related products and services. 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/or 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:
o the difficulties in the integration and assimilation of the operations,
technologies, products and personnel of the acquired business,
o the diversion of management's attention from other business concerns,
o the availability of favorable acquisition financing, and
o 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
using our capital stock could result in potentially dilutive issuances of our
capital stock, which could adversely affect the market price of our common
stock. Amortization of intangible
22
assets would reduce our earnings, which in turn could negatively influence 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, other than Albert A. Angrisani, or key employees is bound by an
employment agreement, and our relationships with our officers and key
employees are at will. We do not have "key person" life insurance policies
covering any of our employees other than Gordon S. Black.
We are growing rapidly, and may not be able to effectively manage and support
that growth.
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 may have to divert
resources away from the continued growth of our business and the
implementation of our business strategy.
If we do not continue to 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 amplifies 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, flooding, power loss,
telecommunications failure, break-ins and similar events. Verio Co-location, a
secure, off-site Web hosting facility, currently maintains approximately one-
third of our servers at its facility in Rochester, New York. We depend upon
them 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 may 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 corrected within several hours to
forty-eight 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 failures in our
systems. 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 fund the expansion and
modification of our network infrastructure. If we were unable
23
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 unrelated to our systems in the future.
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 Harris Interactive and
The Harris Poll. If we were prevented from using The Harris Poll name, 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.
Currently, we have pending trademark applications for a number of our
products and services. We also have patent applications currently pending for
our CONCEPTLOC encryption system and our 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
patent or trademark applications are not approved because third parties own
these patents or trademarks, our use of these patents or 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 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 continued development and worldwide
growth of the Internet. The Internet may not grow, or if it does grow, may be
unable to support the demands placed on it by this growth.
If worldwide Internet usage does not continue to grow, we may be unable to
attract International 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:
o inadequate network infrastructure,
o security concerns,
o inconsistent quality of service, and
o 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.
Nua Ltd., of Dublin, Ireland, a company that specializes in measuring global
online populations, reported that the total number of worldwide users who had
access to the Internet during the month of May 2002 (but did not necessarily
log on), was approximately 580 million or about 9.5% of the world population,
an increase of almost 26% from one year ago (462 million) and an increase of
over 72% from two years ago (336 million). If worldwide Internet usage
declines, or grows at a significantly slower rate than projected, our ability
to maintain our current Internet panel, expand our global Internet panel and
gather research data and information around the world will decrease, which
would likely harm our business financial condition and results of operations.
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.
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.
25
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 both in the United States and on a global basis, due
to the increasing popularity and worldwide 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:
o email distribution,
o user privacy and expression,
o the rights and safety of children,
o intellectual property,
o information security,
o anti-competitive practices,
o the convergence of traditional channels with Internet commerce,
o taxation and pricing, and
o 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, particularly on
an International basis. 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 maintain the highest standards for
the recruitment of members into 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.
Historically, the capability to securely transmit confidential information
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 end their membership in
our Internet panel. This could harm our credibility with our current clients.
If our clients become dissatisfied, they may stop using our products and
services. In addition, dissatisfied and lost clients could damage our
reputation. A loss of online panelists or a loss of clients would hurt our
efforts to generate increased revenues.
We are susceptible to breaches of database security.
A party who is able to circumvent our security measures could misappropriate
the personal information of our online panelists. As a result, we may be
required to expend capital and other resources to protect against the threat
of such security breaches or to alleviate problems caused by such breaches,
which could have a material adverse effect on our business, financial
condition and results of operations.
Liability arising from the use of the personal information of our Internet
panel could be costly.
We could be subject to liability claims by our online panelists for any
misuse of personal information. These claims could result in costly
litigation. In addition, the Federal Trade Commission and other domestic and
26
international 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 associated with 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:
o export controls relating to encryption technology,
o more restrictive privacy laws,
o unexpected changes in regulatory requirements,
o lower penetration of Internet use globally, which may effect our ability
to obtain international panel members,
o currency exchange fluctuations,
o problems in collecting accounts receivable and longer collection periods,
o potentially adverse tax consequences,
o political instability,
o Internet access restrictions,
o terrorist activity against American interests abroad, and
o ability to attract a critical mass of panel members in key countries and
regions.
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 in the future, we may
experience some or all of these risks, which may have a material adverse
effect on our business, financial condition and results of operations.
We may be subject to liability for publishing or distributing content over the
Internet.
We may be subject to claims relating to content that is published on or
downloaded from our websites. We also could be subject to liability for
content that is accessible from our website through links to other websites.
Although we carry general liability insurance, our insurance may not cover
potential claims of this type, such as defamation or trademark infringement,
or may not be adequate to cover all costs incurred in defense of potential
claims or to indemnify us for all liability that may be imposed. In addition,
any claims of this type, with or without merit, would result in the diversion
of our financial resources and management personnel.
The price of our common stock is likely to be volatile and subject to wide
fluctuations.
The market prices of the securities of Internet-related companies have been
especially volatile and these securities may be overvalued. The market price
of our common stock is likely to be subject to wide fluctuations. If financial
operating results do not improve or improve at a slower rate than we
anticipate, or if operating or capital expenditures exceed our expectations
and cannot be adjusted accordingly, or if some other event adversely affects
us, the market price of our common stock would decline. In addition, if the
market for Internet-related stocks or the stock market in general experiences
an additional loss in investor confidence or declines further, 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 subjects of
27
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 that 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.
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. While the United Kingdom now
contributes significantly to our revenues, we continue to believe our exposure
to foreign currency fluctuation risk is low. 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.
28
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Accountants ........................................ 30
Consolidated Balance Sheets at June 30, 2002 and 2001 .................... 31
Consolidated Statements of Operations for the years ended June 30, 2002,
2001 and 2000........................................................... 32
Consolidated Statements of Stockholders' Equity for the years ended June
30, 2002, 2001 and 2000................................................. 33
Consolidated Statements of Cash Flows for the years ended June 30, 2002,
2001 and 2000........................................................... 34
Notes to Consolidated Financial Statements (including unaudited
quarterly results of operations)........................................ 35
Index to Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts ........................... 54
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.
29
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 of cash flows
listed in the accompanying index present fairly, in all material respects, the
financial position of Harris Interactive Inc. (the "Company") and its
subsidiaries at June 30, 2002 and June 30, 2001, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended June 30, 2002, 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.
As discussed in the Notes to the Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets", on July 1,
2001.
/S/ PricewaterhouseCoopers LLP
Rochester, New York
July 29, 2002
30
HARRIS INTERACTIVE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 30,
-------------------
2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 10,787 $ 10,585
Marketable securities .................................. 17,070 31,906
Accounts receivable, less allowances of $474 and $383,
respectively.......................................... 20,791 12,722
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 4,669 1,888
Other current assets ................................... 4,808 2,340
-------- --------
Total current assets ................................ 58,125 59,441
Property, plant and equipment, net ...................... 9,703 13,523
Goodwill ................................................ 63,428 8,912
Other intangibles, less accumulated amortization of $408
and $41, respectively................................. 1,042 59
Other assets ............................................ 3,221 3,286
-------- --------
Total assets ........................................ $135,519 $ 85,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installment of long-term debt .................. $ 1,193
Accounts payable ....................................... 7,417 $ 4,805
Accrued expenses ....................................... 11,081 2,863
Short-term borrowings .................................. 811
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. 9,824 6,379
-------- --------
Total current liabilities ........................... 30,326 14,047
Long-term debt, excluding current installment ........... 314
Other long-term liabilities ............................. 1,579
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; 53,020,087 shares issued at June 30, 2002
and 34,614,503 shares issued at June 30, 2001......... 53 34
Additional paid-in capital ............................. 177,014 128,793
Unamortized deferred compensation ...................... (147) (436)
Accumulated other comprehensive (loss) income .......... (248) 184
Accumulated deficit .................................... (71,402) (56,609)
Officer Loan ........................................... (277)
Less: Treasury stock at cost, 655,600 shares at June,
30, 2002 and 232,700 shares at June 30, 2001.......... (1,693) (792)
-------- --------
Total stockholders' equity .......................... 103,300 71,174
-------- --------
Total liabilities and stockholders' equity .......... $135,519 $ 85,221
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
31
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
For the Years Ended June 30,
----------------------------------------
2002 2001 2000
----------- ----------- -----------
Revenues from services ........................................ $ 100,048 $ 60,061 $ 51,289
Cost of services .............................................. 53,470 30,764 28,600
----------- ----------- -----------
Gross profit ............................................... 46,578 29,297 22,689
Operating expenses:
Internet database development expenses ....................... 448 7,422 5,647
Sales and marketing expenses ................................. 9,720 8,475 8,665
General and administrative expenses .......................... 46,260 41,115 32,209
Restructuring and asset impairment ........................... 6,222 - -
----------- ----------- -----------
Operating loss ............................................. (16,072) (27,715) (23,832)
Interest and other income ..................................... 1,412 3,721 3,100
Interest expense .............................................. (95) (26) (160)
----------- ----------- -----------
Loss before income taxes ................................... (14,755) (24,020) (20,892)
Income tax expense ............................................ 38 - 50
----------- ----------- -----------
Net loss ................................................... (14,793) (24,020) (20,942)
Accrued dividends on preferred stock .......................... - - (738)
----------- ----------- -----------
Net loss attributable to holders of common stock .............. $ (14,793) $ (24,020) $ (21,680)
=========== =========== ===========
Basic and diluted net loss per share .......................... $ (0.32) $ (0.70) $ (0.93)
=========== =========== ===========
Weighted average shares outstanding--basic and diluted ........ 46,136,445 34,239,393 23,317,847
=========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
32
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Common Stock Accumulated
Outstanding Additional Unamortized Other
---------------- Paid-In Deferred Comprehensive Accumulated
Shares Amount Capital Compensation (Loss) Income Deficit
------ ------ ---------- ------------ ------------- -----------
Balance At June 30, 1999 ................. 10,871 109 4,813 (650) (12,767)
Comprehensive loss:
Net loss ................................ (20,942)
Unrealized losses on
marketable securities.................. $(127)
Foreign currency translation ............ (6)
Total comprehensive loss .................
Exercise of options and warrants ......... 2,010 2 696
Issuance of common stock under Employee
Stock Purchase Plan ..................... 28 118
Deferred compensation on stock options
issued .................................. 2,431 (2,431)
Amortization of deferred Compensation .... 1,006
Conversion to $.001 par value stock ...... (98) 98
Issuance costs incurred on preferred
stock ................................... (56)
Issuance of common stock ................. 151 811
Accrued dividends on preferred stock ..... (738)
Conversion of Class A Preferred Stock .... 11,790 12 14,688 1,688
Conversion of Class B Preferred Stock .... 2,591 2 19,998 226
Initial public offering, net of costs .... 6,670 7 85,460
------ ---- -------- ------- ----- --------
Balance At June 30, 2000 ................. 34,111 34 129,113 (2,075) (133) (32,589)
Comprehensive loss:
Net loss ................................ (24,020)
Unrealized gains on
marketable securities.................. 357
Foreign currency translation ............ (40)
Total comprehensive loss .................
Exercise of options and warrants ......... 291 318
Issuance of common stock under Employee
Stock Purchase Plan ..................... 145 385
Deferred compensation related to
cancelled stock options ................. (1,218) 1,218
Amortization of deferred compensation .... 421
Repurchase of common stock ...............
Issuance of common stock ................. 67 195
------ ---- -------- ------- ----- --------
Balance At June 30, 2001 ................. 34,614 34 128,793 (436) 184 (56,609)
Comprehensive loss:
Net loss ................................ (14,793)
Unrealized gains on
marketable securities.................. (176)
Foreign currency translation ............ (256)
Total comprehensive loss .................
Exercise of options and warrants ......... 466 1 731
Issuance of common stock under Employee
Stock Purchase Plan ..................... 347 281
Amortization of deferred compensation .... 289
Repurchase of common stock ...............
Issuance of common stock under 401(k)
plan .................................... 120 328
Issuance of common stock for acquisitions 17,533 18 47,104
Paydown of officer loan .................. (60) (223)
------ ---- -------- ------- ----- --------
Balance At June 30, 2002 ................. 53,020 $ 53 $177,014 $ (147) $(248) $(71,402)
====== ==== ======== ======= ===== ========
Total
Stockholders'
Treasury Officer Equity
Stock Loan (Deficit)
-------- ------- -------------
Balance At June 30, 1999 ................. (8,495)
Comprehensive loss:
Net loss ................................ (20,942)
Unrealized losses on
marketable securities.................. (127)
Foreign currency translation ............ (6)
--------
Total comprehensive loss ................. (21,075)
-------------
Exercise of options and warrants ......... 698
Issuance of common stock under Employee
Stock Purchase Plan ..................... 118
Deferred compensation on stock options
issued ..................................
Amortization of deferred Compensation .... 1,006
Conversion to $.001 par value stock ......
Issuance costs incurred on preferred
stock ................................... (56)
Issuance of common stock ................. 811
Accrued dividends on preferred stock ..... (738)
Conversion of Class A Preferred Stock .... 16,388
Conversion of Class B Preferred Stock .... 20,226
Initial public offering, net of costs .... 85,467
------- ----- --------
Balance At June 30, 2000 ................. 94,350
Comprehensive loss:
Net loss ................................ (24,020)
Unrealized gains on
marketable securities.................. 357
Foreign currency translation ............ (40)
--------
Total comprehensive loss ................. (23,703)
--------
Exercise of options and warrants ......... 318
Issuance of common stock under Employee
Stock Purchase Plan ..................... 385
Deferred compensation related to
cancelled stock options .................
Amortization of deferred compensation .... 421
Repurchase of common stock ............... $ (792) (792)
Issuance of common stock ................. 195
------- ----- --------
Balance At June 30, 2001 ................. (792) 71,174
Comprehensive loss:
Net loss ................................ (14,793)
Unrealized gains on
marketable securities.................. (176)
Foreign currency translation ............ (256)
--------
Total comprehensive loss ................. (15,226)
--------
Exercise of options and warrants ......... 732
Issuance of common stock under Employee
Stock Purchase Plan ..................... 281
Amortization of deferred compensation .... 289
Repurchase of common stock ............... (901) (901)
Issuance of common stock under 401(k)
plan .................................... 328
Issuance of common stock for acquisitions $(500) 46,622
Paydown of officer loan .................. 223
------- ----- --------
Balance At June 30, 2002 ................. $(1,693) $(277) $103,300
======= ===== ========
The accompanying notes are an integral part of
these consolidated financial statements.
33
HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended June 30,
-------------------------------
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net loss.................................... $(14,793) $(24,020) $(20,942)
Adjustments to reconcile net loss to net
cash used in operating activities--
Depreciation and amortization............. 6,534 6,441 3,584
Restructuring and asset impairment charge. 6,222
Less: Cash outflows related to
restructuring and asset
impairment charge........................ (1,104)
Amortization of deferred compensation..... 289 421 1,006
Amortization of premium and discount on
marketable
securities............................... 54 (493) (269)
Loss on disposal of assets................ 152
Decrease (increase) in--
Accounts receivable...................... 3,138 (2,666) (4,067)
Costs and estimated earnings in excess of
billings on
uncompleted contracts.................. 425 1,892 (2,074)
Other current assets..................... (379) 492 (1,918)
Other assets 681 (1,668) (316)
(Decrease) increase in--
Accounts payable........................ (1,975) 562 2,400
Accrued expenses........................ (4,817) (95) 1,158
Billings in excess of costs and
estimated earnings on
uncompleted contracts................. (971) 3,478 (569)
Other long-term liabilities............. 1,168
-------- -------- --------
Net cash used in operating activities. (5,528) (15,504) (22,007)
-------- -------- --------
Cash flows from investing activities:
Cash paid in connection with acquisitions,
net of cash acquired...................... (3,751) (8,207)
Purchase of marketable securities........... (36,603) (41,838) (73,860)
Proceeds from sales and maturities of
marketable securities..................... 51,208 59,742 25,042
Capital expenditures........................ (2,841) (7,606) (12,092)
-------- -------- --------
Net cash provided by (used in)
investing activities...................... 8,013 2,091 (60,910)
-------- -------- --------
Cash flows from financing activities:
Principal payments under long-term debt..... (2,327)
Decrease in short-term borrowings........... (137) (291)
Net proceeds from initial public offering of
common stock.............................. 85,467
Net proceeds from issuance of preferred
stock..................................... 19,944
Repurchase of common stock.................. (901) (792)
Issuance of common stock and exercise of
stock options............................. 1,662 898 1,627
-------- -------- --------
Net cash (used in) provided by
financing activities...................... (1,703) 106 106,747
-------- -------- --------
Effect of exchange rate changes on cash and
cash equivalents.......................... (580) (40) (6)
Net increase (decrease) in cash and cash
equivalents............................... 202 (13,347) 23,824
Cash and cash equivalents at beginning of
year...................................... 10,585 23,932 108
-------- -------- --------
Cash and cash equivalents at end of year..... $ 10,787 $ 10,585 $ 23,932
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
34
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2002, 2001 and 2000
(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 all highly liquid investments with a
remaining maturity of three months or less at date of purchase.
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, 2002 and 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
Property, plant 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
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 No.141 requires all business combinations
initiated after June 30,2001, to be accounted for using the purchase method of
accounting, thereby eliminating the pooling-of-interests method. Effective
January 1, 2002, SFAS No. 142 eliminates the requirement to amortize goodwill
and instead requires periodic testing of goodwill for impairment. If goodwill is
impaired, it will be written down to its estimated fair value. The impact of
adoption of SFAS No. 142 did not result in an adjustment to recorded goodwill.
Goodwill amortization expense was $330 in fiscal 2001 and $103 in fiscal 2000.
See also footnotes 17 and 19.
35
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies--(Continued)
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. Such amounts are included in other assets in the balance
sheet and amounted to $1,628 and $1,460 at June 30, 2002 and 2001, respectively.
Amortization expense related to these costs amounted to $913 and $678 for fiscal
years 2002 and 2001, respectively. 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 $488, $7,422, and $5,647 in fiscal 2002, 2001,
and 2000, respectively. Such costs have been classified as Internet database
development expenses in the consolidated statements of operations and are
expensed as incurred.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk consist principally of accounts receivable as well as costs and
estimated earnings in excess of billings on uncompleted contracts.
Credit losses are provided for in the financial statements and have been
within management's expectations.
In fiscal 2002, no single customer accounted for more than 10% of the
Company's consolidated revenues. For the year ended June 30, 2001, our largest
customer comprised 12% of total revenues and 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%.
Income Taxes
The Company and its U.S. subsidiaries file a consolidated federal income tax
return. The Company files separate state income tax returns in certain states
and combined income tax returns in other states.
The Company follows the asset and liability approach to account for income
taxes, which requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of operating loss carryforwards and
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. The Company has not provided any domestic income taxes
applicable to the unremitted earnings of its foreign subsidiaries as these
amounts are considered to be indefinitely reinvested outside the U.S.
36
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies--(Continued)
Foreign Currency
For the Company's subsidiaries outside of the United States, the local
currency is the functional currency. In accordance with SFAS No. 52, "Foreign
Currency Translation," the financial statements of the subsidiaries are
translated into U.S. dollars as follows: assets and liabilities at year-end
exchange rates; income, expenses and cash flows at average exchange rates; and
stockholders' equity at historical exchange rates. The resulting translation
adjustment is recorded as a component of accumulated other
comprehensive(loss)income in the accompanying consolidated balance sheet.
Advertising Expenses
Advertising expenses are expensed as incurred and are included in selling,
general and administrative expenses in the accompanying consolidated statement
of operations. Such expenses amounted to $1,275, $1,653 and $3,133, for the
years ended June 30, 2002, 2001 and 2000, respectively.
Recent Accounting Pronouncements
SFAS 144
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets to
be held and used, to be disposed of other than by sale and to be disposed of by
sale. The Statement is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years, and will thus be adopted by the Company, as required, on July 1, 2002.
The adoption of SFAS No. 144 is not expected to have a material impact on the
Company's consolidated financial statements.
SFAS 146
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 146 ("SFAS 146"), "Accounting for the Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)."SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when it is incurred and measured initially at fair value. This new guidance will
impact the timing of recognition and the initial measurement of the amount of
liabilities the Company recognizes in connection with exit or disposal
activities initiated after December 31, 2002, the effective date of SFAS No.
146. The adoption of SFAS No. 146 is not expected to have a material impact on
the Company's consolidated financial statements.
Reclassifications
It is the Company's policy to reclassify amounts in prior years' financial
statements to conform to 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
37
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies--(Continued)
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.
Loss Per Share
Basic loss per share amounts are computed based on the weighted average
number of shares of common stock outstanding during the year. Diluted net loss
per share reflects the assumed exercise and conversion of employee stock options
that have an exercise price that is below the average market price of the common
shares for the respective periods. Options to purchase 6,543,458, 3,858,484 and
4,059,400 shares of common stock at weighted average per share prices of $2.67,
$3.38 and $3.52, for the years ended June 30, 2002, 2001 and 2000, respectively,
were outstanding during the years presented but were not included in the
computation of net loss per share on a diluted basis because the effect would
have been anti-dilutive.
3. Business Combinations
On November 1, 2001 the Company acquired all of the issued and outstanding
shares of common stock, par value $.001 per share, of Total Research Corporation
("Total Research"), a Delaware corporation, located in Princeton, New Jersey,
pursuant to the Agreement and Plan of Merger, dated as of August 5, 2001, among
the Company, Total Merger Sub Inc., a Delaware corporation and direct, wholly
owned subsidiary of the Company, and Total Research. Pursuant to the merger
agreement, Total Merger Sub was merged with and into Total Research (the
"Merger"), with Total Research continuing as the surviving corporation and as a
direct, wholly owned subsidiary of the Company. Harris Interactive and Total
Research are engaged in complementary businesses in the market research and
polling industry. The acquisition is expected to create opportunities for
revenue growth, cost savings and other synergies including the ability to
convert Total Research traditional-based clients to the Internet, sell to one
another's customers, offer customers more comprehensive and diverse products and
services, use a combined worldwide network, and pursue jointly future
acquisitions. Consequently, the acquisition is intended to result in increased
value for stockholders. The preliminary results of our first seven months of
combined operations lead us to believe that our expectations were correct.
Upon consummation of the merger, each outstanding share of Total Research
common stock was converted into the right to receive 1.222 shares of Harris
Interactive common stock, par value $.001 per share. An aggregate of
approximately 16,610,000 shares of common stock, with an estimated fair value of
$41,259, was issued to the stockholders of Total Research. The value was
determined using the average fair market value of the stock for the range of
trading days beginning August 2, 2001 and ending August 8, 2001. Additionally,
pursuant to the merger agreement, all outstanding options to purchase shares of
Total Research common stock were, upon consummation of the merger, fully vested
and converted into an option to purchase 1.222 shares of Harris Interactive
common stock.
As a result, the former option holders of Total Research received from Harris
Interactive options to purchase approximately 2,899,000 shares of Harris
Interactive common stock, with an estimated fair value of $3,609. The
acquisition was accounted for as a purchase in accordance with FAS 141 and is
included in the Company's financial statements commencing on November 1, 2001.
The Company recorded approximately $50,281 in goodwill and intangibles
related to the acquisition in accordance with the provisions of SFAS 142 (See
Note 19).
38
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
3. Business Combinations--(Continued)
The unaudited pro forma information set forth below assumes the acquisition
with Total Research Corporation had occurred at the beginning of fiscal 2001,
after giving effect to adjustments for amortization of intangibles.
The unaudited pro forma information is presented for informational purposes
only and is not necessarily indicative of the results of operations that would
have been achieved had the acquisitions been consummated at that time.
Twelve months ended
June 30,
-------------------
2002 2001
-------- --------
Revenue ................................................. $114,139 $113,845
Net income (loss) ....................................... (22,755) (21,992)
Loss per share--basic ................................... $ (0.43) $ (0.43)
Loss per share--diluted ................................. $ (0.43) $ (0.43)
In September, 2001, the Company acquired all of the issued and outstanding
stock of M&A Create Limited, a privately owned company headquartered in Tokyo,
Japan, in consideration of a combination of cash and shares of Harris
Interactive common stock. Additionally, in August, 2001, the Company acquired
all of the issued and outstanding stock of 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.
Supplemental cash flow information and non-cash investing and financing
activities are as follows:
As of June 30, 2002
-------------------
Acquisitions--Market Research Solutions Limited
and M&A Create Limited:
Fair value of assets acquired ......................... $ 4,500
Liabilities assumed ................................... 6,568
Stock issued .......................................... 2,256
Acquisition--Total Research Corporation:
Fair value of assets acquired ......................... $13,443
Liabilities assumed ................................... 16,925
Stock issued .......................................... 41,259
Fair value of stock options issued .................... 3,609
4. Restructuring and Asset Impairment Charge
During the second quarter of fiscal 2002, the Company recorded a
restructuring and asset write-down charge of $6,222 directly related to the
operational integration of Harris Interactive and Total Research. Management
developed a formal plan that included a 5% reduction in Harris Interactive staff
of the full-time workforce in Rochester, NY; New York, NY; Norwalk, CT and
a few other outlying locations. The affected employees were mainly support staff
with overlapping functions in the combined Company. Other integration actions
included the closing of our telephone center located in Youngstown, OH and
offices in New York, NY and Chicago, IL which resulted in asset write-downs and
lease commitments at these locations. The plan was formally communicated to the
affected employees during the second fiscal quarter. The following table
summarizes activity with respect to the restructuring charges for the period
ended June 30, 2002:
39
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
4. Restructuring and Asset Impairment Charge--(Continued)
Severance Asset write-downs Lease Commitments Total
--------- ----------------- ----------------- -------
Net charge fiscal 2002 .................................... $ 1,169 $ 2,792 $2,261 $ 6,222
Asset write-downs during 2002............................ 0 (2,792) 0 (2,792)
Cash payments during 2002................................ (1,098) 0 (160) (1,258)
------- ------- ------ -------
Remaining reserve at June 30, 2002 ........................ $ 71 $ 0 $2,101 $ 2,172
======= ======= ====== =======
As of June 30, 2002, all actions have been completed, however cash payments
for severance and lease commitments will be made on a longer-term basis
according to the contractually scheduled payments of such commitments. Cash
payments on the leases will continue through 2005. Total number of employees
included in the charge was 82. All have been terminated as of June 30, 2002 with
the balance of severance to be paid in fiscal 2003.
5. Marketable Securities
At June 30, 2002 and 2001, marketable securities consisted of the following:
2002 2001
-------------------- --------------------
Cost Fair Value Cost Fair Value
------- ---------- ------- ----------
Type of issue:
Available-for-sale securities--
Commercial paper ....................................................... $ 4,127 $ 4,127 $ 5,000 $ 5,000
Corporate bonds ........................................................ 7,878 7,924 16,507 16,627
Government securities .................................................. 5,012 5,019 10,169 10,279
------- ------- ------- -------
Total available-for-sale securities.................................... $17,017 $17,070 $31,676 $31,906
======= ======= ======= =======
Gross unrealized gains and losses on available-for-sale securities at June
30, 2002 were $53 and $3, respectively. Gross unrealized gains and losses on
available-for-sale securities at June 30, 2001 were $232 and $2, respectively.
The cost and fair value of available-for-sale securities at June 30, 2002 and
2001, by contractual maturity, are shown below:
2002 2001
-------------------- --------------------
Cost Fair Value Cost Fair Value
------- ---------- ------- ----------
Maturity date:
Due in one year or less.................................................. $15,507 $15,560 $22,676 $22,768
Due after one year through three years .................................. 1,510 1,510 9,000 9,138
------- ------- ------- -------
Total available-for-sale securities.................................... $17,017 $17,070 $31,676 $31,906
======= ======= ======= =======
There were no material gains or losses from sales of available-for-sale
securities during the years ended June 30, 2002 and 2001.
40
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
6. Contracts In Progress
Accumulated costs and estimated earnings and billings on contracts in
progress at June 30 was as follows:
2002 2001
-------- --------
Accumulated costs and estimated earnings ................ $ 16,687 $ 17,399
Billings ................................................ (21,842) (21,890)
-------- --------
$ (5,155) $ (4,491)
======== ========
Contracts in progress are included in the accompanying balance sheets under
the following captions:
2002 2001
------- -------
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $ 4,669 $ 1,888
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... (9,824) (6,379)
------- -------
$(5,155) $(4,491)
======= =======
7. Property, Plant and Equipment
Property, plant and equipment consists of the following:
June 30,
-------------------
2002 2001
-------- --------
Furniture and fixtures .................................. $ 4,691 $ 5,178
Equipment ............................................... 17,679 18,332
Leasehold improvements .................................. 3,173 3,802
-------- --------
25,543 27,312
Accumulated depreciation............................... (15,840) (13,789)
-------- --------
$ 9,703 $ 13,523
======== ========
Depreciation expense amounted to $5,334, $5,433 and $3,481 in fiscal years
2002, 2001 and 2000, 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, 2002 are as follows:
Years Ending June 30:
---------------------
2003 .................................................................. $5,340
2004 .................................................................. 5,126
2005 .................................................................. 4,514
2006 .................................................................. 1,524
2007 .................................................................. 496
2008 and beyond ....................................................... 386
Total rental expense for operating leases in 2002, 2001 and 2000 was $5,922,
$5,121 and $2,749, respectively.
41
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
8. Business Segment and Geographical Information
The Company identifies its segments based on the Company's geographic
locations and industries in which the Company operates. The Company currently
has one reportable segment. However, the Company is comprised of operations in
the U.S., United Kingdom and Japan. There were no significant inter-segment
transactions that materially affected the financial statements. Geographic
information for the years ended June 30, 2002, 2001 and 2000 are as follows:
US United Kingdom Japan
Market Market Market
Research Research Research Total
-------- -------------- -------- --------
Year ended June 30, 2002:
Revenues .............................................................. $78,488 $16,418 $5,142 $100,048
Long-lived assets ..................................................... 64,277 9,056 3,188 76,521
Year ended June 30, 2001:
Revenues .............................................................. $60,061 $ 0 $ 0 60,061
Long-lived assets ..................................................... 25,804 0 0 25,804
Year ended June 30, 2000:
Revenues .............................................................. $51,289 $ 0 $ 0 51,289
Long-lived assets ..................................................... 14,960 0 0 14,960
9. Accrued Expenses
Accrued expenses consisted of the following at June 30:
2002 2001
------- ------
Payroll and withholding expenses ........................... $ 1,022 $ 791
Accrued benefits ........................................... 1,055 210
Bonuses .................................................... 2,003 373
Accrued software ........................................... -- 709
Accrued restructuring ...................................... 1,053 --
Accrued HI Points .......................................... 930 --
Vacation accrual ........................................... 688 --
Other ...................................................... 4,330 780
------- ------
$11,081 $2,863
======= ======
Other consists of accrued expenses individually less than 5% of total current
liabilities.
10. Line of Credit
The Company maintains a line of credit with a commercial bank providing
borrowings up to $5,000 in fiscal 2002 and fiscal 2001 at prime. The prime rate
in effect at June 30, 2002 was 4.75%. Borrowings under this arrangement are due
upon demand. There were no borrowings under this agreement at June 30, 2002 and
June 30, 2001. The line of credit is collateralized by the assets of the
Company.
As of June 30, 2002, the Company had short-term and long-term borrowings of
$0.8 million and $1.5 million, respectively, limited to operations in the United
Kingdom and Japan. Interest rates related to the borrowings range from 1.8% to
3.0% with maturity dates extending to 2006. There are no restrictive covenants
associated with these borrowings.
42
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
11. Income Taxes
The provision for income taxes consists of:
2002 2001 2000
---- ---- -----
Current:
Federal.......................................................................................... $ -- $-- $ 256
State............................................................................................ -- 50
Foreign.......................................................................................... 38 -- --
---- --- -----
$ 38 $-- $ 306
Deferred:
Federal.......................................................................................... $ -- $-- $(256)
State............................................................................................ -- -- --
Foreign.......................................................................................... -- -- --
---- --- -----
$ -- $-- $(256)
---- --- -----
38 -- 50
==== === =====
The U.S. and foreign components of loss before income taxes are as follows:
2002 2001 2000
-------- -------- --------
U.S..................................................................................... $(12,528) $(23,839) $(20,892)
Foreign................................................................................. (2,227) (181) --
-------- -------- --------
$(14,755) $(24,020) $(20,892)
======== ======== ========
Deferred tax assets (liabilities) at June 30 consist of the following:
2002 2001
-------- --------
Net operating loss carryforwards ........................ $ 30,121 $ 21,011
Internet database development expenses .................. 1,837 3,227
Stock option compensation ............................... 521 723
Restructuring Charges ................................... 357 --
Tax credit carryforwards ................................ 97 107
Property, plant and equipment ........................... 85 86
Other ................................................... 945 174
-------- --------
Gross deferred tax assets ............................... 33,963 25,328
Valuation allowance ..................................... (32,966) (24,592)
-------- --------
997 736
Goodwill ................................................ (261) --
-------- --------
Net deferred tax assets ................................. $ 736 $ 736
======== ========
As of June 30, 2002, the Company has Federal and New York State net operating
loss carryforwards of approximately $75,406 and $73,331, respectively, that will
begin to expire in 2019. A change in ownership could create a limitation on the
amount of income that can be offset by net operating loss carryforwards and
credits.
43
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
11. Income Taxes--(Continued)
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
income before income taxes as follows:
2002 2001 2000
------- ------- -------
Benefit at Federal statutory rate.......................................................... $(5,017) $(8,167) $(7,104)
State income tax benefit, net of Federal income tax........................................ (938) (1,162) (1,388)
Stock option deductions.................................................................... (202) (211) (2,832)
Foreign losses............................................................................. (778) 62 --
Merger related expenses.................................................................... (1,426) -- --
Increase in valuation allowance............................................................ 8,374 9,588 11,488
Other non-deductible items................................................................. 25 (110) (114)
------- ------- -------
$ 38 $ -- $ 50
======= ======= =======
12. Stockholders' Equity
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, 2002 the Company had no outstanding Warrants. At June 30, 2001, the Company
had outstanding Warrants to purchase 67,659 shares of common stock at $1.50 per
share.
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 2002, 2001 and 2000, employees purchased 104,507,
145,143 and 28,672 shares of common stock, respectively.
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, 2002, the Company had repurchased 655,600 shares of common stock, at a
cost of $1,693 under such program.
13. 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 were added in fiscal 2000. 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 12 and
14) were excluded from the calculation of diluted net loss per share, as the
effect would be anti-dilutive.
44
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
13. Net Loss Per Share--(Continued)
The following table sets forth the computation of basic and diluted net loss
per share:
2002 2001 2000
----------- ----------- -----------
Numerator:
Net loss..................................................................... $ (14,793) $ (24,020) $ (20,942)
Accrued dividends on preferred stock......................................... -- -- (738)
----------- ----------- -----------
Net loss attributable to holders of common stock............................... $ (14,793) $ (24,020) $ (21,680)
=========== =========== ===========
Denominator for basic and diluted loss per share--weighted average shares...... 46,136,445 34,239,393 23,317,847
=========== =========== ===========
Basic and diluted net loss per share........................................... $ (0.32) $ (0.70) $ (0.93)
=========== =========== ===========
14. 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 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 has registered 3,250,000 shares of common stock for issuance
under the 1999 long-term incentive plan. There were 923,194 shares available for
future grant at June 30, 2002.
During fiscal 2000, 617,000 were granted to employees at an amount that was
less than the fair value of the common stock as of the grant date. Accordingly,
the Company recorded $2,431 in unamortized deferred compensation in fiscal 2000
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 2002 or 2001. During fiscal 2002, 2001 and 2000, compensation expense
recognized in the consolidated statements of operations amounted to $289, $421
and $1006, respectively.
Stock option activity is as follows:
Number of Weighted Average
Shares Price Per Share
--------- ----------------
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
Assumed in acquisition ........................ 2,898,706 2.03
Granted....................................... 877,000 2.10
Canceled...................................... 367,194 6.51
Exercised..................................... 723,538 1.15
---------
Outstanding at June 30, 2002 ................... 6,543,458 2.67
=========
45
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
14. Employee Stock Option Plan--(Continued)
Options exercisable as of June 30, 2002, 2001 and 2000 amounted to 5,209,755,
2,456,572 and 2,173,408 respectively. The weighted average exercise price of the
exercisable options at June 30, 2002, 2001 and 2000 was $2.40, $2.50 and $0.80,
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 Available to Available to
Holders Holders Holders
of Common Stock of Common Stock of Common Stock
------------------- ---------------- ----------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- -------- -------- ----- -------- -----
2002 ....................................................... $(14,793) $(18,443) $(.32) $(.40) $(.32) $(.40)
2001 ....................................................... (24,020) (25,282) (.70) (.74) (.70) (.74)
2000 ....................................................... (21,680) (22,224) (.93) (.95) (.93) (.95)
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 2002,
2001 and 2000.
2002 2001 2000
---- ---- ----
Risk-free interest rate............................................................................. 3.01% 4.31% 6.28%
Weighted average expected life (years).............................................................. 3 3 3
For option grants made subsequent to the initial public offering, volatility
factors of 81%, 110% and 137% were used for fiscal 2002, 2001 and 2000,
respectively.
The weighted average grant date fair value of options granted in 2002, 2001
and 2000 is summarized below:
2002 2001 2000
---------------- ---------------- ----------------
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................................................... $2.37 $4.37 $3.95 $5.80 $3.33 $6.16
Options whose exercise price was less than the grant date
fair value................................................... $4.18 $3.46 $6.57 $4.92 $4.36 $4.65
46
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
14. Employee Stock Option Plan--(Continued)
The following represents additional information about stock options
outstanding at June 30, 2002:
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............................. 1,246,010 5 $ .45 1,246,010 $ .45
1.26 - 3.70............................. 4,228,908 7 2.32 3,338,539 2.28
3.75 - 7.06............................. 750,540 8 4.70 428,623 4.87
11.00 - 14.00............................. 318,000 8 11.26 196,583 11.32
15. 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.
Transactions under the 1997 Stock Program are as follows:
2000
------------------
Number
of Shares Amount
--------- ------
Shares purchased or retired .............................. -- --
Shares issued ............................................ 75,880 $281
There were no transactions under the 1997 Stock Program for the years ended
June 30, 2002 and June 30, 2001.
16. 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 2002, 2001 and 2000 was $634, $344 and $137, respectively.
47
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
17. Acquired Intangible Assets Subject to Amortization
As of June 30, 2002
-----------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Amortized intangible assets
Contract based intangibles................... $1,450 $408
------ ----
Total....................................... $1,450 $408
====== ====
Aggregate amortization expense:
For the three months ended June 30, 2002..... $ 78
------
For the twelve months ended June 30, 2002.... $ 241
Estimated amortization expense:
For the year ended June 30, 2003............. $ 312
------
For the year ended June 30, 2004............. $ 312
------
For the year ended June 30, 2005............. $ 312
------
For the year ended June 30, 2006............. $ 106
------
18. Goodwill and other intangibles
Balance as of July 1, 2001 ........................................... $ 8,913
Acquisitions of Market Research Solutions Limited and M&A Create
Limited during the quarter ended September 30, 2001................. $ 5,276
-------
Balance as of September 30, 2001 ..................................... $14,189
=======
Acquisition of Total Research during the quarter
Ended December 31, 2001............................................. $50,281
=======
Balance as of June 30, 2002 .......................................... $64,470
=======
19. Goodwill and Other Intangible Asset - Adoption of FAS 142
Twelve months ended June 30,
----------------------------
2002 2001 2000
------- ------- -------
Reported net loss.......................................................................... $14,793 $24,020 $21,680
Add back goodwill amortization............................................................. 331 103
Adjusted net loss.......................................................................... $14,793 $23,689 $21,577
Basic and diluted net loss per share:
Reported net loss.......................................................................... $ 0.32 $ 0.70 $ 0.93
Add back goodwill amortization............................................................. -- 0.01 0.00
Adjusted basic and diluted net loss........................................................ $ 0.32 $ 0.69 $ 0.93
The Company completed its transitional impairment test in accordance with FAS
142 as of December 31, 2001, with no impairment identified. The Company
completed its annual impairment test in accordance with FAS 142 as of June 30,
2002, with no impairment identified.
48
HARRIS INTERACTIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 2002, 2001 and 2000
(In thousands, except share and per share amounts)
20. Supplemental Cash Flow Information
Supplemental Disclosure of Cash Flow Information
Cash paid (received) during the year for:
2002 2001 2000
---- ---- ----
Interest................................................... $95 $26 $160
--- --- ----
Taxes...................................................... $41 $ - $ 50
--- --- ----
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.
22. Unaudited Quarterly Results of Operations
The following table presents unaudited consolidated quarterly statement of
operations data for the years ended June 30, 2001 and 2002. 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,
2000 2000 2001 2001 2001 2001 2002 2002
------------- ------------ --------- -------- ------------- ------------ --------- --------
(In thousands, except per share data)
Revenues from
services......... $12,053 $14,532 $15,826 $17,650 $17,134 $ 24,804 $28,323 $29,787
Cost of services .. 6,301 6,939 8,444 9,080 9,188 14,405 14,536 15,341
------- ------- ------- ------- ------- -------- ------- -------
Gross Profit ...... 5,752 7,593 7,382 8,570 7,946 10,399 13,787 14,446
Operating
expenses:
Internet database
development
Expenses......... 2,517 2,617 1,633 655 48 84 136 180
Sales and
marketing
expenses......... 1,913 2,071 2,443 2,048 1,599 2,742 3,023 2,344
General and
administrative
Expenses........ 10,086 9,748 10,045 11,236 10,039 12,248 12,069 11,916
Restructuring and
asset impairment. -- -- -- -- -- 6,222* -- --
------- ------- ------- ------- ------- -------- ------- -------
Operating (loss)
income........... (8,764) (6,843) (6,739) (5,369) (3,740) (10,897) (1,441) 6
Interest and other
income........... 1,144 1,051 860 878 529 406 246 230
Interest expense .. (6) (174) (42) (16) (19) (25) (21) (29)
------- ------- ------- ------- ------- -------- ------- -------
(Loss) income
before income
taxes............ (7,626) (5,966) (5,921) (4,507) (3,230) (10,516) (1,216) 207
Income tax expense -- -- -- -- -- -- -- 38
------- ------- ------- ------- ------- -------- ------- -------
Net (loss) income.. $(7,626) $(5,966) $(5,921) $(4,507) $(3,230) $(10,516) $(1,216) $ 169
======= ======= ======= ======= ======= ======== ======= =======
Basic and diluted
net (loss) income
Per share........ $ (0.22) $ (0.17) $ (0.17) $ (0.13) $ (0.09) $ (0.23) $ (0.02) $ 0.00
======= ======= ======= ======= ======= ======== ======= =======
- ---------------
* During the quarter ended December 31, 2002, the Company recorded a
restructuring and asset impairment charge of $6,222 directly related to the
operational integration of Harris Interactive and Total Research. See further
discussion in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Item 8 "Financial Statements and
Supplementary Data", Footnote 8 of the "Notes to Consolidated Financial
Statements."
Our results include the acquisitions of Total Research Corporation (November
2001), Market Research Solutions Limited (August 2001), M&A Create Limited
(August 2001) and the custom research division of Yankelovich Partners
(February 2001).
49
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 of Form 10-K with respect to our
directors is incorporated by reference from the information contained in the
section captioned "Election of Directors" in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in November 2002
(the "Proxy Statement"), a copy of which will be filed with the Securities and
Exchange Commission before the meeting date. For information with respect to
our executive officers, see the section captioned "Executive Officers of Harris
Interactive" at the end of Part I of this report. The information required by
Item 10 of Form 10-K with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference from the
information contained in the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by
reference from the information contained in the sections captioned
"Compensation Committee Report on Executive Compensation", "Compensation of
Executive Officers and Directors and Other Matters" and "Comparison of
31 Month Cumulative Total Return" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by Item 12 of Form 10-K is incorporated by
reference from the information contained in the sections captioned "Security
Ownership of Certain Beneficial Owners and Management" and "Equity Compensation
Plan Information" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement.
50
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
Financial Statements
The following financial statements are filed as a part of this Report under
"Item 8--Financial Statements and Supplementary Data":
Report of Independent Accountants ........................................ 30
Consolidated Balance Sheets at June 30, 2002 and 2001 .................... 31
Consolidated Statements of Operations for the years ended
June 30, 2002, 2001 and 2000 ............................................. 32
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2002, 2001 and 2000 ................................. 33
Consolidated Statements of Cash Flows for the years ended
June 30, 2002, 2001 and 2000 ............................................. 34
Notes to Consolidated Financial Statements (including unaudited
quarterly results of operations) ......................................... 35
Financial Statement Schedules
The following financial statement schedule is filed as a part of this Report
under Schedule II immediately preceding the signature page: Schedule
II--Valuation and Qualifying Accounts for the three fiscal years ended
June 30, 2002. All other schedules called for by Form 10-K are omitted
because they are inapplicable or the required information is shown in the
financial statements, or notes thereto, included herein.
Reports on Form 8-K
On April 25, 2002, a report on Form 8-K was filed with the SEC announcing the
Company's earnings for the calendar quarter ended March 31, 2002, the
participation of certain current and former executives of the Company in 10b5-1
Sales plans, and the resignation of David Clemm from the Board of Directors of
the Company.
Exhibits
Exhibit
Number Exhibit Title
- ------ -------------
2.1 Agreement and Plan of Merger, dated August 5, 2001, among Harris Interactive Inc., Total Merger Sub Inc., and Total
Research Corporation (Incorporated by reference to Harris Interactive's Current Report on Form 8-K filed August 14, 2001,
listed as Exhibit 99.1).
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 By laws of the Company (filed as Exhibit 3.2 to Form 10-K filed August 31, 2002 and incorporated herein by reference).
10.1 1999 Long Term Incentive Plan and form of agreements thereto of the Company (filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 filed September 17, 1999 (Registration No. 333-87311) and incorporated herein by
reference).
10.2 1999 Employee Stock Purchase Plan and form of agreements thereto of the Company (filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1 filed September 17, 1999 (Registration No. 333-87311) and incorporated herein by
reference).
10.5.1 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).
51
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 as Exhibit 10.6.1 to Form 10-K filed August 31, 2001 and
incorporated herein by reference).
10.6.2 Lease for 70 Carlson Road, Rochester, New York dated July 1, 1998 between Gordon S. Black Corporation and Carlson Park
Associates, together with all amendments thereto (filed as Exhibit 10.6.2 to the Company's Registration Statement on Form
S-1 filed September 17, 1999 (Registration No. 333-87311) and incorporated herein by reference).
10.6.3 Lease for 111 Fifth Avenue, New York, New York dated June 9, 1994 between Louis Harris and Associates, Inc. and B.J.W.
Associates (filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1/A filed October 26, 1999
(Registration No. 333-87311) and incorporated herein by reference).
10.6.4 Sublease for 5th Floor, 500 Fifth Avenue, New York, New York dated March 31, 2000 between the Company and New York Life
Insurance Company (filed 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 CreditFacility 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
52
Exhibit
Number Exhibit Title
- ------ -------------
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 as Exhibit 10.21 to Form 10-K
filed August 31, 2002 and incorporated herein by reference).
10.22 Separation Agreement by and between Harris Interactive Inc. and David H. Clemm, dated as of March 15, 2002 (filed as
Exhibit 10.1 to Form 10-Q filed May 15, 2002 and incorporated herein by reference).
10.23 Employment Agreement by and between Harris Interactive Inc. and Albert A. Angrisani, dated as of August 5, 2001 (filed as
Exhibit 10.23 to Form S-4 filed September 6, 2001 and incorporated herein by reference).
10.24 Letter Agreement of Albert A. Angrisani, dated August 5, 2001 (filed as Exhibit 10.24 to Form S-4 filed September 6, 2001
and incorporated herein by reference).
10.25 Change of Control Agreement by and between Harris Interactive Inc. and Bruce A. Newman, dated as of June 28, 2002 (filed
herewith).
10.26 Amendment No. 1 to the Employment Agreement by and between Harris Interactive Inc. and Albert A. Angrisani, dated as of
June 28, 2002 (filed herewith).
10.27 Amendment No. 1 to the Letter Agreement of Albert A. Angrisani, dated as of June 28, 2002 (filed herewith).
21. List of Subsidiaries (filed herewith).
23.1 Consent of Independent Accountants (filed herewith).
23.2 Report of Independent Accountants on Financial Statemen Schedule (filed herewith).
24. Power of Attorney (included on page 61 of this Report).
53
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, 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
======= ======= ==== =======
Year ended June 30, 2002
Deducted in the consolidated balance sheet:
Trade accounts receivable, allowance for
doubtful accounts ....................................................... 383 364 273 474
======= ======= ==== =======
Deferred tax valuation allowance ........................................... 24,592 8,374 0 32,966
======= ======= ==== =======
54
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 30th day of
September 2002.
HARRIS INTERACTIVE INC.
By: /s/ BRUCE A. NEWMAN
---------------------------------------
Bruce A. Newman
Title: Chief Financial Officer,
Secretary, and Treasurer
55
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
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 Executive Officer September 30, 2002
----------------------------------------------- (Principal Executive Officer)
Gordon S. Black
/s/ Bruce A. Newman Chief Financial Officer, Secretary, and September 30, 2002
----------------------------------------------- Treasurer (Principal Financial and Accounting
Bruce A. Newman Officer)
/s/ Albert A. Angrisani President, Chief Operating Officer, and September 30, 2002
----------------------------------------------- Director
Albert A. Angrisani
/s/ Leonard R. Bayer Director September 30, 2002
-----------------------------------------------
Leonard R. Bayer
/s/ Thomas D. Berman Director September 30, 2002
-----------------------------------------------
Thomas D. Berman
/s/ James R. Riedman Director September 30, 2002
-----------------------------------------------
James R. Riedman
/s/ Benjamin D. Addoms Director September 30, 2002
-----------------------------------------------
Benjamin D. Addoms
/s/ David Brodsky Director September 30, 2002
-----------------------------------------------
David Brodsky
/s/ Howard L. Shecter Director September 30, 2002
-----------------------------------------------
Howard L. Shecter
56
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
HARRIS INTERACTIVE INC.
I, Gordon S. Black, Chairman and Chief Executive Officer of Harris Interactive
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Harris Interactive
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operation and cash
flows of the registrant as of, and for, the periods presented in this
annual report.
Date: September 30, 2002
/s/ GORDON S. BLACK
-------------------------------------------
Gordon S. Black,
Chairman and Chief Executive Officer
I, Bruce A. Newman, Chief Financial Officer, Secretary, and Treasurer of
Harris Interactive Inc., certify that:
4. I have reviewed this annual report on Form 10-K of Harris Interactive
Inc.;
5. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
6. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operation and cash
flows of the registrant as of, and for, the periods presented in this
annual report.
Date: September 30, 2002
/s/ BRUCE A. NEWMAN
-------------------------------------------
Bruce A. Newman,
Chief Financial Officer, Secretary, and
Treasurer
57